<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, 1999
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
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As of April 7, 1999, the number of shares outstanding of the registrant's
Common Stock, par value $.01 per share, was 15,249,995.
<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,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents....................................... $28,967 $18,197
Investments..................................................... 48,097 48,721
Accounts receivable, net........................................ 10,544 8,790
Deferred income tax assets...................................... 5,004 4,630
Other current assets............................................ 5,042 3,456
------------- -------------
Total current assets.......................................... 97,654 83,794
Property and equipment, net........................................ 11,159 8,501
Goodwill and other intangibles, net................................ 4,099 4,946
Deferred income tax assets......................................... 3,318 3,318
Other assets....................................................... 4,132 2,286
------------- -------------
Total assets.................................................. $120,362 $102,845
------------- -------------
------------- -------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................ $ 3,870 $ 4,135
Accrued expenses................................................ 13,152 13,702
Deferred revenue................................................ 21,976 15,133
------------- -------------
Total current liabilities..................................... 38,998 32,970
Long-term liabilities:
Deferred income tax liabilities................................. 204 204
------------- -------------
Total liabilities............................................. 39,202 33,174
Stockholders' equity:
Common stock.................................................... 139 137
Additional paid-in capital...................................... 70,924 67,801
Accumulated translation adjustment.............................. (42) -
Retained earnings............................................... 10,139 1,733
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Total stockholders' equity.................................... 81,160 69,671
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Total liabilities and stockholders' equity......................... $120,362 $102,845
------------- -------------
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</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 SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1999 1998 1999 1998
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License ............................................... $21,247 $ 13,816 $ 55,802 $ 36,433
Service ............................................... 14,597 8,791 38,978 22,993
------ ----- ------ ------
Total revenues...................................... 35,844 22,607 94,780 59,426
Cost of revenues:
License ............................................... 5,388 3,266 14,041 7,855
Service ............................................... 4,910 2,723 12,634 7,483
----- ----- ------ -----
Total cost of revenues.............................. 10,298 5,989 26,675 15,338
------ ----- ------ ------
Gross profit........................................ 25,546 16,618 68,105 44,088
Operating expenses:
Sales and marketing.................................... 12,398 8,416 33,671 22,325
Research and development............................... 5,320 3,030 14,695 8,718
General and administrative............................. 3,018 2,086 7,872 5,641
----- ----- ----- -----
Total operating expenses............................ 20,736 13,532 56,238 36,684
------ ------ ------ ------
Operating income.......................................... 4,810 3,086 11,867 7,404
Other income, net......................................... 794 878 2,142 2,681
--- --- ----- -----
Income before income taxes................................ 5,604 3,964 14,009 10,085
Income tax provision...................................... 2,242 1,587 5,603 4,035
----- ----- ----- -----
Net income.......................................... $ 3,362 $ 2,377 $ 8,406 $ 6,050
-------- --------- --------- ---------
-------- --------- --------- ---------
Income per common share:
Basic $0.24 $0.17 $0.61 $0.46
Diluted $0.23 $0.17 $0.58 $0.43
Shares used in computing income per common share:
Basic 13,890,107 13,626,934 13,828,243 13,269,032
Diluted 14,589,959 14,253,808 14,511,467 13,963,303
</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,
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Funds generated by current operations:
Net income..................................................... $ 8,406 $ 6,050
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.................................. 3,568 2,019
Deferred income tax expense.................................... (374) 239
Changes in operating assets and liabilities:
Accounts receivable......................................... (1,754) (1,586)
Other current assets........................................ (1,225) (1,838)
Accounts payable............................................ (265) 1,191
Accrued expenses............................................ (550) 677
Deferred revenue............................................ 6,843 2,714
----- -----
Net cash provided by operating activities................. 14,649 9,466
Investing activities:
Purchases of property and equipment............................... (5,379) (3,567)
Net sale (purchase) of investments................................ 624 (50,757)
Purchase of other assets.......................................... (1,846) (2,362)
------- -------
Net cash used by investing activities..................... (6,601) (56,686)
Financing activities:
Exercise of stock options ........................................ 2,764 1,799
Proceeds from issuance of common stock, net....................... --- 50,243
------ ------
Net cash provided by financing activities................. 2,764 52,042
Effect of exchange rate changes on cash.............................. (42) ---
---- -----
Net increase in cash................................................. 10,770 4,822
Cash at beginning of period.......................................... 18,197 12,101
------ ------
Cash at end of period................................................ $28,967 $16,923
------- -------
------- -------
</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, 1999 and 1998 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, 1998. 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, 1999 are not necessarily indicative of
operating results for the full fiscal year.
2. Earnings per Share
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.
The following table sets forth the computation of basic and diluted net income
per share:
(Dollars in thousands, except share and per share
amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended February 28, Ended February 28,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic earnings per share calculation
Net income available to common shareholders $3,362 $2,377 $8,406 $6,050
Weighted average common shares 13,890,107 13,626,934 13,828,243 13,269,032
Basic net income per share $0.24 $0.17 $0.61 $0.46
Diluted earnings per share calculation:
Net income $3,362 $2,377 $8,406 $6,050
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<PAGE>
Shares calculation
Weighted average number of common shares 13,890,107 13,626,934 13,828,243 13,269,032
Other common stock equivalents 699,852 626,874 683,224 694,271
--------------------------------------------------------------------
14,589,959 14,253,808 14,511,467 13,963,303
Diluted net income per share $0.23 $0.17 $0.58 $0.43
</TABLE>
3. Comprehensive Income
On June 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting of Comprehensive Income".
The standard requires the reporting of comprehensive income, which
includes all changes in stockholders' equity with the exception of
additional investments by stockholders or distributions to
stockholders. Comprehensive income for the Company includes net income
and the effects of translation which are charged or credited to the
cumulative translation adjustments account within stockholders' equity.
Comprehensive income for the three and nine months ended February 28,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended February 28, Ended February 28,
(Dollars in thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $3,362 $2,377 $8,406 $6,050
Changes in cumulative translation adjustments (43) - (42) -
---- --------- --------- -----
Comprehensive income $3,319 $2,377 $8,364 $6,050
</TABLE>
4. Subsequent Event
Subsequent to February 28, 1999, the Company completed a public offering of
2,083,325 shares of common stock offered by the Company and existing
shareholders. The net proceeds of the 1,318,325 shares sold by the Company were
approximately $47 million. These proceeds are expected to be used for general
corporate purposes including working capital, product development, capital
expenditures and possible acquisitions.
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<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 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,
1999 1998 1999 1998
-------------------------- -----------------------
<S> <C> <C> <C> <C>
As a percentage of total revenues Revenues:
License.................................... 59.3% 61.1% 58.9% 61.3%
Service.................................... 40.7 38.9 41.1 38.7
---- ---- ---- ----
Total revenue............................ 100.0 100.0 100.0 100.0
Cost of revenues:
License.................................. 15.0 14.4 14.8 13.2
Service.................................. 13.7 12.0 13.3 12.6
---- ---- ---- ----
Total cost of revenues................ 28.7 26.4 28.1 25.8
---- ---- ---- ----
Gross profit.......................... 71.3 73.6 71.9 74.2
Operating expenses:
Sales and marketing...................... 34.6 37.3 35.6 37.6
Research and development................. 14.9 13.4 15.5 14.7
General and administrative............... 8.4 9.2 8.3 9.4
--- --- ---- ---
Total operating expenses.............. 57.9 59.9 59.4 61.7
---- ---- ---- ----
Operating income........................... 13.4 13.7 12.5 12.5
Other income, net.......................... 2.2 3.8 2.3 4.5
--- ---- ----- ----
Income before income taxes................. 15.6 17.5 14.8 17.0
Income tax provision....................... 6.2 7.0 5.9 6.8
--- --- --- ---
Net income............................ 9.4% 10.5% 8.9% 10.2%
---- ----- ----- -----
---- ----- ----- -----
</TABLE>
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<PAGE>
REVENUES
REVENUES. Revenues for the quarter ended February 28, 1999 were $35.8
million, representing an increase of 58.6% over revenues of $22.6 million for
the quarter ended February 28, 1998. 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,
the Company extended its Dynamics C/S+ product line in the quarter to include a
manufacturing suite of products. Revenues from this new solution as well as the
solution areas of enterprise reporting and human resources, which were not
available in the same period last fiscal year, also contributed to the revenue
growth in the quarter. Revenues for the nine months ended February 28, 1999 were
$94.8 million, representing an increase of 59.5% over revenues of $59.4 million
for the nine months ended February 28, 1998. This increase in revenues was
primarily a result of increased demand for the Company's client/server products
including the new solution areas of manufacturing, enterprise reporting and
human resources.
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,
1999 1998
------ ------
<S> <C> <C>
Client/server product revenues....................................... 93.3% 86.1%
Heritage product revenues............................................ 6.7% 13.9%
Nine months ended February 28,
1999 1998
------ ------
Client/server product revenues....................................... 93.1% 86.6%
Heritage product revenues............................................ 6.9% 13.4%
</TABLE>
Client/server product revenues, including license and service fees, were
$33.4 million for the quarter ended February 28, 1999, representing an increase
of 72.0% over client/server product revenues of $19.5 million for the quarter
ended February 28, 1998. For the nine months ended February 28, 1999,
client/server product revenues were $88.2 million, an increase of 71.4% over the
$51.4 million in client/server product revenues for the nine months ended
February 28, 1998. This increase in revenues was primarily the result of
increases in new customer licenses as well as increased revenues from
maintenance and telephone support contracts due to an increased base of
client/server customers. The increase in new customer licenses was partially
driven by demand for the Company's manufacturing, enterprise reporting and human
resources solutions, which were not available in this same period of fiscal
1998.
Heritage product revenues, including license and service fees, were $2.4
million for the quarter ended February 28, 1999, representing a decrease of
24.3% from revenues of $3.1 million for the quarter ended February 28, 1998. For
the nine months ended February 28, 1999, heritage product revenues were $6.6
million, a decrease of 17.7% compared with heritage product revenues of $8.0
million for the nine months ended February 28, 1998. Heritage product revenues
decreased for the quarter and nine months ended February 28, 1999 due to a
decline in the number of customers purchasing the Version 9 and Great Plains
Accounting for Windows upgrades of the Company's heritage product. The most
recent upgrades to the Company's heritage product were released in February 1997
and December 1997 and, as anticipated, demand for these products has declined in
fiscal 1999. The Company anticipates that heritage product revenues will
decrease in future periods.
The Company's international revenues increased 76.3% to $5.7 million for
the quarter ended February 28, 1999, compared to $3.2 million for the quarter
ended February 28, 1998. International revenues represented 15.9% of total
revenues for the quarter ended February 28, 1999 as compared to
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<PAGE>
14.3% of total revenues for the same period last fiscal year. This dollar and
percentage increase was a result of a new international subsidiary in
Scandinavia, which was added in the fourth quarter of fiscal 1998, as well as
growth in existing markets including the Company's subsidiary operations in
Canada, the United Kingdom, South Africa, Singapore, and Australia.
International revenues for the nine months ended February 28, 1999 were $15.7
million, representing an increase of 80.9% over international revenues of $8.7
million for the nine months ended February 28, 1998. This increase is a result
of growth in existing international markets including its existing international
subsidiaries as well as the addition of a new international subsidiary in
Scandinavia.
LICENSE. Total license fee revenues for the quarter ended February 28,
1999 were $21.2 million, representing an increase of 53.8% over license revenues
of $13.8 million for the quarter ended February 28, 1998. For the nine months
ended February 28, 1999, license fee revenues were $55.8 million, representing
an increase of 53.2% over the $36.4 million in license fee revenues for the nine
months ended February 28, 1998. This increase in total license fees was largely
attributable to increased market acceptance and demand for the Company's Windows
NT solutions, Dynamics and Dynamics C/S+. The increase in demand for the
Company's client/server solutions was also driven by demand for the new solution
areas of manufacturing, enterprise reporting and human resources.
SERVICE. Service revenues for the quarter ended February 28, 1999 were
$14.6 million, representing an increase of 66.0% over service revenues of $8.8
million for the quarter ended February 28, 1998. Service revenues for the nine
months ended February 28, 1999 were $39.0 million, representing an increase of
69.5% over service revenues of $23.0 million for the nine months ended February
28, 1998. 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 increasing base of
client/server customers. In addition, this increase in service revenues can also
be attributed to service revenue from the new solution areas of manufacturing,
enterprise reporting, and human resources. Service revenues as a percentage of
total revenues were 40.7% for the three months ended February 28, 1999 compared
with 38.9% of total revenues for the three months ended February 28, 1998. For
the nine months ended February 28, 1999 and 1998, service revenues as a
percentage of total revenues were 41.1% and 38.7%, respectively. The increase in
service revenues as a percentage of total revenues is largely attributable to
the increasing installed base of client/server customers and the resulting
increases in maintenance and support revenue.
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, 1999 increased to $5.4
million from $3.3 million in the quarter ended February 28, 1998, representing
25.3% and 23.6% of total license fee revenues, respectively. Cost of license
fees for the nine months ended February 28, 1999 increased to $14.0 million from
$7.9 million in the nine months ended February 28, 1998, representing 25.2% and
21.6% of total license fee revenues, respectively. The dollar increase in cost
of license fees in the quarter and nine months ended February 28, 1999 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 due to
an increase in the sale of products 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,
1999 increased to $4.9 million from $2.7 million for the quarter ended February
28, 1998, representing 33.6% and 31.0% of total service revenues, respectively.
Cost of services as a percentage of service revenue increased for the quarter
ended February 28, 1999 compared to the same period last fiscal year as a result
of additional service resources added to support
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<PAGE>
the new solution areas of manufacturing, enterprise reporting, and human
resources. These additional resources will allow the Company to recognize
additional service revenue in future periods. Cost of services for the nine
months ended February 28, 1999 increased to $12.6 million from $7.5 million for
the nine months ended February 28, 1998, representing 32.4% and 32.5% of total
service revenues, respectively. These increases in cost of services were
primarily due to the expansion of the Company's service resources, including
those service resources needed to support new solution areas.
SALES AND MARKETING. Sales and Marketing expenses consist primarily of
salaries, commissions, travel and promotional expenses. Sales and marketing
expenses increased to $12.4 million for the quarter ended February 28, 1999
compared with $8.4 million for the quarter ended February 28, 1998, representing
34.6% and 37.3% of total revenues, respectively. Sales and marketing expenses
for the nine months ended February 28, 1999 increased to $33.7 million from
$22.3 million for the nine months ended February 28, 1998, representing 35.6%
and 37.6% of total revenues, respectively. The increases in sales and marketing
expenses for both the quarter and nine months ended February 28, 1999 is
attributable to the following: i) increased investments in corporate image and
brand awareness marketing including a global advertising campaign ii) increased
investments in direct marketing campaigns and events including national and
local tradeshows, iii) investments in expanding the capacity and capability of
the channel for it client/server products, iv) hiring of additional sales and
marketing personnel and, v) increased commission expenses associated with
additional sales personnel and higher revenues. In addition, the Company
increased sales and marketing expenses related to the operation of its
international subsidiaries in Canada, the United Kingdom, Scandinavia, South
Africa, Singapore, and Australia. The decrease in sales and marketing as a
percentage of total revenues for the quarter and nine months ended February 28,
1999 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 percentage 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 $5.3 million for the
quarter ended February 28, 1999 compared with $3.0 million for the quarter ended
February 28, 1998, representing 14.9% and 13.4% of total revenues, respectively.
For the nine months ended February 28, 1999, total research and development
expenses were $14.7 million, compared with $8.7 million for the nine months
ended February 28, 1998, representing 15.5% and 14.7% 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 including the additional solution areas of
manufacturing, enterprise reporting, and human resources (ii) additional
research and development to optimize the Company's client/server products for
the latest technologies (iii) research and development of Internet-based
electronic commerce products which enhance the functionality of the Company's
business management solutions. Research and development expenses have increased
as a percentage of total revenues in the most recent quarter and nine month
period due to an acceleration in the hiring of additional technical personnel to
support the new solution areas of manufacturing, enterprise reporting, human
resources and electronic commerce. 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 total 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, 1999 were $3.0
million, compared with $2.1 million for the quarter ended February 28, 1998,
representing 8.4% and 9.2% of total revenues, respectively. For the nine months
ended February 28, 1999, general and administrative expenses were $7.9 million,
compared with $5.6 million for the nine months ended February 28, 1998,
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<PAGE>
representing 8.3% and 9.4% of total revenues, respectively. These increases in
dollar amounts were primarily due to increased staffing and additional
professional fees to support the growth of the 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.
OTHER INCOME, NET
Other income, net consists primarily of earnings from investments and
gains or losses from disposal of fixed assets, net of any interest expense.
Other income, net was $0.8 million for the quarter ended February 28, 1999,
compared with $0.9 million for the quarter ended February 28, 1998. For the nine
months ended February 28, 1999, other income, net was $2.1 million compared with
$2.7 million for the nine months ended February 28, 1998. The decrease in dollar
amount for the quarter and nine months ended February 28, 1999 was primarily a
result of the Company recognizing lower investment earnings due to lower
interest rates in the quarter and nine months ended February 28, 1999 as
compared to the quarter and nine months ended February 28, 1998.
PROVISION FOR INCOME TAXES
The Company's income tax provision for the quarter ended February 28, 1999
was $2.2 million, compared with $1.6 million for the quarter ended February 28,
1998. The Company's income tax provision for the nine months ended February 28,
1999 was $5.6 million, compared with $4.0 million for the nine months ended
February 28, 1998. The provision for income taxes was 40% of income before
income taxes for the quarter and nine months ended February 28, 1999 and for the
quarter and nine months ended February 28, 1998. This increase in the provision
for income taxes is primarily attributable to the increased operating income for
the quarter and nine months ended February 28, 1999, compared with the quarter
and nine months ended February 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded operations primarily through cash
provided by operations and the sale of equity securities. 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, 1999 was $14.6 million, compared with $9.5 million for the nine months ended
February 28, 1998. The increase in cash provided by operations for the nine
months ended February 28, 1999, was primarily due to revenue growth, increased
profitability of the Company's operations and an increase in deferred revenues.
This increase was offset, in part, by a decrease in accounts payable and accrued
expenses.
The Company's investing activities used cash of $6.6 million for the nine
months ended February 28, 1999, compared with $56.7 million for the nine months
ended February 28, 1998. Cash used for the acquisition of computer equipment and
furniture required to support expansion of the Company's operations for the nine
months ended February 28, 1999 and February 28, 1998 was $5.4 million and $3.6
million, respectively. 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.
The Company's financing activities provided cash of $2.8 million during
the nine months ended February 28, 1999, compared with cash provided of $52.0
million for the nine months ended February 28, 1998. For the nine months ended
February 28, 1999, cash provided by financing activities consisted of proceeds
received from the exercise of stock options. For the nine months ended February
28, 1998, cash provided from financing activities was primarily the result of
$50.2 million from the sale of the
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<PAGE>
Company's common stock in an initial public offering.
The Company's sources of liquidity at February 28, 1999 consisted principally
of cash, cash equivalents and investments of $77.1 million. Subsequent to
February 28, 1999, the Company received proceeds of approximately $47 million
from a public offering of common stock. The Company also has a $10.0 million
revolving line of credit facility with a bank. The line of credit expires in
November 1999 and borrowings made thereunder are subject to certain
covenants. No amounts were outstanding under the line of credit at February
28, 1999. 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. In the future, the Company may use cash for the purposes
of acquiring products and/or companies it deems important to its strategy.
YEAR 2000
Many currently installed computer systems and software are coded to
accept only two-digit entries in the date code fields. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced in order to
comply with Year 2000 requirements. The potential global impact of the Year 2000
problem is not known. If Year 2000 problems are not corrected in a timely
manner, they could affect Great Plains and the U.S. and world economy generally.
All of Great Plains' current products are Year 2000 compliant. Great
Plains' client/server products have been Year 2000 compliant since their initial
introduction, as are Versions 8 and 9 of the heritage product. Great Plains is
currently offering its heritage product customers a free Year 2000 compliant
upgrade for prior versions of the heritage product. Even though Great Plains'
current products are Year 2000 compliant, there can be no assurance that
Midmarket businesses will have sufficient resources available for the
acquisition of new systems from Great Plains because they may be diverting
resources to assess and fix internal systems that may not be Year 2000
compliant.
Great Plains has formed a project team (consisting of representatives from
its information technology, finance, manufacturing, product development, sales,
marketing and legal departments) to address other internal and external Year
2000 issues. Great Plains' internal financial, manufacturing and other computer
systems are being reviewed to assess and remediate Year 2000 problems. Great
Plains' assessment of internal systems includes its information technology as
well as other systems (which systems contain embedded technology in
manufacturing or process control equipment containing microprocessors or other
similar circuitry). Great Plains' Year 2000 compliance program includes the
following phases:
- 12 -
<PAGE>
- - identifying systems that need to be modified or replaced;
- - carrying out remediation work to modify existing systems or convert
to new systems; and
- - conducting validation testing of systems and applications to ensure
compliance. Great Plains is currently completing the second phase of this
program.
The amount of remediation work required to address Year 2000 problems
is not expected to be extensive. Great Plains has replaced certain of its
financial and operational systems in the last several years, and management
believes that the new equipment and software substantially addresses Year 2000
issues. However, Great Plains will be required to modify some of its existing
hardware and software in order for its computer systems to function properly in
the year 2000 and thereafter. Great Plains estimates that it will complete its
Year 2000 compliance program for all of its significant internal systems no
later than May 1, 1999.
In addition, Great Plains has received assurances from its major
suppliers that they are addressing the Year 2000 issue and that products
purchased by Great Plains from such suppliers will function properly in the year
2000. However, it is impossible to fully assess the potential consequences in
the event service interruptions from suppliers occur or in the event that there
are disruptions in such infrastructure areas as utilities, communications,
transportation, banking or government. Great Plains is currently assessing the
Year 2000 readiness of its Partners.
The total estimated cost for resolving Great Plains' Year 2000 issues
is $100,000, of which approximately $75,000 has been spent through February 28,
1999. The total cost estimate includes the cost of replacing of non-compliant
systems as a remediation cost in cases where Great Plains has accelerated plans
to replace such systems. Estimates of Year 2000 costs are based on numerous
assumptions, and there can be no assurance that the estimates are correct or
that actual costs will not be materially greater than anticipated.
Based on its assessments to date, Great Plains believes it will not
experience any material disruption as a result of Year 2000 problems in internal
manufacturing processes, information processing or interface with major
customers, or with processing orders and billing. However, if certain critical
third-party providers, such as those providers supplying electricity, water or
telephone service, experience difficulties resulting in disruption of service to
Great Plains, a shutdown of Great Plains' operations at individual facilities
could occur for the duration of the disruption. Great Plains has not yet
developed a contingency plan to provide for continuity of processing in the
event of various problem scenarios, but it will assess the need to develop such
a plan based on the outcome of its validation phase of its Year 2000 compliance
program and the results of surveying its major suppliers and customers. Assuming
no major disruption in service from utility companies or other critical
third-party providers, Great Plains believes that it will be able to manage its
total Year 2000 transition without any material effect on Great Plains' results
of operations or financial condition.
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 Quarterly Report on Form 10-Q for the quarter ended November 30, 1998
as well as the factors listed under the heading "Risk Factors" in the Company's
Prospectus dated March 1, 1999.
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,
1999.
- 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: April 13, 1999
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 Executive Vice President,
(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-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 28,967
<SECURITIES> 48,097
<RECEIVABLES> 16,487
<ALLOWANCES> 5,943
<INVENTORY> 1,095
<CURRENT-ASSETS> 97,654
<PP&E> 25,225
<DEPRECIATION> 14,066
<TOTAL-ASSETS> 120,362
<CURRENT-LIABILITIES> 38,998
<BONDS> 0
0
0
<COMMON> 139
<OTHER-SE> 81,021
<TOTAL-LIABILITY-AND-EQUITY> 120,362
<SALES> 55,802
<TOTAL-REVENUES> 94,780
<CGS> 14,041
<TOTAL-COSTS> 26,675
<OTHER-EXPENSES> 56,238
<LOSS-PROVISION> 930
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 14,009
<INCOME-TAX> 5,603
<INCOME-CONTINUING> 8,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,406
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.58
</TABLE>
