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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 NOVEMBER 30, 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)
<TABLE>
<S> <C>
Delaware 94-2871189
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
500 Oracle Parkway
Redwood City, California 94065
(Address of principal executive offices, including zip code)
(650) 506-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
---
Number of shares of registrant's common stock outstanding as of November 30,
1997: 983,963,673.
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ORACLE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at November 30, 1997 and
May 31, 1997.................................................. 3
Condensed Consolidated Statements of Operations for the three
months and six months ended November 30, 1997 and 1996........ 4
Condensed Consolidated Statements of Cash Flows for the six
months ended November 30, 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............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........... 16
Item 6. Exhibits and Reports on Form 8-K.............................. 16
Signatures.................................................... 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ORACLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................. $ 994,261 $ 890,162
Short-term cash investments........................... 520,134 323,028
Trade receivables, net of allowance for doubtful
accounts of $140,432 and $127,840, respectively...... 1,321,368 1,540,470
Prepaid and refundable income taxes................... 265,996 274,366
Other current assets.................................. 210,634 243,070
---------- ----------
Total current assets........................... 3,312,393 3,271,096
---------- ----------
LONG-TERM CASH INVESTMENTS............................ 139,863 116,337
PROPERTY, net......................................... 898,967 868,948
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of
accumulated amortization of $40,201 and $36,303,
respectively......................................... 99,029 98,981
OTHER ASSETS.......................................... 312,465 268,953
---------- ----------
Total assets................................... $4,762,717 $4,624,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term
debt................................................. $ 9,992 $ 3,361
Accounts payable...................................... 206,642 185,444
Income taxes.......................................... 129,193 203,646
Accrued compensation and related benefits............. 282,888 394,153
Customer advances and unearned revenues............... 615,752 602,862
Value added tax and sales tax payable................. 59,718 121,914
Other accrued liabilities............................. 419,904 410,759
---------- ----------
Total current liabilities...................... 1,724,089 1,922,139
---------- ----------
LONG-TERM DEBT........................................ 304,602 300,836
OTHER LONG-TERM LIABILITIES........................... 57,298 24,226
DEFERRED INCOME TAXES................................. 8,153 7,402
STOCKHOLDERS' EQUITY.................................. 2,668,575 2,369,712
---------- ----------
Total liabilities and stockholders' equity..... $4,762,717 $4,624,315
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Licenses and other................ $ 645,366 $ 624,137 $1,176,008 $1,085,985
Services.......................... 968,361 687,236 1,806,548 1,277,708
---------- ---------- ---------- ----------
Total revenues................. 1,613,727 1,311,373 2,982,556 2,363,693
---------- ---------- ---------- ----------
OPERATING EXPENSES
Sales and marketing............... 528,490 454,688 977,941 814,538
Cost of services.................. 548,631 377,483 1,016,798 713,590
Research and development.......... 183,217 135,300 342,884 252,509
General and administrative........ 81,383 69,714 156,897 139,993
Acquired in-process research and
development...................... -- -- 167,054 --
---------- ---------- ---------- ----------
Total operating expenses....... 1,341,721 1,037,185 2,661,574 1,920,630
---------- ---------- ---------- ----------
OPERATING INCOME................... 272,006 274,188 320,982 443,063
Other income (expense), net....... 16,248 6,275 56,222 13,605
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................. 288,254 280,463 377,204 456,668
Provision for income taxes........ 100,930 100,967 181,409 164,401
---------- ---------- ---------- ----------
NET INCOME......................... $ 187,324 $ 179,496 $ 195,795 $ 292,267
========== ========== ========== ==========
EARNINGS PER SHARE................. $ 0.19 $ 0.18 $ 0.19 $ 0.29
========== ========== ========== ==========
COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING....................... 1,008,558 1,013,924 1,007,412 1,012,320
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
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ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 195,795 $ 292,267
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 155,694 126,680
Write-off of acquired in-process research and
development........................................... 167,054 --
Provision for doubtful accounts........................ 53,523 28,203
Changes in assets and liabilities:
Decrease (increase) in trade receivables.............. 149,176 (1,892)
Decrease (increase) in prepaid and refundable income
taxes................................................ 6,961 (7,326)
Decrease (increase) in other current assets........... 28,842 (16,043)
Increase (decrease) in accounts payable............... 22,903 (7,056)
Decrease in income taxes.............................. (75,790) (97,671)
Increase in customer advances and unearned revenues... 19,306 6,985
Decrease in other accrued liabilities................. (153,278) (71,868)
Increase in other long-term liabilities............... 33,135 1,085
Increase (decrease) in deferred income taxes.......... 14,495 (4,621)
--------- ---------
Net cash provided by operating activities............... 617,816 248,743
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in cash investments........................... (220,632) (165,074)
Capital expenditures................................... (155,294) (173,853)
Capitalization of computer software development costs.. (17,337) (16,891)
Increase in other assets............................... (169,898) (19,178)
--------- ---------
Net cash used for investing activities.................. (563,161) (374,996)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under notes payable and long-term debt.. 10,332 6,018
Proceeds from common stock issued...................... 111,221 70,332
Repurchase of common stock............................. (62,717) (109,876)
--------- ---------
Net cash provided by (used for) financing activities.... 58,836 (33,526)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................. (9,392) 3,421
--------- ---------
Net increase (decrease) in cash and cash equivalents.... 104,099 (156,358)
CASH AND CASH EQUIVALENTS
Beginning of period..................................... 890,162 715,742
--------- ---------
End of period........................................... $ 994,261 $ 559,384
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock dividend.................................. $ 3,266 $ --
========= =========
</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 fiscal 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 six month period ended November 30, 1997. The results for the six month
period ended November 30, 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 earnings per share, and to disclose the methodology used for the
calculation. If SFAS No. 128 had been applied by the Company during the second
quarters of fiscal 1998 and 1997, basic net income per share and diluted net
income per share would have been $0.19 and $0.18, respectively, for both
periods. For the first six months of fiscal 1998 and 1997, basic net income per
share and diluted net income per share would have been $0.20 and $0.19,
respectively, in fiscal 1998 and $0.30 and $0.29, respectively, in fiscal 1997.
In December 1997, the Company reduced the exercise price of approximately 20%
of the outstanding common stock options held by the Company's employees to the
fair market value per share as of the date of the reduction in price. The
Company repriced these employee stock options in an effort to retain employees
at a time when a significant percentage of employee stock options had exercise
prices that were above fair market value. The Company believes that stock
options are a valuable tool in compensating and retaining employees. Executive
officers and directors were excluded from this repricing.
3. ACQUISITIONS
On August 29, 1997, the Company acquired the shares of Treasury Services
Corporation ("TSC") for approximately $110,262,000 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
6
<PAGE>
accompanying condensed consolidated statements of operations in the first
quarter of fiscal 1998. The remaining intangible assets are being amortized
over a five year period.
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
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 are being amortized over a three
year period. As a result of the merger, the Company's ownership interest in NCI
was reduced to approximately 66%. The minority interest's share of NCI's loss
from the date of the merger, including the charge for the acquired in-process
research and development, is reflected in other income in the accompanying
consolidated statement of operations for the first half of fiscal 1998.
4. LITIGATION
Refer to Part II, Item 1 for a description of legal proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains forward-
looking statements. The forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those reflected in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Affect Future Results and Market
Price of Stock." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company
files from time to time with the 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 filed by the Company in fiscal 1998.
RESULTS OF OPERATIONS
Total revenues increased 23% in the second quarter and 26% in the first half of
fiscal 1998 as compared to the corresponding periods in fiscal 1997.
International revenues were unfavorably affected in the second quarter and
first half of fiscal 1998 when compared to the corresponding periods of the
prior year as a result of the strengthening of the U. S. dollar against certain
major international currencies. Total revenues expressed in local currency
increased in the second quarter and first half of fiscal 1998 by approximately
29% and 32%, respectively, from the corresponding periods in fiscal 1997.
Domestic revenues increased 27% and 29% in the second quarter and first half of
fiscal 1998, respectively, while international revenues increased 19% and 23%
in the second quarter and first half of fiscal 1998, respectively, as compared
to the corresponding periods in fiscal 1997. International revenues expressed
in local currency increased in the second quarter and first half of fiscal 1998
by approximately 31% and 35%, respectively, from the corresponding periods of
fiscal 1997. International revenues constituted approximately 53% and 54% of
total revenues in the second quarters of fiscal 1998 and 1997, respectively,
and 54% and 55% of total revenues in the first half 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
strengthens against certain major international currencies.
7
<PAGE>
REVENUES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
NOV 30, NOV 30, NOV 30, NOV 30,
1997 CHANGE 1996 1997 CHANGE 1996
---------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Licenses and other...... $ 645,366 3% $ 624,137 $1,176,008 8% $1,085,985
Percentage of revenues.. 40.0% 47.6% 39.4% 45.9%
Services................ $ 968,361 41% $ 687,236 $1,806,548 41% $1,277,708
Percentage of revenues.. 60.0% 52.4% 60.6% 54.1%
Total revenues........ $1,613,727 23% $1,311,373 $2,982,556 26% $2,363,693
</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 integration business,
documentation revenues, certain software development revenues and other
miscellaneous revenues, which constituted 4% and 3% of total license and other
revenues during the second quarter and first half, respectively, in both fiscal
1998 and 1997. License revenue growth rates were 3% and 24% in the second
quarters of fiscal 1998 and 1997, respectively, and 8% and 25% in the first
half of fiscal 1998 and 1997, respectively. The decrease in the license revenue
growth rate during the second quarter and first half of fiscal 1998 is
primarily due to lower revenue growth in Asia Pacific as a result of the
weakened economies in that region, the strengthening of the U.S. dollar against
certain major international currencies, weaker domestic sales due to slower
database market growth and a significant reorganization of the sales force
during the first half of fiscal 1998 which the Company believes adversely
affected both the database and applications license revenue growth rates.
SERVICE REVENUES. Support, consulting and education services revenues in the
second quarter and first half of fiscal 1998 each increased from the
corresponding periods of fiscal 1997. The Company's consulting revenues
comprised the largest portion of service revenues during the second quarter of
fiscal 1998, while support revenues continued to constitute the largest portion
of service revenues in the first half of fiscal 1998. Support revenues grew 35%
and 38% in the second quarter and first half of fiscal 1998, respectively, when
compared to the corresponding periods 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 46%
and 45% in the second quarter and first half of fiscal 1998, respectively, when
compared to the corresponding periods in fiscal 1997. The Company continued to
expand its services to assist customers in the use and implementation of
applications based on the Company's products.
8
<PAGE>
OPERATING EXPENSES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ --------------------------
NOV 30, NOV 30, NOV 30, NOV 30,
1997 CHANGE 1996 1997 CHANGE 1996
-------- ------ -------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing..... $528,490 16% $454,688 $ 977,941 20% $814,538
Percentage of revenues.. 32.7% 34.7% 32.8% 34.5%
Cost of services........ $548,631 45% $377,483 $1,016,798 42% $713,590
Percentage of revenues.. 34.0% 28.8% 34.1% 30.2%
Research and development
(1).................... $183,217 35% $135,300 $ 342,884 36% $252,509
Percentage of revenues.. 11.4% 10.3% 11.5% 10.7%
General and
administrative......... $ 81,383 17% $ 69,714 $ 156,897 12% $139,993
Percentage of revenues.. 5.0% 5.3% 5.3% 5.9%
Acquired in-process
research and
development............ $ -- -- $ -- $ 167,054 * $ --
Percentage of revenues . -- -- 5.6% --
</TABLE>
--------
* Not meaningful
(1) Pursuant to Statement of Financial Accounting Standards (SFAS) No. 86,
the Company capitalized software development costs equal to 0.8% and
0.6% of total revenues during the second quarters of fiscal 1998 and
1997, respectively, and 0.6% and 0.7% of total revenues in the first
half of fiscal 1998 and 1997, respectively.
International expenses were favorably affected in the second quarter and first
half of fiscal 1998 when compared to the corresponding periods in the prior
year 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. Sales and
marketing expenses increased 16% and 20% in the second quarter and first half
of fiscal 1998, respectively, as compared to 27% and 28% in the corresponding
periods of fiscal 1997. The decrease in sales and marketing expense growth in
the second quarter and first half of fiscal 1998 is due primarily to lower
license and other revenue growth rates, as well as controls over increases in
headcount and headcount related expenditures. As a result of lower than
anticipated license revenues, sales margins decreased in both periods. Included
in sales and marketing expenses is the amortization of capitalized software
development costs (see below).
COST OF SERVICES. The cost of providing services consists largely of
consulting, education, and support personnel expenses. As a percentage of
service revenues, cost of services was 57% and 55% of revenues in the second
quarters of fiscal 1998 and 1997, respectively, and 56% in the first half of
both fiscal 1998 and 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
second quarters of fiscal 1998 and 1997 would have been 12% and 11% of total
revenues, respectively, without the capitalization of software development
costs in accordance with Statement of Financial Accounting Standards No. 86.
Before considering the impact of software capitalization, research and
development expenses increased 37% from the second quarter of fiscal 1997 and
34% from the first half of fiscal 1997 to the corresponding periods of fiscal
1998 (35% and 36% after the adjustment for software capitalization). A portion
of this increase was due to research and development staff hired in connection
with the acquisitions of Datalogix International, Inc., TSC, as well as the
merger of NCI and Navio. The Company capitalized approximately $12,895,000 and
$7,383,000 during the second quarters of fiscal 1998 and 1997, respectively,
and $17,337,000 and $16,891,000 in the first six months of fiscal 1998 and
1997, respectively. Amortization of capitalized software development costs is
charged to sales and marketing expenses and totaled $12,804,000 and $7,521,000
in the second quarters of fiscal 1998 and 1997, respectively, and $17,289,000
and $17,139,000 in the corresponding six month periods. The Company believes
that research and development expenditures are essential to maintaining its
competitive position and expects these costs to continue to constitute a
significant percentage of revenues.
9
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses as a
percentage of revenues decreased in the second quarter and first half of fiscal
1998 as compared to the corresponding periods in fiscal 1997, primarily due 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 acquisition of TSC and the merger of NCI and
Navio, 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 SIX MONTHS ENDED
------------------------ ------------------------
NOV 30, NOV 30, NOV 30, NOV 30,
1997 CHANGE 1996 1997 CHANGE 1996
-------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Other income (expense).... $ 16,248 159% $ 6,275 $ 56,222 313% $ 13,605
Percentage of revenues.... 1.0% 0.5% 1.9% 0.6%
Other income and expense in the first half of fiscal 1998 includes the minority
interest's share of the one-time acquired research and development charge for
NCI. Excluding this credit of $25,726,000, other income and expense for the
first half of fiscal 1998 was $30,496, a 124% 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 half of fiscal 1998 related to the sale of certain securities.
PROVISION FOR INCOME TAXES:
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
NOV 30, NOV 30, NOV 30, NOV 30,
1997 CHANGE 1996 1997 CHANGE 1996
-------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Provision for income
taxes.................... $100,930 -- $100,967 $181,409 10% $164,401
Percentage of revenues ... 6.3% 7.7% 6.1% 7.0%
The effective tax rate in the first half 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 half 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:
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
NOV 30, NOV 30, NOV 30, NOV 30,
1997 CHANGE 1996 1997 CHANGE 1996
-------- ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net income................ $187,324 4% $179,496 $195,795 (33%) $292,267
Percentage of revenues ... 11.6% 13.7% 6.6% 12.4%
Earnings per share........ $ 0.19 6% $ 0.18 $ 0.19 (34%) $ 0.29
</TABLE>
Excluding the financial statement effects of the acquisition of TSC and the
merger of NCI and Navio, net income and earnings per share in the first half of
fiscal 1998 would have been $337,123,000 and $0.33, respectively, representing
increases of 15% and 16%, respectively.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
NOV 30, NOV 30,
1997 CHANGE 1996
---------- ------ ----------
<S> <C> <C> <C>
Working capital............................. $1,588,304 54% $1,029,588
Cash and cash investments................... $1,654,258 86% $ 891,587
Cash provided by operating activities....... $ 617,816 148% $ 248,743
Cash used for investing activities.......... $ 563,161 50% $ 374,996
Cash provided by (used for) financing
activities................................. $ 58,836 * $ (33,526)
</TABLE>
- --------
* Not meaningful
Working capital increased in the first half of fiscal 1998 over the
corresponding prior year period, due primarily to increased cash flow from
operations, which resulted in higher cash levels.
The Company generated higher positive cash flows from operations in the first
six months of fiscal 1998 over fiscal 1997, due primarily to higher cash
collections and improved profitability, excluding the charges for in-process
research and development.
Cash used for investing activities increased in the first half of fiscal 1998
as compared to the corresponding period of the prior year, due primarily to
changes in the levels of cash investments and the acquisition of TSC. In both
periods, the Company made significant investments in capital expenditures.
Since July 1992, the Company's Board of Directors has approved the repurchase
of up to 84,500,000 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 1,736,106 shares of the Company's Common Stock
for approximately $62,717,000 during the first half of fiscal 1998. As of
November 30, 1997, the Company has repurchased a total of 54,122,869 shares of
the Company's Common Stock for approximately $904,657,000. 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.
At November 30, 1997, the Company also had other outstanding debt of
approximately $14,594,000 primarily in the form of other notes payable.
The Company anticipates that current cash balances and 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.
INDUSTRY GROWTH AND ECONOMIC CONDITIONS. The strength and profitability of the
Company's business depends on the overall demand for computer software and
services, in particular, in the product segments in which the Company competes.
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. The unexpected decline in
license revenue growth rates that the Company experienced in
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the first and second quarters of fiscal 1998 may indicate a slowdown in the
growth rate for database software products; if so, there can be no assurances
that the market growth rate for such products will increase in the near term or
that the Company's license revenue growth rates will return to previous levels.
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 experienced a large decline in revenue growth rates in
Asia Pacific during the second quarter of fiscal 1998 in part due to the
economic crises that occurred throughout this region. There can be no
assurances that these economies will recover in the near term or that the
Company's growth rates in this geographic region will return to previous levels
if the recovery occurs. The Company also has experienced relatively slower
growth rates in countries within its Europe Middle East Africa (EMEA) division
during the last several years, primarily as a result of weaker economies
relative to the rest of the world, slower adoption of information technology,
and senior management changes in several major countries. There can be no
assurances that the Company will be able to successfully address each of these
challenges in the near term. Other risks associated with international
operations include import and export licensing requirements, trade restrictions
and changes in tariff rates.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Changes in the value of major foreign currencies
relative to the value of the U.S. dollar adversely affected revenues and
operating results in the first and second quarters of fiscal 1998, particularly
in Asia Pacific and EMEA, and will continue to do so if the U.S. dollar
continues to strengthen relative to local currencies. 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.
The Company has reduced its transaction and translation gains and losses
associated with converting foreign currencies into U.S. dollars by using
forward foreign exchange contracts to hedge transaction and translation
exposures in major currencies. The Company finds it impractical to hedge all
foreign currencies in which it conducts business. As a result, the Company will
continue to experience foreign currency gains and losses.
SALES FORCE RESTRUCTURING AND VERTICAL MARKETS. The Company historically has
relied heavily on its direct sales force. At the beginning of the current
fiscal year, the Company restructured its sales force to provide specialized
expertise within certain vertical markets and general business areas designated
by size of transaction. Transition issues associated with this restructuring
may have contributed to the unexpected decline in revenue growth rates
experienced by the Company in the first and second quarters of fiscal 1998.
Management has focused its resources on addressing these transition issues.
However, there can be no assurances that transition issues associated with the
restructuring will be resolved in a timely manner or that revenue growth rates
in subsequent quarters will not be adversely affected by the restructuring.
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. A decline in the growth rate of
revenues without a corresponding and timely slowdown in expense growth could
have a material adverse effect on the Company's business, results of operations
or financial 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
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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.
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.
For example, in order to remain competitive in the European markets for
applications products, the Company will be required to enhance certain of its
applications products to meet reporting requirements as defined by the European
Monetary Unit (EMU). The Company's inability to port to or run on new or
increasingly popular operating systems, or the Company's failure to
successfully enhance and improve its products in a timely manner, and position
and/or price its products, could have a material adverse effect on the
Company's business, results of operations or financial 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 the demand the Company has experienced in
recent years 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 their
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.
The Company has designed and tested the most current versions of its products
to be year 2000 compliant. Some of the Company's customers are running product
versions that are not year 2000 compliant. The Company has been encouraging
such customers to migrate to current product versions. It is possible that the
Company may experience increased expenses in addressing migration issues for
such customers. In addition, there can be no assurances that the Company's
current products do not contain undetected errors or defects associated with
year 2000 date functions that may result in material costs to the Company. Some
commentators have stated that a
13
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significant amount of litigation will arise out of year 2000 compliance issues,
and the Company is aware of at least two such lawsuits against other software
vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether or to what extent the Company may be affected by it.
Although the Company is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000, there can be
no assurances that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems, which are composed
predominantly of the Company's own software products with respect to software
and which also include third party software and hardware technology.
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 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.
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 software
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 assurances 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 assurances 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
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<PAGE>
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 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.
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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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A shareholder class action was filed in California Superior Court for the
County of San Mateo against the Company and its chief financial officer and
chief operating officer on December 18, 1997. The class action has been brought
on behalf of purchasers of the stock of the Company during the period April 29,
1997 through December 11, 1997. The complaint alleges violations of California
state securities laws. Specifically, the complaint alleges that the Company
made misstatements about anticipated revenue growth in the Company's database
and applications businesses. The complaint further alleges that certain
officers and directors sold stock in the Company while making the allegedly
false and misleading statements. The Company believes that it has meritorious
defenses to this action and intends to vigorously defend it.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 13, 1997, the Company held its Annual Meeting of Stockholders. At
the meeting, the stockholders elected as directors Lawrence J. Ellison (with
885,841,156 affirmative votes, and 3,619,642 votes withheld), Raymond J. Lane
(with 886,085,275 affirmative votes, and 3,375,523 votes withheld), Jeffrey O.
Henley (with 886,084,560 affirmative votes, and 3,376,238 votes withheld),
Donald L. Lucas (with 885,883,799 affirmative votes, and 3,576,999 votes
withheld), Michael J. Boskin (with 886,043,302 affirmative votes, and 3,417,496
votes withheld), Jack F. Kemp (with 885,673,465 affirmative votes, and
3,787,333 votes withheld), Jeffrey Berg (with 885,882,665 affirmative votes,
and 3,578,133 votes withheld) and Richard A. McGinn (with 882,697,632
affirmative votes, and 6,763,166 votes withheld).
In addition, the stockholders approved the adoption of the Company's Executive
Officers 1998 Bonus Plan (with 868,577,217 affirmative votes, 17,036,936
negative votes and 3,846,645 votes withheld).
The stockholders also ratified the appointment of Arthur Andersen LLP, as the
Company's independent public accountants for fiscal year 1998 (with 886,635,169
affirmative votes, 842,471 negative votes and 1,983,158 votes withheld).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b)Reports on Form 8-K
None
16
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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
<TABLE>
<S> <C>
Dated: January 14, 1998 By: /s/ JEFFREY O. HENLEY
</TABLE>
-------------------------------------
Jeffrey O. Henley
Executive Vice President and Chief
Financial Officer
<TABLE>
<S> <C>
Dated: January 14, 1998 By: /s/ THOMAS A. WILLIAMS
</TABLE>
-------------------------------------
Thomas A. Williams
Vice President and Corporate Controller
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[RECYCLE LOGO]
<PAGE>
ORACLE CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # EXHIBIT TITLES
--------- --------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 994,261
<SECURITIES> 520,134
<RECEIVABLES> 1,461,800
<ALLOWANCES> 140,432
<INVENTORY> 12,620
<CURRENT-ASSETS> 3,312,393
<PP&E> 1,611,518
<DEPRECIATION> 712,551
<TOTAL-ASSETS> 4,762,717
<CURRENT-LIABILITIES> 1,724,089
<BONDS> 0
0
0
<COMMON> 10,233
<OTHER-SE> 2,658,342
<TOTAL-LIABILITY-AND-EQUITY> 4,762,717
<SALES> 0
<TOTAL-REVENUES> 1,613,727
<CGS> 0
<TOTAL-COSTS> 548,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,316
<INTEREST-EXPENSE> 4,127
<INCOME-PRETAX> 288,254
<INCOME-TAX> 100,930
<INCOME-CONTINUING> 187,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187,324
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
