Oracle Systems Corporation

1. Oracle Systems Corporation Case Presentation/Discussion Brian Covello Stephen Fletcher

2. Background • Supplies database management software • Also offers maintenance, consulting, training, and systems integration services • Leader in the market, rapid growth

3. Revenue Analysis • Current situation • Oracle recognizes any revenue for products shipped in the next 12 months • Revenue sources • Software licensing and sub-licensing recognized at time of signing • Maintenance, tech support, updates recognized over the contract period

4. Revenue Analysis • Why is Oracle Booking Sales at time of Contract ? • Is this Strategic / Legacy ? • Adding Accounting Yeast ? • Cooking the Books? What makes the dough $$ rise?

5. Who are the Primary Stakeholders? • Customers • Employees • Stockholders • Lending agencies

6. Industry and Competitive Analysis • New industry, high growth rate, R&D focus • Oracle differentiates based on relational database system • 1st mover advantage w/patent rights • Corporate relationships • High switching costs, few substitute products • Differentiation over low cost

7. Strategy Compensation based on revenue targets Recently redrew sales territories Pressure to be 1st to mkt Impact Pressure to grow sales Extended payment terms (A/R) to customers Low profit growth Drop in customer satisfaction, salespeople unsure of responsibility Product glitches Corporate Strategy Analysis+’ve and –’ve effects

8. Accounting Analysis • Accounting Policies • Recognize contract revenue to be received w/in 12 mos. • Recognize service revenue after services are performed • High level of accounts receivable • Accounting Flexibility • Strong freedom in an infant market segment • Limited flexibility in the future (1991)

9. Accounting Analysis • Accounting Strategy • Revenue reporting is more aggressive than the industry norm • A/R is high at 160 days vs. 62 as industry avg. • Strong incentives to manage earnings • Legacy of early choices

10. Asset Distortions/Overstatements • Quality of Disclosure • Not disclosing revenue properly • Red Flags • Overstated revenues • Review (recast) accounting distortions

11. Revenue Recognition • Revenue should hit the Income Statement if 1- Product / Service Rendered 2- Cash Collection is Reasonably Likely • If Revenue Recognized at Contract then = ? 1- Will Vendor Provide the service / product ? 2- Will the cost be higher than expected ? 3- Will Customer be satisfied ( Returns ) ? 4- Risk of A/R Collection ?

12. Revenue Recognition

13. Contract A/R Risks • . • -contract default • -agency concerns Sales motives • -legally binding=? • -collection of receivables • -underestimated reserves • -potential product returns

14. So what should Oracle do? • Options • Do nothing – Keep on cookin’ • Change to adjust the revenue recognition to the controller’s preference • Change to adjust the revenue recognition to a comparable revenue policy

15. A/R Adjustments

16. Revenue Recognition Change

17. Balance Sheet Changes

18. Market Signaling = Risk • The question – is the current system appropriate? • Effect on Stake Holders • -Shareholders • -Customers • -Banker / Lenders • -Management Compensation

19. Factors to Consider • Impact on the stock price • Action to correct problems = increase in price • Signal lack of confidence = decrease in price • Impact on Customers • Require long term prospects to maintain long term service

20. Factors to Consider • Impact on management • compensation and stockholder status • Impact on lending agreements • Less attractive to lenders • Higher lending rate • Consider breach/violation of covenants?

21. Stakeholders Customers Employees Stockholders Lending agencies Options Do nothing – Keep on cookin’ Adjust revenue recognition to controller’s preference Adjust revenue recognition to industry comparable revenue recognition What do you think?Consider stakeholders and the options

22. Oracle Post - 1990 • Aug 27, 1990 Oracle changed Revenue Recognition -$117,410 to $ 83,654 -change of $33,756 ( 162 ) -Stock fell 26% • September 9,1990 Reports Net loss Q1 -Loss of $27.4 million -Layoff 10% workforce -Initiate Cash Collection Program • Breach of Loan Covenants

23. news People soft PeopleSoft's Accounting Draws CriticsBy Ronna AbramsonStaff Reporter11/28/2003 10:00 AM ESTURL: http://www.thestreet.com/tech/ronnaabramson/10129027.html Allegations by Oracle (ORCL:Nasdaq) that a controversial anti-takeover strategy being employed PeopleSoft (PSFT:Nasdaq) is causing PeopleSoft to book revenue improperly might have some teeth, two accounting experts say. The independent accounting experts think the issue might even warrant a look from the Securities and Exchange Commission. Oracle is trying to acquire PeopleSoft in a $7.3 billion hostile takeover bid. "It's a prominent public company that's involved in an acquisition that is in an industry that has had problems with revenue recognition in the past," said Charles Mulford, director of the DuPree Financial Analysis Lab and an accounting professor at the Georgia Institute of Technology. "At the minimum, they [SEC officials] have to look at the transaction." Jim Brendel, author of "Software Industry Accounting" and a partner at the accounting firm Hein & Associates, agreed. "I would think the SEC would be looking at it," he said. It's conceivable, in a worst-case scenario, that the SEC could require PeopleSoft to restate results, he said. But the matter is not clear-cut, so the agency also could conclude there's no problem, he noted. At issue is a change in PeopleSoft's so-called "customer assurance program," in which customers are promised refunds of two to five times their license fees if PeopleSoft is acquired. Under a change made in the third quarter, PeopleSoft said the refunds would also kick in if a majority of its directors changed, according to an SEC filing. PeopleSoft stated that $155.9 million in revenue was collected with that change in place. ………………