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Capitalization of computer software development
costs (27,639) (10,526) (4,447)
Increase in other assets (1,116) (2,084) (481)
Purchase of a business ” (6,650) ”
Net cash used for investing activities (118,510) (84,690) (43,385)

CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable to banks 21,156 10,305 (169)
Proceeds from issuance of long-term debt 68,530 37,539 1,445
Payments of long-term debt (34,239) (6,205) (3,638)
Proceeds from common stock issued 18,460 11,060 4,712
Tax bene¬ts from stock options 15,366 10,593 3,992
Net cash provided by ¬nancing activities 89,273 63,292 6,342
EFFECT OF EXCHANGE RATE CHANGES ON CASH 552 (1,061) 69

NET INCREASE (DECREASE) IN CASH (45) 3,781 3,555
CASH: BEGINNING OF YEAR 44,893 41,112 37,557

CASH: END OF YEAR $44,848 $44,893 $41,112
......................................................................................................................................
244 Revenue Analysis




6-24
Revenue Analysis




EXCERPTS FROM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Significant Accounting Policies
Organization
Oracle Systems Corporation (the Company) develops and markets computer software
products used for database management, applications development, decision support,




Oracle Systems Corporation
programmer tools, computer network communication, end user applications, and of¬ce
automation. The Company offers maintenance, consulting, and training services in sup-
port of its clients™ use of its software products.

Basis of Financial Statements
The consolidated ¬nancial statements include the Company and its subsidiaries. All trans-
actions and balances between the companies are eliminated.

Business Combination
In November 1988, the Company™s subsidiary, Oracle Complex Systems Corporation,
acquired all of the outstanding shares of Falcon Systems, Inc., a systems integrator, for
$13,714,000 in cash and $4,600,000 in notes which become due November 1, 1991.
The acquisition was accounted for as a purchase and the excess of the cost over the fair
value of assets acquired was $5,648,000, which is being amortized over 5 years on a
straight-line method. Pro forma results of operations, assuming the acquisition had taken
place June 1, 1987, would not differ materially from the Company™s actual results of
operations.

Software Development Costs
Effective June 1, 1986, the Company began capitalizing internally generated software
development costs in compliance with Statement of Financial Accounting Standards No.
86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed.” Capitalization of computer software development costs begins upon the
establishment of technological feasibility for the product. Capitalized software develop-
ment costs amounted to $27,639,000, $10,526,000, and $4,447,000 in ¬scal 1990,
1989, and 1988, respectively.
Amortization of capitalized computer software development costs begins when the prod-
ucts are available for general release to customers, and is computed product by product
as the greater of: (a) the ratio of current gross revenues for a product to the total of cur-
rent and anticipated future gross revenues for the product, or (b) the straight-line method
over the remaining estimated economic life of the product. Currently, estimated economic
lives of 24 months are used in the calculation of amortization of these capitalized costs.
Amortization amounted to $8,185,000, $3,504,000, and $2,345,000 for ¬scal years
ended May 31, 1990, 1989, and 1988, respectively, and is included in sales and market-
ing expenses.

Statements of Cash Flows
The Company paid income taxes in the amount of $33,731,000, $29,006,000, and
$711,000 and interest expense of $8,026,000, $4,274,000 and $1,540,000 during the
¬scal years ended 1990, 1989, and 1988, respectively. The Company purchased equip-
ment under capital lease obligations in the amount of $17,616,000, $4,692,000, and
$4,108,000 in ¬scal 1990, 1989 and 1988, respectively.
245
Revenue Analysis




6-25 Part 2 Business Analysis and Valuation Tools




Revenue Recognition
The Company generates several types of revenue including the following:
License and Sublicense fees. The Company licenses ORACLE products to end users under
license agreements. The Company also has entered into agreements whereby the Com-
pany licenses Oracle products and receives license and sublicense fees from original
equipment manufacturers (OEMs) and software value-added relicensors (VARs). The min-
Oracle Systems Corporation




imum amount of license and sublicense fees speci¬ed in the agreements is recognized
either upon shipment of the product or at the time such agreements are effective (which in
most instances is the date of the agreement) if the customer is creditworthy and the terms
of the agreement are such that the amounts are due within one year and are nonrefund-
able, and the agreements are noncancellable. The Company recognizes revenue at such
time as it has substantially performed all of its contractual obligations. Additional subli-
cense fees are subsequently recognized as revenue at the time such fees are reported to
the Company by the OEMs and VARs.
Maintenance Agreements. Maintenance agreements generally call for the Company to
provide technical support and certain systems updates to customers. Revenue related to
providing technical support is recognized proportionately over the maintenance period,
which in most instances is one year, while the revenue related to systems updates is recog-
nized at the beginning of each maintenance period.
Consulting, Training, and Other Services. The Company provides consulting services to
its customers; revenue from such services is generally recognized under the percentage of
completion method.

2. Short-Term Debt
Year Ended May 31
................................
Short term debt (in $000) consists of: 1990 1989
...................................................................................................

Unsecured revolving lines of credit $18,198 $5,955
Other 13,038 3,792
Total $31,236 $9,747
...................................................................................................


At May 31, 1990, the Company had short-term unsecured revolving lines of credit with
two banks providing for borrowings aggregating $42,000,000, of which $18,198,000
was outstanding. These lines expire in September 1990 ($2,000,000), November 1990
($10,000,000), and January 1991 ($30,000,000). Interest on these borrowings is based
on varying rates pegged to the banks™ prime rate, cost of funds, or LIBOR. The Company
also had other unsecured short-term indebtedness to banks of $13,038,000 at May 31,
1990, payable upon demand. The average interest rate on short-term borrowings was
9.4% at May 31, 1990.
The Company is required to maintain certain ¬nancial ratios under the line of credit
agreements. The Company was in compliance with these ¬nancial covenants at May 31,
1990.
246 Revenue Analysis




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Revenue Analysis




3. Long-Term Debt
At May 31, 1990, the Company had long-term unsecured revolving lines of credit with
four banks providing for borrowings aggregating $135,000,000, of which $61,460,000
was outstanding. Of the $61,460,000 outstanding, $58,210,000 was classi¬ed as long-
term debt and $3,250,000 was classi¬ed as current maturities of long-term debt. These
lines of credit expire in December 1991 ($60,000,000), March 1992 ($15,000,000), July




Oracle Systems Corporation
1992 ($20,000,000), January 1991 ($20,000,000), and March 1991 ($20,000,000).
The Company has the option to convert $20,000,000 of its line expiring in January of
1991 and $8,000,000 of that expiring in March of 1991 into two term loans which would
mature in 1993. Interest on these borrowings vary based on the banks™ cost of funds
rates. At May 31, 1990 the interest rate on outstanding domestic and foreign currency
borrowings ranged from 8.6% to 15.6%. The aggregate amount available under these
lines of credit at May 31, 1990 was $73,540,000.
Under the line-of-credit agreements, the Company is required to maintain certain ¬nan-
cial ratios. At May 31, 1990 the Company was in compliance with these ¬nancial cove-
nants.
Subsequent to May 31, 1990, the Company obtained two additional unsecured revolving
lines of credit, one which expires May 1992 ($20,000,000) and one which expires Janu-
ary 1991 ($20,000,000).

4. Stockholders™ Equity
Stock Option Plan
The Company™s stock option plan provides for the issuance of incentives stock options to
employees of the Company and nonquali¬ed options to employees, directors, consul-
tants, and independent contractors of the Company. Under the terms of this plan, options
to purchase up to 23,335,624 shares of Common Stock may be granted at not less than
fair market value, are immediately exercisable, become vested as established by the
Board (generally ratably over four to ¬ve years), and generally expire ten years from the
date of grant. The Company has the right to repurchase shares issued upon the exercise
of unvested options at the exercise price paid by the stockholder should the stockholder
leave the Company prior to the scheduled vesting date. At May 31, 1990, 271,300
shares of Common Stock outstanding were subject to such repurchase rights. Options to
purchase 5,005,720 common shares were vested at May 31, 1990.

Non-Plan Options
In addition to the above option plan, nonquali¬ed stock options to purchase a total of
5,712,000 common shares have been granted to employees and directors of the Com-
pany. These options were granted at the fair market value as determined by the Board of
Directors, became exercisable immediately, vest either immediately (for directors) or rat-
ably over a period of up to ¬ve years (for individuals other than directors) and generally
expire ten years from the date of grant. The Company has the right to repurchase shares
issued upon the exercise of unvested options at the exercise price paid by the stockholder
should the stockholder leave the Company prior to the scheduled vesting date. Options to
purchase 160,000 common shares were vested as of May 31, 1990.
As of May 31, 1990, the Company had reserved 11,135,194 shares of Common Stock
for exercise of options.
247
Revenue Analysis




6-27 Part 2 Business Analysis and Valuation Tools




Stock Purchase Plan
In October 1987, the Company adopted an Employee Stock Purchase Plan and reserved
8,000,000 shares of Common Stock for issuance thereunder. Under this plan, the Com-
pany™s employees may purchase shares of Common Stock at a price per share that is
85% of the lesser of the fair market value as of the beginning or the end of the semi-
annual option period. Through May 31, 1990, 2,326,772 shares have been issued and
5,673,228 shares are reserved for future issuances under this plan.
Oracle Systems Corporation




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Oracle Systems Corporation:


We have audited the accompanying consolidated balance sheets of Oracle Systems Cor-
poration (a Delaware corporation) and subsidiaries as of May 31, 1990 and 1989 and
the related consolidated statements of income, stockholders™ equity, and cash ¬‚ows for
each of the three years in the period ended May 31, 1990. These ¬nancial statements are
the responsibility of the company™s management. Our responsibility is to express an opin-
ion on these ¬nancial statements based on our audits. We conducted our audits in accor-
dance with generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the ¬nancial state-
ments are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the ¬nancial statements. An audit
also includes assessing the accounting principles used and signi¬cant estimates made by
management, as well as evaluating the overall ¬nancial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the ¬nancial statements referred to above present fairly, in all material
respects, the ¬nancial position of Oracle Systems Corporation and subsidiaries as of May
31, 1990 and 1989 and the results of their operations and their cash ¬‚ows for each of
the three years in the period ended May 31, 1990, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic ¬nancial state-
ments taken as a whole. The schedules listed under Item 14(a)2. are presented for pur-
poses of complying with the Securities and Exchange Commission™s rules and are not part
of the basic ¬nancial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic ¬nancial statements and, in our opinion,
fairly state in all material respects the ¬nancial data required to be set forth therein in
relation to the basic ¬nancial statements taken as a whole

ARTHUR ANDERSEN & CO.
SAN JOSE, CALIFORNIA
JULY 9, 1990
248 Revenue Analysis




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