ORACLE CORP, 10-K filed on 7/1/2010
Annual Report
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions
May 31, 2010
May 31, 2009
Assets:
 
 
Current assets:
 
 
Cash and cash equivalents
$ 9,914 
$ 8,995 
Marketable securities
8,555 
3,629 
Trade receivables, net of allowances for doubtful accounts of $305 and $270 as of May 31, 2010 and 2009, respectively
5,585 
4,430 
Inventories
259 
0 
Deferred tax assets
1,159 
661 
Prepaid expenses and other current assets
1,532 
866 
Total current assets
27,004 
18,581 
Non-current assets:
 
 
Property, plant and equipment, net
2,763 
1,922 
Intangible assets: software support agreements and related relationships, net
2,903 
3,411 
Intangible assets: other, net
6,418 
3,858 
Goodwill
20,425 
18,842 
Other assets
2,065 
802 
Total non-current assets
34,574 
28,835 
Total assets
61,578 
47,416 
Liabilities and Stockholders' Equity:
 
 
Current liabilities:
 
 
Notes payable, current and other current borrowings
3,145 
1,001 
Accounts payable
775 
271 
Accrued compensation and related benefits
1,895 
1,409 
Deferred revenues
5,900 
4,592 
Other current liabilities
2,976 
1,876 
Total current liabilities
14,691 
9,149 
Non-current liabilities:
 
 
Notes payable and other non-current borrowings
11,510 
9,237 
Income taxes payable
2,695 
2,423 
Deferred tax liabilities
424 
480 
Other non-current liabilities
1,059 
682 
Total non-current liabilities
15,688 
12,822 
Oracle Corporation stockholders' equity:
 
 
Preferred stock, $0.01 par value-authorized: 1.0 shares; outstanding: none
0 
0 
Common stock, $0.01 par value and additional paid in capital-authorized: 11,000 shares; outstanding: 5,026 shares as of May 31, 2010 and 5,005 shares as of May 31, 2009
 
 
Common stock, $0.01 par value and additional paid in capital-authorized: 11,000 shares; outstanding: 5,026 shares and 5,005 shares as of May 31, 2010 and May 31, 2009, respectively
14,648 
12,980 
Retained earnings
16,146 
11,894 
Accumulated other comprehensive income
4 
216 
Total Oracle Corporation stockholders' equity
30,798 
25,090 
Noncontrolling interests
401 
355 
Total equity
31,199 
25,445 
Total liabilities and equity
$ 61,578 
$ 47,416 
CONSOLIDATED BALANCE SHEETS PARENTHETICAL (USD $)
In Millions, except Per Share data
May 31, 2010
May 31, 2009
Allowance for doubtful accounts receivable
$ 305 
$ 270 
Preferred stock par or stated value per share
0.01 
0.01 
Preferred stock shares authorized
1 
1 
Preferred stock shares outstanding
0 
0 
Common stock par or stated value per share
0.01 
0.01 
Common stock shares authorized
11,000 
11,000 
Common stock shares outstanding
5,026 
5,005 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data
Year Ended
May 31,
2010
2009
2008
Revenues:
 
 
 
Software revenues:
 
 
 
New software licenses
$ 7,533 
$ 7,123 
$ 7,515 
Software license updates and product support revenue
13,092 
11,754 
10,328 
Software revenues
20,625 
18,877 
17,843 
Hardware systems revenues:
 
 
 
Hardware systems products revenue
1,506 
0 
0 
Hardware systems support revenue
784 
0 
0 
Hardware systems revenues
2,290 
0 
0 
Services revenues
3,905 
4,375 
4,587 
Total revenues
26,820 
23,252 
22,430 
Operating Expenses:
 
 
 
Sales and marketing
5,080 
4,638 
4,679 
Software license updates and product support costs
1,063 
1,088 
997 
Hardware systems products costs
880 
0 
0 
Hardware systems support costs
423 
0 
0 
Services costs
3,398 
3,706 
3,984 
Research and development
3,254 
2,767 
2,741 
General and administrative
911 
785 
808 
Amortization of intangible assets
1,973 
1,713 
1,212 
Acquisition related and other
154 
117 
124 
Restructuring
622 
117 
41 
Total operating expenses
17,758 
14,931 
14,586 
Operating income
9,062 
8,321 
7,844 
Interest expense
(754)
(630)
(394)
Non-operating income (expense), net
(65)
143 
384 
Income before provision for income taxes
8,243 
7,834 
7,834 
Provision for income taxes
2,108 
2,241 
2,313 
Net Income
6,135 
5,593 
5,521 
Earnings per share:
 
 
 
Earnings per share, basic
1.22 
1.10 
1.08 
Earnings per share, diluted
1.21 
1.09 
1.06 
Weighted average common shares outstanding:
 
 
 
Weighted average common shares outstanding, basic
5,014 
5,070 
5,133 
Weighted average common shares outstanding, diluted
5,073 
5,130 
5,229 
Dividends declared per common share
$ 0.20 
$ 0.05 
$ 0.00 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions
Year Ended
May 31,
2010
2009
2008
Cash Flows From Operating Activities:
 
 
 
Net income
$ 6,135 
$ 5,593 
$ 5,521 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
298 
263 
268 
Amortization of intangible assets
1,973 
1,713 
1,212 
Allowances for doubtful accounts receivable
143 
118 
164 
Deferred income taxes
(511)
(395)
(135)
Stock-based compensation
436 
355 
369 
Tax benefits on the exercise of stock options and vesting of restricted stock-based awards
203 
252 
588 
Excess tax benefits on the exercise of stock options and vesting of restricted stock-based awards in operating activities
(110)
(194)
(454)
Other, net in operating activities
13 
185 
18 
Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
(Increase) decrease in trade receivables, net
(362)
336 
(825)
Decrease in inventories
73 
0 
0 
Decrease (increase) in prepaid expenses and other assets
340 
145 
(191)
Decrease in accounts payable and other liabilities
(360)
(691)
(153)
(Decrease) increase in income taxes payable
(79)
142 
368 
Increase in deferred revenues
489 
433 
652 
Net cash provided by operating activities
8,681 
8,255 
7,402 
Cash Flows From Investing Activities:
 
 
 
Purchases of marketable securities and other investments
(15,703)
(9,315)
(5,624)
Proceeds from maturities and sales of marketable securities and other investments
11,220 
8,404 
4,281 
Acquisitions, net of cash acquired
(5,606)
(1,159)
(7,643)
Capital expenditures
(230)
(529)
(243)
Proceeds from sale of property
0 
0 
153 
Net cash used for investing activities
(10,319)
(2,599)
(9,076)
Cash Flows From Financing Activities:
 
 
 
Payments for repurchases of common stock
(992)
(3,972)
(2,023)
Proceeds from issuances of common stock
874 
760 
1,288 
Payment of dividends to stockholders
(1,004)
(250)
0 
Proceeds from borrowings, net of issuance costs
7,220 
0 
6,171 
Repayments of borrowings
(3,582)
(1,004)
(2,560)
Excess tax benefits on the exercise of stock options and vesting of restricted stock-based awards in financing activities
110 
194 
454 
Distributions to noncontrolling interests
(59)
(53)
(49)
Other, net in financing activities
97 
(97)
0 
Net cash provided by (used for) financing activities
2,664 
(4,422)
3,281 
Effect of exchange rate changes on cash and cash equivalents
(107)
(501)
437 
Net increase in cash and cash equivalents
919 
733 
2,044 
Cash and cash equivalents at beginning of period
8,995 
8,262 
6,218 
Cash and cash equivalents at end of period
9,914 
8,995 
8,262 
Non-cash investing and financing transactions:
 
 
 
Fair value of stock options and restricted stock-based awards assumed in connection with acquisitions
100 
1 
240 
Decrease in unsettled repurchases of common stock
0 
(12)
(23)
Supplemental schedule of cash flow data:
 
 
 
Cash paid for income taxes
2,488 
2,170 
1,687 
Cash paid for interest
$ 652 
$ 627 
$ 347 
CONSOLIDATED STATEMENTS OF EQUITY (USD $)
In Millions
Year Ended
May 31,
2010
2009
2008
Beginning balances
$ 25,445 
$ 23,394 
$ 17,235 
Common stock issued under stock-based compensation plans
812 
696 
1,229 
Common stock issued under stock purchase plans
62 
64 
59 
Assumption of stock-based compensation plan awards in connection with acquisitions
100 
1 
240 
Stock-based compensation in consolidated statements of equity
440 
348 
367 
Repurchase of common stock
(992)
(3,960)
(2,000)
Cash dividends declared
(1,004)
(250)
 
Tax benefit from stock plans
268 
56 
472 
Adjustment to retained earnings upon adoption of revised guidance for income taxes
 
 
3 
Other, net in consolidated statements of equity
100 
(118)
7 
Distributions to noncontrolling interests in consolidated statements of equity
(59)
(53)
(49)
Net unrealized loss on defined benefit plans, net of tax
(35)
(14)
(9)
Foreign currency translation
(162)
(358)
335 
Net unrealized losses on derivative financial instruments, net of tax
(6)
(39)
(77)
Net unrealized gain on marketable securities, net of tax
 
1 
1 
Net income in consolidated statements of equity
6,230 
5,677 
5,581 
Comprehensive income
0 
0 
0 
Ending balances
31,199 
25,445 
23,394 
Comprehensive Income
 
 
 
Beginning balances
0 
0 
0 
Common stock issued under stock-based compensation plans
0 
0 
0 
Common stock issued under stock purchase plans
0 
0 
0 
Assumption of stock-based compensation plan awards in connection with acquisitions
0 
0 
0 
Stock-based compensation in consolidated statements of equity
0 
0 
0 
Repurchase of common stock
0 
0 
0 
Cash dividends declared
0 
0 
 
Tax benefit from stock plans
0 
0 
0 
Adjustment to retained earnings upon adoption of revised guidance for income taxes
 
 
0 
Other, net in consolidated statements of equity
0 
0 
0 
Distributions to noncontrolling interests in consolidated statements of equity
0 
0 
0 
Net unrealized loss on defined benefit plans, net of tax
(35)
(14)
(9)
Foreign currency translation
(171)
(350)
300 
Net unrealized losses on derivative financial instruments, net of tax
(6)
(39)
(77)
Net unrealized gain on marketable securities, net of tax
 
1 
1 
Net income in consolidated statements of equity
6,135 
5,593 
5,521 
Comprehensive income
5,923 
5,191 
5,736 
Ending balances
0 
0 
0 
Common Stock and Additional Paid in Capital
 
 
 
Beginning balances
12,980 
12,446 
10,293 
Common stock issued under stock-based compensation plans
812 
696 
1,229 
Common stock issued under stock purchase plans
62 
64 
59 
Assumption of stock-based compensation plan awards in connection with acquisitions
100 
1 
240 
Stock-based compensation in consolidated statements of equity
440 
348 
367 
Repurchase of common stock
(112)
(550)
(214)
Cash dividends declared
0 
0 
 
Tax benefit from stock plans
268 
56 
472 
Adjustment to retained earnings upon adoption of revised guidance for income taxes
 
 
0 
Other, net in consolidated statements of equity
98 
(81)
0 
Distributions to noncontrolling interests in consolidated statements of equity
0 
0 
0 
Net unrealized loss on defined benefit plans, net of tax
0 
0 
0 
Foreign currency translation
0 
0 
0 
Net unrealized losses on derivative financial instruments, net of tax
0 
0 
0 
Net unrealized gain on marketable securities, net of tax
 
0 
0 
Net income in consolidated statements of equity
0 
0 
0 
Comprehensive income
0 
0 
0 
Ending balances
14,648 
12,980 
12,446 
Retained Earnings
 
 
 
Beginning balances
11,894 
9,961 
6,223 
Common stock issued under stock-based compensation plans
0 
0 
0 
Common stock issued under stock purchase plans
0 
0 
0 
Assumption of stock-based compensation plan awards in connection with acquisitions
0 
0 
0 
Stock-based compensation in consolidated statements of equity
0 
0 
0 
Repurchase of common stock
(880)
(3,410)
(1,786)
Cash dividends declared
(1,004)
(250)
 
Tax benefit from stock plans
0 
0 
0 
Adjustment to retained earnings upon adoption of revised guidance for income taxes
 
 
3 
Other, net in consolidated statements of equity
1 
0 
0 
Distributions to noncontrolling interests in consolidated statements of equity
0 
0 
0 
Net unrealized loss on defined benefit plans, net of tax
0 
0 
0 
Foreign currency translation
0 
0 
0 
Net unrealized losses on derivative financial instruments, net of tax
0 
0 
0 
Net unrealized gain on marketable securities, net of tax
 
0 
0 
Net income in consolidated statements of equity
6,135 
5,593 
5,521 
Comprehensive income
0 
0 
0 
Ending balances
16,146 
11,894 
9,961 
Accumulated Other Comprehensive Income
 
 
 
Beginning balances
216 
618 
403 
Common stock issued under stock-based compensation plans
0 
0 
0 
Common stock issued under stock purchase plans
0 
0 
0 
Assumption of stock-based compensation plan awards in connection with acquisitions
0 
0 
0 
Stock-based compensation in consolidated statements of equity
0 
0 
0 
Repurchase of common stock
0 
0 
0 
Cash dividends declared
0 
0 
 
Tax benefit from stock plans
0 
0 
0 
Adjustment to retained earnings upon adoption of revised guidance for income taxes
 
 
0 
Other, net in consolidated statements of equity
0 
0 
0 
Distributions to noncontrolling interests in consolidated statements of equity
0 
0 
0 
Net unrealized loss on defined benefit plans, net of tax
(35)
(14)
(9)
Foreign currency translation
(171)
(350)
300 
Net unrealized losses on derivative financial instruments, net of tax
(6)
(39)
(77)
Net unrealized gain on marketable securities, net of tax
 
1 
1 
Net income in consolidated statements of equity
0 
0 
0 
Comprehensive income
0 
0 
0 
Ending balances
4 
216 
618 
Total Oracle Corporation Stockholders' Equity
 
 
 
Beginning balances
25,090 
23,025 
16,919 
Common stock issued under stock-based compensation plans
812 
696 
1,229 
Common stock issued under stock purchase plans
62 
64 
59 
Assumption of stock-based compensation plan awards in connection with acquisitions
100 
1 
240 
Stock-based compensation in consolidated statements of equity
440 
348 
367 
Repurchase of common stock
(992)
(3,960)
(2,000)
Cash dividends declared
(1,004)
(250)
 
Tax benefit from stock plans
268 
56 
472 
Adjustment to retained earnings upon adoption of revised guidance for income taxes
 
 
3 
Other, net in consolidated statements of equity
99 
(81)
0 
Distributions to noncontrolling interests in consolidated statements of equity
0 
0 
0 
Net unrealized loss on defined benefit plans, net of tax
(35)
(14)
(9)
Foreign currency translation
(171)
(350)
300 
Net unrealized losses on derivative financial instruments, net of tax
(6)
(39)
(77)
Net unrealized gain on marketable securities, net of tax
 
1 
1 
Net income in consolidated statements of equity
6,135 
5,593 
5,521 
Comprehensive income
0 
0 
0 
Ending balances
30,798 
25,090 
23,025 
Noncontrolling Interests
 
 
 
Beginning balances
355 
369 
316 
Common stock issued under stock-based compensation plans
0 
0 
0 
Common stock issued under stock purchase plans
0 
0 
0 
Assumption of stock-based compensation plan awards in connection with acquisitions
0 
0 
0 
Stock-based compensation in consolidated statements of equity
0 
0 
0 
Repurchase of common stock
0 
0 
0 
Cash dividends declared
0 
0 
 
Tax benefit from stock plans
0 
0 
0 
Adjustment to retained earnings upon adoption of revised guidance for income taxes
 
 
0 
Other, net in consolidated statements of equity
1 
(37)
7 
Distributions to noncontrolling interests in consolidated statements of equity
(59)
(53)
(49)
Net unrealized loss on defined benefit plans, net of tax
0 
0 
0 
Foreign currency translation
9 
(8)
35 
Net unrealized losses on derivative financial instruments, net of tax
0 
0 
0 
Net unrealized gain on marketable securities, net of tax
 
0 
0 
Net income in consolidated statements of equity
95 
84 
60 
Comprehensive income
0 
0 
0 
Ending balances
$ 401 
$ 355 
$ 369 
CONSOLIDATED STATEMENTS OF EQUITY PARENTHETICAL
Share data in Millions, except Per Share data
May 31, 2010
May 31, 2009
Year Ended
May 31, 2008
Beginning common stock shares outstanding
 
 
 
Ending common stock shares outstanding
5,026 
5,005 
 
Common Stock and Additional Paid in Capital
 
 
 
Beginning common stock shares outstanding
5,005 
5,150 
5,107 
Common stock issued under stock-based compensation plans (shares)
60 
76 
137 
Common stock issued under stock purchase plans (shares)
3 
3 
3 
Repurchase of common stock (shares)
(43)
(226)
(97)
Other, net (shares)
1 
2 
0 
Ending common stock shares outstanding
5,026 
5,005 
5,150 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
 
1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
We develop, manufacture, market, distribute and service database and middleware software as well as applications software designed to help our customers manage and grow their business operations. Database and middleware software is used for the secure storage, retrieval and manipulation of all forms of software-based data, and for developing and deploying applications on the internet and on corporate intranets. Applications software is used to automate business processes and to provide business intelligence. We also offer software license updates and product support contracts that provide our customers with rights to unspecified product upgrades and maintenance releases issued during the support period, as well as technical support assistance.
On January 26, 2010, we completed our acquisition of Sun Microsystems, Inc. (Sun), a provider of hardware systems, software and services, for $7.3 billion. As a result of our acquisition of Sun, we entered into a new hardware systems business. Our hardware systems business consists of two operating segments: (1) hardware systems products, which consists primarily of computer server and storage product offerings, and (2) hardware systems support, which provides customers with unspecified software updates for the software components that are essential to the functionality of our hardware systems and storage products and can include product repairs, maintenance services and technical support services.
We also offer software and non-software related services including consulting, On Demand, and education.
Basis of Financial Statements
The consolidated financial statements include our accounts and the accounts of our wholly- and majority-owned subsidiaries. As a result of our adoption of the Financial Accounting Standards Board's (FASB) new accounting guidance for noncontrolling interests as contained in ASC 810, Consolidation, as of the beginning of fiscal 2010, we retrospectively classified noncontrolling interest positions of certain of our consolidated entities as a separate component of consolidated equity from the equity attributable to Oracle's stockholders for all periods presented. The noncontrolling interests in our net income were not significant to our consolidated results for the periods presented and therefore have been included as a component of non-operating income (expense), net in our consolidated statements of operations. Intercompany transactions and balances have been eliminated. Certain other prior year balances have been reclassified to conform to the current year presentation. Such reclassifications did not affect total revenues, operating income or net income.
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) as set forth in the FASB's Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result.
Revenue Recognition
Our sources of revenues include: (1) software, which includes new software license revenues and software license updates and product support revenues; (2) hardware systems, which includes the sale of hardware systems products including computer servers and storage products, and hardware systems support revenues; and (3) services, which include software and hardware related services including consulting, On Demand and education revenues.
 
 
Revenue Recognition for Software Products and Software Related Services (Software Elements)
New software license revenues represent fees earned from granting customers licenses to use our database, middleware and applications software, and exclude revenues derived from software license updates, which are included in software license updates and product support revenues. While the basis for software license revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition, we exercise judgment and use estimates in connection with the determination of the amount of software and services revenues to be recognized in each accounting period.
For software license arrangements that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Substantially all of our new software license revenues are recognized in this manner.
Substantially all of our software license arrangements do not include acceptance provisions. However, if acceptance provisions exist as part of public policy, for example, in agreements with government entities where acceptance periods are required by law, or within previously executed terms and conditions that are referenced in the current agreement and are short-term in nature, we generally recognize revenues upon delivery provided the acceptance terms are perfunctory and all other revenue recognition criteria have been met. If acceptance provisions are not perfunctory (for example, acceptance provisions that are long-term in nature or are not included as standard terms of an arrangement), revenues are recognized upon the earlier of receipt of written customer acceptance or expiration of the acceptance period.
The vast majority of our software license arrangements include software license updates and product support contracts, which are entered into at the customer's option and are recognized ratably over the term of the arrangement, typically one year. Software license updates provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period. Product support includes internet access to technical content, as well as internet and telephone access to technical support personnel. Software license updates and product support contracts are generally priced as a percentage of the net new software license fees. Substantially all of our customers renew their software license updates and product support contracts annually.
Revenue Recognition for Multiple-Element Arrangements - Software Products and Software Related Services (Software Arrangements)
We often enter into arrangements with customers that purchase both software related products and services from us at the same time, or within close proximity of one another (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, software license updates and product support contracts and other software related services whereby software license delivery is followed by the subsequent or contemporaneous delivery of the other elements. For those software related multiple-element arrangements, we have applied the residual method to determine the amount of license revenues to be recognized pursuant to ASC 985-605. Under the residual method, if fair value exists for undelivered elements in a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the arrangement consideration recognized upon delivery of the software license or services arrangement. We allocate the fair value of each element of a software related multiple-element arrangement based upon its fair value as determined by our vendor specific objective evidence (VSOE - described further below), with any remaining amount allocated to the software license.
Revenue Recognition for Hardware Systems Products and Hardware Systems Related Services (Nonsoftware Elements)
Revenues from the sale of hardware systems products represent amounts earned primarily from the sale of computer servers and storage products. Our revenue recognition policy for these nonsoftware deliverables is based upon the accounting guidance contained in ASC 605, Revenue Recognition, and we exercise judgment and use estimates in connection with the determination of the amount of hardware systems products and hardware systems related services revenues to be recognized in each accounting period.
Revenues from the sales of hardware products are recognized when: (1) persuasive evidence of an arrangement exists; (2) we deliver the products and passage of the title to the buyer occurs; (3) the sale price is fixed or determinable; and (4) collection is reasonably assured. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met. When applicable, we reduce revenues for estimated returns or certain other incentive programs where we have the ability to sufficiently estimate the effects of these items. Where an arrangement is subject to acceptance criteria and the acceptance provisions are not perfunctory (for example, acceptance provisions that are long-term in nature or are not included as standard terms of an arrangement), revenues are recognized upon the earlier of receipt of written customer acceptance or expiration of the acceptance period.
Our hardware systems support offerings generally provide customers with software updates for the software components that are essential to the functionality of our systems and storage products and can also include product repairs, maintenance services, and technical support services. Hardware systems support contracts are entered into at the customer's option and are recognized ratably over the contractual term of the arrangements.
Revenue Recognition for Multiple-Element Arrangements - Hardware Systems Products and Hardware Systems Related Services (Nonsoftware Arrangements)
In the third quarter of fiscal 2010, we early adopted the provisions of Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (ASU 2009-13) and Accounting Standards Update 2009-14, Software (Topic 985)—Certain Revenue Arrangements that Include Software Elements (ASU 2009-14). ASU 2009-13 amended existing accounting guidance for revenue recognition for multiple-element arrangements. To the extent a deliverable within a multiple-element arrangement is not accounted for pursuant to other accounting standards, including ASC 985-605, Software-Revenue Recognition, ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price (ESP) to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither VSOE nor third-party evidence (TPE) is available for that deliverable. ASU 2009-14 modifies the scope of ASC 985-605 to exclude tangible products containing software components and nonsoftware components that function together to deliver the product's essential functionality. In addition, ASU 2009-14 provides guidance on how a vendor should allocate arrangement consideration to nonsoftware and software deliverables in an arrangement where the vendor sells tangible products containing software components that are essential in delivering the tangible product's functionality.
As a result of our early adoption of ASU 2009-13 and ASU 2009-14, we applied the provisions of these accounting standards updates as of the beginning of fiscal 2010. The impact of our adoption of ASU 2009-13 and ASU 2009-14 was not material to our results of operations for fiscal 2010.
We enter into arrangements with customers that purchase both nonsoftware related products and services from us at the same time, or within close proximity of one another (referred to as nonsoftware multiple-element arrangements). Each element within a nonsoftware multiple-element arrangement is accounted for as a separate unit of accounting provided the following criteria are met: the delivered products or services have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by us. We consider a deliverable to have standalone value if the product or service is sold separately by us or another vendor or could be resold by the customer. Further, our revenue arrangements generally do not include a general right of return relative to the delivered products. Where the aforementioned criteria for a separate unit of accounting are not met, the deliverable is combined with the undelivered element(s) and treated as a single unit of accounting for the purposes of allocation of the arrangement consideration and revenue recognition. For those units of accounting that include more than one deliverable but are treated as a single unit of accounting, we generally recognize revenues over the delivery period. For the purposes of revenue classification of the elements that are accounted for as a single unit of accounting, we allocate revenue to hardware systems and services based on a rational and consistent methodology utilizing our best estimate of fair value of such elements.
For our nonsoftware multiple-element arrangements, we allocate revenue to each element based on a selling price hierarchy at the arrangement inception. The selling price for each element is based upon the following selling price hierarchy: VSOE if available, TPE if VSOE is not available, or ESP if neither VSOE nor TPE is available (a description as to how we determine VSOE, TPE and ESP is provided below). If a tangible hardware systems product includes software, we determine whether the tangible hardware systems product and the software work together to deliver the product's essential functionality and, if so, the entire product is treated as a nonsoftware deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the nonsoftware deliverables using the relative selling prices of each unit based on the aforementioned selling price hierarchy. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or meeting of any specified performance conditions.
To determine the selling price in multiple-element arrangements, we establish VSOE of selling price using the price charged for a deliverable when sold separately and for software license updates and product support and hardware systems support, based on the renewal rates offered to customers. For nonsoftware multiple element arrangements, TPE is established by evaluating similar and interchangeable competitor products or services in standalone arrangements with similarly situated customers. If we are unable to determine the selling price because VSOE or TPE doesn't exist, we determine ESP for the purposes of allocating the arrangement by considering several external and internal factors including, but not limited to, pricing practices, margin objectives, competition, geographies in which we offer our products and services, internal costs and stage of the product lifecycle. The determination of ESP is made through consultation with and approval by our management, taking into consideration our go-to-market strategy. As our, or our competitors', pricing and go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes to our determination of VSOE, TPE and ESP. As a result, our future revenue recognition for multiple-element arrangements could differ materially from our results in the current period. Selling prices are analyzed on an annual basis or more frequently if we experience significant changes in our selling prices.
Revenue Recognition Policies Applicable to both Software and Nonsoftware Elements
Revenue Recognition for Multiple-Element Arrangements -Arrangements with Software and Nonsoftware Elements
We also enter into multiple-element arrangements that may include a combination of our various software related and nonsoftware related products and services offerings including hardware systems products, hardware systems support, new software licenses, software license updates and product support, consulting, On Demand and education. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the nonsoftware elements. We then further allocate consideration within the software group to the respective elements within that group following the guidance in ASC 985-605 and our policies described above. After the arrangement consideration has been allocated to the elements, we account for each respective element in the arrangement as described above.
Other Revenue Recognition Policies Applicable to Software and Nonsoftware Elements
Many of our software arrangements include consulting implementation services sold separately under consulting engagement contracts and are included as a part of our services business. Consulting revenues from these arrangements are generally accounted for separately from new software license revenues because the arrangements qualify as services transactions as defined in ASC 985-605. The more significant factors considered in determining whether the revenues should be accounted for separately include the nature of services (i.e. consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Revenues for consulting services are generally recognized as the services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenues are deferred until the uncertainty is sufficiently resolved. We estimate the proportional performance on contracts with fixed or “not to exceed” fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If we do not have a sufficient basis to measure progress towards completion, revenues are recognized when we receive final acceptance from the customer. When total cost estimates exceed revenues, we accrue for the estimated losses immediately using cost estimates that are based upon an average fully burdened daily rate applicable to the consulting organization delivering the services. The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the proportional performance method of accounting affects the amounts of revenues and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.
On Demand is comprised of Oracle On Demand and Advanced Customer Services and is a part of our services business. Oracle On Demand services are offered as standalone arrangements or as a part of arrangements to customers buying new software licenses or hardware systems products and services. Our On Demand services provide multi-featured software and hardware management and maintenance services for our software and hardware systems products delivered at our data center facilities, select partner data centers or customer facilities. Advanced Customer Services provide customers with services to architect, implement and manage customer IT environments including software and hardware systems product management services, industry-specific solution support centers and remote and on-site expert services. Depending upon the nature of the arrangement, revenues from On Demand services are recognized as services are performed or ratably over the term of the service period, which is generally one year or less.
Education revenues are a part of our services business and include instructor-led, media-based and internet-based training in the use of our software and hardware products. Education revenues are recognized as the classes or other education offerings are delivered.
If an arrangement contains multiple elements and does not qualify for separate accounting for the product and service transactions, then new software license revenues and/or hardware systems products revenues, including the costs of hardware systems products, are generally recognized together with the services based on contract accounting using either the percentage-of-completion or completed-contract method. Contract accounting is applied to any bundled software, hardware systems and services arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license or hardware systems product fees; (2) where consulting services include significant modification or customization of the software or hardware systems product; (3) where significant consulting services are provided for in the software license contract or hardware systems product contract without additional charge or are substantially discounted; or (4) where the software license or hardware systems product payment is tied to the performance of consulting services. For the purposes of revenue classification of the elements that are accounted for as a single unit of accounting, we allocate revenues to software and nonsoftware elements based on a rational and consistent methodology utilizing our best estimate of fair value of such elements.
We also evaluate arrangements with governmental entities containing “fiscal funding” or “termination for convenience” provisions, when such provisions are required by law, to determine the probability of possible cancellation. We consider multiple factors, including the history with the customer in similar transactions, the “essential use” of the software or hardware systems products and the planning, budgeting and approval processes undertaken by the governmental entity. If we determine upon execution of these arrangements that the likelihood of cancellation is remote, we then recognize revenues once all of the criteria described above have been met. If such a determination cannot be made, revenues are recognized upon the earlier of cash receipt or approval of the applicable funding provision by the governmental entity.
We assess whether fees are fixed or determinable at the time of sale and recognize revenues if all other revenue recognition requirements are met. Our standard payment terms are net 30 days. However, payment terms may vary based on the country in which the agreement is executed. Payments that are due within six months are generally deemed to be fixed or determinable based on our successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition.
While most of our arrangements for sales within our software and hardware systems businesses include short-term payment terms, we have a standard practice of providing long-term financing to creditworthy customers through our financing division. Since fiscal 1989, when our financing division was formed, we have established a history of collection, without concessions, on these receivables with payment terms that generally extend up to five years from the contract date. Provided all other revenue recognition criteria have been met, we recognize new software license revenues and hardware systems products revenues for these arrangements upon delivery, net of any payment discounts from financing transactions. We have generally sold receivables financed through our financing division on a non-recourse basis to third party financing institutions and we classify the proceeds from these sales as cash flows from operating activities in our consolidated statements of cash flows. We account for the sales of these receivables as “true sales” as defined in ASC 860, Transfers and Servicing.
In addition, we sell hardware products to leasing companies that, in turn, lease these products to end-users. In transactions where the leasing companies have no recourse to us in the event of default by the end-user, we recognize revenue at point of shipment or point of delivery, depending on the shipping terms and if all the other revenue recognition criteria have been met. In arrangements where the leasing companies have more than insignificant recourse to us in the event of default by the end-user (defined as recourse leasing), we recognize both the product revenue and the related cost of the product as the payments are made to the leasing company by the end-user, generally ratably over the lease term.
Our customers include several of our suppliers and on rare occasion, we have purchased goods or services for our operations from these vendors at or about the same time that we have sold our products to these same companies (Concurrent Transactions). Software license agreements or sales of hardware systems that occur within a three-month time period from the date we have purchased goods or services from that same customer are reviewed for appropriate accounting treatment and disclosure. When we acquire goods or services from a customer, we negotiate the purchase separately from any sales transaction, at terms we consider to be at arm's length, and settle the purchase in cash. We recognize new software license revenues or hardware systems product revenues from Concurrent Transactions if all of our revenue recognition criteria are met and the goods and services acquired are necessary for our current operations.
Business Combinations
In fiscal 2010, we adopted ASC 805, Business Combinations, which revised the accounting guidance that we were required to apply for our acquisitions in comparison to prior fiscal years. The underlying principles are similar to the previous guidance and require that we recognize separately from goodwill the assets acquired and the liabilities assumed, generally at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
 
As a result of adopting the revised accounting guidance provided for by ASC 805 as of the beginning of fiscal 2010, certain of our policies differ when accounting for acquisitions in fiscal 2010 and prospective periods in comparison to the accounting for acquisitions in fiscal 2009 and prior periods, including:
 
- the fair value of in-process research and development is recorded as an indefinite-lived intangible asset until the underlying project is completed, at which time the intangible asset is amortized over its estimated useful life, or abandoned, at which time the intangible asset is expensed (prior to fiscal 2010, in-process research and development was expensed at the acquisition date);
- the direct transaction costs associated with the business combination are expensed as incurred (prior to fiscal 2010, direct transaction costs were included as a part of the purchase price);- the costs to exit or restructure certain activities of an acquired company are accounted for separately from the business combination (prior to fiscal 2010, these restructuring and exist costs were included as a part of the assumed obligations in deriving the purchase price allocation); and
- any changes in estimates associated with income tax valuation allowances or uncertain tax positions after the measurement period are generally recognized as income tax expense with application of this policy also applied prospectively to all of our business combinations regardless of the acquisition date (prior to fiscal 2010, any such changes were generally included as a part of the purchase price allocation indefinitely). Costs to exit or restructure certain activities of an acquired company or our internal operations are accounted for as one-time termination and exit costs pursuant to ASC 420, Exit or Disposal Cost Obligations, and, as noted above, are accounted for separately from the business combination. A liability for a cost associated with an exit or disposal activity is recognized and measured at its fair value in our consolidated statement of operations in the period in which the liability is incurred. When estimating the fair value of facility restructuring activities, assumptions are applied regarding estimated sub-lease payments to be received, which can differ materially from actual results. This may require us to revise our initial estimates which may materially affect our results of operations and financial position in the period the revision is made.
For a given acquisition, we generally identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period (up to one year from the acquisition date) in order to obtain sufficient information to assess whether we include these contingencies as a part of the purchase price allocation and, if so, to determine the estimated amounts.
If we determine that a pre-acquisition contingency (non-income tax related) is probable in nature and estimable as of the acquisition date, we record our best estimate for such a contingency as a part of the preliminary purchase price allocation. We often continue to gather information for and evaluate our pre-acquisition contingencies throughout the measurement period and if we make changes to the amounts recorded or if we identify additional pre-acquisition contingencies during the measurement period, such amounts will be included in the purchase price allocation during the measurement period and, subsequently, in our results of operations.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period or our final determination of the tax allowance's or contingency's estimated value, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.
 
Marketable and Non-Marketable Securities
In accordance with ASC 320, Investments—Debt and Equity Securities, and based on our intentions regarding these instruments, we classify substantially all of our marketable debt and equity securities as available-for-sale. Marketable debt and equity securities are reported at fair value, with all unrealized gains (losses) reflected net of tax in stockholders' equity. If we determine that an investment has an other than temporary decline in fair value, we recognize the investment loss in non-operating income (expense), net in the accompanying consolidated statements of operations. We periodically evaluate our investments to determine if impairment charges are required.
We hold investments in certain non-marketable equity securities in which we do not have a controlling interest or significant influence. These equity securities are recorded at cost and included in other assets in the accompanying consolidated balance sheets. If based on the terms of our ownership of these non-marketable securities we determine that we exercise significant influence on these non-marketable securities, we apply the requirements of ASC 323, Investments—Equity Method and Joint Ventures to account for such investments. Our non-marketable securities are subject to periodic impairment reviews and we recorded impairment losses of $17 million related to non-marketable equity securities and other investments in fiscal 2010. Losses related to non-marketable equity securities and other investments were nominal in fiscal 2009 and 2008.
Fair Value of Financial Instruments
We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to our financial instruments that we are required to carry at fair value pursuant to other accounting standards, including our marketable debt and equity securities and our derivative financial instruments. We have not applied the fair value option to those financial instruments that we are not required to carry at fair value pursuant to other accounting standards, including our senior notes outstanding.
The additional disclosures regarding our fair value measurements are included in Note 4.
Allowances for Doubtful Accounts
We record allowances for doubtful accounts based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable, the collection history associated with the geographic region that the receivable was recorded in and current economic trends.
Concentrations of Credit Risk
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade receivables. Our cash and cash equivalents are generally held with a number of large, diverse financial institutions worldwide to reduce the amount of exposure to any single financial institution. Investment policies have been implemented that limit purchases of marketable debt securities to investment grade securities. We do not require collateral to secure accounts receivable. The risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers, the short duration of our payment terms for the significant majority of our customer contracts and by the diversification of our customer base. No single customer accounted for 10% or more of our total revenues in fiscal 2010, 2009 or 2008.
Inventories
Inventories are stated at the lower of cost or market value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. We evaluate our ending inventories for estimated excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand within specific time horizons (generally six months or less). Inventories in excess of future demand are written down and charged to the provision for inventories, which is a component of hardware systems products expenses. In addition, we assess the impact of changing technology to our inventories and we write down inventories that are considered obsolete. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Other Receivables
Other receivables represent value-added tax and sales tax receivables associated with the sale of our products and services to third parties. Other receivables are included in prepaid expenses and other current assets in our consolidated balance sheets and totaled $733 million and $555 million at May 31, 2010 and 2009, respectively.
Property, Plant and Equipment
Property, plant and equipment is stated at the lower of cost or realizable value, net of accumulated depreciation. Depreciation is computed using the straight-line method based on estimated useful lives of the assets, which range from one to fifty years. Leasehold improvements are amortized over the lesser of estimated useful lives or lease terms, as appropriate. Property, plant and equipment is periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We did not recognize any significant property impairment charges in fiscal 2010, 2009 or 2008.
Goodwill, Intangible Assets and Impairment Assessments
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Intangible assets that are not considered to have an indefinite useful life are amortized over their useful lives, which range from one to ten years. Each period we evaluate the estimated remaining useful life of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization.
The carrying amounts of these assets are periodically reviewed for impairment (at least annually for goodwill and indefinite lived intangible assets) and whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The goodwill impairment analysis is comprised of two steps. In the first step, we compare the fair value of each reporting unit to its carrying value. Our reporting units are consistent with the reportable segments identified in Note 16 below. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. Recoverability of finite lived intangible assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. Recoverability of indefinite lived intangible assets is measured by comparison of the carrying amount of the asset to the future discounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. We did not recognize any goodwill or intangible asset impairment charges in fiscal 2010, 2009 or 2008.
Derivative Financial Instruments
During fiscal 2010, 2009 and 2008, we used derivative financial instruments to manage foreign currency and interest rate risks. We account for these instruments in accordance with ASC 815, Derivatives and Hedging, which requires that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value as of the reporting date. ASC 815 also requires that changes in our derivatives' fair values be recognized in earnings, unless specific hedge accounting and documentation criteria are met (i.e. the instruments are accounted for as hedges). We recorded the effective portions of the gain or loss on derivative financial instruments that were designated as cash flow hedges or net investment hedges in accumulated other comprehensive income in the accompanying consolidated balance sheets. The offset to gain or loss on derivative financial instruments that were designated as fair value hedges were recorded to the item for which the risk is being hedged. Any ineffective or excluded portion of a designated cash flow hedge or net investment hedge, and gains or losses on our fair value hedges are recognized in earnings.
We adopted the disclosure requirements of ASC 815 during fiscal 2009 and have provided these disclosures prospectively from the year of adoption in Note 11.
Legal Contingencies
We are currently involved in various claims and legal proceedings. Quarterly, we review the status of each significant matter and assess our potential financial exposure. For legal and other contingencies that are not a part of a business combination, if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. A description of our accounting policies associated with contingencies assumed as a part of a business combination is provided under “Business Combinations” above.
Shipping Costs
Our shipping and handling costs for hardware systems products sales are included in hardware systems products expenses for all periods presented.
Foreign Currency
We transact business in various foreign currencies. In general, the functional currency of a foreign operation is the local country's currency. Consequently, revenues and expenses of operations outside the United States are translated into U.S. Dollars using weighted average exchange rates while assets and liabilities of operations outside the United States are translated into U.S. Dollars using exchange rates at the balance sheet date. The effects of foreign currency translation adjustments are included in stockholders' equity as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets. Foreign currency transaction (losses) gains, net which include the effects of our derivative financial instruments, are included in non-operating income (expenses), net in our consolidated statements of operations and were $(148) million, $(55) million and $40 million in fiscal 2010, 2009 and 2008, respectively.
Stock-Based Compensation
We account for share-based payments, including grants of employee stock options and restricted stock-based awards and purchases under employee stock purchase plans, in accordance with ASC 718, Compensation-Stock Compensation, which requires that share-based payments (to the extent they are compensatory) be recognized in our consolidated statements of operations based on their fair values and the estimated number of shares we ultimately expect will vest. In addition, we have applied certain of the provisions of the SEC's Staff Accounting Bulletin No. 107 (Topic 14), as amended, that is also made a part of ASC 718, in our accounting for stock-based compensation. We recognize stock-based compensation expense on a straight-line basis over the service period of the award, which is generally four years.
We record deferred tax assets for stock-based compensation plan awards that result in deductions on our income tax returns based on the amount of stock-based compensation recognized and the statutory tax rate in the jurisdiction in which we will receive a tax deduction. We have adopted and apply the alternative transition method as defined within ASC 718 to calculate the excess tax benefits available for use in offsetting future tax shortfalls and to determine the excess tax benefits from stock-based compensation that we reclassify as cash flows from financing activities.
Advertising
All advertising costs are expensed as incurred. Advertising expenses, which are included within sales and marketing expenses, were $75 million, $71 million and $81 million in fiscal 2010, 2009 and 2008, respectively.
Research and Development
All research and development costs are expensed as incurred. Costs eligible for capitalization under ASC 985-20, Software-Costs of Software to be Sold, Leased or Marketed, were not material to our consolidated financial statements in fiscal 2010, 2009 or 2008.
Acquisition Related and Other Expenses
Acquisition related and other expenses consist of personnel related costs for transitional and certain other employees, stock-based compensation expenses, integration related professional services, certain business combination adjustments after the measurement period or purchase price allocation period has ended, and certain other operating expenses (income), net. Stock-based compensation included in acquisition related and other expenses resulted from unvested options or restricted stock-based awards assumed from acquisitions whereby vesting was accelerated upon termination of the employees pursuant to the original terms of those options or restricted stock-based awards. As a result of our adoption of the FASB's revised accounting guidance for business combinations as of the beginning of fiscal 2010, certain acquisition related and other expenses are now recorded as expenses in our statements of operations that would previously have been included as a part of the consideration transferred and capitalized as a part of the accounting for our acquisitions pursuant to previous accounting rules, primarily direct transaction costs such as professional services fees.
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
 
(in millions)
  
2010
  
2009
  
2008
 
Transitional and other employee related costs
  
$
            66
  
$
            45
  
$
            32
  
Stock-based compensation
  
 
15
  
 
15
  
 
112
  
Professional fees and other, net
  
 
68
  
 
35
  
 
31
  
Business combination adjustments, net
  
 
5
  
 
22
  
 
6
  
Gain on sale of property
  
 
—
  
 
—
  
 
(57)
 
 
  
 
 
  
 
 
  
 
 
 
Total acquisition related and other expenses
  
$
154
  
$
117
  
$
124
  
 
  
 
 
  
 
 
  
 
 
 
In fiscal 2008, we sold certain of our land and buildings for $153 million in cash. Concurrent with the sale, we leased the property back from the buyer for a period of up to three years. We have accounted for this transaction in accordance with ASC 840, Leases and ASC 360, Property, Plant and Equipment. We deferred $19 million of the gain on the sale representing the present value of the operating lease commitment and recognized a gain of approximately $57 million for fiscal 2008. The deferred portion of the gain was recognized as a reduction of rent expense over the operating lease term.
Non-Operating Income (Expense), net
Non-operating income (expense), net consists primarily of interest income, net foreign currency exchange gains (losses), the noncontrolling interests in the net profits of our majority-owned subsidiaries (Oracle Financial Services Software Limited and Oracle Japan), and net other income (losses), including net realized gains and losses related to all of our investments and net unrealized gains and losses related to the small portion of our investment portfolio that we classify as trading.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
 
(in millions)
  
2010
 
 
2009
 
 
2008
 
Interest income
  
$
          122
  
 
$
          279
  
 
$
          337
  
Foreign currency (losses) gains, net
  
 
(148)
 
 
 
(55)
 
 
 
40
  
Noncontrolling interests in income
  
 
(95)
 
 
 
(84)
 
 
 
(60)
 
Other income, net
  
 
56
  
 
 
3
  
 
 
67
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total non-operating income (expense), net
  
$
(65)
 
 
$
143
  
 
$
384
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Included in non-operating income (expense), net were net foreign currency losses in fiscal 2010 relating to our Venezuelan subsidiary's operations. Effective December 1, 2009, we designated our Venezuelan subsidiary as “highly inflationary” in accordance with ASC 830, Foreign Currency Matters, and began using the U.S. Dollar as the subsidiary's new functional currency. During fiscal 2010, the Venezuelan government devalued its currency and we recognized $81 million of foreign currency losses due to the remeasurement of certain assets and liabilities and conversion of certain cash balances of our Venezuelan subsidiary into U.S. Dollars.
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
At the beginning of fiscal 2008, we adopted revised guidance contained in ASC 740 to account for our uncertain tax positions. The revised guidance contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We recognize interest and penalties related to uncertain tax positions in our provision for income taxes line of our consolidated statements of operations.
A description of our accounting policies associated with tax related contingencies and valuation allowances assumed as a part of a business combination is provided under “Business Combinations” above.
Recent Accounting Pronouncements
Milestone Method of Revenue Recognition:    In April 2010, the FASB issued Accounting Standards Update No. 2010-17, Revenue Recognition—Milestone Method (Topic 605) - Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for us in fiscal 2012 and should be applied prospectively. Early adoption is permitted. If we were to adopt ASU 2010-17 prior to the first quarter of fiscal 2012, we must apply it retrospectively to the beginning of the fiscal year of adoption and to all interim periods presented. We are currently evaluating the impact of the pending adoption of ASU 2010-17 on our consolidated financial statements.
Disclosure Requirements Related to Fair Value Measurements:    In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820)—Fair Value Measurements and Disclosures (ASU 2010-06), to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3 (as defined in Note 4 below). Certain provisions of this update will be effective for us in fiscal 2012 and we are currently evaluating the impact of the pending adoption of this standards update on our consolidated financial statements.
Transfers of Financial Assets:    In June 2009, the FASB issued and subsequently codified Accounting Standards Update No. 2009-16, Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets (ASU 2009-16). ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” with regards to transfer of financial assets and changes the requirements for derecognizing financial assets. We will adopt this new accounting standards update in fiscal 2011 and are currently evaluating the impact of its pending adoption on our consolidated financial statements.
Variable Interest Entities:    In June 2009, the FASB issued and subsequently codified Accounting Standards Update No. 2009-17, Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 amends the evaluation criteria to identify the primary beneficiary of a variable interest entity as provided pursuant to existing accounting standards and requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. We will adopt ASU 2009-17 in fiscal 2011 and are currently evaluating the impact of its pending adoption on our consolidated financial statements.
 
ACQUISITIONS
ACQUISITIONS
 
 
2.
ACQUISITIONS
Acquisition of Sun Microsystems, Inc.
On January 26, 2010 we completed our acquisition of Sun Microsystems, Inc., a provider of hardware systems, software and services, by means of a merger of one of our wholly owned subsidiaries with and into Sun such that Sun became a wholly owned subsidiary of Oracle. We acquired Sun to, among other things, expand our product offerings by adding Sun's existing hardware systems business and broadening our software and services offerings. We have included the financial results of Sun in our consolidated financial statements from the date of acquisition. For fiscal 2010, we estimate that Sun's contribution to our total revenues was $2.8 billion, which included allocations of revenues from our software and services businesses that were not separately identifiable due to our integration activities. For fiscal 2010, Sun reduced our operating income by $620 million, which included management's allocations and estimates of revenues and expenses that were not separately identifiable due to our integration activities, intangible asset amortization, restructuring expenses and stock-based compensation expenses.
The total purchase price for Sun was approximately $7.3 billion and was comprised of:
 
 
 
 
 
(in millions, except per share amounts)
  
 
Acquisition of approximately 757 million shares of outstanding common stock of Sun at $9.50 per share in cash
  
$
  7,196
Fair values of stock options and restricted stock-based awards assumed
  
 
99
 
  
 
 
Total purchase price
  
$
7,295
 
  
 
 
The fair values of stock options assumed were estimated using a Black-Scholes-Merton option-pricing model. The fair values of unvested Sun stock options and restricted stock-based awards as they relate to post combination services will be recorded as operating expense over the remaining service periods, while the fair values of vested stock options and restricted stock-based awards, as they relate to pre combination services, are included in the total purchase price.
Preliminary Purchase Price Allocation
Pursuant to our business combinations accounting policy, the total purchase price for Sun was allocated to the preliminary net tangible and intangible assets based upon their preliminary fair values as of January 26, 2010 as set forth below. The excess of the purchase price over the preliminary net tangible assets and intangible assets was recorded as goodwill. The preliminary allocation of the purchase price was based upon a preliminary valuation and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, certain legal matters, income and non-income based taxes and residual goodwill. We expect to continue to obtain information to assist us in determining the fair values of the net assets acquired at the acquisition date during the measurement period. Our preliminary purchase price allocation for Sun is as follows:
 
 
 
 
 
 
(in millions)
  
 
 
Cash, cash equivalents and marketable securities
  
$
    2,571
  
Trade receivables
  
 
1,120
  
Inventories
  
 
331
  
Goodwill
  
 
1,291
  
Intangible assets
  
 
3,347
  
In-process research and development
  
 
415
  
Other assets
  
 
2,035
  
Deferred tax assets, net
  
 
1,250
  
Accounts payable and other liabilities
  
 
(3,950
) 
Deferred revenues
  
 
(1,115
) 
 
  
 
 
 
Total preliminary purchase price
  
$
7,295
  
 
  
 
 
 
We generally do not expect the goodwill recognized to be deductible for income tax purposes.
Valuations of Intangible Assets Acquired
The following table sets forth the components of intangible assets acquired in connection with the Sun acquisition:
 
 
 
 
 
 
 
(Dollars in millions)
  
Fair Value
  
Useful Life
Hardware systems support agreements and related relationships
  
$
771
  
7 years
Developed technology
  
 
          1,349
  
4 years
Core technology
  
 
534
  
4 years
Customer relationships
  
 
467
  
3 years
Trademarks
  
 
226
  
7 years
 
  
 
 
  
 
Total intangible assets subject to amortization
  
 
3,347
  
 
In-process research and development
  
 
415
  
N.A.
 
  
 
 
  
 
Total intangible assets
  
$
3,762
  
 
 
  
 
 
  
 
Hardware systems support agreements and related relationships and customer relationships represent the fair values of the underlying relationships and agreements with Sun's customers. Developed technology represents the fair values of Sun products that have reached technological feasibility and are a part of Sun's product lines. Core technology represents the fair values of the Sun processes, patents and trade secrets related to the design and development of Sun's products. This proprietary know-how can be leveraged to develop new technology and improve our existing products. Trademarks represent the fair values of brand and name recognition associated with the marketing of Sun's products and services. In-process research and development represents the fair values of incomplete Sun research and development projects that had not reached technological feasibility as of the date of acquisition.
 
Preliminary Pre-Acquisition Contingencies Assumed
We have evaluated and continue to evaluate pre-acquisition contingencies relating to Sun that existed as of the acquisition date. We have preliminarily determined that certain of these pre-acquisition contingencies are probable in nature and estimable as of the acquisition date and, accordingly, have preliminarily recorded our best estimates for these contingencies as a part of the preliminary purchase price allocation for Sun. We continue to gather information for and evaluate substantially all pre-acquisition contingencies that we have assumed from Sun. If we make changes to the amounts recorded or identify additional pre-acquisition contingencies during the remainder of the measurement period, such amounts recorded will be included in the purchase price allocation during the measurement period and, subsequently, in our results of operations.
Other Fiscal 2010 Acquisitions and Proposed Acquisition of Phase Forward Incorporated and Others
During fiscal 2010, we acquired other companies and purchased certain technology and development assets to expand our product and services offerings. These acquisitions were not significant individually or in the aggregate. We have included the financial results of these companies in our consolidated results from their respective acquisition dates. The preliminary purchase price allocations for each of these acquisitions were based upon a preliminary valuation and our estimates and assumptions for certain of these acquisitions are subject to change as we obtain additional information for our estimates during the respective measurement periods. The primary areas of those purchase price allocations that are not yet finalized relate to identifiable intangible assets, certain legal matters, income and non-income based taxes and residual goodwill.
Separately, in the fourth quarter of fiscal 2010, we agreed to acquire Phase Forward Incorporated, a provider of applications for life sciences companies and healthcare providers, for $17.00 per share in cash, amounting to approximately $810 million. Our proposed acquisition of Phase Forward is subject to stockholder and regulatory approval and other customary closing conditions. In addition, we agreed to acquire certain other companies for amounts that are not material to our business.
Fiscal 2009 Acquisitions
During fiscal 2009, we acquired several companies and purchased certain technology and development assets to expand our product offerings. These acquisitions were not individually significant. We have included the financial results of these companies in our consolidated results from their respective acquisition dates. In the aggregate, the total purchase price for these acquisitions was approximately $1.2 billion, which consisted of approximately $1.2 billion in cash, $1 million for the fair value of stock options and restricted stock-based awards assumed and $13 million for transaction costs. In allocating the total purchase price for these acquisitions based on estimated fair values, we recorded $708 million of goodwill, $587 million of identifiable intangible assets, $96 million of net tangible liabilities (resulting primarily from deferred tax and restructuring liabilities assumed as a part of these transactions) and $10 million of in-process research and development.
Fiscal 2008 Acquisitions
BEA Systems, Inc.
We acquired BEA Systems, Inc. on April 29, 2008 by means of a merger of one of our wholly-owned subsidiaries with and into BEA such that BEA became a wholly-owned subsidiary of Oracle. We acquired BEA to, among other things, expand our offering of middleware products. We have included the financial results of BEA in our consolidated financial results effective April 29, 2008.
The total purchase price for BEA was $8.6 billion which consisted of $8.3 billion in cash paid to acquire the outstanding common stock of BEA, $225 million for the fair value of BEA stock options and restricted stock-based awards assumed and $10 million for acquisition related transaction costs. In allocating the purchase price based on estimated fair values, we recorded approximately $4.5 billion of goodwill, $3.3 billion of identifiable intangible assets, $733 million of net tangible assets and $17 million of in-process research and development.
 
Other Fiscal 2008 Acquisitions
During fiscal 2008, we acquired several other companies and purchased certain technology and development assets. Our fiscal 2008 acquisitions, other than BEA, were not significant individually or in the aggregate. We have included the effects of these transactions in our results of operations prospectively from the respective dates of the acquisitions.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations for Oracle, Sun and certain other companies that we acquired since the beginning of fiscal 2009 (which were collectively significant for the purposes of unaudited pro forma financial information disclosure) as though the companies were combined as of the beginning of fiscal 2009. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from these acquisitions including our amortization charges from acquired intangible assets (certain of which are preliminary), the elimination of certain goodwill and intangible asset impairment charges incurred by Sun, stock-based compensation charges for unvested stock options and restricted stock-based awards assumed, adjustments to interest expense for borrowings and the related tax effects as though the aforementioned companies were combined as of the beginning of fiscal 2009. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions and any borrowings undertaken to finance these acquisitions had taken place at the beginning of fiscal 2009.
The unaudited pro forma financial information for fiscal 2010 combined the historical results of Oracle for fiscal 2010, the historical results of Sun for the eight months ended September 27, 2009 (due to differences in reporting periods) and the historical results for certain other companies that we acquired since the beginning of fiscal 2010 based upon their respective previous reporting periods, the dates that these companies were acquired by us, and the effects of the pro forma adjustments listed above.
The unaudited pro forma financial information for fiscal 2009 combined the historical results of Oracle for fiscal 2009, the historical results of Sun for the year ended June 30, 2009 (due to differences in reporting periods) and the historical results of certain other companies that we acquired since the beginning of fiscal 2009 based upon their respective previous reporting periods and the dates these companies were acquired by us, and the effects of the pro forma adjustments listed above. The unaudited pro forma financial information was as follows for fiscal 2010 and 2009:
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
(in millions, except per share data)
  
2010
  
2009
Total revenues
  
$
33,550
  
$
34,831
Net income
  
$
5,656
  
$
4,639
Basic earnings per share
  
$
1.13
  
$
0.91
Diluted earnings per share
  
$
1.11
  
$
0.90
 
 
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
 
3.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents primarily consist of deposits held at major banks, money market funds, Tier-1 commercial paper, U.S. Treasury obligations, U.S. government agency and government sponsored enterprise obligations, and other securities with original maturities of 90 days or less. Marketable securities primarily consist of time deposits held at major banks, Tier-1 commercial paper, corporate notes, U.S. Treasury obligations and U.S. government agency and government sponsored enterprise debt obligations and certain other securities.
The amortized principal amounts of our cash, cash equivalents and marketable securities approximated their fair values at May 31, 2010 and 2009. We use the specific identification method to determine any realized gains or losses from the sale of our marketable securities classified as available-for-sale. Such realized gains and losses were insignificant for fiscal 2010, 2009 and 2008. The following table summarizes the components of our cash equivalents and marketable securities held, substantially all of which were classified as available-for-sale:
 
 
 
 
 
 
 
 
 
  
May 31,
(in millions)
  
2010
  
2009
Money market funds
  
$
2,423
  
$
467
U.S. Treasury, U.S. government and U.S. government agency debt securities
  
 
3,010
  
 
4,078
Commercial paper, corporate debt securities and other
  
 
5,634
  
 
2,700
 
  
 
 
  
 
 
Total investments
  
$
      11,067
  
$
        7,245
 
  
 
 
  
 
 
Investments classified as cash equivalents
  
$
2,512
  
$
3,616
 
  
 
 
  
 
 
Investments classified as marketable securities
  
$
8,555
  
$
3,629
 
  
 
 
  
 
 
Substantially all of our marketable security investments held as of May 31, 2010 mature within one year. Our investment portfolio is subject to market risk due to changes in interest rates. We place our investments with high credit quality issuers as described above and, by policy, limit the amount of credit exposure to any one issuer. As stated in our investment policy, we are averse to principal loss and seek to preserve our invested funds by limiting default risk, market risk and reinvestment risk.
 
 
FAIR VALUE MEASUREMENTS
FAIR VALUE MEASUREMENTS
 
4.
FAIR VALUE MEASUREMENTS
We perform fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset's or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
 
 
•
 
Level 1:    quoted prices in active markets for identical assets or liabilities;
 
 
•
 
Level 2:    inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
 
 
•
 
Level 3:    unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types of instruments (Level 1 and 2 inputs are defined above):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
May 31, 2010
  
May 31, 2009
 
  
Fair Value
Measurements
Using Input Types
  
 
  
Fair Value
Measurements
Using Input Types
  
 
(in millions)
  
    Level 1    
  
    Level 2    
  
     Total     
  
    Level 1    
  
    Level 2    
  
     Total     
Assets:
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Money market funds
  
$
2,423
  
$
—
  
$
2,423
  
$
467
  
$
—
  
$
467
U.S. Treasury, U.S. government and U.S. government agency debt securities
  
 
3,010
  
 
—
  
 
3,010
  
 
4,078
  
 
—
  
 
4,078
Commercial paper debt securities
  
 
—
  
 
3,378
  
 
3,378
  
 
—
  
 
1,365
  
 
1,365
Corporate debt securities and other
  
 
—
  
 
2,256
  
 
2,256
  
 
—
  
 
1,335
  
 
1,335
Derivative financial instruments
  
 
—
  
 
33
  
 
33
  
 
—
  
 
—
  
 
—
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Total assets
  
$
5,433
  
$
5,667
  
$
11,100
  
$
4,545
  
$
2,700
  
$
7,245
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Liabilities:
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Derivative financial instruments
  
$
—
  
$
—
  
$
—
  
$
—
  
$
35
  
$
35
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Total liabilities
  
$
—
  
$
—
  
$
—
  
$
—
  
$
35
  
$
35
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Our valuation techniques used to measure the fair values of our money market funds and U.S. Treasury, U.S. government and U.S. government agency debt securities, that were classified as Level 1 in the table above, were derived from quoted market prices as substantially all of these instruments have maturity dates (if any) within one year from our date of purchase and active markets for these instruments exist. Our valuation techniques used to measure the fair values of all other instruments listed in the table above, generally all of which mature within one year and the counterparties to which have high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data. Our discounted cash flow techniques used observable market inputs, such as LIBOR-based yield curves, and currency spot and forward rates.
Our cash and cash equivalents, marketable securities and derivative financial instruments are recognized and measured at fair value in our consolidated financial statements. Based on the trading prices of our $14.62 billion and $10.25 billion borrowings, which included senior notes and commercial paper notes, that were outstanding as of May 31, 2010 and May 31, 2009, respectively, and the interest rates we could obtain for other borrowings with similar terms at those dates, the estimated fair values of our borrowings at May 31, 2010 and May 31, 2009 were $15.90 billion and $10.79 billion, respectively.
 
INVENTORIES
INVENTORIES
 
5.
INVENTORIES
Inventories consisted of the following as of May 31, 2010 (insignificant as of May 31, 2009):
 
 
 
 
 
(in millions)
  
May 31, 2010
Raw materials
  
$
95
Work-in-process
  
 
43
Finished goods
  
 
121
 
  
 
 
Total
  
$
259
 
  
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
 
 
6.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Estimated
Useful Lives
  
May 31,
 
(Dollars in millions)
  
  
2010
 
 
2009
 
Computer, network, machinery and equipment
  
1-5 years
  
$
1,400
  
 
$
1,213
  
Buildings and improvements
  
1-50 years
  
 
1,995
  
 
 
1,579
  
Furniture and fixtures
  
3-10 years
  
 
406
  
 
 
388
  
Land
  
—
  
 
757
  
 
 
515
  
Automobiles
  
5 years
  
 
3
  
 
 
5
  
Construction in progress
  
—
  
 
87
  
 
 
126
  
 
  
 
  
 
 
 
 
 
 
 
Total property, plant and equipment
  
1-50 years
  
 
4,648
  
 
 
3,826
  
Accumulated depreciation
  
 
  
 
(1,885
) 
 
 
(1,904
) 
 
  
 
  
 
 
 
 
 
 
 
Total property, plant and equipment, net
  
 
  
$
    2,763
  
 
$
    1,922
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
INTANGIBLE ASSETS AND GOODWILL
INTANGIBLE ASSETS AND GOODWILL
 
 
 
7.
INTANGIBLE ASSETS AND GOODWILL
The changes in intangible assets for fiscal 2010 and the net book value of intangible assets at May 31, 2010 and 2009 were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Intangible Assets, Gross
 
Accumulated Amortization
 
 
Intangible Assets, Net
 
Weighted
Average
Useful Life
 
May 31,
2009
 
Additions
 
May 31,
2010
 
May 31,
2009
 
 
Expense
 
 
May 31,
2010
 
 
May 31,
2009
 
May 31,
2010
 
Software support agreements and related relationships
 
$
5,012
 
$
66
 
$
5,078
 
$
(1,601
) 
 
$
(574
) 
 
$
(2,175
) 
 
$
3,411
 
$
2,903
 
9 years
Hardware systems support agreements and related relationships
 
 
—
 
 
759
 
 
759
 
 
—
  
 
 
(29
) 
 
 
(29
) 
 
 
—
 
 
730
 
7 years
Developed technology
 
 
3,844
 
 
1,494
 
 
5,338
 
 
(1,925
) 
 
 
(811
) 
 
 
(2,736
) 
 
 
1,919
 
 
2,602
 
5 years
Core technology
 
 
1,502
 
 
609
 
 
2,111
 
 
(687
) 
 
 
(277
) 
 
 
(964
) 
 
 
815
 
 
1,147
 
5 years
Customer relationships
 
 
1,284
 
 
481
 
 
1,765
 
 
(320
) 
 
 
(234
) 
 
 
(554
) 
 
 
964
 
 
1,211
 
7 years
Trademarks
 
 
273
 
 
231
 
 
504
 
 
(113
) 
 
 
(48
) 
 
 
(161
) 
 
 
160
 
 
343
 
7 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total intangible assets subject to amortization
 
 
11,915
 
 
3,640
 
 
15,555
 
 
(4,646
) 
 
 
(1,973
) 
 
 
(6,619
) 
 
 
7,269
 
 
8,936
 
 
In-process research and development
 
 
—
 
 
385
 
 
385
 
 
—
  
 
 
—
  
 
 
—
  
 
 
—
 
 
385
 
N.A.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
    11,915
 
$
    4,025
 
$
    15,940
 
$
    (4,646
) 
 
$
    (1,973
) 
 
$
    (6,619
) 
 
$
    7,269
 
$
    9,321
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total amortization expense related to our intangible assets was $2.0 billion, $1.7 billion and $1.2 billion in fiscal 2010, 2009 and 2008, respectively. As of May 31, 2010, estimated future amortization expense related to our intangible assets subject to amortization was $2.3 billion in fiscal 2011, $2.0 billion in fiscal 2012, $1.6 billion in fiscal 2013, $1.4 billion in fiscal 2014, $1.0 billion in fiscal 2015 and $638 million thereafter.
 
The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, by operating segment for fiscal 2010 and 2009 were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
New
Software
Licenses
 
Software
License
    Updates and    
Product
Support
 
 
    Hardware    
Systems
Support
 
Services
 
 
Other(1)
 
 
Total
 
Balances as of May 31, 2008
 
$
    4,058
 
$
    8,028
  
 
$
—
 
$
   1,550
  
 
$
    4,355
  
 
$
  17,991
  
Allocation of goodwill(1)
 
 
1,258
 
 
2,907
  
 
 
—
 
 
190
  
 
 
(4,355
) 
 
 
—
  
Goodwill from acquisitions
 
 
373
 
 
283
  
 
 
—
 
 
56
  
 
 
—
  
 
 
712
  
Goodwill adjustments(2)
 
 
27
 
 
116
  
 
 
—
 
 
(4
) 
 
 
—
  
 
 
139
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of May 31, 2009
 
 
5,716
 
 
11,334
  
 
 
—
 
 
1,792
  
 
 
—
  
 
 
18,842
  
Goodwill from acquisitions
 
 
217
 
 
490
  
 
 
891
 
 
2
  
 
 
—
  
 
 
1,600
  
Goodwill adjustments for acquisitions consummated since the beginning of fiscal 2010(2)
 
 
7
 
 
17
  
 
 
32
 
 
—
  
 
 
—
  
 
 
56
  
Goodwill adjustments for acquisitions consummated prior to fiscal 2010(2)
 
 
55
 
 
(39
) 
 
 
—
 
 
(89
) 
 
 
—
  
 
 
(73
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of May 31, 2010
 
$
5,995
 
$
11,802
  
 
$
923
 
$
1,705
  
 
$
—
  
 
$
  20,425
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents the goodwill allocation associated with certain acquisitions that was allocated to our software business operating segments and services business upon the completion of certain valuations.
 
(2)
Pursuant to our business combinations accounting policy, we record goodwill adjustments for the effect on goodwill of changes to net assets acquired during the measurement or purchase price allocation period (either of which can be up to one year from the date of an acquisition). Goodwill adjustments for our services business includes $82 million that primarily relates to the reclassification of goodwill associated with certain acquired product offerings to our new software licenses operating segment. Goodwill adjustments for acquisitions consummated since the beginning of fiscal 2010 were generally balance sheet related with insignificant effects to our previously reported operating results.
 
 
NOTES PAYABLE AND OTHER BORROWINGS
NOTES PAYABLE AND OTHER BORROWINGS
 
 
8.
NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following:
 
 
 
 
 
 
 
 
(Dollars in millions)
  
May 31,
2010
  
May 31,
2009
Floating rate senior notes due May 2010
  
$
—
  
$
1,000
Commercial paper notes (effective interest rate of 0.28%)
  
 
881
  
 
—
5.00% senior notes due January 2011, net of discount of $1 and $3 as of May 31, 2010 and 2009, respectively
  
 
2,249
  
 
2,247
4.95% senior notes due April 2013
  
 
1,250
  
 
1,250
3.75% senior notes due July 2014, net of fair value adjustment of $33(1)
  
 
1,533
  
 
—
5.25% senior notes due January 2016, net of discount of $6 and $7 as of May 31, 2010 and 2009, respectively
  
 
1,994
  
 
1,993
5.75% senior notes due April 2018, net of discount of $1 as of May 31, 2010 and 2009
  
 
2,499
  
 
2,499
5.00% senior notes due July 2019, net of discount of $6 as of May 31, 2010
  
 
1,744
  
 
—
6.50% senior notes due April 2038, net of discount of $2 as of May 31, 2010 and 2009
  
 
1,248
  
 
1,248
6.125% senior notes due July 2039, net of discount of $8 as of May 31, 2010
  
 
1,242
  
 
—
Capital leases
  
 
15
  
 
1
 
  
 
 
  
 
 
Total borrowings
  
$
    14,655
  
$
    10,238
 
  
 
 
  
 
 
Notes payable, current and other current borrowings
  
$
3,145
  
$
1,001
 
  
 
 
  
 
 
Notes payable, non-current and other non-current borrowings
  
$
11,510
  
$
9,237
 
  
 
 
  
 
 
 
(1)
Refer to Note 11 for a description of our accounting for fair value hedges
 
 
Senior Notes and Other
In July 2009, we issued $4.5 billion of fixed rate senior notes comprised of $1.5 billion of 3.75% notes due July 2014 (2014 Notes), $1.75 billion of 5.00% notes due July 2019 (2019 Notes) and $1.25 billion of 6.125% notes due July 2039 (2039 Notes). We issued these senior notes for general corporate purposes and for our acquisition of Sun and acquisition related expenses.
In April 2008, we issued $5.0 billion of fixed rate senior notes, of which $1.25 billion of 4.95% senior notes is due April 2013 (2013 Notes), $2.5 billion of 5.75% senior notes is due April 2018 (2018 Notes), and $1.25 billion of 6.50% senior notes is due April 2038 (2038 Notes). We issued these senior notes to finance the acquisition of BEA and for general corporate purposes.
In May 2007, we issued $2.0 billion of floating rate senior notes, of which $1.0 billion was due and paid in May 2009 and $1.0 billion was due and paid in May 2010. We had also entered into certain variable to fixed interest rate swap agreements related to these senior notes, which settled as of the same dates the notes were repaid (see Note 11).
In January 2006, we issued $5.75 billion of senior notes, of which $2.25 billion of 5.00% senior notes due 2011 (2011 Notes) and $2.0 billion of 5.25% senior notes due 2016 (2016 Notes and together with the 2011 Notes, Original Senior Notes) remained outstanding as of May 31, 2010 and 2009. In June 2006, we completed a registered exchange offer with substantially identical terms to the Original Senior Notes.
The effective interest yields of the 2011 Notes, 2013 Notes, 2014 Notes, 2016 Notes, 2018 Notes, 2019 Notes, 2038 Notes and 2039 Notes (collectively, the Senior Notes) at May 31, 2010 were 5.08%, 4.96%, 3.75%, 5.32%, 5.76%, 5.05%, 6.52% and 6.19%, respectively. Interest is payable semi-annually for the Senior Notes. In September 2009, we entered into interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with the 2014 Notes so that the interest payable on these notes effectively became variable (1.44% at May 31, 2010; see Note 11 for additional information). All of the Senior Notes may be redeemed at any time, subject to payment of a make-whole premium.
The Senior Notes rank pari passu with the Commercial Paper Notes (defined below) that we have issued, any other notes we may issue in the future pursuant to the CP Program described below and all existing and future senior indebtedness of Oracle Corporation. All existing and future liabilities of the subsidiaries of Oracle Corporation will be effectively senior to the Senior Notes and our Commercial Paper Notes.
Separately, shortly after the closing of our acquisition of Sun we repaid, in full, $700 million of Sun's legacy convertible notes in the third quarter of fiscal 2010.
We were in compliance with all debt-related covenants at May 31, 2010. Future principal payments for all of our borrowings, including borrowings pursuant to our CP Program described below, at May 31, 2010 were as follows: $3.1 billion in fiscal 2011, none in fiscal 2012, $1.3 billion in fiscal 2013, none in fiscal 2014, $1.5 billion in fiscal 2015 and $8.8 billion thereafter.
Commercial Paper Program & Commercial Paper Notes
We entered into a commercial paper program in February 2006 (amended in May 2008) via dealer agreements with Banc of America Securities LLC and JP Morgan Securities, Inc. and an Issuing and Paying Agency Agreement entered into in February 2006 with JPMorgan Chase Bank, National Association (CP Program). On May 11, 2010, we reduced the overall capacity of our CP Program from $5.0 billion to $3.0 billion after our March 17, 2009 $2.0 billion 364-day revolving credit agreement terminated pursuant to its terms (see additional discussion below).
During fiscal 2010, 2009 and 2008, we issued $2.8 billion, none and $1.2 billion of unsecured short-term commercial paper notes (Commercial Paper Notes), respectively, pursuant to the CP Program, which allows us to issue and sell unsecured short-term promissory notes pursuant to a private placement exemption from the registration requirements under federal and state securities laws. As of May 31, 2010, we had $881 million of Commercial Paper Notes outstanding at a weighted average yield, including issuance costs, of 0.28% that mature at various dates through July 15, 2010 (none outstanding as of May 31, 2009). We back-stop these notes with our revolving credit agreement and therefore, as of May 31, 2010, we consider that we have $2.1 billion of capacity remaining under our reduced CP Program.
Revolving Credit Agreements
On March 16, 2010, our $2.0 billion, 364-Day Revolving Credit Agreement dated March 17, 2009, among Oracle; the lenders named therein; Wachovia Bank, National Association, as administrative agent; BNP Paribas as syndication agent; the documentation agents named therein; and Wachovia Capital Markets, LLC, and BNP Paribas Securities Corp., as joint lead arrangers and joint bookrunners (the 2009 Credit Agreement), terminated pursuant to its terms. No debt was outstanding pursuant to the 2009 Credit Agreement as of its date of termination.
As of May 31, 2010, we had a $3.0 billion, five-year Revolving Credit Agreement with certain lenders that we entered into in March 2006 (the 2006 Credit Agreement). The 2006 Credit Agreement provides for unsecured revolving credit facilities, which can also be used to back-stop any Commercial Paper Notes (defined above) that we may issue and for working capital and other general corporate purposes. Subject to certain conditions stated in the 2006 Credit Agreement, we may borrow, prepay and re-borrow amounts under the facilities at any time during the term of the 2006 Credit Agreement. Interest for the 2006 Credit Agreement is based on either (a) a LIBOR-based formula or (b) a formula based on Wells Fargo's prime rate or on the federal funds effective rate. Any amounts drawn pursuant to the 2006 Credit Agreement are due on March 14, 2011. No amounts were outstanding pursuant to the 2006 Credit Agreement as of May 31, 2010 and 2009 and a total of $3.0 billion remained available.
The 2006 Credit Agreement contains certain customary representations and warranties, covenants and events of default, including the requirement that our total net debt to total capitalization ratio not exceed 45%. If any of the events of default occur and are not cured within applicable grace periods or waived, any unpaid amounts under the 2006 Credit Agreement may be declared immediately due and payable and the 2006 Credit Agreement may be terminated. We were in compliance with the Credit Agreements' covenants as of May 31, 2010.
 
 
RESTRUCTURING ACTIVITIES
RESTRUCTURING ACTIVITIES
 
 
9.
RESTRUCTURING ACTIVITIES
Sun Restructuring Plan
During the third quarter of fiscal 2010, our management approved, committed to and initiated a plan to restructure our operations due to our acquisition of Sun (the Sun Restructuring Plan) in order to improve the cost efficiencies in our merged operations. Our management subsequently amended the Sun Restructuring Plan to reflect additional actions that we expect to take to improve the cost efficiencies in our merged operations. The total estimated restructuring costs associated with the Sun Restructuring Plan are $1.1 billion consisting primarily of employee severance expenses, abandoned facilities obligations and contract termination costs. The restructuring costs will be recorded to the restructuring expense line item within our consolidated statements of operations as they are recognized. We recorded $342 million of restructuring expenses in connection with the Sun Restructuring Plan during fiscal 2010 and we expect to incur the majority of the approximately $755 million of remaining expenses pursuant to the Sun Restructuring Plan through the calendar year 2011. Any changes to the estimates of executing the Sun Restructuring Plan will be reflected in our future results of operations.
Fiscal 2009 Oracle Restructuring Plan
During the third quarter of fiscal 2009, our management approved, committed to and initiated plans to restructure and further improve efficiencies in our operations (the 2009 Plan). Our management subsequently amended the 2009 Plan to reflect additional actions that we implemented over the course of fiscal 2010. The total estimated restructuring costs associated with the 2009 Plan are $453 million and will be recorded to the restructuring expense line item within our consolidated statements of operations as they are recognized. In fiscal 2010, we recorded $286 million of restructuring expenses and in fiscal 2009 we recorded $85 million of restructuring expenses in connection with the 2009 Plan. We expect to incur the remaining $82 million during our fiscal 2011. Any changes to the estimates of executing the 2009 Plan will be reflected in our future results of operations.
Acquisition Related Restructuring Plans Adopted Prior to Fiscal 2010
Included in the other restructuring plans line in the fiscal 2010 and 2009 activity tables below and in the total restructuring plans line for the fiscal 2008 activity table below are certain restructuring plans that relate to companies that we acquired prior to our adoption of the revised business combinations accounting guidance contained in ASC 805 as of the beginning of fiscal 2010. Costs related to these restructuring plans were originally recognized as liabilities assumed in each of the respective business combinations and included in the allocation of the cost to acquire these companies and, accordingly, have resulted in an increase to goodwill. Our restructuring expenses may change as our management executes the approved plans. Future decreases to the estimates of executing these acquisitions related restructuring plans will be recorded as an adjustment to goodwill indefinitely. Increases to the estimates of the acquisition related restructuring plans will be recorded to operating expenses.
Summary of All Plans
Fiscal 2010 Activity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
Accrued
May  31,
2009(2)
 
Year Ended May 31, 2010
 
Accrued
May  31,
2010(2)
 
Total
Costs
Accrued
to Date
 
Total
Expected
Program
Costs
 
 
Initial
Costs(3)
 
Adj.
to  Cost(4)
 
Cash
Payments
 
Others(5)
 
 
 
Sun Restructuring Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New software licenses
 
$
      —
 
$
        6
 
$
      —
 
$
      (1)
 
$
       —
 
$
        5
 
$
         6
 
$
   88
Software license updates and product support
 
 
—
 
 
6
 
 
—
 
 
(3)
 
 
—
 
 
3
 
 
6
 
 
89
Hardware systems business
 
 
—
 
 
61
 
 
—
 
 
(19)
 
 
—
 
 
42
 
 
61
 
 
98
Services
 
 
—
 
 
11
 
 
—
 
 
(3)
 
 
—
 
 
8
 
 
11
 
 
152
General and administrative and other(1)
 
 
—
 
 
258
 
 
—
 
 
(222)
 
 
(7)
 
 
29
 
 
258
 
 
670
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Sun Restructuring
 
$
      —
 
$
    342
 
$
      —
 
$
  (248)
 
$
      (7)
 
$
      87
 
$
     342
 
$
   1,097
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2009 Oracle Restructuring Plan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New software licenses
 
$
      12
 
$
    106
 
$
        4
 
$
    (98)
 
$
      (4)
 
$
      20
 
$
     140
 
$
      162
Software license updates and product support
 
 
—
 
 
3
 
 
(2)
 
 
(4)
 
 
3
 
 
—
 
 
2
 
 
21
Services
 
 
22
 
 
128
 
 
2
 
 
(104)
 
 
(15)
 
 
33
 
 
165
 
 
206
Other(1)
 
 
13
 
 
49
 
 
(4)
 
 
(34)
 
 
—
 
 
24
 
 
64
 
 
64
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Fiscal 2009 Oracle Restructuring
 
$
      47
 
$
    286
 
$
      —
 
$
  (240)
 
$
    (16)
 
$
      77
 
$
     371
 
$
      453
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other restructuring plans
 
$
    342
 
$
        6
 
$
    (84)
 
$
  (157)
 
$
     275
 
$
    382
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total restructuring plans(6)
 
$
    389
 
$
    634
 
$
    (84)
 
$
  (645)
 
$
     252
 
$
    546
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2009 Activity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
  
Accrued
May  31,
2008(2)
  
Year Ended May 31, 2009
 
 
Accrued
May  31,
2009(2)
  
  
Initial
Costs(3 )
  
Adj. To
Cost(4)
 
 
Cash
Payments
 
 
Other(5 )
 
 
Fiscal 2009 Oracle Restructuring Plan
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New software licenses
  
$
—
  
$
30
  
$
      —
  
 
$
    (18
) 
 
$
      —
  
 
$
12
Software license updates and product support
  
 
—
  
 
1
  
 
—
  
 
 
(1
) 
 
 
—
  
 
 
—
Services
  
 
—
  
 
35
  
 
—
  
 
 
(13
) 
 
 
—
  
 
 
22
Other(1)
  
 
—
  
 
19
  
 
—
  
 
 
(6
) 
 
 
—
  
 
 
13
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Fiscal 2009 Oracle Restructuring
  
$
—
  
$
85
  
$
—
  
 
$
(38
) 
 
$
—
  
 
$
47
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other restructuring plans
  
$
    568
  
$
26
  
$
(12
) 
 
$
(215
) 
 
$
(25
) 
 
$
    342
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total restructuring plans(6)
  
$
568
  
$
    111
  
$
(12
) 
 
$
(253
) 
 
$
(25
) 
 
$
389
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal 2008 Activity
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
  
Accrued
May 31,
2007
  
Year Ended May 31, 2008
 
 
Accrued
May  31,
2008(2)
  
  
Initial
Costs(3)
  
Adj. To
Cost(4)
 
 
Cash
Payments
 
 
Others(5)
 
 
Total restructuring plans(6)
  
$
459
  
$
272
  
$
10
  
 
$
(184
) 
 
$
11
  
 
$
568
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Other includes severance costs related to operating segments that were not individually or collectively significant, facilities related restructuring expenses and contract termination costs.
 
(2)
Accrued restructuring for our most significant restructuring plans at May 31, 2010 and 2009 was $546 million and $389 million, respectively. The balances at May 31, 2010 and 2009 include $290 million and $203 million recorded in other current liabilities, respectively, and $256 million and $186 million recorded in other non-current liabilities, respectively.
 
(3)
Initial costs recorded for the respective restructuring plans.
 
(4)
All plan adjustments are changes in estimates whereby all increases in costs are generally recorded to operating expenses in the period of adjustment with decreases in the costs of our Oracle-based plans and the Sun Restructuring Plan being recorded to operating expenses and decreases in costs of our acquisition related plans adopted prior to fiscal 2010 or assumed from Sun recorded as adjustments to goodwill.
 
(5)
Represents foreign currency translation, other adjustments and accrued restructuring plan liabilities of $275 million that were assumed from our acquisition of Sun during fiscal 2010.
 
(6)
Restructuring plans included in this footnote represent those plans that management has deemed the most significant.
 
 
DEFERRED REVENUES
DEFERRED REVENUES
 
 
10.
DEFERRED REVENUES
Deferred revenues consisted of the following:
 
 
 
 
 
 
 
 
 
  
May 31,
(in millions)
  
2010
  
2009
Software license updates and product support
  
$
    4,618
  
$
    4,158
Hardware systems support
  
 
537
  
 
—
Services
  
 
376
  
 
243
New software licenses
  
 
330
  
 
191
Hardware systems products
  
 
39
  
 
—
 
  
 
 
  
 
 
Deferred revenues, current
  
 
5,900
  
 
4,592
Deferred revenues, non-current (in other non-current liabilities)
  
 
388
  
 
204
 
  
 
 
  
 
 
Total deferred revenues
  
$
6,288
  
$
4,796
 
  
 
 
  
 
 
Deferred software license updates and product support revenues and deferred hardware systems support revenues represent customer payments made in advance for annual support contracts. Software license updates and product support contracts and hardware systems support contracts are typically billed on a per annum basis in advance and revenues are recognized ratably over the support periods. Deferred services revenues include prepayments for consulting, On Demand and education services. Revenue for these services is recognized as the services are performed. Deferred new software license revenues typically result from undelivered products or specified enhancements, customer specific acceptance provisions, software license transactions that cannot be segmented from consulting services, amongst other reasons. Deferred hardware systems product revenues typically result from sales to customers, including channel partners and resellers, where revenue recognition criteria have not been met, transactions involving customer specific acceptance provisions or transactions that cannot be segmented from consulting services.
In connection with the purchase price allocations related to our acquisitions, we have estimated the fair values of the support obligations assumed. The estimated fair values of the support obligations assumed were determined using a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligations. These fair value adjustments reduce the revenues recognized over the support contract term of our acquired contracts.
 
 
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
 
 
11.
DERIVATIVE FINANCIAL INSTRUMENTS
We adopted the disclosure requirements of ASC 815 during fiscal 2009 and have provided these disclosures prospectively from the year of adoption.
Interest Rate Swap Agreements
Fair Value Hedges
In September 2009, we entered into interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with the 2014 Notes (as defined in Note 8) so that the interest payable on these notes effectively became variable based on LIBOR. The critical terms of the interest rate swap agreements and the 2014 Notes match, including the notional amounts and maturity dates. Accordingly, we have designated these swap agreements as qualifying hedging instruments and are accounting for them as fair value hedges pursuant to ASC 815. These transactions are characterized as fair value hedges for financial accounting purposes because they protect us against changes in the fair value of our fixed rate borrowings due to benchmark interest rate movements. The changes in fair values of these interest rate swap agreements are recognized as interest expense in our consolidated statements of operations with the corresponding amounts included in other assets or other non-current liabilities in our consolidated balance sheets. The amount of net gain (loss) attributable to the risk being hedged is recognized as interest expense in our consolidated statement of operations with the corresponding amount included in notes payable and other non-current borrowings. The periodic interest settlements, which occur at the same interval as the 2014 Notes, are recorded as interest expense.
We do not use any interest rate swap agreements for trading purposes.
Cash Flow Hedges
In relation to the variable interest obligations associated with our senior notes that were due and paid in May 2010 and May 2009 (Floating Rate Notes), we entered into certain variable to fixed interest rate swap agreements to manage the economic effects of the variable interest obligations and designated these agreements as qualifying cash flow hedges. Upon payment of the Floating Rate Notes in May 2010 and May 2009, we also settled the interest rate swap agreements associated with these notes and no arrangements were outstanding as of May 31, 2010. The unrealized losses on these interest rate swap agreements were included in accumulated other comprehensive income and the corresponding fair value payables were included in other current liabilities in our consolidated balance sheet. The periodic interest settlements, which occurred at the same interval as the Floating Rate Notes were recorded as interest expense.
 
Net Investment Hedges
Periodically, we hedge net assets of certain of our international subsidiaries using foreign currency forward contracts to offset the translation and economic exposures related to our foreign currency-based investments in these subsidiaries. These contracts have been designated as net investment hedges pursuant to ASC 815. We entered into these net investment hedges for all of fiscal 2009 and the majority of fiscal 2010. We suspended this program during our fourth quarter of fiscal 2010 and, as of May 31, 2010, we have no contracts outstanding (one contract was outstanding as of May 31, 2009 in Japanese Yen with a nominal fair value and notional amount of $694 million).
We used the spot method to measure the effectiveness of our net investment hedges. Under this method for each reporting period, the change in fair value of the forward contracts attributable to the changes in spot exchange rates (the effective portion) was reported in accumulated other comprehensive income on our consolidated balance sheet and the remaining change in fair value of the forward contract (the ineffective portion, if any) was recognized in non-operating income (expense), net, in our consolidated statement of operations. We recorded settlements under these forward contracts in a similar manner. The fair values of both the effective and ineffective portions were recorded to our consolidated balance sheet as prepaid expenses and other current assets for amounts receivable from the counterparties or other current liabilities for amounts payable to the counterparties.
Foreign Currency Forward Contracts Not Designated as Hedges
We transact business in various foreign currencies and are subject to risks associated with the effects of certain foreign currency exposures. We have a program that primarily utilizes foreign currency forward contracts to offset these risks associated with foreign currency exposures. Our program may be suspended from time to time. This program was active for the majority of fiscal 2010 and was suspended during our fourth quarter of fiscal 2010. When this program is active, we enter into foreign currency forward contracts so that increases or decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Our foreign currency exposures typically arise from intercompany sublicense fees and other intercompany transactions that are expected to be cash settled in the near term. Although we have suspended our historical foreign currency forward contract program as of May 31, 2010, our subsidiaries continue to enter into cross-currency transactions and create cross-currency exposures via intercompany arrangements and we expect that these transactions and exposures will continue. Our ultimate realized gain or loss with respect to currency fluctuations will generally depend on the size and type of cross-currency transactions that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered into foreign currency forward contracts to offset these exposures and other factors.
Historically, we have neither used these foreign currency forward contracts for trading purposes nor have designated these forward contracts as hedging instruments pursuant to ASC 815. Accordingly, we recorded the fair value of these contracts as of the end of our reporting period to our consolidated balance sheet with changes in fair value recorded in our consolidated statement of operations. The balance sheet classification for the fair values of these forward contracts was prepaid expenses and other current assets for unrealized gains and other current liabilities for unrealized losses. The statement of operations classification for the fair values of these forward contracts was non-operating income (expense), net, for both realized and unrealized gains and losses.
As of May 31, 2010, we had a nominal amount of foreign currency forward contracts outstanding. As of May 31, 2009, the notional amounts of the forward contracts we held to purchase and sell U.S. Dollars in exchange for other major international currencies were $860 million and $1.1 billion, respectively, and the notional amounts of the foreign currency forward contracts we held to purchase European Euros in exchange for other major international currencies were €142 million ($198 million).
 
The effects of derivative instruments on our consolidated financial statements were as follows as of or for each of the respective periods presented below (amounts presented exclude any income tax effects):
Fair Value of Derivative Instruments in Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
May 31, 2010
 
May 31, 2009
(in millions)
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate swap agreement designated as cash flow hedge
 
Not applicable
 
$
—
 
Other current liabilities
 
$
35
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements designated as fair value hedges
 
Other assets
 
$
33
 
Not applicable
 
$
—
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts not designated as hedges
 
Prepaid expenses and other current assets
 
$
—
 
Other current liabilities
 
$
—
 
 
 
 
 
 
 
 
 
 
 
Effects of Derivative Instruments on Income and Other Comprehensive Income (OCI)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Amount of Gain (Loss)
Recognized in Accumulated
OCI on Derivative
(Effective Portion)
 
 
Location and Amount of Gain (Loss)
Reclassified from Accumulated OCI into
Income (Effective Portion)
 
 
Location and Amount of Gain (Loss)
Recognized in Income on Derivative
(Ineffective Portion and Amount Excluded
from Effectiveness Testing)
 
  
Year Ended May 31,
 
 
 
  
Year Ended May 31,
 
 
 
  
Year Ended May 31,
(in millions)
  
  2010  
 
 
  2009  
 
 
  
      2010      
 
 
     2009     
 
 
  
      2010      
  
      2009      
Cash flow hedges:
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
Interest rate swap
  
$
—
  
 
$
3
  
 
Interest
  expense
  
$
(41
) 
 
$
(47
) 
 
Non operating
  income
  (expense),
  net
  
$
—
  
$
—
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
Net investment hedges:
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
Foreign currency forward contract
  
$
(37
) 
 
$
(63
) 
 
Not
  applicable
  
$
—
  
 
$
—
  
 
Non-operating
  income
  (expense),
  net
  
$
1
  
$
10
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Location and Amount of Gain (Loss)
Recognized in Income  on Derivative
    
Location and Amount of Gain (Loss) on
Hedged Item  Recognized in Income
Attributable to Risk Being Hedged
 
(in millions)
  
 
  
Year Ended
May 31, 2010
    
 
  
Year Ended
May 31, 2010
 
Fair value hedges:
  
 
  
 
 
    
 
  
 
 
 
Interest rate swaps
  
Interest expense
  
$
      33
    
Interest expense
  
$
    (33
) 
 
  
 
  
 
 
    
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Location and Amount of Gain (Loss)
Recognized in Income on Derivative
 
 
 
 
Year Ended May 31,
(in millions)
 
 
 
      2010      
 
 
      2009      
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
Non-operating
  income
  (expense),
  net
 
$
(35
) 
 
$
3
 
 
 
 
 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
 
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease certain facilities, furniture and equipment under operating leases. As of May 31, 2010, future minimum annual operating lease payments and future minimum payments to be received from non-cancelable subleases were as follows:
 
 
 
 
 
 
(in millions)
  
 
 
Fiscal 2011
  
$
511
  
Fiscal 2012
  
 
376
  
Fiscal 2013
  
 
257
  
Fiscal 2014
  
 
157
  
Fiscal 2015
  
 
103
  
Thereafter
  
 
293
  
 
  
 
 
 
Future minimum operating lease payments
  
 
1,697
  
Less: minimum payments to be received from non-cancelable subleases
  
 
(214
) 
 
  
 
 
 
Total future minimum operating lease payments, net
  
$
  1,483
  
 
  
 
 
 
Lease commitments include future minimum rent payments for facilities that we have vacated pursuant to our restructuring and merger integration activities, as discussed in Note 9. We have approximately $386 million in facility obligations, net of estimated sublease income and other costs, in accrued restructuring for these locations in our consolidated balance sheet at May 31, 2010.
Rent expense was $318 million, $293 million and $276 million for fiscal 2010, 2009 and 2008, respectively, net of sublease income of approximately $73 million, $69 million and $57 million, respectively. Certain lease agreements contain renewal options providing for an extension of the lease term.
Unconditional Purchase Obligations
In the ordinary course of business, we enter into certain unconditional purchase obligations with our suppliers, which are agreements that are enforceable, legally binding and specify terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the payment. As a result of our acquisition of Sun, we utilize several external manufacturers to manufacture sub-assemblies for our products and to perform final assembly and testing of finished products. We also obtain individual components for our products from a variety of individual suppliers based on projected demand information. Such purchase commitments are based on our forecasted component and manufacturing requirements and typically provide for fulfillment within agreed upon lead-times and/or commercially standard lead-times for the particular part or product and have been included in this amount. Routine arrangements for other materials and goods that are not related to our external manufacturers and certain other suppliers and that are entered into in the ordinary course of business are not included in the amounts below as they are generally entered into in order to secure pricing or other negotiated terms and are difficult to quantify in a meaningful way.
As of May 31, 2010, our unconditional purchase obligations approximate to $684 million for fiscal 2011, $27 million for fiscal 2012, $19 million for fiscal 2013, $6 million for fiscal 2014, $3 million for fiscal 2015 and $3 million thereafter.
As described in Note 2, we also have a commitment to acquire certain companies for cash consideration that we expect to pay upon the closing of these acquisitions. As described in Note 8, we have notes payable and other borrowings outstanding of $14.7 billion that mature at various future dates.
 
Guarantees
Our software and hardware systems product sales agreements generally include certain provisions for indemnifying customers against liabilities if our products infringe a third party's intellectual property rights. To date, we have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our consolidated financial statements. Certain of our product sales agreements also include provisions indemnifying customers against liabilities in the event we breach confidentiality or service level requirements. It is not possible to determine the maximum potential amount under these indemnification agreements due to our limited and infrequent history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.
Our software license and hardware systems products agreements also generally include a warranty that our products will substantially operate as described in the applicable program documentation for a period of one year after delivery. We also warrant that services we perform will be provided in a manner consistent with industry standards for a period of 90 days from performance of the service.
We occasionally are required, for various reasons, to enter into financial guarantees with third parties in the ordinary course of our business including, among others, guarantees related to foreign exchange trades, taxes, import licenses and letters of credit on behalf of parties we conduct business with. Such agreements have not had a material effect on our results of operations, financial position or cash flows.
 
STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
 
13. STOCKHOLDERS' EQUITY
Stock Repurchases
Our Board of Directors has approved a program for us to repurchase shares of our common stock. On October 20, 2008, we announced that our Board of Directors approved the expansion of our repurchase program by $8.0 billion and as of May 31, 2010, approximately $5.3 billion was available for share repurchases pursuant to our stock repurchase program. We repurchased 43.3 million shares for $1.0 billion (including 0.5 million shares for $12 million that were repurchased but not settled), 225.6 million shares for $4.0 billion and 97.3 million shares for $2.0 billion in fiscal 2010, 2009 and 2008, respectively under the applicable repurchase programs authorized.
Our stock repurchase authorization does not have an expiration date and the pace of our repurchase activity will depend on factors such as our working capital needs, our cash requirements for acquisitions and dividend payments, our debt repayment obligations or repurchase of our debt, our stock price, and economic and market conditions. Our stock repurchases may be effected from time to time through open market purchases or pursuant to a Rule 10b5-1 plan. Our stock repurchase program may be accelerated, suspended, delayed or discontinued at any time.
Dividends on Common Stock
During fiscal 2010, our Board of Directors declared cash dividends of $0.20 per share of our outstanding common stock, which we paid during the same period.
In June 2010, our Board of Directors declared a quarterly cash dividend of $0.05 per share of outstanding common stock payable on August 4, 2010 to stockholders of record as of the close of business on July 14, 2010. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.
 
Accumulated Other Comprehensive Income
The following table summarizes, as of each balance sheet date, the components of our accumulated other comprehensive income, net of income taxes (income tax effects were insignificant for all periods presented):
 
 
 
 
 
 
 
 
 
 
 
  
May 31,
 
(in millions)
  
2010
 
 
2009
 
Foreign currency translation gains, net
  
$
     169
  
 
$
     340
  
Unrealized losses on derivative financial instruments, net
  
 
(131
) 
 
 
(125
) 
Unrealized gains on marketable securities, net
  
 
4
  
 
 
4
  
Unrealized losses on defined benefit plan, net
  
 
(38
) 
 
 
(3
) 
 
  
 
 
 
 
 
 
 
Total accumulated other comprehensive income
  
$
4
  
 
$
216
  
 
  
 
 
 
 
 
 
 
 
EMPLOYEE BENEFIT PLANS
EMPLOYEE BENEFIT PLANS
 
14. EMPLOYEE BENEFIT PLANS
Stock-based Compensation Plans
Stock Option Plans
In fiscal 2001, we adopted the 2000 Long-Term Equity Incentive Plan (the 2000 Plan), which replaced the 1991 Long-Term Equity Incentive Plan (the 1991 Plan) and provides for the issuance of non-qualified stock options and incentive stock options, as well as stock purchase rights, stock appreciation rights and long-term performance awards to our eligible employees, officers, and directors who are also employees or consultants, independent consultants and advisers. Under the terms of the 2000 Plan, options to purchase common stock generally are granted at not less than fair market value, become exercisable as established by the Board (generally 25% annually over four years under our current practice), and generally expire no more than ten years from the date of grant. Options granted under the 1991 Plan were granted with similar terms. If options outstanding under the 1991 Plan are forfeited, repurchased, or otherwise terminate without the issuance of stock, the shares underlying such options will also become available for future awards under the 2000 Plan. As of May 31, 2010, options to purchase 301 million shares of common stock were outstanding under both plans, of which 144 million were vested. Approximately 197 million shares of common stock were available for future awards under the 2000 Plan. To date, we have not issued any stock purchase rights, stock appreciation rights, restricted stock-based awards or long-term performance awards under the 2000 Plan.
In fiscal 1993, the Board adopted the 1993 Directors' Stock Option Plan (the Directors' Plan), which provides for the issuance of non-qualified stock options to non-employee directors. The Director's Plan has from time to time been amended and restated. In fiscal 2010, the Director's Plan was further amended to increase the amounts of annual stock option grants to the Chair of the Compensation Committee of the Board. Under the terms of the Directors' Plan, options to purchase 8 million shares of common stock were reserved for issuance, options are granted at not less than fair market value, become exercisable over four years, and expire no more than ten years from the date of grant. The Directors' Plan provides for automatic grants of options to each non-employee director upon first becoming a director and thereafter on an annual basis, as well as automatic nondiscretionary grants for chairing certain Board committees. The Board has the discretion to replace any automatic option grant under the Directors' Plan with awards of restricted stock, restricted stock units or other stock-based awards. The number of shares subject to any such stock award will be no more than the equivalent value of the options, as determined on any reasonable basis by the Board, which would otherwise have been granted under the applicable automatic option grant. The Board will determine the particular terms of any such stock awards at the time of grant, but the terms will be consistent with those of options, as described below, granted under the Directors' Plan with respect to vesting or forfeiture schedules and treatment on termination of status as a director. At May 31, 2010, options to purchase approximately 3 million shares of common stock were outstanding under the 1993 Directors' Plan, of which approximately 2 million were vested. Approximately 2 million shares are available for future option awards under this plan of which a lesser portion than the total may be used for grants other than options.
 
In connection with certain of our acquisitions, including Sun, BEA, PeopleSoft, Siebel and Hyperion, we assumed all of the outstanding stock options and other stock awards of each acquiree's respective stock plans. These stock options and other stock awards generally retain all of the rights, terms and conditions of the respective plans under which they were originally granted. As of May 31, 2010, options to purchase 48 million shares of common stock and 4 million shares of restricted stock were outstanding under these plans.
The following table summarizes stock option activity for our last three fiscal years ended May 31, 2010:
 
 
 
 
 
 
 
 
 
 
Options Outstanding
(in millions, except exercise price)
 
Shares Under
Option
 
 
Weighted
Average
Exercise Price
Balance, May 31, 2007
 
434
  
 
$
13.65
Granted
 
61
  
 
$
20.49
Assumed
 
36
  
 
$
17.24
Exercised
 
(135
) 
 
$
9.12
Canceled
 
            (18
) 
 
$
20.83
 
 
 
 
 
 
 
Balance, May 31, 2008
 
378
  
 
$
16.37
Granted
 
69
  
 
$
20.53
Assumed
 
1
  
 
$
6.54
Exercised
 
(76
) 
 
$
9.31
Canceled
 
(13
) 
 
$
25.14
 
 
 
 
 
 
 
Balance, May 31, 2009
 
359
  
 
$
18.32
Granted
 
72
  
 
$
21.23
Assumed
 
23
  
 
$
55.77
Exercised
 
(60
) 
 
$
14.03
Canceled
 
(42
) 
 
$
43.93
 
 
 
 
 
 
 
Balance, May 31, 2010
 
352
  
 
$
18.84
 
 
 
 
 
 
 
Options outstanding that have vested and that are expected to vest as of May 31, 2010 are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Outstanding
Options
(in millions)
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contract Term
(in years)
  
In-the-Money
Options as of
May 31, 2010
(in millions)
  
Aggregate
Intrinsic
Value(1)
(in millions)
Vested
  
192
  
$
17.44
  
4.24
  
172
  
$
1,372
Expected to vest(2)
  
            145
  
$
20.44
  
8.15
  
            140
  
 
340
 
  
 
  
 
 
  
 
  
 
  
 
 
Total
  
337
  
$
18.73
  
5.93
  
312
  
$
1,712
 
  
 
  
 
 
  
 
  
 
  
 
 
 
(1)
The aggregate intrinsic value was calculated based on the gross difference between our closing stock price on the last trading day of fiscal 2010 of $22.57 and the exercise prices for all in-the-money options outstanding, excluding tax effects.
 
(2)
The unrecognized compensation expense calculated under the fair value method for shares expected to vest (unvested shares net of expected forfeitures) as of May 31, 2010 was approximately $709 million and is expected to be recognized over a weighted average period of 2.56 years. Approximately 15 million shares outstanding as of May 31, 2010 are not expected to vest.
  
 
Stock-Based Compensation Expense and Valuation of Stock Options and Restricted Stock-Based Awards
Stock-based compensation is included in the following operating expense line items in our consolidated statements of operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
 
(in millions)
  
2010
 
 
2009
 
 
2008
 
Sales and marketing
  
$
         81
  
 
$
         67
  
 
$
         51
  
Software license updates and product support
  
 
17
  
 
 
13
  
 
 
10
  
Hardware systems products
  
 
3
  
 
 
—
  
 
 
—
  
Hardware systems support
  
 
2
  
 
 
—
  
 
 
—
  
Services
  
 
14
  
 
 
12
  
 
 
13
  
Research and development
  
 
172
  
 
 
155
  
 
 
114
  
General and administrative
  
 
132
  
 
 
93
  
 
 
69
  
Acquisition related and other
  
 
15
  
 
 
15
  
 
 
112
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total stock-based compensation
  
 
436
  
 
 
355
  
 
 
369
  
Estimated income tax benefit included in provision for income taxes
  
 
(146
) 
 
 
(122
) 
 
 
(128
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
Total stock-based compensation, net of estimated income tax benefit
  
$
       290
  
 
$
       233
  
 
$
       241
  
 
  
 
 
 
 
 
 
 
 
 
 
 
We estimate the fair value of our share-based payments using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models, including the Black-Scholes-Merton option-pricing model, require the input of assumptions, including stock price volatility. Changes in the input assumptions can materially affect the fair value estimates and ultimately how much we recognize as stock-based compensation expense. The fair values of our stock options were estimated at the date of grant or date of acquisition for options assumed in a business combination. The weighted average input assumptions used and resulting fair values were as follows for fiscal 2010, 2009 and 2008:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
 
 
  
2010
 
 
2009
 
 
2008
 
Expected life (in years)
  
 
4.7
  
 
 
5.3
  
 
 
5.0
  
Risk-free interest rate
  
 
2.1%
  
 
 
3.3%
  
 
 
4.6%
  
Volatility
  
 
31%
  
 
 
37%
  
 
 
29%
  
Dividend yield
  
 
0.9%
  
 
 
—
  
 
 
—
  
Weighted-average fair value per share
  
$
      5.21
  
 
$
      7.93
  
 
$
      7.53
  
The expected life input is based on historical exercise patterns and post-vesting termination behavior, the risk-free interest rate input is based on United States Treasury instruments and the volatility input is calculated based on the implied volatility of our longest-term, traded options. Our expected dividend yield was zero prior to our first dividend declaration on March 18, 2009 as we did not historically pay cash dividends on our common stock and did not anticipate doing so for the foreseeable future for grants issued prior to March 18, 2009. For grants issued subsequent to March 18, 2009, we used an annualized dividend yield based on the per share dividend declared by our Board of Directors.
Tax Benefits from Exercise of Stock Options and Vesting of Restricted Stock-Based Awards
Total cash received as a result of option exercises was approximately $812 million, $696 million and $1.2 billion for fiscal 2010, 2009 and 2008, respectively. The aggregate intrinsic value of options exercised and vesting of restricted stock-based awards was $647 million, $807 million and $2.0 billion for fiscal 2010, 2009 and 2008, respectively. In connection with these exercises and vesting of restricted stock-based awards, the tax benefits realized by us were $203 million, $252 million and $588 million for fiscal 2010, 2009 and 2008, respectively. Of the total tax benefits received, we classified excess tax benefits from stock-based compensation of $110 million, $194 million and $454 million as cash flows from financing activities rather than cash flows from operating activities for fiscal 2010, 2009 and 2008, respectively.
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (Purchase Plan) and have amended the Purchase Plan such that employees can purchase shares of common stock at a price per share that is 95% of the fair market value of Oracle stock as of the end of the semi-annual option period. As of May 31, 2010, 75 million shares were reserved for future issuances under the Purchase Plan. We issued 3 million shares under the Purchase Plan in each of fiscal 2010, 2009 and 2008.
Defined Contribution and Other Postretirement Plans
We offer various defined contribution plans for our U.S. and non-U.S. employees. Total defined contribution plan expense was $282 million, $258 million and $234 million for fiscal 2010, 2009 and 2008, respectively. The number of plan participants in our defined contribution plans has generally increased in recent years primarily as a result of additional eligible employees from our acquisitions.
In the United States, regular employees can participate in the Oracle Corporation 401(k) Savings and Investment Plan (Oracle 401(k) Plan). Participants can generally contribute up to 40% of their eligible compensation on a per- pay-period basis as defined by the plan document or by the section 402(g) limit as defined by the United States Internal Revenue Service (IRS). We match a portion of employee contributions, currently 50% up to 6% of compensation each pay period, subject to maximum aggregate matching amounts. Our contributions to the plan, net of forfeitures, were $90 million, $78 million and $80 million in fiscal 2010, 2009 and 2008, respectively.
We also offer non-qualified deferred compensation plans to certain key employees whereby they may defer a portion of their annual base and/or variable compensation until retirement or a date specified by the employee in accordance with the plans. Deferred compensation plan assets and liabilities were approximately $216 million and $176 million as of May 31, 2010 and 2009, respectively, and are presented in other assets and other non-current liabilities in the accompanying consolidated balance sheets.
We sponsor certain defined benefit pension plans that are offered primarily by certain of our foreign subsidiaries. Many of these plans were assumed through our acquisitions. We deposit funds for these plans with insurance companies, third-party trustees, or into government-managed accounts consistent with local regulatory requirements, as applicable. Our total defined benefit plan pension expense was $29 million for fiscal 2010 (insignificant for fiscal 2009 and 2008). The aggregate projected benefit obligation and aggregate net funded status (net liability) of our defined benefit plans were $636 million and $196 million as of May 31, 2010, respectively.
 
 
INCOME TAXES
INCOME TAXES
 
15. INCOME TAXES
The following is a geographical breakdown of income before the provision for income taxes:
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
(in millions)
  
2010
  
2009
  
2008
Domestic
  
$
4,282
  
$
3,745
  
$
3,930
Foreign
  
 
3,961
  
 
4,089
  
 
3,904
 
  
 
 
  
 
 
  
 
 
Total income before provision for income taxes
  
$
8,243
  
$
7,834
  
$
7,834
 
  
 
 
  
 
 
  
 
 
 
The provision for income taxes consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
 
(Dollars in millions)
  
2010
 
 
2009
 
 
2008
 
Current provision:
  
 
 
 
 
 
 
 
 
 
 
 
Federal
  
$
  1,307
  
 
$
  1,341
  
 
$
  1,325
  
State
  
 
299
  
 
 
361
  
 
 
231
  
Foreign
  
 
1,013
  
 
 
934
  
 
 
892
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total current provision
  
 
2,619
  
 
 
2,636
  
 
 
2,448
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Deferred benefit:
  
 
 
 
 
 
 
 
 
 
 
 
Federal
  
 
(380
) 
 
 
(177
) 
 
 
(96
) 
State
  
 
(76
) 
 
 
(52
) 
 
 
(24
) 
Foreign
  
 
(55
) 
 
 
(166
) 
 
 
(15
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
Total deferred benefit
  
 
(511
) 
 
 
(395
) 
 
 
(135
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
Total provision for income taxes
  
$
2,108
  
 
$
2,241
  
 
$
2,313
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Effective income tax rate
  
 
25.6%
  
 
 
28.6%
  
 
 
29.5%
  
The provision for income taxes differed from the amount computed by applying the federal statutory rate to our income before provision for income taxes as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
 
(in millions)
  
2010
 
 
2009
 
 
2008
 
Tax provision at statutory rate
  
$
  2,885
  
 
$
  2,742
  
 
$
  2,742
  
Foreign earnings at other than United States rates
  
 
(672
) 
 
 
(673
) 
 
 
(569
) 
State tax expense, net of federal benefit
  
 
161
  
 
 
201
  
 
 
135
  
Settlements and releases from judicial decisions and statute expirations, net
  
 
(315
) 
 
 
25
  
 
 
(20
) 
Other, net
  
 
49
  
 
 
(54
) 
 
 
25
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total provision for income taxes
  
$
2,108
  
 
$
2,241
  
 
$
2,313
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
The components of our deferred tax liabilities and assets were as follows:
 
 
 
 
 
 
 
 
 
 
 
  
May 31,
 
(in millions)
  
2010
 
 
2009
 
Deferred tax liabilities:
  
 
 
 
 
 
 
 
Unrealized gain on stock
  
$
(130
) 
 
$
(130
) 
Unremitted earnings of foreign subsidiaries
  
 
(100
) 
 
 
(117
) 
Acquired intangible assets
  
 
(1,748
) 
 
 
(1,831
) 
Depreciation and amortization
  
 
(24
) 
 
 
—
  
Other
  
 
—
  
 
 
(1
) 
 
  
 
 
 
 
 
 
 
Total deferred tax liabilities
  
$
(2,002
) 
 
$
(2,079
) 
 
  
 
 
 
 
 
 
 
Deferred tax assets:
  
 
 
 
 
 
 
 
Accruals and allowances
  
$
629
  
 
$
492
  
Employee compensation and benefits
  
 
649
  
 
 
401
  
Differences in timing of revenue recognition
  
 
67
  
 
 
141
  
Depreciation and amortization
  
 
—
  
 
 
219
  
Tax credit and net operating loss carryforwards
  
 
2,916
  
 
 
1,201
  
Other
  
 
250
  
 
 
44
  
 
  
 
 
 
 
 
 
 
Total deferred tax assets
  
$
          4,511
  
 
$
          2,498
  
 
  
 
 
 
 
 
 
 
Valuation allowance
  
$
(649
) 
 
$
(137
) 
 
  
 
 
 
 
 
 
 
Net deferred tax assets
  
$
1,860
  
 
$
282
  
 
  
 
 
 
 
 
 
 
Recorded as:
  
 
 
 
 
 
 
 
Current deferred tax assets
  
$
1,159
  
 
$
661
  
Non-current deferred tax assets (in other assets)
  
 
1,267
  
 
 
145
  
Current deferred tax liabilities (in other current liabilities)
  
 
(142
) 
 
 
(44
) 
Non-current deferred tax liabilities
  
 
(424
) 
 
 
(480
) 
 
  
 
 
 
 
 
 
 
Net deferred tax assets
  
$
1,860
  
 
$
282
  
 
  
 
 
 
 
 
 
 
We provide for United States income taxes on the undistributed earnings and the other outside basis temporary differences of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. At May 31, 2010, the amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which United States income taxes have not been provided was approximately $13.0 billion and $4.7 billion, respectively. If these undistributed earnings were repatriated to the United States, or if the other outside basis differences were recognized in a taxable transaction, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. Assuming a full utilization of the foreign tax credits, the potential deferred tax liability associated with these temporary differences of undistributed earnings and other outside basis temporary differences would be approximately $3.6 billion and $1.5 billion, respectively.
Our net deferred tax assets increased from $282 million as of May 31, 2009 to $1.9 billion as of May 31, 2010, primarily as a result of our acquisition of Sun. We believe it is more likely than not that the net deferred tax assets will be realized in the foreseeable future. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards, and tax credit carryforwards. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.
The valuation allowance was $649 million at May 31, 2010 and $137 million at May 31, 2009. The net increase is primarily attributable to deferred taxes of Sun, principally state and foreign attributes. Substantially all of the valuation allowance relates to tax assets established in purchase accounting. Any subsequent reduction of that portion of the valuation allowance and the recognition of the associated tax benefits associated with our acquisitions will be recorded to our provision for income taxes subsequent to our final determination of the valuation allowance or the conclusion of the measurement period (as defined above), whichever comes first.
At May 31, 2010, we had federal net operating loss carryforwards of approximately $1.6 billion. These losses expire in various years between fiscal 2012 and fiscal 2029, and are subject to limitations on their utilization. We had state net operating loss carryforwards of approximately $3.8 billion, which expire between fiscal 2011 and fiscal 2029, and are subject to limitations on their utilization. We had foreign net operating loss carryforwards of approximately $1.3 billion, which are subject to limitations on their utilization. Approximately $1.2 billion of these net operating losses are not currently subject to expiration dates. The remainder, approximately $90 million, expires between fiscal 2011 and fiscal 2030. We had tax credit carryforwards of approximately $1.2 billion, which are subject to limitations on their utilization. Approximately $405 million of these tax credit carryforwards are not currently subject to expiration dates. The remainder, approximately $791 million, expires in various years between fiscal 2011 and fiscal 2029.
We classify our unrecognized tax benefits as either current or non-current income taxes payable in the accompanying consolidated balance sheets. The aggregate changes in the balance of our gross unrecognized tax benefits, including acquisitions, were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
 
(in millions)
  
2010
 
 
2009
 
 
2008
 
Gross unrecognized tax benefits as of June 1
  
$
   2,262
  
 
$
   1,693
  
 
$
   1,251
  
Increases related to tax positions from prior fiscal years
  
 
94
  
 
 
434
  
 
 
256
  
Decreases related to tax positions from prior fiscal years
  
 
(491
) 
 
 
(86
) 
 
 
(5
) 
Increases related to tax positions taken during current fiscal year
  
 
813
  
 
 
370
  
 
 
180
  
Settlements with tax authorities
  
 
(88
) 
 
 
(41
) 
 
 
(20
) 
Lapses of statutes of limitation
  
 
(48
) 
 
 
(25
) 
 
 
(24
) 
Other, net
  
 
(15
) 
 
 
(83
) 
 
 
55
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total gross unrecognized tax benefits as of May 31
  
$
2,527
  
 
$
2,262
  
 
$
1,693
  
 
  
 
 
 
 
 
 
 
 
 
 
 
As of May 31, 2010, $1.9 billion of unrecognized benefits would affect our effective tax rate if recognized. We recognized interest and penalties related to uncertain tax positions in our provision for income taxes line of our consolidated statements of operations of $3 million during fiscal 2010. The amount of interest and penalties accrued as of May 31, 2010 was $576 million.
During fiscal 2010, the provision for income taxes was reduced due to recent judicial decisions, including the March 2010 U.S. Court of Appeals Ninth Circuit ruling in Xilinx v. Commissioner, and settlements with various worldwide tax authorities.
Domestically, U.S. federal and state taxing authorities are currently examining income tax returns of Oracle and various acquired entities for years through fiscal 2008. Many issues are at an advanced stage in the examination process, the most significant of which include the deductibility of certain royalty payments, issues related to certain capital gains and losses, extraterritorial income exemptions, domestic production activity deductions, stewardship deductions, stock-based compensation and foreign tax credits taken. Other issues are related to years with expiring statutes of limitation. With all of these domestic audit issues considered in the aggregate, we believe it was reasonably possible that, as of May 31, 2010, the gross unrecognized tax benefits related to these audits could decrease (whether by payment, release, or a combination of both) in the next 12 months by as much as $399 million ($353 million net of offsetting tax benefits). Our U.S. federal and, with some exceptions, our state income tax returns have been examined for all years prior to fiscal 2000, and we are no longer subject to audit for those periods.
  
Internationally, tax authorities for numerous non-U.S. jurisdictions are also examining returns affecting our unrecognized tax benefits. We believe it was reasonably possible that, as of May 31, 2010, the gross unrecognized tax benefits, could decrease (whether by payment, release, or a combination of both) by as much as $187 million ($53 million net of offsetting tax benefits) in the next 12 months, related primarily to transfer pricing and a technical matter of corporate restructuring, which would be affected by the possible passage of favorable legislation. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal 1998.
We believe that we have adequately provided for any reasonably foreseeable outcomes related to our tax audits and that any settlement will not have a material adverse effect on our consolidated financial position or results of operations. However, there can be no assurances as to the possible outcomes.
We previously negotiated three successive unilateral Advance Pricing Agreements with the IRS that cover many of our intercompany transfer pricing issues and preclude the IRS from making a transfer pricing adjustment within the scope of the agreements. These agreements are effective for fiscal years through May 31, 2006. We have submitted to the IRS a request for another renewal of this Advance Pricing Agreement for the years ending May 31, 2007 through May 31, 2011. However, these agreements do not cover all elements of our transfer pricing and do not bind tax authorities outside the United States. We have finalized two bilateral Advance Pricing Agreements, one of which was effective for the years ending May 31, 2002 through May 31, 2006 and we have submitted a request for a renewal of this agreement for the years ending May 31, 2007 through May 31, 2011. There can be no guarantee that such negotiations will result in an agreement. The additional bilateral agreement covers the period from June 1, 2001 through January 25, 2008.
 
SEGMENT INFORMATION
SEGMENT INFORMATION
 
 
16.
SEGMENT INFORMATION
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. 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. Our chief operating decision maker is our Chief Executive Officer. We are organized geographically and by line of business. While our Chief Executive Officer evaluates results in a number of different ways, the line of business management structure is the primary basis for which the allocation of resources and financial results are assessed. As a result of our acquisition of Sun, we entered into a new hardware systems business with two operating segments as described further below. We have three businesses—software, hardware systems and services—which are further divided into seven operating segments. Our software business is comprised of two operating segments: (1) new software licenses and (2) software license updates and product support. Our hardware systems business is comprised of two operating segments: (1) hardware systems products and (2) hardware systems support. Our services business is comprised of three operating segments: (1) consulting, (2) On Demand and (3) education.
The new software licenses line of business is engaged in the licensing of database and middleware software as well as our applications software. Database and middleware software includes database management software, application server software, business intelligence software, identification and access management software, content management software, portal and user interaction software, Service-Oriented Architecture and business process management software, data integration software and development tools. As a result of our acquisition of Sun, we acquired certain software technologies that expanded and enhanced our existing database and middleware software product offerings, including Java, which is a global software development platform used in a wide range of computers, networks and devices. Applications software provides enterprise information that enables companies to manage their business cycles and provide intelligence in functional areas such as customer relationship management, financials, human resources, maintenance management, manufacturing, marketing, order fulfillment, product lifecycle management, enterprise project portfolio management, enterprise performance management, procurement, sales, services, enterprise resource planning and supply chain planning.
 
The software license updates and product support line of business provides customers with rights to unspecified software product upgrades and maintenance releases, internet access to technical content, as well as internet and telephone access to technical support personnel during the support period.
The hardware systems products line of business consists primarily of computer server and storage product offerings. Most of our computer servers are based on our SPARC family of microprocessors and on Intel Xeon microprocessors. Our servers range from high performance computing servers to cost efficient, entry-level servers, and run with our Solaris Operating System, Linux and certain other operating systems environments. Our storage products are designed to securely manage, protect, archive and restore customers' data assets and consist of tape, disk and networking solutions for open systems and mainframe server environments. Customers that purchase our hardware systems products may also elect to purchase our hardware systems support offerings. Our hardware systems support offerings provide customers with software updates for the software components that are essential to the functionality of our hardware systems and storage products and can include product repairs, maintenance services, and technical support services.
The consulting line of business primarily provides services to customers in business strategy and analysis, business process simplification, solutions integration and the implementation, enhancement and upgrade of our database, middleware and applications software. On Demand includes Oracle On Demand and Advanced Customer Services. Oracle On Demand provides multi-featured software and hardware management and maintenance services for customers that are delivered at our data center facilities, select partner data centers or customer facilities. Advanced Customer Services consists of solution lifecycle management services, industry-specific solution support centers, hardware systems expert services, packaged offerings that support the installation and optimization of our hardware products and remote and on-site expert services. The education line of business provides instructor-led, media-based and internet-based training in the use of our software and hardware products.
We do not track our assets by operating segments. Consequently, it is not practical to show assets by operating segments results.
 
The following table presents a summary of our businesses' and operating segments' results:
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
(in millions)
  
2010
  
2009
  
2008
New software licenses:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
    7,525
  
$
    7,112
  
$
    7,501
Sales and distribution expenses
  
 
3,980
  
 
4,006
  
 
4,040
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
    3,545
  
$
    3,106
  
$
    3,461
Software license updates and product support:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
  13,175
  
$
  11,997
  
$
  10,507
Software license update and product support expenses
  
 
958
  
 
1,012
  
 
933
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
  12,217
  
$
  10,985
  
$
    9,574
Total software business:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
  20,700
  
$
  19,109
  
$
  18,008
Expenses
  
 
4,938
  
 
5,018
  
 
4,973
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
  15,762
  
$
  14,091
  
$
  13,035
Hardware systems products:
  
 
 
  
 
 
  
 
 
Revenues
  
$
    1,493
  
$
         —
  
$
         —
Hardware systems products expenses
  
 
850
  
 
—
  
 
—
Sales and distribution expenses
  
 
307
  
 
—
  
 
—
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
       336
  
$
         —
  
$
         —
Hardware systems support:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
       912
  
$
         —
  
$
         —
Hardware systems support expenses
  
 
408
  
 
—
  
 
—
 
  
 
 
  
 
 
  
 
 
Margin (2)
  
$
       504
  
$
         —
  
$
         —
Total hardware systems business:
  
 
 
  
 
 
  
 
 
Revenues (1) 
  
$
    2,405
  
$
         —
  
$
         —
Expenses
  
 
1,565
  
 
—
  
 
—
 
  
 
 
  
 
 
  
 
 
Margin (2)
  
$
       840
  
$
         —
  
$
         —
Consulting:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
    2,705
  
$
    3,221
  
$
    3,454
Services expenses
  
 
2,319
  
 
2,686
  
 
2,914
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
       386
  
$
       535
  
$
       540
On Demand:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
       887
  
$
       780
  
$
       695
Services expenses
  
 
679
  
 
566
  
 
569
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
       208
  
$
       214
  
$
       126
Education:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
       337
  
$
       385
  
$
       452
Services expenses
  
 
247
  
 
282
  
 
314
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
         90
  
$
       103
  
$
       138
Total services business:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
    3,929
  
$
    4,386
  
$
    4,601
Services expenses
  
 
3,245
  
 
3,534
  
 
3,797
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
       684
  
$
       852
  
$
       804
Totals:
  
 
 
  
 
 
  
 
 
Revenues(1)
  
$
  27,034
  
$
  23,495
  
$
  22,609
Expenses
  
 
9,748
  
 
8,552
  
 
8,770
 
  
 
 
  
 
 
  
 
 
Margin(2)
  
$
  17,286
  
$
  14,943
  
$
  13,839
 
  
 
 
  
 
 
  
 
 
 
 (1)
Operating segment revenues differ from the external reporting classifications due to certain software license products that are classified as service revenues for management reporting purposes. Software license updates and product support revenues for management reporting included $86 million, $243 million and $179 million of revenues that we did not recognize in the accompanying consolidated statements of operations in fiscal 2010, 2009 and 2008, respectively. In addition, we did not recognize hardware systems support revenues related to hardware systems support contracts that would have otherwise been recorded by Sun as an independent entity, in the amount of $128 million in fiscal 2010. See Note 10 for an explanation of these adjustments and the following table for a reconciliation of operating segment revenues to total revenues.
 
(2)
The margins reported reflect only the direct controllable costs of each line of business and do not include allocations of product development, information technology, marketing and partner programs, and corporate and general and administrative expenses incurred in support of the lines of business. Additionally, the margins do not reflect the amortization of intangible assets, acquisition related and other expenses, restructuring costs, or stock-based compensation.
 
The following table reconciles operating segment revenues to total revenues as well as operating segment margin to income before provision for income taxes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
 
(in millions)
  
2010
 
 
2009
 
 
2008
 
Total revenues for reportable segments
  
$
27,034
  
 
$
23,495
  
 
$
22,609
  
Software license updates and product support revenues(1)
  
 
(86
) 
 
 
(243
) 
 
 
(179
) 
Hardware systems support revenues(1)
  
 
(128
) 
 
 
—
  
 
 
—
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total revenues
  
$
26,820
  
 
$
23,252
  
 
$
22,430
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Total margin for reportable segments
  
$
17,286
  
 
$
14,943
  
 
$
13,839
  
Software license updates and product support revenues(1)
  
 
(86
) 
 
 
(243
) 
 
 
(179
) 
Hardware systems support revenues(1)
  
 
(128
) 
 
 
—
  
 
 
—
  
Hardware systems products expenses(2)
  
 
(29
) 
 
 
—
  
 
 
—
  
Product development and information technology expenses
  
 
(3,479
) 
 
 
(2,984
) 
 
 
(3,012
) 
Marketing and partner program expenses
  
 
(503
) 
 
 
(439
) 
 
 
(460
) 
Corporate and general and administrative expenses
  
 
(755
) 
 
 
(634
) 
 
 
(677
) 
Amortization of intangible assets
  
 
(1,973
) 
 
 
(1,713
) 
 
 
(1,212
) 
Acquisition related and other
  
 
(154
) 
 
 
(117
) 
 
 
(124
) 
Restructuring
  
 
(622
) 
 
 
(117
) 
 
 
(41
) 
Stock-based compensation
  
 
(421
) 
 
 
(340
) 
 
 
(257
) 
Interest expense
  
 
(754
) 
 
 
(630
) 
 
 
(394
) 
Non-operating income (expense), net
  
 
(139
) 
 
 
108
  
 
 
351
  
 
  
 
 
 
 
 
 
 
 
 
 
 
Income before provision for income taxes
  
$
8,243
  
 
$
7,834
  
 
$
7,834
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)          Software license updates and product support revenues for management reporting include $86 million, $243 million and $179 million of revenues that we did not recognize in the accompanying condensed consolidated statements of operations for fiscal 2010, 2009 and 2008, respectively. In addition, we did not recognize hardware systems support revenues related to hardware systems support contracts that would have otherwise been recorded by Sun as an independent entity, in the amount of $128 million for fiscal 2010. See Note 10 for an explanation of these adjustments and this table for a reconciliation of operating segment revenues to total revenues
 
 
(2)          Represents the effects of fair value adjustments to our inventories acquired from Sun that were sold to customers in the periods presented. Business combination accounting rules require us to account for inventories assumed from our acquisitions at their fair values. The amount included in hardware systems products expenses above is intended to adjust these expenses to the hardware systems products expenses that would have been otherwise recorded by Sun as a standalone entity upon the sale of these inventories. If we assume inventories in future acquisitions, we will be required to assess their fair values, which may result in fair value adjustments to those inventories
 
 
Geographic Information
Disclosed in the table below is geographic information for each country that comprised greater than three percent of our total revenues for fiscal 2010, 2009 or 2008.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
As of and for the Year Ended May 31,
 
  
2010
  
2009
  
2008
(in millions)
  
Revenues
  
Long  Lived
Assets(1)
  
Revenues
  
Long  Lived
Assets(1)
  
Revenues
  
Long  Lived
Assets(1)
United States
  
$
11,472
  
$
2,141
  
$
10,190
  
$
1,466
  
$
9,650
  
$
1,465
United Kingdom
  
 
1,685
  
 
136
  
 
1,587
  
 
89
  
 
1,655
  
 
110
Japan
  
 
1,349
  
 
505
  
 
1,189
  
 
485
  
 
1,068
  
 
207
Germany
  
 
1,112
  
 
20
  
 
956
  
 
5
  
 
983
  
 
9
France
  
 
965
  
 
24
  
 
856
  
 
8
  
 
858
  
 
21
Canada
  
 
888
  
 
10
  
 
737
  
 
13
  
 
737
  
 
15
Other countries
  
 
9,349
  
 
660
  
 
7,737
  
 
462
  
 
7,479
  
 
532
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Total
  
$
26,820
  
$
3,496
  
$
23,252
  
$
2,528
  
$
22,430
  
$
2,359
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Long-lived assets exclude goodwill, intangible assets, equity investments and deferred taxes, which are not allocated to specific geographic locations as it is impracticable to do so.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EARNINGS PER SHARE
EARNINGS PER SHARE
 
 
17.
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 for the period by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock options and restricted stock-based awards and shares issuable under the employee stock purchase plan using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
  
Year Ended May 31,
(in millions, except per share data)
  
2010
  
2009
  
2008
Net income
  
$
6,135
  
$
5,593
  
$
5,521
 
  
 
 
  
 
 
  
 
 
Weighted average common shares outstanding
  
 
5,014
  
 
5,070
  
 
5,133
Dilutive effect of employee stock plans
  
 
59
  
 
60
  
 
96
 
  
 
 
  
 
 
  
 
 
Diluted weighted average common shares outstanding
  
 
5,073
  
 
5,130
  
 
5,229
 
  
 
 
  
 
 
  
 
 
Basic earnings per share
  
$
1.22
  
$
1.10
  
$
1.08
Diluted earnings per share
  
$
1.21
  
$
1.09
  
$
1.06
Shares subject to anti-dilutive stock options and restricted stock-based awards excluded from calculation(1)
  
 
141
  
 
173
  
 
98
 
(1)
These weighted shares relate to anti-dilutive stock options and restricted stock-based awards as calculated using the treasury stock method (described above) and could be dilutive in the future. See Note 14 for information regarding the exercise prices of our outstanding, unexercised options.
 
LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
 
 
18.
LEGAL PROCEEDINGS
Securities Class Action
Stockholder class actions were filed in the United States District Court for the Northern District of California against us and our Chief Executive Officer on and after March 9, 2001. Between March 2002 and March 2003, the court dismissed plaintiffs' consolidated complaint, first amended complaint and a revised second amended complaint. The last dismissal was with prejudice. On September 1, 2004, the United States Court of Appeals for the Ninth Circuit reversed the dismissal order and remanded the case for further proceedings. The revised second amended complaint named our Chief Executive Officer, our then Chief Financial Officer (who currently is Chairman of our Board of Directors) and a former Executive Vice President as defendants. This complaint was brought on behalf of purchasers of our stock during the period from December 14, 2000 through March 1, 2001. Plaintiffs alleged that the defendants made false and misleading statements about our actual and expected financial performance and the performance of certain of our applications products, while certain individual defendants were selling Oracle stock in violation of federal securities laws. Plaintiffs further alleged that certain individual defendants sold Oracle stock while in possession of material non-public information. Plaintiffs also allege that the defendants engaged in accounting violations. On July 26, 2007, defendants filed a motion for summary judgment, and plaintiffs filed a motion for partial summary judgment against all defendants and a motion for summary judgment against our Chief Executive Officer. On August 7, 2007, plaintiffs filed amended versions of these motions. On October 5, 2007, plaintiffs filed a motion seeking a default judgment against defendants or various other sanctions because of defendants' alleged destruction of evidence. A hearing on all these motions was held on December 20, 2007. On April 7, 2008, the case was reassigned to a new judge. On June 27, 2008, the court ordered supplemental briefing on plaintiffs' sanctions motion. On September 2, 2008, the court issued an order denying plaintiffs' motion for partial summary judgment against all defendants. The order also denied in part and granted in part plaintiffs' motion for sanctions. The court denied plaintiffs' request that judgment be entered in plaintiffs' favor due to the alleged destruction of evidence, and the court found that no sanctions were appropriate for several categories of evidence. The court found that sanctions in the form of adverse inferences were appropriate for two categories of evidence: e-mails from our Chief Executive Officer's account, and materials that had been created in connection with a book regarding our Chief Executive Officer. The court then denied defendants' motion for summary judgment and plaintiffs' motion for summary judgment against our Chief Executive Officer and directed the parties to revise and re-file these motions to clearly specify the precise contours of the adverse inferences that should be drawn, and to take these inferences into account with regard to the propriety of summary judgment. The court also directed the parties to address certain legal issues in the briefing.
On October 13, 2008, the parties participated in a court-ordered mediation, which did not result in a settlement. On October 20, 2008, defendants filed a motion for summary judgment, and plaintiffs filed a motion for summary judgment against our Chief Executive Officer. The parties also filed several motions challenging the admissibility of the testimony of various expert witnesses. Opposition briefs were filed on November 17, 2008, and reply briefs were filed on December 12, 2008. A hearing on all these motions was held on February 13, 2009.
On June 16, 2009, the court issued an order granting defendants' motion for summary judgment and denying plaintiffs' motion for summary judgment against our Chief Executive Officer, and it entered a judgment dismissing the entire case with prejudice. On July 14, 2009, plaintiffs filed a notice of appeal. Plaintiffs filed their opening appellate brief on November 30, 2009. Defendants filed their opposition brief on February 4, 2010, and plaintiffs filed their reply on March 15, 2010. The court has scheduled oral argument on this appeal for July 13, 2010. Plaintiffs seek unspecified damages plus interest, attorneys' fees and costs, and equitable and injunctive relief. We believe that we have meritorious defenses against this action, and we will continue to vigorously defend it.
EpicRealm/Parallel Networks Intellectual Property Litigation
On June 30, 2006, we filed a declaratory judgment action against EpicRealm Licensing, LP (“EpicRealm”) in the United States District Court, District of Delaware, seeking a judicial declaration of noninfringement and invalidity of U.S. Patent Nos. 5,894,554 (the '554 Patent) and 6,415,335B1 (the '335 Patent). We filed the lawsuit following the resolution of an indemnification claim by one of our customers related to EpicRealm's assertion of the '554 Patent and '335 Patent against the customer in a patent infringement case in the United States District Court for the Eastern District of Texas.
On April 13, 2007, EpicRealm filed an Answer and Counterclaim in which it: (1) denies our noninfringement and invalidity allegations; (2) alleges that we have willfully infringed, and are willfully infringing, the '554 Patent and '335 Patent; and (3) requests a permanent injunction, an award of unspecified money damages, interest, attorneys' fees, and costs. On May 7, 2007, we filed an Answer to EpicRealm's infringement counterclaim, denying EpicRealm's infringement allegations and asserting affirmative defenses. In August 2007, the patents-in-suit were sold to Parallel Networks, LLC, which thereafter substituted in as the defendant in place of EpicRealm.
The parties have completed discovery and filed briefing on claim construction and summary judgment motions. A Markman hearing and oral argument on summary judgment motions were held October 3, 2008. A court-ordered mediation was held on October 8, 2008, which did not result in a settlement. On December 4, 2008, the court issued an order granting summary judgment that our Web Cache, Internet Application Server, and RAC Database do not infringe the patents. The court also denied our motion for summary judgment that the patents are invalid, and denied in part and granted in part Parallel Networks's motion for summary judgment that certain prior art references do not invalidate the patents through anticipation. Trial was scheduled to begin on January 12, 2009, on issues of invalidity and inequitable conduct. On December 23, 2008, the parties reached an agreement allowing Parallel Networks to immediately appeal the court's summary judgment order and preserving Oracle's invalidity and inequitable conduct claims in the event that the matter is remanded for trial at a later time. On January 23, 2009, Parallel Networks filed a notice of appeal. A court-ordered mediation was held on June 1, 2009, which did not result in a settlement. The appellate court heard oral argument on December 10, 2009 after full briefing. On April 28, 2010, the Federal Circuit issued a decision vacating the district court's grant of summary judgment of noninfringement in Oracle's favor and remanding the case to the district court for further proceedings. On May 28, 2010, Oracle filed a Petition for Rehearing with the Federal Circuit which was denied on June 11, 2010. We believe that we have meritorious defenses against this action, and we will continue to vigorously defend it.
SAP Intellectual Property Litigation
On March 22, 2007, Oracle Corporation, Oracle USA, Inc. and Oracle International Corporation (collectively, Oracle) filed a complaint in the United States District Court for the Northern District of California against SAP AG, its wholly owned subsidiary, SAP America, Inc., and its wholly owned subsidiary, TomorrowNow, Inc., (collectively, the SAP Defendants) alleging violations of the Federal Computer Fraud and Abuse Act and the California Computer Data Access and Fraud Act, civil conspiracy, trespass, conversion, violation of the California Unfair Business Practices Act, and intentional and negligent interference with prospective economic advantage. Oracle alleged that SAP unlawfully accessed Oracle's Customer Connection support website and improperly took and used Oracle's intellectual property, including software code and knowledge management solutions. The complaint seeks unspecified damages and preliminary and permanent injunctive relief. On June 1, 2007, Oracle filed its First Amended Complaint, adding claims for infringement of the federal Copyright Act and breach of contract, and dropping the conversion and separately pled conspiracy claims. On July 2, 2007 the SAP Defendants' filed their Answer and Affirmative Defenses, acknowledging that TomorrowNow had made some “inappropriate downloads” and otherwise denying the claims alleged in the First Amended Complaint. The parties are engaged in discovery and continue to negotiate a Preservation Order. At case management conferences held on February 12, 2008 and April 24, 2008, Oracle advised the Court that Oracle intended to file a Second Amended Complaint, based on new facts learned during the course of discovery.
On July 28, 2008, Oracle filed a Second Amended Complaint, which added additional allegations based on facts learned during discovery. Among the new allegations contained in the Second Amended Complaint, Oracle alleges that TomorrowNow's business model relied on illegal copies of Oracle's underlying software applications and that TomorrowNow used these copies as generic software environments that TomorrowNow then used to create fixes and updates, to service customers and to train employees. The Second Amended Complaint also alleges that these practices may have extended to other Oracle products, including Siebel products.
On October 8, 2008, Oracle filed a Third Amended Complaint pursuant to stipulation. The Third Amended Complaint made some changes relating to the Oracle plaintiff entities (removing Oracle Corporation and adding Oracle Systems Corporation, Oracle EMEA Ltd., and J.D. Edwards Europe Ltd.) but did not change the substantive allegations. On October 15, 2008, the SAP Defendants filed a motion to dismiss portions of the Third Amended Complaint, and after full briefing, the court heard oral argument on November 26, 2008. On December 15, 2008, the court issued an order granting in part and denying in part the motion. The court dismissed with prejudice the claims asserted by plaintiffs JD Edwards Europe Ltd. and Oracle Systems Corporation, and denied the motion in all other respects. The parties are in the process of concluding discovery.
On July 15, 2009, Oracle filed a motion for leave to file a Fourth Amended Complaint to add claims for infringement of Oracle's Siebel software and database programs. The Court granted Oracle's motion and Oracle filed its Fourth Amended Complaint on August 18, 2009. The SAP Defendants filed an Answer to Oracle's Fourth Amended Complaint on August 26, 2009.
On August 26, 2009, the SAP Defendants filed an early motion for summary judgment directed to Oracle's damages theory. After full briefing, the motion was heard on October 28, 2009. By order dated January 28, 2010, SAP's motion for partial summary judgment was denied.
On March 3, 2010, the SAP Defendants and Oracle each filed motions for partial summary judgment. Opposition briefs were filed on March 31, 2010, and reply briefs were filed April 14, 2010. The Court heard oral argument on the motions for partial summary judgment on May 5, 2010, but has not yet ruled on the motions.
Trial is scheduled to begin on November 1, 2010.
Other Litigation
We are party to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including proceedings and claims that relate to acquisitions we have completed or to companies we have acquired or are attempting to acquire. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a materially adverse effect on our consolidated financial position, results of operations or cash flows.
 
VALUATION AND QUALIFYING ACCOUNTS
VALUATION AND QUALIFYING ACCOUNTS
 
 
SCHEDULE II
ORACLE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
  
Beginning
Balance
  
Additions
Charged
to Operations or
Other Accounts
  
Write-offs
 
 
Translation
Adjustments
and
Other
 
 
Ending
Balance
Trade Receivable Allowances
  
 
 
  
 
  
 
 
 
 
 
 
 
 
Year Ended:
  
 
 
  
 
  
 
 
 
 
 
 
 
 
May 31, 2008
  
$
306
  
164
  
(182
) 
 
15
  
 
$
303
 
  
 
 
  
 
  
 
 
 
 
 
 
 
 
May 31, 2009
  
$
303
  
118
  
(128
) 
 
(23
) 
 
$
270
 
  
 
 
  
 
  
 
 
 
 
 
 
 
 
May 31, 2010
  
$
270
  
143
  
(92
) 
 
(16
) 
 
$
305
 
  
 
 
  
 
  
 
 
 
 
 
 
 
 
 
Document Information
Year Ended
May 31, 2010
Document Type
10-K 
Document Period End Date
05/31/2010 
Amendment Flag
FALSE 
Amendment Description
 
Entity Information (USD $)
In Millions, except Share data
Jun. 22, 2010
Year Ended
May 31, 2010
Nov. 30, 2009
Entity Registrant Name
 
Oracle Corporation 
 
Entity Central Index Key
 
0001341439 
 
Current Fiscal Year End Date
 
05/31 
 
Entity Well-known Seasoned Issuer
 
Yes 
 
Entity Voluntary Filers
 
No 
 
Entity Current Reporting Status
 
Yes 
 
Entity Filer Category
 
Large Accelerated Filer 
 
Entity Public Float
 
 
$ 85,417 
Entity Common Stock, Shares Outstanding
5,026,247,000 
 
 
Document Fiscal Year Focus
 
2010 
 
Document Fiscal Period Focus
 
FY