<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED AUGUST 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 0-14376
ORACLE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2871189
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
500 Oracle Parkway
Redwood City, California 94065
(Address of principal executive offices, including zip code)
(650) 506-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Number of shares of registrant's common stock outstanding as of August 31,
1997: 980,497,793
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ORACLE CORPORATION
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at August 31, 1997 and
May 31, 1997................................................... 3
Condensed Consolidated Statements of Operations for the three
months ended August 31, 1997 and 1996.......................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended
August 31, 1997 and 1996....................................... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signatures..................................................... 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ORACLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1997 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $1,006,712 $ 890,162
Short-term cash investments............................. 481,614 323,028
Trade receivables, net of allowance for doubtful
accounts of $131,260 and $127,840, respectively........ 1,183,408 1,540,470
Prepaid and refundable income taxes..................... 265,785 274,366
Other current assets.................................... 197,326 243,070
---------- ----------
Total current assets................................. 3,134,845 3,271,096
---------- ----------
LONG-TERM CASH INVESTMENTS............................... 180,740 116,337
PROPERTY, net............................................ 882,018 868,948
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $30,639 and $36,303, respectively....... 98,938 98,981
OTHER ASSETS............................................. 300,524 268,953
---------- ----------
Total assets......................................... $4,597,065 $4,624,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt.. $ 4,913 $ 3,361
Accounts payable........................................ 173,955 185,444
Income taxes............................................ 153,174 203,646
Accrued compensation and related benefits............... 223,427 394,153
Customer advances and unearned revenues................. 694,123 602,862
Value added tax and sales tax payable................... 40,119 121,914
Other accrued liabilities............................... 523,761 410,759
---------- ----------
Total current liabilities............................ 1,813,472 1,922,139
---------- ----------
LONG-TERM DEBT........................................... 300,742 300,836
OTHER LONG-TERM LIABILITIES.............................. 29,649 24,226
DEFERRED INCOME TAXES.................................... 7,910 7,402
STOCKHOLDERS' EQUITY..................................... 2,445,292 2,369,712
---------- ----------
Total liabilities and stockholders' equity........... $4,597,065 $4,624,315
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
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ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
REVENUES
Licenses and other...................................... $ 530,642 $ 461,848
Services................................................ 838,187 590,472
---------- ----------
Total revenues....................................... 1,368,829 1,052,320
---------- ----------
OPERATING EXPENSES
Sales and marketing..................................... 449,451 359,850
Cost of services........................................ 468,167 336,107
Research and development................................ 159,667 117,209
General and administrative.............................. 75,514 70,279
Acquired in-process research and development............ 167,054 --
---------- ----------
Total operating expenses............................. 1,319,853 883,445
---------- ----------
OPERATING INCOME......................................... 48,976 168,875
Other income (expense), net............................. 39,974 7,330
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES................. 88,950 176,205
Provision for income taxes.............................. 80,479 63,434
---------- ----------
NET INCOME............................................... $ 8,471 $ 112,771
========== ==========
EARNINGS PER SHARE....................................... $ 0.01 $ 0.11
========== ==========
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING.......... 1,006,266 1,010,715
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 8,471 $ 112,771
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 71,137 62,765
Write-off of acquired in-process research and
development.......................................... 167,054 --
Provision for doubtful accounts....................... 21,604 10,365
Changes in assets and liabilities, net of effects of
acquisitions:
Decrease in trade receivables........................ 319,896 214,306
Decrease in prepaid and refundable income taxes...... 7,194 2,150
Decrease (increase) in other current assets.......... 42,237 (7,887)
Decrease in accounts payable......................... (9,238) (5,511)
Decrease in income taxes............................. (47,461) (53,321)
Increase in customer advances and unearned revenues.. 98,039 35,780
Decrease in other accrued liabilities................ (238,177) (133,122)
Increase in other long-term liabilities.............. 5,485 286
Increase (decrease) in deferred income taxes......... 598 (4,483)
---------- ---------
Net cash provided by operating activities.............. 446,839 234,099
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in cash investments.......................... (222,988) (100,432)
Capital expenditures.................................. (77,484) (88,976)
Capitalization of computer software development costs. (4,442) (9,509)
Increase in other assets.............................. (35,849) (17,600)
---------- ---------
Net cash used for investing activities................. (340,763) (216,517)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under notes payable and
long-term debt....................................... 1,701 (194)
Payments of capital leases............................ (290) --
Proceeds from common stock issued..................... 32,817 15,421
Repurchase of common stock............................ (15,563) (11,957)
---------- ---------
Net cash provided by financing activities.............. 18,665 3,270
---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................. (8,191) 6,671
---------- ---------
Net increase in cash and cash equivalents.............. 116,550 27,523
CASH AND CASH EQUIVALENTS
Beginning of period.................................... 890,162 715,742
---------- ---------
End of period.......................................... $1,006,712 $ 743,265
========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock dividend................................. $ 3,266 $ --
========== =========
Accrual of Treasury Services Corporation acquisition
cost................................................. $ 110,262 $ --
========== =========
Stock options assumed in acquisition.................. $ 8,967 $ --
========== =========
</TABLE>
See notes to condensed consolidated financial statements.
5
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ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended May 31, 1997.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments)
which are, in the opinion of management, necessary to state fairly the results
for the three month period ended August 31, 1997. The results for the three
month period ended August 31, 1997 are not necessarily indicative of the
results expected for the full fiscal year.
2. EARNINGS PER SHARE
On July 14, 1997, the Company effected a three-for-two stock split in the form
of a common stock dividend distributed August 15, 1997 to stockholders of
record as of August 1, 1997. All per share data and numbers of common shares,
where appropriate, have been retroactively adjusted to reflect the stock
split.
Earnings per share was computed based on the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares are calculated using the treasury stock method and represent
incremental shares issuable upon the exercise of outstanding stock options.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings per
Share", which will be adopted by the Company in the third quarter of fiscal
1998. SFAS No. 128 requires companies to compute under two different methods,
basic and diluted, and to disclose the methodology used for the calculation.
If SFAS No. 128 had been applied by the Company during the first three months
of fiscal 1998 and 1997, basic net income per share and diluted net income per
share would have been $0.01 and $0.11, respectively, in both periods.
3. ACQUISITIONS
On August 29, 1997, the Company acquired the shares of Treasury Services
Corporation ("TSC") for approximately $110,262,000 (which was included in
other accrued liabilities as of August 31, 1997 in the accompanying condensed
consolidated balance sheet) and the conversion of outstanding TSC options to
the Company's options. The Company received an appraisal of certain intangible
assets which indicated that $91,500,000 of the acquired intangible assets
consisted of in-process research and development. In the opinion of management
and the appraiser, the acquired in-process research and development had not
yet reached technological feasibility and had no alternative future uses.
Accordingly, the Company recorded a special charge of $91,500,000 in the
accompanying condensed consolidated statement of operations in the first
quarter of fiscal 1998. The remaining intangible assets acquired will be
amortized over a five year period beginning in the second quarter of fiscal
1998.
On August 11, 1997, the Company completed the merger of its wholly owned
subsidiary, Network Computer, Inc. ("NCI") and Navio Communications, Inc.
("Navio"), a development stage company, in a stock for stock exchange valued
at approximately $77,000,000. The Company received an appraisal of certain
intangible assets which indicated that $75,554,000 of the acquired intangible
assets consisted of in-process research and development. In the opinion of
management and the appraiser, the acquired in-process research and development
6
<PAGE>
had not yet reached technological feasibility and had no alternative future
uses. Accordingly, the Company recorded a special charge of $75,554,000 in the
accompanying consolidated statement of operations in the first quarter of
fiscal 1998. The remaining intangible assets acquired will be amortized over a
three year period beginning in the second quarter of fiscal 1998. As a result
of the merger, the Company's ownership interest in NCI was reduced to 66%.
Accordingly, the minority interest share of NCI's loss from the date of the
merger, including the acquired in-process research and development, is
reflected in other income in the accompanying condensed consolidated statement
of operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains forward-
looking statements. The forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future Results
and Market Price of Stock." Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's opinions only
as of the date hereof. The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including the Annual Report on Form 10-K for the fiscal
year ended May 31, 1997 and the Quarterly Reports on Form 10-Q to be filed by
the Company in fiscal 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenues increased 30% in the first quarter of fiscal 1998 as compared
to the corresponding period in fiscal 1997, or 36% expressed in local currency
terms. Domestic revenues increased 32% in the first quarter while
international revenues increased 29% in the first quarter as compared to the
corresponding period in fiscal 1997. International revenues were unfavorably
affected in the first quarter of fiscal 1998 when compared to the
corresponding period of the prior year as a result of the strengthening of the
U.S. dollar against certain major international currencies. International
revenues expressed in local currency increased in the first quarter of fiscal
1998 by approximately 40% from the corresponding period of fiscal 1997.
International revenues constituted approximately 54% and 55% of total revenues
in the first three months of fiscal 1998 and 1997, respectively. Management
expects that the Company's international operations will continue to provide a
significant portion of total revenues. However, international revenues will be
adversely affected if the U.S. dollar continues to strengthen against certain
major international currencies.
REVENUES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
1997 CHANGE 1996
---------- ------ ----------
<S> <C> <C> <C>
Licenses and other.............................. $ 530,642 15% $ 461,848
Percentage of revenues.......................... 38.8% 43.9%
Services........................................ $ 838,187 42% $ 590,472
Percentage of revenues.......................... 61.2% 56.1%
Total revenues................................ $1,368,829 30% $1,052,320
</TABLE>
LICENSES AND OTHER REVENUES. License revenues represent fees earned for
granting customers licenses to use the Company's software products. License
revenues also include revenues from the Company's systems
7
<PAGE>
integration business, documentation revenues, certain software development
revenues and other miscellaneous revenues, which constituted 5% and 4% of
total license and other revenues in the first three months of fiscal 1998 and
1997, respectively. License and other revenues grew 15% and 26% in the first
three months of fiscal year 1998 and 1997, respectively, as compared to the
prior year corresponding periods. The lower license and other revenues growth
rate experienced in the first quarter of fiscal 1998 was due primarily to a
relatively strong first quarter of fiscal 1997 as compared to fiscal 1997 as
whole, strengthening of the U.S. dollar against certain major international
currencies, and a significant reorganization of the sales force during the
first quarter of fiscal 1998 to segment customer accounts by vertical industry
and size.
SERVICES REVENUES. Support, consulting and education services revenues each
increased in the first quarter of fiscal 1998 from the corresponding period in
fiscal 1997. The Company's support revenues continued to constitute the
largest portion of services revenues and grew 41% in the first quarter of
fiscal 1998 as compared to the corresponding period in fiscal 1997. This
growth reflects the continued increase in the installed base of the Company's
products under support contracts as well as an increase in the number of
customers electing higher support service offerings. Consulting and education
services grew 43% in the first quarter of fiscal 1998 when compared to the
corresponding period in fiscal 1997 as the Company continued to expand its
services to assist customers in the use and implementation of systems software
and applications based on the Company's products.
OPERATING EXPENSES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
1997 CHANGE 1996
---------- ------ ----------
<S> <C> <C> <C>
Sales and marketing............................. $449,451 25% $359,850
Percentage of revenues.......................... 32.8% 34.2%
Cost of services................................ $468,167 39% $336,107
Percentage of revenues.......................... 34.2% 31.9%
Research and development (1).................... $159,667 36% $117,209
Percentage of revenues.......................... 11.7% 11.1%
General and administrative...................... $ 75,514 7% $ 70,279
Percentage of revenues.......................... 5.5% 6.7%
Acquired in-process research and development.... $167,054 * $ --
Percentage of revenues.......................... 12.2% --
</TABLE>
--------
* Not meaningful due to the effects of the one time charges for acquired
in-process research and development.
(1) Pursuant to Statement of Financial Accounting Standards (SFAS) No. 86,
the Company capitalized software development costs equal to 0.3% and
0.9% of total revenues during the first quarters of fiscal 1998 and
1997, respectively.
International expenses were favorably affected in the first quarter of fiscal
1998 when compared to the corresponding prior year period due to the
strengthening of the U. S. dollar against certain major international
currencies.
SALES AND MARKETING EXPENSES. The Company continues to place significant
emphasis, both domestically and internationally, on direct sales through its
own sales force. However, the Company also continues to market its products
through indirect channels in order to increase market share while reducing
distribution costs. As a percentage of licenses and other revenues, sales and
marketing expenses were 85% and 78% in the first quarters of fiscal 1998 and
1997, respectively. The increase in the first three months of fiscal 1998 when
compared to the corresponding period of fiscal 1997 was due in part to
increased sales expenses incurred in anticipation of higher license growth
rates than experienced. In addition, the first quarter of fiscal 1997 sales
and marketing expenses were favorably affected due to revisions to certain
prior fiscal year compensation related accruals based on actual payments made.
Included in sales and marketing expenses is the amortization of capitalized
software development costs (see below).
8
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COST OF SERVICES. The cost of providing services consists largely of
consulting, education and support personnel expenses. As a percentage of
services revenues, cost of services were 56% and 57% of revenues in the first
quarters of fiscal 1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses would
have been 12% of total revenues in the first three months of both fiscal 1998
and 1997, without the capitalization of software development costs in
accordance with SFAS No. 86. Before considering the impact of software
capitalization, research and development expenses increased 30% from the first
quarter of fiscal 1997 (36% after the adjustment for software capitalization).
A portion of this increase was due to research and development staff hired in
connection with the January 1997 acquisition of Datalogix International, Inc.
The Company capitalized approximately $4,442,000 and $9,508,000 of software
development costs during the first quarters of fiscal 1998 and 1997,
respectively. Amortization of capitalized software development costs is
charged to sales and marketing expenses and totaled $4,485,000 and $9,618,000
in the first quarters of fiscal 1998 and 1997, respectively. The Company
believes that research and development expenditures are essential to
maintaining its competitive position and expects these costs to continue to
constitute a significant percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of total revenues decreased to 5.5% in the first three months of
fiscal 1998 from 6.7% in the corresponding prior year period, due primarily to
higher revenue levels.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Based on the results of third-
party appraisals, the Company recorded charges of $91,500,000 and $75,554,000
in the first quarter of fiscal 1998 to expense in-process research and
development costs related to the acquisitions of Treasury Services Corporation
and Navio Communications, Inc., respectively. In the opinion of management and
the appraiser, the acquired in-process research and development had not yet
reached technological feasibility and had no alternative future uses.
OTHER INCOME (EXPENSE):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
1997 CHANGE 1996
---------- ------ ----------
<S> <C> <C> <C>
Other income (expense)......................... $39,974 * $7,330
Percentage of revenues......................... 2.9% 0.7%
</TABLE>
- --------
* Not meaningful
Other income and expense in the first quarter of fiscal 1998 includes the
minority interest share of the one-time acquired in-process research and
development charge for NCI. Excluding this credit of $25,726,000, other income
and expense for the first quarter of fiscal 1998 was $14,248,000, a 94%
increase over the corresponding prior year period. Changes in non-operating
income and expense primarily reflect fluctuations in interest income and
expense related to changes in cash and debt balances and interest rates, as
well as foreign exchange and other miscellaneous items. The Company also
realized a gain of approximately $4,300,000 during the first quarter of fiscal
1998 related to the sale of certain securities.
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
1997 CHANGE 1996
---------- ------ ----------
<S> <C> <C> <C>
Provision for income taxes...................... $80,479 * $63,434
Percentage of revenues.......................... 5.9% 6.0%
</TABLE>
- --------
* Not meaningful.
9
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The effective tax rate in the first quarter of fiscal 1998 was negatively
affected due to the non-deductibility of the charges related to the acquired
in-process research and development. Excluding the effect of these charges,
the effective tax rate for the first quarter of fiscal 1998 would have been
35% as compared to a 36% tax rate in the corresponding prior year period.
NET INCOME AND EARNINGS PER SHARE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
1997 CHANGE 1996
---------- ------ ----------
<S> <C> <C> <C>
Net income...................................... $8,471 * $112,771
Percentage of revenues.......................... 0.6% 10.7%
Earnings per share.............................. $ 0.01 * $ 0.11
</TABLE>
--------
* Not meaningful
Excluding the financial statement effects of the acquisitions of Treasury
Services Corporation and Navio Communications, Inc., net income and earnings
per share in the first quarter of fiscal 1998 would have been $149,799,000 and
$0.15, respectively, representing increases of 33% and 36%, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
AUGUST 31, AUGUST 31,
1997 CHANGE 1996
---------- ------ ----------
<S> <C> <C> <C>
Working capital.............................. $1,321,373 43% $ 926,628
Cash and cash investments.................... $1,669,066 65% $1,010,826
Cash provided by operating activities........ $ 446,839 91% $ 234,099
Cash used for investing activities........... $ (340,763) 57% $ (216,517)
Cash provided by financing activities........ $ 18,665 471% $ 3,270
</TABLE>
Working capital increased in the first three months of fiscal 1998 over the
corresponding prior year period, due primarily to increased cash flows from
operations, which resulted in higher cash levels.
The Company generated higher positive cash flows from operations in the first
three months of fiscal 1998 over fiscal 1997, due primarily to improved
profitability, excluding the charges for in-process research and development,
as well as higher cash collections.
Cash used for investing activities increased in the first three months of
fiscal 1998 as compared to the corresponding prior year period, due primarily
to changes in the levels of cash investments. In both periods, the Company
made significant investments in capital expenditures.
The Company's Board of Directors has approved the repurchase of up to
70,500,000 shares of Common Stock on the open market to reduce the dilutive
effect of the Company's stock plans. Pursuant to this repurchase program, the
Company repurchased 421,106 shares of the Company's Common Stock for
approximately $15,563,000 during the first quarter of fiscal 1998. To date,
the Company has repurchased a total of 52,807,869 shares of the Company's
Common Stock for approximately $857,505,000. The Company used cash flow from
operations and proceeds from the issuance of Senior Notes in fiscal 1997 to
repurchase the Company's Common Stock, and to invest in working capital and
other assets to support its growth.
During the third quarter of fiscal 1997, the Company issued $150,000,000 in
6.72% Senior Notes due in the year 2004 and $150,000,000 in 6.91% Senior Notes
due in the year 2007. The Senior Notes are unsecured general obligations of
the Company that rank on parity with all other unsecured and unsubordinated
indebtedness of the Company that may be outstanding.
10
<PAGE>
At August 31, 1997, the Company also had other outstanding debt of
approximately $5,655,000 primarily in the form of other notes payable and
capital leases.
The Company anticipates that current cash balances, as well as anticipated
cash flows from operations, will be sufficient to meet its working capital and
capital expenditure needs at least through the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
The Company operates in a rapidly changing environment that involves numerous
risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
MANAGEMENT OF GROWTH. The Company has a history of rapid growth. The Company's
future operating results will depend on management's ability to manage growth,
continuously hire and retain significant numbers of qualified employees,
forecast revenues and control expenses. An unexpected decline in the growth
rate of revenues without a corresponding and timely slowdown in expense growth
could have a material adverse effect on the Company's business, results of
operations or financial condition.
COMPETITIVE ENVIRONMENT. The computer software industry is an intensely
competitive industry with several large vendors that develop and market
databases, applications, development tools or decision support products.
Certain of these vendors have significantly more financial and technical
resources than the Company. The introduction of new competitive products into
one or more of the Company's various markets could have a material adverse
effect on the Company's business, results of operations or financial
condition. In addition, new distribution methods (e.g. electronic channels)
and opportunities presented by the Internet have removed many of the barriers
to entry historically faced by small and start-up companies in the software
industry. The Company expects to face increasing competition from such
companies in the various markets in which it competes.
PRICING. Intense competition in the various markets in which the Company
competes may put pressure on the Company to reduce prices on certain products,
particularly in the database marketplace where certain vendors offer deep
discounts in an effort to recapture or gain marketshare. In addition, the
bundling of software products for promotional purposes or as a long-term
pricing strategy by certain of the Company's competitors could have the effect
over time of significantly reducing the prices that the Company can charge for
its products. Shifts toward the use of operating systems on which the Company
experiences relatively greater price competition could result in lower average
license prices, thereby reducing license revenues for the Company. Any such
price reductions and resulting lower license revenues could have a material
adverse effect on the Company's business, results of operations or financial
condition if the Company cannot offset these price reductions with a
corresponding increase in sales volumes.
INTERNATIONAL SALES. A substantial portion of the Company's revenues is
derived from international sales and is therefore subject to the risks
attendant thereto, including the general economic conditions in each country,
the overlap of different tax structures, the difficulty of managing an
organization spread over various countries, changes in regulatory
requirements, compliance with a variety of foreign laws and regulations and
longer payment cycles in certain countries. The Company has experienced
relatively slower growth rates in certain international countries during the
last several years, primarily as a result of weaker economies relative to the
rest of the world, slower adoption of information technology, a strong U.S.
dollar which negatively affects reported revenue growth in U.S. dollars, and
senior management changes in several major countries. There can be no
assurance that the Company will be able to successfully address each of these
challenges in the near term. Other risks associated with international
operations include import and export licensing requirements, trade
restrictions and changes in tariff rates.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Changes in the value of major foreign currencies
relative to the value of the U.S. dollar therefore could adversely affect
future revenues and operating results. Foreign currency transaction gains and
losses are primarily related to sublicense fee agreements between the Company
and selling distributors and subsidiaries. These gains and losses are charged
against earnings in the period incurred.
11
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The Company has reduced its transaction and translation gains and losses
associated with converting foreign currencies into U.S. dollars by using
forward foreign exchange contracts to hedge transaction and translation
exposures in major currencies. Such contracts meet the criteria established in
FASB 52 for hedge accounting treatment. The Company finds it impractical to
hedge all foreign currencies in which it conducts business. As a result, the
Company will continue to experience foreign currency gains and losses.
INDUSTRY GROWTH AND ECONOMIC CONDITIONS. The strength and profitability of the
Company's business depends on the overall demand for computer software and
growth in the computer industry. Because the Company's sales are primarily to
major corporate, government, education and other business customers, the
Company's business also partly depends on general economic and business
conditions. A softening of demand for computer software, caused by a weakening
of the economy or otherwise, may result in decreased revenues or declining
revenue growth rates for the Company.
NEW PRODUCTS. The markets for the Company's products are characterized by
rapid technological advances in hardware and software development, evolving
standards in computer hardware and software technology and frequent new
product introductions and enhancements. Product introductions and short
product life cycles necessitate high levels of expenditure for research and
development. To maintain its competitive position, the Company must enhance
and improve existing products and continue to introduce new products and new
versions of existing products that keep pace with technological developments,
satisfy increasingly sophisticated customer requirements and achieve market
acceptance. The Company's inability to port to or run on new or increasingly
popular operating systems, or the Company's failure to successfully improve,
position and/or price its products, could have a material adverse effect on
the Company's business, results of operations or financial condition.
Significant undetected errors or delays in new products or new versions of a
product may affect market acceptance of the Company's products and could have
a material adverse effect on the Company's business, results of operations or
financial condition. If the Company were to experience delays in the
commercialization and introduction of new or enhanced products, if customers
were to experience significant problems with the implementation and
installation of products or if customers were dissatisfied with product
functionality or performance, this could have a material adverse effect on the
Company's business, results of operations or financial condition.
There can be no assurance that the Company's new products will achieve
significant market acceptance or will generate significant revenue. Additional
products that the Company plans to directly or indirectly market in the future
are in various stages of development. Some of these products, such as web
applications server and network computing software, are in business areas that
are relatively new to the Company's product development and sales and product
marketing personnel. See "New Business Areas."
YEAR 2000. A significant amount of current demand for applications software
may be generated by customers in the process of replacing and upgrading
applications in order to accommodate the change in date to the year 2000. Once
such customers have completed such preparations, the software industry and the
Company may experience a significant deceleration from the strong annual
growth rates recently experienced in the applications software marketplace. In
addition, the Company may experience increased expenses in addressing the
transition of customers to software that is year 2000 compliant.
UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS. The Company's revenues in
general, and its license revenues in particular, are relatively difficult to
forecast and vary from quarter to quarter due to various factors, including
(i) the relatively long sales cycles for the Company's products, (ii) the size
and timing of individual license transactions, which tend to be initiated by
customers at the end of a fiscal quarter as a negotiating tactic, (iii) the
timing of the introduction of new products or product enhancements by the
Company or its competitors, (iv) the potential for delay or deferral of
customer implementations of the Company's software, (v) changes in customer
budgets and (vi) seasonality of technology purchases and other general
economic conditions. Accordingly, the Company's quarterly results are
difficult to predict until the end of the quarter, and delays in product
delivery or
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closing of sales near the end of a quarter can cause quarterly revenues and
net income to fall significantly short of anticipated levels.
The Company's license revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter. Because the Company's operating
expenses are based on anticipated revenue levels and because a high percentage
of the Company's expenses are relatively fixed, a delay in the recognition of
revenue from even a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
cause net income to fall significantly short of anticipated levels.
SALES FORCE AND ALTERNATE DISTRIBUTION CHANNELS. The Company historically has
relied heavily on its direct sales force. However, the Company is moving
increasingly toward indirect, electronic and other alternate distribution
channels to meet competitive demands. In addition, the Company is training and
reorganizing part of its sales force to provide specialized expertise within
certain vertical markets. There can be no assurance that the Company will be
successful in increasing sales within these alternate distribution channels or
within these markets. If the Company is not successful, it may lose
significant sales opportunities.
UNCERTAINTY OF EMERGING AREAS. The impact on the Company of emerging areas
such as the Internet, on-line services and electronic commerce is uncertain.
There can be no assurance that the Company will be able to provide a product
offering that will satisfy new customer demands in these areas. In addition,
standards for network protocols, as well as other industry adopted and de
facto standards for the Internet, are evolving rapidly. There can be no
assurance that standards chosen by the Company will position its products to
compete effectively for business opportunities as they arise on the Internet
and other emerging areas.
NEW BUSINESS AREAS. The Company has in recent years expanded its technology
into a number of new business areas to foster long-term growth, including
Internet/electronic commerce, interactive media and data warehousing. It also
has begun to promote the use of network computers. These areas are relatively
new to the Company's product development and sales and marketing personnel.
There is no assurance that the Company will compete effectively or will
generate significant revenues in these new areas. The success of network
computers and, in particular, the Company's current network computer products
is difficult to predict because network computers represent a method of
computing that is new to the entire computer industry. The successful
introduction of network computers to the market will depend in large measure
on (i) the commitment by hardware and software vendors to manufacture, promote
and distribute network computers, (ii) the lower cost of ownership relative to
personal computers, and (iii) the ease of use and administration relative to
personal computers. There can be no assurance that sufficient numbers of
vendors will undertake this commitment, that the market will accept network
computers or that network computers will generate significant revenues to the
Company. See "New Products."
HIRING AND RETENTION OF EMPLOYEES. The Company's continued growth and success
depend to a significant extent on the continued service of its senior
management and other key employees and the hiring of new qualified employees.
Competition for highly-skilled business, product development, technical and
other personnel is intense. There can be no assurance that the Company will be
successful in continuously recruiting new personnel and in retaining existing
personnel. None of the Company's employees is subject to a long-term
employment or a non-competition agreement. The loss of one or more key
employees or the Company's inability to attract additional qualified employees
or retain other employees could have a material adverse effect on the
continued growth of the Company. In addition, the Company may experience
increased compensation costs in order to attract and retain skilled employees.
FUTURE ACQUISITIONS. As part of its business strategy, the Company has
recently completed the acquisitions of Navio Communications, Inc. and Treasury
Services Corporation, and expects to make acquisitions of, or significant
investments in, businesses that offer complementary products, services and
technologies. Any acquisitions or investments will be accompanied by the risks
commonly encountered in acquisitions of businesses. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of
the acquired businesses, the potential disruption of the Company's ongoing
business, the inability of management
13
<PAGE>
to maximize the financial and strategic position of the Company, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and clients as a result of any
integration of new management personnel. These factors could have a material
adverse effect on the Company's business, results of operations or financial
condition. Consideration paid for future acquisitions, if any, could be in the
form of cash, stock, rights to purchase stock or a combination thereof.
Dilution to existing stockholders and to earnings per share may result to the
extent that shares of stock or other rights to purchase stock are issued in
connection with any such future acquisitions.
RELATIVE PRODUCT PROFITABILITY. Certain of the Company's revenues are derived
from products which, as a percentage of revenues, currently require a higher
level of development, distribution and support expenditures compared to
certain of its other core products. To the extent that revenues generated from
such products become a greater percentage of the Company's total revenues, the
Company's operating margins may be adversely affected, unless the expenses
associated with such products decline as a percentage of revenues.
ENFORCEMENT OF THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS. Despite the
Company's efforts to protect its intellectual property rights, it may be
possible for unauthorized third parties to copy certain portions of the
Company's products or to reverse engineer or obtain and use technology or
other information that the Company regards as proprietary. In addition, the
laws of certain countries do not protect the Company's proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can be
no assurance that the Company will be able to protect its proprietary
technology against unauthorized third party copying or use, which could
adversely affect the Company's competitive position.
The Company from time to time receives notices from third parties claiming
infringement by the Company's products of third party patent and other
intellectual property rights. The Company expects that software products will
increasingly be subject to such claims as the number of products and
competitors in the Company's industry segments grows and the functionality of
products overlaps. Regardless of its merit, responding to any such claim could
be time-consuming, result in costly litigation and require the Company to
enter into royalty and licensing agreements which may not be offered or
available on terms acceptable to the Company. If a successful claim is made
against the Company and the Company fails to develop or license a substitute
technology, the Company's business, results of operations or financial
condition could be materially adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock has experienced significant fluctuations and may continue to fluctuate
significantly. The market price of the Common Stock may be significantly
affected by factors such as the announcement of new products or product
enhancements by the Company or its competitors, technological innovation by
the Company or its competitors, quarterly variations in the Company's or its
competitors' results of operations, changes in prices of the Company's or its
competitors' products and services, changes in revenue and revenue growth
rates for the Company as a whole or for specific geographic areas, business
units, products or product categories, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. The stock
prices for many companies in the technology sector have experienced wide
fluctuations which often have been unrelated to their operating performance.
Such fluctuations may adversely affect the market price of the Company's
Common Stock.
LONG-TERM INVESTMENT CYCLE. Developing and localizing software is expensive
and the investment in product development often involves a long payback cycle.
The Company's plans for its fiscal year ending May 31, 1998 include
significant investments in software research and development and related
product opportunities from which significant revenues are not anticipated for
several years.
14
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse effect on the Company's consolidated results of operations or
consolidated financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Oracle
Corporation has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORACLE CORPORATION
Dated: October 15, 1997 By:/s/ JEFFREY O. HENLEY
------------------------------------
Jeffrey O. Henley
Executive Vice President and Chief
Financial Officer
Dated: October 15, 1997 By:/s/ THOMAS A. WILLIAMS
------------------------------------
Thomas A. Williams
Vice President and Corporate Controller
16
<PAGE>
ORACLE CORPORATION
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLES
- --------- --------------
27.1 Financial Data Schedule
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 1,006,712
<SECURITIES> 481,614
<RECEIVABLES> 1,313,668
<ALLOWANCES> 131,260
<INVENTORY> 9,396
<CURRENT-ASSETS> 3,134,845
<PP&E> 1,538,024
<DEPRECIATION> 656,006
<TOTAL-ASSETS> 4,597,065
<CURRENT-LIABILITIES> 1,813,472
<BONDS> 0
9,805
0
<COMMON> 0
<OTHER-SE> 2,435,487
<TOTAL-LIABILITY-AND-EQUITY> 4,597,065
<SALES> 0
<TOTAL-REVENUES> 1,368,829
<CGS> 0
<TOTAL-COSTS> 468,167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,094
<INTEREST-EXPENSE> 3,656
<INCOME-PRETAX> 88,950
<INCOME-TAX> 80,479
<INCOME-CONTINUING> 8,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,471
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
