<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 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
0-22703
GREAT PLAINS SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 45-0374871
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1701 S.W. 38TH STREET, FARGO, NORTH DAKOTA 58103
(Address of principal executive offices) (Zip Code)
(701) 281-0550
(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
---------- ----------
As of March 16, 1998, the number of shares outstanding of the registrant's
Common Stock, par value $.01 per share, was 13,704,889.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
February 28, May 31,
1998 1997
------------ -------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents....................... $16,923 $12,101
Investments..................................... 54,899 4,142
Accounts receivable, net........................ 7,038 5,452
Deferred income taxes........................... 3,718 3,279
Other current assets............................ 3,569 1,731
------- -------
Total current assets........................... 86,147 26,705
Property and equipment, net...................... 7,528 5,821
Goodwill, net.................................... 351 438
Other assets..................................... 2,612 250
------- -------
Total assets..................................... $96,638 $33,214
------- -------
------- -------
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable................................ $ 2,979 $ 1,788
Accrued expenses................................ 8,488 7,811
Deferred revenue................................ 13,162 10,448
------- -------
Total current liabilities...................... 24,629 20,047
------- -------
------- -------
Long-term liabilities:
Deferred tax liability.......................... 838 746
------- -------
Total liabilities.............................. 25,467 20,793
Mandatorily redeemable convertible
preferred stock................................. 28,698
Stockholders' equity (deficit):
Convertible preferred stock..................... 199
Common stock.................................... 137 81
Additional paid-in capital...................... 67,698 (13,843)
Retained earnings (deficit)..................... 3,336 (2,714)
------- -------
Total stockholders' equity (deficit)........... 71,171 (16,277)
Total liabilities and stockholders'
equity (deficit)............................... $96,638 $33,214
------- -------
------- -------
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
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<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
February 28, February 28,
1998 1997 1998 1997
---------------------- ------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License............................................ $13,816 $ 9,224 $36,433 $24,357
Service............................................ 8,791 5,475 22,993 15,096
------- ------- ------- -------
Total revenues.................................... 22,607 14,699 59,426 39,453
Cost of revenues:
License............................................ 3,266 1,832 7,855 4,552
Service............................................ 2,723 2,050 7,483 5,699
------- ------- ------- -------
Total cost of revenues............................ 5,989 3,882 15,338 10,251
------- ------- ------- -------
Gross profit...................................... 16,618 10,817 44,088 29,202
Operating expenses:
Sales and marketing................................ 8,416 5,702 22,325 15,416
Research and development........................... 3,030 2,414 8,718 6,903
General and administrative......................... 2,086 1,540 5,641 3,973
------- ------- ------- -------
Total operating expenses.......................... 13,532 9,656 36,684 26,292
------- ------- ------- -------
Operating income.................................... 3,086 1,161 7,404 2,910
Other income, net................................... 878 103 2,681 305
------- ------- ------- -------
Income before income taxes.......................... 3,964 1,264 10,085 3,215
Income tax provision................................ 1,587 470 4,035 1,220
------- ------- ------- -------
Net income........................................ $ 2,377 $ 794 $ 6,050 $ 1,995
------- ------- ------- -------
------- ------- ------- -------
Basic net income per share $ 0.17 $ 0.06 $ 0.46 $ 0.12
Shares used in computing basic net income per share 13,626,934 7,755,385 13,269,032 7,489,826
Diluted net income per share $ 0.17 $ 0.08 $ 0.43 $ 0.20
Shares used in computing diluted net income per share 14,253,808 10,113,218 13,963,303 9,847,658
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
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<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended February 28,
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,050 $ 1,995
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 2,019 1,565
Deferred taxes............................................. 239 1,213
Changes in operating assets and liabilities:
Accounts receivable....................................... (1,586) 594
Accounts payable.......................................... 1,191 427
Accrued expenses.......................................... 677 (168)
Deferred revenue.......................................... 2,714 727
Other current assets...................................... (1,838) (668)
------ -----
Net cash provided by operating activities................ 9,466 5,685
Cash flows from investing activities:
Purchase of property, plant and equipment and other assets.. (5,929) (2,031)
Purchase of investments.................................... (50,757) (2,102)
------ -----
Net cash used by investing activities..................... (56,686) (4,133)
Cash flows from financing activities:
Principal payments on long-term debt and capital
leases obligations......................................... - (847)
Sale (repurchase) of stock.................................. 50,243 (54)
Exercise of stock options................................... 1,799 1,215
------ -----
Net cash provided (used) by financing activities........... 52,042 314
Net increase in cash......................................... 4,822 1,866
Cash at beginning of period.................................. 12,101 8,256
------ -----
Cash at end of period........................................ $ 16,923 $10,122
------ -----
------ -----
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
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<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information at February 28, 1998 and 1997 and for the three and nine
month periods then ended is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) which the Company's
management believes to be necessary for the fair presentation of the
financial position, results of operations and changes in cash flows for the
periods presented. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Despite management's
best effort to establish good faith estimates and assumptions, actual results
may differ.
The accompanying interim financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended May 31, 1997. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as permitted by rules and
regulations of the Securities and Exchange Commission. Interim results of
operations for the three and nine month periods ended February 28, 1998 are
not necessarily indicative of operating results for the full fiscal year.
2. Earnings per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No.128 applies to entities with publicly held common
stock or potential common stock and is effective for financial statements
issued for periods ending after December 15, 1997. Under SFAS No. 128, the
presentation of primary earnings per share is replaced with a presentation of
basic earnings per share. SFAS No. 128 requires dual presentation of basic
and diluted earnings per share for entities with complex capital structures.
Basic earnings per share includes no dilution and is computed by dividing net
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform with the provisions of SFAS No. 128.
-5-
<PAGE>
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
(In thousands except per share amounts) For the three months For the nine months
ended February 28, ended February 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic earnings per share computation
Net income $ 2,377 $ 794 $ 6,050 $ 1,995
Increase to carrying value of
mandatorily redeemable preferred stock (359) - (1,076)
Net income available to common stockholders 2,377 435 6,050 919
Weighted average common shares 13,626,934 7,755,385 13,269,032 7,489,826
Basic net income per share $ 0.17 $ 0.06 $ 0.46 $ 0.12
Diluted earnings per share computation
Net income $ 2,377 $ 794 $ 6,050 $ 1,995
Shares calculation
Weighted average number of common shares 13,626,934 7,755,385 13,269,032 7,489,826
Weighted average of assumed conversion
of mandatorily redeemable preferred stock 1,847,627 1,847,627
Other common stock equivalents 626,874 510,206 694,271 510,205
14,253,808 10,113,218 13,963,303 9,847,658
Diluted net income per share $ 0.17 $ 0.08 $ 0.43 $ 0.20
</TABLE>
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<PAGE>
3. Initial Public Offering
In June 1997, the Company sold 3,450,000 shares of common stock at a
price of $16.00 per share in an initial public offering. The initial public
offering generated more than $50 million of proceeds to the Company. As a
result of the initial public offering, the Series A Preferred Stock and the
Series B Preferred Stock were converted to common stock. In connection with
the initial public offering, certain other resolutions of the Company's Board
of Directors became effective, including authorization of a four-for-three
stock split of the issued and outstanding shares of the Company's common
stock, in the form of a stock dividend, which was issued immediately prior to
the initial public offering. All references to common stock amounts, shares
and per share data have been adjusted to give retroactive effect to the stock
split.
4. Acquisitions
During the quarter ending November 30, 1997, the Company acquired all
of the outstanding capital stock of its Singapore distributor in a
transaction that was accounted for as a pooling of interests. In exchange
for capital stock, the Company issued 56,250 shares of the Company's common
stock. Financial data for the periods prior to the closing of this
transaction has not been restated because neither the net assets nor
operating results would have been material to the Company's consolidated
financial statements.
In December 1997, the Company acquired its South African distributor in
a transaction that was accounted for as a purchase. Pro forma information is
not presented as it is not deemed material.
-7-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Condensed Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in the Company's
consolidated condensed statement of income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1998 1997 1998 1997
----------------- -----------------
As a percentage of total revenues
<S> <C> <C> <C> <C>
Revenues:
License................................. 61.1% 62.8% 61.3% 61.7%
Service................................. 38.9 37.2 38.7 38.3
----- ----- ----- -----
Total revenue.......................... 100.0 100.0 100.0 100.0
Cost of revenues:
License................................. 14.4 12.5 13.2 11.5
Service................................. 12.0 13.9 12.6 14.5
----- ----- ----- -----
Total cost of revenues................. 26.4 26.4 25.8 26.0
----- ----- ----- -----
Gross margin........................... 73.6 73.6 74.2 74.0
Operating expenses:
Sales and marketing.................... 37.3 38.8 37.6 39.1
Research and development............... 13.4 16.4 14.7 17.5
General and administrative............. 9.2 10.5 9.4 10.0
----- ----- ----- -----
Total operating expenses.............. 59.9 65.7 61.7 66.6
----- ----- ----- -----
Operating income........................ 13.7 7.9 12.5 7.4
Other income, net....................... 3.8 .7 4.5 .8
----- ----- ----- -----
Income before income taxes.............. 17.5 8.6 17.0 8.2
Income tax provision.................... 7.0 3.2 6.8 3.1
----- ----- ----- -----
Net income............................ 10.5% 5.4% 10.2% 5.1%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
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<PAGE>
REVENUES
REVENUES. Revenues for the quarter ended February 28, 1998 were $22.6
million, representing an increase of 53.8% over revenues of $14.7 million for
the quarter ended February 28, 1997. This increase in revenues was primarily
due to increased demand for the Company's Dynamics C/S+ and Dynamics products
(together, the "client/server products") and related service fees. In
addition, during the quarter ended February 28, 1998, revenues from the
Company's heritage products increased slightly as compared to the quarter
ended February 28, 1997. Revenues for the nine months ended February 28, 1998
were $59.4 million, representing an increase of 50.6% over revenues of $39.5
million for the nine months ended February 28, 1997. This increase in
revenues was primarily a result of increased demand for the Company's
client/server products. Revenues from the Company's heritage products were
$8.0 million for the nine months ended February 28, 1998, consistent with the
$8.0 million for the nine months ended February 28, 1997. Heritage revenues
did not decline in the most recent nine month period due to strong demand
from heritage customers for upgrades to the Company's heritage product,
upgrades which were released in February 1997 and December 1997.
The following tables set forth for the periods indicated client/server and
heritage product revenues, each as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended February 28,
1998 1997
-------- --------
<S> <C> <C>
Client/server product revenues.... 86.1% 80.1%
Heritage product revenues......... 13.9% 19.9%
</TABLE>
<TABLE>
<CAPTION>
Nine months ended February 28,
1998 1997
-------- --------
<S> <C> <C>
Client/server product revenues.... 86.6% 79.9%
Heritage product revenues......... 13.4% 20.1%
</TABLE>
Client/server product revenues, including license and service fees, were
$19.5 million for the quarter ended February 28, 1998, representing an
increase of 65.2% over client/server product revenues of $11.8 million for
the quarter ended February 28, 1997. For the nine months ended February 28,
1998, client/server product revenues were $51.4 million, an increase of 63.3%
over the $31.5 million in client/server product revenues for the nine months
ended February 28, 1997. This increase in revenues was primarily the result
of an increase in new customer licenses as well as increased revenues from
maintenance and telephone support contracts due to an increased base of
client/server customers.
Heritage product revenues, including license and service fees, were $3.1
million for the quarter ended February 28, 1998, representing an increase of
7.8% from revenues of $2.9 million for the quarter ended February 28, 1997.
This increase in heritage product revenues was primarily due to an increase
in the sale of upgrades to the Company's installed base of heritage customers
offset, in part, by a decrease in the number of new heritage customer
licenses. In December 1997, the Company shipped a new heritage product
upgrade, Great Plains Accounting for Windows. In addition to sales of this
upgrade, demand continued for the Company's Great Plains Accounting Version 9
upgrade, which shipped in February 1997. For the nine months ended February
28, 1998, heritage product revenues were $8.0 million compared with heritage
product revenues of $8.0 million for the nine months ended February 28, 1997.
Heritage product revenues remained consistent for the nine months ended
February 28, 1998 due to strong demand for the latest upgrades to the
Company's heritage product, which released in February 1997 and December
1997. The Company anticipates that heritage product revenues will decrease in
future periods where the Company does not experience strong demand for
existing or new upgrades from its installed base of heritage customers.
The Company's international revenues increased to $3.2 million for the
quarter ended February 28, 1998, representing 14.3% of total revenues and
compared to $1.9 million for the quarter ended February 28, 1997. This
increase was primarily a result of growth in existing markets, including
growth in the Company's subsidiary operations in the United Kingdom,
Australia, and Singapore as well as revenues from a new subsidiary in South
Africa.
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<PAGE>
International revenues for the nine months ended February 28, 1998 were $8.7
million, representing an increase of 55.7% over international revenues of
$5.6 million for the nine months ended February 28, 1997. This increase is
primarily a result of growth in existing international markets including its
international subsidiaries. In December 1997, the Company opened an
international subsidiary in South Africa to serve Partners and customers
throughout Africa.
LICENSE. Total license fee revenues for the quarter ended February 28,
1998 were $13.8 million, representing an increase of 49.8% over license
revenues of $9.2 million for the quarter ended February 28, 1997. This
increase in total license fees was largely attributable to increased market
acceptance and demand for the Company's Windows NT client/server product
offerings, Dynamics and Dynamics C/S+. In addition, demand for product
upgrades to the Company's heritage product was strong in the quarter. For the
nine months ended February 28, 1998, license fee revenues were $36.4 million,
representing an increase of 49.6% over the $24.4 million in license revenues
for the nine months ended February 28, 1997. This increase was primarily a
result of an increased number of new client/server customer licenses as well
as strong demand from heritage customers for the latest upgrades to the
Company's heritage product.
SERVICE. Service revenues for the quarter ended February 28, 1998 were
$8.8 million, representing an increase of 60.6% over service revenues of $5.5
million for the quarter ended February 28, 1997. Service revenues for the
nine months ended February 28, 1998 were $23.0 million, representing an
increase of 52.3% over service revenues of $15.1 million for the nine months
ended February 28, 1997. These increases in service revenues were largely a
result of the service revenues associated with new client/server licenses as
well as renewals of existing maintenance and support contracts from the
increased installed base of client/server customers. Service revenues as a
percentage of total revenues were 38.9% for the three months ended February
28, 1998 compared with 37.2% of total revenues for the three months ended
February 28, 1997. For the nine months ended February 28, 1998 and 1997,
service revenues as a percentage of total revenues were 38.7% and 38.3%,
respectively.
COSTS AND EXPENSES
COST OF LICENSE FEES. Cost of license fees consists primarily of the
costs of product manuals, media, shipping and royalties paid to third-party
vendors. Cost of license fees for the quarter ended February 28, 1998
increased to $3.3 million from $1.8 million in the quarter ended February 28,
1997, representing 23.6% and 19.9% of total license fee revenues,
respectively. Cost of license fees for the nine months ended February 28,
1998 increased to $7.9 million from $4.6 million in the nine months ended
February 28, 1997, representing 21.6% and 18.7% of total license fee
revenues, respectively. The dollar increase in cost of license fees in the
quarter and nine months ended February 28, 1998 is primarily attributable to
the overall growth in license fee revenues, and an increase in royalties paid
to third-party vendors. The increase in cost of license fees as a percentage
of total license fee revenues is primarily attributable to an increase in the
sale of product for which the Company is obligated to pay royalties to
third-party vendors. The cost of license fees as a percentage of license fee
revenues may increase if the Company continues to add third-party vendors or
if sales which include third-party products increase as a percentage of total
revenues.
COST OF SERVICES. Cost of services consists of the costs of providing
telephone support, training and consulting services to the Company's
customers and distribution channel. Cost of services for the quarter ended
February 28, 1998 increased to $2.7 million from $2.1 million for the quarter
ended February 28, 1997, representing 31.0% and 37.4% of total service
revenues, respectively. Cost of services for the nine months ended February
28, 1998 increased to $7.5 million from $5.7 million for the nine months
ended February 28, 1997, representing 32.5% and 37.8% of total service
revenues, respectively. These increases in cost of services was primarily due
to the expansion of the Company's service resources. Cost of services as a
percentage of service revenues decreased for the quarter and nine months
ended February 28, 1998 compared to the same periods last fiscal year. This
decrease was primarily a result of improved efficiency and continued strong
customer enrollment in maintenance plans and support contracts. The Company
anticipates that cost of services will increase in dollar amount as service
revenues increase and may decrease slightly as a percentage of service
revenues.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, travel and promotional expenses. Sales and marketing
expenses increased to $8.4 million for the quarter ended February 28, 1998
compared with $5.7 million for the quarter ended February 28, 1997,
representing 37.3% and 38.8% of total revenues, respectively. Sales and
marketing expenses for the nine months ended February 28, 1998 increased to
$22.3 million
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<PAGE>
from $15.4 million for the nine months ended February 28, 1997, representing
37.6% and 39.1% of total revenues, respectively. The increase in sales and
marketing expenses for both the quarter and nine months ended February 28,
1998 is attributable to the hiring of additional sales and marketing
personnel, increased commission expenses associated with higher revenue,
continued investments in expanding the capacity and capability of the channel
for its Windows NT client/server products, and increased marketing expenses
for the Company's client/server products. In addition, the Company increased
sales and marketing expenses related to the operation of its international
subsidiaries in the United Kingdom, Australia, Singapore and South Africa.
The decrease in sales and marketing expenses as a percentage of total
revenues for the quarter and nine months ended February 28, 1998 compared to
the same periods in the last fiscal year was primarily a result of increased
productivity in the Company's Partner channel. The Company anticipates that
sales and marketing expenses will increase in dollar amount as total revenues
increase; however, the Company does not anticipate significant changes in
sales and marketing expenses as a percent of total revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation of development personnel and depreciation of
equipment. Total research and development expenses were $3.0 million for the
quarter ended February 28, 1998 compared with $2.4 million for the quarter
ended February 28, 1997, representing 13.4% and 16.4% of total revenues,
respectively. For the nine months ended February 28, 1998, total research and
development expenses were $8.7 million, compared with $6.9 million for the
nine months ended February 28, 1997, representing 14.7% and 17.5% of total
revenues, respectively. Research and development expenditure increases were
primarily attributable to increases in the Company's salary cost for software
engineers and the infrastructure costs required to support product
development initiatives in the following areas: (i) expansion and enhancement
of the Company's client/server product offerings, (ii) research and
development of Internet-based products which enhance the functionality of the
Company's financial management solutions, and (iii) additional research and
development to optimize the Company's client/server products for the latest
technologies. Research and development expenses have decreased as a percentage
of total revenues in the most recent quarter and nine month period due to
efficiencies gained through greater experience levels among development
personnel, even greater automation in the Company's development testing
processes, and additional efficiencies gained through an increased research
and development focus on Microsoft technologies. The Company anticipates
that it will continue to devote substantial resources to its research and
development effort and that research and development expenses will increase
in dollar amount in future periods and may increase as a percentage of
revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive, financial, human resources and
information services personnel as well as outside professional fees. General
and administrative expenses for the quarter ended February 28, 1998 were $2.1
million, compared with $1.5 million for the quarter ended February 28, 1997,
representing 9.2% and 10.5% of total revenues, respectively. For the nine
months ended February 28, 1998, general and administrative expenses were $5.6
million, compared with $4.0 million for the nine months ended February 28,
1997, representing 9.4% and 10.0% of total revenues, respectively. These
increases in dollar amounts were primarily due to increased staffing to
support the growth of the company as well as increased professional fees
related to the requirements of being a publicly held company The Company
believes that its general and administrative expenses will increase in dollar
amount in the future to support the expansion of its operations and as a
result of expenses associated with being a publicly held company. In
addition, the Company anticipates that its rent expense will increase in
future years due to its expected move into a new facility late in fiscal 1999.
OTHER INCOME, NET. Other income, net consists primarily of earnings from
investments, net of any interest expense. Other income, net increased to
$0.9 million for the quarter ended February 28, 1998, compared with $0.1
million for the quarter ended February 28, 1997. For the nine months ended
February 28, 1998, other income, net increased to $2.7 million from $0.3
million for the nine months ended February 28, 1997. The increase in dollar
amount for the quarter and nine months ended February 28, 1998 was primarily
from increased investment earnings due to increased investment levels as a
result of the more than $50 million received from the Company's initial
public offering of common stock in June 1997, as well as additional cash
resulting from the Company's increased profitability.
PROVISION FOR INCOME TAXES. The Company's income tax provision for the
quarter ended February 28, 1998 was $1.6 million, compared with $0.5 million
for the quarter ended February 28, 1997. The Company's income tax provision
for the nine months ended February 28, 1998 was $4.0 million, compared with
$1.2 million for the nine months ended February 28, 1997. The provision
for income taxes was 40% of income before income taxes for the
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<PAGE>
quarter and nine months ended February 28, 1998, which represents a 2%
increase from the fiscal 1997 annual effective income tax rate of 38% as a
result of full state statutory tax rates. In addition, this increase in the
provision for income taxes is primarily attributable to the increased
operating income and interest income for the Company for the quarter and nine
months ended February 28, 1998, compared with the quarter and nine months
ended February 28, 1997.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded operations primarily through cash
provided by operations and the sale of equity securities and, to a lesser
extent, from borrowings. Currently, the Company meets its working capital
needs and capital equipment needs with cash provided by operations.
Cash provided by operating activities for the nine months ended February
28, 1998 was $9.5 million, compared with $5.7 million for the nine months
ended February 28, 1997. The increase in cash provided by operations for the
nine months ended February 28, 1998, was primarily due to increased
profitability of the Company's operations, an increase in deferred revenues
and an increase in accounts payable and accrued expenses offset, in part, by
an increase in accounts receivable.
The Company's investing activities used cash of $56.7 million for the nine
months ended February 28, 1998, compared with $4.1 million for the nine
months ended February 28, 1997. The principal use of cash in investing
activities for the nine months ended February 28, 1998 was approximately $50
million for the purchase of investments following the Company's initial
public offering of common stock. In addition, investing activities for the
nine months ended February 28, 1998 included increased capital expenditures
related to the acquisition of computer equipment required to support
expansion of the Company's operations. Investing activities also included
investment in minority interest positions in certain international operations.
The Company's financing activities provided cash of $52.0 million during
the nine months ended February 28, 1998, compared with cash provided of $0.3
million for the nine months ended February 28, 1997. For the nine months
ended February 28 1998, cash provided by financing activities primarily
included $50.2 million from the sale of the Company's common stock in an
initial public offering and $1.8 million from the exercise of stock options.
For the nine months ended February 28, 1997, cash provided from financing
activities consisted primarily of proceeds received from the exercise of
stock options offset in part by payments on capital lease obligations and
notes payable.
The Company's sources of liquidity at February 28, 1998 consisted
principally of cash, cash equivalents and investments of $71.8 million. This
amount includes approximately $50.2 million in cash generated from the
Company's initial public offering of common stock which was completed on June
25, 1997. The Company also has a $10.0 million revolving line of credit
facility with a bank. The line of credit expires in November 1998 and
borrowings made thereunder are subject to certain covenants. No amounts were
outstanding under the line of credit at February 28, 1998. The Company
believes that its existing cash, cash equivalents and investments, cash
generated from operations and the amounts available under the line of credit
will be sufficient to fund its operations for the foreseeable future.
The Company is actively engaged in researching any issues presented by
the Year 2000 that may impact the Company's internal systems. These potential
issues result from the use of two-digit year dates rather than four-digit
year dates in computer code, which could cause potential failures in
date-sensitive software systems that do not recognize "00" as 2000. The
Company does not anticipate that Year 2000 issues will materially impact its
operations. In addition, recent versions of the Company's client/server and
heritage products are Year 2000 compliant. The Company does not anticipate
any material impact on its revenues or earnings as a result of Year 2000
issues.
RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants has approved a new
Statement of Position (SOP), SOP 97-2, which will supersede Statement of
Position 91-1, "Software Revenue Recognition." SOP 97-2 will be effective
for the Company in Fiscal 1999. Management has assessed this new statement
and believes that its adoption will not have a material effect on the timing
of the Company's revenue recognition or cause changes to its revenue
recognition policies.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the Company's expectations or beliefs,
including, but not limited to, statements concerning the Company's operations
and financial performance and condition. For this purpose, any statements
contained in this Form 10-Q that are not statements of historical fact may be
deemed to be forward-looking statements. The Company cautions that these
statements by their nature involve risks and uncertainties, certain of which
are beyond the Company's control, and actual results may differ materially
depending on a variety of important factors, including those described in
Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-13-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-14-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8K
No reports on Form 8K were filed during the quarter ended February 28, 1998.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 17, 1998
GREAT PLAINS SOFTWARE, INC.
By /s/ Douglas J. Burgum
-------------------------------------------
Douglas J. Burgum
Chairman of the Board, President and
Chief Executive Officer
By /s/ Terri F. Zimmerman
-------------------------------------------
Terri F. Zimmerman
Chief Financial Officer and Group Vice
President, Finance and Operations
(principal financial and accounting
officer)
-16-
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 16,923
<SECURITIES> 54,899
<RECEIVABLES> 11,269
<ALLOWANCES> 4,231
<INVENTORY> 924
<CURRENT-ASSETS> 86,147
<PP&E> 18,849
<DEPRECIATION> 11,321
<TOTAL-ASSETS> 96,638
<CURRENT-LIABILITIES> 24,629
<BONDS> 0
0
0
<COMMON> 137
<OTHER-SE> 71,034
<TOTAL-LIABILITY-AND-EQUITY> 96,638
<SALES> 36,433
<TOTAL-REVENUES> 59,426
<CGS> 7,855
<TOTAL-COSTS> 15,338
<OTHER-EXPENSES> 36,684
<LOSS-PROVISION> 590
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 10,085
<INCOME-TAX> 4,035
<INCOME-CONTINUING> 6,050
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,050
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.43
</TABLE>
