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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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number
0-22703
GREAT PLAINS SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 45-0374871
(State or other jurisdiction of (I.R.S. Employer 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. / /
The aggregate market value of Common Stock, par value $.01 per share, held by
non-affiliates of the registrant as of July 26, 1999 was approximately
$463,147,910 (based on the last sale price of such stock as quoted on the Nasdaq
National Market ($44.313) on such date).
As of July 26, 1999, the number of shares outstanding of the registrant's Common
Stock, par value $.01 per share, was 15,465,963.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated August 9, 1999 for the 1999
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Annual Report on Form 10-K (the "Form 10-K Report").
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PART I
ITEM 1. BUSINESS
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GENERAL
Great Plains Software, Inc. provides fully integrated front office/back office
business management software solutions for the midmarket. These include
financial, distribution, enterprise reporting, project accounting, electronic
business, human resources and payroll, manufacturing, service management, sales
and marketing, and customer service and support applications. Our solutions are
sold and implemented by a worldwide network of independent partner organizations
that share our commitment to lasting customer relationships.
Great Plains' front office/back office business management products, eEnterprise
(formally called Dynamics C/S+) and Dynamics, 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 annual revenues.
eEnterprise is our e-business and enterprise-wide solution which includes
financial, distribution, enterprise reporting, project accounting, electronic
business, human resources and payroll, manufacturing, service management, sales
and marketing, and customer service and support solutions. Dynamics is our
business management solution for smaller businesses in the midmarket and
consists of financial, distribution, project accounting, electronic business,
human resources and payroll, sales and marketing, and customer service and
support applications. Great Plains also offers a DOS-based product, Great Plains
Accounting.
To meet the needs of the midmarket, Great Plains designs, develops, markets,
sells and supports business management solutions that are cost-effective,
scalable, easy to implement, customize and use. Our solutions are optimized for
Microsoft technologies, most notably Windows NT and SQL Server, the standard in
the midmarket. Our solutions are also fully integrated across key application
areas including front office. Moreover, by utilizing Internet and electronic
commerce technologies, our e-business and enterprise-wide solutions allow
midmarket businesses to effectively conduct business over the Internet.
Great Plains 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), global, national, regional and local accounting firms and specialized
software consultants (together, the "partners"). Through our partner network,
customers are served by trained and knowledgeable software professionals who are
available locally to implement our systems as well as provide ongoing service.
Partners customize Great Plains' systems to fit individual business needs, and
more than 300 ISVs provide vertical and horizontal extensions to our eEnterprise
and Dynamics solutions.
Great Plains believes that prompt and effective service and support are
essential elements of a complete business management software solution and we
dedicate significant resources to delivering timely, reliable and innovative
service to our customers and partners. We have received numerous industry awards
for our customer and partner service including our innovative online services,
CustomerSource and PartnerSource. We earned a 1998 "Best Practices Award,"
sponsored by Arthur Andersen, in the category of "Exceeding Customer
Expectations."
Great Plains has been recognized by numerous industry organizations and
publications including being named as one of Business Week's "100 Hot Growth
companies" on June 1, 1998; Forbes "200 Best Small Companies" on November 2,
1998; Forbes ASAP's "Dynamic 100" companies on April 5, 1999 and Start's
"Hottest Companies of 1999" in July 1999. We earned two 1998 "Best Practices
Awards," sponsored by Arthur Andersen, in the categories of "Exceeding Customer
Expectations", as noted above, and "Motivating and Retaining Employees." In the
January 11, 1999 issue of FORTUNE magazine, Great Plains was named as one of the
"100 Best Companies to Work for in America" for the third time. Great Plains
also received the Presidential "E" award from the President of the United States
in July 1999 for outstanding contributions to export commerce.
Great Plains was founded in 1981 and was incorporated as a Minnesota corporation
in 1983.
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INDUSTRY BACKGROUND
The midmarket generally consists of businesses with $1 million to $250 million
in annual revenues. In contrast, the "large enterprise" market consists of
businesses with more than $250 million in annual revenues.
In the 1980s, the large enterprise market was the first to embrace client/server
technologies and begin to implement large-scale, single-vendor enterprise
solutions to replace aging mainframe-based applications. These large enterprise
implementations were often multi-year projects with large budgets that extended
across multiple departments and locations. At the same time, the midmarket
continued to be highly fragmented with DOS, local area network and minicomputer
technology implementations. These solutions were provided by hundreds of
midmarket horizontal and vertical software vendors.
Beginning in the early to mid 1990s, the midmarket began embracing client/server
technologies and specifically, Windows NT and Microsoft SQL Server technologies,
and replace their aging systems with business management solutions optimized for
the Microsoft platform. Their system needs were unique and different from those
of the large enterprise businesses. The midmarket required systems that were far
less costly to purchase, yet functionally rich, scalable and customizable. In
addition, because midmarket businesses often have fewer information technology
(IT) resources than large enterprise businesses, their systems had to be easier
to customize, implement and use than large enterprise solutions.
MIDMARKET BUSINESS MANAGEMENT SYSTEM NEEDS
Today, the midmarket migration from aging systems to Microsoft-based business
management systems continues. We believe that midmarket businesses require
systems that are:
- - cost-effective,
- - easy to customize, implement and use; and
- - designed for Microsoft technologies.
Midmarket businesses generally have fewer IT resources and smaller IT budgets
than large enterprise 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.
Many midmarket businesses experience rapid growth and have evolving business
models. These businesses require solutions that can be customized quickly and
cost-effectively to accommodate the constantly changing nature of their business
systems and procedures. We believe that business management 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. In addition, due to their limited IT resources and the often
rapidly changing nature of their businesses, midmarket companies require systems
than can be implemented in a short amount of time and are easy for their staff
to use once implemented.
To ensure ongoing compatibility, supportability and ease of maintenance,
midmarket businesses generally are standardizing on Microsoft technologies, most
notably Windows NT and SQL Server, as well as other Microsoft BackOffice and
Internet components. As a result, midmarket businesses are demanding business
solutions that are native to Windows, optimized for Windows NT and SQL Server,
and take advantage of Internet technologies.
Great Plains believes midmarket businesses also require systems that are:
- - e-commerce capable,
- - fully integrated across key application areas, including front
office, and
- - seamlessly integrate with existing systems.
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In business, the Internet is removing geographic boundaries and redefining
the field of competition. We believe this technological, economic and
business change has and will continue to impact midmarket businesses and
require them to not only embrace Internet and electronic commerce
technologies, but change the ways in which they interact with their
customers, their suppliers and their employees. We believe that to remain
competitive, midmarket businesses will need to implement Internet, intranet
and e-commerce solutions that allow them to communicate electronically and
conduct digital transactions.
Midmarket businesses are increasingly seeking a fully integrated platform of
business management applications that fulfill their financial and operational
software needs across the entire enterprise. Specifically, they are
implementing the back office components of financials, distribution, human
resources and payroll, manufacturing, and project accounting; and the front
office components of sales, marketing, and customer service and support. In
addition, they are complementing these solutions with knowledge management
applications such as sophisticated reporting and intranet applications that
deliver business-critical information to desktops across the enterprise.
Moreover, midmarket businesses are beginning to implement e-commerce
solutions. Further, midmarket business require these systems to integrate
seamlessly with one another.
Midmarket businesses have a wide variety of existing software systems. When
selecting a new business management software solution, midmarket businesses
require a system that can be seamlessly integrated with their existing
software applications. Because many companies in the midmarket have limited
IT resources, midmarket businesses require their new business management
software solutions to include integration tools that facilitate ease of
integration with their existing software applications.
STRATEGY
Great Plains' strategy is to extend its position as a leading provider of
front office/back office business management solutions for the midmarket. To
meet the needs of businesses in the midmarket, we have deployed the following
strategies:
ENABLE OUR CUSTOMERS TO IMPLEMENT E-COMMERCE. As the Internet changes almost
every aspect of business, midmarket companies will need to implement
comprehensive Internet and e-commerce solutions to remain competitive. Great
Plains provides an enterprise-wide platform of front office/back office
applications that fully integrate with our Internet and e-commerce solutions.
These solutions allow our customers to take orders electronically from both
established customers and at-large consumers with our business-to-business
and consumer-to-business e-commerce solutions. Our e-business solutions also
enable our customers to communicate and deliver services to their customers
and employees with "customer-facing" and "employee-facing" applications,
applications that allow their customers and employees to receive web-based
services from their desktop.
DELIVER FULLY INTEGRATED FRONT OFFICE/BACK OFFICE SOLUTION. Businesses in the
upper-tier of the midmarket are increasingly demanding a fully integrated
enterprise-wide platform of front office and back office applications,
including comprehensive Internet and electronic commerce solutions. Great
Plains, through its own internal development efforts, acquisitions, and
strategic partnerships, provides a fully integrated enterprise-wide platform
of front office, back office and e-business applications. This
enterprise-wide platform consists of financial, distribution, enterprise
reporting, project accounting, electronic business, human resources and
payroll, manufacturing, service management, sales and marketing, and customer
service and support applications. In addition, independent software vendors
offer more than 300 vertical and horizontal applications that further extend
our software solutions.
EXTEND TECHNOLOGY LEADERSHIP. We have built a strong record of technical
leadership and continue to invest in developing new technologies and
products. Great Plains eEnterprise and Dynamics provide award-winning
functionality including navigation, customization, information access,
scalability and integration. During fiscal 1999 we delivered Release 5.0 to
the market, with more than 100 new features and enhancements. Release 5.0 was
followed by Release 5.1 in December 1999, which included enhanced
multicurrency capabilities and support for the euro, the common currency
being adopted by eleven European Monetary Union countries. Release 5.1, with
it's euro functionality, has been certified by the Business and Accounting
Software Developers Association (BASDA). Release 5.1 was the first midmarket
solution to achieve that level of certification. Both eEnterprise and
Dynamics are designed to take full advantage of Windows 2000, and we were
among the first front office/back office solution providers in the midmarket
to support Windows 98. In addition, we believe eEnterprise was one of the
first front
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office/back office solutions to fully integrate and leverage Microsoft Site
Server, Commerce Edition, enabling midmarket businesses to integrate their
web storefront with their back office applications. Our eEnterprise and
Dynamics products have received more than 15 industry awards, including "Best
Functionality" in the Microsoft BackOffice Challenge, an Editors' Choice
Award from PC magazine and a Reviewers' Choice Award from Personal Computing
Magazine in the United Kingdom. We believe that our product architecture is
well suited for ongoing integration of new technologies. We maintain a
research team dedicated to assessing new and emerging technologies. In
addition, we intend to maintain our leadership in providing customization
capabilities that are essential to businesses in the midmarket.
STRENGTHEN PARTNER NETWORK. We believe that our partner network has been
effective in serving the midmarket by providing high-quality, cost-effective
marketing, pre-sales, sales, local service and consulting. Through our channel
development and recruiting efforts, as well as our training, certification and
performance recognition programs, we continue to strengthen this network. We
offer an innovative electronic implementation tool to assist our partners in
delivering efficient, high-quality business management solutions to our
customers. We also offer extensive programs that provide partners with training,
service and support to help them develop and expand their businesses. In
addition, we have programs that provide product and curricula offerings to
colleges and universities designed to increase the number of graduates familiar
with our products. We offer a number of technology conferences each year,
including "Stampede," an annual partner conference in Fargo. In 1998, 1,365
participants attended Stampede.
CONTINUE AWARD-WINNING SERVICE AND SUPPORT. We believe that high-quality service
and technical support are essential elements of a complete front office/back
office business management solution and are vital to maintaining customer and
partner satisfaction. We have received numerous industry awards for our customer
and partner service and continue to invest in our support infrastructure. Our
most recent honor was a prestigious Arthur Andersen "Best Practices Award" in
the category of "Exceeding Customer Expectations." We believe that our
initiatives will further increase the timeliness and effectiveness of our
service and technical support.
EXPAND GLOBAL PRODUCT OFFERING AND INFRASTRUCTURE. We currently sell our
products in the United States and through subsidiaries located in Canada, the
United Kingdom, Scandinavia, South Africa, Singapore and Australia. In addition,
we sell our products through international distribution partners in Germany,
Poland, the Czech Republic, the Benelux countries, Portugal, Latin America and
the Middle East. We intend to expand our global infrastructure by expanding our
existing subsidiary and international partner operations, entering new markets,
and extending the global functionality of our eEnterprise and Dynamics products.
We also have development offices in Fargo, North Dakota; Minneapolis, Minnesota;
Watertown, South Dakota; Seattle, Washington; Oslo, Norway; and Manila,
Philippines.
REMAIN COMMITTED TO PARTNERS, CUSTOMERS AND TEAM MEMBERS. We are deeply
committed to developing and sustaining long-term relationships with our
partners, customers and team members. The Great Plains Mission Statement: "To
improve the lives and business success of Partners and Customers," expresses
this commitment. Great Plains has been recognized throughout the industry for
its high levels of customer and partner service and its commitment to its team
members. In addition, we have a low team member turnover rate. On January 11,
1999, Great Plains was named to the FORTUNE list of the "100 Best Companies to
Work For in America." We also received two 1998 "Best Practices Awards" from
Arthur Andersen in the categories of "Motivating and Retaining Employees" and
"Exceeding Customer Expectations." These relationships allow us to achieve high
customer, partner and team member satisfaction.
TECHNOLOGY
Great Plains' solutions leverage key Microsoft technologies and are based on the
following design objectives:
INTERNET AND E-COMMERCE ENABLED. Great Plains was among the first midmarket
business management solution providers to deliver Internet and e-commerce
enabled business management solutions. We leverage Internet and e-commerce
technologies, such as Microsoft Site Server, Commerce Edition, to deliver
business-to-business and consumer-to-business e-commerce solutions as well as
both "customer-facing" and "employee-facing" applications. Our
business-to-business and consumer-to-business solutions allow our customers
to complete digital transactions over the Internet, both with established
customers and at-large consumers. Our customer-facing and employee-
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facing applications allow customers to deliver web-based desktop services to
their customers and employees.
NATIVE WINDOWS AND WINDOWS NT IMPLEMENTATION. Great Plains' front office/back
office products are designed to take full advantage of Windows NT, Windows 98,
and Windows 2000 capabilities, unlike "screen scraper" products that have a
graphical interface grafted onto DOS-based or legacy software systems. We
believe that our 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, our products require less memory and enable more efficient
multi-tasking than screen-scraper products.
STANDARDS-BASED C++ DEVELOPMENT ARCHITECTURE. The development architecture of
Great Plains' business management solutions is standards-based C++. This
powerful and flexible development environment has enabled us to build our
products to leverage important technology advancements including 32-bit
technologies, Windows NT, Microsoft SQL Server, Visual Basic for Applications,
and Microsoft's standard for application interoperability, the Component Object
Model (COM). The use of standards-based C++ as our development architecture will
provide us flexibility in continuing to deliver solutions on the emerging
technologies and platforms.
MICROSOFT SQL SERVER OPTIMIZATION. Great Plains eEnterprise is optimized for the
latest releases of Microsoft SQL Server, including Microsoft SQL Server 7.0, and
includes stored procedures to enhance distributed processing, overall
performance and data integrity. Our implementation of Microsoft SQL Server and
Windows NT also enhances data accessibility and system scalability.
COMPONENTIZED FUNCTIONALITY. The business rules, or financial logic, of Great
Plains' products have been designed and developed into "logic components." This
"componentization" of the product allows us 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 our products also allows our applications and third-party
applications to share a common user interface, thereby creating a seamless and
easy-to-use environment for customers. In addition, the components that make up
the business logic are separate from the technical application layer, allowing
eEnterprise to adopt new technologies like COM and VBA rapidly without affecting
the quality or performance of the business logic. Moreover, we make certain
components available to ISVs, which facilitates their ability to integrate
companion products into our business management solutions.
PRODUCTS
Great Plains' upper-tier product, eEnterprise, is a fully integrated,
enterprise-wide platform of front office, back office, knowledge management and
e-business solutions, consisting of financial, distribution, enterprise
reporting, project accounting, e-business, human resources and payroll,
manufacturing, service management, sales and marketing management, and customer
service and support applications. Our business management product for smaller
midmarket businesses, Dynamics, is a front office/back office solution
consisting of financial, distribution, project accounting, e-business, human
resources and payroll, sales and marketing management, and customer service and
support applications. Both business management products also include of a suite
of reporting, customization and integration tools. We also offer a DOS-based
product, Great Plains Accounting.
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<TABLE>
<CAPTION>
eENTERPRISE DYNAMICS
----------- --------
<S> <C> <C>
INITIAL RELEASE DATE July 1994 February 1993
CURRENT VERSION/
RELEASE DATE Release 5.1/December 1998 Release 5.1/December 1998
REVENUE OF TARGET
CUSTOMERS $10 to $250 million $1 to $10 million
DATABASE Microsoft SQL Server Btrieve from Pervasive Software
TYPICAL SYSTEM
PRICE RANGE $20,000 to $75,000 $5,000 to $20,000
SOLUTION Financial, Distribution, Financial, Distribution,
Enterprise Reporting, Project Accounting, E-business,
Project Accounting, Human Resources and Payroll,
E-Business, Human Resources Sales and Marketing Management,
and Payroll, Manufacturing, and Customer Service and Support.
Service Management, Sales
and Marketing Management,
and Customer Service and Support.
</TABLE>
The eEnterprise typical system price is based on systems with six to 20 users
and three to six modules. An eEnterprise system that includes our manufacturing
solution or front office components typically costs more than $75,000. The
Dynamics typical price range is based on systems with one to seven users and
four to six modules. The system price is the price paid by the customer to a
partner and does not represent sale proceeds to Great Plains or the cost of
implementation.
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eENTERPRISE
First released in July 1994, eEnterprise (formerly called Dynamics C/S+) is
Great Plains' solution for midmarket businesses that have high volume
processing requirements, complex enterprise-wide business management needs
and formal IT departments. eEnterprise has received several industry awards,
was one of the first enterprise-wide midmarket solutions to receive Microsoft
BackOffice logo compliance, the first enterprise-wide solution to fully
integrate with Microsoft Site Server, Commerce Edition, and the first to
receive full accreditation for the euro by the Business and Accounting
Software Developers Association (BASDA). eEnterprise also was awarded the
1998 Industry Solution Award in the "Best Mid Market/Financial Management
Functionality" category in February 1999. The eEnterprise solution consists
of the following:
FINANCIAL. The eEnterprise Financial Series consists of General Ledger,
Accounts Receivable, Accounts Payable, Fixed Assets, Bank
Reconciliation and Reporting and Analysis Tools. The Financial Series
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 Series fully
integrates with all other components of the eEnterprise solution and is
designed to meet the needs of businesses across all industries.
DISTRIBUTION. The eEnterprise Distribution Series consists of
Inventory, Bill of Materials, Sales Order Processing, Purchase Order
Processing, web-based purchase requisitions and electronic commerce
solutions. The Distribution Series is designed to meet the distribution
needs of wholesale distribution and manufacturing businesses in the
midmarket and is integrated with eEnterprise Manufacturing, Sales
and Marketing, Customer Service and Support and the Financial Series.
ENTERPRISE REPORTING. The Enterprise Reporting Series is designed for
sophisticated group reporting and consolidation needs, and includes
web-based reporting, advanced multi-dimensional consolidation and
eliminations with complete multicurrency capabilities. Enterprise
Reporting couples solid information
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control with a high degree of flexibility to mold the reporting
processes around evolving business practices.
PROJECT ACCOUNTING. The Project Series consists of project definition,
tracking, purchasing, billing, plus time and expense entry for remote
employees or employees who are otherwise not connected to the
eEnterprise solution. The Project Series is designed to meet the needs
of midmarket businesses that require an automated system to track
internal projects, administer time and materials projects and manage
accounting information. The Project Series integrates with the
Financial, Distribution and Human Resources and Payroll Series for
complete General Ledger, Accounts Payable, Accounts Receivable,
Inventory and Payroll information control.
ELECTRONIC COMMERCE. Two eEnterprise e-business solutions, e.Commerce
and e.Order, enable midmarket businesses to conduct commerce via the
Internet, fully integrating with their distribution and financial
applications. e.Commerce allows midmarket businesses to integrate their
Microsoft Site Server-based web storefront with their eEnterprise
Financial and Distribution Series. e.Order gives businesses an
out-of-the-box solution to enable established customers and salespeople
to enter and review their own orders over the Internet.
HUMAN RESOURCES AND PAYROLL. The eEnterprise Human Resources and
Payroll solution consists of Payroll, Human Resources, Direct Deposit,
integration to ADP Payroll, and web-based employee personal information
management applications. The Human Resources and Payroll solutions are
designed to meet the needs of midmarket businesses across all
industries and are integrated with the eEnterprise Financial Series. In
addition, for midmarket manufacturing businesses, the eEnterprise Human
Resources and Payroll solutions integrate with eEnterprise
Manufacturing, allowing more accurate cost accounting for discrete
manufacturing firms.
MANUFACTURING. The eEnterprise Manufacturing Series consists of Sales
Forecasting, Master Production Scheduling, Materials Requirements
Planning, Capacity Requirements Planning, Routings, Work Center
Definition, Work in Process, Inventory Management, Standard Costing,
Bill of Materials, Engineering Change Management, Quality Assurance,
Job Costing, and Sales Configuration. The Manufacturing Series is
designed to meet the needs of discrete manufacturing businesses in the
midmarket and is integrated with the eEnterprise Financial Series,
Distribution Series, Customer Serivce and Support, and Human Resources
and Payroll solutions.
SERVICE MANAGEMENT. The eEnterprise Service Management Series 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, e.Service
Center, which allows customers to schedule a service technician visit
using the Internet. The Service Management Series is designed for
service businesses in the midmarket that deliver fee, contract, or
warranty based services on equipment, either at a customer's site or at
a depot location. The Service Management Series is integrated with the
eEnterprise Financial Series and Distribution Series. In addition,
Manufacturing Series customers who also service the products they
manufacture can utilize the Service Management Series.
SALES AND MARKETING MANAGEMENT. The Great Plains Siebel Front Office
Series consists of Opportunity Management, Sales Pipeline Analysis,
Account Management, Contact Management, Organizational Charting,
Activity Management, Outlook Synchronization, Correspondence
Fulfillment, Expense Reporting, Sales Reporting, and Mobile
Synchronization. Additional modules include the Advanced Selling Pack
for marketing libraries and product catalogs, quoting and forecasting;
the Product Configurator for automating the ordering and buying
processes; the Server Pack for territory management, lead routing,
build data integration and remote software distribution; eSales to
allow customers to browse product catalogs and create product
configurations and quotes over the web; and eChannel for web-based lead
routing and sales channel opportunity management. The Great Plains
Siebel Front Office Series is designed to meet the needs of Midmarket
businesses that want to automate sales, marketing, service and
e-commerce processes, and is integrated with eEnterprise Financial and
Distribution Series solutions for customer and order entry information
control. The Great Plains Siebel Front Office Series was announced in
July 1999 and the Sales and Marketing applications are scheduled to
release in September 1999.
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CUSTOMER SERVICE AND SUPPORT.
In addition to Sales and Marketing Management, the Great Plains Siebel
Front Office Series consists of applications for call center,
e-business and tools. The Great Plains Siebel Front Office Customer
Service and Support Series allows businesses to offer on-demand sales
and service assistance to their customers. The Great Plains Siebel
Front Office Series was announced in July 1999 and the Customer Service
and Support applications are scheduled to release in December 1999.
In addition to the eEnterprise platform of front office, back office,
knowledge management and e-business applications, numerous independent
software developers provide vertical solutions on the same platform with the
same architecture and interface as the eEnterprise solution, allowing
eEnterprise customers and partners to deploy a fully integrated business
solution.
DYNAMICS
First released in February 1993, Dynamics is Great Plains' front office/back
office business management solution for midmarket businesses that need a Windows
solution that is flexible and cost-effective, but does not require IT personnel
dedicated to database administration. Dynamics leverages leading Microsoft
technologies, including Microsoft Windows 98, Windows NT and Visual Basic.
Dynamics has received several industry awards, was one of the first business
management applications to support Windows 98 and, along with Great Plains
eEnterprise, the first to receive full accreditation for the euro by the
Business and Accounting Software Developers Association (BASDA). The Dynamics
solution consists of the following:
FINANCIAL. The Dynamics Financial Series consists of General Ledger,
Accounts Receivable, Accounts Payable and Bank Reconciliation. The
Dynamics Financial Series 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 Series consists of Inventory, Sales
Order Processing, Purchase Order Processing and Bill of Materials. The
Distribution Series is designed to meet the distribution needs of
wholesale distribution and light manufacturing businesses in the
midmarket, and is integrated with the Dynamics Financial Series.
PROJECT ACCOUNTING. The Dynamics Project Series consists of Project
Definition, Tracking, Purchasing, Billing, plus Time and Expense Entry
for remote employees or employees who are otherwise not connected to
the Dynamics solution. The Project Series is designed to meet the needs
of midmarket businesses that require an automated system to track
internal projects, administer time and materials projects, and manage
accounting information. The Project Series integrates with Dynamics
Financial, Distribution and Human Resources and Payroll solutions for
complete General Ledger, Accounts Payable, Accounts Receivable,
Inventory and Payroll information control.
E-BUSINESS. The Dynamics E-business Series consists of e.View. This
solution allows customers to use the potential of the Internet to build
corporate knowledge.
HUMAN RESOURCES AND PAYROLL. The Dynamics Human Resources and Payroll
solution consists of Payroll, Human Resources and Direct Deposit
applications. The Dynamics Human Resources and Payroll solution is
designed to meet the needs of smaller midmarket businesses across all
industries, and is integrated with the Dynamics Financial Series.
SALES AND MARKETING MANAGEMENT. The Great Plains Siebel Front Office
Series consists of Opportunity Management, Sales Pipeline Analysis,
Account Management, Contact Management, Organizational Charting,
Activity Management, Outlook Synchronization, Correspondence
Fulfillment, Expense Reporting, Sales Reporting, and Mobile
Synchronization. The Great Plains Siebel Front Office Series is
designed to meet the needs of midmarket businesses that want to
automate sales, marketing and service, and is integrated with Dynamics
Financial and Distribution Series solutions for customer and order
entry information control. The Great Plains Siebel Front Office Series
was announced in July 1999 and the Sales and Marketing applications are
scheduled to release in September 1999.
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CUSTOMER SERVICE AND SUPPORT.
In addition to Sales and Marketing Management, the Great Plains Siebel
Front Office Series consists of applications for call center,
e-business and tools. The Great Plains Siebel Front Office Customer
Service and Support Series allows businesses to offer on-demand sales
and service assistance to their customers. The Great Plains Siebel
Front Office Series was announced in July 1999 and the Customer Service
and Support applications are scheduled to release in December 1999.
In addition to the Dynamics platform of applications, 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 a fully integrated business solution.
REPORTING, CUSTOMIZATION AND INTEGRATION
Great Plains' suite of business management reporting tools consists of the
Dynamics Report Writer, FRx Advanced Report Writer, Seagate Crystal Reports, and
e.View. The Dynamics Report Writer, FRx Advanced Report Writer and Seagate
Crystal Reports enable our customers and partners to create custom financial and
business management reports. e.View, an Intranet-based application, allows
employees across a customer's enterprise secure access to business information
via a web browser. In addition, for eEnterprise customers, we offer Enterprise
Reporting for handling multi-entity consolidations and reporting, and an
eEnterprise edition of Cognos PowerPlay, which includes specialized reporting
templates for sophisticated reporting and analysis.
Great Plains' suite of business management customization and integration tools,
our Customization and Integration Series, allows our customers and partners to
customize and extend the functionality of eEnterprise and Dynamics. Key tools in
the Customization and Integration Series are Integration Manager, Modifier with
Visual Basic for Applications, the Continuum line of application integration
solutions, and Dexterity. Integration Manager enables customers to integrate
data from external databases, e-commerce solutions and desktop applications with
Dynamics and eEnterprise. Modifier with Visual Basic for Applications can be
used to customize any eEnterprise and Dynamics window, report, control or
component of business logic. The Continuum line of application integration
solutions, including Continuum for Visual Basic, Continuum for Excel, and
Continuum for Delphi, facilitate integration between our business management
products and applications written in Visual Basic, Excel, Delphi or other
Microsoft Component Object Model (COM) compliant development tools through the
use of wizards (online instruction guides) and point-and-click operations.
Dexterity enables customers and third party developers to create applications
that seamlessly integrate with, and have the same look and feel as our business
management applications.
GREAT PLAINS ACCOUNTING
Great Plains' product for DOS operating systems, Great Plains Accounting, is
available for systems in single user and local area network environments. Great
Plains Accounting includes a suite of financial and distribution applications
that provide customers with a broad range of features and functions. We are
actively promoting the migration of our Great Plains Accounting customers to
eEnterprise and Dynamics. Great Plains' revenues from our Great Plains
Accounting product have been declining, and we expect that these revenues will
continue to decline in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Revenues."
10
<PAGE>
SALES AND MARKETING
SALES. Great Plains sells, implements and supports its products exclusively
through its partner network consisting of:
- - value added resellers (VARs) - professionals who sell and install business
hardware and software
- - systems integrators - professionals who combine technological products from
various vendors to produce enhanced solutions
- - independent software vendors (ISVs) - professionals who develop and market
complementary software products
- - global, national, regional and local accounting firms
- - specialized software consultants.
Our 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 our
products.
We believe that our partners have a significant influence over product choices
by customers, and that our relationships with our partners are an essential
element in our marketing, sales and implementation efforts. Through our partner
network, customers are served by trained and knowledgeable software
professionals who are available locally to implement our systems as well as
provide ongoing service and support. Many of our partners customize our systems
to fit individual business needs and develop industry-specific software
applications that integrate with and extend the functionality of our products.
Great Plains actively recruits partners through channel development groups. More
importantly, we continue to assist our partners in growing their businesses
through:
- - Management strategy consulting
- - Employee recruitment and placement
- - Comprehensive training and support
- - Cooperative marketing programs
- - Annual professional conferences
We also have 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 our products, and must
maintain certain standards and sales volumes to retain such authorization.
Great Plains has subsidiary offices and distribution relationships worldwide.
Internationally, we operate via subsidiaries in Canada, the United Kingdom,
Scandinavia, South Africa, Singapore, and Australia. In addition, we have
established distribution relationships with international partners in Western
and Eastern Europe, the Middle East, and Latin America to further the
international distribution of our products. These distribution partners
typically localize and translate our products, locate and train qualified VARs,
market our products, and provide ongoing customer service and technical support.
International partners typically pay localization and translation costs for our
software in exchange for exclusive distribution rights, while Great Plains
retains ownership of the localized version of the software. Great Plains and its
international distributors have developed localized language versions of our
business management solutions including Arabic, Polish, German, Portuguese and
Spanish. In addition, we have developed localized versions for the United
Kingdom, Australia, New Zealand, South Africa and French-speaking Canada. Our
product architecture is designed to facilitate the translation, localization and
maintenance of multilingual, multinational versions.
Great Plains' 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 our 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.
11
<PAGE>
MARKETING. Great Plains is focused on building market awareness and acceptance
of the company and our products as well as on generating qualified customer
leads. Partners pursue customer leads with assistance from our sales personnel.
Great Plains has a comprehensive marketing strategy with several key components:
global corporate and product image and awareness building, direct marketing to
both prospective and existing customers, a strong web presence, and local
marketing with partners. Our corporate image strategy includes global
advertising in key financial, business and technology publications as well as
web-based advertising. Our direct marketing includes direct mail, online and
regional seminars, tradeshows, and outbound telemarketing to existing and
prospective customers. For prospective customers, we also offer seminars and
self-qualifying tools to assist them in selecting business management solutions.
Seminars are offered in conjunction with partners in their local or
industry-specific markets. Our web-based marketing is designed to generate new
leads for Great Plains. Our marketing strategy is designed to take advantage of
our partner network by including cooperative marketing programs designed for
partners' local markets. Finally, we have developed a new brand mark to more
accurately align our image with our core strategies and position us for global
expansion.
SEASONALITY
Great Plains' business has experienced and may continue to experience
seasonality. In recent years, we have recognized a greater percentage of our
revenue and operating income in the 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 our sales incentive programs. Moreover, due to generally
diminished business activity in the summer quarter, and to Great Plains' fiscal
year-end sales incentive programs, we have historically recognized less revenue
and operating income in our first fiscal quarter than in other quarters.
CUSTOMERS
Great Plains' 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, our front office/back office
solution, implemented as a integrated e-business and enterprise-wide solution or
with an industry-specific third party application, have been purchased by
companies in a wide variety of industries, such as:
Advertising Healthcare Non-Profit Broadcasting
Hospitality Professional Sports Computer Software
Information Services Publishing Construction
Insurance and Financial Services Retail Distribution
Internet Software and Services Telecommunications Education
Manufacturing Transportation
Great Plains provides an annual learning and information sharing opportunity for
our customers through our annual customer conference, Convergence. Convergence
is designed specifically to bring together customers, business partners and
industry experts. More than 1,000 customers, business partners and industry
experts attended Convergence 1999. Convergence is held each spring in Orlando,
Florida, and is aimed at our front office/back office customers.
CUSTOMER AND PARTNER SERVICE
Great Plains believes that prompt and effective service and technical support is
an important component of a complete e-business and enterprise-wide solution and
is critical to the long-term satisfaction of our customers and partners. We have
received numerous awards for our partner and customer service, including the
1998 "Best Practices Award" in the category of "Exceeding Customer
Expectations," sponsored by Arthur Andersen.
Great Plains was one of the first personal computer software providers to
introduce fee-based support plans and guaranteed telephone response times. We
also maintain profiles and detailed call histories on each of our customers and
partners. These profiles enable our support personnel to respond more
effectively to service inquiries, allow us to better forecast which customers
are likely to purchase new products or upgraded versions of existing products
and assist us in developing new applications and features that accurately
address the needs of the market.
Great Plains provides service and technical support through a service
organization consisting of 312 (FTE) employees as of May 31, 1999. We provide a
variety of training, technical support and service programs for
12
<PAGE>
customers that supplement the primary support provided by partners. We offer
video, teleconference and classroom training as well as technical support
through a toll-free number and our website. 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 our 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 our CustomerSource web site. We also offer
comprehensive training and product support to our partners, including an
award-winning web site, PartnerSource, to ensure that they provide the
necessary levels of technical support and assistance to customers. We offer
our partners a variety of consulting resources for resale to customers,
including strategic implementation planning, project management and product
customization.
RESEARCH AND DEVELOPMENT
Since our inception, Great Plains has made substantial investments in
research and development. During the fiscal years 1999, 1998 and 1997,
software development expenses were $20.4 million, $12.6 million, and $9.7
million, respectively. As of May 31, 1999, we had 290 employees engaged in
research and development.
Great Plains' 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 our products to better
meet customer needs.
Great Plains' software products are designed for Microsoft technologies,
including Windows NT, Windows 98, Windows 2000 and SQL Server. In addition,
our products utilize other Microsoft technologies, including Site Server,
Internet Information Server, Visual Basic, Visual Basic for Applications and
BizTalk. Accordingly, our strategy will require that our products and
technology are compatible with new developments in Microsoft's technology.
PRODUCTION
The principal physical components of Great Plains' software products are
computer media and manuals. We prepare master software CDs, manuals and
packaging materials that are then duplicated by Great Plains and third party
vendors. To date, we have not experienced any material difficulties or delays
in the manufacture and assembly of our products or material returns due to
product defects.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
Great Plains regards certain features of our internal operations, software
and documentation as intellectual property. We rely on a combination of
contract, copyright, trademark and trade secret laws, a mandatory software
registration mechanism and other measures to protect our intellectual
property. We have no patents. We believe 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 our team members, frequent product enhancements and
the timeliness and quality of support services. It is our policy to file for
protection of our basic trademarks and service marks in countries in which we
sell our products either directly or through our international partners and
in countries in which protection is advisable. Despite these measures there
can be no assurance that we will be able to fully protect our intellectual
property.
Great Plains provides our products to customers on a "right-to-use" basis,
under non-exclusive licenses, which generally are nontransferable and have a
perpetual term. We typically license our products solely for the customer's
internal operations.
COMPETITION
The market for Great Plains' products is highly competitive and rapidly
changing. Our primary market consists of businesses in the midmarket. Our
current and prospective competitors offer a variety of solutions for this
market. We experience significant competition and expect substantial
additional competition from established and emerging software companies that
offer products similar to our products and target the same customers as we
do. We believe we compete on each of the following factors:
- - product features, functionality, performance and price
- - the capacity and capabilities of distribution partners
13
<PAGE>
- - the quality of customer and partner service and technical support
- - sales and marketing efforts
- - new product and technology introductions, including e-commerce
- - company image and stability.
In North America, Great Plains faces a number of competitors in the midmarket.
Outside North America, we also face competition from a number of competitors,
several of which have significant shares in their home markets. In addition, we
compete for midmarket business with companies primarily targeting the large
enterprise market. We believe that the products from these competitors are
neither designed nor priced to meet the needs of the midmarket, and that we
compete effectively against them in the midmarket. Our 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 Great Plains' competitors have substantially greater financial,
marketing or technical resources than Great Plains. There can be no assurance
that other companies have not developed or marketed or will not develop or
market products that are superior to our products, that are offered at
substantially lower prices than ours, or that have or will achieve greater
market acceptance than those of our products. In addition, there can be no
assurance that alternative methods of delivering business management
applications will not provide increased competition.
TEAM MEMBERS
As of May 31, 1999, Great Plains (including subsidiaries) had a total of 1,065
full time equivalent employees ("FTEs"), including 655 FTEs in sales, marketing,
technical support and consulting services, 290 FTEs in research and development,
and 120 FTEs in administration. None of our employees are represented by a labor
union. Management believes that its relations with its employees are good. We
earned a 1998 "Best Practices Award" sponsored by Arthur Andersen, in the
category of "Motivating and Retaining Employees." We also received recognition
for the third time as one of the "100 Best Companies to Work for in America," as
reported in FORTUNE magazine, January 11, 1999.
Great Plains believes that our continued success will depend in large part upon
our ability to attract and retain highly-skilled technical, managerial, sales
and marketing personnel. The loss of services of one or more of our key
employees could have a materially adverse effect on our business, operating
results and financial condition. We intend to hire a significant number of
additional service and technical personnel in fiscal 2000. Competition for the
hiring of such personnel in the software industry is intense, and from time to
time we experience 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 we will be successful in attracting
and retaining the personnel required to develop, market and support new or
existing software. The growth in our customer base and expansion of our product
lines and supported platforms have placed, and are expected to continue to
place, a significant strain on our management and operations, including our
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. Great Plains'
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.
14
<PAGE>
EXECUTIVE OFFICERS
Great Plains' executive officers as of August 1, 1999, 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.................. 43 Chairman of the Board, President and Chief Executive Officer
Tami L. Reller..................... 35 Vice President and Chief Financial Officer
Steven K. Sydness.................. 43 Executive Vice President, Worldwide Sales and Marketing
Jodi A. Uecker-Rust................ 37 Executive Vice President, Organizational Development
Darren C. Laybourn................. 37 Vice President, Research and Development
</TABLE>
DOUGLAS J. BURGUM has served as President of Great Plains since March 1984,
Chief Executive Officer since September 1991 and Chairman of the Board since
January 1996. Mr. Burgum was an early investor in Great Plains, and he
initially served as Vice President and a director from March 1983 to March
1984. Before joining Great Plains, 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.
TAMI L. RELLER has served as Chief Financial Officer since July 1999. Ms.
Reller is a 15 year veteran with Great Plains and has served as Vice
President of Finance and Investor Relations since January 1998, and Director
of Finance and Investor Relations since December 1996. She has also held
accounting, marketing management and sales positions during her career with
Great Plains. She holds a B.S. degree from Moorhead State University and a
M.B.A. from St. Mary's College in Moraga, CA.
STEVEN K. SYDNESS has served as Executive Vice President, Worldwide Sales and
Marketing, since January 1999. Mr. Sydness was Vice President, International
Operations from June 1997 to January 1999, Vice President, Dynamics 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
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 Executive Vice President, Organizational
Development, since November 1998. Ms. Uecker-Rust served as Vice President,
Center for Organizational Excellence (CORE) and Heritage Business of Great
Plains from June 1996 through November 1998. Ms. Uecker-Rust served as Vice
President, Employee Services for Great Plains 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 for more than
14 years. Prior to 1984 she was with Honeywell, Inc. She is a 1983 graduate
of North Dakota State University in Fargo, North Dakota where she earned a
B.S. in Industrial Engineering.
DARREN C. LAYBOURN has served as Vice President, Research and Development
since July 1998. 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, DynamicTools. Mr. Laybourn joined Great Plains in 1994 and prior to
that time was employed by the Boeing Company in Seattle, where he lead
development efforts supporting manufacturing and corporate computing
infrastructure. He holds a B.S. in Computer Science and Mathematics from the
University of Washington.
15
<PAGE>
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
Great Plains' 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. We also lease space for our
subsidiary operations in Canada, the United Kingdom, Scandinavia, South
Africa, Singapore and Australia. In addition, we have research and
development offices in Seattle, Washington, Minneapolis, Minnesota,
Watertown, South Dakota; Oslo, Norway; and Manila, Philippines. We occupy the
Fargo sites under lease agreements that expire at various times through 2004.
Total rent expense during fiscal 1999, 1998, and 1997 was $1,593,000,
$1,054,000, and $866,000, respectively. We are currently planning to move
into an expanded leased facility in Fargo, North Dakota, that is expected to
be occupied during the month of September and is under a lease agreement that
expires in 2013. We expect that the new facility will result in a substantial
increase in rent expense.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
From time to time, Great Plains and our subsidiaries are involved in litigation
arising out of operations in the normal course of business. In the opinion of
management, we currently are 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 our results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1999.
16
<PAGE>
PART II
ITEM 5. MARKET PRICE
- --------------------------------------------------------------------------------
Great Plains' 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 our Common Stock.
The following table sets forth, for the period indicated, the high and low
closing sales prices of Great Plains' 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 $29.250 $21.500
Third Quarter Fiscal 1998 $33.625 $20.500
Fourth Quarter Fiscal 1998 $39.250 $29.500
First Quarter Fiscal 1999 $39.500 $31.625
Second Quarter Fiscal 1999 $48.250 $30.125
Third Quarter Fiscal 1999 $49.000 $39.563
Fourth Quarter Fiscal 1999 $42.000 $26.750
</TABLE>
On July 26, 1999, the closing sales price per share of Great Plains' Common
Stock as quoted on the Nasdaq National Market was $44.313. On July 26, 1999,
there were approximately 284 holders of record of our Common Stock,
representing approximately 3,000 shareholder accounts.
The trading price of Great Plains' 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 us or
our 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 Great Plains' Common Stock.
Great Plains has never declared or paid cash dividends on its capital stock.
We currently intend to retain future earnings for use in our business and do
not anticipate paying any cash dividends in the foreseeable future.
17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 below and the Consolidated Financial Statements and
the Notes thereto included in Item 8 below.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------- ------------- ------------- ------------- ------------- -------------
YEAR ENDED MAY 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Revenues:
License $ 79,685 $ 52,949 $ 35,919 $ 27,078 $ 25,050
Service 55,222 32,710 21,201 15,193 12,847
---------------------------------------------------------------------
Total revenues 134,907 85,659 57,120 42,271 37,897
Cost of revenues:
License 19,355 11,220 6,362 4,913 4,439
Service 18,350 11,118 8,260 5,980 5,622
---------------------------------------------------------------------
Total cost of revenues 37,705 22,338 14,622 10,893 10,061
---------------------------------------------------------------------
Gross profit 97,202 63,321 42,498 31,378 27,836
Operating expenses:
Sales and marketing 47,982 31,636 21,935 14,477 14,013
Research and development 20,427 12,586 9,678 8,876 9,308
General and administrative 11,080 7,587 5,592 4,763 3,886
Acquired in-process research and
development - 7,136 - - -
---------------------------------------------------------------------
Total operating expenses 79,489 58,945 37,205 28,116 27,207
---------------------------------------------------------------------
Operating income 17,713 4,376 5,293 3,262 629
Other income (expense), net 3,592 3,274 558 100 (260)
---------------------------------------------------------------------
Income before income taxes 21,305 7,650 5,851 3,362 369
Income tax provision (benefit) (1) 8,520 3,203 2,207 (4,099) 45
---------------------------------------------------------------------
Income before cumulative effect of
change in accounting principle 12,785 4,447 3,644 7,461 324
Cumulative effect of a change in - - - - (200)
accounting principle
---------------------------------------------------------------------
Net income $ 12,785 $ 4,447 $ 3,644 $ 7,461 $ 124
---------------------------------------------------------------------
---------------------------------------------------------------------
Income (loss) per common share:
Basic (2) $ 0.90 $ 0.33 $ (1.78) $ 0.58 $ 0.00
Diluted $ 0.86 $ 0.32 $ 0.36 $ 0.76 $ 0.01
---------------------------------------------------------------------
Shares used in computing income
(loss) per common share:
Basic 14,231,102 13,381,414 7,629,460 7,352,820 7,158,950
Diluted 14,872,579 14,089,092 10,003,349 9,764,924 9,164,980
---------------------------------------------------------------------
18
<PAGE>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------
MAY 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Assets:
Cash, cash equivalents and
investments $ 123,683 $ 66,918 $ 16,243 $ 8,256 $ 2,892
Total assets 180,252 102,845 33,214 24,361 15,327
Working capital 101,954 50,824 6,658 1,012 (4,992)
Liabilities and stockholders' equity
(deficit):
Deferred revenues 23,884 15,133 10,448 9,018 8,027
Long-term debt and capital lease
obligations, less current portion - - - 20 750
Mandatory redeemable convertible
preferred stock - - 28,698 11,502 8,300
Total stockholders' equity (deficit) 133,193 69,671 (16,277) (4,812) (9,066)
</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 carry forwards and
other deferred tax assets and was a result of management's analysis of
Great Plains' current levels of earnings and future outlook, which
increased the likelihood of Great Plains realizing its deferred tax assets.
See Note 10 to Consolidated Financial Statements.
(2)For the fiscal years ending May 31, 1997, 1996 and 1995, basic net income
per share is lower than the diluted net income per share due to the fact
that net income available to common stockholders for the basic calculation
is reduced by the increase in carrying value of the mandatorily redeemable
preferred stock. This increase in carrying value has a greater impact on
the basic calculation than does the inclusion of the preferred shares in
the diluted calculation. The mandatorily redeemable preferred stock was
converted into shares of common stock in June 1997 in connection with Great
Plains' initial public offering. See "Earnings Per Share" in Note 1 of
Notes to Consolidated Financial Statements.
19
<PAGE>
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 GREAT PLAINS SHOULD BE READ IN CONJUNCTION WITH GREAT PLAINS' CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO, AND THE OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS FORM 10-K REPORT. THIS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS DESCRIPTIONS OF GREAT
PLAINS' EXPECTATIONS REGARDING FUTURE TRENDS AFFECTING OUR 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 AS WELL AS EXHIBIT 99.1 TO THIS FORM 10-K SET FORTH CERTAIN
FACTORS GREAT PLAINS BELIEVES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS. GREAT PLAINS
UNDERTAKES NO OBLIGATION TO UPDATE THE FORWARD-LOOKING INFORMATION CONTAINED
IN THIS ITEM 7.
OVERVIEW
- --------------------------------------------------------------------------------
Great Plains Software, Inc. (Nasdaq: GPSI) provides fully integrated front
office/back office business management solutions for the midmarket. These
include financial, distribution, enterprise reporting, project accounting,
electronic business, human resources and payroll, manufacturing, service
management, sales and marketing, and customer service and support
applications. Our solutions are sold and implemented by a worldwide network
of independent partner organizations that share the company's commitment to
lasting customer relationships.
Great Plains 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, we anticipated the market shift toward Windows and
client/server technologies and in February 1993, released Dynamics. Dynamics
is our business management solution for small businesses in the midmarket. In
July 1994, we released eEnterprise (formally Dynamics C/S+). eEnterprise is
our e-business and enterprise-wide business management solution for the upper
tier of the midmarket, and is optimized for Windows NT and Microsoft SQL
Server.
During fiscal 1999, Great Plains launched several new applications on our
fully integrated platform. We added a human resources application, a
manufacturing solution and a sophisticated enterprise reporting solution,
which enhance our front office/back office business management solutions. The
acquisition of Match Data Systems in April 1999 further expanded our offering
with the addition of a project accounting solution developed specifically for
the Great Plains platform. Through this acquisition, we also acquired a
development center in Manila, Philippines with a 45-member development team.
In addition, in July 1999 we announced a partnership with Siebel Systems to
offer Great Plains Siebel Front Office, providing midmarket customers the
only fully integrated back office, front office, and electronic business
solution from a single source.
In addition to the new Manila development office established through the
Match Data Systems acquisition, our global organization now includes
subsidiaries in Canada, the United Kingdom, Scandinavia, South Africa,
Singapore and Australia. Our activities in additional countries through
international distribution partners include an intensified focus on Germany,
as well as ongoing efforts in Poland, the Czech Republic, the Benelux
countries, Portugal, Latin America, and the Middle East. Our solutions are
available in nine languages and have been sold in approximately 95 countries.
Great Plains made significant investments in research and development in the
early 1990s to launch Dynamics and eEnterprise. In addition, we have made a
significant investment in building an experienced and knowledgeable network
of independent channel partners to market, implement and support our Dynamics
and eEnterprise products (together, the "Great Plains platform products").
Since the release of the Great Plains platform products, our principal source
of revenues has shifted from the heritage product to Great Plains platform
products. Great Plains platform products accounted for 93.7%, 87.3% and 77.4%
of our total revenue for fiscal 1999, 1998 and 1997, respectively.
Great Plains' revenues are derived from two principal sources: software
license fees and fees for maintenance, technical support, training and
consulting services. As required, Great Plains recognizes revenue in
accordance with Statement of Position 97-2, Software Revenue Recognition,
which we adopted beginning June 1, 1998. Statement of Position 97-2 generally
requires revenue earned on software products, upgrades or enhancements,
rights to exchange or return software, post contract customer support, or
services, including elements deliverable only on a when-and-
20
<PAGE>
if-available basis, to be allocated to the various elements of such sale
based on vendor specific objective evidence of fair market values. If this
evidence does not exist, revenue from the sale would be deferred until
sufficient evidence exists, or until all elements have satisfied the
requirements for revenue recognition. Prior to adoption of Statement of
Position 97-2, Great Plains recognized revenue in accordance with Statement
of Position 91-1, Software Revenue Recognition. This adoption did not have a
material effect on the timing of Great Plains' revenue recognition or cause
changes to our 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 and associated registration keys. Fees for Great Plains'
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 Great Plains'
training and consulting services are recognized at the time the services are
performed.
Great Plains' eEnterprise and Dynamics customers are required to purchase a
one-year maintenance plan at the time the product is acquired. A majority of
these customers renew the maintenance plan after the initial term. Under the
maintenance plan, Great Plains provides these customers with product upgrades
in addition to on-line assistance and information. The maintenance program
for Great Plains' 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.
For further discussion of recently issued accounting standards that may
impact Great Plains' future financial results, see Note 1 of the Consolidated
Financial Statements.
21
<PAGE>
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in Great Plains'
consolidated statement of income.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES
Revenues:
License 59.1% 61.8% 62.9%
Service 40.9 38.2 37.1
- ----------------------------------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Cost of revenues:
License 14.3 13.1 11.1
Service 13.6 13.0 14.5
- ----------------------------------------------------------------------------------------------------------
Total cost of revenues 27.9 26.1 25.6
- ----------------------------------------------------------------------------------------------------------
Gross profit 72.1 73.9 74.4
Operating expenses:
Sales and marketing 35.6 36.9 38.4
Research and development 15.2 14.7 16.9
General and administrative 8.2 8.9 9.8
Acquired in-process research and
development 8.3
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 59.0 68.8 65.1
- ----------------------------------------------------------------------------------------------------------
Operating income 13.1 5.1 9.3
Other income, net 2.7 3.8 1.0
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 15.8 8.9 10.3
Income tax provision 6.3 3.7 3.9
- ----------------------------------------------------------------------------------------------------------
Net income 9.5% 5.2% 6.4%
---------------------------------------------------------------
</TABLE>
22
<PAGE>
REVENUES
REVENUES. Revenues increased to $134.9 million for fiscal 1999 from $85.7
million in fiscal 1998 and $57.1 million in fiscal 1997, representing
increases of 57.5% and 50.0%, respectively. These increases in revenues were
primarily due to increased demand for Great Plains platform products and
related services. The following table sets forth for the periods indicated
Great Plains platform and heritage product revenues, each as a percentage of
total revenues:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Great Plains platform product revenues 93.7% 87.3% 77.4%
Heritage product revenues 6.3% 12.7% 22.6%
--------------------------------------------------------------
</TABLE>
Great Plains platform product revenues, including license and service fees,
increased to $126.4 million for fiscal 1999 from $74.8 million in fiscal 1998
and $44.2 million in fiscal 1997, representing increases of 69.1% and 69.1%,
respectively.
The increase in Great Plains platform product revenues was offset, in part,
by a decrease in revenues from Great Plains' heritage product. Heritage
product revenues decreased to $8.5 million in fiscal 1999 from $10.9 million
in fiscal 1998 and $12.9 million in fiscal 1997 representing decreases of
22.1% and 15.6%, 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.
Also, the decrease in heritage product revenue can be attributed to the
expected decline in the number of customers purchasing Great Plains
Accounting Version 9 heritage upgrade, which was initially released in
February 1997. Great Plains anticipates that heritage product revenues will
continue to decrease in future periods.
Great Plains' international revenues increased to $22.8 million in fiscal
1999 from $13.4 million in fiscal 1998 and $8.6 million in fiscal 1997,
representing 16.9%, 15.6%, and 15.0% of total revenues for fiscal 1999, 1998
and 1997, respectively. These increases were the result of growth in existing
markets as well as the addition of distribution in new markets through new
subsidiaries and new international distribution partners. In fiscal 1999, the
revenue growth was largely a result of growth in markets served by our
existing subsidiary operations and the fact that all of our subsidiaries were
in operation for the entire year. In fiscal 1998, the growth was primarily a
result of growth in our international subsidiary operations in the United
Kingdom and Australia, as well as from the addition of new subsidiary
operations in Singapore, South Africa and Scandinavia.
LICENSE. Total license fee revenues increased to $79.7 million in fiscal 1999
from $53.0 million in fiscal 1998 and $35.9 million in fiscal 1997,
representing increases of 50.5% and 47.4%, respectively. These increases in
total license fee revenues are largely attributable to increased market
demand for our Great Plains platform products. In addition, we broadened our
Great Plains platform solutions in fiscal 1999 with the addition of human
resources, manufacturing and enterprise reporting solutions. The release of
these new solutions contributed to the increase in license fee revenue for
fiscal 1999.
The increase in Great Plains platform 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
sales of upgrades to existing heritage customers. The most recent significant
upgrade of the heritage product, Great Plains Accounting Version 9, was
released in February 1997 which was marketed principally to our installed
base of heritage product customers. Therefore, the decline in revenue from
the heritage products of 22.1% and 15.6% in 1999 and 1998 respectively, was
expected as we generally experience the majority of upgrade sales in the
quarters following a new release. Great Plains continues to expect that
overall heritage product license fee revenues will continue to decline.
23
<PAGE>
SERVICE. Service revenues increased to $55.2 million in fiscal 1999, from
$32.7 million in fiscal 1998 and $21.2 million in fiscal 1997, representing
increases of 68.8% and 54.3%, respectively. Service revenues as a percentage
of total revenues were 40.9%, 38.2%, and 37.1% for fiscal 1999, 1998 and
1997, respectively. The increase in service revenues is due largely to the
increased number of licenses for Great Plains platform products and renewals
of existing maintenance and support contracts from the increased installed
base of Great Plains platform 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-parties. Cost of
license fees increased to $19.4 million in fiscal 1999 from $11.2 million in
fiscal 1998 and $6.4 million in fiscal 1997, representing 24.3%, 21.2% and
17.7% of total license fee revenues in fiscal 1999, 1998 and 1997,
respectively. The increases in cost of license fees for fiscal 1999 and
fiscal 1998 are primarily attributable to an overall growth in license fee
revenues and an increase in the sale of products for which Great Plains is
obligated to pay royalties to third-party vendors. The increase in cost of
license fees as a percentage of license revenue increased in fiscal 1999 and
fiscal 1998 due to a higher mix of revenue from sales of third-party products
for which we have a royalty obligation. The cost of license fees as a
percentage of license fee revenues may continue to increase if Great Plains
enters into additional royalty arrangements or if the sale of products which
include a royalty obligation increase as a percentage of total license fee
revenues.
COST OF SERVICES. Cost of services consists of the costs of providing
telephone support, training and consulting services to customers and
partners. Cost of services increased to $18.3 million for fiscal 1999 from
$11.1 million in fiscal 1998 and $8.3 million in fiscal 1997. The increase in
cost of services is primarily due to the expansion of Great Plains' service
resources. Cost of services as a percentage of service revenues decreased to
33.2% for fiscal 1999 from 34.0% in fiscal 1998 and 39.0% for fiscal 1997.
These decreases are due, in part, to improved efficiency in operations and
continued strong customer enrollment in maintenance plans and support
contracts. We anticipate that cost of services will increase in dollar amount
as service revenues increase and may increase as a percentage of service
revenue if additional resources are added to support new initiatives.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, travel and promotional expenses. Sales and marketing
expenses increased to $48.0 million for fiscal 1999 from $31.6 million in
fiscal 1998 and $21.9 million in fiscal 1997, representing 35.6%, 36.9%, and
38.4% of total revenues for fiscal 1999, 1998 and 1997, respectively. The
decrease in sales and marketing expenses as a percentage of total revenues in
fiscal 1999 reflects an increase in sales and marketing productivity and a
corresponding increase in revenues derived from our Great Plains platform
products. The dollar increase in sales and marketing expenses for fiscal 1999
and fiscal 1998 is attributable to the hiring of additional sales and
marketing personnel, continued investments in expanding the capacity and
capability of the channel for our platform products, increased marketing
expenses for our Great Plains platform products including, a global
advertising and brand awareness campaign, and increased commission expenses
associated with higher revenues. In addition, Great Plains increased sales
and marketing expenses related to the operation of our international
subsidiaries in Canada, the United Kingdom, Scandinavia, South Africa,
Singapore and Australia. Great Plains anticipates that sales and marketing
expenses will increase in dollar amount as total revenues increase; however,
Great Plains 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 $20.4 million in fiscal 1999
from $12.6 million in fiscal 1998 and $9.7 million in fiscal 1997,
representing 15.2%, 14.7% and 16.9% of total revenues for fiscal 1999, 1998
and 1997, respectively. In fiscal 1999, the increase in research and
development both in dollars and as a percentage of total revenues was, in
part, due to additional resources added to further develop the new solution
areas of e-business, human resources, manufacturing and enterprise reporting,
as well as from resources added as a result of the fourth quarter 1999
acquisition of Match Data Systems, which included an established development
center in Manila, Philippines. In fiscal 1998, the dollar increase for
research and development was from development efforts primarily focused on
the delivery of substantial new versions of Great Plains platform products
and the release of an electronic commerce solution. Research and development
expenses decreased as a percentage of total revenues in fiscal 1998 due to
efficiencies gained through greater experience
24
<PAGE>
levels among development personnel, greater automation in our development
testing process and an increased focus on Microsoft technologies. We
anticipate that we will continue to devote substantial resources to our
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 $11.1 million for fiscal 1999 from
$7.6 million in fiscal 1998 and $5.6 million in fiscal 1997, representing
8.2%, 8.9% and 9.8% of total revenues for fiscal 1999, 1998 and 1997,
respectively. These increases in dollar amount were primarily due to
increased staffing and related expenses necessary to manage and support the
expansion of our operations. In addition, dollar increases in fiscal 1998
were due, in part, to expenses related to being a publicly held company. We
believe that our general and administrative expenses will increase in dollar
amount in the future to support the expansion of our operations.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Great Plains completed two
acquisitions in the fourth quarter of fiscal 1998, both of which were
accounted for using the purchase method of accounting. The first acquisition
provided a human resources application and manufacturing solution, while the
second acquisition provided a multinational enterprise reporting solution.
The purchase price for these acquisitions was $7.5 million for the
manufacturing and human resource applications and $4.4 million for the
enterprise reporting solution.
Valuation of the intangible assets acquired were determined by an independent
third party appraisal company and consisted of in-process research and
development, current technology, assembled workforce, and goodwill. The
amounts related to in-process research and development, as determined by the
independent third party appraisal company that was charged against income in
fiscal 1998, as the underlying research and development projects had not yet
reached technological feasibility and had no alternative future uses included
$3.2 million for manufacturing, $2.2 million for human resources, and $1.7
million for enterprise reporting.
Great Plains has used the acquired in-process research and development to
complete new products in the areas of human resources, manufacturing, and
enterprise reporting, which will become part of our product lines over the
next several years. We released the initial products developed from the
acquired in-process research and development in fiscal 1999. We expect
additional significant releases will continue through fiscal 2003.
The nature of the efforts required to complete development of the acquired
in-process research and development into commercially viable products
principally related to the completion of all designing, prototyping,
verification and testing activities necessary to establish that the products
can be produced to meet design specifications, including functions, features,
and technical performance requirements. The estimated costs at the time of
acquisition to be incurred to develop the purchased in-process technology
into commercially viable products were $8.6 million for the manufacturing
solution, $3.4 million for human resources, and $2.7 million for enterprise
reporting.
The value assigned to purchased in-process research and development was
determined by an independent third party appraiser, which projected cash
flows related to future products expected to be derived once technological
feasibility was achieved, including costs to complete the development of
technology and the future revenues and costs which are expected to result
from commercialization of the products. Cash flows recognized the
contribution of core technology and other supporting assets and were
discounted back to their present value at a rate of 35%. The resulting net
cash flows from such projects were based on estimates made by Great Plains
management of revenues, cost of sales, research and development costs,
selling, general and administrative costs, and income taxes resulting from
such projects. These management estimates were based on expected trends in
technology and the nature and expected timing of completion of acquired
in-process research and development. Nothing has come to management's
attention that would lead management to believe substantial changes need to
be made to the underlying assumptions.
Great Plains did not have any write-off of acquired in-process research and
development in fiscal 1999 or fiscal 1997. See Note 2 of Notes to
Consolidated Financial Statements.
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 $3.6 million for fiscal 1999
from $3.3 million in fiscal 1998 and $0.6 million in fiscal 1997. The
increase in other income, net in fiscal 1999 was
25
<PAGE>
primarily a result of increased investment earnings due to increased
investments as a result of the more than $47 million received from Great
Plains' public offering of common stock in March 1999, as well as additional
cash resulting from our increased operating income.
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 Great Plains' initial public offering of
common stock in June 1997, as well as additional cash resulting from our
increased operating income.
PROVISION FOR INCOME TAXES. Provision for income taxes was $8.5 million, $3.2
million and $2.2 million for fiscal 1999, 1998 and 1997, respectively. In fiscal
1999 and 1998, the provision for income taxes was 40% and 42%, respectively, of
income before income taxes, which represents an increase from the fiscal 1997
annual effective income tax rate of 38%. See Note 10 of Notes to Consolidated
Financial Statements.
26
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited consolidated financial
information for each of the four quarters in Great Plains' fiscal years ended
May 31, 1999, and May 31, 1998. 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. Great Plains believes that quarter-to-quarter
comparisons of our financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------------
MAY 31, FEB. 28, NOV. 30, AUG. 31, MAY 31, FEB. 28, NOV. 30, AUG. 31,
THREE MONTHS ENDED 1999 1999 1998 1998 1998 1998 1997 1997
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License $ 23,883 $ 21,247 $ 18,441 $ 16,114 $ 16,516 $ 13,816 $ 12,282 $ 10,335
Service 16,244 14,597 13,366 11,015 9,716 8,791 7,763 6,439
-----------------------------------------------------------------------------------------------------------------------------
Total revenues 40,127 35,844 31,807 27,129 26,232 22,607 20,045 16,774
Cost of revenues:
License 5,314 5,388 4,657 3,996 3,364 3,266 2,654 1,935
Service 5,716 4,910 4,148 3,576 3,635 2,723 2,511 2,251
-----------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 11,030 10,298 8,805 7,572 6,999 5,989 5,165 4,186
-----------------------------------------------------------------------------------------------------------------------------
Gross profit 29,097 25,546 23,002 19,557 19,233 16,618 14,880 12,588
Operating expenses:
Sales and marketing 14,311 12,398 11,740 9,533 9,311 8,416 7,709 6,199
Research and development 5,732 5,320 4,858 4,517 3,868 3,030 3,011 2,676
General and
administrative 3,208 3,018 2,336 2,518 1,946 2,086 1,662 1,894
Acquired in-process
research and development 7,136
-----------------------------------------------------------------------------------------------------------------------------
Total operating
expenses 23,251 20,736 18,934 16,568 22,261 13,532 12,382 10,769
-----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 5,846 4,810 4,068 2,989 (3,028) 3,086 2,498 1,819
Other income, net 1,450 794 699 649 593 878 1,067 736
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 7,296 5,604 4,767 3,638 (2,435) 3,964 3,565 2,555
Income tax provision
(benefit) 2,917 2,242 1,907 1,454 (832) 1,587 1,426 1,022
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,379 3,362 2,860 $ 2,184 $(1,603) $ 2,377 $ 2,139 $ 1,533
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
</TABLE>
Great Plains' 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 Great Plains' common stock. Great Plains establishes its expenditure
levels based on its expectations as to future revenue, and, if revenue levels
are below expectations, expenses can be disproportionately high. As a result,
a drop in near-term demand for Great Plains' products could significantly
affect both revenues and profits in any quarter. In the
27
<PAGE>
future, Great Plains' 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 Great Plains or our competitors, and capital
spending patterns of Great Plains' customers.
Great Plains' business has experienced and may continue to experience
seasonality. In recent years, due to a number of factors, including the
timing of product releases and sales incentive programs, Great Plains has
recognized a greater percentage of our revenue and operating income in our
fourth fiscal quarter than in any of the first three quarters. Moreover, due
to fiscal year-end sales incentive programs, Great Plains has historically
recognized less revenue and operating income in our first fiscal quarter than
in the other quarters.
As a result of these factors, there can be no assurance that Great Plains
will be able to maintain profitability on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
Great Plains has historically funded operations primarily through cash
provided by operations and the sale of equity securities. Currently, Great
Plains meets its working capital needs and capital equipment needs with cash
provided by operations.
Cash provided by operating activities was $24.6 million, $17.6 million, and
$10.3 million for fiscal 1999, 1998 and 1997, respectively. The increase in
cash provided by operations in fiscal 1999 was primarily due to revenue
growth and increased profits from Great Plains' operations as well as
increases in deferred revenues of $8.8 million, increase in accounts payable
and accrued expenses of $8.9 million offset by a $3.3 million reduction in
income taxes payable and a $3.8 million increase in accounts receivable. The
increase in cash provided by operations for fiscal 1998 was due primarily to
cash provided by the following: improved profitability of Great Plains'
operations, the $7.1 million non-cash charge for acquired in-process research
and development, an increase in accounts payable and accrued expenses of $4.4
million, an increase in deferred revenues of $3.9 million and an increase in
income taxes payable of $3.8 million. Cash generated from operations was
offset primarily by a $5.2 million increase in deferred tax assets and a $2.6
million increase in accounts receivable.
Great Plains' investing activities used cash of $65.8 million, $63.8 million,
and $7.1 million for fiscal 1999, 1998, and 1997, respectively. The principal
use of cash in investing activities for fiscal 1999 and 1998 was
approximately $47 million and approximately $50 million for the purchase of
investments following Great Plains' second public offering and initial public
offering of common stock, respectively. Investing activities in fiscal 1999
also included cash used of approximately $14.7 million for the purchase of
property and equipment to support our growth as well as the need to furnish
the new building that we will be moving into late in the first quarter of
fiscal 2000. Investing activities in fiscal 1998 also included cash used of
approximately $11.9 million for two acquisitions completed in the fourth
quarter of fiscal 1998. 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 our
operations. Investing activities in fiscal 1997 primarily consisted of
increased capital expenditures related to the acquisition of computer
equipment and furniture required to support expansion of our operations as
well as the purchase of investments.
Great Plains' financing activities provided cash of $50.0 million, $52.2
million, and $0.7 million during fiscal 1999, 1998 and 1997, respectively.
For fiscal 1999, cash of $50.0 million was provided from financing activities
primarily from $47.2 million from the sale of Great Plains common stock in a
public offering in March 1999 and proceeds received from stock options that
were exercised during the year. For fiscal 1998, cash of $52.2 million was
provided from financing activities primarily from $50.2 million from the sale
of Great Plains 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.
Great Plains' sources of liquidity at May 31, 1999, consisted principally of
cash, cash equivalents and investments of $123.7 million. Great Plains also
has a $10.0 million revolving line of credit facility with a bank. The line
of credit
28
<PAGE>
expires November 1999, and borrowings made thereunder are subject to certain
covenants. No amounts were outstanding under the line of credit at May 31,
1999. See Note 8 of Notes to Consolidated Financial Statements. Great Plains
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.
YEAR 2000
Many currently installed computer systems and software are coded to accept
only two-digit entries in the date code fields. These date code fields will
need to accept four-digit entries to distinguish 21st century dates from 20th
century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced to comply
with Year 2000 requirements. The potential global impact of the Year 2000
problem is not known. If Year 2000 problems are not corrected in a timely
manner, they could affect Great Plains, and the U.S. and world economy
generally.
All of Great Plains' current products are Year 2000 compliant. Great Plains
platform products have been Year 2000 compliant since their initial
introduction, as are Versions 8 and 9 of the heritage product. Great Plains
is currently offering our heritage product customers a free Year 2000
compliant upgrade for prior versions of the heritage product. Even though
Great Plains' current products are Year 2000 compliant, there can be no
assurance that midmarket businesses will have sufficient resources available
for the acquisition of new systems from us because they may be diverting
resources to fix internal systems that are not Year 2000 compliant.
Great Plains has formed a project team (consisting of representatives from
our information technology, finance, manufacturing, product development,
sales, marketing and legal departments) to address other internal and
external Year 2000 issues. Our internal financial, manufacturing and other
computer systems are being reviewed to assess and remediate Year 2000
problems. Our assessment of internal systems includes our information
technology as well as other systems that contain embedded technology in
manufacturing or process control equipment containing microprocessors or
other similar circuitry. Our Year 2000 compliance program includes the
following phases:
- - identifying systems that need to be modified or replaced;
- - carrying out remediation work to modify existing systems or convert to new
systems; and
- - conducting validation testing of systems and applications to ensure
compliance. Great Plains is currently completing the second phase of this
program.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive. We have replaced certain financial and operational
systems in the last several years, and management believes that the new
equipment and software substantially addresses Year 2000 issues. However, we
will be required to modify some of our existing hardware and software for our
computer systems to function properly in the Year 2000 and thereafter. We
have substantially completed our Year 2000 compliance program for all of our
significant internal systems as of May 31, 1999.
In addition, Great Plains has received assurances from our major suppliers
that they are addressing the Year 2000 issue, and that products purchased by
us from such suppliers will function properly in the Year 2000. However, it
is impossible to fully assess the potential consequences in the event service
interruptions from suppliers occur or in the event that there are disruptions
in such infrastructure areas as utilities, communications, transportation,
banking and government.
The total estimated cost for resolving Great Plains' Year 2000 issues is
approximately $100,000, of which approximately $75,000 has been spent through
May 31, 1999. The total cost estimate includes the cost of replacing
non-compliant systems as a remediation cost in cases where we have
accelerated plans to replace such systems. Estimates of Year 2000 costs are
based on numerous assumptions, and there can be no assurance that the
estimates are correct or that actual costs will not be materially greater
than anticipated.
29
<PAGE>
Based on assessments to date, Great Plains believes it will not experience
any material disruption as a result of Year 2000 problems in internal
manufacturing processes, information processing or interface with major
customers, or with processing orders and billing. However, if certain
critical third-party providers, such as those providers supplying
electricity, water or telephone service, experience difficulties resulting in
disruption of service to Great Plains, a shutdown of Great Plains' operations
at individual facilities could occur for the duration of the disruption.
Great Plains has developed a contingency plan to provide for continuity of
processing in the event of various problem scenarios. Assuming no major
disruption in service from utility companies or other critical third-party
providers, we believe that we will be able to manage our total Year 2000
transition without any material effect on our results of operations or
financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." See Note 1 of Notes to Consolidated
Financial Statements included in "Item 8 -- Consolidated Financial Statements
and Supplementary Data."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Great Plains does not have operations subject to risks of material foreign
currency fluctuations, nor does it use derivative financial instruments in
our operations or investment portfolio. Great Plains places our investments
in instruments that meet high credit quality standards, as specified in our
investment policy guidelines. We do not expect any material loss with respect
to our investment portfolio or exposure to market risks associated with
interest rates.
30
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants..............................................................................32
Consolidated Balance Sheet as of May 31, 1999 and 1998.........................................................33
Consolidated Statement of Income for the three fiscal years ended May 31, 1999.................................34
Consolidated Statement of Stockholders' Equity for the three fiscal years ended May 31, 1999...................35
Consolidated Statement of Cash Flows for the three fiscal years ended May 31, 1999.............................36
Notes to Consolidated Financial Statements.....................................................................37
Financial Statement Schedule:
For the three years ended May 31, 1999
Schedule II -- Schedule of Valuation and Qualifying Accounts.................................................55
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Great Plains Software, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Great Plains Software, Inc. and its subsidiaries at May 31, 1999
and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended May 31, 1999, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedules 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
June 25, 1999
32
<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31,
- ----------------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,983 $ 18,197
Investments 96,700 48,721
Accounts receivable, net 12,593 8,790
Inventories 746 542
Prepaid expenses and other assets 6,340 2,914
Deferred income tax assets 5,542 4,630
----------- -----------
Total current assets 148,904 83,794
Property and equipment, net 19,126 8,501
Goodwill and other intangibles, net 3,838 4,946
Deferred income tax assets 3,091 3,318
Other assets 5,293 2,286
----------- -----------
Total assets $ 180,252 $ 102,845
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,392 $ 4,135
Accrued expenses 11,590 6,941
Income tax payable - 3,257
Salaries and wages payable 1,031 836
Commissions payable 2,053 2,668
Deferred revenues 23,884 15,133
----------- -----------
Total current liabilities 46,950 32,970
Deferred income tax liabilities 109 204
----------- -----------
Total liabilities 47,059 33,174
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, par value $.01 per share: 100,000,000 shares authorized,
15,362,820 shares and 13,720,920 shares issued and outstanding, respectively 154 137
Additional paid-in capital 118,683 67,801
Accumulated other comprehensive loss (162) -
Retained earnings 14,518 1,733
----------- -----------
Total stockholders' equity 133,193 69,671
----------- -----------
Total liabilities and stockholders' equity $ 180,252 $ 102,845
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
-33-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Revenues:
License $ 79,685 $ 52,949 $ 35,919
Service 55,222 32,710 21,201
------------- ------------- -------------
Total revenues 134,907 85,659 57,120
------------- ------------- -------------
Cost of revenues:
License 19,355 11,220 6,362
Service 18,350 11,118 8,260
------------- ------------- -------------
Total cost of revenues 37,705 22,338 14,622
------------- ------------- -------------
Gross profit 97,202 63,321 42,498
Operating expenses:
Sales and marketing 47,982 31,636 21,935
Research and development 20,427 12,586 9,678
General and administrative 11,080 7,587 5,592
Acquired in-process research and development - 7,136 -
------------- ------------- -------------
Total operating expenses 79,489 58,945 37,205
------------- ------------- -------------
Operating income 17,713 4,376 5,293
Interest expense (3) (2) (98)
Other income, net 3,595 3,276 656
------------- ------------- -------------
Income before income taxes 21,305 7,650 5,851
Income tax provision 8,520 3,203 2,207
------------- ------------- -------------
Net income $ 12,785 $ 4,447 $ 3,644
------------- ------------- -------------
------------- ------------- -------------
Income (loss) per common share:
Basic $ 0.90 $ 0.33 $ (1.78)
------------- ------------- -------------
------------- ------------- -------------
Diluted $ 0.86 $ 0.32 $ 0.36
------------- ------------- -------------
------------- ------------- -------------
Shares used in computing income (loss) per common share:
Basic 14,231,102 13,381,414 7,629,460
------------- ------------- -------------
------------- ------------- -------------
Diluted 14,872,579 14,089,092 10,003,349
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to the consolidated financial statements.
-34-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A PREFERRED COMMON STOCK ACCUMULATED
------------------ ------------ ADDITIONAL RETAINED OTHER
PAID-IN EARNINGS COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) LOSS TOTAL INCOME
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance May 31, 1996 225,000 $ 199 7,359,765 $ 74 $ 1,273 $ (6,358) $ (4,812)
Exercise of stock 732,447 7 1,544 1,551
options
Net repurchases of (11,877) (54) (54)
common stock
Increase of carrying
value of mandatorily
redeemable preferred
stock (17,196) (17,196)
Tax benefit from
stockholder transaction 590 590
Net income 3,644 3,644 $ 3,644
---------------------------------------------------------------------------------------------------------
Balance May 31, 1997 225,000 $ 199 8,080,335 81 (13,843) (2,714) (16,277) 3,644
-----------
-----------
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 (225,000) (199) 1,847,627 18 28,878 28,697
to common stock
Tax benefit from
stockholder
transactions 586 586
Stock issued for business
Combination 56,250 1 71 72
Net income 4,447 4,447 4,447
---------------------------------------------------------------------------------------------------------
Balance May 31, 1998 13,720,920 137 67,801 1,733 69,671 4,447
-----------
-----------
Sale of common
stock, net 1,318,325 13 47,165 47,178
Exercise of stock
options 218,534 3 2,804 2,807
Tax benefit from
stockholder transactions 978 978
Stock issued for
business combination 105,041 1 (65) (64)
Translation adjustment (81) (81) (81)
Unrealized loss on investments (81) (81) (81)
Net income 12,785 12,785 12,785
---------------------------------------------------------------------------------------------------------
Balance May 31, 1999 $ 15,362,820 $154 $118,683 $14,518 $ (162) $133,193 $ 12,623
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
-35-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,785 $ 4,447 $ 3,644
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,147 2,863 2,155
Acquired in-process research and development - 7,136 -
Deferred income tax expense (780) (5,211) 2,207
Changes in operating assets and liabilities excluding
effect of business combinations:
Accounts receivable (3,803) (2,603) (256)
Inventories (204) 25 (113)
Prepaid expenses and other assets (2,512) (1,601) (557)
Accounts payable and accrued expenses 8,906 4,391 (141)
Income taxes payable (3,257) 3,843 -
Salaries, wages and commissions payable (420) 391 1,933
Deferred revenue 8,751 3,947 1,430
----------- ----------- -----------
Net cash provided by operating activities 24,613 17,628 10,302
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (14,744) (5,265) (2,778)
Purchases of businesses - (11,870) -
Purchase of investments (384,089) (714,104) (4,892)
Proceeds from investments 336,028 669,525 750
Purchase of other assets (3,007) (2,036) (188)
----------- ----------- -----------
Net cash used by investment activities (65,812) (63,750) (7,108)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on notes payable and long-term debt - - (599)
Exercise of stock options 2,807 1,903 1,551
Principal payments on capital lease obligations - - (247)
Repurchases of common stock - - (54)
Proceeds from issuance of common stock, net 47,178 50,315 -
----------- ----------- -----------
Net cash provided by financing activities 49,985 52,218 651
----------- ----------- -----------
Increase in cash and cash equivalents 8,786 6,096 3,845
Cash and cash equivalents at beginning of period 18,197 12,101 8,256
----------- ----------- -----------
Cash and cash equivalents at end of period $ 26,983 $ 18,197 $ 12,101
----------- ----------- -----------
----------- ----------- -----------
Supplemental cash flow information:
Interest paid $ 3 $ 2 $ 68
Income taxes paid $ 11,475 $ 4,005 $ 83
Noncash tax benefit from stockholder transactions $ 978 $ 586 $ 590
</TABLE>
See accompanying notes to the consolidated financial statements.
-36-
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS INFORMATION
Great Plains Software, Inc. (NASDAQ: GPSI) provides fully integrated
front office/back office business management solutions for the midmarket.
These include financial, distribution, enterprise reporting, project
accounting, electronic business, human resources and payroll,
manufacturing, service management, sales and marketing, and customer
service and support applications. Our solutions are sold and implemented
by a unique worldwide network of independent partner organizations that
share the Company's commitment to lasting customer relationships.
SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY AND FOREIGN CURRENCY TRANSLATIONS
The consolidated financial statements include the accounts of the
Company and its subsidiaries in Canada, the United Kingdom, Scandinavia,
South Africa, Singapore, Australia and the Philippines. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Essentially all assets and liabilities are translated to
U.S. dollars at year-end exchange rates, while elements of the income
statement are translated at average exchange rates in effect during the
year. The functional currency of the subsidiaries is the local currency.
Therefore, all translation gains and losses resulting from fluctuations
in currency exchange rates of these subsidiaries are recorded as a
component of accumulated other comprehensive loss in equity.
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. No single customer or region represents a
significant concentration of credit risk. The Company invests its cash
with high quality financial institutions.
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.
37
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments in debt securities that are not cash equivalents have been
designated as available for sale. Those securities, which consist of
various high rated governmental securities and corporate commercial
paper, are reported at fair value, with net unrealized gains and losses
included in stockholders' equity. The unrealized loss, net of income tax,
was $81,000 at May 31, 1999. The maturities of the 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.
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.
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
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 their 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 revenues are recognized upon shipment less a reserve
for estimated future returns. Revenues from support and maintenance
service contracts are recorded as deferred revenues 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. Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition," is effective in fiscal 1999
and was adopted by the Company on June 1, 1998. The adoption of SOP 97-2
did not have a material effect on the timing of the Company's revenue
recognition or cause changes to its revenue recognition policies.
38
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $7,638,000, $3,731,000,
and $1,990,000 for the years ended May 31, 1999, 1998 and 1997,
respectively.
RESEARCH AND DEVELOPMENT
Expenditures for software development costs and research are expensed
as incurred. Such costs are required to be expensed until the point that
technological feasibility is established. The period between achieving
technological feasibility and the general availability of such software
has been short. Consequently, costs otherwise capitalizable after
technological feasibility is achieved are generally expensed because they
are insignificant.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"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. All earnings per share amounts
for all periods have been presented, and where necessary, restated to
conform with the provisions of SFAS No. 128.
39
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted net
income per share (dollars in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Basic earnings per share computation:
Net income $ 12,785 $ 4,447 $ 3,644
Increase to carrying value of mandatorily
redeemable preferred stock - - (17,196)
--------------- --------------- ---------------
Net income available to common stockholders $ 12,785 $ 4,447 $ (13,552)
--------------- --------------- ---------------
--------------- --------------- ---------------
Weighted average common shares 14,231,102 13,381,414 7,629,460
--------------- --------------- ---------------
--------------- --------------- ---------------
Basic net income per share $ 0.90 $ 0.33 $ (1.78)
--------------- --------------- ---------------
--------------- --------------- ---------------
Diluted earnings per share computation:
Net income $ 12,785 $ 4,447 $ 3,644
Shares calculation:
Weighted average number of common shares 14,231,102 13,381,414 7,629,460
Weighted average of assumed conversion of
mandatorily redeemable preferred stock - - 1,847,627
Effect of dilutive stock options 641,477 707,678 526,262
--------------- --------------- ---------------
14,872,579 14,089,092 10,003,349
--------------- --------------- ---------------
--------------- --------------- ---------------
Diluted net income per share $ 0.86 $ 0.32 $ 0.36
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
COMPREHENSIVE INCOME
On June 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting of Comprehensive Income."
Comprehensive income for the Company includes net income, the effects of
currency translation which are charged or credited to the cumulative
translation adjustment account within stockholder's equity, and the
unrealized gain/loss on investments available for sale which is recorded
within stockholders' equity. Comprehensive income for all periods
presented is included in the Consolidated Statement of Stockholders'
Equity.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities." This standard establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company
must adopt this standard no later than June 1, 2001. Management believes
the adoption of SFAS No. 133 will not have a material effect on the
Company's financial statements.
40
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS
On April 30, 1999, the Company received all of the outstanding
capital stock of Match Data Systems, Inc., a software provider of project
accounting solutions, in a transaction that was accounted for as a
pooling of interests. To affect the business combination, the Company
issued a combination of 159,618 shares and options 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 Match Data Systems, Inc. since May 1, 1999.
On April 20, 1998, the Company acquired certain assets and assumed
certain liabilities of ICONtrol, Inc., a software provider of
manufacturing and human resource 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 allocation included $5,456,000 to
in-process research and development, $1,935,000 to intangible assets and
$145,000 to the fair value of net tangible assets.
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 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 (dollars in thousands):
<TABLE>
<CAPTION>
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.
41
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATIONS (CONTINUED)
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 allocation included $1,680,000 to in-process research and
development, $990,000 to intangible assets, $1,681,000 to goodwill and
$55,000 to the fair value of net tangible assets.
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.
The application of purchase accounting to the acquisitions described
above was based on independent third-party appraisals using valuation
techniques commonly applied to attribute fair value to acquired assets. The
appraisals incorporated management's best estimates for future revenue and
profitability from products in the process of development at the time of
acquisition. As is the case with all projections of future events, actual
results could differ. Additionally, the SEC has challenged valuations
incorporating in-process research and development. If the assumptions or
valuation methods used were changed, the Company's financial statements
would be affected because allocations to in-process research and
development, which have been expensed, would be reallocated to intangible
assets which require amortization against income in future periods.
In September 1997, the Company received all of the outstanding capital
stock of its Singapore distributor in a transaction that was accounted for
as a pooling of interests. To effect 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 have 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
(dollars in thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------------
1999 1998
<S> <C> <C>
Gross accounts receivable $ 18,280 $ 13,472
Less allowance for returns and doubtful accounts (5,687) (4,682)
------------ ----------
$ 12,593 $ 8,790
------------ ----------
------------ ----------
</TABLE>
42
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------------
1999 1998
<S> <C> <C>
Furniture and fixtures $ 7,239 $ 2,416
Computers and equipment 23,520 15,685
Leasehold improvements 943 369
Purchased software for internal use 2,632 1,675
----------- -----------
34,334 20,145
Less accumulated depreciation and amortization (15,208) (11,644)
----------- -----------
$ 19,126 $ 8,501
----------- -----------
----------- -----------
</TABLE>
Depreciation expense for the years ended May 31, 1999, 1998, 1997, was
$4,069,000, $2,676,000, and $2,038,000, respectively.
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------------
1999 1998
<S> <C> <C>
Goodwill $2,308 $2,354
Other intangibles 2,925 2,925
------- ------
5,233 5,279
Less accumulated amortization (1,395) (333)
------- ------
$ 3,838 $4,946
------- ------
------- ------
</TABLE>
Amortization expense for the years ended May 31, 1999, 1998 and 1997
was $1,078,000, $187,000, and $117,000, respectively.
6. ACCRUED EXPENSES
Accrued expenses consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------------
1999 1998
<S> <C> <C>
Accrued vacation payable $ 2,473 $ 1,882
Coop advertising accrual 2,074 1,390
Other 7,043 3,669
----------- -----------
$ 11,590 $ 6,941
----------- -----------
----------- -----------
</TABLE>
43
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER INCOME, NET
Other income, net consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
MAY 31,
-------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Interest income $ 3,998 $ 3,508 $ 540
Other (403) (232) 116
----------- ----------- -----------
$ 3,595 $ 3,276 $ 656
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
8. LINE OF CREDIT
The Company has a $10,000,000 revolving line of credit facility with a
bank that 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 1999, and is subject to certain covenants, all of
which had been complied with at May 31, 1999. There were no amounts
outstanding at May 31, 1999 or 1998.
9. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
Rental expense incurred for operating leases of office facilities and
office equipment was approximately $1,706,000 in 1999, $1,054,000 in 1998
and $866,000 in 1997. Future minimum rental payments as of May 31, 1999,
for noncancelable operating leases with initial or remaining terms in
excess of one year are payable as follows: fiscal 2000 - $3,413,000,
fiscal 2001 - $3,154,000, fiscal 2002 - $2,889,000 and fiscal 2003 -
$2,454,000 and fiscal 2004 - $2,303,000.
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 material adverse effect on the financial position
or results of operations or cash flows of the Company.
44
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (dollars in thousands):
<TABLE>
<CAPTION>
MAY 31,
------------------------
1999 1998
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of financial reporting $ 109 $ 204
----------- -----------
Total deferred tax liabilities 109 204
----------- -----------
Deferred tax assets:
Current:
Accounts receivable allowances 2,086 1,925
Deferred revenue 592 507
Accruals and other 2,864 2,198
----------- -----------
Total current deferred income tax assets 5,542 4,630
----------- -----------
Long-term:
Net operating loss of foreign subsidiaries 664 606
Acquired-in-process research and development 2,427 2,712
----------- -----------
Total long-term deferred income tax assets 3,091 3,318
----------- -----------
Total net deferred income taxes $ 8,524 $ 7,744
----------- -----------
----------- -----------
</TABLE>
The provision for income taxes is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
MAY 31,
-------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Current income taxes:
Federal $ 8,244 $ 6,954 $ 1,502
State 1,056 1,460 38
Net operating loss carryforward - - (950)
----------- ----------- -----------
9,300 8,414 590
Deferred income taxes:
Federal (683) (4,560) 1,471
State (97) (651) 146
----------- ----------- -----------
(780) (5,211) 1,617
----------- ----------- -----------
$ 8,520 $ 3,203 $ 2,207
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
45
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
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 (dollars in thousands):
<TABLE>
<CAPTION>
MAY 31,
-------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Expected tax provision at statutory rate $ 7,457 $ 2,678 $ 1,981
State income taxes, net of federal tax effect 633 575 175
Other 430 (50) 51
----------- ----------- -----------
Total $ 8,520 $ 3,203 $ 2,207
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
11. INCENTIVE STOCK OPTION PLAN
On May 31, 1999, 1,709,727 shares of common stock had been reserved
for issuance or grant under the Company's stock option plans. 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:
<TABLE>
<CAPTION>
WEIGHTED
OPTION EXPIRATION AVERAGE
OPTIONS PRICE RANGE DATE EXERCISE PRICE
OUTSTANDING PER SHARE (FISCAL YEAR) PER SHARE
----------- -------------- ------------ --------
<S> <C> <C> <C> <C>
Outstanding at May 31, 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
Granted 453,061 $29.50 to $48.25 $36.31
Exercised (152,522) $ 2.42 to $28.25 $ 6.28
Canceled/expired (24,672) $ 6.41 to $48.25 $25.06
--------------
Outstanding at May 31, 1999 1,272,782 $3.41 to $48.25 2000 - 2009 $19.46
--------------
--------------
</TABLE>
As of May 31, 1999 there were currently exercisable options
outstanding covering 352,478 shares, exercisable at prices ranging
from $3.41 to $41.94 per share.
46
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCENTIVE STOCK OPTION PLAN (CONTINUED)
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
(dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $ 12,785 $ 4,447 $ 3,644
Pro forma $ 10,597 $ 2,826 $ 3,508
Earnings per share (diluted):
As reported $ 0.86 $ 0.32 $ 0.36
Pro forma $ 0.71 $ 0.20 $ 0.35
</TABLE>
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>
1999 1998 1997
<S> <C> <C> <C>
Expected dividend level 0 0 0
Expected stock price volatility 62.6% 58.8% 53.8%
Risk free interest rates 5.1% 6.0% 6.5%
Expected life of options 5-10 years 5-10 years 6 years
</TABLE>
The following table summarizes the status of the Company's stock
options outstanding as of May 31, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
------------------------ --------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE PRICE EXERCISE PRICE
EXERCISE PRICE SHARES CONTRACTUAL LIFE PER SHARE SHARES PER SHARE
-------------- ------ ---------------- --------- ------ ---------
<C> <C> <C> <C> <C> <C>
$ 3.41 to $ 4.16 71,860 1.4 years $ 4.12 46,121 $ 4.10
$ 5.20 to $ 7.71 463,130 2.7 years $ 6.42 187,927 $ 6.55
$ 16.00 to $ 23.88 311,658 6.6 years $ 18.24 77,686 $ 17.56
$ 26.38 to $ 39.25 386,400 9.1 years $ 34.85 28,744 $ 27.70
$ 41.94 to $ 48.25 39,734 6.4 years $ 43.16 12,000 $ 41.94
------ ------
1,272,782 352,478
--------- -------
--------- -------
</TABLE>
47
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999,
1998, and 1997, was approximately $578,000, $389,000, and $310,000,
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,
the form of a stock dividend, to be effective immediately prior to the
public offering (all references to common stock amounts, shares, per
share data and preferred stock conversion rights included in the
financial statements and these notes have been adjusted to give
retroactive effect to the stock split); (b) authorized an increase in
capital stock to 100,000,000 shares of $0.01 par value common stock and
30,000,000 shares of $0.01 par value preferred stock to be both
contingent and effective upon stockholder approval and the first closing
of the initial public offering of common stock; (c) waived, subject to
the closing of an initial public offering, the Company's contractual
rights to repurchase shares of common stock from employees of the
Company; and (d) authorized certain incentive stock plans contingent and
effective upon stockholder approval and consummation of the initial
public offering. These incentive plans include (i) the 1997 Employee
Stock Purchase Plan providing for the purchase of common stock at a
discounted price, (ii) the 1997 Stock Incentive Plan providing for the
grant of stock-based compensation to eligible persons and (iii) the
Outside Directors' Stock Option Plan providing for the grant of
nonqualified stock options to nonemployee directors of the Company.
SERIES A CONVERTIBLE PREFERRED STOCK
In June 1994, the Company sold 225,000 shares of $.01 par value
Series A Convertible Preferred Stock (the "Series A Preferred Stock") at
$1.00 per share to an officer/director who may convert these shares into
54,000 shares of common stock at any time after June 15, 1997, at a rate
of .24 shares of common stock for each share of Series A Preferred Stock.
The Series A Preferred Stock were converted to shares of common stock
upon completion of the Initial Public Offering on June 19, 1997.
SERIES B MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Also in June 1994, the Company entered into an agreement for the sale
of Series B Mandatorily Redeemable Convertible Preferred Stock (the
"Series B Preferred Stock") and issued a total of 1,345,220 shares at an
average price of $6.17.
Holders of the Series B Preferred Stock converted their shares into
1,793,627 shares of common stock upon completion of the Initial Public
Offering on June 19, 1997. Prior to the conversion to common stock, the
Company carried this Series B Preferred Stock at fair value which
management considered to equal $21.33 per share at May 31, 1997. The
increase in carrying value of Series B Preferred Stock is reflected as a
reduction to Additional Paid-in Capital.
48
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION AND GEOGRAPHIC AREAS
Effective June 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for disclosures about operating segments, products
and services, geographic areas and major customers. Management has
determined that the Company operates in one industry segment, providing
business management software solutions to midmarket businesses.
Substantially all of the Company's revenues are derived from the
licensing of software products and providing related consulting, support
and training services. The following table presents a revenue and
long-lived asset summary by geographic region (dollars in thousands):
<TABLE>
<CAPTION>
NORTH ASIA AND OTHER ELIMI- CONSOLI-
AMERICA EUROPE AUSTRALIA FOREIGN NATIONS DATED
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues from external
customers $ 119,496 $ 9,651 $ 3,388 $ 2,372 $ - $ 134,907
Intergeographic sales 5,256 1,526 - - (6,782) -
----------- ---------- ---------- ---------- ---------- -----------
Total sales $ 124,752 $ 11,177 $ 3,388 $ 2,372 $ (6,782) $ 134,907
----------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- -----------
Long-lived assets $ 17,286 $ 1,166 $ 530 $ 144 $ - $ 19,126
1998
Revenues from external
customers $ 77,441 $ 4,552 $ 2,096 $ 1,570 $ - $ 85,659
Intergeographic sales 4,779 - - - (4,779) -
----------- ---------- ---------- ---------- ---------- -----------
Total sales $ 82,220 $ 4,552 $ 2,096 $ 1,570 $ (4,779) $ 85,659
----------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- -----------
Long-lived assets $ 7,958 $ 194 $ 207 $ 142 $ - $ 8,501
1997
Revenues from external
customers $ 53,477 $ 2,195 $ 645 $ 803 $ - $ 57,120
Intergeographic sales 956 - - - (956) -
----------- ---------- ---------- ---------- ---------- -----------
Total sales $ 54,433 $ 2,195 $ 645 $ 803 $ (956) $ 57,120
----------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- -----------
Long-lived assets $ 5,676 $ 145 $ - $ - $ - $ 5,821
</TABLE>
Sales between geographic regions are made at prices which would
approximate transfers to unaffiliated distributors. Revenues are
allocated to geographic regions based on the location in which the sale
originated. No single customer represents over 10% of the Company's
consolidated sales.
49
<PAGE>
GREAT PLAINS SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. QUARTERLY FINANCIAL DATA (UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
<S> <C> <C> <C> <C> <C>
Net revenues:
Fiscal 1999 $ 27,129 $ 31,807 $ 35,844 $ 40,127 $ 134,907
Fiscal 1998 16,774 20,045 22,607 26,232 85,659
Gross profit:
Fiscal 1999 $ 19,557 $ 23,002 $ 25,546 $ 29,097 $ 97,202
Fiscal 1998 12,588 14,880 16,618 19,233 63,321
Net income (loss):
Fiscal 1999 $ 2,184 $ 2,860 $ 3,362 $ 4,379 $ 12,785
Fiscal 1998 1,533 2,139 2,377 (1,603) 4,447
Basic earnings (loss) per share:
Fiscal 1999 $ 0.16 $ 0.21 $ 0.24 $ 0.29 $ 0.90
Fiscal 1998 0.12 0.16 0.17 (0.12) 0.33
Diluted earnings (loss) per share:
Fiscal 1999 $ 0.15 $ 0.20 $ 0.23 $ 0.28 $ 0.86
Fiscal 1998 0.11 0.15 0.17 (0.12) 0.32
</TABLE>
Quarterly and annual earnings per share are calculated independently
based on the weighted-average number of shares outstanding during the
period.
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
The section under the heading "Election of Directors" on pages 3 through 5 and
the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
on page 12 of the Company's Proxy Statement dated August 9, 1999 ("1999 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 5 and 6 and the section entitled "Executive Compensation" on
pages 8 through 13 of the 1999 Proxy Statement are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" on pages 2 and 3 of the 1999 Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
None.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
DOCUMENTS FILED AS PART OF THIS REPORT
(a)
(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, 1999 and 1998
Consolidated Statement of Income for the three years in the
period ended May 31, 1999 Consolidated Statement of
Stockholder's Equity for the three years in the period ended
May 31, 1999 Consolidated Statement of Cash Flows for the
three years in the period ended May 31, 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. The following schedule follows
the signature page of this Annual Report on Form 10-K
Schedule II. Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable or not required or because the required information
is included in financial statements or notes thereto.
(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 Quarterly Report on Form 10-Q filed January 4, 1999)
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 Amendments 5 & 6 to Lease Agreement dated October 1, 1983, between the
Company and West Acres Office Park
10.3 Lease Agreement, dated October 23, 1997, between the Company and
Investor's Real Estate Trust
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, as amended
* 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.
52
<PAGE>
10.7 1997 Employee Stock Purchase Plan, as amended
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 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)) *
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
(b) Reports on Form 8-K
Great Plains filed no reports on Form 8-K during the quarter ended
May 31, 1999
* 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.
53
<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 9, 1999 GREAT PLAINS SOFTWARE, INC.
By /s/ Douglas J. Burgum
-------------------------------
Douglas J. Burgum
Chief Executive Officer,
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Douglas J. Burgum President, Chief Executive August 9, 1999
- ---------------------------- Officer and Chairman of the Board
Douglas J. Burgum
/s/ Tami L. Reller Chief Financial Officer August 9, 1999
- ----------------------------
Tami L. Reller
/s/ David K. Edson Controller August 9, 1999
- ----------------------------
David K. Edson
* Director August 9, 1999
- ----------------------------
Bradley J. Burgum
* Director August 9, 1999
- ----------------------------
Frederick W. Burgum
* Director August 9, 1999
- ----------------------------
William V. Campbell
* Director August 9, 1999
- ----------------------------
J.A. Heidi Roizen
* Director August 9, 1999
- ----------------------------
Joseph S. Tibbetts, Jr.
</TABLE>
* By /s/ Douglas J. Burgum
----------------------------
Douglas J. Burgum Attorney-in-Fact
54
<PAGE>
GREAT PLAINS SOFTWARE, INC.
SCHEDULE II--SCHEDULE OF VALUATION AND QUALIFYING
ACCOUNTS RECEIVABLE AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended May 31,
1999 . . . . . . . . . . . . $ 1,631 $ 1,123 $ 664 $ 2,090
1998 . . . . . . . . . . . . 991 766 126 1,631
1997 . . . . . . . . . . . . 667 408 84 991
Allowances for returns
Year ended May 31,
1999 . . . . . . . . . . . . $ 3,051 $ 9,859 $ 9,313 $ 3,597
1998 . . . . . . . . . . . . 1,616 6,726 5,291 3,051
1997 . . . . . . . . . . . . 1,213 4,007 3,604 1,616
</TABLE>
55
<PAGE>
EXHIBIT 10.2
AMENDMENT TO LEASE DATED OCTOBER 1, 1983
This Amendment is to be attached, and will constitute an extension of
the Lease dated October 1, 1983, by and between West Acres Office Park
(hereafter referred to as "WAOP") as Landlord, and Great Plains Software O.C.,
Inc. (hereafter referred to as GPS) as Tenant, covering the continuing leasing
of office space in the WAOP building.
<TABLE>
<CAPTION>
TOTAL SQUARE COST PER MONTHLY
AREA DESCRIPTION FEET SQUARE FOOT RENTAL
- ---------------- ------------ ----------- -------
<S> <C> <C> <C>
BASEMENT:
1. NW Corner 741 $ 8.53 527
2. Northwest (foss small repro) 520 $ 8.53 370
3. West Conf. Room 300 $ 8.53 213
4. Northeast 1,275 $ 8.53 906
5. Southwest Corner 1,276 $ 8.53 907
6. South Middle 280 $ 8.53 199
MAIN:
7. North 5,355 $13.97 6,234
8. Southwest Corner 3,912 $13.97 4,554
TOP:
9. North 5,354 $13.97 6,233
10. South 7,825 $13.97 9,110
------ -------
TOTALS 26,838 Total Sq. Feet $29,253
------ -------
PARKING:
1. Garage (four paid at $45, five free) $ 180
2. Outside plug-ins (six paid at $7.50, three free) 45
TOTAL MONTHLY RENTAL $29,478
</TABLE>
ADDITIONALLY, WAOP AND GPS HAVE AGREED TO THE FOLLOWING:
A. This Amendment shall be effective July 1, 1998 and continue through
June 30, 2003.
B. The rent listed above shall be effective July 1, 1998 and remain fixed
through June 30, 2002. Thereafter, the rent shall be adjusted as of
July 1, 2002 by the change in the Midwest Consumer Price Index from
March 31, 2001 vs. March 31, 2002, not to exceed 3%.
C. WAOP shall perform the following maintenance as soon as is practicable,
and no later than March 1, 1999:
i. Replace the bathroom flooring
<PAGE>
D. WAOP will install an external shut-off valve as soon as is practicable,
and no later than May 1, 1999.
E. WAOP will continue to work on exterior building water leaks, with a
problem correction by October 1, 1998, if possible, and no later than
June 1, 1999.
F. WAOP shall seek improvements in daytime maintenance as outlined in the
GPS letter of July 20, 1998, attached hereto.
G. Between January 1 and May 31, 2002, GPS may give notice of early
termination by providing WAOP a six month notice of termination AND a
lump sum prepayment of four months rent beyond occupancy. After June 1,
2002, GPS may give notice of early termination by providing WAOP a four
month notice of termination AND a lump sum payment of three months rent
beyond occupancy.
H. At any time during the term of this lease extension, GPS shall have the
right to sublease any and all space to a related entity or to a
Partner/Developer, doing business with GPS. GPS shall also have the
right to sublease any or all space to any business entity, with the
consent of WAOP, and such consent shall not be unreasonably withheld.
Dated this 21 day of December, 1998.
WEST ACRES OFFICE PARK GREAT PLAINS SOFTWARE O.C., INC.
By: /s/ Dennis L. Fuhrman By: /s/ Jodi Uecker-Rust
------------------------- --------------------------------
(as Landlord) (as Tenant)
DENNIS L. FUHRMAN, JODI UECKER-RUST,
GENERAL PARTNER EXECUTIVE VICE PRESIDENT
WITNESS: WITNESS:
/s/ Donna Hentges /s/ Douglas R. Herman
- ----------------------------- ------------------------------------
<PAGE>
SIXTH AMENDMENT TO LEASE
This Sixth Amendment to Lease is dated as of the 14th day of June,
1999, between WEST ACRES OFFICE PARK PARTNERSHIP, A NORTH DAKOTA GENERAL
PARTNERSHIP ("Landlord") and GREAT PLAINS SOFTWARE O.C., INC., A MINNESOTA
CORPORATION ("Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Lease dated
October 1, 1983, as amended by Amendment dated April 25, 1984, as amended by
Amendment dated September 30, 1985, as amended by Amendment dated November 26,
1988, as amended by Amendment dated July 20, 1993, and as amended by Amendment
dated December 21, 1998 (the Lease, as amended by all such Amendments, the
"Lease"), relating to certain real property hereafter identified.
B. The parties wish to clarify and/or amend the legal description of
the real property intended to be covered by the Lease.
AGREEMENTS
In consideration of the recitals and the following mutual agreements,
the parties agree to amend the Lease as follows:
1. LEGAL DESCRIPTION. Notwithstanding anything in the Lease to the
contrary, the only real property upon which the Leased Premises (as defined in
Section 1 of the Lease) is located is legally described as: Lot 1, Block 1, of
West Acres First Subdivision in part of the East 1/2 of Section 15, Township 139
North of Range 49 West of the 5th P.M., situate in the City of Fargo, Cass
County, North Dakota.
2. CONTINUING EFFECT/FURTHER MODIFICATIONS. The Lease, except as
hereby expressly amended, remains unmodified and in full force and effect. The
Lease shall not be further amended except in a writing signed by the parties.
The parties have signed this Sixth Amendment as of the date first above
written.
LANDLORD: TENANT:
WEST ACRES OFFICE PARK PARTNERSHIP GREAT PLAINS SOFTWARE O.C., INC.
By: /s/ Dennis L. Fuhrman By: /s/ Douglas R. Herman
----------------------------------- --------------------------------
Dennis L. Fuhrman, Managing Partner Douglas R. Herman,
General Counsel
<PAGE>
Exhibit 10.3
GREAT PLAINS SOFTWARE, INC.
CORPORATE HEADQUARTERS
LEASE AGREEMENT
DATED: OCTOBER 23, 1997
TENANT: GREAT PLAINS SOFTWARE, INC.,
A MINNESOTA CORPORATION
LANDLORD: IRET PROPERTIES,
A NORTH DAKOTA LIMITED PARTNERSHIP
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
SUMMARY OF BASIC LEASE PROVISIONS . . . . . . . . . . . . . . . . . . . . . iv
1. DEMISE AND PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . 1
2. TERM OF LEASE, HOLDOVER AND OPTIONS . . . . . . . . . . . . . . . . 1
3. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. CONSTRUCTION OF PREMISES . . . . . . . . . . . . . . . . . . . . . . 4
5. COMPLETION OF CONSTRUCTION; RENT COMMENCEMENT . . . . . . . . . . . 4
6. EVIDENCE OF TITLE, COVENANT OF TITLE AND QUIET POSSESSION . . . . . 5
7. USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. REAL ESTATE TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 6
9. MAINTENANCE BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . 8
10. MAINTENANCE BY TENANT . . . . . . . . . . . . . . . . . . . . . . . 8
11. ALTERATIONS, ADDITIONS AND IMPROVEMENTS . . . . . . . . . . . . . . 9
12. LANDLORD'S RIGHT OF ENTRY . . . . . . . . . . . . . . . . . . . . . 9
13. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
14. ASSIGNMENTS AND SUBLEASING . . . . . . . . . . . . . . . . . . . . . 10
15. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
16. INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17. RELEASE AND WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . . 13
18. FIRE AND CASUALTY DAMAGE . . . . . . . . . . . . . . . . . . . . . . 13
19. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
20. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
21. BANKRUPTCY OR INSOLVENCY . . . . . . . . . . . . . . . . . . . . . . 20
22. OPTION TO PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . 20
23. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . . . . . . . . 22
24. WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
25. NOTICES TO TENANT . . . . . . . . . . . . . . . . . . . . . . . . . 23
26. NOTICES TO LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . 23
27. RECORDATION, SHORT FORM . . . . . . . . . . . . . . . . . . . . . . 23
28. PARTIES BOUND . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
29. ENTIRE AGREEMENT; MODIFICATION; SEVERABILITY; CONSTRUCTION . . . . . 24
30. NUMBER AND GENDER . . . . . . . . . . . . . . . . . . . . . . . . . 24
31. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
32. LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
33. LAST EXECUTION AND EFFECTIVE DATE . . . . . . . . . . . . . . . . . 25
34. NO PARTNERSHIP FORMED . . . . . . . . . . . . . . . . . . . . . . . 25
35. AUTHORITY TO EXECUTE LEASE . . . . . . . . . . . . . . . . . . . . . 25
36. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
37. BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
38. HAZARDOUS WASTE . . . . . . . . . . . . . . . . . . . . . . . . . . 26
39. SURRENDER OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . 27
40. ATTORNEY'S FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 28
41. ESTOPPEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
42. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
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<PAGE>
ATTACHMENTS AND EXHIBITS
CONSTRUCTION ADDENDUM
EXHIBIT A - LEGAL DESCRIPTION
EXHIBIT B - NOTICE OF LEASE
EXHIBIT C - MEMORANDUM OF LEASE
EXHIBIT D - LANDLORD'S TITLE COMMITMENT
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<PAGE>
SUMMARY OF BASIC LEASE PROVISIONS
<TABLE>
<C> <S> <S>
1. Location: South of 42nd Avenue
Southwest and west of 38th Street
Southwest in the City of Fargo, North
Dakota, as more particularly described
in EXHIBIT A hereto
2. Rent Commencement: See Paragraph 3.3
3. Landlord's Address: IRET Properties
12 South Main
Minot, ND 58701
ATTN: Timothy P. Mihalick
Phone: (701) 837-4738
Fax: (701) 838-7785
4. Tenant's Address: Great Plains Software, Inc.
1701 SW 38th St.
Fargo, ND 58103
ATTN: Terri F. Zimmerman
Phone: (701) 281-6776
Fax: (701) 281-3752
5. Property: Corporate headquarters
6. Primary Term: Fourteen (14) years
7. Extension Options: Six (6) extension options for (5) years
each
8. Fixed Annual Rent: YEARS 1-14: 12.5% of Project Costs (as
defined in the Construction Addendum
attached hereto)
</TABLE>
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<PAGE>
<TABLE>
<C> <S> <S>
EXTENSION PERIODS: as provided in
Paragraph 2.4
9. Purchase Option: See Paragraph 22
10. Right of First Refusal: See Paragraph 23
</TABLE>
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<PAGE>
LEASE AGREEMENT
This Lease Agreement (hereinafter the "LEASE") is made and entered into
by and between:
<TABLE>
<S> <S>
"LANDLORD": IRET Properties, a North Dakota
Limited Partnership
12 South Main
Minot, ND 58701
Federal Tax #91-1764859
"TENANT" Great Plains Software, Inc.,
& a Minnesota corporation
"Developer": 1701 SW 38th St.
Fargo, ND 58103
Federal Tax # 45-0374871
</TABLE>
W I T N E S S E T H:
1. DEMISE AND PREMISES
1.1. Landlord, in consideration of the rents hereinafter reserved and
agreed to be paid by Tenant, hereby leases to Tenant, and Tenant hereby leases
from Landlord, all of the land situated within the County of Cass and State of
North Dakota, as more particularly described with full legal description in
EXHIBIT A (the "LAND"), and all buildings and improvements now or hereafter
constructed or located thereon ( collectively the "BUILDING") (the Land and
Building hereinafter collectively referred to as the "PREMISES"), together with,
and the term Premises shall include, all Landlord's rights, privileges,
easements, hereditament and appurtenances appertaining thereto, including
without limitation any such rights, privileges, easements, hereditament and
appurtenances in, over and upon adjoining and adjacent public and private land,
highways, roads and streets required for ingress and egress to and from the
Premises.
2. TERM OF LEASE, HOLDOVER AND OPTIONS
2.1. Tenant shall have and hold the same for a term (the "Lease Term")
commencing on the date hereof and ending on the last day of the fourteenth
(14th) Lease Year (as such term is defined in Paragraph 3.4), unless extended or
terminated in accordance with the provisions hereof; provided, however, that
Tenant's obligation to pay Rent shall not commence until the Rent Commencement
Date (as defined in Article 5 below).
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<PAGE>
2.2. Landlord and Tenant agree to sign, within 10 days following the
Rent Commencement Date, a document titled "Notice of Lease" in the form set
forth in EXHIBIT B, reciting the Rent Commencement Date and expiration date of
the Lease Term and the commencement of Tenant's liability for the payment of
Rent, and such Notice of Lease shall be conclusive as to the Lease Term.
2.3. Should Tenant continue to occupy the Premises, or any part
thereof, after the expiration of the initial or extended term of this Lease,
unless otherwise agreed in writing, such occupancy shall constitute and be
construed as a tenancy from month to month on the same terms and conditions of
this Lease then in effect, and Landlord or Tenant may thereafter terminate such
tenancy upon thirty (30) days' prior written notice to the other.
2.4. Provided that a Tenant Default (as defined in Paragraph 20.1
hereof) is not in existence at the time of exercise of such option and the time
of commencement of the extension term, Tenant shall have the right to extend the
Lease Term for six (6) additional successive periods of five (5) years each,
upon the same terms and conditions as set forth in this Lease, except that Fixed
Rent shall be as set forth below:
<TABLE>
<S> <C>
First Extension Term: 12-1/2% of the Fair Market Value (as
(Years 15-19) defined in Paragraph 22.1 below) of the
Premises as of the date one (1) year
prior to the first day of the First
Extension Term, as determined in
accordance with the provisions of
Paragraph 22 below
Second Extension Term: 12-1/2% of the Fair Market Value (as
(Years 20-24) defined in Paragraph 22.1 below) of the
Premises as of the date one (1) year
prior to the first day of the Second
Extension Term, as determined in
accordance with the provisions of
Paragraph 22 below
Third Extension Term: 12-1/2% of the Fair Market Value (as
(Years 25-29) defined in Paragraph 22.1 below) of the
Premises as of the date one (1) year
prior to the first day of the Third
Extension Term, as determined in
accordance with the provisions of
Paragraph 22 below
Fourth Extension Term: 12-1/2% of the Fair Market Value (as
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(Years 30-34) defined in Paragraph 22.1 below) of the
Premises as of the date one (1) year
prior to the first day of the Fourth
Extension Term, as determined in
accordance with the provisions of
Paragraph 22 below
Fifth Extension Term: 12-1/2% of the Fair Market Value (as
(Years 35-39) defined in Paragraph 22.1 below) of the
Premises as of the date one (1) year
prior to the first day of the Fifth
Extension Term, as determined in
accordance with the provisions of
Paragraph 22 below
Sixth Extension Term: 12-1/2% of the Fair Market Value (as
(Years 40-44) defined in Paragraph 22.1 below) of the
Premises as of the date one (1) year
prior to the first day of the Sixth
Extension Term, as determined in
accordance with the provisions of
Paragraph 22 below
</TABLE>
Tenant shall exercise the extension option set forth herein by giving written
notice of such exercise to Landlord on or before the date six (6) months prior
to the expiration of the initial Lease Term or the then current extension term,
as the case may be.
3. RENT
3.1. Tenant agrees and covenants to pay to Landlord, without offset or
deduction, except as provided herein, or to such other persons or entities at
such place or places as Landlord may from time to time designate in writing, an
annual fixed rent in the amount computed in accordance with in Paragraph 3.2
below (hereinafter "FIXED RENT"). Fixed Rent shall be payable in advance on the
first day of each calendar month in equal monthly installments and shall not be
increased, abated or diminished unless set forth herein. If the Rent
Commencement Date is not the first day of a calendar month, the Fixed Rent for
the month in which the Rent Commencement Date occurs shall be prorated, and
shall be payable with the first full monthly Fixed Rent due hereunder.
3.2. Annual Fixed Rent for the initial term of this Lease shall be
12 1/2 % of the Project Costs paid by Landlord pursuant to the Construction
Addendum attached hereto and hereby made a part hereof (the "Construction
Addendum").
3.3. Tenant's obligation to pay Fixed Rent and all other charges
payable by Tenant hereunder ("ADDITIONAL RENT") (Fixed Rent and Additional Rent
being sometimes hereinafter collectively called "RENT") shall commence on the
Rent Commencement Date.
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<PAGE>
3.4. "LEASE YEAR" shall mean the period ending on the first
anniversary of the last day of the calendar month in which the Rent Commencement
Date occurs, or the first anniversary of the last day of the day one day prior
to the Rent Commencement Date if the Rent Commencement Date occurs on the first
day of a month, and each twelve-month period thereafter.
4. CONSTRUCTION OF PREMISES
4.1. Tenant has furnished Landlord with two (2) original copies of a
complete set of the plans and specifications prepared as of the date hereof for
construction of the Building and related sitework, and Landlord has approved
such plans and specifications in writing and initialled the same (the
construction of the Building is being done on a "fast-track" basis, and such
plans and specifications will be supplemented and modified from time to time,
and as the same may be changed from time to time in accordance herewith and with
the Construction Addendum are herein referred to as the "Plans").
4.2. As provided in the Construction Addendum, Tenant will construct
the Building and related improvements in accordance with the Plans, and Landlord
will pay, or reimburse Tenant for, the costs thereof in accordance with the
Construction Addendum.
5. COMPLETION OF CONSTRUCTION; RENT COMMENCEMENT
5.1. Completion of construction of the Building shall be deemed to
have occurred on the date (the "Completion Date") on which:
5.1.1. The Architect which prepared the Plans has issued a
Certificate of Substantial Completion certifying that the Premises has been
substantially completed in accordance with the Plans; AND
5.1.2. The City of Fargo, North Dakota has issued a permanent
or temporary certificate of occupancy certifying that the Premises may be
lawfully occupied for the conduct of business.
5.2. Tenant's obligation to pay Rent shall commence on the date (the
"Rent Commencement Date") that is the later to occur of: (i) the date thirty
(30) days after the Completion Date, or (ii) the date on which Landlord has
paid, or reimbursed Tenant for, all Project Costs which Landlord is required to
pay, in accordance with the terms and conditions of the Construction Addendum.
If Landlord fails to pay, or reimburse Tenant for, any such Project Costs within
thirty (30) days after the Completion Date in accordance with the terms and
conditions of the Construction Addendum, Tenant may pursue and enforce whatever
rights and remedies it may have against Landlord at law or in equity or
otherwise arising out of such failure by Landlord.
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<PAGE>
6. EVIDENCE OF TITLE, COVENANT OF TITLE AND QUIET POSSESSION
6.1. There shall be attached hereto as EXHIBIT D a copy of Landlord's
commitment for title insurance with respect to the Premises.
6.2. Landlord represents and warrants to Tenant that, as of the date
hereof, Landlord is vested with fee simple title to the Premises and has full
rights and lawful authority to lease the Premises to Tenant. Landlord further
represents and warrants to Tenant that there are and will be no liens,
encumbrances, mortgages or other instruments affecting title to the Premises
except (i) as are shown in EXHIBIT D, (ii) any mortgage loan which Landlord
hereafter enters into to acquire and improve the Premises; and (iii) any utility
easements which may be granted by Landlord which do not interfere with the
operation of Tenant's business. Landlord further warrants that any such liens
shall not affect the rights granted to Tenant under this Lease, including but
not limited to the right to quiet possession of the Premises as provided below.
If at any time Landlord's title or right to receive Rent hereunder is disputed,
or if there is a change of ownership of Landlord's estate by act of the parties
or operation of law, Tenant may deposit Rent thereafter accruing into the
registry of a court of competent jurisdiction until Tenant is furnished proof,
satisfactory to it, as to the party entitled thereto. Landlord covenants with
Tenant to keep Tenant in quiet possession of the Premises during the Lease Term
and any extensions thereof, provided Tenant is not in default hereunder beyond
any applicable cure period.
7. USE OF PREMISES
7.1. Tenant may use the Premises for office purposes and any other
related lawful business. No portion of the Premises shall be used for any
business, establishment or purpose which violates any applicable city ordinance,
rule or regulation or any other rule, regulation or restriction of any
governmental agency having jurisdiction (Tenant hereby representing and
warranting to Landlord that Tenant's proposed use, as described in this
paragraph, will not violate any applicable city ordinance, rule or regulation or
any other rule, regulation or restriction of any governmental agency having
jurisdiction) or which, as a result of its hazardous or extra-hazardous nature,
would cause the casualty insurance for the Premises to be cancelled or the
premiums for such insurance to be increased. Tenant shall be solely responsible,
at its own expense, for obtaining any licenses or permits required for the
operation of or any use of the Premises.
7.2. Tenant hereby represents and warrants that on the Rent
Commencement Date the Premises and all parts thereof shall be in substantial
compliance with all applicable laws, orders and regulations of all federal,
state, county and municipal authorities having jurisdiction including Title III
of the Americans With Disabilities Act of 1990 (collectively, "LEGAL
REQUIREMENTS"). Except as otherwise set forth herein, Tenant, at its sole cost
and expense, shall be required to comply with Legal Requirements
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<PAGE>
including any changes enacted subsequent to the date hereof, relating to the
physical condition of all parts of the Premises, including, but not limited
to, any changes in Legal Requirements that apply to (i) Tenant's specific use
of, or manner of operation in, the Premises, or (ii) any alteration to the
Premises made by Tenant.
8. REAL ESTATE TAXES
8.1. (a) For purposes of this Article 8, "real property taxes and
assessments" shall mean any and all taxes, assessments, impositions, fees,
maintenance or other assessments and other levies of every kind or nature
commonly levied or assessed by municipal, county, district, state, federal and
other governmental authorities, whether ordinary or extraordinary, against the
owners or occupants of real property. Real property taxes and assessments for
the first and last Lease Years hereunder shall, if necessary, be prorated based
on a three hundred sixty-five (365) day year and apportioned between Landlord
and Tenant to coincide with the date hereof and vacation by Tenant of the
Premises, as the case may be, such that Tenant only pays those real property
taxes and assessments solely allocable to the Lease Term. Nothing contained in
this Lease, however, shall be deemed or construed to require Tenant to pay or
discharge: (i) any tax which may be levied as a result of the voluntary or
involuntary assignment or transfer of all or any portion of Landlord's interest
in the Premises (Tenant acknowledges, however, that the appraised value of the
Premises may increase as a result of a sale of the Premises and Tenant would be
obligated to pay any increase in taxes based upon the increase in appraised
value), (ii) any tax upon the income, profits or business of Landlord, or (iii)
any personal property taxes, capital levy, franchise, gross receipts, revenue,
inheritance or estate taxes, income or profit, gift, payroll or stamp tax which
may be levied against the estate or interest of Landlord, however such taxes may
be designated, even though such taxes may become a lien against the Premises.
(b) From and after the date hereof, Tenant shall pay, as
Additional Rent, any and all real property taxes and assessments covering the
Premises before delinquency, provided, that if the tax bill is not sent to the
Premises, Tenant shall not be responsible for any delinquent payment penalties
unless Landlord has provided Tenant with a copy of the tax bill at least thirty
(30) days prior to its due date.
(c) If a tax on rentals received from Tenant under this Lease is
ever imposed during or which is applicable to the Lease Term, Tenant shall be
responsible for the same.
8.2. (a) If any general or special assessment is assessed against the
Premises, the following shall apply: Regardless of whether Landlord elects to
pay the assessment in installments, assessments shall be computed as if Landlord
had elected to pay the same in installments over the longest period of time
allowed by applicable law and only those installments (or partial installments)
attributable to installment periods (or partial periods) falling within the
Lease Term shall be considered in determining Tenant's tax liability.
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<PAGE>
(b) If at any time during the Lease Term any governmental
subdivision shall undertake to create an improvement or special assessment
district the proposed boundaries of which include the Premises, Tenant, without
prejudice to the rights of Landlord with regard thereto, shall be entitled to
appear in any proceeding relating thereto and present its position as to whether
the Premises should be included or excluded from the proposed improvement or
assessment district and as to the degree of benefit to the Premises resulting
from inclusion. Landlord shall promptly advise Tenant in writing of the receipt
of any notice or other information relating to the proposed creation of any such
improvement or special assessment district, the boundaries of which include the
Premises.
(c) To the extent permitted by law, Tenant or its designees
shall have the right to apply to have any assessment for local improvements
assessed during the Lease Term payable in annual installments. Landlord shall
permit any such application to be filed in its name, if necessary or
appropriate, and shall execute any and all documents reasonably requested by
Tenant to accomplish the foregoing result.
8.3. Tenant shall receive the entire amount of any real property tax
and assessment refunds or rebates paid to Landlord and attributed to the Lease
Term or any extension thereof except Landlord may deduct from such refund the
reasonable costs incurred by Landlord in contesting any real property taxes and
assessments.
8.4. If Tenant desires to contest any ad valorem assessment or the
validity of any tax and gives Landlord written notice of this intention, then
Tenant may contest the assessment or tax without being in default hereunder.
Tenant agrees to indemnify Landlord and hold Landlord harmless from all costs,
expenses and damages of whatsoever nature arising out of any contest made by
Tenant. Tenant further agrees to comply with all applicable laws, statutes and
ordinances governing tax appeals. In any event, Tenant will not take or fail to
take any action which will subject all or part of the Premises to forfeiture or
loss or permit any lien to become affixed thereto.
9. MAINTENANCE BY LANDLORD
Notwithstanding anything to the contrary contained herein, Landlord
shall, at its cost and expense, make any repairs to or replacements of the roof,
foundations, exterior walls and other structural components of the Premises, and
improvements to and alterations of the Premises required by Legal Requirements,
if the useful life of the portion of the Premises so repaired, replaced,
improved or altered would extend beyond the initial Lease Term or the then
current extension term, provided, however, that in such case Tenant shall pay
that portion of such cost and expense which bears the same ratio to the total of
such cost and expense as the number of years (including any partial year)
remaining in the Lease Term, as it may have been extended, bears to the number
of years of the useful life of the portion of the Premises in question. The
portion of such cost and expense to be paid by Tenant shall be paid, at Tenant's
option, either in full within thirty
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<PAGE>
(30) days after Tenant's receipt of an invoice therefor from Landlord,
together with such supporting documentation as Tenant may reasonably request,
or in equal monthly installments payable at the same time as monthly
installments of Fixed Rent are payable, commencing on the first day of the
first full month following the date thirty (30) days after Tenant's receipt
of such invoice, in an amount sufficient to fully amortize Tenant's portion
of such cost and expense, together with interest thereon at the rate of
twelve and one-half percent (12 1/2%) per annum, over the number of months
then remaining in the Lease Term, as it may have been previously extended.
In the further event that Tenant thereafter exercises an extension option,
Tenant's portion of such cost and expense shall be increased in accordance
with the formula set forth above and shall be payable, at Tenant's option, as
provided above.
10. MAINTENANCE BY TENANT
10.1. Except as set forth in Paragraph 9 hereof, Tenant shall, at
its sole expense, maintain the Premises in good repair and condition. This
is a net lease with Landlord having no obligation whatsoever for repairs,
except as set forth in Paragraph 9 hereof.
10.2. Tenant shall keep and maintain the Premises free from waste
or nuisance and shall deliver the Premises to Landlord broom clean at the
expiration of this Lease, with the exception of (i) reasonable wear and tear
and (ii) casualty repairs which Tenant is not obligated to perform. Tenant
further agrees not to deface or injure the Building or overload the floor,
roof, structural, mechanical, electrical or plumbing systems beyond those
loads contemplated by the Plans and Specifications.
11. ALTERATIONS, ADDITIONS AND IMPROVEMENTS
11.1. Tenant shall not create any openings in the roof or exterior
walls, not make any structural alterations, additions or improvements to the
Premises without prior written consent of Landlord, which consent shall not
be unreasonably withheld.
11.2. All alterations, additions or improvements made by Tenant
which are permanently attached to and made part of the Premises, unless
removed by Tenant prior to the expiration of the Lease Term, shall become
the property of the Landlord at the expiration of the Lease Term and any
extensions thereof.
11.3. Tenant, in its sole discretion, shall have the right to make
any alterations, additions or improvements other than the type described in
Paragraph 11.1, without the consent of Landlord, provided that such
alterations do not diminish the value of the Premises.
11.4. Notwithstanding the ownership of the alterations, additions
or improvements to the Premises, Tenant retains the right to depreciation
deductions of all such alterations, additions or improvements made at
Tenant's expense.
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<PAGE>
12. LANDLORD'S RIGHT OF ENTRY
12.1. Subject to Tenant's consent, which shall not be unreasonably
withheld, Landlord and its authorized agents may enter the Premises during
Tenant's normal business hours for the following purposes: (a) to inspect the
general condition and state of repair of the Premises; and (b) to show the
Premises to any prospective purchaser or mortgagee. Any such entry by
Landlord shall be preceded by at least two business days' prior notice to
Tenant and shall be under the supervision of Tenant. Landlord shall not
interfere with, or create a hazard to, Tenant's normal business operations
during such entry.
12.2. Within twelve (12) months prior to the expiration of the
Lease Term, including extensions thereof, Landlord may enter the Premises
during Tenant's normal business hours to show the Premises to prospective
tenants. During the final four (4) months of the Lease Term, including
extensions thereof, Landlord and its authorized agents may erect on, or
about, the Premises its customary sign advertising the property for sale or
lease, provided such sign does not interfere with or create a hazard to
Tenant's normal business operation.
13. UTILITIES
13.1. From and after the Rent Commencement Date, Tenant will pay
before delinquency all charges for gas, water, electricity, and any other
utility services used solely on the Premises during the Lease Term hereof by
Tenant.
13.2. In the event of any interruption in service, Tenant shall
diligently pursue the resumption of service, and Tenant shall not be entitled
to any abatement of Rent or other claim (including, but not limited to, loss
of business) as a result thereof.
14. ASSIGNMENTS AND SUBLEASING
14.1. Tenant may assign this Lease or sublease the Premises, in
whole or in part, without the consent of Landlord. No assignment or
subletting shall operate to release Tenant of liabilities and obligations
arising hereunder, which shall continue in full force and effect.
14.2. Subsequent to the Rent Commencement Date, Landlord shall
have the absolute right to assign or otherwise transfer its interest in this
Lease, the Premises or any part thereof. Tenant shall make all payments
required under this Lease to Landlord, or its successors in interest, unless
and until Tenant is notified in writing of an assignment, and Tenant shall
not be liable to any assignee for any Rent due hereunder until Tenant is so
notified. The term "Landlord" as used in this Lease so far as covenants or
obligations on the part of Landlord are concerned, shall be limited to mean
and include only the owner or owners of the Premises at the time in question.
In the event of any transfer or transfers
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of the title thereto, the Landlord herein named (and, in the case of any
subsequent transfer of conveyance, the then transferor) shall be
automatically freed and relieved from and after the date of such performance
of any covenants or obligations on the part of Landlord contained in this
Lease thereafter to be performed, and any such transferee shall be deemed
without any further action to have assumed the covenants and obligations on
the part of Landlord contained in this Lease arising after the date of such
transfer. The Landlord who has been relieved from all liability with respect
to the performance of covenants or obligations on the part of Landlord
contained in this Lease after the transfer shall remain liable to Tenant for
all obligations of Landlord arising prior to such transfer (and the same
shall survive the transfer and/or any subsequent termination of the Lease).
15. INSURANCE
15.1. Tenant shall, at all times during the Lease Term, or any
extension thereof, at Tenant's sole cost and expense, maintain full and adequate
insurance for the Premises including, but not limited to, insurance of the
following character:
(a) Insurance against loss by fire and lightning and
insurance against risks customarily covered by extended coverage endorsement
including, but not limited to, loss by windstorm, hurricane, earthquake,
typhoon, hail, explosion, riot (including riot attending a strike), civil
commotion, aircraft, vehicles, smoke damage and vandalism and malicious
mischief in amounts sufficient to prevent Landlord or Tenant from being a
co-insurer of any loss under the applicable policies, but in any event in
amounts not less than the full insurable value of all buildings and other
improvements constituting a part of the Premises. The term "full insurable
value" as used herein means the current value for actual replacement costs,
including cost of debris removal, provided that such insurance may include
deductibles that under the circumstances are reasonable in amount. Such
policy of insurance shall be endorsed so as to provide loss of rental income
coverage to Landlord for a period of not less than one (1) year.
(b) Comprehensive general public liability insurance with
broad form endorsement covering the legal liability of Landlord and Tenant
against claims for bodily injury, death or property damage occurring on, in
or about the Premises in the minimum amounts of $1,000,000.00 for each claim
for bodily injury or death with respect to one occurrence and $2,000,000.00
in the aggregate, and $250,000.00 for all claims for property damage with
respect to any one occurrence and $500,000.00 in the aggregate.
(c) Excess liability (umbrella) policy of insurance in an
amount not less than $2,000,000.00.
15.2. Such insurance shall be written by companies of recognized
financial standing which are well rated by national rating organizations and
have an A.M. Best rating of A-10 or better, and are legally qualified to
issue such policies of insurance in the State of North Dakota, and shall name
as the insured parties: (i) Landlord as loss payee
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under the property policy and as an additional insured under the liability
insurance policy for the Premises; (ii) any mortgagee of Landlord holding a
lien or security interest against the Premises or this Lease under standard
mortgagee's endorsements; and (iii) Tenant as its interest may appear. The
foregoing coverage shall be reviewed annually upon request by either Landlord
or Tenant and adjusted to reflect increases in replacement or other costs to
levels consistent with sound property management.
15.3. Every policy of insurance required hereunder shall provide
that thirty (30) days prior written notice of cancellation shall be given to
Landlord and any mortgagee of Landlord and shall not be invalidated by any
act or neglect of Landlord or Tenant or any owner of the Premises or any
interest therein, nor by any foreclosure or any other proceedings or notices
thereof relating to the Premises or any interest therein, nor by any change
in the title or ownership of the Premises or interests therein. Tenant shall
promptly deliver to Landlord original or duplicate policies or certificates
of insurance evidencing all the insurance which is required to be maintained
by Tenant. Tenant shall within thirty (30) days prior to the expiration of
any such insurance, deliver other original or duplicate policies or
certificates of insurance evidencing the renewal of such insurance. If Tenant
fails to maintain such insurance, then Landlord shall be entitled to purchase
such insurance on behalf of the Tenant and the Tenant agrees to reimburse the
Landlord for such amounts so expended in the purchase of such insurance
within ten (10) days after written demand therefor.
16. INDEMNITY
16.1. Tenant shall pay and shall protect, indemnify, defend and
hold Landlord and Landlord's agents, officers, directors, shareholders,
partners and employees harmless from and against any and all liabilities,
losses, damages, costs, expenses (including without limitation, reasonable
attorney's fees and costs of litigation), causes of action, suits, claims,
demands or judgments of any nature arising, or alleged to arise, from or in
connection with: (i) any injury to or the death of any person, or any damage
to property on or in the Premises in any manner arising out of or connected
with Tenant's use, occupancy, maintenance or repair of the Premises or any
portion thereof or in connection with the actions or omissions of Tenant, its
employees, agents, contractors, subcontractors, business invitees or
licensees on or about the Premises except to the extent caused by Landlord's
negligence or willful misconduct; and (ii) any violation by Tenant of any
law, rule, regulation, ordinance or restriction now or hereafter in effect
which is Tenant's obligation to comply with hereunder and applicable to the
Premises or to Tenant or its business property except to the extent caused by
Landlord's negligence or willful misconduct.
16.2. Landlord shall pay and shall protect, indemnify, defend and
hold Tenant, its agents, officers, directors, shareholders, partners and
employees harmless from and against any and all liabilities, losses, damages,
costs, expenses (including, without limitation, reasonable attorney's fees
and costs of litigation), causes of action, suits, claims, demands or
judgments of any nature arising, or alleged to arise, from or in
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connection with: (i) any injury to or death of any person, or any damage to
property on or in the Premises in any manner arising out of, or connected
with the actions or omissions of Landlord, its employees, agents, contractors
or subcontractors, on or about the Premises except to the extent caused by
Tenant's negligence or willful misconduct; or (ii) any violation by Landlord
of any provisions of this Lease or of any law, rule, regulation, ordinance or
restriction, now or hereafter in effect which is Landlord's obligation
hereunder to comply with hereunder.
17. RELEASE AND WAIVER OF SUBROGATION
Landlord and Tenant hereby waive and release each other from any and
all rights of recovery, claim, action or cause of action against each other,
their agents, officers, directors, partners and employees, for any loss or
damage that may occur to the Premises, or personal property including building
contents within the Premises, by reason of fire or the elements of nature
regardless of cause or origin, including negligence of Landlord or Tenant and
their agents, officers, directors, partners and employees. Because this
paragraph will preclude the assignment of any claim mentioned in it by way of
subrogation or otherwise to any insurance company or any other person, Landlord
and Tenant agree immediately to give to each of their respective insurance
companies which has issued to it policies of insurance, written notice of the
terms of mutual waivers contained in this paragraph, and to have the insurance
policies properly endorsed to prevent the invalidation of such insurance
coverage by reason of these waivers.
18. FIRE AND CASUALTY DAMAGE
18.1. If all or any part of the Premises is damaged or destroyed
by fire or other casualty, Tenant shall give immediate written notice thereof
to Landlord.
18.2. If the Premises should be damaged by fire or other casualty
such that rebuilding or repairs cannot be completed within two hundred ten
(210) days from the date of such damage, Tenant may, within thirty (30) days
of the determination of the number of days necessary to restore the Premises,
terminate this Lease on written notice to Landlord. Fixed Rent shall be
abated as of the date of the happening of the damage but other charges
payable by Tenant to Landlord hereunder shall not abate unless such other
charges are covered under the loss of rental income insurance required to be
carried hereunder.
18.3. (a) Except as otherwise expressly set forth herein, Tenant
shall proceed forthwith to rebuild or repair the Premises to substantially
the condition which existed prior to such damage except that Tenant may make
changes to the Premises in the course of such restoration that do not
diminish the value thereof.
(b) If the Premises should be damaged during the final two
(2) years of the initial Term Lease hereof or any extension of the initial
Term Lease as provided herein, there shall be no requirement to rebuild or
repair such damage and this
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Lease shall, at the option of Tenant, terminate and Rent and all additional
charges shall be abated as of the date of such damage, unless Tenant shall
exercise its option to extend the Term Lease, by giving written notice of
such extension to the Landlord within sixty (60) days after the date of such
damage, in which case Tenant shall proceed forthwith to rebuild or repair
such damage.
(c) If the existing laws do not permit restoration of the
Premises to substantially the same condition as they were in immediately
before destruction (which shall mean that the Premises, as restored, would
have comparable amenities and ambiance, for example, ceiling height, access,
colors, lighting and windows), then Tenant, at its option, may (i) restore
the Premises so as to comply with the then existing laws or codes, or (ii)
terminate this Lease immediately by giving written notice to Landlord within
thirty (30) days after Tenant determines that the existing laws do not permit
restoration as described above, in which case this Lease shall cease as of
the date of destruction.
18.4. The determination of whether the Premises can be rebuilt or
repaired within two hundred ten (210) days from the date of any damage shall
be in the mutual judgment of both Landlord and Tenant. If Landlord and Tenant
cannot agree, the determination shall be made by an independent contractor
mutually acceptable to both Landlord and Tenant.
18.5. If so much of the Premises shall be damaged so that Tenant
is unable to conduct business from the Premises, in its sole reasonable
judgment, Tenant may discontinue the conduct of business from the Premises
and all Fixed Rent shall abate and the Term Lease shall toll thereafter and
the Lease Term shall be extended by the number of days the Lease Term is
tolled. The Fixed Rent abatement and tolling of the Lease Term shall end on
the earlier to occur of the date on which the damage shall be repaired or
replaced or the date on which the conduct of business from the Premises shall
be resumed. If Fixed Rent abates in accordance with this Article, the other
charges payable by Tenant to Landlord shall not abate unless covered by the
loss of rental income insurance required to be carried by Tenant hereunder.
18.6. The insurance proceeds with respect to any damage or
destruction of the Premises shall be applied solely to the cost of the repair
or replacement of the damage or destruction with any excess insurance
belonging to Tenant. In the event the casualty is not covered by the
insurance required to be carried by Tenant then Tenant shall not be obligated
to rebuild the Premises to the extent of such insufficiency, and either party
may terminate the Lease; provided, however, if either party elects to pay for
the cost of restoration not covered by Tenant's insurance policy (and which
Tenant was not required to provide pursuant to the terms of this Lease), then
the other party shall not have a termination right.
19. CONDEMNATION
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19.1. (a) In the event all of the Premises is taken or condemned
by any competent authority or sold under threat thereof, then this Lease
shall be automatically terminated on the date when the condemning authority
takes possession of the Premises.
(b) In the event any part of the Premises is taken or
condemned by any competent authority or sold under threat thereof and the
part not so taken is insufficient for the reasonable operation of Tenant's
business, Tenant shall have the right: (a) to terminate this Lease as of the
earlier of the date of title transfer or the date of the taking of possession
by the condemning authority in which event the terms hereof and Rent and all
other charges shall be abated and any unearned rent paid or credited will be
refunded by Landlord to Tenant; or (b) to continue this Lease in full force
and effect with a reduced Fixed Rent commensurate with the reduced area
and/or reduced utility of the Premises, in lieu of the amount of Fixed Rent
hereinabove provided, which reduced Fixed Rent will become effective upon the
date the condemning authority takes possession. Tenant shall elect among
these rights and give notice to Landlord of its election within sixty (60)
days after the date when possession of the portion of the Premises in
question is required by the condemning authority.
19.2. If this Lease does not terminate as set forth herein, then
the award or payment for the taking shall be paid to Landlord and made
available by Landlord to Tenant to restore the Premises, and Tenant shall,
except as otherwise provided in this paragraph, commence, and with reasonable
dispatch continue, out of the proceeds of the award, to restore the portion
of the Premises remaining after the taking to substantially the same
condition and tenantability as existed immediately preceding the taking,
except that Tenant shall have the right to make changes to the Premises in
the course of such restoration that do not diminish the value thereof.
19.3. If Tenant does not commence within thirty (30) days of
notification by Landlord to Tenant of Landlord's receipt of the award, and
with reasonable dispatch continue, to restore the portion of the Premises, as
aforesaid (commencement meaning taking such steps as drawing plans or
applying for permits), Landlord shall have the right, upon giving notice to
Tenant, to restore the Premises itself and Landlord shall use the amount of
such award necessary to restore the Premises. If the amount of the award is
insufficient to cover the cost of restoration and neither Landlord nor Tenant
is willing to pay the difference, then either party may terminate this Lease
unless the other party nullifies such termination by agreeing to pay the
difference.
19.4. Termination of this Lease because of condemnation shall be
without prejudice to the rights of either Landlord or Tenant to recover from
the condemning authority compensation and damages for the injury and loss
sustained by them as a result of the taking, and Tenant shall have the right
to make a separate claim against the condemning authority for the reasonable
value of Tenant's trade fixtures and leasehold improvements, if any,
furniture, personal property, interruption or dislocation of business in the
Premises, loss of good will and for moving and remodeling expenses; provided,
however, if the laws of the jurisdiction where the Premises is located do not
allow
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Tenant to make a separate claim for the above described items, then the award
for the same shall come out of Landlord's award. Except as specifically
provided herein, any and all awards or proceeds payable shall belong solely
to Landlord and Tenant hereby disclaims any right or interest therein.
20. DEFAULT
20.1. (a) Tenant shall be in default under this Lease (a "TENANT
DEFAULT") if any of the following events shall occur:
(i) If Tenant shall fail to pay Fixed Rent, Additional Rent
or any other charge due hereunder when due and the failure shall continue for
a ten (10) day period after Landlord shall have given Tenant written notice
of Tenant's failure to pay, it being understood and agreed that if Tenant
fails to pay any Fixed Rent, Additional Rent or any other charge when due and
such failure occurs twice in any 12-month period, then thereafter Tenant
shall pay to Landlord, in addition to any other penalty hereunder, an
administrative charge for each subsequent late payment equal to One Hundred
Dollars ($100).
(ii) If Tenant shall fail to perform any of its other
obligations under this Lease and the failure shall continue for a thirty (30)
day period after Landlord shall have given Tenant written notice of its
failure to perform.
(b) Notwithstanding the foregoing, if Tenant shall fail to
perform an obligation, other than an obligation to pay Fixed Rent or
Additional Rent, and the failure cannot be cured by Tenant within thirty (30)
days after Landlord shall have given written notice of the failure, Tenant
shall not be in default if Tenant commences to cure the failure within the
thirty (30) day period and diligently thereafter prosecutes the cure to
completion.
20.2. If a Tenant Default shall occur under this Lease, and for so
long as such Tenant Default shall continue, Landlord may elect any one or
more of the following remedies:
(a) Landlord may terminate this Lease and forthwith
repossess the Premises with due process of law. In such event, Landlord shall
be entitled to recover from Tenant: (i) the amount of any unpaid Rent,
Additional Rent and other charges that are owed by Tenant to Landlord at the
time of such termination, together with interest thereon at the rate
specified in Paragraph 20.6(b) hereof; (ii) (x) all Rent, Additional Rent
and other charges payable by Tenant to Landlord for the unexpired Lease Term
(as same may have been extended), discounted to present value at the prime
rate of interest published in the Wall Street Journal on the date of
termination (or, if such rate of interest is no longer published on such
date, then such comparable rate of interest published by a financial
periodical of recognized standing as may be selected by Landlord in its good
faith discretion), less (y) the fair market value of the Premises for such
unexpired term
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(as same may have been extended) also discounted to present value at such
interest rate; (iii) Landlord's reasonable attorney's fees and costs of
litigation incurred in enforcing its remedies against Tenant; and (iv) any
and all other sums owed by Tenant and actual (not consequential) damages
which Landlord could not have reasonably prevented which arise as a result of
Tenant's default which are attributable to periods of time up to and
including the date when Tenant vacates the Premises.
(b) Landlord may terminate Tenant's right of possession
without terminating the Lease and may repossess the Premises by forcible
entry or detainer suit or otherwise, without demand or notice of any kind to
Tenant in which event Landlord shall use reasonable efforts to relet the
Premises or any portion thereof for the account of Tenant for such rent and
upon such terms as shall be satisfactory to Landlord. If Landlord, after
using reasonable efforts, shall be unable to relet the Premises, or if the
same are relet and a sufficient sum shall not be realized from such reletting
to satisfy the Rent, Additional Rent and other sums provided for in this
Lease to be paid by Tenant, then Tenant shall pay to Landlord as damages a
sum equal to the amount of the rental and other sums reserved in this Lease
for such period or periods or if the Premises have been relet, Tenant shall
satisfy and pay any such deficiency upon written demand therefor from time to
time. Landlord shall also be entitled to recover forthwith as damages,
Landlord's reasonable expenses of reentering, repossessing, reletting
(including market-rate leasing commissions attributable to the unexpired
term) and repairing the Premises, reasonable sums expended by Landlord in
good faith in order to remodel the Premises for subsequent occupants, the
rent from which will operate to reduce Tenant's liability hereunder,
Landlord's reasonable attorney's fees and cost of litigation, and any and all
other sums owed by Tenant or actual (not consequential) damages suffered by
Landlord which Landlord could not reasonably prevent, as a result of Tenant's
default. Tenant agrees that Landlord may file suit to recover any sums
falling due under the terms of this Paragraph 20.2(b) from time to time, and
that no delivery or recovery of any portion due Landlord hereunder shall be a
defense to any subsequent action brought for any amount not theretofore
reduced to judgment in favor of Landlord, nor shall such reletting be
construed as an election on the part of Landlord to terminate this Lease
unless a written notice of such intention be given to Tenant by Landlord.
Notwithstanding any such reletting without termination, Landlord may at any
time thereafter elect to terminate this Lease for such previous breach, in
which event the provisions of Paragraph 20.2(a) hereof shall apply.
(c) Landlord may enter upon the Premises and/or do whatever
Tenant is obligated to do under the terms of this Lease and Tenant agrees to
reimburse Landlord upon demand for any reasonable expenses Landlord may incur
in effecting compliance with Tenant's obligation under this Lease.
(d) Landlord may bring a suit against Tenant in a court of
competent jurisdiction in order to collect all sums owed by Tenant as a
result of Tenant's default. If Landlord does not elect to terminate this
Lease on account of a Tenant Default, Landlord may, from time to time,
without terminating this Lease, recover all
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Fixed Rent, Additional Rent and other charges payable by Tenant hereunder as
they become due under this Lease in one or more successive suits.
(e) Landlord may exercise any and all other remedies
available to Landlord at law or in equity; provided, however, that Landlord
shall never be entitled to any acceleration of rents which are not (i)
discounted to present value, and (ii) reduced by the fair market value of the
Premises, as provided in Paragraph 20.2(a) hereof.
Tenant covenants and agrees that the receipt by Landlord of Fixed
Rent, Additional Rent or other charges with or without knowledge of the breach
of any provision of this Lease, shall not be deemed a waiver of such breach,
shall not reinstate this Lease or Tenant's right to possession if either or both
have been terminated, and shall not otherwise affect any notice, action or
election by Landlord. Further, in the event that this Lease or Tenant's right to
possession of the Premises have been terminated, Tenant agrees to surrender
possession of the Premises. The remedies of Landlord under this Section 20.2
shall be cumulative and not exclusive, and may be exercised by Landlord
concurrently and whenever and as often as may be necessary.
20.3. In the event this Lease is assigned or sublet by Tenant and
should any default occur requiring notice as provided in this paragraph,
Landlord agrees that it will furnish Tenant with a copy of the notice at the
same time it is sent to the assignee or sublessee. In the event that the
default is not corrected by the assignee or sublessee during the specified
time periods, Tenant shall have an additional period of ten (10) days to
correct the default, and, upon correction of the default, Tenant shall have
the right and option to resume actual possession of the Premises as Tenant
for the unexpired term of this Lease.
20.4. Except for cure periods expressly set forth in this Lease
which shall govern and control, should there be any default or breach of this
Lease on the part of Landlord, Tenant shall give Landlord notice thereof
(except in case of an emergency), and should Landlord fail to commence to
correct the breach or default within thirty (30) days after the notice (or
such longer time as necessary so long as Landlord has commenced the cure and
is diligently prosecuting the cure to completion), Tenant may give Landlord a
second notice which notice shall set forth the steps Tenant intends to take
to effectuate the cure and the approximate anticipated costs of the cure. If
Landlord fails to correct the breach or default within five (5) days of such
second notice and diligently pursue same to completion, then Tenant may, or
in the case of an emergency Tenant may without notice, as its sole remedies,
either (i) cure the breach or default and deduct the reasonable cost,
including interest at the rate described in 20.6(b) below, from Rent due or
to become due Landlord or (ii) Tenant may sue Landlord for its damages. If
Tenant has not been reimbursed for its reasonable cost in remedying
Landlord's breach or default at the expiration of the Lease Term, or if
Landlord is indebted to Tenant because of a breach or default of this Lease
at the expiration of the Lease Term, Tenant may, at its option, extend this
Lease on the same terms and conditions then in effect until the costs and
indebtedness are fully paid by application of all Rent thereto.
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20.5. (a) Neither the Landlord nor Tenant shall have any right
arising from a failure to perform or remedy against the other unless a default
shall have occurred.
(b) Except for defaults arising from a failure to pay Fixed
Rent or Additional Rent, no default shall be deemed to have occurred if and
so long as Tenant or Landlord, as the case may be, shall be delayed in, or
prevented from, curing the underlying failure to perform by Force Majeure (as
such term is defined in Article 36).
20.6. (a) If a dispute shall arise between the parties as to the
performance of any obligation, a party contending that an obligation is the
other party's duty may perform the obligation under protest. The performance
of an obligation under protest shall not be regarded as voluntary
performance. A party which shall have performed an obligation under protest
shall have the right to bring suit for the recovery of the cost and expense
of performance. If it shall be determined that the other party was required
to perform the obligation, the other party shall reimburse the party that
shall have performed the obligation under protest for the cost and expense of
performance.
(b) Any payment due from either Landlord or Tenant to the
other which is past due for over ten (10) days shall bear interest at the
lesser of: (i) the maximum lawful rate; or (ii) twelve percent (12%) per
annum except in the case of Tenant's failure to timely pay Fixed Rent or
Additional Rent, such interest shall be due only if Tenant fails to pay same
within ten (10) days after written notice that same is past due, such
interest to be calculated from the first day such installment of Fixed Rent
or Additional Rent was due.
21. BANKRUPTCY OR INSOLVENCY
21.1. If at any time during the term hereof proceedings in
bankruptcy shall be instituted by or against Tenant that result in an
adjudication of bankruptcy, or if Tenant shall file, or any creditor of
Tenant shall file any petition under any provision of the United States
Bankruptcy Code, as the same is now in force or may hereafter be amended and
Tenant be adjudicated bankrupt, or if a receiver of the business or assets of
Tenant be appointed and this appointment not be vacated within sixty (60)
days after notice to Tenant, or Tenant makes an assignment for the benefit of
creditors, or any sheriff, marshal, constable, or keeper takes possession of
substantially all of the assets of Tenant by virtue of any attachment or
execution proceedings and offers same for sale publicly, then Tenant shall be
in default hereunder and Landlord may, in addition to any other remedies
available to Landlord, at its option, in either or any of these events,
immediately take possession of the Premises and terminate this Lease. Upon
this termination, all installments of Rent earned to the date of termination
and unpaid shall at once become due and payable, and in addition thereto
Landlord shall have all rights provided by the bankruptcy laws relative to
the proof of claims on an anticipatory breach of an executory contract.
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21.2. Notwithstanding any provision in this Lease to the contrary,
neither bankruptcy, insolvency, nor the appointment of a receiver or trustee
shall affect this Lease so long as the obligations of Tenant are being
performed by the Tenant or its successors in interest.
22. OPTION TO PURCHASE
22.1 At any time on or after the first (1st) day of the eleventh
(11th) Lease Year (including during any extension of the Lease Term), Tenant
shall have the right to purchase the Premises for a purchase price equal to
the greater of (i) the Fair Market Value (as hereinafter defined) of the
Premises, reduced by that portion thereof attributable to improvements to the
Premises paid for by Tenant, or (ii) the total amount of Project Costs paid
or reimbursed to Tenant by Landlord. Tenant shall exercise the purchase
option set forth herein by giving written notice of such election to
Landlord. If the Fair Market Value is not agreed upon by the parties hereto
in writing within thirty (30) days after exercise of the purchase option,
then either party may submit the determination of Fair Market Value to a
binding appraisal in accordance with the provisions of Paragraph 22.2 below.
Fair Market Value means the price at which a seller would be willing to sell
the Premises and a buyer would be willing to purchase the Premises, assuming
that each is ready, willing and able to enter into a purchase agreement at
such price but under no compulsion to do so; provided, however, that
notwithstanding anything to the contrary contained herein, that portion of
the Fair Market Value attributable to the Land shall not exceed the lesser of
(i) the Fair Market Value of the Land, or (ii) $125,000.00.
22.2 Either party may request by written notice to the other
party ("Appraisal Request") that the Fair Market Value be determined by an
appraisal board consisting of three appraisers who are members of the
Appraisers Institute (or a successor or similar organization, if such
organization no longer exists) and have at least five (5) years' experience
appraising commercial real estate in the City of Fargo, North Dakota. One
appraiser will be appointed by each party, and each such appraiser will have
no material financial or other business interest in common with the party
selecting such appraiser. If a party fails to appoint an appraiser and
notify the other party of such appointment within 30 days after the Appraisal
Request is made, then the appraiser that was appointed by such other party
within such 30 day period will be the sole appraiser. If two appraisers are
properly appointed and such first two appraisers are unable to agree on a
third appraiser within thirty (30) days after the appointment of the second
appraiser, then such third appraiser will be appointed by the presiding judge
of the District Court of Cass County, North Dakota, or by any person to whom
such presiding judge formally delegates the matter, or, if such methods of
appointment fail, by the American Arbitration Association.
If the appraisal is conducted by a sole appraiser, such sole appraiser
will render to Landlord and Tenant his or her determination of the Fair Market
Value by the 60th day after the Appraisal Request was made. If the appraisal is
conducted by three appraisers, each appraiser will submit his or her
determination(s) of the Fair Market
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Value in a sealed envelope by the 30th day following appointment of the last
appraiser, and any determinations not submitted by such time shall be
disregarded. In such cases, the parties will meet on such 30th day (or if it
is not a business day, on the first business day thereafter) at 11:00 a.m. at
the office of Tenant, or such other place as the parties may agree, and
simultaneously deliver the determinations. If the determinations of at least
two of the appraisers are identical in amount, such amount will be deemed the
decision of the appraisers. If the determinations of the three appraisers
are different in amount, the decision as to the Fair Market Value will be
independently determined as follows:
(a) If neither the highest nor lowest determination differs
from the middle determination by more than 15% of such middle
determination, then the decision will be deemed to be the average of the
three determinations; and
(b) If clause (a) does not apply, then the decision will be
deemed to be the average of the middle determination and the
determination closest in amount to such middle determination.
The decision of the appraisers, determined as above set forth, will be final
and non-appealable. The fees and expenses of the appraiser or appraisers
will be shared equally by Landlord and Tenant.
22.3 If Tenant exercises the purchase option set forth herein,
the purchase price shall be paid in cash and the closing of the purchase
shall take place on such date as Tenant may designate, but not later than the
date six (6) months after Tenant gives written notice of the exercise of such
purchase option; provided, however, that if Tenant determines that there are
any matters affecting title to the Premises which are unacceptable to Tenant,
Tenant shall not be obligated to close such purchase until such matters are
resolved to its satisfaction. At closing Landlord shall execute and/or
deliver to Tenant a general warranty deed conveying title to the Premises to
Tenant and such other documents and instruments as are customary in
transactions of such type.
23. RIGHT OF FIRST REFUSAL
23.1 If, at any time during the Lease Term, or any extension
thereof, Landlord shall receive a bona fide written offer (the "Offer") from
any third party to purchase the Premises or any part thereof, Landlord shall
give notice to Tenant of its intent to enter into a purchase and sale
agreement with such third party (which notice shall include a copy of the
Offer), and Tenant shall have a right of first refusal ("First Refusal
Right").
23.2 Tenant may, within sixty (60) days after the receipt of the
Offer, give notice to Landlord agreeing to purchase the Premises or part
thereof subject to the Offer in accordance with the terms set forth in the
Offer. If Tenant shall give such notice, then Landlord and Tenant shall
close the sale and purchase contemplated by the Offer in accordance with the
terms specified in the Offer.
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23.3 Should Tenant fail to give notice under Paragraph 23.2 above
within the time provided, then Landlord shall be free to sell the Premises or
part thereof subject to the Offer to such third party in accordance with the
terms of the Offer; provided, however, if the Landlord shall propose to sell
the Premises or part thereof subject to the Offer on terms more favorable to
such third party than disclosed to Tenant in the Offer, then Landlord shall
give an additional notice to Tenant of the revised terms and Tenant shall
have the right to purchase the Premises or part thereof in question in
accordance with the terms of the revised notice if Tenant shall give notice
exercising such right with thirty (30) days after receipt of such second
notice. If Tenant shall give such notice, then Landlord and Tenant shall
close the sale and purchase in accordance with the terms specified in the
revised notice and otherwise consistent with the terms hereof. Any sale to
any such third party shall be subject to this Lease, including without
limitation the provisions of Articles 22 and 23 hereof.
24. WAIVER
The failure of Landlord or Tenant to insist upon prompt and strict
performance of any of the terms, conditions or undertakings of this Lease, or to
exercise any right herein conferred, in any one or more instances, shall not be
construed as a waiver of the same or any other term, condition, undertaking,
right or option.
25. NOTICES TO TENANT
Any notice required to be given to Tenant under the terms of this
Lease shall be effective upon receipt by Tenant or refusal to accept delivery,
provided such notice is in writing and mailed via registered or certified mail
return, receipt requested or by overnight courier providing proof of delivery to
the appropriate address as Tenant may furnish to Landlord in writing.
26. NOTICES TO LANDLORD
Any notice required to be given to Landlord under the terms of this
Lease shall be effective upon receipt by the Landlord or refusal to accept
delivery, provided such notice is in writing and mailed via registered or
certified mail, return receipt requested or sent by overnight courier providing
proof of delivery to Landlord at the address given on page one of this Lease, or
to such other address as Landlord may furnish to Tenant in writing. Rental
payments shall be forwarded to Landlord at the referenced address via first
class mail. If at any time or from time to time, there shall be more than one
Landlord, the Landlords shall designate a party to receive all notices and rent
payments, and service upon or payment to the designated party shall constitute
service upon or payment to all. Tenant shall not be required to issue multiple
checks for any single payment or rent or other charges hereunder.
27. RECORDATION, SHORT FORM
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<PAGE>
Landlord agrees, upon Tenant's request, to execute a short form of
this Lease, entitled Memorandum of Lease in the form of EXHIBIT C. Tenant may
record the Memorandum of Lease at its expense following the execution hereof.
The provisions of this Lease shall control, however, with regard to any
omissions from the Memorandum of Lease, or with respect to any provisions hereof
which may be in conflict with the Memorandum of Lease. Except for such
Memorandum, Tenant agrees not to record this Lease.
28. PARTIES BOUND
The terms, covenants, agreements, conditions and undertakings
contained herein shall be binding upon and shall inure to the benefit of the
heirs, successors in interest and assigns of the parties hereto. Where more than
one party shall be the Landlord in this Lease, the word "Landlord", whenever
used in this Lease, shall include all Landlords jointly and severally.
29. ENTIRE AGREEMENT; MODIFICATION; SEVERABILITY; CONSTRUCTION
This Lease, including the Construction Addendum and Exhibits A through
D attached hereto, contains the entire agreement between the parties hereto with
respect to the subject matter hereof, and no representations, inducements,
promises or agreements, oral or otherwise, entered into prior to the execution
of this Lease, will alter the covenants, agreements and undertakings herein set
forth. This Lease shall not be modified in any manner, except by an instrument
in writing executed by the parties. If any term or provision of this Lease or
the application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each term
and provision of this Lease shall be valid and be enforced to the fullest extent
permitted by law. The terms and provisions of this Lease shall not be construed
against or in favor of a party hereto merely because such party or its counsel
is the draftsman of this Lease.
30. NUMBER AND GENDER
All of the terms and words used in this Lease, regardless of the
number and gender in which they were used, shall be deemed and construed to
include any other number (singular and plural), and any other gender (masculine,
feminine or neuter), as the context or sense of this Lease or any paragraph or
clause hereof may require, the same as if the words had been fully and properly
written in the number and gender.
31. EXHIBITS
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<PAGE>
All exhibits, attachments and addenda referred to herein shall be
considered a part hereof for all purposes with the same force and effect as if
copied at full length herein. The Exhibits attached hereto are listed as
follows:
Exhibit A - LEGAL DESCRIPTION
Exhibit B - NOTICE OF LEASE
Exhibit C - MEMORANDUM OF LEASE
Exhibit D - LANDLORD'S PRELIMINARY TITLE REPORT
32. LIENS
If, because of any act or omission of Tenant, a mechanic's or other
lien or order for the payment of money shall be filed against the Premises,
Tenant shall, at Tenant's own cost and expense, within thirty (30) business days
after notice of the filing thereof, cause the same to be cancelled and
discharged of record, or furnish Landlord with a surety bond in form and issued
by a surety company reasonably acceptable to Landlord or with other security
reasonably acceptable to Landlord, protecting Landlord and the Premises from any
loss because of nonpayment of such lien claim. In the event Tenant does post
bond or provide the security, Tenant shall be entitled to contest any such lien
claims by appropriate judicial proceedings, so long as Tenant complies with all
applicable laws regarding such contest and shall never permit the Premises or
any part thereof to be subjected to forfeiture as a result of any such item.
33. LAST EXECUTION AND EFFECTIVE DATE
This Lease shall be effective on the date set forth in the first
paragraph hereof. Any reference contained in this Lease to the "date of last
execution" or "date hereof" shall mean the last date on which any party required
to execute or initial this Lease does so, and such date shall be set forth in
the first paragraph of this Lease where indicated.
34. NO PARTNERSHIP FORMED
Landlord does not become a partner of Tenant in the conduct of its
business or otherwise, or a joint venturer or a member of a joint enterprise
with Tenant by virtue of this Lease and nothing contained herein shall ever
cause either party to become liable for the debts or obligations of the other.
35. AUTHORITY TO EXECUTE LEASE
Tenant and Landlord each warrant and represent that the party signing
this Lease on behalf of each has authority to enter into this Lease and to bind
Tenant and Landlord respectively to the terms, covenants and conditions
contained herein. Each shall deliver to the other, upon request, all documents
reasonably requested by the other evidencing such authority including, without
limitation, a copy of all corporate
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<PAGE>
resolutions, consents or minutes reflecting the authority of persons or
parties to enter into agreements on behalf of Tenant or Landlord.
36. FORCE MAJEURE
Landlord and Tenant shall be excused for the period of any delay in
performance of any obligations hereunder when prevented from doing so by an
Event of Force Majeure or by cause or causes beyond either party's control which
shall include, without limitation, all labor disputes, civil disturbance, war,
war-like operations, invasions, rebellion, hostilities, military or usurped
power, sabotage, governmental regulations or controls, fires or other casualty,
inclement weather, inability to obtain any permits, material, service or
equipment, or acts of God. Nothing contained in this paragraph shall excuse
either party from paying the other party any sums due hereunder and Landlord's
inability to obtain financing shall not constitute Force Majeure or otherwise
extend any time periods set forth herein for the performance of Landlord's
obligations.
37. BROKERS
Tenant and Landlord represent and warrant to each other that such
party has not had any dealings with any realtor, broker or agent in connection
with this Lease or the negotiation thereof and each party agrees to defend,
indemnify, and hold the other party harmless from any claim, cost, expense or
liability, including without limitation, reasonable attorney's fees, for any
breach of this representation by the other.
38. HAZARDOUS WASTE
38.1. "HAZARDOUS SUBSTANCE" shall mean the following without
limitation:
38.1.1. Those substances included within the definitions of
"hazardous substances," "hazardous materials," "toxic
substances," or "solid waste" in CERCLA, RCRA, and the
Hazardous Materials Transportation Act, 49 U.S.C. Sections
1801 ET SEQ., and in the regulations promulgated pursuant
to said laws;
38.1.2. Those substances listed in the United States Department of
Transportation Table (49 CFR 172.101 and any amendments
thereto) or by the Environmental Protection Agency (or any
successor agency) as hazardous substances (40 CFR Part 302
and any amendments thereto);
38.1.3. Such other substances, materials and wastes which are or
become regulated under applicable local, state or federal
law or the United States government, or which are
classified as hazardous or toxic under federal, state or
local laws or regulations; and
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<PAGE>
38.1.4. Any materials, waste or substance which is (A) asbestos,
(B) polychlorinated biphenyls, (C) designated as a
"hazardous substance" pursuant to Section 311 of the Clean
Water Act, 33 U.S.C. Sections 1251 ET SEQ. (33 U.S.C.
Section 1321) or listed pursuant to Section 107 of the
Clean Water Act (33 U.S.C. Section 1371); (D) an
explosive; (E) radioactive; or (F) gasoline, diesel fuel,
kerosene or other petroleum products not contained in an
underground or above ground storage tank upon the
Premises.
38.2. "ENVIRONMENTAL LAWS" shall mean any federal, state or
local law, statute, ordinance, or regulation pertaining to health, industrial
hygiene, or the environmental conditions on, under or about the Premises,
including without limitation the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, 42 U.S.C.
Sections 9601 ET SEQ., and the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, 42 U.S.C. Sections 6901 ET SEQ.
38.3. Tenant represents and warrants to Landlord that it will
not use, store, sell, release, generate or dispose of or otherwise introduce any
Hazardous Substance in or from the Premises in violation of any Environmental
Laws. Tenant agrees to indemnify, defend and hold harmless Landlord from and
against any claims, suits and/or causes of action, costs and fees, including
attorney's fees, arising from a violation of such representation and warranty
except to the extent the same may be caused by Landlord or any of Landlord's
agents, employees, contractors or invitees. This provision shall survive
termination of this Lease.
39. SURRENDER OF PREMISES
Tenant shall, upon the expiration of the Lease Term, or any earlier
termination of this Lease, surrender to Landlord the Premises, and all
alterations, improvements and other additions which may be made or installed by
either party to, in, upon or about the Premises, other than trade fixtures,
signs, equipment and other personal property which remain the property of
Tenant, shall be surrendered to Landlord by Tenant without any damage, injury or
disturbance thereto or payment therefor, reasonable wear and tear and damage by
fire or other casualty excepted.
40. ATTORNEY'S FEES
In the event that at any time either Landlord or Tenant shall
institute any action or proceeding against the other relating to the provisions
of this Lease, or any default hereunder, the unsuccessful party in such action
or proceeding agrees to reimburse the successful party for the reasonable
expenses, attorney's fees and disbursements incurred therein by the successful
party.
41. ESTOPPEL
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<PAGE>
At any time and from time to time either party, upon request of the
other party, will execute, acknowledge and deliver an instrument stating, if the
same be true, that this Lease is a true and exact copy of the Lease between the
parties hereto, that there are no amendments hereof (or stating what amendments
there may be), that the same is then in full force and effect and that, to the
best of its knowledge, there are no offsets, defenses or counterclaims with
respect to the payment of Rent reserved hereunder or in the performance of the
other terms, covenants and conditions hereof on the part of Tenant or Landlord,
as the case may be, to be performed, and that as of such date no default has
been declared hereunder by either party and such other matters as may be
reasonably requested. Such instrument will be executed by the other party and
delivered to the requesting party within ten (10) business days of receipt of a
request therefor.
42. MISCELLANEOUS
42.1. THIS LEASE SHALL BE DEEMED TO BE MADE IN AND CONSTRUED
UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH DAKOTA. EACH PARTY
AND THEIR RESPECTIVE COUNSEL HAVE PARTICIPATED IN THE PREPARATION AND
NEGOTIATION OF THIS LEASE AND, ACCORDINGLY, THE NORMAL RULE OF CONSTRUCTION THAT
AMBIGUITIES ARE TO BE RESOLVED AGAINST THE DRAFTING PARTY SHALL NOT BE EMPLOYED
IN THE INTERPRETATION HEREOF.
42.2. Time is of the essence of this Lease.
42.3. The captions in this Lease are inserted only as a matter
of convenience and for reference and they in no way define, limit or describe
the scope of this Lease or the intent of any provision hereof.
42.4. This Lease may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Lease to be duly
executed as of the dates set forth below.
LANDLORD:
IRET PROPERTIES, a North Dakota
Limited Partnership, by IRET, INC.,
its General Partner
ATTEST: /s/ Thomas A. Wentz Name: /s/ Roger R. Odell
------------------------------- -----------------------------
Thomas A. Wentz, Vice President Roger R. Odell, President
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<PAGE>
Date: 10/23/97 Title: President
------------------------------- -----------------------------
TENANT:
GREAT PLAINS SOFTWARE, INC.
ATTEST: /s/ Sharon Hensch Name: /s/ Terri F. Zimmerman
------------------------------- -----------------------------
Date: 10/22/97 Title: CFO
------------------------------- -----------------------------
SHARON A. HENSCH
NOTARY PUBLIC - NORTH DAKOTA
My Commission Expires DEC. 15, 1999
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<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
A PART OF LOT 1, BLOCK 2 OF THE GREAT PLAINS SOFTWARE ADDITION TO THE CITY OF
FARGO, COMMENCING AT THE SOUTHEAST CORNER OF LOT 1 BLOCK 2 IN THE GREAT
PLAINS SOFTWARE ADDITION TO THE CITY OF FARGO, NORTH DAKOTA. THENCE NORTH 04
DEGREES 22 MINUTES 19 SECONDS WEST 117.09 FEET ALONG THE EAST LINE OF SAID
LOT 1, THENCE SOUTH 88 DEGREES 05 MINUTES 21 SECONDS WEST 346.61 FEET
PARALLEL WITH THE SOUTH LINE OF SAID LOT 1, TO THE POINT OF THE BEGINNING;
THENCE NORTH 01 DEGREES 54 MINUTES 39 SECONDS WEST 335.00 FEET; THENCE SOUTH
88 DEGREES 05 MINUTES 21 SECONDS WEST 335.50 FEET; THENCE NORTH 12 DEGREES 15
MINUTES 20 SECONDS WEST 523.73 FEET; THENCE SOUTH 82 DEGREES 54 MINUTES 44
SECONDS WEST 163.14 FEET; THENCE SOUTH 13 DEGREES 15 MINUTES 08 SECONDS WEST
470.14 FEET; THENCE SOUTH 01 DEGREES 54 MINUTES 39 SECONDS EAST 393.73 FEET;
THENCE NORTH 88 DEGREES 05 MINUTES 21 SECONDS EAST 715.00 FEET; THENCE NORTH
01 DEGREES 54 MINUTES 39 SECONDS WEST, 12.01 FEET TO THE POINT OF BEGINNING.
SAID TRACT CONTAINING 388.495 SF MORE OR LESS.
TOGETHER WITH A NORTH ACCESS EASEMENT, COMMENCING AT THE SOUTHEAST CORNER OF
LOT 1 BLOCK 2 IN THE GREAT PLAINS SOFTWARE ADDITION TO THE CITY OF FARGO,
NORTH DAKOTA; THENCE NORTH 04 DEGREES 22 MINUTES 19 SECONDS WEST 117.09 FEET
ALONG THE EAST LINE OF SAID LOT 1; THENCE SOUTH 88 DEGREES 05 MINUTES 21
SECONDS WEST, 346.61 FEET; THENCE NORTH 01 DEGREES 54 MINUTES 39 SECONDS
WEST, 335.00 FEET; THENCE SOUTH 88 DEGREES 05 MINUTES 21 SECONDS WEST, 292.25
FEET TO THE POINT OF
<PAGE>
BEGINNING OF THE FOLLOWING DESCRIBED 26.50 FEET WIDE STRIP OF LAND, THE
CENTERLINE OF WHICH IS DESCRIBED AS FOLLOWS:
THENCE NORTH 01 DEGREES 54 MINUTES 39 SECONDS WEST 55.26 FEET; THENCE
NORTHEASTERLY ON A CIRCULAR CURVE, CONCAVE TO THE SOUTHEAST WITH A RADIUS OF
736.75 FEET AND AN ARC LENGTH OF 261.20 FEET; THENCE NORTH 18 DEGREES 24
MINUTES 08 SECONDS EAST 13.37 FEET; THENCE NORTHEASTERLY ON A CIRCULAR CURVE
CONCAVE TO THE NORTHWEST WITH A RADIUS OF 613.25 FEET AND AN ARC LENGTH OF
243.76 FEET; THENCE NORTH 04 DEGREES 22 MINUTES 19 SECONDS WEST 119.16 FEET
TO THE SOUTH RIGHT OF WAY OF 44TH AVENUE SOUTHWEST AND THERE ENDING. THE SIDE
LINES OF SAID STRIP TO BE SHORTENED OR LENGTHENED TO TERMINATE AT SAID SOUTH
RIGHT OF WAY LINE OF 44TH AVENUE SOUTHWEST.
TOGETHER WITH A SOUTH ACCESS EASEMENT, COMMENCING AT THE SOUTHEAST CORNER OF
LOT 1 BLOCK 2 IN THE GREAT PLAINS SOFTWARE ADDITION TO THE CITY OF FARGO,
NORTH DAKOTA; THENCE NORTH 04 DEGREES 22 MINUTES 19 SECONDS WEST 117.09 FEET
ALONG THE EAST LINE OF SAID LOT 1 TO THE POINT OF BEGINNING OF THE FOLLOWING
DESCRIBED 24.00 FEET WIDE STRIP OF LAND; THENCE SOUTH 88 DEGREES 05 MINUTES
21 SECONDS WEST FOR A DISTANCE OF 346.61 FEET AND THERE ENDING.
SUBJECT TO EASEMENTS OF RECORD.
<PAGE>
EXHIBIT B
NOTICE OF LEASE
As provided by the terms of the Lease Agreement (the "Lease") dated
_______________, 19___ between the undersigned parties leasing premises
described as follows:
the undersigned hereby establish and agree (i) the initial term of the Lease
commenced on ___________________, 19___; (ii) the Fixed Rent for the first
calendar month of the Lease Term is _________________; (iii) the date of
Commencement of Tenant's liability for the payment of rent and other charges as
specified in the Lease is ________________________; and (iv) the initial term of
the Lease will expire on _________________, unless Tenant exercises its renewal
options as set forth in the Lease.
Landlord:
IRET PROPERTIES, a North Dakota Limited
Partnership, by IRET, INC., its General Partner
By: _____________________________________
Name: ________________________________
Date: ______________________ Title: ________________________________
Tenant:
GREAT PLAINS SOFTWARE, INC.
By: _____________________________________
Name: ________________________________
Date: ______________________ Title: ________________________________
<PAGE>
EXHIBIT C
MEMORANDUM OF LEASE
THIS MEMORANDUM OF LEASE, made and entered into this ____ day of
____________, 1997, by and between IRET Properties, a North Dakota Limited
Partnership (hereinafter referred to as "LANDLORD"), with its principal office
at 12 South Main, Minot, North Dakota 58701, and Great Plains Software, Inc., a
Minnesota corporation (hereinafter referred to as "TENANT"), with its office at
1701 SW 38th Street, Fargo, North Dakota 58103.
WITNESSETH, that:
1. Landlord, in consideration of the rents reserved and agreed to be
paid by Tenant, and of the covenants, agreements, conditions and understandings
to be performed and observed by Tenant, all as more fully set out in a lease
(the "LEASE AGREEMENT") executed by Landlord and Tenant, and dated the ____ day
of October, 1997, hereby lets, leases and demises to the Tenant, and Tenant
leases from Landlord, the land described in Exhibit A attached hereto, together
with all buildings and improvements now or hereafter constructed or located
thereon, and together with all rights, privileges, easements, hereditaments and
appurtenances appertaining thereto, including without limitation all rights,
privileges, easements, hereditaments and appurtenances in, over and upon
adjoining and adjacent public and private land, highways, roads and streets
required for ingress and egress to or from said land, buildings and improvements
(collectively the "Premises").
2. The term of this Lease shall commence as set forth in the Lease
Agreement and terminate fourteen (14) years (plus, in the event the rent
commencement date does not commence on the first day of a month, the period from
the rent commencement date through the last day of the month in which the rent
commencement date occurs) after the rent commencement date as determined by the
provisions of the Lease Agreement. Tenant has the right to extend the term of
this Lease for six (6) successive periods of five (5) years each.
3. Tenant has an option to purchase the Premises, and a right of
first refusal to purchase the Premises, as provided in the Lease Agreement.
4. This Memorandum of Lease is subject to all of the terms,
conditions and understandings set forth in the Lease Agreement between the
Landlord and Tenant, which agreement is incorporated herein by reference and
made a part hereof, as though copied verbatim herein. In the event of a conflict
between the terms and conditions of this Memorandum of Lease and the terms and
conditions of the actual Lease Agreement, the terms and conditions of the Lease
Agreement shall prevail.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Memorandum to be
duly executed as of the day and year first above written.
Landlord:
IRET PROPERTIES, a North Dakota Limited
Partnership, by IRET, INC., its General Partner
By: ____________________________________
Name: _______________________________
Date: _______________________ Title: _______________________________
Tenant:
GREAT PLAINS SOFTWARE, INC.
By: ____________________________________
Name: _______________________________
Date: _______________________ Title: _______________________________
STATE OF NORTH DAKOTA )
) ss
COUNTY OF WARD )
On this ____ day of ________________, 1997, before me personally
appeared Thomas A. Wentz, known to me to be the Vice-President of IRET, Inc., a
North Dakota Corporation, the sole General Partner of IRET Properties, a North
Dakota Limited Partnership, described in the foregoing instrument, and
acknowledged that he executed the same on behalf of and with the authority of
said Limited Partnership.
__________________________
(SEAL) Notary Public in and for the State of
North Dakota
STATE OF NORTH DAKOTA )
) ss
COUNTY OF CASS )
C-2
<PAGE>
On this ____ day of ________________, 1997, before me personally
appeared _________________________, known to me to be the
_____________________________ of Great Plains Software, Inc., the corporation
described in the foregoing instrument, and acknowledged that he/she executed the
same on behalf and with the authority of said Corporation.
__________________________
(SEAL) Notary Public in and for the State of
North Dakota
C-3
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EXHIBIT D
LANDLORD'S TITLE COMMITMENT
<PAGE>
Exhibit 10.6
GREAT PLAINS SOFTWARE, INC.
OUTSIDE DIRECTORS' STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of this Great Plains Software, Inc.
Outside Directors' Stock Option Plan is to attract and retain the best available
individuals for service as Directors of the Company and provide additional
incentive to the Outside Directors of the Company to serve as Directors. None
of the options granted hereunder shall be "incentive stock options" within the
meaning of Section 422 of the Code.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the Common Stock of the Company.
(d) "COMPANY" shall mean Great Plains Software, Inc., a Minnesota
corporation.
(e) "CONTINUOUS STATUS AS A DIRECTOR" shall mean the absence of any
interruption or termination of service as a Director.
(f) "DIRECTOR" shall mean a member of the Board.
(g) "EFFECTIVE DATE" shall mean the date on which the Company's
registration statement relating to its initial public offering of Common Stock
becomes effective with the Securities and Exchange Commission.
(h) "EMPLOYEE" shall mean any person, including officers and
Directors, employed by the Company or any parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(i) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "IPO PRICE" shall mean the initial public offering price set
forth on the cover of the Company's final prospectus relating to its initial
public offering of Common Stock.
(k) "OPTION" shall mean a stock option granted pursuant to the Plan.
<PAGE>
(l) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(m) "OPTIONEE" shall mean an Outside Director who receives an Option.
(n) "OUTSIDE DIRECTOR" shall mean a Director who is not an Employee.
(o) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 425(e) of the Code.
(p) "PLAN" shall mean this Outside Directors' Stock Option Plan.
(q) "SHARES" shall mean shares of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(r) "SUBSIDIARY" shall mean a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 425(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 200,000 shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in any
event be returned to the Plan and shall not become available for future grant
under the Plan.
4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.
(a) ADMINISTRATOR. Except as otherwise required herein, the Plan
shall be administered by the Board.
(b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall be
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director shall automatically be granted an
Option (an "Effective Date Grant") to purchase 3,000 shares upon the Effective
Date. Options granted under this Section 4(b)(ii) shall become vested and
thereby exercisable with respect to all shares of Optioned Stock on the twelve
(12) month anniversary of such Effective Date Grant; provided, however, that an
Option that is the subject of the Effective Date Grant shall only vest so long
as the Outside Director remains a Director on the date such option vests.
<PAGE>
(iii) Each Outside Director (other than any Outside Director who
received an Effective Date Grant) shall be automatically granted an Option (an
"Election Date Grant") to purchase 15,000 Shares upon the date on which such
person first becomes a Director, whether through election by the shareholders of
the Company or appointment by the Board of Directors to fill a vacancy. Options
granted under this section 4(b)(iii) shall become vested and thereby exercisable
in three equal installments each on each of the three twelve-month anniversary
dates following such Election Date Grant; provided, however, an Option that is
the subject of the Election Date Grant shall only vest so long as the Outside
Director remains a Director on the date such option vests.
(iv) Each Outside Director shall automatically receive, on the
date of each Annual Meeting of Shareholders held after the Effective Date, an
Option to purchase 4,000 Shares, such Option to vest and thereby become
exercisable immediately.
(v) The terms of an Option granted hereunder shall be as
follows:
(A) The term of the Option shall be five (5) years.
(B) The Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth
in Section 8 hereof.
(C) The exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the Option.
(c) POWERS OF THE BOARD. Subject to the provisions and restrictions
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
7(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per share of Options to be granted, which exercise price
shall be determined in accordance with Section 7(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(d) EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
5. ELIGIBILITY; CONTINUED SERVICE AS DIRECTOR. Options may be granted
only to Outside Directors. All Options shall be automatically granted in
accordance with the terms set forth in Section 4(b) hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his directorship at any time.
<PAGE>
6. TERM OF PLAN. The Plan shall become effective on the Effective Date.
It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 12 of the Plan.
7. EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.
(b) FAIR MARKET VALUE. The fair market value ("Fair Market Value")
of a Share on the Effective Date shall be the IPO Price. On any other dates,
the Fair Market Value shall be determined by the Board in its discretion;
provided, however, that if there is a public market for the Common Stock, the
fair market value per Share shall be the closing price of the Common Stock in
the over-the-counter market on the date of grant of the Option, as reported in
THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by the
National Association of Securities Dealers Automated Quotation System) or, in
the event the Common Stock is traded on the Nasdaq National Market System or
listed on a stock exchange, the fair market value per Share shall be the closing
price on such system or exchange on the date of grant of the Option, as reported
in THE WALL STREET JOURNAL.
(c) FORM OF CONSIDERATION. Subject to compliance with applicable
provisions of Section 16(b) of the Exchange Act, (or other applicable law), the
consideration to be paid for the Shares to be issued upon exercise of an Option,
including the method of payment, shall be determined by the Board and may
consist entirely of (i) cash, (ii) check, (iii) other Shares which have a Fair
Market Value on the date of exercise equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised, (iv) authorization for
the Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (v) delivery of a properly executed exercise notice
together with irrevocable instructions to a broker to promptly deliver to the
Company the amount of sale or loan proceeds required to pay the exercise price,
(vi) any combination of the foregoing methods of payment or (vii) such other
consideration and method of payment for the issuance of Shares as may be
permitted under applicable laws. In making its determination as to the type of
consideration to accept, the Board shall consider whether acceptance of such
consideration may be reasonably expected to benefit the Company.
8. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
<PAGE>
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be
issued to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 10 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF STATUS AS A DIRECTOR. If an Outside Director
ceases to serve as a Director, he may, but only within five (5) years after the
date he ceases to be a Director of the Company, or by the date of termination of
the Option, whichever is earlier, exercise his Option to the extent that he was
entitled to exercise it at the date of such termination. To the extent that he
was not entitled to exercise an Option at the date of such termination, or if he
does not exercise such Option (which he was entitled to exercise) within the
time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 8(b) above, in the event an Optionee is unable to continue his service
as a Director with the Company as a result of his total and permanent disability
(as defined in Section 22(e)(3) of the Code) he may, but only within seven (7)
months from the date of termination, exercise his Option to the extent he was
entitled to exercise it at the date of such termination. To the extent that he
was not entitled to exercise the Option at the date of termination, or if he
does not exercise such Option (which he was entitled to exercise) within the
time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. Notwithstanding the provisions of Section
8(b) above, in the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his
death a Director of the Company and who has been in Continuous Status as a
Director since the date of grant of the Option, the Option may be exercised, at
any time within six months following the date of death, by the Optionee's estate
or by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous Status as a
Director for six months after the date of death; or
(ii) within thirty (30) days after the termination of Continuous
Status as a Director, the Option may be exercised, at any time within six months
following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by
<PAGE>
bequest or inheritance, but only to the extent of the right to exercise that had
accrued at the date of termination.
9. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION OR MERGER.
(a) In the event that the number of outstanding shares of Common
Stock of the Company is changed by a stock dividend, stock split, reverse stock
split, combination, reclassification or similar change in the capital structure
of the Company without consideration, the number of Shares available under this
Plan and the number of Shares subject to outstanding Options and the exercise
price per share of such Options shall be proportionately adjusted, subject to
any required action by the Board or shareholders of the Company and compliance
with applicable securities laws; provided, however, that no certificate or scrip
representing fractional shares shall be issued upon exercise of any Option and
any resulting fractions of a Share shall be ignored. Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive.
(b) In the event of a dissolution or liquidation of the Company, a
merger in which the Company is not the surviving corporation, a transaction or
series of related transactions in which 100% of the then outstanding voting
stock is sold or otherwise transferred, or the sale of substantially all of the
assets of the Company, any or all outstanding Options shall, notwithstanding any
contrary terms of the written agreement governing such Option, accelerate and
become exercisable in full at least ten days prior to (and shall expire on) the
consummation of such dissolution, liquidation, merger or sale of stock or sale
of assets on such conditions as the Board shall determine unless the successor
corporation assumes the outstanding Options or substitutes substantially
equivalent options.
11. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
12. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuance shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act (or any other applicable law or regulation), the Company shall
obtain shareholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in
<PAGE>
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
13. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of the Shares available
for issuance pursuant to this Plan as shall be sufficient to satisfy the
requirements of the Plan.
15. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company prior to the Effective Date.
<PAGE>
EXHIBIT 10.7
GREAT PLAINS SOFTWARE, INC.
SUMMARY PLAN DESCRIPTION
FOR EMPLOYEES ELIGIBLE TO PARTICIPATE
IN THE GREAT PLAINS SOFTWARE
EMPLOYEE STOCK PURCHASE PLAN
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS
COVERING SECURITIES REGISTERED UNDER
THE SECURITIES ACT OF 1933.
THE DATE OF THIS DOCUMENT IS THAT OF THE EFFECTIVE DATE
OF THE INITIAL PUBLIC OFFERING
The stockholders of Great Plains Software (the "Company") has approved the
adoption by the Company's Board of Directors (the "Board") of the Great
Plains Software Employee Stock Purchase Plan (the "Plan"). In brief, the plan
permits Eligible Employees (as defined below) to authorize the company to
deduct a specified amount from their after-tax compensation for each pay
period and to use such amount to purchase whole shares of the Company's
Common Stock for such employees at a discount from market value. The purpose
of the Great Plains Software, Inc. 1997 Employee Stock Purchase Plan (the
"Plan") is to provide employees of Great Plains Software, Inc., a Minnesota
corporation, and certain related corporations with an opportunity to share in
the ownership of the Company by providing them with a convenient means for
regular and systematic purchases of the Company's Common Stock, par value
$.01 per share, and, thus, to develop a stronger incentive to work for the
continued success of the Company.
The Plan is intended to be an "employee stock purchase plan" as defined in
Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
and Treasury Regulations promulgated thereunder. Accordingly, the Plan shall
be interpreted and administered in a manner consistent therewith if so
approved. All Participants in the Plan will have the same rights and
privileges consistent with the provisions of the Plan. No employee shall be
granted any right to purchase Common Stock if such employee possesses 5% or
more of the total combined voting power or value of all the classes of the
capital stock of the Company.
ELIGIBLE EMPLOYEES
Participation in the Plan on the part of a Participant is voluntary and such
participation is not a condition of employment nor does participation in the
Plan entitle a Participant to be retained as an employee. All Permanent
Full-Time Employees shall be eligible to participate in the Plan beginning on
the first day of the first Purchase Period to commence after such person
becomes a Permanent Full-Time Employee. Each employee will continue to be
eligible to participate in the Plan so long as he or she remains a Permanent
Full-Time Employee.
<PAGE>
METHOD OF PARTICIPATION
ELECTION. To participate in the Plan, Eligible Employees must file an
Enrollment Form with the Company in advance of a Purchase Period. This form
authorizes regular payroll deductions from Compensation beginning with the
first pay day in the Purchase Period. The deductions will continue until the
Eligible Employee withdraws from the Plan, modifies his or her authorization,
or ceases to be an Eligible Employee.
PURCHASE PERIOD. The first Purchase period will be an extended period
beginning the effective date of the Initial Public Offering and ending
December 31, 1997. Periods after the first Purchase Period will begin and end
on a semi-annual basis beginning January and July 1, and ending June 30 and
December 31.
DEDUCTION FROM PAY. The Enrollment Form will permit a Participant to elect
payroll deductions in any multiple of 1% but not less than 1% or more than
10% of such Participant's Current Compensation for each pay period. A
Participant may cease making payroll deductions at any time. Payroll
deductions will be credited to the Participant's Stock Purchase Account as
soon as administratively feasible following each payday.
COMPANY CONTRIBUTIONS. The Company may from time to time contribute to each
Participant's Stock Purchase Account an amount equal to up to 50% of each
payroll deduction credited to such Account. No Company contributions shall be
deemed to have been made until such contributions are credited to the
Participant's Stock Purchase Account. Company contributions will be credited
to the Participant's Stock Purchase Account as soon as administratively
feasible following the last business day of the Purchase Period at the time
of and in connection with the purchase of shares of Common Stock.
STOCK PURCHASE ACCOUNT. The Stock Purchase Account is established solely for
accounting purposes, and all amounts credited to the Stock Purchase Account
will remain part of the general assets of the Company or the Participating
Affiliate (as the case may be). No interest will be paid upon payroll
deductions, Company contributions or on any amount credited to, or on deposit
in, a Participant's Stock Purchase Account. A Participant may not make any
payment into the Stock Purchase Account other than the payroll deductions
made pursuant to the Plan.
PURCHASE OF COMMON STOCK. As soon as administratively feasible following the
last business day of a Purchase Period, the entire credit balance in each
Participant's Stock Purchase Account will be used to purchase the largest
number of whole shares of Common Stock purchasable with such amount, unless
the Participant has filed with the Company, in advance of that date, a form
provided by the Company that requests the distribution of the entire credit
balance in cash. The purchase price for any Purchase Period shall be the
lesser of (a) 85% of the Fair Market Value of the Common Stock on the first
business day of that Purchase Period or (b) 85% of the Fair Market Value of
the Common Stock on the last business day of that Purchase Period, in either
case to be rounded up to the next full cent.
<PAGE>
Shares of Common Stock delivered pursuant to the Plan may be newly issued
shares or treasury shares previously acquired by the Company. As soon as
administratively feasible after the close of the Purchase Period,
certificates for the number of whole shares of Common Stock purchased by each
Participant will be held in trust. Any amount remaining in a Participant's
Stock Purchase Account will be held until the end of the next Purchase Period
and added to that Purchase Period's Contributions. A Participant may purchase
no more than 5,000 shares of Common Stock under the Plan for a given Purchase
Period and no more than an aggregate of $25,000 in Fair Market Value of
shares of Common Stock under the Plan and all other employee stock purchase
plans (if any) of the Company and its Affiliates in any calendar year.
VOLUNTARY WITHDRAWAL. A Participant may withdraw from the Plan and cease
making payroll deductions by filing with the Company a form provided for this
purpose. Upon withdrawal, all further withholding will cease and the entire
amount credited to the Participant's Stock Purchase Account will be paid to
the Participant, without interest, in cash within 30 days. A Participant who
withdraws from the Plan will not be eligible to reenter the Plan until the
beginning of the next Purchase Period following the date of such withdrawal.
CHANGING WITHHOLDING PERCENTAGES. A Participant may change the percentage
withheld from his or her Compensation by filing a Stock Purchase Plan
Change/Withdrawal Form with the Company, indicating the new contribution
percentage. The new election will take affect with the next payroll period
following receipt of the form in Human Resources.
RIGHTS NOT TRANSFERABLE
A Participant's rights under the Plan are exercisable only by the Participant
during his or her lifetime, and may not be sold, pledged, assigned or
transferred in any manner other than by will or the laws of descent and
distribution. The amounts credited to a Stock Purchase Account may not be
assigned, transferred, pledged or hypothecated in any way, and any attempted
assignment, transfer, pledge, hypothecation or other disposition of such
amounts will be null and void and without effect.
TERMINATION OF EMPLOYMENT
If a Participant's employment is terminated prior to the end of a Purchase
Period for any reason, including death, permanent disability, or retirement
at or after age 65, the Company will refund in cash all amounts credited to
his or her Stock Purchase Account.
TAX CONSIDERATIONS
Payroll deductions under the Plan will be made on an after-tax basis.
Participants will not be taxed as a result of participation in the Plan until
the time of disposition of shares acquired under the Plan or the death of the
Participant. Participants will have a basis in their shares equal to the
purchase price of their shares plus any amount that must be treated as
ordinary income at the time of disposition of the shares, as described below.
Any additional gain or loss realized on the disposition of shares acquired
under the Plan will be capital gain or loss.
<PAGE>
If a Participant holds shares for less than two years after the first day of
the relevant Purchase Period or one year after the last day of such Purchase
Period, then the excess of the fair market value of the shares on the date of
purchase by the Participant over the purchase price paid by the Participant
will be taxed as ordinary income. In this circumstance, the Company generally
would be entitled to a deduction in the amount taxed as ordinary income.
If a Participant holds shares for longer than the periods described in the
preceding paragraph or dies while holding the shares, then only a portion of
the gain realized upon the sale of other disposition of the shares will be
taxed as ordinary income, and the remainder will be taxed as capital gain.
The portion to be taxed as ordinary income would be equal to the lesser of
(i) the excess of the fair market value of the shares on the date of
disposition or death over the purchase paid by the Participant or (ii) the
excess of the fair market value of the shares on the first day of the
Purchase Period over the purchase price paid by the Participant. In this
circumstance, the Company would not be entitled to a deduction for any amount
taxed as ordinary income.
The foregoing is only a brief summary of the applicable federal income tax
laws and should not be relied upon as being a complete statement.
Furthermore, the tax laws are from time to time subject to legislative
changes and new or revised judicial or administrative interpretations. In
addition, a Participant may incur state or local taxes in connection with the
purchase of shares of Common Stock under the Plan and the disposition of such
shares. Therefore, each Participant is encouraged to review with a tax
adviser from time to time his or her tax status with respect to participation
in the Plan and, prior to disposing of the shares acquired thereunder, to
consult a tax adviser as to the income tax consequences of such a disposition.
PLAN ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") of two or
more directors of the Company, none of whom shall be officers or employees of
the Company and all of whom shall be "disinterested persons" with respect to
the Plan. The members of the Committee shall be appointed by and serve at the
pleasure of the Board of Directors. The Committee may be the Compensation
Committee of the Board of Directors.
The Committee should be addressed as follows: Great Plains Software, Inc.
1701 S.W. 38th Street
Fargo, North Dakota 58103
Attention: Vice President,
Human Resources
AMENDMENT OF THE PLAN
The Board may at any time amend the Plan in any manner which does not adversely
affect the rights of Participants pursuant to shares previously acquired
under the Plan, except that, without stockholder approval on the same basis
as required to originally approve the Plan, no amendment will be made (i) to
increase the number of shares to be reserved under the Plan, (ii) to decrease
the minimum purchase price, (iii) to withdraw the administration of the Plan
from the Committee, or (iv) to change the definition of employees eligible to
participate in the Plan.
<PAGE>
TERMINATION OF THE PLAN
All rights of Participants under the Plan will terminate at the earlier of
(i) the conclusion of the last authorized Purchase Period on DECEMBER 31,
2004, (ii) the last day that Participants become entitled to purchase a
number of shares of Common Stock equal to or greater than the number of
shares remaining available for purchase; or (iii) at any time, at the
discretion of the Board, after 30 days' notice has been given to all
Participants. Upon termination of the Plan, shares of Common Stock will be
issued to Participants, and cash, if any, remaining in the Participants'
Stock Purchase Accounts will be refunded to them, as if the Plan were
terminated at the end of the Purchase Period.
CERTAIN LAWS AND REGULATIONS
The Plan is not subject to any of the provisions of the Employee Retirement
Income Security Act of 1974, as amended, and is not a qualified plan under
Section 401(a) of the Code. Rights to purchase Common Stock granted under the
Plan shall be construed and shall take effect in accordance with the laws of
the State of Minnesota.
ADDITIONAL INFORMATION
The Company will provide without charge to each participant, on the oral or
written request of any such Participant, a copy of any or all of the
following documents (without exhibits, except where such exhibits are
specifically incorporated by reference into the information incorporated into
this document), all of which are incorporated by reference into the
prospectus.
- - The Company's prospectus which contains audited financial statements.
- - The Company's Form 10-Q filed with the SEC.
- - The description of the Company's Common Stock and all amendments and reports
filed for the purpose of updating such description.
- - All reports and other documents subsequently filed by the Company pursuant
to the Exchange Act, prior to the filing of a post-effective amendment which
indicates that all securities offered have been sold or which deregisters all
securities remaining unsold.
The company will provide to each Participant, upon such Participant's written
or oral request and without charge, additional copies of this document and
the Company's latest annual report to stockholders. Each Participant will
also be sent a copy of all reports, proxy statements and other communications
distributed to its stockholders generally. Additional information about the
Plan and its administrators is also available upon request. Written requests
for such copies or information should be directed to:
Lisa Cook, Plan Administrator
Great Plains Software, Inc.
1701 S.W. 38th Street
Fargo, North Dakota 58103
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Great Plains Software O.C., Inc.
a Minnesota corporation
Great Plains Software South Africa Pty. Ltd.
a South Africa private company
Great Plains Software U.K., LLC
a Delaware limited liability company
Great Plains Software Singapore Pte. Ltd.
a Singapore private company
Great Plains Software Pty. Ltd. (Australia)
a Australia private company
Great Plains Software Canada, Inc.
a Delaware corporation
Great Plains Software Scandinavia AB
a Swedish company
Match Data Systems International, Inc.
a Washington corporation
<PAGE>
EXHIBIT 23.1: CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-30767 and 333-79713) of Great Plains Software,
Inc. of our report dated June 25, 1999 relating to the financial statements and
financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 9, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Douglas J. Burgum and Tami L.
Reller (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, 1999 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.
Signature Title Date
--------- ----- ----
/s/ Douglas J. Burgum
- --------------------------- President, Chief Executive August 9, 1999
Douglas J. Burgum Officer and Chairman of the Board
/s/ Tami L. Reller
- --------------------------- Chief Financial Officer August 9, 1999
Tami L. Reller
/s/ Bradley J. Burgum
- --------------------------- Director August 9, 1999
Bradley J. Burgum
/s/ Frederick W. Burgum
- --------------------------- Director August 9, 1999
Frederick W. Burgum
/s/ William V. Campbell
- --------------------------- Director August 9, 1999
William V. Campbell
/s/ J.A. Heidi Roizen
- --------------------------- Director August 9, 1999
J.A. Heidi Roizen
/s/ Joseph S. Tibbetts, Jr.
- --------------------------- Director August 9, 1999
Joseph S. Tibbetts, Jr.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 26,983
<SECURITIES> 96,700
<RECEIVABLES> 18,280
<ALLOWANCES> 5,687
<INVENTORY> 746
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0
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</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:
WE MAY BE UNABLE TO MARKET AND SELL OUR PRODUCTS IF WE ARE UNABLE TO MAINTAIN
A STRONG PARTNER NETWORK
We do not maintain a direct sales force; rather, we rely exclusively
on our Partner network to sell our solutions. We cannot assure you that our
Partners will aggressively market our products and services or will maintain
their relationship with us. Our failure to maintain these relationships and
to develop new Partner relationships in the future could have a material
adverse effect on our business.
Our ability to achieve significant future revenue growth will depend
in large part on adding new Partners, leveraging our relationships with
existing Partners and our Partners' ability to implement their growth plans.
We cannot assure you that either we or our Partners will be able to achieve
these goals. Our inability or our Partners' inability to do so could have a
material adverse effect on our business, results of operations and financial
condition.
DEMAND FOR OUR PRODUCTS MAY DECREASE IF WE ARE UNABLE TO ANTICIPATE AND ADAPT
TO RAPIDLY CHANGING TECHNOLOGY
Our markets are characterized by rapidly changing technologies,
evolving industry standards, frequent new product and service introductions,
and changing customer and Partner demands. Our future success will depend on
our ability to adapt to these rapidly changing technologies, to enhance our
existing solutions, and to introduce new solutions to address our customers'
and Partners' changing demands. We may experience difficulties that could
delay or prevent the successful design, development, introduction or
marketing of new solutions. In addition, these new solutions and enhancements
must meet the requirements of our current and prospective customers and must
achieve significant market acceptance.
DEMAND FOR OUR PRODUCTS MAY DECREASE IF MIDMARKET BUSINESSES FAIL TO ADOPT
MICROSOFT TECHNOLOGIES OR OUR PRODUCTS BECOME INCOMPATIBLE WITH NEW DEVELOPMENTS
IN THESE TECHNOLOGIES
Our software products are designed for Microsoft technologies,
including Windows NT and SQL Server. In addition, our products utilize other
Microsoft technologies, including Visual Basic for Applications and Site
Server. Although we believe that Microsoft technologies will continue to be
widely utilized by Midmarket businesses, we cannot assure you that Midmarket
businesses will adopt these technologies as anticipated or will not in the
future migrate to other computing platforms or technologies that we do not
currently support. Moreover, our strategy
<PAGE>
requires that our products and technologies continue to be compatible with
new developments in Microsoft's technologies.
OUR MANAGEMENT AND INTERNAL SYSTEMS MAY BE INADEQUATE TO HANDLE POTENTIAL
GROWTH OF OUR SALES AND WORKFORCE
Our growth has resulted in increased responsibilities placed upon
our management and has placed added pressures on our internal systems.
Continued growth will require us to implement additional systems and controls
and to expand, train and manage a larger workforce. We cannot assure you that
the systems and management skills currently in place will be adequate if we
continue to grow. In addition, from time to time we may acquire businesses,
products, services and technologies that are complementary to ours, or that
allow us to enter into new markets. Such acquisitions would place additional
demands upon our management.
DEMAND FOR OUR PRODUCTS MAY DECREASE IF WE ARE UNABLE TO COMPETE SUCCESSFULLY
IN THE MIDMARKET BUSINESS SOFTWARE MARKET
The market for business management solutions is highly competitive.
We expect this competition to intensify, particularly in the Midmarket. Many
of our competitors have greater financial, marketing and technical resources
than we do. We cannot assure you that we will be able to compete successfully
against these companies.
SOFTWARE THAT WE LICENSE FROM OTHER COMPANIES FOR RESALE MAY BECOME UNAVAILABLE
OR OUTDATED
Some of our products utilize software licensed to us by independent,
third-party software developers. For example, we rely on third parties for
our primary reporting tool, for our Integration Manager, and for our Service
Management Series. Although we believe that there are alternatives for most
of these products, any significant interruption in the supply of such
third-party software could have a material adverse impact on our sales unless
and until we can replace the functionality provided by key third-party
products. In addition, we depend on these third parties to enhance their
current products, to develop new products on a timely and cost-effective
basis, and to respond to emerging industry standards and rapid technological
change. We cannot assure you that we would be able to replace the
functionality provided by third-party software if that software becomes
obsolete or incompatible with future versions of our products, or otherwise
is not adequately maintained or updated. Any failure of key third-party
solutions could have a material adverse effect on our business, results of
operations and financial condition.
WE MAY BE UNABLE TO IDENTIFY OR COMPLETE SUITABLE ACQUISITIONS AND INVESTMENTS,
AND ANY ACQUISITIONS AND INVESTMENTS WE DO COMPLETE MAY CREATE BUSINESS
DIFFICULTIES OR DILUTE OUR SHAREHOLDERS
We may acquire or make investments in complementary businesses,
products, services or technologies. We cannot assure you that we will be able
to identify suitable acquisitions or investment candidates. Even if we
identify suitable candidates, we cannot assure you that we will be able to
make such acquisitions or investments on commercially acceptable terms. If we
acquire a company, we may have difficulty assimilating its personnel and
operations into our operations. In addition, its key personnel may decide not
to work for us. We may also have difficulty in assimilating acquired
businesses, products, services and technologies into our operations. These
difficulties could disrupt our ongoing business, distract our management and
workforce, increase our expenses and adversely affect our results of
operations. Furthermore, we may incur significant debt or be required to
issue equity securities to pay for future acquisitions or investments. The
issuance of equity securities could be dilutive to our shareholders.
OUR EARNINGS MAY BE AFFECTED BY POTENTIAL CHANGES IN ACCOUNTING PROFESSION
PRACTICES
Recently, the SEC has been critical of the U.S. accounting practice
of writing off in-process research and development costs incurred in
connection with acquisitions. We are aware that the SEC and the U.S.
accounting profession are in dialog regarding retroactive application of
recent SEC guidelines on this subject. We cannot predict the outcome of that
dialog. However, if the new SEC guidelines were applied, it could cause a
reduction of in-process research and development write-offs taken in
connection with two acquisitions in fiscal 1998, and a
<PAGE>
corresponding increase in the amount of goodwill associated with each
acquisition, which would produce increased amortization expense against
income in future periods.
ANTICIPATED FLUCTUATIONS IN OUR QUARTERLY REVENUE AND OPERATING RESULTS MAY
RESULT IN REDUCED PROFITABILITY AND LEAD TO REDUCED PRICES FOR OUR STOCK
Our quarterly revenue and operating results have varied in the past
and can be expected to vary in the future. As a result, we cannot assure you
that we will be able to maintain profitability on an annual or quarterly
basis. It is possible that in some future quarters our operating results will
fall below our expectations or those of market analysts and investors. In
that event, the price of our common stock would likely decrease.
Most of our quarterly revenue results from orders booked in that
quarter. We establish expenditure levels based on our expectation for future
revenue. If revenue levels are below expectation, expenses could be
disproportionately high. In addition, our business has experienced and may
continue to experience seasonality. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Selected Quarterly
Operating Results." In Item 7 of our Form 10-K for the year ended May 31,
1999.
THE EXPECTED CONTINUING DECLINE IN SALES OF OUR DOS- AND MACINTOSH-BASED PRODUCT
COULD NEGATIVELY AFFECT OUR BUSINESS
We have shifted our product focus from a DOS- and Macintosh-based
product, Great Plains Accounting, to our Dynamics C/S+ and Dynamics products
which are based on Windows NT and Microsoft SQL Server technologies. As a
result of this shift and the decrease in general market demand for DOS- and
Macintosh-based solutions, our revenues from our Great Plains Accounting
product have declined and are expected to decline in the future. We cannot
assure you that the decline in revenues from sales of Great Plains Accounting
will not have a material adverse effect on the results of our operations and
our financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In Item 7 of our Form 10-K
for the year ended May 31, 1999.
WE MAY FACE INCREASED COMPETITION AND DOWNWARD PRICE PRESSURE IF WE ARE UNABLE
TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of trade secret, copyright and trademark
laws, nondisclosure agreements and other contractual provisions to protect
our intellectual property rights. We cannot assure you that these protections
will be adequate to prevent our competitors from copying or reverse-engineering
our products, or that our competitors will not independently develop
technologies that are substantially equivalent or superior to ours. We make
source code available to certain of our Partners and customers. This
availability may increase the likelihood of misappropriation or other misuse
of our intellectual property.
We have no patents. Existing copyright and trademark laws afford
only limited protection for our intellectual property rights and will not
protect such rights if competitors independently develop similar products.
While we license the Dynamics C/S+ product under signed license agreements,
Dynamics and Great Plains Accounting are licensed under "shrink wrap"
licenses not signed by the licensees. These non-negotiable license agreements
found printed on the software packaging may be unenforceable under the laws
of certain jurisdictions. In addition, the laws of certain countries where we
sell products do not protect our products and intellectual property rights to
the same extent as the laws of the United States.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WHICH WOULD BE COSTLY TO
RESOLVE
Although we have never been the subject of a material intellectual
property dispute, we cannot assure you that a third party will not assert
that our technology violates its intellectual property rights. As the number
of software products in our target markets increases and the functionality of
these products further overlap, we believe that all software developers may
become increasingly subject to infringement claims. Any infringement claims,
whether with or without merit, can be time consuming and expensive to defend.
We cannot assure you that third parties will not assert infringement claims
against us in the future with respect to our current or future products or
that any infringement claim assertions will not require us to enter into
royalty arrangements that could be costly.
<PAGE>
DIFFICULTIES PRESENTED BY INTERNATIONAL ECONOMIC, POLITICAL, LEGAL, ACCOUNTING
AND BUSINESS FACTORS COULD NEGATIVELY AFFECT OUR BUSINESS IN INTERNATIONAL
MARKETS
We have operations in a number of international markets. We intend
to continue to expand our international operations and our international
sales and marketing efforts. Our international business is subject to many
risks, including:
- - local economic and market conditions
- - political and economic instability
- - difficulties in enforcing intellectual property and contract rights
- - difficulties in tailoring our products to fit local accounting principles,
rules, regulations, language, tax codes and customs
- - fluctuations in currency exchange rates
- - difficulties and costs of staffing and managing foreign operations
- - the need for compliance with a wide variety of foreign and United States
export regulations
These risks may materially and adversely affect our business, results of
operations or financial condition.
OUR PRODUCTS, SYSTEMS AND SALES MAY BE SUBJECT TO YEAR 2000 PROBLEMS
Our current products are Year 2000 compliant. Nevertheless, our
business could be adversely affected by Year 2000 problems. For example,
Midmarket businesses may lack sufficient resources to acquire new systems
such as ours because they may be diverting resources to assess and fix
internal systems that may not be Year 2000 compliant.
We have reviewed our own information technology and other technology
systems to assess and remediate any Year 2000 problems. While the amount of
remediation work required to address Year 2000 problems is not expected to be
extensive and while we have received assurances from our major suppliers that
they are addressing the Year 2000 issue, we cannot assure you that our
internal systems will function properly in the Year 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Year 2000." In Item 7 of our Form 10-K for the year ended May 31, 1999.
OUR STOCK PRICE IS VOLATILE
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.
