<PAGE>
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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 AUGUST 31, 1998
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 number)
</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 August 31,
1998: 971,905,047
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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 August 31, 1998 and
May 31, 1998................................................... 3
Condensed Consolidated Statements of Operations for the three
months ended August 31, 1998 and 1997.......................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended August 31, 1998 and 1997.......................... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 17
Item 2. Changes in Securities and Use of Proceeds...................... 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signatures..................................................... 18
</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,
1998 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $1,628,083 $1,273,681
Short-term cash investments............................. 673,813 645,518
Trade receivables, net of allowance for doubtful
accounts of $205,684 and $195,609, respectively........ 1,351,416 1,857,480
Prepaid and refundable income taxes..................... 254,615 260,624
Other current assets.................................... 226,449 285,747
---------- ----------
Total Current Assets................................. 4,134,376 4,323,050
---------- ----------
LONG-TERM CASH INVESTMENTS............................... 196,935 186,511
PROPERTY, net............................................ 952,849 934,350
COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $35,781 and $37,473, respectively....... 98,832 99,012
OTHER ASSETS............................................. 308,471 276,088
---------- ----------
Total Assets......................................... $5,691,463 $5,819,011
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term debt.. $ 3,600 $ 2,924
Accounts payable........................................ 246,004 239,698
Income taxes............................................ 116,614 181,354
Accrued compensation and related benefits............... 332,566 541,809
Customer advances and unearned revenues................. 956,370 877,087
Value added tax and sales tax payable................... 27,747 119,600
Other accrued liabilities............................... 551,864 521,693
---------- ----------
Total Current Liabilities............................ 2,234,765 2,484,165
---------- ----------
LONG-TERM DEBT........................................... 304,204 304,337
OTHER LONG-TERM LIABILITIES.............................. 55,727 57,095
DEFERRED INCOME TAXES.................................... 15,568 15,856
STOCKHOLDERS' EQUITY..................................... 3,081,199 2,957,558
---------- ----------
Total Liabilities and Stockholders' Equity........... $5,691,463 $5,819,011
========== ==========
</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,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
Licenses and other...................................... $ 582,464 $ 530,642
Services................................................ 1,166,646 838,187
---------- ----------
Total Revenues....................................... 1,749,110 1,368,829
---------- ----------
OPERATING EXPENSES
Sales and marketing..................................... 510,076 449,451
Cost of services........................................ 679,290 468,167
Research and development................................ 187,623 159,667
General and administrative.............................. 94,284 75,514
Acquired in-process research and development............ -- 167,054
---------- ----------
Total Operating Expenses............................. 1,417,273 1,319,853
---------- ----------
OPERATING INCOME......................................... 277,837 48,976
Other income (expense), net............................. 22,166 39,974
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES................. 300,003 88,950
Provision for income taxes.............................. 105,001 80,479
---------- ----------
NET INCOME............................................... $ 195,002 $ 8,471
========== ==========
EARNINGS PER SHARE:
Basic................................................... $ 0.20 $ 0.01
========== ==========
Diluted................................................. $ 0.20 $ 0.01
========== ==========
SHARES OUTSTANDING:
Basic................................................... 972,894 979,285
========== ==========
Diluted................................................. 989,149 1,006,266
========== ==========
</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>
THREE MONTHS ENDED
AUGUST 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 195,002 $ 8,471
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 81,406 71,137
Write-off of acquired in-process research and
development......................................... -- 167,054
Provision for doubtful accounts...................... 19,890 21,604
Changes in assets and liabilities, net of effects of
acquisitions:
Decrease in trade receivables....................... 474,912 319,896
Decrease in prepaid and refundable income taxes..... 5,101 7,194
Decrease in other current assets.................... 56,665 42,237
Increase (decrease) in accounts payable............. 7,527 (9,238)
Decrease in income taxes............................ (57,815) (47,461)
Increase in customer advances and unearned revenues. 85,402 98,039
Decrease in other current liabilities............... (263,892) (238,177)
Increase (decrease) in other long-term liabilities.. (1,311) 5,485
Increase (decrease) in deferred income taxes........ (5,319) 598
---------- ----------
Net cash provided by operating activities............. 597,568 446,839
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in cash investments......................... (38,719) (222,988)
Capital expenditures................................. (88,319) (77,484)
Capitalization of computer software development
costs............................................... (7,140) (4,442)
Increase in other assets............................. (40,265) (35,849)
---------- ----------
Net cash used for investing activities................ (174,443) (340,763)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under notes payable and long-term
debt................................................ 920 1,701
Payments of capital leases........................... (378) (290)
Proceeds from common stock issued.................... 20,696 32,817
Repurchase of common stock........................... (81,064) (15,563)
---------- ----------
Net cash provided by (used for) financing activities.. (59,826) 18,665
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................ (8,897) (8,191)
---------- ----------
Net increase in cash and cash equivalents............. 354,402 116,550
CASH AND CASH EQUIVALENTS
Beginning of period................................... 1,273,681 890,162
---------- ----------
End of period......................................... $1,628,083 $1,006,712
========== ==========
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
<PAGE>
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,
1998.
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, 1998. The results for the three
month period ended August 31, 1998 are not necessarily indicative of the
results expected for the full fiscal year.
2. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period. Diluted earnings per share is computed
on the basis of the weighted average number of common shares outstanding plus
the dilutive effect of outstanding stock options using the "treasury stock"
method. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
AUGUST AUGUST
31, 1998 31, 1997
-------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net Income............................................... $195,002 $ 8,471
======== =========
Weighted average shares outstanding...................... 972,894 979,285
Dilutive effect of employee stock options
and employee stock purchase plan........................ 16,255 26,981
-------- ---------
Diluted Shares outstanding............................... 989,149 1,006,266
======== =========
Basic Earnings Per Share................................. $ 0.20 $ 0.01
Diluted Earnings Per Share............................... $ 0.20 $ 0.01
</TABLE>
6
<PAGE>
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which was adopted by the Company in the first quarter
of fiscal 1999. SFAS No. 130 requires companies to report a new, additional
measure of income on the income statement or to create a new financial
statement that shows the new measure of income. "Comprehensive Income"
includes foreign currency translation gains and losses and unrealized gains
and losses on equity securities that have been previously excluded from net
income and reflected instead in equity. The following table sets forth the
calculation of comprehensive income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
AUGUST AUGUST 31,
31, 1998 1997
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net Income.............................................. $195,002 $ 8,471
Foreign Currency Translation Losses..................... (10,946) (5,188)
Unrealized Losses on Equity Securities.................. (62) --
-------- -------
Total Comprehensive Income.............................. $183,994 $ 3,283
======== =======
</TABLE>
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, 1998 and the Quarterly Reports on Form 10-Q filed by the
Company in fiscal 1999.
RESULTS OF OPERATIONS
Total revenues increased 28% (33% in local currency) in the first quarter as
compared to the corresponding period in fiscal 1998. Domestic revenues
increased 44% in the first quarter, while international revenues increased 14%
as compared to the corresponding period in fiscal 1998. International revenues
expressed in local currency increased by approximately 22% in the first
quarter of fiscal 1999 from the corresponding period of fiscal 1998. Revenues
from international customers were approximately 48% and 54% of total revenues
in the first quarters of fiscal 1999 and 1998, 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.
7
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REVENUES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
1998 CHANGE 1997
---------- ------ ----------
<S> <C> <C> <C>
Licenses and other.............................. $ 582,464 10% $ 530,642
Percentage of revenues.......................... 33.3% 38.8%
Services........................................ $1,166,646 39% $ 838,187
Percentage of revenues.......................... 66.7% 61.2%
Total revenues................................ $1,749,110 28% $1,368,829
</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, and other miscellaneous revenues, which
constituted 4% and 5% of total license and other revenues in the first
quarters of fiscal 1999 and 1998, respectively. License and other revenue
growth rates were 10% and 15% in the first quarters of fiscal 1999 and 1998,
respectively. The lower license and other revenues growth rate experienced in
the first quarter of fiscal 1999 was due primarily to lower revenue growth in
Asia Pacific as a result of the weakened economies in that region and the
strengthening of the U.S. dollar against certain major international
currencies.
SERVICES REVENUES. Support, consulting and education services revenues each
increased in the first quarters of fiscal 1999 and 1998 over the corresponding
prior period levels. The Company's consulting and education revenues comprised
the largest portion of services revenues and represented 55% of services
revenues during the first quarter of fiscal 1999. Consulting and education
services grew 48% in the first quarter of fiscal 1999 as compared to the
corresponding period in fiscal 1998. The Company continued to expand its
services to assist customers in the use and implementation of applications
based on the Company's products. Support revenues represented 45% of services
revenues for the first quarter of fiscal 1999 and grew 30% in the first
quarter of fiscal 1999 as compared to the corresponding period in fiscal 1998.
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 enhanced support service offerings.
OPERATING EXPENSES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
AUGUST AUGUST
31, 1998 CHANGE 31, 1997
-------- ------ --------
<S> <C> <C> <C>
Sales and marketing................................. $510,076 13% $449,451
Percentage of revenues.............................. 29.2% 32.8%
Cost of services.................................... $679,290 45% $468,167
Percentage of revenues.............................. 38.8% 34.2%
Research and development (1)........................ $187,623 18% $159,667
Percentage of revenues.............................. 10.7% 11.7%
General and administrative.......................... $ 94,284 25% $ 75,514
Percentage of revenues.............................. 5.4% 5.5%
Acquired in-process research and development........ $ -- * $167,054
Percentage of revenues.............................. -- 12.2%
</TABLE>
--------
* Not meaningful
(1) Pursuant to SFAS No. 86, the Company capitalized software development
costs equal to 0.4% and 0.3% of total revenues during the first
quarters of fiscal 1999 and 1998, respectively.
8
<PAGE>
International expenses were favorably affected in the first quarter of fiscal
1999 when compared to the corresponding period in the prior year due to the
strengthening of the U.S. dollar against certain major international
currencies. The net impact on operating margins, however, was negative, since
the negative effect on revenues was greater than the positive effect on
expenses.
SALES AND MARKETING EXPENSES. The Company continues to place significant
emphasis, both domestically and internationally, on direct sales through its
own sales force. However, the Company also continues to market its products
through indirect channels. Sales and marketing expenses increased 13% and 25%
in the first quarter of fiscal 1999 and 1998, respectively. The decrease in
the expense growth rate was due primarily to controls over increases in
headcount and headcount related expenditures. Sales and marketing expenses as
a percentage of license revenues increased in both periods as a result of
lower than anticipated license revenues in fiscal 1998 and continued
investment in sales and marketing resources and programs. 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
services revenues, cost of services increased to 58% in the first quarter of
fiscal 1999 from 56% in the first quarter of fiscal 1998. Increases in cost of
services as a percentage of services revenues were due primarily to an
increase in consulting and education services as a percentage of total
services revenue. Consulting and education services typically have lower
margins than support.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses would
have been 11% of total revenues in the first quarter of fiscal 1999 and 12% in
the first quarter of fiscal 1998, 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
19% and 30% in the first quarters of fiscal 1999 and 1998, respectively (18%
and 36% after the adjustment for software capitalization). The lower expense
growth rate in the first quarter of fiscal 1999 was due to planned reductions
in headcount growth rates to correspond with anticipated decreases in license
revenue growth rates. This decrease was partially offset by increases
associated with research and development staff hired in connection with the
acquisitions of Treasury Services Corporation ("TSC"), as well as the merger
of Network Computer, Inc. ("NCI") and Navio Communications, Inc. ("Navio").
The Company capitalized $7,140,000 and $4,442,000 of computer software
development costs in the first quarters of fiscal 1999 and 1998, respectively.
Amortization of capitalized software development costs is charged to sales and
marketing expenses and totaled $7,321,000 and $4,485,000 in the first quarters
of fiscal 1999 and 1998, 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 revenues decreased in both the first quarters of fiscal 1999 and
1998 when compared to their corresponding prior year periods, due primarily to
higher revenue levels.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Based on the results of third-
party appraisals, the Company recorded special charges of $91,500,000 and
$75,554,000 in the first quarter of fiscal 1998 related to the acquisition of
TSC and the merger of NCI and Navio, respectively, to expense in-process
research and development costs. 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.
9
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OTHER INCOME (EXPENSE):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
AUGUST 31, AUGUST 31,
1998 CHANGE 1997
---------- ------ ----------
<S> <C> <C> <C>
Other income (expense)......................... $22,166 * $39,974
Percentage of revenues......................... 1.3% 2.9%
</TABLE>
--------
*Not meaningful
Other income and expense for the first quarter 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 quarter of fiscal 1998 was $14,248,000. 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 sales of certain securities.
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
AUGUST AUGUST 31,
31, 1998 CHANGE 1997
-------- ------ ----------
<S> <C> <C> <C>
Provision for income taxes........................ $105,001 * $80,479
Percentage of revenues............................ 6.0% 5.9%
</TABLE>
--------
*Not meaningful
The Company's effective tax rates have historically differed from the federal
statutory rate primarily because of tax credits, certain foreign sales
corporation income that is not taxed, state taxes, foreign income taxes
provided at rates greater than the federal statutory rate, as well as foreign
losses that could not be utilized. The effective tax rate was 35% in the first
quarters of fiscal 1999 and 1998 (excluding the effect of the acquired
research and development charges for the TSC and Navio transactions, net of a
credit of $25,726,000 for minority interest in the first quarter of fiscal
1998).
NET INCOME AND EARNINGS PER SHARE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
AUGUST AUGUST 31,
31, 1998 CHANGE 1997
-------- ------ ----------
<S> <C> <C> <C>
Net income........................................ $195,002 * $8,471
Percentage of revenues............................ 11.1% 0.6%
Earnings per share:
Basic........................................... $ 0.20 * $ 0.01
Diluted......................................... $ 0.20 * $ 0.01
</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.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
AUGUST 31, AUGUST 31,
1998 CHANGE 1997
---------- ------ ----------
<S> <C> <C> <C>
Working capital.............................. $1,899,611 44 % $1,321,373
Cash and cash investments.................... $2,498,831 50 % $1,669,066
Cash provided by operating activities........ $ 597,568 34 % $ 446,839
Cash used for investing activities........... $ (174,443) (49)% $ (340,763)
Cash provided by (used for) financing
activities.................................. $ (59,826) * $ 18,665
</TABLE>
--------
* Not meaningful
Working capital increased in the first quarter of fiscal 1999 over the
corresponding period in fiscal 1998, due primarily to increased cash flow from
operations, which resulted in higher cash and cash investment levels.
The Company generated higher positive cash flows from operations in the first
quarter of fiscal 1999 over fiscal 1998, due primarily to improved
profitability, before the charges for acquired in-process research and
development, as well as higher cash collections.
Cash used for investing activities decreased in the first quarter of fiscal
1999 as compared to the corresponding prior year period due primarily to
changes in the levels and maturities of cash investments. In each period, the
Company made significant investments in capital expenditures. The Company
expects to continue to invest in capital and other assets to support its
growth.
The Company's Board of Directors has approved the repurchase of up to
126,000,000 shares of Common Stock to reduce the dilutive effect of the
Company's stock plans. Pursuant to this repurchase program, the Company
purchased 3,250,000 shares of the Company's Common Stock for approximately
$81,064,000 in the first quarter of fiscal 1999. To date, the Company has
purchased a total of 74,082,870 shares of the Company's Common Stock for
approximately $1,412,829,000. 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.
During fiscal 1998 and the first quarter of fiscal 1999, the Company, as part
of its authorized stock repurchase program, sold put warrants and purchased
call options through private placements. As of August 31, 1998, the Company
has a maximum potential obligation under the put warrants to buy back
25,381,000 shares of its Common Stock for prices ranging from $15.86 to $24.85
per share for an aggregate price of approximately $518,746,000. The put
warrants will expire from January 1999 through January 2000. The Company
purchased call options for 12,690,000 shares of its Common Stock at prices
ranging from $19.18 to $30.18 per share for an aggregate price of
approximately $317,292,000. The call options will expire from January 1999
through January 2000.
At August 31, 1998, the Company also had other outstanding debt of
approximately $7,804,000, 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.
11
<PAGE>
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.
REVENUE GROWTH AND ECONOMIC CONDITIONS. The revenue growth and profitability
of the Company's business depends on the overall demand for computer software
and services, particularly in the product segments in which the Company
competes. Because the Company's sales are primarily to major corporate and
government customers, the Company's business also depends on general economic
and business conditions. A softening of demand for computer software, caused
by a weakening of the economy, as the Company recently experienced in the Asia
Pacific region, may result in decreased revenues or decelerating growth rates.
The Company experienced a deceleration in license revenue growth rates in
fiscal 1998 and the first quarter of fiscal 1999; there can be no assurances
that such growth rates will increase or be sustainable in the near term or
that the Company's license revenue growth rates will return to previous
levels.
In particular, one of the challenges the Company continues to face in
promoting future growth in license revenues will be to refocus its marketing
and sales efforts in its applications business where the Company experienced
lower revenue growth in fiscal 1998 and the first quarter of fiscal 1999 than
the overall applications market. There can be no assurances that the Company
will be able to effectively address the challenges it faces in promoting
future license revenue growth in its applications business.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition" which superseded SOP No. 91-1. SOP No. 97-2 is effective for the
Company's fiscal year beginning June 1, 1998 and provides guidance on applying
generally accepted accounting principles for software revenue recognition
transactions. Based on the Company's interpretation of the requirements of SOP
No. 97-2, application of this statement did not and is not expected to have a
material impact on the Company's revenue. However, the accounting profession
is currently reviewing certain provisions of SOP 97-2 with the objective of
providing additional guidance on implementing its provisions. Depending upon
the outcome of this review and the issuance of implementation guidelines and
potential interpretations, the Company may be required to change its revenue
recognition polices and business practices, and such changes 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, the addition of new
functionality into an existing competitive product or the acquisition by one
of the Company's competitors of a product 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 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 market share. 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,
12
<PAGE>
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 experienced a large
decline in revenue growth rates in Asia Pacific during fiscal 1998 and the
first quarter of fiscal 1999 in part due to the economic difficulties that
have 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 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 quarter of fiscal 1999, particularly in Asia
Pacific, 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 and other 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.
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 increasingly intense due to lower overall unemployment
rates and the boom in information technology spending. Accordingly, the
Company expects to experience increased compensation costs that may not be
offset through either improved productivity or higher prices. There can be no
assurances that the Company will be successful in continuously recruiting new
personnel and in retaining existing personnel. In general, the Company does
not have long-term employment or non-competition agreements with its
employees. The loss of one or more key employees or the Company's inability to
attract additional qualified employees or retain other employees could have a
material adverse effect on the continued growth of the Company.
SALES FORCE RESTRUCTURING AND VERTICAL MARKETS. The Company historically has
relied heavily on its direct sales force. In fiscal 1998, the Company
restructured its sales force to provide, among other things, specialized
expertise within certain vertical markets and certain product areas.
Management will continue to address these transition issues in fiscal 1999 by
making additional adjustments within the sales organization, though management
believes that it has resolved the primary issues relating to the transition.
There can be no assurances that transition issues associated with the
restructuring will not recur or that revenue growth rates will not be
adversely affected in future quarters.
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,
accurately forecast revenues and control expenses. A decline in the growth
rate of revenues
13
<PAGE>
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.
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. However, some of the Company's customers are
running product versions that are not year 2000 compliant. The Company has
been encouraging its 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 significant amount
of litigation will arise out of year 2000 compliance issues, and the Company
is aware of a growing number of lawsuits against other software vendors.
Because of the unprecedented nature of such litigation, it is uncertain to
what extent the Company may be affected by it.
With respect to its internal information technology systems (including
information technology-based office facilities such as data and voice
communications, and building management and security systems), the Company has
adopted standard industry practices, as published by the British Standards
Institute, in preparing for the year 2000 date change. The Company's year 2000
internal readiness program primarily covers: taking inventory of hardware,
software and embedded systems, assessing business and customer satisfaction
risks associated with such systems, creating action plans to address known
risks, executing and monitoring action plans, and contingency planning. The
Company currently is in the process of sending detailed questionnaires to
vendors and service providers to certify year 2000 readiness and conducting
ongoing risk analysis. The Company expects to substantially complete year 2000
readiness preparations at the end of calendar 1998 with respect to its core
business and software systems and at the end of June 1999 with respect to its
hardware systems. In each case, the Company expects to continue extensive
testing through calendar 1999.
Although the Company does not believe that it will incur any material costs or
experience material disruptions in its business 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 of third party software, third
party hardware that contains embedded software and the Company's own software
products. The most reasonably likely worst case scenarios would include: (i)
corruption of data contained in the Company's internal information systems,
(ii) hardware failure, and (iii) the failure of infrastructure services
provided by government agencies and other third parties (e.g., electricity,
phone service, water transport, internet services, etc.). The Company is in
the process of completing its contingency planning for high risk areas at this
time and is scheduled to commence contingency planning for medium to low risk
areas in October 1998. The Company expects its contingency plans to include,
among other things, manual "work-arounds" for software and hardware failures,
as well as substitution of systems, if necessary.
FUTURE ACQUISITIONS. As part of its business strategy, the Company expects to
continue to make acquisitions of, or significant investments in, businesses
that offer complementary products, services and technologies. Any acquisitions
or investments will be accompanied by the risks commonly encountered in
acquisitions of businesses. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the acquired
businesses, the potential disruption of the Company's ongoing business, the
distraction of management from the Company's business, the inability of
management to maximize the 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
14
<PAGE>
or financial condition, particularly in the case of a larger acquisition.
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 in connection with
any such future acquisitions.
NEW PRODUCTS. The markets for the Company's products are characterized by
rapid technological advances in hardware and software development, evolving
standards in computer hardware and software technology and frequent new
product introductions and enhancements. Product introductions and short
product life cycles necessitate high levels of expenditures for research and
development. To maintain its competitive position, the Company must enhance
and improve existing products and continue to introduce new products and new
versions of existing products that keep pace with technological developments,
satisfy increasingly sophisticated customer requirements and achieve market
acceptance. For example, in order to remain competitive in the European
markets for applications products, the Company will be required to continue 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.
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
the (i) relatively long sales cycles for the Company's products, (ii) 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) introduction of new products or product enhancements by the Company or
its competitors, (iv) potential for delay or deferral of customer
implementations of the Company's software, (v) changes in customer budgets 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 could cause quarterly revenues and
net income to fall significantly short of anticipated levels.
The Company's license revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter. Because the Company's operating
expenses are based on anticipated revenue levels and because a high percentage
of 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.
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 products. To the extent that revenues generated from such
products become a greater percentage of the Company's total revenues, the
Company's operating margins may be adversely affected, unless the expenses
associated with such products decline as a percentage of revenues.
LONG-TERM INVESTMENT CYCLE. Developing and localizing software is expensive
and the investment in product development often involves a long payback cycle.
The Company's plans for its fiscal year ending May 31, 1999
15
<PAGE>
include significant investments in software research and development and
related product opportunities from which significant revenues are not
anticipated for several years.
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
application servers, internet/electronic commerce, interactive media and
network computing. These areas are relatively new to the Company's product
development and sales and marketing personnel. There is no assurance that the
Company will compete effectively or will generate significant revenues in
these new areas. The success of network computing and, in particular, the
Company's current network computer software products is difficult to predict
because network computing represents a method of computing that is new to the
entire computer industry. The successful introduction of network computing 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 computing or that network computing will
generate significant revenues to the Company. See "New Products."
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.
POSSIBILITY OF INFRINGEMENT CLAIMS. The Company from time to time receives
notices from third parties claiming infringement by the Company's products of
third party patent and other intellectual property rights. The Company expects
that software products will increasingly be subject to such claims as the
number of products and competitors in the Company's industry segments 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.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative information about market risk was addressed in
Item 7A of the Company's Form 10-K for the fiscal year ended May 31, 1998.
There has been no material change to that information required to be disclosed
in this Form 10-Q filing.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Shareholder class actions were filed in the California Superior Court for the
County of San Mateo against the Company and its Chief Financial Officer and
Chief Operating Officer on and after December 18, 1997. The class actions were
brought on behalf of purchasers of the stock of the Company during the period
April 29, 1997 through December 9, 1997. Plaintiffs allege that the defendants
made misstatements about anticipated revenue growth in the Company's database
and applications businesses, while selling Company stock, in violation of
California state securities laws. The class actions have been consolidated
into a single action. On June 16, 1998, the Court overruled the Company's
demurrer and the Company filed its answer to the complaint on July 31, 1998.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During fiscal 1998 and the first quarter of fiscal 1999, the Company, as part
of its authorized stock repurchase program, sold put warrants and purchased
call options through private placements involving institutional investors.
These securities were issued pursuant to the exemption contained in Section
4(2) of the Securities Act of 1933. As of August 31, 1998, the Company has a
maximum potential obligation under the put warrants to buy back 25,381,000
shares of its Common Stock for prices ranging from $15.86 to $24.85 per share
for an aggregate price of approximately $518,746,000. The put warrants will
expire from January 1999 through January 2000. The Company purchased call
options for 12,690,000 shares of its Common Stock at prices ranging from
$19.18 to $30.18 per share for an aggregate price of approximately
$317,292,000. The call options will expire from January 1999 through January
2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<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 2, 1998 By: /s/ JEFFREY O. HENLEY
---------------------------------------
Jeffrey O. Henley
Executive Vice President and Chief
Financial Officer
Dated: October 2, 1998 By: /s/ THOMAS A. WILLIAMS
---------------------------------------
Thomas A. Williams
Vice President and Corporate Controller
18
<PAGE>
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