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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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number
0-22703
GREAT PLAINS SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 45-0374871
(State or other jurisdiction of (I.R.S. Employer 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 X No
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 July 31, 1998 was approximately
$282,561,873 (based on the last sale price of such stock as quoted on the Nasdaq
National Market ($33.00) on such date).
As of July 31, 1998, the number of shares outstanding of the registrant's Common
Stock, par value $.01 per share, was 13,787,833.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated August 7, 1998 for the 1998
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Annual Report on Form 10-K (the "Form 10-K Report").
PART I
ITEM 1. BUSINESS
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GENERAL
Great Plains Software, Inc. (the "Company") is a leading provider of Microsoft
Windows NT-Registered Trademark- and SQL Server-based enterprise-wide solutions
to the Midmarket. The Company's award-winning products and services automate
essential business functions and enhance the strategic value of financial and
operational information. The Company's products and services are sold and
implemented exclusively by its extensive network of independent partner
organizations throughout the world.
The Company's client/server products, Dynamics and Dynamics C/S+, are designed
to meet the broad spectrum of business application needs of the "Midmarket",
which generally consists of businesses with $1 million to $250 million in
revenues and 10 to 2,500 employees. Dynamics C/S+ is the Company's client/server
enterprise-wide solution and consists of the solution areas of financial,
distribution, payroll and human resources, manufacturing, and service
management. In addition, Dynamics C/S+ offers Internet electronic commerce
solutions, which enable customers to integrate their web storefront with their
financial and distribution applications. Dynamics is the Company's client/server
solution for small businesses in the Midmarket and consists of financial,
distribution, and payroll and human resources solutions.
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 implement, customize and use. The Company's client/server
products are optimized for Microsoft technologies, most notably Windows NT and
SQL Server, which are increasingly becoming the standard in the Midmarket.
Moreover, by utilizing emerging Internet and electronic commerce technologies,
the Company's enterprise-wide solutions allow Midmarket businesses to
effectively conduct business over the Internet.
The Company has made a significant investment in building an experienced,
knowledgeable and highly motivated distribution network, which consists of value
added resellers (VARs), systems integrators, independent software vendors
(ISVs), national, regional and local accounting firms 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.
Partners customize the Company's systems to fit individual business needs, and
more than 200 independent software vendors (ISVs) provide vertical and
horizontal extensions to the Company's Dynamics and Dynamics C/S+ solutions.
The Company believes that prompt and effective service and support are essential
elements of a complete business management solution and dedicates significant
resources to delivering timely, reliable and innovative service to its
customers and Partners. The Company has received numerous industry awards for
its customer and Partner service including its innovative on-line services,
CustomerSource and PartnerSource. In May 1998, CustomerSource was named
"Best Overall Support Site of 1998" in the Association of Support
Professionals (ASP) and Softletter's annual "Ten Best Web Support Sites"
competition. In May 1998, the Company also reached the service milestone of
more than 250,000 consecutive support calls taken without missing a response
time guarantee.
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The Company was founded in 1981 and was incorporated as a Minnesota corporation
in 1983.
INDUSTRY BACKGROUND
Throughout the 1990s, businesses of all sizes have increasingly deployed
client/server business applications to improve their competitive position.
Client/server business applications often enable greater access to information
and allow for more efficiency in a company's operations than do traditional
mainframe, minicomputer or stand-alone PC solutions. Greater access to business
information can allow for better and faster decision making and higher levels of
customer service. More efficient operations can result in lower costs, higher
employee satisfaction, and expanded growth opportunities.
Businesses employing client/server business solutions can generally be grouped
into two market segments: (i) the Midmarket (described above) and (ii) the
"Enterprise Market", which consists of businesses with revenues in excess of
$250 million and more than 2,500 employees.
Businesses in the Enterprise Market were the first to adopt client/server
architecture as the standard for new implementations of enterprise-wide
solutions. More recently, businesses in the Midmarket have also begun to demand
fully integrated enterprise-wide business solutions based on client/server
technology. However, client/server solutions designed for the Enterprise Market
are often too complex and generally require too much time and money to implement
for Midmarket businesses. Furthermore, implementation of traditional Enterprise
Market solutions often require significant business process re-engineering that
is unduly burdensome for 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 enterprise-wide business solution
that is:
- cost-effective,
- designed for Microsoft technologies,
- easy to implement, customize and use; and,
- scalable
Midmarket businesses generally have fewer IT resources than Enterprise Market
businesses. As a result, Midmarket 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. Midmarket businesses also require systems
that can be rapidly implemented and are easy to learn, use and modify.
In order to ensure ongoing compatibility, supportability and ease of
maintenance, many Midmarket businesses are standardizing on Microsoft
technologies, most notably Windows NT and SQL Server as well as other Microsoft
BackOffice components. As a result, Midmarket businesses are demanding business
solutions that are native to Windows and optimized for Windows NT and Microsoft
SQL Server.
Many Midmarket businesses experience rapid growth and have evolving business
models. These businesses require business solutions that can be customized
quickly and cost-effectively to accommodate the constantly changing nature of
their business systems and procedures. The Company believes that client/server
business solutions must allow Midmarket businesses to easily modify windows and
reports, to integrate third-party solutions and to quickly write and seamlessly
integrate custom applications.
Finally, Midmarket companies require business management solutions 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 and electronic commerce technologies which can
extend the availability of information to employees across the enterprise and
allow businesses to effectively conduct business over the Internet.
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STRATEGY
The Company's strategy is to extend its position as a leading provider of
Windows NT and Microsoft SQL Server enterprise-wide solutions to the Midmarket.
To meet the needs of businesses in the Midmarket, the Company has deployed the
following strategies:
DELIVER FULLY INTEGRATED ENTERPRISE-WIDE SOLUTION. Businesses in the
upper-tier of the Midmarket are increasingly demanding a fully integrated
enterprise-wide business solution. The Company, through its own internal
development efforts and recent strategic product acquisitions, provides a
fully integrated enterprise-wide client/server business solution whose
components share the same platform, architecture and interface. This
enterprise-wide business solution consists of financial, distribution,
payroll and human resources, manufacturing, service management and electronic
commerce solutions. In addition, independent software vendor (ISVs) offer
more than 200 vertical and horizontal applications which further extend the
Company's client/server solutions.
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 business management
solutions in the Midmarket to support Windows 98 and among the first 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 Microsoft SQL Server). In
addition, Dynamics C/S+ was the first enterprise-wide solution to fully
integrate and leverage Microsoft's Commerce Server to enable Midmarket
businesses to integrate their web storefront with their financial and
distribution applications. Moreover, 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 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. The Company offers extensive programs that provide Partners
training, service and support to help them develop and expand their businesses,
including a program which assists Partners in recruiting additional
personnel. These programs also provide 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 Partner conference in Fargo, where the Company is headquartered, that
had more than 1,200 Partner participants in 1997.
CONTINUE AWARD-WINNING SERVICE AND SUPPORT. The Company believes that prompt
and effective service and technical support are essential elements of a complete
enterprise-wide business solution 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 expanded its Internet-based technical
support to customers and Partners and, in fiscal 1998, received industry
recognition and awards on these offerings. The Company believes that its
initiatives will further increase the timeliness and effectiveness of its
service and technical support. In addition to offering award-winning support on
its client/server products, the Company intends to continue to support customers
who use its DOS-based product, Great Plains Accounting.
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EXPAND GLOBAL PRODUCT OFFERING AND INFRASTRUCTURE. The Company currently
sells its products in the United States, Canada and through subsidiaries
located in the United Kingdom, Australia, Singapore, South Africa and
Scandinavia. In addition, the Company sells its products through
international distribution partners in Germany, Poland, Latin America, the
Czech Republic, Portugal, and the Middle East. The Company's client/server
products have been sold in approximately 92 countries. The Company intends to
expand its global infrastructure by expanding its existing subsidiary and
international Partner operations, entering new markets, and extending the
global functionality of its client/server products.
COMMITMENT TO PARTNERS, CUSTOMERS, AND EMPLOYEES. Great Plains Software is
deeply committed to developing and sustaining long-term relationships with
its Partners, customers, and employees. The Company's Mission Statement: "to
improve the life and business success of partners and customers," expresses
this commitment. The Company has been recognized throughout the industry for
its high levels of customer and Partner service and its commitment to its
employees. In December 1997, Great Plains was again named to the FORTUNE list
of the "100 Best Companies to Work For in America".
TECHNOLOGY
The Company's client/server products leverage key Microsoft technologies and are
based on the following strategies:
NATIVE WINDOWS AND WINDOWS NT IMPLEMENTATION. The Company's client/server
products are designed to take full advantage of Windows and Windows NT
capabilities. 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.
STANDARDS-BASED C++ DEVELOPMENT ARCHITECTURE. The development architecture
of the Company's client/server products is standards-based C++. This robust
and flexible development environment has enabled the Company to build its
products to leverage important technology advancements including 32-bit
technologies, Windows NT, Microsoft SQL Server, and Visual Basic for
Applications. Most recently, the Company has leveraged and embedded Visual
Basic for Applications into its client/server products, allowing customers
and Partners to customize their solutions with a familiar tool. The use of
standards-based C++ as the Company's development architecture will provide
the Company flexibility in continuing to deliver solutions on the latest
technologies and platforms.
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.
INTEGRATION WITH MICROSOFT SITE SERVER, COMMERCE EDITION. Dynamics C/S+ was the
first enterprise-wide solution to fully integrate with Microsoft's Site Server,
Commerce Edition, enabling Midmarket businesses to integrate their web
storefront with their financial and distribution applications.
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
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 solution developer Partners,
which facilitates their ability to integrate companion products into the
Company's client/server products.
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MULI-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.
PRODUCTS
The Company's upper-tier client/server product line, Dynamics C/S+, is a fully
integrated enterprise-wide solution consisting of financial, distribution,
payroll and human resources, manufacturing, service management, and electronic
commerce solutions. The Company's client/server product line for smaller
businesses in the Midmarket, Dynamics, is a broad business management solution
consisting of financial, distribution, and payroll and human resources
solutions. Both client/server product lines also consist of a suite of
reporting, customization and development tools. In addition, 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
enterprise-wide solution for Midmarket businesses that have high volume
processing requirements, complex enterprise-wide business management needs and
formal IT departments. Dynamics C/S+ has received several industry awards, was
one of the first enterprise solutions to receive Microsoft Windows 95 and
BackOffice logo compliance, and was the first enterprise-wide solution to fully
integrate with Microsoft Site Server, Commerce Edition. The Dynamics C/S+
solution consists of the following:
FINANCIAL. The Dynamics C/S+ Financial Suite consists of General Ledger,
Consolidations and Budgeting, Fixed Assets, Accounts Receivable, and
Accounts Payable. The Financial Suite is designed to meet the needs of
businesses in the upper-tier of the Midmarket, including those businesses
with multiple entity and multinational reporting requirements. The
financial suite fully integrates with all other components of the Dynamics
C/S+ solution and is designed to meet the needs of businesses across all
industries.
DISTRIBUTION. The Dynamics C/S+ Distribution Suite consists of Inventory,
Sales Order Processing, Purchase Order Processing and an Internet
self-service application, Dynamics.Requisition, which allows customers to
automate the purchase requisition and approval process. The Distribution
Suite is designed to meet the distribution needs of wholesale distribution
and manufacturing businesses in the Midmarket and is integrated with the
Dynamics C/S+ Manufacturing and Financial Suites. In addition, the
Distribution Suite is a key component in the Company's electronic commerce
solution, Dynamics.Commerce.
PAYROLL AND HUMAN RESOURCES. The Dynamics C/S+ Payroll and Human Resources
solution consists of Payroll, Human Resources and Direct Deposit
applications. The Payroll and Human Resources solution is designed to meet
the needs of Midmarket businesses across all industries and is integrated
with the Dynamics C/S+ Financial Suite. In addition, for Midmarket
manufacturing businesses, the Dynamics C/S+ Payroll and Human Resources
solution integrates with the Dynamics C/S+ Manufacturing Suite, allowing
more accurate cost accounting for Midmarket discrete manufacturing firms.
MANUFACTURING. The Dynamics C/S+ Manufacturing Suite consists of Bill of
Materials, Materials Requirements Planning, Capacity Requirements Planning,
Master Production Scheduling, Sales Forecasting, Manufacturing Orders and
Engineering Change Management. The Manufacturing Suite is designed to meet
the needs of discrete manufacturing businesses in the Midmarket and is
integrated with the Dynamics C/S+ Financial Suite, Distribution Suite, and
Payroll and Human Resources solution. In addition, the Manufacturing Suite
shares the same platform, architecture and interface as these Dynamics C/S+
solution components.
SERVICE MANAGEMENT. The Dynamics C/S+ Service Management Suite consists of
Service Call Management, Depot Management, Contract Administration,
Preventive Maintenance and Returns Management. In addition, the solution
consists of an Internet self-service application, Dynamics.Service Center,
which allows customers to, over the Internet, schedule a service technician
visit.
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The Service Management Suite is designed for service businesses in the
Midmarket who deliver fee, contract, or warrantee based services on
equipment either at a customer's site or at a depot location. The Service
Management suite is integrated with the Dynamics C/S+ Financial Suite and
Distribution Suite. In addition, the Service Management Suite can be
utilized by Manufacturing Suite customers who also deliver service on the
products they manufacture.
INTERNET ELECTRONIC COMMERCE. The Dynamics C/S+ electronic commerce
solution, Dynamics.Commerce, is fully integrated with the Microsoft Site
Server, Commerce Edition and allows Midmarket businesses to integrate their
web storefront with their Dynamics C/S+ Financial Suite and Distribution
Suite.
DYNAMICS
First released in February 1993, Dynamics is the Company's client/server
business solution 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 98, Windows NT and Visual Basic. Dynamics has received
several industry awards and was one of the first client/server business
applications to receive Windows 95 logo compliance. The Dynamics solution
consists of the following:
FINANCIAL. The Dynamics Financial Suite consists of General Ledger,
Accounts Receivable, and Accounts Payable. The Dynamics Financial Suite is
designed to meet the needs of smaller businesses in the Midmarket and is
fully integrated with all other components of the Dynamics solution.
DISTRIBUTION. The Distribution Suite consists of Inventory, Sales Order
Processing, Purchase Order Processing and Bill of Materials (Beta Release).
The Distribution Suite is designed to meet the distribution needs of
wholesale distribution and light manufacturing businesses in the Midmarket
and is integrated with the Dynamics Financial Suite.
PAYROLL AND HUMAN RESOURCES. The Dynamics Payroll and Human Resources
solution consists of Payroll, Human Resources and Direct Deposit
applications. The Dynamics Payroll and Human Resources solution is
designed to meet the needs of smaller Midmarket businesses across all
industries and is integrated with the Dynamics Financial Suite
In addition to the Dynamics Financial Suite, Distribution Suite, and Payroll and
Human Resources solution, numerous independent software developers provide
vertical solutions on the same platform with the same architecture and interface
as the Dynamics solution, allowing Dynamics customers and Partners to deploy an
integrated business management solution.
REPORTING, CUSTOMIZATION AND DEVELOPMENT
The Company's suite of client/server reporting tools consists of the Dynamics
Report Writer, Crystal Reports, and Dynamics.View. The Dynamics Report Writer
and Crystal Reports enable the Company's client/server customers and Partners to
meet their specialized reporting needs. Dynamics.View, an Intranet-based
application, allows employees across a customer's enterprise to gain secure
access to business information via a web browser. In addition, for Dynamics C/S+
customers, the Company offers a Dynamics C/S+ edition of Cognos, which includes
specialized reporting templates for sophisticated reporting and analysis.
The Company's suite of client/server customization and development 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 with Visual Basic for Applications, Continuum for
Visual Basic, and Continuum for Excel. 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
with Visual Basic for Applications can be used to customize any Dynamics or
Dynamics C/S+ window, report, control or component of business logic. 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. Continuum for
Microsoft Excel facilitates integration between the Company's client/server
products and Microsoft Excel spreadsheets through the use of wizards and
point-and-click operations.
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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 and distribution applications that
provide customers with a broad range of features and functions. The Company's
most recent versions of Great Plains Accounting, Version 9 and Great Plains
Accounting for Windows, were released in February 1997 and December 1997,
respectively. Both releases were 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, systems integrators, ISVs,
national, regional and local accounting firms, and specialized software
consultants. 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.
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, Australia,
Singapore, South Africa and Scandinavia. In addition, the Company has
established distribution relationships with international distribution partners
in Western and Eastern Europe, the Middle East, and Latin America to further the
international distribution of its products. These distribution Partners
typically localize and translate the Company's products, locate and train
qualified VARs, market the Company's products and provide 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 Partners have
developed localized language versions of its client/server products including
Arabic, Polish, Russian, German, Portuguese and Spanish. In addition, the
Company has developed localized versions for the United Kingdom, Australia, New
Zealand, South Africa and French-speaking Canada. The Company's client/server
product architecture is designed to facilitate the translation, localization and
maintenance of multilingual, multinational versions.
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.
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The Company has a comprehensive marketing strategy with several key
components: corporate and product 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 primarily includes national
advertising in key financial, business and technology publications as well as
public relations activities. 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 business management solutions.
Seminars are offered in conjunction with Partners in their local or
industry-specific markets. The Company increases product awareness by
sponsoring large scale events and seminars for prospective customers with key
industry partners, such as Microsoft, Compaq, and IBM. 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 as an integrated enterprise-wide solution or
with an industry-specific third party application, have been purchased by
companies in a wide variety of industries, such as:
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
CUSTOMER AND PARTNER SERVICE
The Company believes that prompt and effective service and technical support
is an important component of a complete business management solution 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.
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The Company provides service and technical support through a service
organization consisting of 183 employees as of May 31, 1998. The Company
provides a variety of training, technical support and service programs for
customers that 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 Web site and onsite consultations. Telephone
support calls are handled by professional support personnel and have various
guaranteed response times, depending on the type of 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 through the Company's award-winning CustomerSource
web site. The Company also offers comprehensive training and product support to
its Partners including an award-winning web site, PartnerSource, 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 1998, 1997, and 1996, software
development expenses were $12.6 million, $9.7 million and $8.9 million,
respectively. As of May 31, 1998, the Company had 227 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, Windows 98 and SQL Server. In addition, the
Company's products utilize other Microsoft technologies, including Site Server,
Internet Information Server, 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.
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.
10
<PAGE>
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. 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 business 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 enterprise
applications will not provide increased competition.
EMPLOYEES
As of May 31, 1998, the Company (including its subsidiaries) had a total of 755
full time equivalent employees ("FTEs"), including 447 FTEs in sales,
marketing, technical support and consulting services, 227 FTEs in research and
development and 81 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. In fiscal 1998, the Company received recognition
as one of the "100 Best Companies to Work for in America" as reported in FORTUNE
magazine, December 1997.
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 service and technical personnel in fiscal 1999.
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 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.
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, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 and Exhibit 99.1 to the Form 10K Report.
11
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company, their ages and positions and a brief
biography of each individual are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Douglas J. Burgum. . . . . 42 Chairman of the Board, President and Chief
Executive Officer
Terri F. Zimmerman . . . . 35 Chief Financial Officer and Vice President
Steve K. Sydness . . . . . 43 Vice President, International Operations
Jodi A. Uecker-Rust. . . . 36 Vice President, Center for Organizational
Excellence (CORE) and Heritage
Business
Darren C. Laybourn . . . . 36 Vice President, Global Development
</TABLE>
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.
TERRI F. ZIMMERMAN has served as Chief Financial Officer since February 1997 and
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.
STEVE K. SYDNESS has served as Vice President, International Operations since
June 1997. Mr. Sydness was Vice President, Dynamics from July 1996, to June
1997, Vice President, Business Development from June 1995 to June 1996, Vice
President of Sales from June 1994 to June 1995 and Vice President of
Strategic Planning June 1993 to June 1994. 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 Vice President, Center for Organizational
Excellence (CORE) and Heritage Business of the Company since June 1996. Ms.
Uecker-Rust served as Vice President of Employee Services for the Company from
August 1994 through May 1996 and as Vice President of Operations and Customer
Service from June 1993 through August 1994. Ms. Uecker-Rust has been with Great
Plains Software for 13 years. Prior to 1984 she was with Honeywell, Inc.
DARREN LAYBOURN is Vice President, Global Development. From June 1997 to July
1998, Mr. Laybourn served as General Manager, Global Development and from June
1994 to June 1997 he was General Manager, Dynamics Tools. Mr. Laybourn joined
the Company in 1994 and prior to that time was employed by The Boeing Company in
Seattle, where he directed development efforts supporting manufacturing and
corporate computing infrastructure. He holds a B.S. in Computer Science and
Mathematics from the University of Washington.
ITEM 2. PROPERTIES
- -------------------------------------------------------------------------------
The Company's principal administrative, marketing, production and product
development facilities consist of an aggregate of approximately 86,000 square
feet at three locations in Fargo, North Dakota. In addition, the Company has
research and development offices in Seattle, Washington, Minneapolis, Minnesota,
and Watertown, South Dakota. The Company occupies the Fargo and research and
development sites under lease agreements that expire at various times through
June 2001. Total rent expense during fiscal 1998, 1997, and 1996 was $1,054,000,
$866,000 and $871,000, respectively. The Company is currently planning to move
12
<PAGE>
into an expanded leased facility in Fargo, North Dakota that is expected to be
occupied by the Company in the fourth quarter of fiscal 1999. The Company
expects that the new facility will result in increased rent expense.
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 SECURTIY HOLDERS
- -------------------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1998.
PART II
-------
ITEM 5. MARKET PRICE
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
First Quarter Fiscal 1998
(from June 20, 1997 through August 31, 1997) $35.000 $23.750
Second Quarter Fiscal 1998 $29.125 $21.500
Third Quarter Fiscal 1998 $33.625 $20.500
Fourth Quarter Fiscal 1998 $39.000 $29.500
</TABLE>
On July 31, 1998, the closing sales price per share of the Company's Common
Stock as quoted on the Nasdaq National Market was $33.00. On July 31, 1998,
there were approximately 242 holders of record of the Company's Common Stock,
representing approximately 2,954 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.
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.
13
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
License $ 52,949 $ 35,919 $ 27,078 $ 25,050 $ 19,165
Service 32,710 21,201 15,193 12,847 9,949
---------------------------------------------------------------------------------
Total revenues 85,659 57,120 42,271 37,897 29,114
Cost of revenues:
License 11,220 6,362 4,913 4,439 4,997
Service 11,118 8,260 5,980 5,622 5,479
---------------------------------------------------------------------------------
Total cost of revenues 22,338 14,622 10,893 10,061 10,476
---------------------------------------------------------------------------------
Gross profit 63,321 42,498 31,378 27,836 18,638
Operating expenses:
Sales and marketing 31,636 21,935 14,477 14,013 14,331
Research and development 12,586 9,678 8,876 9,308 10,676
General and administrative 7,587 5,592 4,763 3,886 3,607
Acquired in-process research and development 7,136 - - - -
---------------------------------------------------------------------------------
Total operating expenses 58,945 37,205 28,116 27,207 28,614
---------------------------------------------------------------------------------
Operating income (loss) 4,376 5,293 3,262 629 (9,976)
Other income (expense), net 3,274 558 100 (260) (381)
---------------------------------------------------------------------------------
Income (loss) before income taxes 7,650 5,851 3,362 369 (10,357)
Income tax provision (benefit) (1) 3,203 2,207 (4,099) 45 (27)
---------------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle 4,447 3,644 7,461 324 (10,330)
Cumulative effect of a change in accounting
principle - - - (200) -
---------------------------------------------------------------------------------
Net income (loss) $ 4,447 $ 3,644 $ 7,461 $ 124 $ (10,330)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Income (loss) per common share:
Basic $ 0.33 $ (1.78) $ 0.58 $ 0.00 $ (1.52)
Diluted $ 0.32 $ 0.36 $ 0.76 $ 0.01 $ (1.52)
---------------------------------------------------------------------------------
Shares used in computing income (loss) per
common share:
Basic 13,381,414 7,629,460 7,352,820 7,158,950 6,776,906
Diluted 14,089,092 10,003,349 9,764,924 9,164,980 6,776,906
---------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MAY 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Assets:
Cash, cash equivalents and investments $ 66,918 $ 16,243 $ 8,256 $ 2,892 $ 119
Total Assets 102,845 33,214 24,361 15,327 8,845
Working Capital 50,824 6,658 1,012 (4,992) (15,400)
Liabilities and stockholders' equity
(deficit)
Deferred revenues 15,133 10,448 9,018 8,027 6,897
Long-term debt and capital lease
obligations, less current portion - - 20 750 1,281
Mandatory redeemable convertible preferred
stock - 28,698 11,502 8,300 -
Total stockholders' equity (deficit) 69,671 (16,277) (4,812) (9,066) (11,303)
</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 10 of Notes to
Consolidated Financial Statements.
(2) For an example of the determination of the number of shares used in
computing 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
- -------------------------------------------------------------------------------
Great Plains Software, Inc. (NASDAQ: GPSI) is a leading provider of Microsoft
Windows NT(R) and SQL Server-based enterprise-wide solutions to the Midmarket.
The company's award-winning products and services automate essential business
functions and enhance the strategic value of financial and operational
information. The Company's products and services are sold and implemented by its
extensive network of independent partner organizations throughout the world.
The Company has been a leading provider of business software solutions since
1982 when it began selling Great Plains Accounting (the "heritage product").
In the late 1980s, the Company anticipated the market shift towards Windows
and client/server business solutions and, in February 1993, released Dynamics.
15
<PAGE>
Dynamics is the Company's client/server product for small businesses in the
Midmarket. In July 1994, the Company released Dynamics C/S+. Dynamics C/S+ is
the Company's enterprise-wide solution for the upper tier of the Midmarket and
is optimized for Windows NT and Microsoft SQL Server. The Company recently
expanded its enterprise-wide client/server product offering with two
acquisitions that were completed in the fourth quarter of fiscal 1998. The
acquisitions added a suite of manufacturing applications, a human resources
management system, and a sophisticated multinational consolidations and
budgeting solution to the Company's client/server solutions.
The Company made significant investments in research and development in the
early 1990s to launch its client/server products. In addition, the Company has
made a significant investment in building an experienced and knowledgeable
network of independent channel Partners to market, implement and support its
Dynamics and Dynamics C/S+ 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 87.3%, 77.4%, and 61.4% of the Company's
total revenue for fiscal 1998, 1997, and 1996, 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. Statement of Position 97-2, which will supersede Statement of
Position 91-1, will be effective for the Company in fiscal 1999. Management has
assessed this new statement and believes that its adoption will not have a
material effect on the timing of the Company's revenue recognition or cause
changes to its revenue recognition policies. 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
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 maintenance
program for the Company's heritage product provides customers with product
updates, which are less significant releases of the heritage product; however,
heritage product upgrades are not included in the heritage maintenance program.
Heritage customers can purchase product upgrades as they are released. The
Company has historically released significant upgrades of its heritage product
approximately every two years.
The Company currently sells its products outside the United States and Canada
through subsidiaries located in the United Kingdom, Australia, Singapore, South
Africa, and Scandinavia as well as through international partners located in
Germany, Poland, Portugal, Latin America, the Czech Republic and the Middle
East. The Company's client/server products are available in 8 languages and have
been sold in approximately 92 countries.
For further discussion of recently issued accounting standards which may impact
the Company's future financial results, see Note 1 of the Consolidated Financial
Statements, Recently Issued Accounting Standards.
16
<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 income.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES
Revenues:
License 61.8% 62.9% 64.1%
Service 38.2 37.1 35.9
- -------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Cost of revenues:
License 13.1 11.1 11.6
Service 13.0 14.5 14.2
- -------------------------------------------------------------------------------
Total cost of revenues 26.1 25.6 25.8
- -------------------------------------------------------------------------------
Gross profit 73.9 74.4 74.2
Operating expenses:
Sales and marketing 36.9 38.4 34.2
Research and development 14.7 16.9 21.0
General and administrative 8.9 9.8 11.3
Acquired in-process research and
development 8.3
- -------------------------------------------------------------------------------
Total operating expenses 68.8 65.1 66.5
- -------------------------------------------------------------------------------
Operating income 5.1 9.3 7.7
Other income, net 3.8 1.0 0.2
- -------------------------------------------------------------------------------
Income before income taxes 8.9 10.3 7.9
Income tax provision (benefit) 3.7 3.9 (9.7)
- -------------------------------------------------------------------------------
Net income 5.2% 6.4% 17.6%
- -------------------------------------------------------------------------------
</TABLE>
REVENUES
REVENUES. Revenues increased to $85.7 million for fiscal 1998 from $57.1 million
in fiscal 1997 and $42.3 million in fiscal 1996, representing increases of 50.0%
and 35.1%, respectively. These increases in revenues were primarily due to
increased demand for the Company's Dynamics C/S+ and Dynamics products
(together, the "client/server products") and related service fees.
The following tables set forth for the periods indicated client/server and
heritage product revenues, each as a percentage of total revenues:
17
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Client/server product revenues 87.3% 77.4% 61.4%
Heritage product revenues 12.7% 22.6% 38.6%
--------------------------------------------
</TABLE>
Client/server product revenues, including license and service fees, increased to
$74.8 million for fiscal 1998 from $44.2 million in fiscal 1997 and $25.9
million in fiscal 1996 representing increases of 69.1% and 70.5%, respectively.
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 to $10.9 million in fiscal 1998 from $12.9 million in fiscal
1997 and $16.4 million in fiscal 1996 representing decreases of 15.6% and 21.1%,
respectively. The decrease in heritage product revenues was primarily due to a
decrease in demand for DOS and Macintosh solutions, which reflects the broader
market trend toward Windows and Windows NT solutions.
The Company's international revenues increased to $13.4 million in fiscal 1998
from $8.6 million in fiscal 1997 and $4.4 million in fiscal 1996 representing
15.6%, 15.0% and 10.4% of total revenues for fiscal 1998, 1997 and 1996,
respectively. These increases were a result of growth in existing markets as
well as the addition of distribution in new markets. In fiscal 1998, the growth
was primarily a result of growth in the Company's international subsidiary
operations in the United Kingdom and Australia as well as from the addition of
new subsidiary operations in Singapore and South Africa. In addition, the
Company completed the acquisition of a company in Scandinavia in the fourth
quarter of fiscal 1998. The acquired company's primary product was a
sophisticated consolidations and budgeting solution, which is an important
component in the expansion of Great Plains' client/server offerings. This new
international operation had minimal impact on revenues in fiscal 1998.
LICENSE. Total license fee revenues increased to $53.0 million in fiscal 1998
from $35.9 million in fiscal 1997 and $27.1 million in fiscal 1996, representing
increases of 47.4% and 32.7%, respectively. These increases in total license fee
revenues are largely attributable to increased market demand for the Company's
client/server products as well as a broader client/server product offering. In
September 1997, with a strategic partner, the Company added to its client/server
product offering with the release of a service management solution. In addition,
the Company broadened its client/server solutions with the addition of
manufacturing, human resources and consolidations and budgeting solutions
through acquisitions completed in the Company's fourth quarter of fiscal 1998.
These acquisitions did not have a material impact on revenue in fiscal 1998.
Moreover, the Company increased its sales, marketing and service capacity in
fiscal 1998, fiscal 1997, and fiscal 1996. These additional investments have led
to an increase in the number of client/server software licenses in fiscal 1998
and fiscal 1997.
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 solutions. 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, Version 9, which the Company marketed principally to
the Company's installed base of heritage product customers. Revenues from the
Version 9 upgrade continued in fiscal 1998. In addition, a less significant
upgrade, Great Plains Accounting for Windows, was released in December 1997,
which also contributed to heritage product revenues in fiscal 1998.
Notwithstanding the positive impact on revenues these releases may have in
future periods, 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 to $32.7 million in fiscal 1998 from $21.2
million in fiscal 1997 and $15.2 million in fiscal 1996 representing increases
of 54.3% and 39.5%, respectively. Service revenues
18
<PAGE>
as a percentage of total revenues were 38.2%, 37.1%, and 35.9% for fiscal 1998,
1997, and 1996, respectively. The increase in service revenues is due largely to
the increased number of licenses for client/server products and renewals of
existing maintenance and support contracts from the increased installed base of
client/server customers.
COSTS AND EXPENSES
COST OF LICENSE FEES. Cost of license fees consists primarily of the costs of
product manuals, media, shipping and royalties paid to third-party OEM partners.
Cost of license fees increased to $11.2 million in fiscal 1998 from $6.4 million
in fiscal 1997 and $4.9 million in fiscal 1996 representing 21.2%, 17.7% and
18.1% of total license fee revenues in fiscal 1998, 1997, and 1996,
respectively. The increases in cost of license fees for fiscal 1998 and fiscal
1997 are primarily attributable to an overall growth in license fee revenues and
an increase in royalties paid to third-party OEM partners. The increase in cost
of license fees as a percentage of total revenues in fiscal 1998 is largely
attributable to an increase in the sale of products for which the Company is
obligated to pay royalties to third-party OEM partners. The cost of license fees
as a percentage of license fee revenues may increase if the Company continues to
add third-party OEM partners or if sales which include third-party products
increase as a percentage of total revenues.
COST OF SERVICES. Cost of services consists of the costs of providing telephone
support, training and consulting services to the Company's customers and
Partners. Cost of services increased to $11.1 million for fiscal 1998 from $8.3
million in fiscal 1997 and $6.0 million in fiscal 1996 representing 34.0%, 39.0%
and 39.4% of total service revenues for fiscal 1998, 1997, and 1996,
respectively. The increase in cost of services is primarily due to the expansion
of the Company's service resources. Cost of services as a percentage of service
revenues decreased in fiscal 1998 and fiscal 1997 due, in part, to increased
efficiency in the Company's support organization and continued strong customer
enrollment in maintenance plans and support contracts. The Company anticipates
that cost of services will increase in dollar amount as service revenues
increase, and may increase as a percentage of service revenues as additional
service resources are added to support the company's expanded product offerings
as a result of acquisitions completed in the fourth quarter of fiscal 1998.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries,
commissions, travel and promotional expenses. Sales and marketing expenses
increased to $31.6 million for fiscal 1998 from $21.9 million in fiscal 1997 and
$14.5 million in fiscal 1996, representing 36.9%, 38.4%, and 34.2% of total
revenues for fiscal 1998, 1997, and 1996, respectively. The decrease in sales
and marketing expenses as a percentage of total revenues from fiscal 1998 to
fiscal 1997 reflects an increase in sales and marketing productivity and a
corresponding increase in revenues derived from the Company's client/server
products. The increase in sales and marketing expenses as a percentage of total
revenues from fiscal 1996 to fiscal 1997 is a result of increased spending on
sales and marketing to promote the Microsoft SQL Server edition of its Dynamics
C/S+ product. The dollar increase in sales and marketing expenses for fiscal
1998 and fiscal 1997 is attributable to the hiring of additional sales and
marketing personnel, increased commission expenses associated with higher
revenues, continued investments in expanding the capacity and capability of the
channel for its client/server products, and increased marketing expenses for the
Company's client/server products. In addition, in fiscal 1998 the Company
increased sales and marketing expenses related to the operation of its
international subsidiaries in the United Kingdom, Australia, Singapore, South
Africa and Scandinavia. The Company anticipates that sales and marketing
expenses will increase in dollar amount as total revenues increase; however, the
Company does not anticipate significant changes in sales and marketing expenses
as a percentage of total revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
compensation of development personnel and depreciation of equipment. Research
and development expenses increased to $12.6 million in fiscal 1998 from $9.7
million in fiscal 1997 and $8.9 million in fiscal 1996 representing 14.7%,
16.9%, and 21.0% of total revenues for fiscal 1998, 1997, and 1996,
respectively. These research and development expenses were primarily related to
the release of additional enhancements, functionality and applications for the
Company's client/server products, including the release of a Microsoft SQL
Server edition of the Dynamics C/S+ product in May 1996. In addition, in fiscal
1998 and fiscal 1997, the Company devoted resources to the development of
Internet and electronic commerce products.
19
<PAGE>
Moreover, in the fourth quarter of fiscal 1998, the Company completed two
acquisitions which added research and development resources to the Company.
Research and development expense increases in fiscal 1998 and fiscal 1997 were
primarily attributable to increases in salary and infrastructure costs related
to additional research and development personnel. Research and development
expenses decreased as a percentage of total revenues in fiscal 1998 and fiscal
1997, due to efficiencies gained through greater experience levels among
development personnel, even greater automation in the Company's development
testing processes, and additional efficiencies gained through an increased
research and development focus on Microsoft technologies. The Company
anticipates that it will continue to devote substantial resources to its
research and development effort and that research and development expenses will
increase in dollar amount in future periods and may increase as a percentage of
revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive, financial, human resources and information
services personnel as well as outside professional fees. General and
administrative expenses increased to $7.6 million for fiscal 1998 from $5.6
million in fiscal 1997 and $4.8 million in fiscal 1996 representing 8.9%, 9.8%,
and 11.3% of total revenues for fiscal 1998, 1997, 1996, respectively. These
increases in dollar amount were primarily due to increased staffing and related
expenses necessary to manage and support the expansion of the Company's
operations. In addition, dollar increases in fiscal 1998 were due, in part, to
expenses related to being a publicly held company. The Company believes that its
general and administrative expenses will increase in dollar amount in the future
to support the expansion of its operations and as a result of expenses
associated with being a publicly held company.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research and
development consists of one-time charges from acquisitions accounted for as a
purchase. The Company had two acquisitions in the fourth quarter of fiscal 1998,
resulting in the write off of acquired in-process research and development of
$7.1 million. The $7.1 million related in-process research and development, as
determined by an independent third-party appraisal, was charged against income
in fiscal 1998 as the underlying research and development projects had not
reached technological feasibility and had no alternative future uses. The
Company did not have any related write off of acquired in-process research and
development in fiscal 1997 or fiscal 1996.
OTHER INCOME, NET. Other income, net consists primarily of earnings from
investments and gains or losses from disposal of fixed assets, net of any
interest expense. Other income, net increased to $3.3 million for fiscal 1998
from $0.6 million in fiscal 1997 and $0.1 million in fiscal 1996. The
increase in other income, net in fiscal 1998 was primarily a result of
increased investment earnings due to increased investments as a result of the
more than $50 million received from the Company's initial public offering of
common stock in June 1997, as well as additional cash resulting from the
Company's increased profitability.
PROVISION FOR INCOME TAXES. Provision (benefit) for income taxes was $3.2
million, $2.2 million and $(4.1) million for fiscal 1998, 1997 and 1996,
respectively. In fiscal 1998, the provision for income taxes was 40% of income
before income taxes, which represents a 2% increase from the fiscal 1997 annual
effective income tax rate of 38% as a result of full state statutory tax rates.
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. The 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. The Company expects
that the income tax provision in the future will reflect the full state
statutory tax rates. See Note 10 of Notes to Consolidated Financial Statements.
20
<PAGE>
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 year ended May
31, 1998, 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 document. 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>
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Aug. 31 Nov. 30 Feb. 28 May 31 Aug. 31 Nov. 30 Feb. 28 May 31
THREE MONTHS ENDED 1996 1996 1997 1997 1997 1997 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License $ 6,655 $ 8,478 $ 9,224 $ 11,562 $ 10,335 $ 12,282 $ 13,816 $ 16,516
Service 4,413 5,208 5,475 6,106 6,439 7,763 8,791 9,716
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 11,068 13,686 14,699 17,668 16,774 20,045 22,607 26,232
Cost of revenues:
License 1,170 1,550 1,832 1,810 1,935 2,654 3,266 3,364
Service 1,636 2,012 2,050 2,562 2,251 2,511 2,723 3,635
- ------------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 2,806 3,562 3,882 4,372 4,186 5,165 5,989 6,999
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 8,262 10,124 10,817 13,296 12,588 14,880 16,618 19,233
Operating expenses:
Sales and marketing 4,054 5,660 5,702 6,519 6,199 7,709 8,416 9,311
Research and development 2,172 2,318 2,414 2,775 2,676 3,011 3,030 3,868
General and
administrative 1,224 1,209 1,540 1,619 1,894 1,662 2,086 1,946
Acquired in-process
research and development 7,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 7,450 9,187 9,656 10,913 10,769 12,382 13,532 22,261
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 812 937 1,161 2,383 1,819 2,498 3,086 (3,028)
Other income, net 83 119 103 252 736 1,067 878 593
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 895 1,056 1,264 2,635 2,555 3,565 3,964 (2,435)
Income tax provision
(benefit) 344 406 470 987 1,022 1,426 1,587 (832)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 551 $ 650 $ 794 $ 1,648 $ 1,533 $ 2,139 $ 2,377 $ (1,603)
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
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
21
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded operations primarily through cash provided
by operations and the sale of equity securities. Currently, the Company meets
its working capital needs and capital equipment needs with cash provided by
operations.
Cash provided by operating activities was $17.6 million, $10.3 million, and $8.3
million for fiscal 1998, 1997, and 1996, respectively. The increase in cash
provided by operations in fiscal 1998 and fiscal 1997 was primarily due to
revenue growth and increased profitability of the Company's operations.
The Company's investing activities used cash of $63.8 million, $7.1 million, and
$2.1 million for fiscal 1998, 1997, and 1996, respectively. The principal use of
cash in investing activities for fiscal 1998 was approximately $50 million for
the purchase of investments following the Company's initial public offering of
common stock. Investing activities in fiscal 1998 also included cash used of
approximately $11.9 million for two acquisitions completed in the Company's
fourth quarter. In addition, investing activities for fiscal 1998 included
increased capital expenditures related to the acquisition of computer equipment
and furniture required to support expansion of the Company's operations. In
addition, investment activities in fiscal 1998 included investment in minority
interest positions in certain international operations. Investing activities in
fiscal 1997 and fiscal 1996 primarily consisted of increased capital
expenditures related to the acquisition of computer equipment and furniture
required to support expansion of the Company's operations.
The Company's financing activities provided (used) cash of $52.2 million, $0.7
million, and ($0.8) million during fiscal 1998, 1997 and 1996, respectively. For
fiscal 1998, cash of $52.2 was provided from financing activities primarily from
$50.2 million from the sale of the Company's common stock in an initial public
offering and proceeds received from the exercise of stock options. For fiscal
1997, cash of $0.7 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.
The Company's sources of liquidity at May 31, 1998, consisted principally of
cash, cash equivalents and investments of $66.9 million. This amount includes
approximately $50.2 million in cash generated from the Company's initial public
offering of common stock, which was completed on June 25, 1997. The Company also
has a $10.0 million revolving line of credit facility with a bank. The line of
credit expires November 1998 and borrowings made thereunder are subject to
certain covenants. No amounts were outstanding under the line of credit at May
31, 1998. The Company believes that its existing cash, cash equivalents and
investments, cash generated from operations and the amounts available under the
line of credit will be sufficient to fund its operations for the foreseeable
future.
22
<PAGE>
OTHER MATTERS
On May 21, 1998, the Company's Board of Directors approved the restructuring of
the Company. This restructuring involved the formation of a new wholly-owned
subsidiary, Great Plains Software O. C. Inc. (the "operating subsidiary"), and
the transfer of substantially all of the Company's operations and assets
to the operating subsidiary. The Company did not transfer its software,
trademarks and other intellectual property or the stock of its other
subsidiaries to the operating subsidiary. Concurrent with the transfers,
the Company entered into long-term licensing agreements with the operating
subsidiary for the use of the Company's intellectual property.
The Company is actively engaged in researching any issues presented by the Year
2000 that may impact the Company's internal systems. These potential issues
result from the use of two-digit year dates rather than four-digit year dates in
computer code, which could cause potential failures in date-sensitive software
systems that do not recognize "00" as 2000. The Company does not anticipate
that Year 2000 issues will materially impact its operations. In addition,
recent versions of the Company's client/server and heritage products are Year
2000 compliant. The Company does not anticipate any material impact on its
revenues or earnings as a result of Year 2000 issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Not applicable.
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 CONSOLIDATED BALANCE SHEETS AND THE RELATED CONSOLIDATED
STATEMENTS OF INCOME, OF STOCKHOLDERS' EQUITY (DEFICIT) AND OF CASH FLOWS
PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF GREAT PLAINS
SOFTWARE, INC. AND ITS SUBSIDIARIES AT MAY 31, 1998 AND 1997, AND THE RESULTS OF
THEIR OPERATIONS AND THEIR CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED MAY 31, 1998, 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
JUNE 19, 1998
23
<PAGE>
GREAT PLAINS SOFTWARE, INC. CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
MAY 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,197 $ 12,101
Investments 48,721 4,142
Accounts receivable, net 8,790 5,452
Inventories 542 567
Prepaid expenses and other assets 2,914 1,164
Deferred income tax assets 4,630 3,279
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 83,794 26,705
Property and equipment, net 8,501 5,821
Goodwill and other intangibles, net 4,946 438
Deferred income tax assets 3,318 -
Other assets 2,286 250
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 102,845 $ 33,214
-------------------------------------
-------------------------------------
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,135 $ 1,788
Accrued expenses 6,941 4,698
Income tax payable 3,257 -
Salaries and wages payable 836 510
Commissions payable 2,668 2,603
Deferred revenues 15,133 10,448
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 32,970 20,047
Deferred income tax liabilities 204 746
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 33,174 20,793
Commitments and contingencies (Note 9)
Mandatorily redeemable convertible preferred stock: 10,000,000
authorized preferred shares, Series B, 1,345,220 shares issued
and outstanding at May 31, 1997 - 28,698
Stockholders' equity (deficit):
Convertible preferred stock:
10,000,000 authorized preferred shares; Series A, par value $.01, 225,000 shares
issued and outstanding at May 31, 1997 - 199
Common stock, par value $.01 per share: 100,000,000 shares
authorized, issued and outstanding -13,720,920 and 8,080,335, respectively 137 81
Additional paid-in capital 67,801 (13,843)
Retained earnings (deficit) 1,733 (2,714)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 69,671 (16,277)
-------------------------------------
Total liabilities and stockholders' equity $ 102,845 $ 33,214
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
GREAT PLAINS SOFTWARE, INC. CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
License $ 52,949 $ 35,919 $ 27,078
Service 32,710 21,201 15,193
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 85,659 57,120 42,271
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
License 11,220 6,362 4,913
Service 11,118 8,260 5,980
- ------------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 22,338 14,622 10,893
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 63,321 42,498 31,378
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 31,636 21,935 14,477
Research and development 12,586 9,678 8,876
General and administrative 7,587 5,592 4,763
Acquired in-process research and development 7,136 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 58,945 37,205 28,116
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 4,376 5,293 3,262
Interest expense (2) (98) (197)
Other income, net 3,276 656 297
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,650 5,851 3,362
Income tax provision (benefit) 3,203 2,207 (4,099)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,447 $ 3,644 7,461
------------------------------------------------------
------------------------------------------------------
Income (loss) per common share:
Basic $ 0.33 $ (1.78) $ 0.58
------------------------------------------------------
------------------------------------------------------
Diluted $ 0.32 $ 0.36 $ 0.76
------------------------------------------------------
------------------------------------------------------
Shares used in computing income per common share:
Basic 13,381,414 7,629,460 7,352,820
------------------------------------------------------
------------------------------------------------------
Diluted 14,089,092 10,003,349 9,764,924
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
GREAT PLAINS SOFTWARE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES A PREFERRED COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ ------------ PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 to 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)
Sale of common stock, net 3,450,000 34 50,209 50,243
Exercise of stock options 286,708 3 1,900 1,903
Conversion of preferred
stock to common stock (225,000) (199) 1,847,627 18 28,878 28,697
Tax benefit from
stockholder transactions 586 586
Stock issued for business
combination 56,250 1 71 72
Net income 4,447 4,447
- ------------------------------------------------------------------------------------------------------------------------------------
Balance May 31, 1998 - - 13,720,920 $ 137 $ 67,801 $ 1,733 $ 69,671
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
GREAT PLAINS SOFTWARE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,447 $ 3,644 $ 7,461
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,863 2,155 1,921
Acquired in-process research and development 7,136 - -
Deferred income tax expense (5,211) 2,207 (4,150)
Changes in operating assets and liabilities
excluding effect of business combinations
Accounts receivable, net (2,603) (256) 526
Inventories 25 (113) 342
Prepaid expenses and other assets (1,601) (557) 335
Accounts payable and accrued expenses 4,391 (141) 499
Income taxes payable 3,843 - (45)
Salaries, wages and commissions payable 391 1,933 388
Deferred revenue 3,947 1,430 990
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 17,628 10,302 8,267
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (5,265) (2,778) (1,990)
Purchases of businesses (11,870) - (123)
Purchase of investments (714,104) (4,892) -
Proceeds from investments 669,525 750 -
Purchase of other assets (2,036) (188) -
- -----------------------------------------------------------------------------------------------------
Net cash used by investing
activities (63,750) (7,108) (2,113)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on notes payable and long-term debt - (599) (197)
Exercise of stock options 1,903 1,551 73
Principal payments on capital lease obligations - (247) (588)
Repurchases of common stock - (54) (78)
Proceeds from issuance of common stock, net 50,315 - -
- -----------------------------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 52,218 651 (790)
- -----------------------------------------------------------------------------------------------------
Increase in cash 6,096 3,845 5,364
Cash and cash equivalents at beginning of period 12,101 8,256 2,892
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18,197 $ 12,101 $ 8,256
---------------------------------------
---------------------------------------
Schedule of noncash investing and financing
activities:
Property and equipment acquired under
capital lease agreements - - $ 19
Interest paid $ 2 $ 68 $ 197
Tax benefit from stockholder transactions $ 586 $ 590 $ -
---------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BUSINESS INFORMATION
Great Plains Software, Inc. (the "Company") is a leading provider of Microsoft
Windows NT and SQL server-based enterprise-wide solutions to the Midmarket. Its
products and services automate essential business functions and enhance the
strategic value of financial and operational information. The Company's products
and services are sold and implemented by its extensive network of independent
partner organizations throughout the world.
SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY AND FOREIGN CURRENCY TRANSLATIONS
The consolidated financial statements include the accounts of the Company and
its subsidiaries in the United Kingdom, Australia, Singapore, South Africa and
Scandinavia. All significant intercompany accounts and transactions have been
eliminated in consolidation. The functional currency of the subsidiaries except
for the Scandinavian subsidiary has been determined to be the U.S. dollar.
Therefore, all transaction gains and losses resulting from fluctuations in
currency exchange rates of these subsidiaries are included in operating results.
For the Scandinavian subsidiary, the functional currency is the local currency.
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.
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.
CONCENTRATION OF CREDIT RISK
Financial instruments that 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.
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.
INVESTMENTS
Investments in debt securities that are not cash equivalents have been
designated as available for sale. Those securities, which consist of various
highly rated government securities and corporate commercial paper, are reported
at fair value, with net unrealized gains and losses included in equity. However,
as of May 31, 1998, investments were carried at cost because unrealized gains
were immaterial. The maturities of the debt securities range from 1999 to 2000.
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.
28
<PAGE>
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.
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 three to
five years for computer equipment and five to ten 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 period of three to five years
using the straight-line method. Amortization expense is included with
depreciation expense in the consolidated statement of cash flows.
INTANGIBLE ASSETS AND GOODWILL
Amortization of intangible assets and goodwill is recorded on a straight line
basis over its estimated useful lives ranging from four to seven years. The
recoverability of unamortized intangible assets and goodwill is assessed on an
ongoing basis by comparing anticipated undiscounted cash flows to net book
value.
REVENUE RECOGNITION AND DEFERRED REVENUE
Software license fees are recognized upon shipment less a reserve for estimated
future returns. Revenues from support and maintenance service contracts are
recorded as deferred revenue when billed and recognized ratably over the
contract period. Other service revenues such as training and consulting services
are recognized as the services are performed. 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.
INTERNATIONAL REVENUES
International revenues represent 15.6%, 15.0% and 10.4% of total revenues for
the years ended May 31, 1998, 1997 and 1996, respectively. All international
revenues are denominated in US dollars. Total revenues by geographic region are
as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America $ 77,441 $ 53,477 $ 40,370
Europe 4,552 2,195 840
Asia and Australia 2,096 645 462
Other 1,570 803 599
- --------------------------------------------------------------------------------
$ 85,659 $ 57,120 $ 42,271
----------------------------------------
----------------------------------------
</TABLE>
ADVERTISING
The Company accrues, at the time of sale, an estimated liability for qualified
advertising expenses incurred by partner organizations for which the Company has
agreed to reimburse such parties as part of a cooperative advertising program.
Other advertising costs are expensed as incurred. Advertising expense was
approximately $3,731,000, $1,990,000 and $1,487,000 for the years ended May 31,
1998, 1997 and 1996, respectively.
29
<PAGE>
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.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 applies to entities with publicly held common stock or potential
common stock and is effective for financial statements issued for periods ending
after December 15, 1997. Under SAFS No. 128, the presentation of primary
earnings per share is replaced with a presentation of basic earnings per share.
SFAS No. 128 requires dual presentation of basic and diluted earnings per share
for entities with complex capital structures. Basic earnings per share includes
no dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted earnings
per share. All earnings per share amounts for all periods have been presented,
and where necessary, restated to conform with the provisions of SFAS No. 128.
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED MAY 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE COMPUTATION:
Net income $ 4,447 $ 3,644 $ 7,461
Increase to carrying value of mandatorily redeemable
preferred stock - (17,196) (3,202)
- ------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------
Net income available to common stockholders $ 4,447 $ (13,552) $ 4,259
------------------------------------------------------------------
------------------------------------------------------------------
Weighted average common shares 13,381,414 7,629,460 7,352,820
------------------------------------------------------------------
------------------------------------------------------------------
Basic net income (loss) per share $0.33 $(1.78) $0.58
------------------------------------------------------------------
------------------------------------------------------------------
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $ 4,447 $ 3,644 $ 7,461
------------------------------------------------------------------
------------------------------------------------------------------
Shares calculation:
Weighted average number of common shares 13,381,414 7,629,460 7,352,820
Weighted average of assumed conversion of mandatorily
redeemable preferred stock - 1,847,627 1,847,627
Other common equivalents 707,678 526,262 564,477
- ------------------------------------------------------------------------------------------------------------------------------------
14,089,092 10,003,349 9,764,924
------------------------------------------------------------------
------------------------------------------------------------------
Diluted net income per share $ 0.32 $ 0.36 $ 0.76
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
30
<PAGE>
RECLASSIFICATIONS
Certain prior year amounts in the financial statements have been reclassified in
order to conform with the current year's presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants has approved a new
Statement of Position (SOP) SOP 97-2, which will supersede Statement of Position
91-1, "Software Revenue Recognition." SOP 97-2 will be effective in fiscal 1999.
Management has assessed this new statement and believes that its adoption will
not have a material effect on the timing of the Company's revenue recognition or
cause changes to its revenue recognition policies.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 is effective for
financial statements for fiscal years beginning after December 15, 1997. This
standard defines comprehensive income as the changes in equity of an enterprise
except those resulting from stockholder transactions. All components of
comprehensive income are required to be reported in a new financial statement.
Management believes the adoption of SFAS No. 130 will not have a material effect
on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board also issued Statement No.
131, "Disclosures about segments of an Enterprise and Related Information" (SFAS
No. 131). SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for
disclosures about operating segments, products and services, geographic areas
and major customers. Management believes the adoption of SFAS No. 131 will not
have a material effect on the Company's financial statements.
2. BUSINESS COMBINATIONS
- --------------------------------------------------------------------------------
On April 20, 1998, the Company acquired certain assets and assumed certain
liabilities of ICONtrol, Inc., a software provider of manufacturing and human
resources solutions. The purchase price was paid in cash and totaled
$7,536,000.
The acquisition was accounted for as a purchase and accordingly, the net assets
acquired were recorded at their estimated fair values at the effective date of
the acquisition. The following table presents the allocation of the purchase
price:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<S> <C>
In-process research and development $ 5,456
Other intangibles 1,935
Net assets 145
</TABLE>
The $5,456,000 related to acquired in-process research and development, as
determined by an independent third party appraisal, was charged against income
in fiscal 1998 as the underlying research and development projects had not yet
reached technological feasibility. The Company's consolidated financial
statements include the results of ICONtrol since the date of acquisition.
The following table presents the consolidated results of operations on an
unaudited pro forma basis as if the acquisition of ICONtrol had taken place at
the beginning of each year:
31
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share information)
- --------------------------------------------------------------------------------
MAY 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 88,060 $ 59,405
Net income $ 7,367 $ 138
Pro forma net income per share (diluted) $ 0.53 $ 0.01
Reported net income per share before acquisition
related charges $ 0.63 $ 0.36
</TABLE>
The one-time charge for acquired in-process research and development is not
reflected in the pro forma results presented above. The unaudited pro forma
results of operations are for comparative purposes only and do not necessarily
reflect the results that would have occurred had the acquisition occurred at the
beginning of the periods presented or the results which may occur in the future.
On May 1, 1998, the Company acquired certain assets and assumed certain
liabilities of Telenor Financial Systems, a software provider of sophisticated
multinational consolidations and budgeting solutions. The purchase price was
paid in cash and totaled $4,406,000. The acquisition was accounted for as a
purchase and accordingly, the net assets acquired were recorded at their
estimated fair values at the effective date of the acquisition. The following
table presents the allocation of the purchase price:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------------------------
<S> <C>
In-process research and development $ 1,680
Other intangibles 990
Goodwill 1,681
Net assets 55
</TABLE>
The $1,680,000 related to acquired in-process research and development, as
determined by an independent third party appraisal, was charged against income
in fiscal 1998 as the underlying research and development projects had not yet
reached technological feasibility. The Company's consolidated financial
statements include the results of Telenor Financial Systems from May 1, 1998.
The results of operations prior to May 1, 1998 were not material to the
consolidated financial statements; accordingly, pro forma financial disclosures
are not presented.
In September 1997, the Company acquired all of the outstanding capital stock of
its Singapore distributor in a transaction that was accounted for as a pooling
of interests. To affect the business combination, the Company issued 56,250
shares of the Company's common stock. Financial data for the periods prior to
the closing of this transaction has not been restated because neither the net
assets nor operating results were material to the Company's consolidated
financial statements. The Company's consolidated financial statements include
the results of the Singapore distributor since September 1, 1997.
3. ACCOUNTS RECEIVABLE
- --------------------------------------------------------------------------------
Accounts receivable, net of allowances, consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------------------------
MAY 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <S> <C>
Gross accounts receivable $ 13,472 $ 8,059
Less allowance for returns and doubtful accounts (4,682) (2,607)
------------------------
$ 8,790 $ 5,452
------------------------
------------------------
</TABLE>
32
<PAGE>
4. PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
Property and equipment consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
MAY 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 2,416 $ 1,702
Computers and equipment 15,685 12,564
Leasehold improvements 369 369
Purchased software for internal use 1,675 1,444
- --------------------------------------------------------------------------------
20,145 16,079
Less accumulated depreciation and amortization (11,644) (10,258)
- --------------------------------------------------------------------------------
$ 8,501 $ 5,821
-------------------------
-------------------------
</TABLE>
Depreciation expense for the years ended May 31, 1998, 1997, 1996, was
$2,676,000, $2,038,000 and $1,892,000 respectively.
5. GOODWILL AND OTHER INTANGIBLES
- --------------------------------------------------------------------------------
Goodwill and other intangibles consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
MAY 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 2,354 $ 584
Other intangibles 2,925 -
- --------------------------------------------------------------------------------
5,279 584
Less accumulated amortization (333) (146)
- --------------------------------------------------------------------------------
$ 4,946 $ 438
-------------------------
-------------------------
</TABLE>
Amortization expense for the years ended May 31, 1998, 1997, 1996 was $187,000,
$117,000, and $29,000, respectively.
6. ACCRUED EXPENSES
- --------------------------------------------------------------------------------
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
MAY 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued vacation payable $ 1,882 $ 1,058
Coop advertising accrual 1,390 1,058
Other 3,669 2,582
- --------------------------------------------------------------------------------
$ 6,941 $ 4,698
-------------------------
-------------------------
</TABLE>
33
<PAGE>
7. OTHER INCOME, NET.
- --------------------------------------------------------------------------------
Other income, net consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
MAY 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 3,508 $ 540 $ 267
Other (232) 116 30
- --------------------------------------------------------------------------------
$ 3,276 $ 656 $ 297
------------------------------------
------------------------------------
</TABLE>
8. LINE OF CREDIT
- --------------------------------------------------------------------------------
The Company has a $10,000,000 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 in November 1998
and is subject to certain covenants, all of which had been complied with at May
31, 1998. There were no amounts outstanding at May 31, 1998 or 1997.
9. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
LEASE OBLIGATIONS
Rental expense incurred for operating leases of office facilities and office
equipment was approximately $1,054,000 in 1998, $866,000 in 1997 and $871,000 in
1996. Future minimum rental payments as of May 31, 1998, for noncancelable
operating leases with initial or remaining terms in excess of one year are
payable as follows: fiscal 1999 - $1,660,000, fiscal 2000 - $2,623,000, fiscal
2001 - $2,469,000 and fiscal 2002 - $2,197,000 and fiscal 2003 - $2,187,000.
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
materially adverse effect on the financial position or results of operations or
cash flows of the Company.
10. 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:
34
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
MAY 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of financial
reporting $ 204 $ 746
- --------------------------------------------------------------------------------
Total deferred tax liabilities 204 746
- --------------------------------------------------------------------------------
Deferred tax assets:
Current:
Accounts receivable allowances 1,925 909
Deferred revenue 507 617
Research and development credit - 651
Alternative minimum tax credit - 133
Accruals and other 2,198 969
- --------------------------------------------------------------------------------
Total current deferred income tax assets $ 4,630 $ 3,279
-----------------------------
Long-Term:
Net operating loss of foreign subsidiaries $ 606 -
Acquired-in-process research and development 2,712 -
- --------------------------------------------------------------------------------
Total long-term deferred income tax assets 3,318 -
- --------------------------------------------------------------------------------
Total net deferred income taxes $ 7,744 $ 2,533
-----------------------------
-----------------------------
</TABLE>
The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
MAY 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $ 6,954 $1,502 $ 595
State 1,460 38 48
Net operating loss carryforward - (950) (592)
- --------------------------------------------------------------------------------
8,414 590 51
Deferred income taxes:
Federal $ (4,560) $ 1,471 $ 1,233
State (651) 146 109
- --------------------------------------------------------------------------------
(5,211) 1,617 1,342
Decrease in valuation allowance - - (5,492)
- --------------------------------------------------------------------------------
$ 3,203 $ 2,207 $(4,099)
----------------------------------------
----------------------------------------
</TABLE>
35
<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:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
MAY 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax provision at statutory $ 2,678 $ 1,981 $ 1,143
rate
State income taxes, net of federal tax 575 175 111
effect
Change in valuation allowance - - (5,492)
Other (50) 51 139
- --------------------------------------------------------------------------------
Total $ 3,203 $ 2,207 $(4,099)
----------------------------------------
----------------------------------------
</TABLE>
At the time of adoption of SFAS No.109, 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 that 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.
11. INCENTIVE STOCK OPTION PLAN
- --------------------------------------------------------------------------------
At May 31, 1998, 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 ten years after
grant. Options issued prior to fiscal 1998 vest ratably over five years from
date of grant and expire six years after grant.
The following summary of outstanding options and shares reserved under the Plan
is as follows:
36
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS OPTION EXPIRATION DATE AVERAGE
OUTSTANDING PRICE RANGE (FISCAL YEAR) EXERCISE PRICE
PER SHARE PER SHARE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 1998 - 2003 $ 5.43
Granted 370,110 $ 16.00 to $ 37.25 $ 19.46
Exercised (200,641) $ 2.42 to $ 6.41 $ 4.06
Canceled/expired (42,087) $ 3.41 to $ 37.25 $ 6.58
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at May 31, 1998 996,915 $ 2.42 to $ 37.25 1999 - 2008 $ 10.85
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
As of May 31, 1998 there were currently exercisable options outstanding covering
188,571 shares, exercisable at prices ranging from $2.42 to $27.13 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 shown as follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 4,447 $ 3,644 $ 7,461
Pro forma $ 2,826 $ 3,508 $ 7,397
Earnings per share (diluted):
As reported $ 0.32 $ 0.36 $ 0.76
Pro forma $ 0.20 $ 0.35 $ 0.76
----------------------------------------
</TABLE>
37
<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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend level 0 0 0
Expected stock price volatility 58.8% 53.8% 44.5%
Risk free interest rates 6.0% 6.5% 6.5%
Expected life of options 5-10 years 6 years 6 years
-----------------------------------------
</TABLE>
The following table summarizes the status of the Company's stock options
outstanding as of May 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE EXERCISE EXERCISE
REMAINING PRICE PRICE
RANGE OF CONTRACTUAL PER PER
EXERCISE PRICE SHARES LIFE SHARE SHARES SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.42 to $3.41 25,736 0.6 years $ 2.61 21,736 $ 2.46
$4.16 to $5.44 241,990 3.1 years $ 4.96 75,436 $ 4.87
$6.41 to $7.71 362,779 4.2 years $ 6.65 67,399 $ 6.72
$16.00 to $23.88 323,370 7.7 years $ 18.23 10,000 $ 16.00
$26.38 to $37.25 43,040 6.1 years $ 28.86 14,000 $ 27.13
- ----------------------------------------------------------------------------------
996,915 188,571
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
12. 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, 1998, 1997 and 1996, was
approximately $389,000, $310,000 and $257,000, respectively.
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
38
<PAGE>
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 $6,300,000. 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 $2,000,000.
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 Company's 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
The section under the heading "Election of Directors" on pages 6 through 8 and
the section entitled Section 16(a) Beneficial Ownership Reporting Compliance" on
page 14 of the Company's Proxy Statement dated August 7, 1998 ("1998 Proxy
Statement") are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The section under the heading "Election of Directors" entitled "Compensation of
Directors" on pages 8 and 9 and the section entitled "Executive Compensation"
on pages 11 through 13 of the 1998 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 4 and 5 of the 1998 Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
The section entitled "Certain Transaction" on page 14 of the 1998 Proxy
Statement is incorporated herein by reference.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
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 Sheet as of May 31, 1998 and 1997
Consolidated Statement of Income for the three years in the period
ended May 31, 1998
Consolidated Statement of Stockholders' Equity (Deficit) for the three
years in the period ended May 31, 1998
Consolidated Statement of Cash Flows for the three years in the period
ended May 31, 1998
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 here 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 here 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 here 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)) *
41
<PAGE>
10.7 1997 Employee Stock Purchase Plan (incorporated here 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 here 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
therein (incorporated here 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 here
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 here
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 here
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 here 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)) *
10.14 Asset Purchase Agreement, dated April 20, 1998, by and among Great Plains
Software, Inc., ICONtrol, Inc. and Holien, Inc., as attached to the 8-K
filing and incorporated herein by reference.
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney
27.1 Financial Data Schedule
99.1 Cautionary Statement for Purposes of the "Safe Habor" Provisions of the
Private Securities Litigation Reform Act of 1995
(a) Reports on Form 8-K
A report on Form 8-K was filed during the quarter ended May 31, 1998 The
Form 8-K was filed on May 5, 1998, which described under Item 2 the
purchase of certain assets of ICONtrol, Inc. The financial statements
for ICONtrol were filed in an amendment to the Form 8-K on July 2, 1998.
(b) See Exhibit Index and Exhibits filed with this Report.
(c) See the Financial Statement Schedule included at the end of this Report.
- --------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Form 10-K to Item 14(c) of the Form 10-K Report.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 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.
Dated: August 21, 1998 GREAT PLAINS SOFTWARE, INC.
By
-----------------------------------------
Douglas J. Burgum
Chief Executive Officer,
Chairman of the Board and President
Signature Title Date
- --------- ----- ----
President, Chief Executive August 21, 1998
- ----------------------- Officer and Chairman of
Douglas J. Burgum the Board
Chief Financial Officer and August 21, 1998
- ----------------------- Vice President
Terri F. Zimmerman
* Director August 21, 1998
- -----------------------
Bradley J. Burgum
* Director August 21, 1998
- -----------------------
Frederick W. Burgum
* Director August 21, 1998
- -----------------------
William V. Campbell
* Director August 21, 1998
- -----------------------
Raymond F. Good
* Director August 21, 1998
- -----------------------
J.A. Heidi Roizen
* Director August 21, 1998
- -----------------------
Joseph S. Tibbetts, Jr.
* By
-----------------------------
Douglas J. Burgum
Attorney-in-Fact
43
<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 June 19, 1998 appearing in item 8 in Great Plains Software, Inc.'s
Annual Report on Form 10-K for the year ended May 31, 1998, also included an
audit of the Financial Statements Schedule listed in item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 19, 1998
44
<PAGE>
Great Plains Software, Inc
Schedule II -- Schedule of Valuation and Qualifying Accounts
(Amounts in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End
Of Year Expenses Deductions of Year
------- -------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended May 31,
1998 991 766 126 1,631
1997 667 408 84 991
1996 255 529 117 667
Allowance for Returns
Year Ended May 31,
1998 1,616 6,726 5,291 3,051
1997 1,213 4,007 3,604 1,616
1996 1,096 3,349 3,232 1,213
</TABLE>
45
<PAGE>
ITEM 21
LIST OF SUBSIDIARIES
The Company maintains the following wholly-owned subsidiary offices:
United Kingdom Old Bridge House
40 Church St.
Staines, Middlesse
TW184EP England
Austrailasia Level 5, Suite 504
1 Elizabeth Plaza, Educom House
North Sydney, 2060 NSW
Australia
Singapore/ASEAN 77 Science Park Drive
CINTECH III #03-05
Singapore 0511
South Africa 2nd fl, Block D, Edenburg Terraces
348 Rivonia Blvd (corner 10th Ave.)
Rivonia, South Africa
GPS Scandinavia Olaf Helsets Veig
P.O. Box 6518 Etterstad
N-060
Olso, Norway
<PAGE>
EXHIBIT 23.1: CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8, Number 333-30767 of Great Plains Software, Inc. of our
report dated June 19, 1998 appearing in this Annual Report on Form 10-K. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule which appears under item 14(a) of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 24, 1998
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby 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 the Annual Report on Form 10-K for the fiscal year
ended May 31, 1998 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, ad 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Douglas J. Burgum
- ------------------------- President, Chief Executive August 7, 1998
Douglas J. Burgum Officer and Chairman of the Board
/s/ Terri F. Zimmerman
- ------------------------- Chief Financial Officer and August 7, 1998
Terri F. Zimmerman Group Vice President, Finance
and Operations
/s/ Bradley J. Burgum
- ------------------------- Director August 7, 1998
Bradley J. Burgum
/a/ Frederick W. Burgum
- ------------------------- Director August 7, 1998
Frederick W. Burgum
/s/ William V. Campbell
- ------------------------- Director August 7, 1998
William V. Campbell
/s/ Raymond F. Good
- ------------------------- Director August 7, 1998
Raymond F. Good
/s/ J.A. Heidi Roizen
- ------------------------- Director August 7, 1998
J.A. Heidi Roizen
/s/ Joseph S. Tibbetts, Jr.
- ------------------------- Director August 7, 1998
Joseph S. Tibbetts, Jr.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 18,197
<SECURITIES> 48,721
<RECEIVABLES> 13,472
<ALLOWANCES> 4,682
<INVENTORY> 542
<CURRENT-ASSETS> 83,794
<PP&E> 20,145
<DEPRECIATION> 11,644
<TOTAL-ASSETS> 102,845
<CURRENT-LIABILITIES> 32,970
<BONDS> 0
0
0
<COMMON> 137
<OTHER-SE> 69,534
<TOTAL-LIABILITY-AND-EQUITY> 102,845
<SALES> 52,949
<TOTAL-REVENUES> 85,659
<CGS> 11,220
<TOTAL-COSTS> 22,338
<OTHER-EXPENSES> 58,945
<LOSS-PROVISION> 766
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 7,650
<INCOME-TAX> 3,203
<INCOME-CONTINUING> 4,447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,447
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
</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, Windows 98 and SQL Server. In addition, the
Company's products utilize other Microsoft technologies, including Site
Server, Internet Information Server, 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, independent software vendors (ISVs), national,
regional and local accounting firms 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 market. The Company's products
also face competition from providers of industry-specific applications as
well as indirect competition from in-house, custom-developed business
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 subsidiaries
located in the United Kingdom, Australia, Singapore, South Africa and
Scandinavia. In addition, the Company has established distribution
relationships with international distribution partners in Western and Eastern
Europe, the Middle East, and Latin America. 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.
