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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number
0-22703
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 Identification No.)
incorporation or organization)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
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 No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/
The aggregate market value of Common Stock, par value $.01 per share,
held by non-affiliates of the registrant as of August 11, 1997 was
approximately $157,916,525 (based on the last sale price of such stock as
quoted on the Nasdaq National Market ($25.00) on such date).
As of August 11, 1997, the number of shares outstanding of the
registrant's Common Stock, par value $.01 per share, was 13,402,842.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated August 20, 1997 for
the 1997 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Annual Report on Form 10-K (the "Form 10-K Report").
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PART I
ITEM 1. BUSINESS
GENERAL
Great Plains Software, Inc. (the "Company") is a leading provider of
Microsoft Windows NT client/server financial management software for
mid-sized businesses. The Company's award-winning products and services
automate essential accounting functions and enhance the strategic value of
financial information. The Company's products and services are sold and
implemented exclusively by its extensive network of independent sales and
support organizations throughout the United States, Canada and select
international markets.
The Company's client/server product lines, Dynamics C/S+ and Dynamics,
consist of a suite of financial and distribution applications, such as
general ledger, accounts receivable, accounts payable, payroll and sales
order and purchase order processing, and a suite of development and
customization tools. The Company's client/server products are designed to
meet the broad spectrum of financial management needs of the corporate market
or midmarket (the "Midmarket"), which generally consists of mid-sized
businesses with $1 million to $250 million in revenues and 10 to 2,500
employees.
In order to meet the needs of the Midmarket, the Company designs,
develops, markets, sells and supports client/server products that are
cost-effective, scalable and easy to customize and use. The Company's
client/server products are optimized for Microsoft technologies, most
notably Windows NT, Windows 95 and SQL Server, which are increasingly
becoming the standard in the Midmarket. Moreover, by utilizing emerging
Internet technologies, the Company's financial management systems provide
employees throughout a business with quick, cost-effective and
security-enhanced access to information, and facilitate order placement and
sharing of business information with key customers and suppliers.
The Company has made a significant investment in building an experienced,
knowledgeable and highly motivated domestic and international service and
distribution network, which consists of value added resellers (VARs), systems
integrators, Big Six and other accounting firms, independent software vendors
(ISVs) and specialized software consultants (together, the "Partners").
Through its Partner network, the Company provides customers with trained and
knowledgeable software professionals who are available locally to implement
its systems as well as provide ongoing service and support. Most of the
Partners customize the Company's systems to fit individual business needs,
and some Partners develop software applications that integrate with and
extend the functionality of the Company's products to meet the requirements
of specific industries.
The Company believes that prompt and effective service and technical
support are essential elements of a complete financial management software
solution and dedicates significant resources to delivering timely, reliable
and cost-effective service to its customers and Partners. The Company has
received numerous industry awards for its customer and Partner service.
The Company was founded in 1981 and was incorporated as a Minnesota
corporation in 1983.
INDUSTRY BACKGROUND
In recent years, businesses of all sizes have been subjected to
heightened competitive pressures and rapidly changing market conditions.
These pressures and conditions have challenged businesses to increase the
speed with which they make decisions, establish closer relationships with
customers and suppliers, raise the productivity of employees throughout the
business and reduce costs. Many mid-sized and larger businesses are meeting
these challenges by leveraging the increased functionality, flexibility and
access to information offered by financial management systems based on
client/server technologies.
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In the past, information technology architectures, particularly the
centralization of information on mainframe systems and minicomputers,
prevented businesses from using their financial management systems for
purposes other than maintaining financial records and processing accounting
transactions. These systems were based on a centralized processing and
reporting model which was inflexible and did not allow effective integration
with other systems or ready access to information.
With the advent of client/server technologies, however, businesses are
better able to use information from their financial management systems to
respond to rapidly changing market conditions. The acceptance of
client/server systems has been driven by their ability to combine the ease of
use and data accessibility of personal computers with the high-volume
processing and data storage capabilities of minicomputer and mainframe
systems. Client/server-based financial management systems offer real-time
information access and distributed processing which enable businesses to
increase the speed of decision making and enhance employee productivity. When
integrated with Internet technologies, client/server systems provide
employees throughout the business and key customers and suppliers with access
to critical information.
Businesses employing client/server financial management systems can
generally be grouped into two market segments: (i) the Midmarket and (ii) the
enterprise or high-end market (the "Enterprise Market"). The Midmarket
generally consists of businesses with $1 million to $250 million in revenues
and 10 to 2,500 employees. In contrast, the Enterprise Market generally
consists of companies with revenues in excess of $250 million and more than
2,500 employees. Although many Midmarket businesses have formal information
technology (IT) departments, Midmarket companies typically have fewer IT
resources than Enterprise Market companies. In addition, whereas Midmarket
businesses have historically employed financial management systems based on
local area network (LAN) technologies, minicomputers and mainframes,
Enterprise Market companies have principally used mainframe financial
management systems.
Businesses in the Enterprise Market were the first to adopt client/server
architecture as the standard for new implementations of financial management
systems. More recently, businesses in the Midmarket have also begun to demand
financial management systems based on client/server technology. However,
client/server financial management systems designed for the Enterprise Market
have not been widely implemented by Midmarket businesses because they are
generally too complex and take too long and cost too much to implement.
Furthermore, the implementation of client/server financial management systems
designed for the Enterprise Market often requires significant business
process re-engineering that is overly burdensome for Midmarket businesses,
especially smaller Midmarket businesses.
MIDMARKET FINANCIAL MANAGEMENT SYSTEM NEEDS
Midmarket businesses have a number of key business requirements that are
different from those of Enterprise Market businesses. The Company believes
that Midmarket businesses require a client/server financial management system
that is cost-effective, designed for Microsoft technologies, easy to
customize and use and scalable.
Midmarket businesses generally have fewer IT resources than businesses in
the Enterprise Market. As a result, these businesses require cost-effective
software solutions from vendors that can provide a substantial amount of
assistance during the software system selection and implementation process as
well as ongoing local support and service. These businesses also require
systems that can be rapidly implemented and are easy to learn, use and modify.
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In order to ensure ongoing compatibility, supportability and ease of
maintenance, many Midmarket businesses are standardizing on Microsoft
technologies, most notably Windows NT, Windows 95 and SQL Server. Many
Midmarket businesses are requesting a financial management system that takes
full advantage of Microsoft technologies. Systems that are 32-bit and native
to Windows currently offer the optimal Microsoft-standard solution.
Many Midmarket businesses experience rapid growth and have evolving
business models. These businesses require financial management systems that
can be customized quickly and cost-effectively to accommodate the constantly
changing nature of their business systems and procedures. The Company
believes that financial management systems must allow Midmarket businesses to
easily modify windows, to integrate third-party solutions and to quickly
write and seamlessly integrate custom applications.
Finally, Midmarket companies require financial management systems that
can be scaled up as their businesses grow. This requirement is best met by
products that offer broad functionality and scalable processing capabilities,
and that have an open and flexible architecture that can easily incorporate
additional technologies, including Internet technologies which can extend the
availability of information from the financial management system to employees
across the business and to key customers and suppliers.
THE GREAT PLAINS SOFTWARE SOLUTION
The Company designs, develops, markets, sells and supports its
client/server financial management products based on the following principles:
OPTIMIZE PRODUCTS FOR LEADING TECHNOLOGIES. The Company has consistently
focused on identifying leading technologies and integrating them into its
products. In particular, the Company's products are designed for Microsoft
technologies, including Windows NT, Windows 95, SQL Server, Internet
Explorer, Internet Information Server, Visual Basic, Visual Basic for
Applications and C++. The Company's products can also be integrated with
technologies from other leading suppliers, such as Netscape, Citrix Systems,
IBM and Novell.
LEVERAGE PARTNER NETWORK. The Company has made a significant investment
in building an experienced and knowledgeable Partner network, which consists
of VARs, systems integrators, Big Six and other accounting firms, ISVs and
specialized software consultants. The Company's products are sold and
implemented exclusively through its extensive network of Partners. The
Company believes that its Partners have a significant influence over product
choices by customers, and that the Company's relationships with its Partners
are essential to the Company's success. Through its Partner network, the
Company is able to provide customers with trained and knowledgeable software
professionals who are available locally to implement its systems as well as
provide ongoing service and technical support. Many of the Partners customize
the Company's products to fit individual business needs and develop software
applications that integrate with and extend the functionality of the
Company's products.
PROVIDE AWARD-WINNING SERVICE AND TECHNICAL SUPPORT. The Company
believes that prompt and effective service and technical support are
essential elements of a complete financial management software solution, and
dedicates significant resources to delivering timely, reliable and
cost-effective service to its customers and Partners. The Company has
received numerous industry awards for its customer and Partner service,
including the 1996 Positive Performer Grand National Award for excellence in
customer service from Inc. magazine and MCI Communications.
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MEET BROAD SPECTRUM OF MIDMARKET NEEDS. The Company's client/server
product lines, Dynamics C/S+ and Dynamics, are designed to meet the broad
spectrum of financial management needs of the Midmarket. Dynamics C/S+ is
designed for businesses in the Midmarket that have high volume processing
requirements, complex financial management needs and formal IT departments.
Dynamics is designed for Midmarket businesses that need a Windows
client/server solution that is cost-effective and flexible, but does not
require IT personnel dedicated to database administration. The Company's
customers can upgrade from Dynamics to Dynamics C/S+ as their businesses grow
and financial management software needs evolve.
ENABLE RAPID IMPLEMENTATION, EASE OF USE AND CUSTOMIZATION. The Company
has designed its software for rapid implementation. The Company's products,
which are based on the Windows-interface standard, are easy to learn and use.
The Company also offers a suite of tools that allow its customers and
Partners to easily modify and create windows and reports, to integrate
third-party solutions and to quickly write and seamlessly integrate custom
applications. In addition, customers and Partners can accomplish similar
customization using industry-standard, third-party tools, such as Microsoft
Visual Basic and Visual Basic for Applications, Crystal Reports and FRx
financial report writer.
IMPROVE INFORMATION ACCESS. The architecture and design of the Company's
client/server products allow customers to quickly and easily access real-time
information. Instead of having to print and analyze reports to locate data,
customers can use the extensive "drill down" capabilities of the products to
gain online access to information contained throughout the financial
management system. In addition, customers can easily transfer information
from the Company's client/server products to desktop applications, such as
Microsoft Word and Excel, for analysis and dissemination.
INTEGRATE AND LEVERAGE INTERNET TECHNOLOGIES. The Company's products
employ Internet technologies to facilitate financial reporting, analysis and
communication both within an organization and with its customers and
suppliers. In addition, Dynamics.Order, one of the Company's electronic
commerce solutions, allows customers of Midmarket businesses to place and
track orders over the Internet. The Company believes that enabling easy,
cost-effective and security-enhanced communication and information sharing
among employees as well as facilitating order placement with customers are
important elements of a Midmarket financial management system.
STRATEGY
The Company's strategy is to extend its position as a leading provider of
Microsoft Windows NT client/server financial management systems to the
Midmarket. The following are the key elements of the Company's strategy:
EXTEND TECHNOLOGY LEADERSHIP. The Company has a strong record of
technical innovation and leadership and intends to continue to invest in the
development of new technologies and products. The Company's client/server
product lines, Dynamics C/S+ and Dynamics, were among the first financial
management systems in the Midmarket to receive Microsoft Windows 95 (Dynamics
C/S+ and Dynamics) and Microsoft BackOffice (Dynamics C/S+) logo compliance
(recognition from Microsoft that they meet the development criteria for
Windows 95 as well as Microsoft BackOffice technologies, including Windows NT
and SQL Server). In addition, the Company's client/server products have
received industry awards, including an Editors' Choice Award from PC Magazine
and a Reviewers' Choice Award from Personal Computing Magazine in the United
Kingdom. The Company believes that
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its client/server architecture is well-suited for the ongoing integration of
new technologies. The Company maintains a research team dedicated to
assessing new and emerging technologies. In addition, the Company intends to
maintain its leadership in providing customization capabilities that are
essential to businesses in the Midmarket.
EXPAND AND STRENGTHEN PARTNER NETWORK. The Company believes that its
Partner network has been able to penetrate the Midmarket by providing
high-quality, cost-effective marketing, sales and service. Through its
channel development and recruiting efforts, as well as its training,
certification and performance recognition programs, the Company intends to
continue to expand and strengthen this network. For example, the Company
recently instituted a program, Center for Organizational Excellence (CORE),
which offers Partners increased training, service and support to help them
develop and expand their businesses. The program also provides product and
curricula offerings to colleges and universities designed to increase the
number of graduates familiar with the Company's products. The Company also
hosts a number of business and technology conferences each year, including
"Stampede," an annual three-day Partner conference in Fargo, where the
Company is headquartered, that had over 1,000 Partner participants in 1996.
CONTINUE AWARD-WINNING SERVICE AND TECHNICAL SUPPORT. The Company
believes that prompt and effective service and technical support are
essential elements of a complete financial management software system and are
vital to maintaining customer and Partner satisfaction. The Company has
received numerous industry awards for its customer and Partner service, and
continues to invest in its support infrastructure. For example, the Company
is expanding its existing Internet-based technical support to customers and
Partners. The Company believes that its initiatives will further increase the
timeliness and effectiveness of its service and technical support.
SUPPORT DOS-BASED PRODUCTS AND MIGRATE CUSTOMERS TO CLIENT/SERVER. The
Company intends to continue to support customers who use its DOS-based
product, Great Plains Accounting, and to offer specialized pricing programs
and tools to migrate these customers to its client/server products. In
addition, the Company has developed and is marketing migration tools for
moving customers from competitors' DOS-based accounting systems to its
client/server financial management systems.
EXPAND GLOBAL PRODUCT OFFERING AND INFRASTRUCTURE. The Company currently
sells its products through international Partners and subsidiaries located in
the United Kingdom and Australasia to markets in the following geographic
regions: Western and Eastern Europe, Australasia, Southern Africa, the Middle
East and Southeast Asia. The Company's client/server products have been sold
in approximately 50 countries. The Company intends to expand its global
infrastructure by entering into additional international distribution
agreements, acquiring certain existing distributors and pursuing the
acquisition of related software products or companies.
MAINTAIN GREAT PLAINS SOFTWARE VALUES. Great Plains Software is deeply
committed to developing and sustaining long-term relationships with its
Partners, customers, employees and suppliers. The Company has been built on a
Mission Statement and a set of Shared Values that express this commitment.
The Company believes that a continued commitment to its Mission Statement and
these values results in higher employee, customer and Partner satisfaction.
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Great Plains Software Mission Statement
To improve the life and business success of Partners and Customers by
providing superior financial management software, services and tools.
Great Plains Software Shared Values
We must:
1. Foster a close relationship with our Partners and Customers that will
result in a better understanding of what they are experiencing;
2. Encourage innovation, independent action, team spirit and personal
growth in all employees;
3. Ensure that everything we do reflects exceptional levels of quality;
and
4. Demonstrate high integrity in all business relationships.
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TECHNOLOGY
The Company's products leverage key Microsoft technologies and are based
on the following strategies:
32-BIT OPTIMIZATION FOR WINDOWS NT AND WINDOWS 95. The Company's
client/server products are 32-bit applications optimized for Windows NT and
Windows 95, and are among the few financial management systems that can be
integrated with Visual Basic for Applications, which the Company has licensed
from Microsoft. In addition, as 32-bit applications, the Company's
client/server products are among the few financial management systems that
support Windows NT on both the desktop and the server, which maximizes the
performance and fault tolerance capabilities of Windows NT.
MICROSOFT SQL SERVER OPTIMIZATION. Dynamics C/S+ is optimized for the
latest releases of Microsoft SQL Server and includes stored procedures to
enhance distributed processing, overall performance and data integrity. The
Company's implementation of Microsoft SQL Server and Windows NT also enhances
data accessibility and system scalability.
NATIVE WINDOWS NT AND WINDOWS 95 IMPLEMENTATION. The Company's
client/server products are designed to take full advantage of Windows NT and
Windows 95 capabilities, unlike "screen scraper" products that have a
graphical interface grafted onto DOS-based or legacy software systems. The
Company believes that its design philosophy has resulted in products that are
easier to use and more intuitive because they adhere closely to the same
interface standards as Windows desktop applications. Moreover, as native
Windows applications, the Company's client/server products require less
memory and enable more efficient multi-tasking than screen-scraper products.
COMPONENTIZED FUNCTIONALITY. The business rules, or financial logic, of
the Company's products have been designed and developed into "logic
components." This "componentization" or "object orientation" of the product
allows the Company to use software code multiple times within a product and
from product to product, increasing the speed with which new applications and
product extensions
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can be developed. The componentized architecture of the Company's products
also allows Company and third-party applications to share a common user
interface thereby creating a seamless and easy to use environment for
customers. Moreover, the Company makes certain components available to ISV
Partners, which facilitates their ability to integrate third party
applications into the Company's client/server products.
MULTI-TIER CLIENT/SERVER ARCHITECTURE. The multi-tier client/server
architecture of the Company's products enhances the processing flexibility
and efficiency of its products by allowing processing to occur on the desktop
computer, the application server or the database server. In addition, this
architecture enhances scalability and deployment capabilities over wide area
networks and the Internet.
INTERNET INTEGRATION. The Company has deployed and is continuing to
develop Internet products to extend the availability of information from
financial management systems to employees across the business and key
customers and suppliers. The Company's client/server products take advantage
of leading Internet technologies, including Microsoft Internet Explorer,
Netscape Navigator, Microsoft Internet Information Server, FrontPage, ActiveX
and Java.
PRODUCTS
The Company's client/server product lines, Dynamics C/S+ and Dynamics,
consist of a suite of financial and distribution applications and a suite of
customization and development tools. The Company also offers a DOS- and
Macintosh-based product, Great Plains Accounting.
DYNAMICS C/S+
First released in July 1994, Dynamics C/S+ is the Company's client/server
financial management system for Midmarket businesses that have high volume
processing requirements, complex financial management needs and formal IT
departments. These businesses require the distributed processing and
increased throughput delivered by Windows NT, Microsoft SQL Server and the
multi-tier architecture of the Company's products. Dynamics C/S+ has received
several industry awards and was one of the first client/server financial
management systems to receive Microsoft Windows 95 and BackOffice logo
compliance.
DYNAMICS
First released in February 1993, Dynamics is the Company's client/server
financial management system for Midmarket businesses that need a Windows
client/server solution that is flexible and cost-effective, but does not
require IT personnel dedicated to database administration. Dynamics is built
on the same foundation as Dynamics C/S+ and leverages leading Microsoft
technologies, including Microsoft Windows 95, Windows NT and Visual Basic.
Dynamics has received several industry awards and was one of the first
client/server financial management applications to receive Windows 95 logo
compliance.
CLIENT/SERVER PRODUCT FUNCTIONALITY
The Company's client/server product lines, Dynamics C/S+ and Dynamics,
consist of a suite of financial and distribution applications and a suite of
development and customization tools. These suites, which are offered across
both product lines, address similar business needs yet provide features and
technologies specifically designed for the distinct requirements of Dynamics
C/S+ and Dynamics customers.
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The financial management solution offered with both client/server
products automate the critical financial and distribution functions of
Midmarket businesses. These applications can be grouped into two categories:
FINANCIAL APPLICATIONS deliver such essential functionality as general
ledger, accounts receivable, accounts payable, invoicing and payroll. In
addition, one of the Company's Internet applications, Dynamics.View,
provides employees across a business with access to financial information
via a Web browser.
DISTRIBUTION APPLICATIONS provide inventory management, sales order
processing and purchase order processing. In addition, Dynamics.Order, the
Company's electronic commerce application, allows customers of Midmarket
businesses to place and track orders over the Internet.
The Company's suite of development and customization tools, DynamicTools,
allows customers and Partners to customize and extend the functionality of
Dynamics C/S+ and Dynamics. Key tools in the DynamicTools suite are
Dexterity, Modifier, Visual Basic for Applications, Report Writer, Continuum
for Visual Basic and NetTools. Dexterity enables customers and third party
developers to create applications that seamlessly integrate with, and have
the same look and feel as, the Company's client/server applications. Modifier
is used to customize windows and cursor navigation. The Company's
implementation of Visual Basic for Applications, under license from
Microsoft, allows the Company's client/server products to be integrated with
customer-specific or industry-standard applications or easily customized to
fit specific customer needs. Report Writer allows for the creation and
modification of reports. Continuum for Visual Basic facilitates integration
between the Company's client/server products and Microsoft Visual Basic
applications through the use of wizards (online instruction guides) and
point-and-click operations. NetTools facilitates the integration of the
Company's client/server products with leading Internet technologies.
GREAT PLAINS ACCOUNTING
The Company's Great Plains Accounting product is available for DOS and
Macintosh operating systems in LAN and single user environments. Great Plains
Accounting includes a suite of financial applications that provides customers
with a broad range of features and functions. The Company's most recent
version of Great Plains Accounting, Version 9.0, released in February 1997,
is marketed primarily to existing Great Plains Accounting customers. The
Company is actively promoting the migration of its Great Plains Accounting
customers to its client/server products. The Company's revenues from its
Great Plains Accounting product have been declining, and the Company expects
that these revenues will continue to decline in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Revenues."
SALES AND MARKETING
SALES. The Company sells, implements and supports its products
exclusively through its Partner network consisting of VARs, specialized
software consultants, ISVs, systems integrators and Big Six and other
accounting firms. The Company's Partners are independent organizations that
perform some or all of the following functions: sales and marketing; systems
implementation and integration; software development and customization; and
ongoing consulting, training, service and technical support. In many
instances, a Partner's primary source of income is derived from selling,
implementing and supporting the Company's products.
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The Company believes that its Partners have a significant influence over
product choices by customers and that its relationships with its Partners are
an essential element in its marketing, sales and implementation efforts.
Through its Partner network, the Company is able to provide customers with
trained and knowledgeable software professionals who are available locally to
implement its systems as well as provide ongoing service and support. Many of
the Company's Partners customize the Company's systems to fit individual
business needs and develop industry-specific software applications that
integrate with and extend the functionality of the Company's products.
The Company actively recruits Partners through channel development groups
and has specialized strategies aimed at recruiting and supporting ISVs and
accounting firms. Partners are required to undergo training and certification
procedures before being authorized to sell and implement the Company's
products and must maintain certain standards and sales volumes to retain such
authorization.
The Company has subsidiaries located in the United Kingdom and
Australasia. The Company also intends to acquire a distribution subsidiary
in Singapore during the first half of fiscal 1998. In addition, the Company
has established cooperative relationships with several international Partners
to further the international distribution of its products, which involves
localizing and translating its products, locating and training qualified
VARs, marketing its products and providing ongoing customer service and
technical support. International Partners typically pay localization and
translation costs for the Company's software in exchange for exclusive
distribution rights, while the Company retains ownership of the localized
version of the software. The Company and its international distributors have
developed localized language versions of its client/server products,
including Arabic, Polish, Russian, German and Portuguese, with a Spanish
version expected to be released in fiscal 1998. In addition, the Company has
developed localized versions for the United Kingdom, Australia, New Zealand,
South Africa and French-speaking Canada. The Company's product architecture
is designed to facilitate the translation, localization and maintenance of
multilingual, multinational versions.
The Company has recently entered into distribution arrangements in
Western and Eastern Europe, Southern Africa, the Middle East and Southeast
Asia. The Company's international business may be affected by such factors
as local economic and market conditions, political and economic instability,
greater difficulty in administering operations, difficulties in enforcing
intellectual property and contractual rights, difficulties in tailoring the
Company's software products to fit local accounting principles, rules,
regulations, language, tax codes and customs, fluctuations in currency
exchange rates and the need for compliance with a wide variety of foreign and
United States export regulations.
MARKETING. The Company is focused on building market awareness and
acceptance of the Company and its products as well as on generating qualified
customer and Partner leads. Customer leads are pursued by Partners with
assistance from the Company's sales personnel.
The Company has a comprehensive marketing strategy with several key
components: image and awareness building, direct marketing to both
prospective and existing customers, a strong Web presence, broad-scale events
with strategic partners and local marketing with Partners. The Company's
corporate image strategy includes national advertising in key financial,
business and technology publications as well as Web-based advertising. The
Company's direct marketing includes ongoing direct mail efforts to existing
and prospective customers. For prospective customers, the Company also offers
seminars and self-qualifying tools to assist them in selecting client/server
financial management systems. Seminars are offered in conjunction with
Partners in their local or industry-specific markets. The Company's Web-based
marketing is designed to generate new leads for the Company. The Company
increases product awareness by sponsoring large scale events and seminars for
prospective
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customers with key industry partners, such as Microsoft, Digital and IBM.
Such events have included satellite product launch events and
video-teleconference-based technical seminars. Finally, the Company's
marketing strategy is designed to take advantage of the Company's Partner
network by including cooperative marketing programs designed for Partners'
local markets.
SEASONALITY
The Company's business has experienced and may continue to experience
seasonality. In recent years, the Company has recognized a greater
percentage of its revenue and operating income in its fourth fiscal quarter
than in any of the first three fiscal quarters due to a number of factors,
including the timing of product releases and the Company's sales incentive
programs. Moreover, due to generally diminished business activity in the
summer quarter, and to the Company's fiscal year-end sales incentive
programs, the Company has historically recognized less revenue and operating
income in its first fiscal quarter than in the other quarters.
CUSTOMERS
The Company's client/server products offer functionality and scalability
to suit a wide range of Midmarket businesses, from fast-growing
entrepreneurial businesses to divisions of large enterprises. In addition,
the Company's client/server products, implemented alone or with an
industry-specific third party application, have been purchased by companies
in a wide variety of industry types, such as:
Advertising Healthcare Non-Profit
Broadcasting Hospitality Professional Sports
Computer Software Information Services Publishing
Construction Insurance and Financial Services Retail
Distribution Internet Software and Services Telecommunications
Education Manufacturing Transportation
CUSTOMER AND PARTNER SERVICE
The Company believes that prompt and effective service and technical
support is an important component of a complete financial management system
and is critical to the long-term satisfaction of its customers and Partners.
The Company has received numerous awards for its Partner and customer
service, including the 1996 Positive Performer Grand National Award for
excellence in customer service from Inc. magazine and MCI Communications.
The Company was one of the first personal computer software providers to
introduce fee-based support plans and guaranteed telephone response times.
The Company also maintains profiles and detailed call histories on each of
its customers and Partners. These profiles enable support personnel at the
Company to respond more effectively to service inquiries, allow the Company
to better forecast which customers are likely to purchase new products or
upgraded versions of existing products and assist the Company in developing
new applications and features that accurately address the needs of the
marketplace.
The Company provides service and technical support through a service
organization consisting of 127 employees as of May 31, 1997. The Company
provides a variety of training, technical support and service programs for
customers which supplement the primary support provided by Partners. The
Company offers video, teleconference and classroom training as well as
technical support through a toll-free number, its Website and onsite
consultations. Telephone support calls are handled by professional support
personnel and have various guaranteed response times, depending on the type of
-10-
<PAGE>
support plan purchased. Response times as short as 30 minutes are offered. In
addition to its technical support programs, customers are offered software
maintenance programs for an annual fee. These programs provide customers with
product upgrades and online information and assistance. The Company also
offers comprehensive training and product support to its Partners to ensure
that they provide the necessary levels of technical support and assistance to
customers. Finally, the Company offers its Partners a variety of consulting
resources for resale to customers, including strategic implementation
planning, project management and product customization.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has made substantial investments in
research and development. During the fiscal years 1995, 1996, and 1997,
software development expenses were approximately $9.3 million, $8.9 million,
and $9.7 million respectively. As of May 31, 1997, the Company had 160
employees engaged in research and development.
The Company's research and development efforts employ a standard
development process to guide software development through stages of product
concept, market requirements analysis, product definition, design
specification, coding, testing and release. These efforts are also focused on
identifying, developing and integrating leading technologies into its
products to better meet customer needs.
The Company's software products are designed for Microsoft technologies,
including Windows NT, Windows 95 and SQL Server. In addition, the Company's
products utilize other Microsoft technologies, including Internet Information
Server, FrontPage, Visual Basic and Visual Basic for Applications.
Accordingly, the Company's strategy will require that the Company's products
and technology be compatible with new developments in Microsoft's technology.
PRODUCTION
The principal physical components of the Company's software products are
computer media and manuals. The Company prepares master software disks,
manuals and packaging materials which are then duplicated by the Company and
third party vendors. To date, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products or
material returns due to product defects.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
The Company regards certain features of its internal operations, software
and documentation as its intellectual property. The Company relies on a
combination of contract, copyright, trademark and trade secret laws, a
mandatory software registration mechanism and other measures to protect its
intellectual property. The Company has no patents. The Company believes that,
because of the rapid pace of technological change in the computer software
industry, trade secret and copyright protection are less significant than
factors such as the knowledge, ability and experience of the Company's
employees, frequent product enhancements and the timeliness and quality of
support services. It is the Company's policy to file for protection of its
basic trademarks and service marks in countries in which the Company sells
its products either directly or through its international Partners and in
countries in which protection is advisable. Despite these measures there can
be no assurance that the Company will be able to fully protect its
intellectual property.
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<PAGE>
The Company provides its products to customers on a "right-to-use" basis
under non-exclusive licenses, which generally are nontransferable and have a
perpetual term. The Company typically licenses its products solely for the
customer's internal operations.
COMPETITION
The market for the Company's products is highly competitive and rapidly
changing. The Company's primary market consists of businesses in the
Midmarket. The Company's current and prospective competitors offer a variety
of solutions for this market. The Company experiences significant competition
and expects substantial additional competition from established and emerging
software companies that offer products similar to the Company's products and
target the same customers as the Company. The Company believes it competes on
the basis of (i) product features, functionality, performance and price, (ii)
the capacity and capabilities of Partners, (iii) the quality of customer and
Partner service and technical support, (iv) sales and marketing efforts, (v)
new product and technology introductions, and (vi) company image and
stability. The Company believes it competes effectively on each of these
factors.
In North America, the Company faces a number of competitors in the
Midmarket. Outside North America, the Company also faces competition from a
number of competitors, several of which have significant shares in their home
markets. In addition, the Company competes for Midmarket business with
companies primarily targeting the Enterprise Market; several of these
competitors, which principally sell UNIX-based systems, offer or have
announced their intention to deliver Windows NT solutions. The Company
believes that the products from these competitors are neither designed nor
priced to meet the needs of the Midmarket, and that the Company competes
effectively against them in the Midmarket. The Company's products also face
competition from providers of industry-specific applications as well as
indirect competition from in-house, custom-developed financial management
applications.
Certain of the Company's competitors have substantially greater
financial, marketing or technical resources than the Company. There can be no
assurance that other companies have not developed or marketed or will not
develop or market products that are superior to those of the Company, that
are offered at substantially lower prices than those of the Company, or that
have or will achieve greater market acceptance than those of the Company. In
addition, there can be no assurance that alternative methods of delivering
financial management systems will not provide increased competition.
EMPLOYEES
As of May 31, 1997, the Company had a total of 561 full time equivalent
employees ("FTEs"), including 327 FTEs in sales, marketing, technical support
and consulting services, 160 FTEs in research and development and 74 FTEs in
administration. None of the Company's employees are represented by a labor
union. Management believes that its relations with the Company's employees
are good.
The Company believes that its continued success will depend in large part
upon its ability to attract and retain highly-skilled technical, managerial,
sales and marketing personnel. The loss of services of one or more of the
Company's key employees could have a materially adverse effect on the
Company's business, operating results and financial condition. The Company
intends to hire a significant number of additional sales, service and
technical personnel in fiscal 1998. Competition for the hiring of such
personnel in the software industry is intense, and the Company from time to
time experiences difficulty in locating candidates with appropriate
qualifications, particularly within the desired geographic location. It is
widely believed that the technology sector is at or over a state of full
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<PAGE>
employment. There can be no assurance that the Company will be successful in
attracting and retaining the personnel it requires to develop, market and
support new or existing software. The growth in the Company's customer base
and expansion of its product lines and supported platforms have placed, and
are expected to continue to place, a significant strain on the Company's
management and operations, including its service and development
organizations.
Any failure to implement and improve the Company's operational, control,
reporting, and management systems or to retain, expand, train, motivate or
manage employees could have a materially adverse effect on the Company's
business, operating results and financial condition.
FORWARD-LOOKING STATEMENTS
The above Business section and other parts of the Form 10-K Report
contain forward-looking statements that involve risk and uncertainties. The
Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those contained above in this
Item 1, he Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 and Exhibit 99.1 to the Form 10-K Report.
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and positions and a
brief biography of each individual are as follows:
Name Age Position
- ---- --- --------
Douglas J. Burgum. . . . . . 41 Chairman of the Board, President and
Chief Executive Officer
Raymond A. August. . . . . . 35 Chief Technology Officer and Group
Vice President, Dynamics C/S+
Terri F. Zimmerman . . . . . 34 Chief Financial Officer and Group Vice
President, Finance and Operations
Michael J. Olsen . . . . . . 47 Group Vice President, Corporate
Communications
Steven K. Sydness. . . . . . 42 Group Vice President, Dynamics
Jodi A. Uecker-Rust. . . . . . 35 Group Vice President, Heritage Products
Brian R. Carey . . . . . . . 39 Vice President, Business Development
Michael A. Slette. . . . . . 40 Vice President, Human Resources and
Legal Affairs
DOUGLAS J. BURGUM has served as President of the Company since March
1984, Chief Executive Officer since September 1991 and Chairman of the Board
since January 1996. Mr. Burgum was an early investor in the Company, and he
initially served as Vice President and a director from March 1983 to March
1984. Before joining the Company, Mr. Burgum was a management consultant in
the Chicago office of McKinsey & Company, Inc. Mr. Burgum holds a B.U.S. from
North Dakota State University and an M.B.A. from the Stanford University
Graduate School of Business.
RAYMOND A. AUGUST has served as Chief Technology Officer and Group Vice
President, Dynamics C/S+ since June 1996. Previously, he served as Chief
Technology Officer and Vice President of Product Strategy from June 1995 to
June 1996 and Vice President of Product Development from June 1993 to June
1995. Prior to joining the Company in October 1992, Mr. August was a Senior
Manager in the Management Consulting Service Practice of Price Waterhouse LLP
in New Jersey and New York. He holds a B.S. in Accounting and Computer
Science from the University of South Carolina. Mr. August is a Certified
Public Accountant.
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<PAGE>
TERRI F. ZIMMERMAN has served as Chief Financial Officer since February
1997 and Group Vice President, Finance and Operations since June 1996.
Previously, she held the position of Vice President of Finance and Operations
from June 1995 to June 1996. Ms. Zimmerman joined the Company as Director of
Finance in September 1994. She was previously employed by Deloitte & Touche
LLP in Minneapolis as a Senior Manager. Ms. Zimmerman holds a B.A. in
Business Administration from the University of North Dakota. Ms. Zimmerman is
a Certified Public Accountant.
MICHAEL J. OLSEN has served as Group Vice President, Corporate
Communications, since June 1996. Mr. Olsen served as Vice President of
Corporate Communications from September 1995 to June 1996. From 1994 to 1995,
Mr. Olsen was Senior Vice President of Himle Horner, Inc., a
Minneapolis-based public relations agency. From 1987 to 1994, he was Vice
President of Corporate Communications for National Car Rental System, an
international car rental company. Prior to such time, he served in various
Senior Public Affairs positions in Washington, D.C. Mr. Olsen holds a B.A. in
Speech and Drama from North Dakota State University.
STEVEN K. SYDNESS has served as Group Vice President, Dynamics since June
1996. Mr. Sydness served as Vice President of Business Development from June
1995 to June 1996, Vice President of Sales from June 1994 to June 1995 and
Vice President of Strategic Planning from June 1993 to June 1994. From
February to November of 1992, Mr. Sydness took a leave of absence from the
Company during which he was a candidate for the United States Senate. Prior
to joining Great Plains Software in January 1987, he was employed by Dr.
Henry Kissinger Associates and the management consulting firm McKinsey &
Company, Inc. in their New York and Tokyo offices. Mr. Sydness holds a B.A.
from Principia College and an M.B.A. from Harvard Business School.
JODI A. UECKER-RUST has served as Group Vice President, Heritage Products
since June 1996. Ms. Uecker-Rust was Vice President of Employee Services from
June 1995 to June 1996, Vice President of Operations, and later Vice
President of Operations and Administration from July 1993 to June 1995 and
Director of Operations from October 1990 to July 1993. Ms. Uecker-Rust joined
the Company in 1984 after being employed by Honeywell Inc. in Minneapolis.
She holds a B.S. in Industrial Engineering from North Dakota State University.
BRIAN R. CAREY has served as Vice President of Business Development since
July 1996. Mr. Carey was Vice President of Product Development from June 1995
to June 1996. He was General Manager and later Vice President and General
Manager of the Small Business Systems Unit of the Company from August 1992 to
June 1995. Mr. Carey joined the Company in June 1989. Before such time, he
was employed by First Interstate Bancorp, where he was Senior Vice President
and Manager of the Retail Banking Division. Previously, Mr. Carey was
employed by Xerox Corporation in Minneapolis as a Sales Executive. He holds a
B.S. in Marketing from Moorhead State University.
MICHAEL A. SLETTE has served as Vice President of Human Resources and
Legal Affairs since June 1996. Mr. Slette was Vice President of Business
Development and Legal Affairs from June 1995 to June 1996 and Vice President
of Finance from June 1988 to June 1995. Mr. Slette joined the Company in 1982
and, prior to such time, was employed by the Minneapolis-based accounting
firm Adrian S. Helgeson & Co. He holds a B.A. in Business Administration and
Accounting from Concordia College. Mr. Slette is a Certified Public
Accountant.
ITEM 2. PROPERTIES
The Company's principal administrative, marketing, production and product
development facilities consist of an aggregate of approximately 75,000 square
feet at two locations in Fargo, North Dakota. The Company occupies these
sites under lease agreements that expire at various times through
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<PAGE>
June 1998. Total rent expense was approximately $894,000, $871,000, and
$866,000 during fiscal 1995, 1996 and 1997, respectively. The Company is
currently planning to consolidate its two locations into an expanded facility
that is expected to be occupied by the Company in fiscal 1999. The Company
expects to enter into a sale and leaseback transaction with respect to the
new facility, which will be located on land to be acquired by the Company
from a director of the Company. The Company expects that the new facility
will result in increased rent expenses.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation arising out of
operations in the normal course of business. In the opinion of management,
the Company currently is not a party to any legal proceedings the adverse
outcome of which, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the Company's results of
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq National Market
under the symbol GPSI on June 20, 1997. Prior to such date, there was no
established public trading market for the Company's Common Stock.
The following table sets forth, for the period indicated, the high and
low sales prices of the Company's Common Stock, as quoted on the Nasdaq
National Market.
High Low
---- ---
First Quarter Fiscal 1998
(from June 20, 1997 through August 11, 1997) $35.50 $23.75
On August 11, 1997, the closing sales price per share of the Company's
Common Stock as quoted on the Nasdaq National Market was $25.00. On August
11, 1997, there were approximately 252 holders of record of the Company's
Common Stock, representing approximately 2,466 shareholder accounts.
The trading price of the Company's Common Stock may be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new software products by the
Company or its competitors, as well as other events or factors. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market prices of many high
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
The Company has never declared or paid cash dividends on its capital
stock. The Company currently intends to retain future earnings for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 below and the Consolidated Financial
Statements and the Notes thereto included in Item 8 below.
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- -------- -------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
License. . . . . . . . . . . . $35,919 $27,078 $25,050 $ 19,165 $20,790
Service. . . . . . . . . . . . 21,201 15,193 12,847 9,949 8,080
------- ------- ------- -------- -------
Total revenues . . . . . . . . 57,120 42,271 37,897 29,114 28,870
Cost of revenues:
License. . . . . . . . . . . . 6,362 4,913 4,439 4,997 3,101
Service. . . . . . . . . . . . 8,620 5,980 5,622 5,479 3,868
------- ------- ------- -------- -------
Total cost of revenues . . . . 14,622 10,893 10,061 10,476 6,969
------- ------- ------- -------- -------
Gross profit . . . . . . . . 42,498 31,378 27,836 18,638 21,901
Operating expenses:
Sales and marketing. . . . . . 21,935 14,477 14,013 14,331 11,582
Research and development . . . 9,678 8,876 9,308 10,676 6,021
General and
administrative . . . . . . . 5,592 4,763 3,886 3,607 2,969
------- ------- ------- -------- -------
Total operating expenses . . . 37,205 28,116 27,207 28,614 20,572
------- ------- ------- -------- -------
Operating income
(loss) . . . . . . . . . . . . 5,293 3,262 629 (9,976) 1,329
Total other expenses (income). . (558) (100) 260 381 306
------- ------- ------- -------- -------
Income (loss) before
income taxes . . . . . . . . 5,851 3,362 369 (10,357) 1,023
Income tax provision
(benefit)(1) . . . . . . . . . 2,207 (4,099) 45 (27) 102
------- ------- ------- -------- -------
Income (loss) before
cumulative effect of
change in accounting
principle. . . . . . . . . . . 3,644 7,461 324 (10,330) 921
------- ------- ------- -------- -------
Cumulative effect of a
change in accounting
principle. . . . . . . . . . . -- -- (200) -- --
------- ------- ------- -------- -------
Net income (loss). . . . . . . $ 3,644 $ 7,461 $ 124 $(10,330) $ 921
------- ------- ------- -------- -------
------- ------- ------- -------- -------
Pro forma net income
per share(2) . . . . . . . . . $0.36
Pro forma weighted
average number of
shares and common
equivalent shares
outstanding(2) . . . . . . . . 10,003,349
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
May 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Assets:
Cash, cash equivalents and investments . . . . . . $ 16,243 $ 8,256 $ 2,892 $ 119 $ 1,351
Total assets . . . . . . . . . . . . . . . . . . . 33,214 24,361 15,327 8,845 13,407
Working capital. . . . . . . . . . . . . . . . . . . 6,658 1,012 (4,992) (15,400) (5,096)
Liabilities and stockholders' equity (deficit)
Deferred revenues. . . . . . . . . . . . . . . . . 10,448 9,018 8,027 6,897 4,952
Long-term debt and capital lease obligations,
less current portion . . . . . . . . . . . . . . -- 20 750 1,281 984
Mandatorily redeemable convertible
preferred stock. . . . . . . . . . . . . . . . . 28,698 11,502 8,300 -- --
Total stockholders' equity (deficit) . . . . . . . (16,277) (4,812) (9,066) (11,303) (1,011)
</TABLE>
- ------------
(1) Net income for the year ended May 31, 1996 includes an
income tax benefit of $4.1 million related to the reversal
of a valuation allowance. The reversal reflects the
recognition of net operating loss carryforwards and other
deferred tax assets and was a result of management's
analysis of the Company's current levels of earnings and
future outlook, which increased the likelihood of the
Company realizing its deferred tax assets. For subsequent
periods, the Company has provided for income taxes utilizing
federal and state statutory income tax rates. See Note 9 of
Notes to Consolidated Financial Statements.
(2) For an explanation of the determination of the
number of shares used in computing pro forma net
income per share, see Note 1 of Notes to
Consolidated Financial Statements.
ITEM 7. 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, and the other financial
information included elsewhere in the Form 10-K Report. This Discussion and
Analysis of Financial Condition and Results of Operations contains
descriptions of the Company's expectations regarding future trends affecting
its business. These forward-looking statements and other forward-looking
statements made elsewhere in this document are made in reliance upon safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
The following discussion sets forth certain factors the Company believes
could cause actual results to differ materially from those contemplated by
the forward looking statements. The Company undertakes no obligation to
update the information contained in this Item 7.
OVERVIEW
The Company is a leading provider of Microsoft Windows NT client/server
financial management software for mid-sized businesses. The Company's
award-winning products and services automate essential accounting functions
and enhance the strategic value of financial information. The Company's
products and services are sold and implemented exclusively by its extensive
network of Partners throughout the United States, Canada and select
international markets.
In 1982, the Company began selling Great Plains Accounting (the "heritage
product"), which is currently a DOS- and Macintosh-based financial management
software system for local area network (LAN) personal computers. In
anticipation of the general market shift to Windows and client/server
technologies, the Company began developing client/server financial management
software systems,
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<PAGE>
and in February 1993, released Dynamics. Dynamics is the Company's
client/server product for the Midmarket businesses that need a Windows
client/server system that is flexible and cost-effective, but does not
require information technology (IT) personnel dedicated to database
administration. In July 1994, the Company released Dynamics C/S+, a Windows
client/server system for Midmarket businesses that have high volume
processing requirements, complex financial management needs and formal IT
departments.
The Company made significant investments in research and development in
the early 1990s to launch its Windows client/server products. In addition,
the Company has made a significant investment in building an experienced and
knowledgeable Partner distribution network to market, implement, support and
service its Dynamics C/S+ and Dynamics products (together, the "client/server
products"). Since the release of the client/server products, the Company's
principal source of revenues has shifted from the heritage product to the
client/server products. Client/server products accounted for 40.2%, 61.4% and
77.4% of the Company's total revenues for fiscal 1995, 1996 and 1997,
respectively.
The Company's revenues are derived from two principal sources: software
license fees ("license fees") and fees for maintenance, technical support,
training and consulting services (collectively, "service fees"). The Company
recognizes revenue in accordance with Statement of Position 91-1, Software
Revenue Recognition. See Note 1 of Notes to Consolidated Financial
Statements. License fee revenues are generally recognized upon shipment of
the related software product. Fees for the Company's maintenance and support
plans are recorded as deferred revenue when billed to the customer and
recognized ratably over the term of the maintenance and support agreement,
which is typically one year. Fees for the Company's training and consulting
services are recognized at the time the services are performed.
The Company's client/server customers are required to purchase a one-year
maintenance plan at the time the product is acquired. A majority of the
client/server customers renew the maintenance plan after the initial term.
Under the maintenance plan, the Company provides client/server customers with
product upgrades in addition to online assistance and information. The
Company's heritage product customers, on the other hand, are not required to
purchase a maintenance plan at the time the product is acquired. In addition,
the optional heritage product maintenance plan does not include significant
product upgrades. The Company has historically released significant upgrades
of its heritage product approximately every two years. Prior to fiscal 1996,
when heritage product revenues represented the principal source of the
Company's revenues, the release of a significant upgrade of the heritage
product had a positive impact on revenues in the quarters following release.
As a result of the shift to client/server products as the Company's principal
source of revenues, the Company expects to experience less fluctuation in
total revenues in the event significant upgrades of its heritage product are
released.
The Company currently sells its products outside the United States and
Canada through international Partners and subsidiaries located in the United
Kingdom and Australasia to markets in the following geographic regions:
Western and Eastern Europe, Australasia, Southern Africa, the Middle East and
Southeast Asia. The Company's client/server products have been sold in
approximately 50 countries.
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<PAGE>
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 statement of operations.
Year Ended May 31,
-----------------------------
1997 1996 1995
----- ----- ------
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
License . . . . . . . . . . . . . . 62.9% 64.1% 66.1%
Service . . . . . . . . . . . . . . 37.1 35.9 33.9
----- ----- -----
Total revenues . . . . . . . . . . 100.0 100.0 100.0
----- ----- -----
Cost of revenues:. . . . . . . . . . .
License . . . . . . . . . . . . . . 11.1 11.6 11.7
Service . . . . . . . . . . . . . . 14.5 14.2 14.9
----- ----- -----
Total cost of revenues . . . . . . 25.6 25.8 26.6
----- ----- -----
Gross margin . . . . . . . . . . . 74.4 74.2 73.4
----- ----- -----
Operating expenses:
Sales and marketing. . . . . . . . . 38.4 34.2 37.0
Research and development . . . . . . 16.9 21.0 24.5
General and administrative . . . . . 9.8 11.3 10.2
----- ----- -----
Total operating expenses . . . . . 65.1 66.5 71.7
----- ----- -----
Operating income . . . . . . . . . . . 9.3 7.7 1.7
Income tax provision (benefit) . . . . 3.9 (9.7) 0.1
Net income . . . . . . . . . . . . . . 6.4% 17.6% 0.3%
REVENUES
REVENUES. Revenues increased from $37.9 million in fiscal 1995 to $42.3
million in fiscal 1996, and to $57.1 million in fiscal 1997, representing
increases of 11.5% and 35.1%, respectively. The fiscal 1996 to fiscal 1997
increase in revenue was primarily due to increased demand for the Company's
client/server products and related service fees.
The following table sets forth for the periods indicated client/server
and heritage product revenues, each as a percentage of total revenues:
Year Ended May 31,
------------------------------
1997 1996 1995
----- ----- -----
Client/server product revenues . . . . 77.4% 61.4% 40.2%
Heritage product revenues. . . . . . . 22.6 38.6 59.8
Client/server product revenues, including license and service fees,
increased from $15.2 million in fiscal 1995 to $25.9 million in fiscal 1996
and to $44.2 million in fiscal 1997, representing increases of 70.4%, and
70.5% respectively.
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<PAGE>
The increase in client/server product revenues was offset, in part, by a
decrease in revenues from the Company's heritage product. Heritage product
revenues decreased from $22.7 million in fiscal 1995 to $16.4 million in
fiscal 1996, and to $12.9 million in fiscal 1997 representing decreases of
28.0% and 21.1%, respectively. The decrease in heritage product revenues was
primarily due to a decrease in demand for DOS- and Macintosh-based financial
management software, which reflects the broader market trend toward Windows
and client/server technologies.
The Company's international revenues increased from $4.1 million in
fiscal 1995 to $4.4 million in fiscal 1996, and to $8.6 million in fiscal
1997 representing 10.8%, 10.4% and 15.0% of total revenues, respectively.
These increases resulted from the addition of international distribution
arrangements in new markets as well as growth in existing markets.
LICENSE. Total license fee revenues increased from $25.1 million in
fiscal 1995 to $27.1 million in fiscal 1996, and to $35.9 million in fiscal
1997, representing increases of 8.1% and 32.7%, respectively. These
increases in total license fee revenues are largely attributable to increased
market acceptance of the Company's client/server products and a broader
client/server product offering. The Company added to its client/server
product offering with the release of Dynamics C/S+ in July 1994, the release
of a Microsoft SQL Server edition of Dynamics C/S+ in April 1996 and the
release of additional functionality and applications for the SQL Server
edition in November 1996. Moreover, since the release of the Company's
client/server products, the Company has increased its sales, marketing and
service capacity. These factors have led to both an increase in the number of
client/server software licenses and an increase in the average revenues
derived from individual client/server licenses.
The increase in client/server product license fee revenues was offset, in
part, by a decrease in heritage product license fee revenues. The decrease in
heritage product license fees is primarily a result of decreased demand for
DOS- and Macintosh-based financial management software. In addition, the
Company has historically released significant upgrades of its heritage
product approximately every two years, which had a positive impact on
heritage product license fee revenues in the quarters following release. A
significant upgrade of the heritage product was released in February 1997,
which the Company expects to market principally to the Company's installed
base of heritage product customers. Notwithstanding the positive impact on
revenues this release may have, the Company expects that overall heritage
product license fee revenues will continue to decline. In addition, the
Company also anticipates that fluctuations in heritage product license fee
revenues due to new releases will have a reduced impact on total license fee
revenues as heritage product license fee revenues become a smaller portion of
total license fee revenues.
SERVICE. Service revenues increased from $12.8 million in fiscal 1995 to
$15.2 million in fiscal 1996, and to $21.2 million in fiscal 1997,
representing increases of 18.3% and 39.5%, respectively. The increase in the
number of licenses for client/server products has resulted in increases in
service revenues. Service revenues as a percentage of total revenues were
33.9%, 35.9% and 37.1% for fiscal 1995, 1996 and 1997, respectively. The
increases in service revenues largely reflect increases in the installed base
of client/server customers and renewals of existing maintenance and support
contracts.
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
parties. Cost of license fees increased from $4.4 million in fiscal 1995 to
$4.9 million in fiscal 1996, and to $6.4 million in fiscal 1997, representing
17.7%, 18.1% and 17.7% of total license fee revenues in fiscal 1995, 1996 and
1997, respectively. The Company's client/server products generate higher
license fees per individual license than its heritage product, and, as a
result, the cost of license fees as a percentage of total product license fee
revenues is lower for
-20-
<PAGE>
the Company's client/server products than for its heritage product. The
increases in cost of license fees in fiscal 1996 and fiscal 1997 are
primarily attributable to the overall growth in license fee revenues and an
increase in royalties paid to third party vendors. The increase in royalties
is primarily due to a new royalty arrangement entered into in the second half
of fiscal 1996 with a third party for a report writer application that is
bundled with the Company's client/server products. The Company anticipates
that cost of license fees will increase in dollar amount as license fee
revenues increase, but remain relatively constant as a percentage of total
license fee revenues. However, in the event that the Company enters into
additional royalty arrangements in the future, cost of license fees as a
percentage of total license fee revenues may increase.
COST OF SERVICES. Cost of services consists of the costs of providing
telephone support, training and consulting services to customers and
Partners. Cost of services increased from $5.6 million in fiscal 1995 to $6.0
million in fiscal 1996, and to $8.3 million in fiscal 1997, representing
43.8%, 39.4% and 39.0% of total service revenues, respectively. The increase
in cost of services is primarily due to the expansion of the Company's
customer and Partner service resources. Cost of services as a percentage of
service revenues has decreased as a result of improved efficiency in
operations. The Company anticipates that cost of services will increase in
dollar amount as service revenues increase, but will remain relatively
constant 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 were $14.0 million in fiscal 1995, $14.5 million in fiscal 1996 and
$21.9 million in fiscal 1997, representing 37.0%, 34.2% and 38.4% of total
revenues, respectively. The decrease in sales and marketing expenses as a
percentage of revenues from fiscal 1995 to fiscal 1996 reflects an increase
in sales and marketing productivity and a corresponding increase in revenues
derived from the Company's client/server products. Since the beginning of
fiscal 1997, however, the Company has increased spending on sales and
marketing to promote the Microsoft SQL Server edition of its Dynamics C/S+
product. The increase in sales and marketing expenses and sales and marketing
expenses as a percentage of total revenues reflects the hiring of additional
sales and marketing personnel, expanded promotional activities and increased
commissions relating to the increase in client/server product revenues. In
addition, the Company has increased sales and marketing expenditures related
to the operation of a United Kingdom subsidiary that was acquired in February
1996.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation of development personnel and depreciation of
equipment. The Company has made significant investments in research and
development with total expenses of $9.3 million in fiscal 1995, $8.9 million
in fiscal 1996 and $9.7 million in fiscal 1997, representing 24.5%, 21.0% and
16.9% of total revenues, respectively. These research and development
expenses were primarily related to the Company's efforts to release
additional applications for its client/server products including the
Microsoft SQL Server edition of Dynamics C/S+. More recently, the Company has
devoted resources to the development of Internet-enabled applications. The
Company anticipates that it will continue to devote substantial resources to
its research and development efforts and that research and development
expenses will increase in dollar amount in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive, financial, human resource and information
services personnel as well as outside professional fees. General and
administrative expenses increased from $3.9 million in fiscal 1995, to $4.8
million in fiscal 1996, and to $5.6 million in fiscal 1997, representing
10.2%, 11.3% and 9.8% of total
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<PAGE>
revenues, respectively. These increases in dollar amounts were primarily due
to increased staffing and related expenses necessary to manage and support
the expansion of the Company's operations. 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 public company.
PROVISION (BENEFIT) FOR INCOME TAXES. Provision (benefit) for income
taxes was $45,000, $(4,099,000) and $2,207,000 in fiscal 1995, 1996 and 1997,
respectively. In fiscal 1995, the Company's provision included the federal
alternative minimum tax and state income taxes. Prior to May 1996, the
Company determined that the realization of the net operating loss
carryforward and other deferred tax assets did not meet the recognition
criteria under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," and, accordingly, a valuation allowance was
established to reserve the net operating loss carryforward and other deferred
tax assets. For fiscal 1996, the Company recorded a $4.1 million tax benefit
related to the reversal of the valuation allowance. This reversal was based
on management's analysis of current levels of earnings and its future
outlook, which increased the likelihood of the Company realizing its deferred
tax assets; thus the valuation allowance was no longer deemed necessary. In
fiscal 1997, the Company recorded an income tax provision consistent with
federal and, in part, state statutory income tax rates. The Company expects
that the income tax provision will increase to reflect the full state
statutory tax rates. See Note 9 of Notes to Consolidated Financial Statements.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited consolidated financial
information for each of the four quarters in the Company's fiscal years ended
May 31, 1996 and May 31, 1997. In management's opinion, this unaudited
quarterly information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
the information for the quarters presented, when read in conjunction with the
audited consolidated financial statements and notes thereto included
elsewhere in this Form 10-K Report. The Company believes that
quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------
August 31, November 30, February 29, May 31, August 31, November 30, February 28, May 31,
1995 1995 1996 1996 1996 1996 1997 1997
--------- ----------- ----------- --------- --------- ------------ ------------ -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License. . . . . . . . . . . . 5,535 $ 6,314 $ 5,943 $ 9,286 $ 6,655 $ 8,478 $ 9,224 $11,562
Service. . . . . . . . . . . . 3,348 3,954 4,114 3,777 4,413 5,208 5,475 6,106
--------- ------- ------- ------- ------- -------- ------- -------
Total revenues . . . . . . . 8,883 10,268 10,057 13,063 11,068 13,686 14,699 17,668
Cost of revenues:
License. . . . . . . . . . . . 805 1,004 1,209 1,895 1,170 1,550 1,832 1,810
Service. . . . . . . . . . . . 1,330 1,509 1,522 619 1,636 2,012 2,050 2,562
--------- ------- ------- ------- ------- -------- ------- -------
Total cost of revenues . . . 2,135 2,513 2,731 3,514 2,806 3,562 3,882 4,372
--------- ------- ------- ------- ------- -------- ------- -------
Gross profit . . . . . . . . 6,748 7,755 7,326 9,549 8,262 10,124 10,817 13,296
Operating expenses:
Sales and marketing. . . . . . 2,867 3,786 3,473 4,351 4,054 5,660 5,702 6,519
Research and development . . . 1,998 2,260 2,093 2,525 2,172 2,318 2,414 2,775
General and administrative . . 994 1,184 1,218 1,367 1,224 1,209 1,540 1,619
--------- ------- ------- ------- ------- -------- ------- -------
Total operating expenses . . 5,859 7,230 6,784 8,243 7,450 9,187 9,656 10,913
Operating income . . . . . . . . 889 525 542 1,306 812 937 1,161 2,383
Other income . . . . . . . . . . 3 37 8 52 83 119 103 252
--------- ------- ------- ------- ------- -------- ------- -------
Income before income taxes . . 892 562 550 1,358 895 1,056 1,264 2,635
Income tax provision (benefit) . 3 -- -- (4,102) 344 406 470 987
--------- ------- ------- ------- ------- -------- ------- -------
Net income . . . . . . . . . . . $ 889 $ 562 $ 550 $ 5,460 $ 551 $ 650 $ 794 $ 1,648
--------- ------- ------- ------- ------- -------- ------- -------
--------- ------- ------- ------- ------- -------- ------- -------
</TABLE>
-22-
<PAGE>
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter
to quarter in the future. Such fluctuations may result in volatility in the
price of the Company's Common Stock. The Company establishes its expenditure
levels based on its expectations as to future revenue, and, if revenue levels
are below expectations, expenses can be disproportionately high. As a result,
a drop in near term demand for the Company's products could significantly
affect both revenues and profits in any quarter. In the future, the Company's
operating results may fluctuate for this reason or as a result of a number of
other factors, including increased expenses, timing of product releases,
increased competition, variations in the mix of sales, announcements of new
products by the Company or its competitors and capital spending patterns of
the Company's customers.
The Company's business has experienced and may continue to experience
seasonality. In recent years, the Company has recognized a greater percentage
of its revenue and operating income in its fourth fiscal quarter than in any
of the first three quarters due to a number of factors, including the timing
of product releases and the Company's sales incentive programs. Moreover, due
to fiscal year-end sales incentive programs, the Company has historically
recognized less revenue and operating income in its first fiscal quarter than
in the other quarters.
As a result of these factors, there can be no assurance that the Company
will be able to maintain profitability on a quarterly basis.
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 (used) by operating activities was ($2.4) million, $8.3
million and $10.3 million for fiscal 1995, 1996 and 1997, respectively. The
cash used by operations in fiscal 1995 was primarily a result of an increase
in accounts receivable and a decrease in accounts payable, offset, in part,
by improved profitability. The increase in cash provided by operations in
fiscal 1996 was primarily due to increased profitability of the Company's
operations and an increase in deferred revenues. The increase in cash
provided by operations in fiscal 1997 resulted primarily from increased
profitability of the Company's operations.
The Company's investing activities used cash of $1.2 million, $2.1
million and $7.1 million in fiscal 1995, 1996 and 1997, respectively. The
principal use of cash in investing activities was for capital expenditures
related to the acquisition of computer equipment required to support
expansion of the Company's operations. For the fiscal year ended May 31,
1997, the Company purchased $4.9 million of government obligations in order
to increase the rate of return earned from cash resources.
The Company's financing activities provided (used) cash of $6.3 million,
($.8) million and $.7 million during fiscal 1995, 1996 and 1997,
respectively. In fiscal 1995, the cash provided by financing activities
included $8.1 million received in connection with the sale of Series B
Preferred Stock and $2.0 million from the sale of Common Stock to employees,
partially offset by $3.8 million of payments on the Company's outstanding
line of credit and notes payable. For fiscal 1996 financing activities used
cash primarily for payments on capital lease obligations and notes payable.
For fiscal 1997, cash of $.7 million was provided from financing activities
which consisted primarily of proceeds received from the exercise of stock
options, offset, in part, by payments on capital lease obligations and notes
payable.
-23-
<PAGE>
The Company's sources of liquidity at May 31, 1997, consisted principally
of cash, cash equivalents and investments of $16.2 million. The Company also
has a $5.0 million revolving line of credit facility with a bank. The line of
credit expires in November 1997 and borrowings made thereunder are subject to
certain covenants. No amounts were outstanding under the line of credit at
May 31, 1997. See Note 6 to Consolidated Financial Statements.
Subsequent to May 31, 1997, the Company completed an initial public
offering which generated more than $50 million of proceeds to the Company.
The Company believes that the proceeds of the initial public offering, cash
generated from operations and amounts available under the line of credit will
be sufficient to fund its operations for the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-24-
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Great Plains Software, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' deficit and of cash flows
present fairly, in all material respects, the financial position of Great
Plains Software, Inc. and its subsidiary at May 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended May 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
July 8, 1997
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<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
May 31,
-------------------------------------
Historical Pro Forma Historical
1997 1997 1996
---- ---- ----
ASSETS (Unaudited)
(Note 1)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 12,101 $ 8,256
Investments 4,142
Accounts receivable, net 5,452 5,196
Inventories 567 455
Prepaid expenses and other assets 1,164 606
Deferred income tax assets 3,279 4,150
-------- -------
Total current assets 26,705 18,663
Property and equipment, net 5,821 5,081
Goodwill, net 438 555
Other assets 250 62
-------- -------
Total assets $ 33,214 $24,361
-------- -------
-------- -------
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,788 $ 1,827
Accrued expenses 4,698 4,799
Salaries and wages payable 510 415
Commissions payable 2,603 765
Deferred revenue 10,448 9,018
Current portion of long-term debt and capital
lease obligations 827
-------- -------
Total current liabilities 20,047 17,651
Deferred income tax liabilities 746
Long-term debt and capital lease obligations,
less current portion 20
-------- -------
Total liabilities 20,793 17,671
Commitments and contingencies (Note 8)
Mandatorily redeemable convertible preferred
stock: 10,000,000 authorized preferred shares,
Series B, at redemption value of $21.33 and
$8.55, 1,345,220 shares issued and outstanding;
pro forma - none 28,698 11,502
Stockholders' equity (deficit):
Convertible preferred stock: 10,000,000
authorized preferred shares; Series A, par
value $.01, 225,000 shares issued and
outstanding; pro forma - none outstanding 199 199
Common stock, par value $.01 per share:
40,000,000 shares authorized, 100,000,000
shares authorized pro forma; issued and
outstanding - 8,080,335, 9,927,962 pro
forma and 7,359,765, respectively 81 $ 99 74
Additional paid-in capital (13,843) 15,036 1,273
Accumulated deficit (2,714) (2,714) (6,358)
-------- ------- -------
Total stockholders' equity (deficit) (16,277) $12,421 (4,812)
-------- ------- -------
-------
Total liabilities and stockholders' equity (deficit) $ 33,214 $24,361
-------- -------
-------- -------
</TABLE>
See accompanying notes to the consolidated financial statements.
-26-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
May 31,
---------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues:
License $ 35,919 $27,078 $25,050
Service 21,201 15,193 12,847
----------- ------- -------
57,120 42,271 37,897
----------- ------- -------
Cost of revenues:
License 6,362 4,913 4,439
Service 8,260 5,980 5,622
----------- ------- -------
Gross profit 42,498 31,378 27,836
----------- ------- -------
Operating expenses:
Sales and marketing 21,935 14,477 14,013
Research and development 9,678 8,876 9,308
General and administrative 5,592 4,763 3,886
----------- ------- -------
Total operating expenses 37,205 28,116 27,207
----------- ------- -------
Operating income 5,293 3,262 629
Interest expense 98 197 291
Related party interest expense 36
Other (income) expense, net (656) (297) (67)
----------- ------- -------
Income before income taxes 5,851 3,362 369
Income tax provision (benefit) 2,207 (4,099) 45
----------- ------- -------
Income before cumulative effect of change
in accounting principle 3,644 7,461 324
Cumulative effect of change in accounting principle (200)
----------- ------- -------
Net income $ 3,644 $ 7,461 $ 124
----------- ------- -------
----------- ------- -------
Unaudited pro forma net income per share $ 0.36
-----------
-----------
Shares used in computing unaudited pro forma
net income per share 10,003,349
-----------
-----------
</TABLE>
See accompanying notes to the consolidated financial statements.
-27-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Dollars in thousands)
<TABLE>
<CAPTION>
Series A Preferred Common Stock Additional Accumulated
------------------ ------------
Shares Amount Shares Amount Paid-in Capital Deficit Total
------ ------ ------ ------ --------------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1994 6,789,904 $68 $ 2,572 $(13,943) $(11,303)
Exercise of stock options 77,333 1 136 137
Repurchase and retirement
of common stock (7,832) (32) (32)
Sale of common stock, less
offering costs of $50 487,147 5 1,961 1,966
Sale of Series A preferred
stock net of issuance costs
of $26 225,000 $199 199
Increase to carrying value
of mandatorily redeemable
preferred stock (157) (157)
Net income 124 124
------- ---- --------- --- -------- -------- --------
Balance May 31, 1995 225,000 199 7,346,552 74 4,480 (13,819) (9,066)
Exercise of stock options 32,013 73 73
Repurchase and retirement
of common stock (18,800) (78) (78)
Increase to carrying value
of mandatorily redeemable
preferred stock (3,202) (3,202)
Net income 7,461 7,461
------- ---- --------- --- -------- -------- --------
Balance May 31, 1996 225,000 199 7,359,765 74 1,273 (6,358) (4,812)
Exercise of stock options 732,447 7 1,544 1,551
Net repurchases of common
stock (11,877) (54) (54)
Increase in carrying value
of mandatorily redeemable
preferred stock (17,196) (17,196)
Tax benefit from stockholder
transaction 590 590
Net income 3,644 3,644
------- ---- --------- --- -------- -------- --------
Balance May 31, 1997 225,000 $199 8,080,335 $81 $(13,843) $ (2,714) $(16,277)
------- ---- --------- --- -------- -------- --------
------- ---- --------- --- -------- -------- --------
</TABLE>
See accompanying notes to the consolidated financial statements.
-28-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
May 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,644 $ 7,461 $ 124
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Cumulative effect of change in accounting principle 200
Depreciation and amortization 2,155 1,921 1,861
Deferred income taxes 2,207 (4,150)
Changes in operating assets and liabilities:
Accounts receivable (256) 526 (3,666)
Inventories (113) 342 10
Prepaid expenses and other assets (557) 335 (540)
Income tax receivable 86
Accounts payable and accrued expenses (141) 499 (1,975)
Salaries, wages and commissions payable 1,933 388 336
Deferred revenue 1,430 990 1,130
Income taxes payable (45) 45
------- ------- --------
Net cash provided (used) by operating activities 10,302 8,267 (2,389)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment and other assets (2,966) (1,990) (1,154)
Purchase of foreign subsidiary, net of cash (123)
Purchase of investments (4,892)
Proceeds from investments 750
------- ------- --------
Net cash used by investment activities (7,108) (2,113) (1,154)
------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable and long-term debt 132
Principal payments on notes payable and long-term debt (599) (197) (1,561)
Payments on line of credit (2,250)
Principal payments on capital lease obligations (247) (588) (417)
Repurchases of common stock (54) (78) (32)
Proceeds from the sale of preferred stock 8,342
Proceeds from issuance of common stock 1,551 73 2,102
------- ------- --------
Net cash (used) provided by financing activities 651 (790) 6,316
------- ------- --------
Increase in cash 3,845 5,364 2,773
Cash and cash equivalents at beginning of period 8,256 2,892 119
Cash and cash equivalents at end of period $12,101 $ 8,256 $ 2,892
------- ------- --------
------- ------- --------
Schedule of noncash investing and financing activities:
Property and equipment acquired under capital
lease agreements $ 19 $ 305
Interest paid $ 68 $ 197 $ 330
Tax benefit from stockholder transaction $ 590
</TABLE>
See accompanying notes to the consolidated financial statements.
-29-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 - BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS INFORMATION
Great Plains Software, Inc. (the "Company") is a leading provider of
Microsoft Windows NT client/server financial management software for
mid-sized businesses. Its products and services automate essential
accounting functions and enhance the strategic value of financial
information. The Company's products and services are sold and implemented
exclusively by its network of independent sales and support organizations
throughout the United States, Canada and select international markets.
SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY AND FOREIGN CURRENCY TRANSLATIONS
The consolidated financial statements include the accounts of the Company and
its subsidiary in the United Kingdom. All significant intercompany accounts
and transactions have been eliminated in consolidation. The functional
currency of the subsidiary has been determined to be the U.S. dollar.
Therefore, all transaction gains and losses resulting from fluctuations in
currency exchange rates are included in operating results.
INTERNATIONAL SALES
International sales represent 15.0%, 10.4% and 10.8% of total revenues for
the years ended May 31, 1997, 1996 and 1995, respectively. All international
sales are denominated in US dollars.
USE OF ESTIMATES
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments with
original maturities of three months or less and which are readily convertible
to cash.
INVESTMENT SECURITIES
Investments in debt securities that are not cash equivalents and marketable
equity securities have been designated as available for sale. Those
securities, which consist of U.S. Treasury Bills, are reported at fair value,
with net unrealized gains and losses included in equity. However, as of May
31, 1997, investments were carried at cost because unrealized gains were
immaterial. The maturities of the debt securities range from 1997 to 1999.
-30-
<PAGE>
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash, cash equivalents, investments and accounts
receivable. The Company grants credit to customers in the ordinary course of
business. The Company invests its cash with high quality financial
institutions. No single customer or region represents a significant
concentration of credit risk.
CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted Statement of Accounting Standards No. 112 requiring
accrual accounting for the expected cost of providing certain disability
benefits. The cumulative effect of this change in accounting principle at
the beginning of fiscal 1995 was $200 and is shown in the consolidated
statement of operations.
REVENUE RECOGNITION AND DEFERRED REVENUE
Software license fees are recognized upon shipment less a reserve for
estimated future returns. Revenue from support and maintenance service
contracts are recorded as deferred revenue when billed and recognized ratably
over the contract period. Other service revenue such as training and
consulting services are recognized as the services are performed. Prior to
1996 the Company provided credits or coupons in association with the sale of
one product as an inducement for customers to purchase future products or
releases. Revenue equal to the coupon value was deferred until used or
expired. The Company, in its discretion may allow customers to return
products for a short period of time following the sale. The Company provides
an allowance for these anticipated returns based upon its historical
experience of returns for similar products. These amounts are recorded as an
offset to license revenues.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, investments, short-term
receivables and payables for which their current carrying amounts approximate
fair market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major improvements are
capitalized while maintenance and repairs are expensed currently.
Depreciation is computed using the straight-line method based on the
estimated useful lives of 3 to 5 years for computer equipment and 5 to 10
years for furniture, fixtures and equipment. Leasehold improvements are
amortized over the lesser of the terms of the related leases or estimated
useful life. Purchased computer software, which is used internally, is
amortized over a five year period using the straight-line method.
Amortization expense is included with depreciation expense in the statement
of cash flows.
INCOME TAXES
Income taxes are accounted for under the liability method in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes." Under the liability method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities reduced by
valuation allowances as necessary.
-31-
<PAGE>
ADVERTISING
The Company accrues, at the time of sales, an estimated liability for
qualified advertising expenses incurred by value added resellers and
independent sales support organizations for which the Company has agreed to
reimburse such parties. Advertising costs are expensed as incurred.
Advertising expense was approximately $1,990, $1,487 and $2,061 for the years
ended May 31, 1997, 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT
Expenditures for software development costs and research are expensed as
incurred. Such costs are required to be expensed until the point that
technological feasibility is established. The period between achieving
technological feasibility and the general availability of such software has
been short. Consequently costs otherwise capitalizable after technological
feasibility is achieved are generally expensed because they are insignificant
to both total assets and pre-tax results of operations.
UNAUDITED PRO FORMA INFORMATION
Unaudited pro forma stockholder's equity information gives effect to the
conversion of all shares of the Company's Preferred Stock into an aggregate
of 1,847,627 shares of common stock upon the closing of the initial public
offering.
Unaudited pro forma net income per share is based on the unaudited pro forma
weighted average number of shares of common stock and common equivalent
shares outstanding for the period. The unaudited pro forma weighted average
number of shares assumes the conversion of the Company's Series A Convertible
Preferred Stock and the Series B Mandatorily Redeemable Convertible Preferred
Stock into 1,847,627 shares of common stock effective June 1, 1996. Because
of the significant impact of the assumed conversion on the Company's capital
structure and earnings per share, historical earnings per share have been
excluded from the financial statements as they are not considered meaningful.
INVENTORIES
Inventories consisting of media, training materials and packaging supplies
are stated at lower of cost or market, with cost determined on a first-in,
first-out ("FIFO") basis.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective June 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The adoption of this standard had no material effect on the Company's
financial statements. In October 1995, SFAS No. 123, "Accounting for
Stock-Based Compensation," was issued. Management has adopted this standard
effective June 1, 1996 by means of disclosure of the pro forma effect of the
compensation components of stock-based compensation in Note 10.
-32-
<PAGE>
In March 1997, the Financial Accounting Standards Board issued Statement 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. Management believes the adoption of SFAS No. 128 will not have a
material effect on the financial statements.
NOTE 2 - BUSINESS COMBINATION
During fiscal 1996, the Company acquired a division of Kewill Systems PLC, a
United Kingdom software sales and service provider, for $634 consisting of
cash and the assumption of certain liabilities in a transaction accounted for
as a purchase. Accordingly, the results of operations of this division have
been consolidated with those of the Company from its date of acquisition.
The net assets acquired were recorded at their estimated fair market values
with the excess allocated to goodwill, as follows:
Software rights acquired $ 50
Goodwill 584
-----
$ 634
-----
-----
The goodwill associated with this transaction is being amortized on a
straight line basis over five years. The recoverability of unamortized
goodwill is assessed on an ongoing basis by comparing anticipated
undiscounted cash flows to net book value. Goodwill is presented net of
accumulated amortization of $146 and $29 at May 31, 1997 and 1996,
respectively. Pro forma operating results are not presented as the effect is
immaterial.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances, consist of the following:
May 31,
-------------------------
1997 1996
---- ----
Gross accounts receivable $ 8,059 $ 7,076
Less allowance for doubtful accounts (991) (667)
Less allowance for returns (1,616) (1,213)
------- -------
$ 5,452 $ 5,196
------- -------
------- -------
-38-
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
May 31,
--------------------
1997 1996
---- ----
Furniture and fixtures $ 1,702 $ 1,444
Computers and equipment 12,564 10,722
Leasehold improvements 369 331
Purchased software for internal use 1,444 1,094
-------- -------
16,079 13,591
Less accumulated depreciation and amortization (10,258) (8,510)
-------- -------
$ 5,821 $ 5,081
-------- -------
-------- -------
Depreciation expense for the years ended May 31, 1997, 1996, 1995, was
$2,038, $1,892 and $1,513, respectively.
The Company leased equipment under long-term lease agreements which are
classified as capital leases. All capital leases were paid in full as of May
31, 1997. Property and equipment includes the following leased property at
May 31, 1996:
Property and equipment $ 350
Less accumulated amortization (149)
-----
$ 201
-----
-----
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
May 31,
-----------------
1997 1996
---- ----
Accrued vacation payable $1,058 $ 904
Coop advertising accrual 1,058 856
Other 2,582 3,039
------ ------
$4,698 $4,799
------ ------
------ ------
-34-
<PAGE>
NOTE 6 - LINE OF CREDIT
The Company has a $5,000 revolving line of credit facility with a bank which
provides for interest at prime. Substantially all of the Company's assets
are pledged as collateral on the line of credit which expires on November 15,
1997 and is subject to certain covenants, all of which had been complied with
at May 31, 1997. There were no amounts outstanding at May 31, 1997 or 1996.
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
All long-term debt and capital lease obligations have been paid in
full as of May 31, 1997. Long-term debt and capital lease
obligations at May 31, 1996 consist of the following:
Various capital lease obligations with interest rates varying
from 4.8% to 11.9%, at May 31, 1996, maturities through
October 1997, repayable in monthly installments and secured
by the related equipment. $247
Term loans bearing interest ranging from 8.0% to 9.5%, at
May 31, 1996, repayable in monthly installments ranging
from $5 to $6 plus accrued interest through December 1996,
secured by various assets and guaranteed by certain stockholders. 83
Note payable to a third party bearing interest at 1.25% over the
prime rate (9.5% as of May 31, 1996). The principal amount is
due in four quarterly installments to commence upon demand. 500
Other notes 17
----
847
Current portion of long-term debt 827
$ 20
----
----
NOTE 8 - COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
Rental expense incurred for operating leases of office facilities and office
equipment was approximately $866 in 1997, $871 in 1996 and $894 in 1995. The
rent expense for the years ended May 31 1997, 1996 and 1995 include $53, $71
and $71, respectively, for computer equipment leased from stockholders.
Future minimum rental payments as of May 31, 1997 for noncancelable operating
leases with initial or remaining terms in excess of one year are payable as
follows: fiscal 1998 - $866, fiscal 1999 - $772, fiscal 2000 - $92 and
fiscal 2001 - $18.
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of business. Management believes that none of this litigation
will have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
-35-
<PAGE>
NOTE 9 - INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as
follows:
May 31,
-----------------
1997 1996
---- ----
Deferred tax liabilities:
Tax depreciation in excess of financial reporting $ 746 $ 470
------ ------
Total deferred tax liabilities 746 470
------ ------
Deferred tax assets:
Accounts receivable allowances 909 687
Deferred revenue 617 1,342
Coop advertising accrual 392 317
Sales tax accrual 127 211
Net operating loss carryforward 950
Research and development credit carryforward 651 573
Alternative minimum tax credit carryforward 133 160
Investment tax credit carryforward 63
Vacation and other 450 317
------ ------
Total deferred tax assets 3,279 4,620
------ ------
Total net deferred income taxes $2,533 $4,150
------ ------
------ ------
The provision (benefit) for income taxes is summarized as follows:
May 31,
--------------------------------
1997 1996 1995
---- ---- ----
Current income taxes:
Federal $1,502 $ 595 $ 1,261
State 38 48 110
Net operating loss carryforward (950) (592) (1,326)
------ ------- -------
590 51 45
Deferred income taxes:
Federal 1,471 1,233 157
State 146 109 20
------ ------- -------
1,617 1,342 177
Increase (decrease) in valuation allowance (5,492) (177)
------ ------- -------
$2,207 $(4,099) $ 45
------ ------- -------
------ ------- -------
-36-
<PAGE>
The differences between the expected tax provision based on the federal
income tax statutory rate and the actual provision for the years presented
are summarized as follows:
May 31,
------------------------------
1997 1996 1995
---- ---- ----
Expected tax provision at statutory rate $1,981 $ 1,143 $ 126
State income taxes, net of federal tax effect 175 111 12
Change in valuation allowance (5,492) (177)
Other 51 139 84
------ ------- -----
Total $2,207 $(4,099) $ 45
------ ------- -----
------ ------- -----
At May 31, 1995, the Company had determined that the realization of the net
operating loss carryforward and other deferred tax assets did not meet the
recognition criteria under SFAS No. 109, and, accordingly, a valuation
allowance was established for the tax benefit of these items. The valuation
allowance was reversed during 1996 due primarily to the utilization of a
portion of the net operating loss carryforwards, and on the basis of an
analysis performed by management which considered all available evidence,
both positive and negative, as well as the weight and importance of such
evidence. As a result of this analysis, management believed it was more
likely than not that these tax benefits would be realized in the future, and,
accordingly, reversed the remaining valuation allowance in the fourth quarter
of fiscal 1996.
NOTE 10 - INCENTIVE STOCK OPTION PLAN
At May 31, 1997, 2,066,667 shares of common stock had been reserved for
issuance or grant under the Employee Incentive Stock Option plan. The
options are granted to employees at 100% of the fair market value on the date
of grant. The fair market value, rate of exercisability and expiration dates
of the options granted are determined by the Board of Directors at the time
of grant. Options generally vest ratably over five years from date of grant
and expire six years after grant.
-37-
<PAGE>
The following summary of outstanding options and shares reserved under the
Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Option Expiration Average
Options Price Range Date Exercise Price
Outstanding Per Share (Fiscal Year) Per Share
----------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Outstanding at May 31, 1994 973,547 $1.70 to $3.41 1995 - 1999 $2.11
Granted 187,433 $4.16 $4.16
Exercised (77,333) $1.70 to $2.55 $1.77
Canceled/expired (20,000) $1.96 to $4.16 $3.08
---------
Outstanding at May 31, 1995 1,063,647 $1.96 to $4.16 1997 - 2001 $2.48
Granted 619,333 $5.20 to $6.41 $5.42
Exercised (32,013) $1.96 to $2.57 $2.30
Canceled/expired (321,320) $2.57 to $5.20 $4.89
---------
Outstanding at May 31, 1996 1,329,647 $1.96 to $6.41 1997 - 2002 $3.27
Granted 361,000 $6.41 to $7.71 $6.65
Exercised (732,447) $1.96 to $6.41 $2.12
Canceled/expired (88,667) $4.16 to $6.41 $5.36
---------
Outstanding at May 31, 1997 869,533 $2.42 to $7.71 1997 - 2003 $5.43
---------
---------
</TABLE>
As of May 31, 1997 there were currently exercisable options outstanding
covering 165,669 shares, exercisable at prices ranging from $2.42 to $6.41
per share.
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, the Company has elected to
continue following the guidance of APB 25 for measurement and recognition of
stock-based transactions with employees and adopt the disclosure only
provisions of SFAS No. 123. As a result, no compensation expense has been
recognized for the awards made in the form of stock options. If the Company
had elected to recognize compensation costs for stock-based compensation
plans based on the fair value at the grant dates for awards under those plans
consistent with the method prescribed by SFAS No. 123, net income and
earnings per share would have been changed to the pro forma amounts indicated
below:
Year Ended
May 31,
-----------------
1997 1996
---- ----
Net income:
As reported $3,644 $7,461
Pro forma $3,508 $7,397
Earnings per share:
Pro forma as reported $ 0.36
Pro forma as adjusted $ 0.35
-38-
<PAGE>
The fair value of the stock options used to compute pro forma net income and
earnings per share disclosures is the present value at grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996: no dividend yield, expected volatility of
53.8% and 44.5%, respectively, risk-free interest rate of 6.46%, and an
expected holding period of six years.
The following table summarizes the status of the Company's stock options
outstanding as of May 31, 1997:
<TABLE>
<CAPTION>
Stock Options Stock Options
Outstanding Exercisable
------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Price Exercise Price
Exercise Price Shares Life Per Share Shares Per Share
- -------------- ------ ---- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
$2.42 to $3.63 127,867 1.7 yrs $2.72 80,133 $2.65
$3.64 to $5.46 317,066 4.0 yrs $4.94 67,536 $4.87
$5.47 to $8.21 424,600 5.2 yrs $6.62 18,000 $6.41
------- -------
Total 869,533 165,669
------- -------
------- -------
</TABLE>
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution 401(k) Profit Sharing Plan
covering substantially all employees. The Company currently matches 25% of
each participant's contribution up to 8% of their annual salary and can make
discretionary profit sharing contributions to the plan. The Company's
contribution to this plan for the years ended May 31, 1997, 1996 and 1995,
was approximately $310, $251 and $230, respectively.
NOTE 12 - RELATED PARTY TRANSACTIONS
CONSULTING SERVICES
A director of the Company was paid $39, $37 and $54 during 1997, 1996, and
1995 (plus reimbursement of expenses), respectively, for consulting services
rendered to the Company pursuant to consulting agreements with the Company.
STOCK OPTION GRANT BY PRINCIPAL STOCKHOLDERS
In April 1995, certain principal common stockholders granted to an
officer/director of the Company an option to purchase 711,156 shares of
common stock directly from them at an exercise price of $4.16 per share (fair
market value at date of grant). Certain events, including a decision by the
Board of Directors to initiate an initial public offering, accelerate the
vesting period. These options were exercised on January 2, 1997.
-39-
<PAGE>
NOTE 13 - STOCKHOLDERS' EQUITY
The Board of Directors met on February 20, 1997, and took the following
actions in connection with the initial public offering of shares of the
Company's common stock: (a) authorized a four-for-three stock split of the
issued and outstanding common stock of the Company, in the form of a stock
dividend, to be effective immediately prior to the public offering (all
references to common stock amounts, shares, per share data and preferred
stock conversion rights included in the financial statements and these notes
have been adjusted to give retroactive effect to the stock split); (b)
authorized an increase in capital stock to 100,000,000 shares of $0.01 par
value common stock and 30,000,000 shares of $0.01 par value preferred stock
to be both contingent and effective upon stockholder approval and the first
closing of the initial public offering of common stock; (c) waived, subject
to the closing of an initial public offering, the Company's contractual
rights to repurchase shares of common stock from employees of the Company;
and (d) authorized certain incentive stock plans contingent and effective
upon stockholder approval and consummation of the initial public offering.
These incentive plans include (i) the 1997 Employee Stock Purchase Plan
providing for the purchase of common stock at a discounted price, (ii) the
1997 Stock Incentive Plan providing for the grant of stock-based compensation
to eligible persons and (iii) the Outside Directors' Stock Option Plan
providing for the grant of nonqualified stock options to nonemployee
directors of the Company.
SERIES A CONVERTIBLE PREFERRED STOCK
In June 1994, the Company sold 225,000 shares of $.01 par value Series A
Convertible Preferred Stock (the "Series A Preferred Stock") at $1.00 per
share to an officer/director who may convert these shares into 54,000 shares
of common stock at any time after June 15, 1997, at a rate of .24 shares of
common stock for each share of Series A Preferred Stock. The Series A
Preferred Stock were converted to shares of common stock upon completion of
the Initial Public Offering on June 19, 1997.
SERIES B MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Also in June 1994, the Company entered into an agreement for the sale of
Series B Mandatorily Redeemable Convertible Preferred Stock (the "Series B
Preferred Stock") and warrants. On June 24, 1994, at the first closing, the
Company sold 888,576 of $.01 par value Series B Preferred Stock and
contingent warrants to purchase an additional 752,234 shares of Series B
Preferred Stock for an aggregate purchase price of $6,300. On September 22,
1994, the second closing, the Company sold an additional 282,088 shares of
Series B Preferred Stock for an aggregate purchase price of $2,000.
During May 1995, the Company and the holders of the Series B Preferred Stock
agreed to reprice the previously issued shares of Series B Preferred Stock
and eliminate the warrants. The Company issued an additional 174,556 shares
of Series B Preferred Stock in return for the cancellation of the warrants.
Thus, the total Series B Preferred Stock sold in the three transactions was
1,345,220 shares at an average price of $6.17.
Holders of the Series B Preferred Stock converted their shares into 1,793,627
shares of common stock upon completion of the Initial Public Offering on June
19, 1997. Prior to the conversion to common stock, the Company carried this
Series B Preferred Stock at fair value which management considered to equal
$21.33 and $8.55 per share at May 31, 1997 and 1996, respectively. The
increase in carrying value of Series B Preferred Stock is reflected as a
reduction to Additional Paid-in Capital.
-40-
<PAGE>
NOTE 14 - SUBSEQUENT EVENT
In June 1997, the Company sold 3,450,000 shares of common stock at an initial
offering price of $16.00 per share. Total transaction 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 and other Board of Director resolutions, as
described in Note 13, became effective.
-41-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section under the heading Election of Directors" on pages 3 through
5 and the section entitled Section 16(a) Beneficial Ownership Reporting
Compliance" on page 12 of the Company's Proxy Statement dated August 20, 1997
( 1997 Proxy Statement") are incorporated herein by reference.
The information contained in Item 1 in Part I hereof under the heading
Executive Officers" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section under the heading Election of Directors" entitled
Compensation of Directors" on page 6 and the section entitled "Executive
Compensation" on pages 9 through 11 of the 1997 Proxy Statement are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" on pages 2 and 3 of the 1997 Proxy Statement are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" on pages 11 and 12 of the
1997 Proxy Statement are incorporated herein by reference.
-42-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) Financial Statements. The following financial statements of the
Company are included in Part II, Item 8, of this Annual Report on
Form 10-K.
Report of Independent Accountants
Consolidated Balance Sheets as of May 31, 1997 and 1996
Consolidated Statement of Income for the three years in
the period ended May 31, 1997
Consolidated Statement of Stockholder's Deficit for the
three years in the period ended May 31, 1997
Consolidated Statement of Cash Flows for the three
years in the period ended May 31, 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Report of Independent Accountants on the financial statement
schedule
Schedule II. Valuation and Qualifying Accounts
(3) EXHIBITS
3.1 Amended and Restated Articles of Incorporation, as
amended (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration
Statement on Form S-1 filed March 5, 1997 (SEC
File No. 333-22833))
3.2 Amended Bylaws (incorporated herein by reference
to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 filed March 5, 1997 (SEC
File No. 333-22833))
10.1 Lease Agreement, dated October 1, 1983, as amended,
between the Company and West Acres Office Park
(incorporated herein by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833))
10.2 Lease Agreement, dated April 20, 1994, between the
Company and Norwest Bank North Dakota, N.A.
(incorporated herein by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833))
10.3 Lease Agreement, dated May 2, 1994, as amended, between
the Company and Blue Cross Blue Shield of North Dakota
and Lincoln Mutual Life and Casualty Insurance Co.
(incorporated herein by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833))
10.4 1983 Incentive Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.4 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.5 1997 Stock Incentive Plan, including form of option
agreement (incorporated herein by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
-43-
<PAGE>
10.6 Outside Directors' Stock Option Plan (incorporated
herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 filed March 5, 1997
(SEC File No. 333-22833)) *
10.7 1997 Employee Stock Purchase Plan (incorporated herein
by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 filed March 5, 1997
(SEC File No. 333-22833)) *
10.8 Registration Rights Agreement, dated as of June 24,
1994, between the Company and the holders of
registerable securities named therein (incorporated
herein by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 filed March 5, 1997
(SEC File No. 333-22833))
10.9 Limited Liability Company Agreement for Great Plains
Software U.K., LLC, dated as of February 20, 1996,
between the Company and Douglas J. Burgum (incorporated
herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 filed March 5, 1997
(SEC File No. 333-22833))
10.10 Agreement between the Company and Terri F. Zimmerman
(incorporated herein by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.11 Agreement between the Company and Raymond F. Good
(incorporated herein by reference to Exhibit 10.11 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.12 Form of Nonemployee Director Stock Option Agreement
(incorporated herein by reference to Exhibit 10.12 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.13 Board of Directors' Resolutions amending 1997 Employee
Purchase Plan (incorporated herein by reference to
Exhibit 10.13 to the Company's Registration Statement
on Form S-1 filed March 5, 1997 (SEC File No. 333-22833)) *
11.1 Computation of Pro Forma Net Income Per Share
21.1 Subsidiary of the Company
23.1 Consent of Price Waterhouse LLP
24.1 Powers of Attorney
27.1 Financial Data Schedule
99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform
Act of 1995
- ---------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Form 10-K pursuant to Item 14(c) of the Form 10-K Report.
-44-
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 31, 1997.
(c) See Exhibit Index and Exhibits filed with this Report.
(d) See the Financial Statement Schedule included at the end of this Report.
-45-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: August 18, 1997 GREAT PLAINS SOFTWARE, INC.
By /s/ Douglas J. Burgum
----------------------------------
Douglas J. Burgum
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on the 18th day of August, 1997.
Signature Title
--------- -----
/s/ Douglas J. Burgum Chairman of the Board, President
- --------------------------- and Chief Executive Officer
Douglas J. Burgum (principal executive officer) and Director
/s/ Terri F. Zimmerman Chief Financial Officer and Group Vice
- --------------------------- President, Finance and Operations
Terri F. Zimmerman (principal financial and accounting officer)
* Director
- ---------------------------
Bradley J. Burgum
* Director
- ---------------------------
Frederick W. Burgum
* Director
- ---------------------------
William V. Campbell
Director
- ---------------------------
Raymond F. Good
Director
- ---------------------------
Sanjeev K. Mehra
* Director
- ---------------------------
J. A. Heidi Roizen
* Director
- ---------------------------
Joseph S. Tibbetts, Jr.
* By /s/ Douglas J. Burgum
----------------------
Douglas J. Burgum
Attorney-in-Fact
-46-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT
SCHEDULE
To the Board of Directors
of Great Plains Software, Inc.
Our audits of the consolidated financial statements referred to in our report
dated July 8, 1997 appearing in item 8 in Great Plains Software, Inc.'s
Annual Report on Form 10-K for the year ended May 31, 1997 also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, the Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
July 8, 1997
<PAGE>
Great Plains Software, Inc.
Schedule II -- Schedule of Valuation and Qualifying Accounts
(Amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Balance at
of Year Expenses Deductions End of Year
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended May 31,
1997 667 408 84 991
1996 255 529 117 667
1995 192 111 48 255
Allowance for Returns
Year Ended May 31,
1997 1,213 4,007 3,604 1,616
1996 1,096 3,349 3,232 1,213
1995 253 2,909 2,066 1,096
</TABLE>
<PAGE>
INDEX TO EXHIBITS TO ANNUAL REPORT ON FORM 10-K
OF GREAT PLAINS SOFTWARE, INC.
FOR THE FISCAL YEAR ENDED MAY 31, 1997
3.1 Amended and Restated Articles of Incorporation, as
amended (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration
Statement on Form S-1 filed March 5, 1997 (SEC
File No. 333-22833))
3.2 Amended Bylaws (incorporated herein by reference
to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 filed March 5, 1997 (SEC
File No. 333-22833))
10.1 Lease Agreement, dated October 1, 1983, as amended,
between the Company and West Acres Office Park
(incorporated herein by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833))
10.2 Lease Agreement, dated April 20, 1994, between the
Company and Norwest Bank North Dakota, N.A.
(incorporated herein by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833))
10.3 Lease Agreement, dated May 2, 1994, as amended, between
the Company and Blue Cross Blue Shield of North Dakota
and Lincoln Mutual Life and Casualty Insurance Co.
(incorporated herein by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833))
10.4 1983 Incentive Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.4 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.5 1997 Stock Incentive Plan, including form of option
agreement (incorporated herein by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.6 Outside Directors' Stock Option Plan (incorporated
herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 filed March 5, 1997
(SEC File No. 333-22833)) *
10.7 1997 Employee Stock Purchase Plan (incorporated herein
by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 filed March 5, 1997
(SEC File No. 333-22833)) *
10.8 Registration Rights Agreement, dated as of June 24,
1994, between the Company and the holders of
registerable securities named therein (incorporated
herein by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1 filed March 5, 1997
(SEC File No. 333-22833))
10.9 Limited Liability Company Agreement for Great Plains
Software U.K., LLC, dated as of February 20, 1996,
between the Company and Douglas J. Burgum (incorporated
herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 filed March 5, 1997
(SEC File No. 333-22833))
10.10 Agreement between the Company and Terri F. Zimmerman
(incorporated herein by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.11 Agreement between the Company and Raymond F. Good
(incorporated herein by reference to Exhibit 10.11 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.12 Form of Nonemployee Director Stock Option Agreement
(incorporated herein by reference to Exhibit 10.12 to
the Company's Registration Statement on Form S-1 filed
March 5, 1997 (SEC File No. 333-22833)) *
10.13 Board of Directors' Resolutions amending 1997 Employee
Purchase Plan (incorporated herein by reference to
Exhibit 10.13 to the Company's Registration Statement
on Form S-1 filed March 5, 1997 (SEC File No. 333-22833)) *
11.1 Computation of Pro Forma Net Income Per Share
21.1 Subsidiary of the Company
23.1 Consent of Price Waterhouse LLP
24.1 Powers of Attorney
27.1 Financial Data Schedule
99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform
Act of 1995
- ---------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Form 10-K pursuant to Item 14(c) of the Form 10-K Report.
<PAGE>
EXHIBIT 11.1
GREAT PLAINS SOFTWARE, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE (1)
<TABLE>
<CAPTION>
Primary EPS Fully Diluted EPS
Year ended May 31, Year ended May 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 7,629,460 7,352,820 7,629,460 7,352,820
Common Stock equivalents:
Assumed conversion of mandatorily
redeemable preferred stock 1,847,627 1,847,627 1,847,627 1,847,627
Stock option (2) 526,262 564,477 541,016 591,078
Pro forma weighted average common
and common equivalent shares
outstanding 10,003,349 9,764,924 10,018,103 9,791,525
Net income $ 3,644,000 $7,461,000 $ 3,644,000 $7,461,000
Unaudited pro forma net income per share $ 0.36 $ 0.76 $ 0.36 $ 0.76
</TABLE>
(1) Unaudited pro forma net income per share is based on the unaudited pro
forma weighted average number of shares of common stock and common
equivalent shares outstanding for the period. The unaudited pro forma
weighted average number of shares assumes the conversion of the Company's
Series A Convertible Preferred Stock and the Series B Mandatorily
Redeemable Convertible Preferred Stock into 1,847,627 shares of common
stock effective June 1, 1995. Because of the significant impact of the
assumed conversion on the Company's capital structure and earnings per
share, historical earnings per share have been excluded from the
financial statements as they are not considered meaningful.
(2) Effect of applying the treasury stock method to weighted average stock
option outstanding during the period.
<PAGE>
EXHIBIT 21.1
SUBSIDIARY OF THE COMPANY
Great Plains Software U.K., LLC
Great Plains Software Australasia PTY. LTD.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-30767) of our report dated July 8, 1997
appearing in Great Plains Software, Inc.'s Annual Report on Form 10-K for the
year ended May 31, 1997.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Minneapolis, Minnesota
August 18, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Douglas J. Burgum and Terri F.
Zimmerman (with full power to act alone), as his or her true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign an Annual Report on Form 10-K of Great Plains
Software, Inc., and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Douglas J. Burgum President, Chief Executive August 18, 1997
- ---------------------------- Officer and Chairman of the
Douglas J. Burgum Board
/s/ Terri F. Zimmerman Chief Financial Officer and August 18, 1997
- ---------------------------- Group Vice President, Finance
Terri F. Zimmerman and Operations
/s/ Bradley J. Burgum Director August 15, 1997
- ----------------------------
Bradley J. Burgum
/s/ Frederick W. Burgum Director August 14, 1997
- ----------------------------
Frederick W. Burgum
/s/ William V. Campbell Director August 18, 1997
- ----------------------------
William V. Campbell
Director
- ----------------------------
Raymond F. Good
Director
- ----------------------------
Sanjeev K. Mehra
/s/ J. A. Heidi Roizen Director August 18, 1997
- ----------------------------
J. A. Heidi Roizen
/s/ Joseph S. Tibbetts, Jr. Director August 18, 1997
- ----------------------------
Joseph S. Tibbetts, Jr.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ANNUAL REPORT ON FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 12,101
<SECURITIES> 4,142
<RECEIVABLES> 8,059
<ALLOWANCES> 2,607
<INVENTORY> 567
<CURRENT-ASSETS> 26,705
<PP&E> 16,079
<DEPRECIATION> 10,258
<TOTAL-ASSETS> 33,214
<CURRENT-LIABILITIES> 20,047
<BONDS> 0
28,698
199
<COMMON> 81
<OTHER-SE> (16,557)
<TOTAL-LIABILITY-AND-EQUITY> 33,214
<SALES> 35,919
<TOTAL-REVENUES> 57,120
<CGS> 6,362
<TOTAL-COSTS> 14,622
<OTHER-EXPENSES> 37,205
<LOSS-PROVISION> 408
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 5,851
<INCOME-TAX> 2,207
<INCOME-CONTINUING> 3,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,644
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
<PAGE>
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES
OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Great Plains Software, Inc. (the Company"), or persons acting on behalf
of the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time make,
in writing or orally, forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended). When used in conjunction with an
identified forward-looking statement, this Cautionary Statement is for the
purpose of qualifying for the safe harbor" provisions of such sections and
is intended to be a readily available written document that contains factors
which could cause results to differ materially from such forward-looking
statements. These factors are in addition to any other cautionary
statements, written or oral, which may be made or referred to in connection
with any such forward-looking statement.
The following matters, among others, may have a material adverse effect
on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this
Cautionary Statement in the context of a forward-looking statement or
statements shall be deemed to be a statement that any or more of the
following factors may cause actual results to differ materially from those in
such forward-looking statement or statements:
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
The Company's quarterly revenue and operating results have varied in the
past, and are likely to vary in the future. The Company generally operates
with little backlog, and most of its revenues in each quarter result from
orders booked in that quarter. The Company establishes its expenditure levels
based on its expectations as to future revenue, and, if revenue levels are
below expectations, expenses could be disproportionately high. As a result, a
drop in near term demand could significantly affect both revenue and profits
in any quarter. In the future, the Company's operating results may fluctuate
for this reason or as a result of a number of other factors, including
increased expenses, timing of product releases, increased competition,
variations in the mix of sales, announcements of new products by the Company
or its competitors and capital spending patterns of the Company's customers.
As a result, there can be no assurance the Company will be able to maintain
profitability on an annual or quarterly basis.
The Company's business has experienced and may continue to experience
seasonality. In recent years, the Company has recognized a greater percentage
of its revenue and operating income in its fourth fiscal quarter than in any
of the first three fiscal quarters due to a number of factors, including the
timing of product releases and the Company's sales incentive programs.
Moreover, due to generally diminished business activity in the summer
quarter, and to fiscal year-end sales incentive programs, the Company has
historically recognized less revenue and operating income in its first fiscal
quarter than in the other quarters.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Furthermore,
it is possible that in some future quarters the Company's operating results
will fall below the expectations of the Company, market analysts and
investors. In such event, the price of the Company's Common Stock would
likely be materially and adversely affected.
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT RISK
The market for the Company's products is characterized by rapid
technological advances and evolving industry standards and can be
significantly affected by new product introductions, changing customer
requirements and market activities of industry participants. The life cycles
of the Company's products are difficult to estimate, and the Company's
position in the current market could be undermined by rapid product advances.
The Company's future success will depend upon its ability to continue to
improve existing products and to develop and introduce products with new or
enhanced capabilities that
<PAGE>
address the increasingly sophisticated needs of its customers and keep pace
with technological and competitive developments. Among other things, the
emergence of the Internet as an alternative computing platform and
distribution medium may adversely affect the demand for client/server
products and alter current software utilization, distribution and pricing
patterns. There can be no assurance that the Company will be able to
successfully develop and market new or enhanced products or respond
effectively to technological changes or new product announcements by others.
Further, the Company may face challenges with customers who are slower to
adopt new technologies or otherwise commit resources to convert to a
client/server solution. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness and revenue.
Delays in the release of new and upgraded versions of the Company's
software products could have a significantly negative impact on the Company's
sales and results of operations. Because of the complexities inherent in
developing software products as sophisticated as those sold by the Company
and the lengthy testing periods associated with such products, no assurance
can be given that future product introductions by the Company will not be
delayed. In addition, complex software programs may contain undetected errors
or bugs when they are first introduced or as new versions are released. There
can be no assurance that errors will not be found in the Company's existing
or future products, with the possible result of delays in or loss of market
acceptance of these products, diversion of the Company's resources, injury to
the Company's reputation and increased service and warranty expenses.
RELIANCE ON MICROSOFT TECHNOLOGY
The Company's software products are designed for Microsoft technologies,
including Windows NT, Windows 95 and SQL Server. In addition, the Company's
products utilize other Microsoft technologies, including Internet Information
Server, FrontPage, Visual Basic and Visual Basic for Applications. Although
the Company believes that Microsoft technologies are and will be widely
utilized by businesses in the corporate market or midmarket (the
"Midmarket"), no assurance can be given that these businesses will actually
adopt such technologies as anticipated or will not in the future migrate to
other computing technologies that the Company does not support. Moreover, the
Company's strategy will require that the Company's products and technology be
compatible with new developments in Microsoft's technology.
RELIANCE ON THIRD-PARTY SUPPLIERS
The Company's products utilize certain software licensed to it by
third-party software developers. Although the Company believes that there are
alternatives for these products, any significant interruption in the supply
of such third-party software could have a material adverse impact on the
Company's sales unless and until the Company can replace the functionality
provided by these products. In addition, the Company is to a certain extent
dependent upon such third parties' abilities to enhance their current
products, to develop new products on a timely and cost-effective basis and to
respond to emerging industry standards and other technological changes. There
can be no assurance that the Company would be able to replace the
functionality provided by the third party software currently offered in
conjunction with the Company's products in the event that such software
becomes obsolete or incompatible with future versions of the Company's
products or is otherwise not adequately maintained or updated. The absence of
or any significant delay in the replacement of that functionality could have
a material adverse effect on the Company's business, results of operations
and financial condition.
DECLINE IN SALES OF DOS- and MACINTOSH-BASED PRODUCTS
The Company has shifted its focus from a product based on DOS, Macintosh
and local area network (LAN) technologies, Great Plains Accounting, to
products based on Windows and client/server technologies. As a result of this
shift and the decrease in general market demand for DOS- and Macintosh-based
products, the Company's revenues from its Great Plains Accounting product
have been
<PAGE>
declining and are expected to decline for the foreseeable future. There can
be no assurance that the decline in revenues from sales of Great Plains
Accounting will not have a material adverse effect on the Company's business,
results of operations and financial condition.
RELIANCE UPON PARTNER DISTRIBUTION CHANNEL; RISKS ASSOCIATED WITH EXPANDING
DISTRIBUTION
The Company relies exclusively upon its network of value added resellers
(VARs), systems integrators, Big Six and other accounting firms, independent
software vendors (ISVs) and specialized software consultants (together, the
"Partners") to provide marketing and sales opportunities. There can be no
assurance that the Company's Partners will aggressively market the Company's
products or will maintain their relationships with the Company. The failure
of the Company to maintain its existing Partner relationships, or to
establish new Partner relationships in the future, because of a divergence of
interests, or for any other reason, could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company's ability to achieve significant revenue growth in the future
will depend in large part on adding new Partners and leveraging its
relationships with existing Partners. In addition, an integral part of the
Company's strategy is to add distributors internationally, who in turn
recruit Partners in their territory. The Company typically grants exclusive
distribution rights to its international Partners. The Company is currently
investing, and intends to continue to invest, significant resources to
develop these channels. There can be no assurance that the Company will be
able to leverage relationships with existing Partners and add new Partners
and distributors to market the Company's products effectively. The inability
to do so could have a material adverse effect on the Company's business,
results of operations and financial condition.
COMPETITION
The market for the Company's products is highly competitive and rapidly
changing. The Company's primary market consists of businesses in the
Midmarket. The Company's current and prospective competitors offer a variety
of solutions for this market. The Company experiences significant competition
and expects substantial additional competition from established and emerging
software companies that offer products similar to the Company's products and
target the same customers as the Company.
In North America, the Company faces a number of competitors in the
Midmarket. Outside North America, the Company also faces competition from a
number of competitors, several of which have significant shares in their home
markets. In addition, the Company competes for Midmarket business with
companies primarily targeting the enterprise or high-end market; several of
these competitors, which principally sell UNIX-based systems, offer or have
announced their intention to deliver Windows NT solutions. The Company's
products also face competition from providers of industry-specific
applications as well as indirect competition from in-house, custom-developed
financial management applications.
Certain of the Company's competitors have substantially greater
financial, marketing or technical resources than the Company. There can be no
assurance that other companies have not developed or marketed or will not
develop or market products that are superior to those of the Company, that
are offered at substantially lower prices than those of the Company, or that
have or will achieve greater market acceptance than those of the Company. In
addition, there can be no assurance that alternative
<PAGE>
methods of delivering financial management systems will not provide increased
competition.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on the
Company's executive officers and certain technical, managerial, sales and
marketing personnel. The loss of the services of any of these individuals or
group of individuals could have a material adverse effect on the Company's
business, results of operations and financial condition.
Competition for qualified personnel in the software industry is intense.
The future success of the Company will depend in large part on its ability to
attract and retain qualified management and technical employees, and there
can be no assurance that the Company will be able to do so. The Company
believes that the continued employment of a number of key management and
technical personnel is important to the Company's future success. The Company
has from time to time experienced difficulty in locating and retaining
candidates with appropriate qualifications.
MANAGEMENT OF GROWTH
The Company's growth has resulted in an increase in responsibilities
placed upon the Company's management and has placed added pressures on the
Company's operating and other systems. To manage its growth effectively, the
Company will be required to continue to implement additional systems and
controls, and to expand, train and manage its employee base. There can be no
assurance that the management skills and systems currently in place will be
adequate if the Company continues to grow, or that the Company will be able
to implement additional systems successfully and in a timely manner as
required. In addition, the Company from time to time may seek acquisitions of
businesses, products and technologies that are complementary to those of the
Company, or that allow the Company to enter new markets. Any such acquisition
would place additional strains upon the Company's management resources.
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT
The Company relies on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements and other contractual provisions and
technical measures to protect its intellectual property rights. There can be
no assurance that these protections will be adequate to prevent the Company's
competitors from copying or reverse-engineering the Company's products, or
that the Company's competitors will not independently develop technologies
that are substantially equivalent or superior to the Company's technology.
The Company makes source code available to certain of its Partners and
customers. This availability may increase the likelihood of misappropriation
or other misuse of the Company's intellectual property. The Company has no
patents, and existing copyright laws afford only limited protection for the
Company's intellectual property rights and will not protect such rights in
the event competitors independently develop products similar to those of the
Company. While the Company licenses its Dynamics C/S+ product under signed
licenses, the Company licenses its Dynamics and Great Plains Accounting
products primarily under "shrink wrap" licenses that are not signed by its
licensees. These shrink wrap licenses may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of certain countries in which
the Company's products are or may be licensed do not protect the Company's
products and intellectual property rights to the same extent as the laws of
the United States.
Although the Company has never been the subject of a material
intellectual property dispute, there can be no assurance that a third party
will not assert that the Company's technology violates its intellectual
property rights in the future. As the number of software products in the
Company's target market increases and the functionality of these products
further overlap, the Company believes that software developers may become
increasingly subject to infringement claims. Any such claims, whether with or
without merit, can be time consuming and expensive to defend. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future with respect to its
<PAGE>
current or future products or that any such assertion will not require the
Company to enter into royalty arrangements or litigation that could be costly
to the Company.
INTERNATIONAL SALES AND OPERATIONS
The Company sells its products in select international markets in
addition to the United States and Canada. The Company has recently entered
into distribution arrangements in Western and Eastern Europe, Australasia,
Southern Africa, the Middle East and Southeast Asia. As a result of the
royalty structure for the Company's international Partner network, the
Company's gross margin on international sales is generally less than its
gross margin on domestic sales. The Company's international business may be
affected by such factors as local economic and market conditions, political
and economic instability, greater difficulty in administering operations,
difficulties in enforcing intellectual property and contractual rights,
difficulties in tailoring the Company's software products to fit local
accounting principles, rules, regulations, language, tax codes and customs,
fluctuations in currency exchange rates and the need for compliance with a
wide variety of foreign and United States export regulations. There can be no
assurance that one or more of these factors will not have a material adverse
effect on the Company's international operations and, consequently, the
Company's business, results of operations and financial condition.
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain jurisdictions. The sale and support of products by
the Company and its Partners may entail the risk of such claims, and there
can be no assurance that the Company will not be subject to such claims in
the future. Furthermore, some of the Company's licenses with customers are
governed by laws of jurisdictions other than the United States, and there can
be no assurance that purported limitations on liability in these licenses
would be enforced were foreign law to govern. A product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, results of operations and financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading prices of the Company's Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, developments or disputes concerning intellectual property
rights, technological innovations or new products, governmental regulatory
action, general conditions in the accounting and financial management
software industry, increased price competition, changes in earnings estimates
by analysts or other events or factors, many of which are beyond the
Company's control. In addition, the stock market has experienced extreme
price and volume fluctuations, which have particularly affected the market
prices of many computer software companies and which have often been
unrelated to the operating performance of such companies.
