-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lvph7INVOCEqn/Wc/irWX0PnwVSpvKJ++DPJuxGEx3rCHxXU8FFipg+CUKN5/GNx pDVBG9IeGH+VTz9Z4MXOTA== 0000912057-97-007900.txt : 19970306 0000912057-97-007900.hdr.sgml : 19970306 ACCESSION NUMBER: 0000912057-97-007900 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19970305 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT PLAINS SOFTWARE INC CENTRAL INDEX KEY: 0000758540 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 450374871 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-22833 FILM NUMBER: 97551231 BUSINESS ADDRESS: STREET 1: 1701 S W 38TH STREET CITY: FARGO STATE: ND ZIP: 58103 BUSINESS PHONE: 7012810550 MAIL ADDRESS: STREET 1: 1701 S W 38TH STREET CITY: FARGO STATE: ND ZIP: 58103 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- GREAT PLAINS SOFTWARE, INC. (Exact name of registrant as specified in its charter) ---------------- MINNESOTA 7372 45-0374871 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
1701 S.W. 38TH STREET FARGO, NORTH DAKOTA 58103 (701) 281-0550 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DOUGLAS J. BURGUM GREAT PLAINS SOFTWARE, INC. 1701 S.W. 38TH STREET FARGO, NORTH DAKOTA 58103 (701) 281-0550 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- COPIES TO: JAY L. SWANSON MARK G. BORDEN DORSEY & WHITNEY LLP JEFFREY A. STEIN PILLSBURY CENTER SOUTH HALE AND DORR LLP 220 SOUTH SIXTH STREET 60 STATE STREET MINNEAPOLIS, MINNESOTA 55402-1498 BOSTON, MASSACHUSETTS 02109 (612) 340-2600 (617) 526-6000
---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ---------------- CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED TITLE OF EACH PROPOSED MAXIMUM MAXIMUM AMOUNT OF CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE Common Stock, $.01 par value...................... 3,450,000 shares $13.00 $44,850,000 $13,591
(1) Including 450,000 shares of Common Stock which the Underwriters have the option to purchase solely to cover over-allotments, if any. (2) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED MARCH 5, 1997 3,000,000 SHARES LOGO GREAT PLAINS SOFTWARE, INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) ---------------- All of the 3,000,000 shares of Common Stock offered hereby are being sold by the Company. Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price per share will be between $11.00 and $13.00. For factors to be considered in determining the initial public offering price, see "Underwriting." Shares of Common Stock are being reserved for sale at the initial public offering price to resellers of the Company's products and services, directors, officers and employees of the Company and certain other persons. See "Underwriting." Such resellers, directors, officers, employees and other persons will purchase, in the aggregate, not more than 15% of the Common Stock offered hereby. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "GPSI." ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE DISCOUNT(1) COMPANY(2) ------------------------ ------------------------ ------------------------ Per Share...................................... $ $ $ Total (3)...................................... $ $ $
- ---------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting estimated expenses of $480,000 payable by the Company. (3) The Company has granted to the Underwriters an option for 30 days to purchase up to an additional 450,000 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. If such option is exercised in full, the total initial public offering price, underwriting discount and proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ---------------- The shares offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York, on or about , 1997 against payment therefor in immediately available funds. ---------------- GOLDMAN, SACHS & CO. HAMBRECHT & QUIST PIPER JAFFRAY INC. --------- The date of this Prospectus is , 1997. Graphic and Text Appearing on Inside Front Cover of Prospectus: This page contains a rendering of a figure standing on the Earth holding a flashlight. The beam of the flashlight illuminates the sky over which the following text is printed: "Mission Statement: To improve the life and business success of partners and customers by providing superior financial management software, services and tools." This page contains a picture of a computer monitor displaying a model of the Earth with figures ascending ladders to the top of the Earth which dissolves into pixels. On the far left-hand side of the page, the following text is printed: "New technology in and of itself is often little more than a passing curiosity. But new technology bent to a purpose can become a powerful tool that truly improves the lot of those who use it. Since 1981 Great Plains Software has identified the best new technologies and used them to craft innovative financial management solutions that fulfill the purpose of our Mission Statement. Beyond our use of the latest technologies our foundation remains based in the strong values of an earlier time and an unblushing commitment to the service of our customers and distribution partners throughout the world." The Company's name and its sun and wheat logo are printed below this text. 2 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING. IN ADDITION, IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." -------------- ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information contained in the Registration Statement. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any agreement or other document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is made to the copy of such agreement filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement, including exhibits and schedules thereto, may be inspected by anyone without charge at the Commission's principal office in Washington, D.C. and copies of all or any part thereof may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, New York, New York 10048, upon payment of certain fees prescribed by the Commission. The Commission also maintains a World Wide Web site which provides online access to reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at the address "http://www.sec.gov." -------------- The Company intends to distribute to its stockholders annual reports containing financial statements audited by its independent accountants and will make available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements. -------------- Great Plains Software-Registered Trademark-, Dynamics C/S+-Registered Trademark-, Great Plains Dynamics-Registered Trademark- and Dexterity-Registered Trademark- are registered trademarks of the Company in the United States and other countries. Great Plains Accounting, the Company's sun/wheat logo, DynamicTools, Dynamics Continuum, Stampede, the trademarks for the Company's Internet applications and various other word and logo marks are trademarks of the Company and are the subject of pending trademark and service mark applications in the United States and other countries. This Prospectus also includes names, trademarks, service marks and registered trademarks and service marks of companies other than the Company. 3 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." UNLESS OTHERWISE INDICATED HEREIN, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN ADJUSTED TO GIVE EFFECT TO AN AMENDMENT AND RESTATEMENT OF THE COMPANY'S ARTICLES OF INCORPORATION TO BECOME EFFECTIVE IMMEDIATELY PRIOR TO THIS OFFERING, PROVIDING FOR, AMONG OTHER THINGS, AN INCREASE IN THE AUTHORIZED SHARES OF CAPITAL STOCK OF THE COMPANY, (II) HAS BEEN ADJUSTED TO REFLECT THE PRO FORMA CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK (THE "SERIES A PREFERRED STOCK") AND SERIES B CONVERTIBLE PREFERRED STOCK (THE "SERIES B PREFERRED STOCK" AND, TOGETHER WITH THE SERIES A PREFERRED STOCK, THE "PREFERRED STOCK") INTO AN AGGREGATE OF 1,847,627 SHARES OF COMMON STOCK UPON CLOSING OF THE OFFERING, (III) HAS BEEN ADJUSTED TO GIVE EFFECT TO A FOUR-FOR-THREE SPLIT OF THE OUTSTANDING COMMON STOCK, IN THE FORM OF A STOCK DIVIDEND, TO BE EFFECTIVE IMMEDIATELY PRIOR TO THIS OFFERING AND (IV) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING." THE COMPANY Great Plains Software, Inc. (the "Company") is a leading provider of Microsoft Windows NT client/ server financial management software for mid-sized businesses. The Company's award-winning products and services automate essential accounting functions and enhance the strategic value of financial information. The Company's products and services are sold and implemented exclusively by its extensive network of independent sales and support organizations throughout the United States, Canada and select international markets. The Company's client/server product lines, Dynamics C/S+ and Dynamics, consist of a suite of financial applications, such as general ledger, accounts receivable, accounts payable, payroll and sales order and purchase order processing, and a suite of development and customization tools. The Company's client/server products are designed to meet the broad spectrum of financial management needs of the corporate or middle market (the "Corporate Market"), which generally consists of mid-sized businesses with $1 million to $250 million in revenues and 10 to 2,500 employees. In order to meet the needs of the Corporate Market, the Company designs, develops, markets, sells and supports client/server products that are cost-effective, scalable and easy to customize and use. The Company's client/server products are optimized for Microsoft technologies, most notably Windows NT, Windows 95 and SQL Server, which are increasingly becoming the standard in the Corporate Market. Moreover, by utilizing emerging Internet technologies, the Company's financial management systems provide employees throughout a business with quick, cost-effective and security-enhanced access to information, and facilitate order placement and sharing of business information with key customers and suppliers. The Company has made a significant investment in building an experienced, knowledgeable and highly motivated domestic and international service and distribution network, which consists of value added resellers (VARs), systems integrators, Big Six and other accounting firms, independent software vendors (ISVs) and specialized software consultants (together, the "Partners"). Through its Partner network, the Company provides customers with trained and knowledgeable software professionals who are available locally to implement its systems as well as provide ongoing service and support. Most of the Partners customize the Company's systems to fit individual business needs, and some Partners develop software applications that integrate with and extend the functionality of the Company's products to meet the requirements of specific industries. The Company believes that prompt and effective service and technical support are essential elements of a complete financial management software solution and dedicates significant resources to delivering timely, reliable and cost-effective service to its customers and Partners. The Company has received numerous industry awards for its customer and Partner service. The Company was founded in 1981 and was incorporated as a Minnesota corporation in 1983. The Company's offices are located at 1701 S.W. 38th Street, Fargo, North Dakota 58103, and its telephone number is (701) 281-0550. 4 THE OFFERING Common Stock offered by the Company................ 3,000,000 shares Common Stock to be outstanding after the 12,769,604 shares(1) offering......................................... Use of proceeds.................................... For general corporate purposes, including working capital, product development, capital expenditures and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol............. "GPSI"
- -------------- (1) Based on the number of shares of Common Stock outstanding on February 21, 1997. Excludes 1,027,800 shares of Common Stock issuable upon exercise of stock options outstanding as of February 21, 1997, at a weighted average exercise price of $4.92 per share, of which options to purchase 298,873 shares were then exercisable. Also excludes 1,212,020 shares reserved for issuance under the Company's 1997 Stock Incentive Plan, 1983 Incentive Stock Option Plan and Outside Directors' Stock Option Plan. See "Capitalization," "Management--Director Compensation" and "--Benefit Plans" and "Description of Capital Stock." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------------------------- ---------------------- 1992 1993 1994 1995 1996 1995 1996 --------- --------- --------- --------- ----------- --------- ----------- STATEMENT OF OPERATIONS DATA: Total revenues............................... $21,204 $28,871 $29,114 $37,897 $42,271 $19,152 $24,754 Operating income (loss)...................... (287) 1,329 (9,976) 629 3,262 1,415 1,749 Income tax provision (benefit)(1)............ 8 102 (27) 45 (4,099) 3 750 Net income (loss)(1)......................... (407) 921 (10,330) 124 7,461 1,451 1,201 Pro forma net income per share(2)(3)......... $ .77 $ .12 Pro forma weighted average number of shares and common equivalent shares outstanding(2)(3).......................... 9,743,969 9,840,336
NOVEMBER 30, 1996 -------------------------------- PRO FORMA PRO FORMA(3) AS ADJUSTED(3)(4) ------------- ----------------- BALANCE SHEET DATA: Cash and cash equivalents...................................................... $ 8,648 $ 41,648 Working capital................................................................ 2,207 35,207 Total assets................................................................... 24,150 57,150 Deferred revenues.............................................................. 7,775 7,775 Total stockholders' equity..................................................... 7,861 40,861
5 - -------------- (1) Net income for the year ended May 31, 1996 includes an income tax benefit of $4.1 million or $.42 per share related to the reversal of a valuation allowance. The reversal reflects the recognition of net operating loss carryforwards and other deferred tax assets and was a result of management's analysis of the Company's current levels of earnings and future outlook, which increased the likelihood of the Company realizing its deferred tax assets. For subsequent periods, the Company has provided for income taxes utilizing federal and state statutory income tax rates. See Note 9 of Notes to Consolidated Financial Statements. (2) For an explanation of the determination of the number of shares used in computing pro forma net income per share, see Note 1 of Notes to Consolidated Financial Statements. (3) Gives effect to the conversion of all shares of the Company's Preferred Stock into an aggregate of 1,847,627 shares of Common Stock upon the closing of the offering made hereby. See Note 1 of Notes to Consolidated Financial Statements. (4) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered hereby at an assumed public offering price of $12.00 per share after deducting the underwriting discount and the estimated offering expenses payable by the Company. 6 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED BY THIS PROSPECTUS. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY The Company's quarterly revenue and operating results have varied in the past, and are likely to vary in the future. The Company operates with little backlog, and most of its revenues in each quarter result from orders booked in that quarter. The Company establishes its expenditure levels based on its expectations as to future revenue, and, if revenue levels are below expectations, expenses could be disproportionately high. As a result, a drop in near term demand could significantly affect both revenue and profits in any quarter. In the future, the Company's operating results may fluctuate for this reason or as a result of a number of other factors, including increased expenses, timing of product releases, increased competition, variations in the mix of sales, announcements of new products by the Company or its competitors and capital spending patterns of the Company's customers. As a result, there can be no assurance the Company will be able to maintain profitability on an annual or quarterly basis. The Company's business has experienced and may continue to experience seasonality. In recent years, the Company has recognized a greater percentage of its revenue and operating income in its fourth fiscal quarter than in any of the first three fiscal quarters due to a number of factors, including the timing of product releases and the Company's sales incentive programs. Moreover, due to fiscal year-end sales incentive programs, the Company has historically recognized less revenue and operating income in its first fiscal quarter than in the other quarters. Because of these factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Furthermore, it is possible that in some future quarters the Company's operating results will fall below the expectations of the Company, market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT RISK The market for the Company's products is characterized by rapid technological advances and evolving industry standards and can be significantly affected by new product introductions, changing customer requirements and market activities of industry participants. The life cycles of the Company's products are difficult to estimate, and the Company's position in the current market could be undermined by rapid product advances. The Company's future success will depend upon its ability to continue to improve existing products and to develop and introduce products with new or enhanced capabilities that address the increasingly sophisticated needs of its customers and keep pace with technological and competitive developments. Among other things, the emergence of the Internet as an alternative computing platform and distribution medium may adversely affect the demand for client/ server products and alter current software utilization, distribution and pricing patterns. There can be no assurance that the Company will be able to successfully develop and market new or enhanced products or respond effectively to technological changes or new product announcements by others. Further, the Company may face challenges with customers who are slower to adopt new technologies or otherwise commit resources to convert to a client/server solution. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness and revenue. Delays in the release of new and upgraded versions of the Company's software products could have a significantly negative impact on the Company's sales and results of operations. Because of the complexities inherent in developing software products as sophisticated as those sold by the Company 7 and the lengthy testing periods associated with such products, no assurance can be given that future product introductions by the Company will not be delayed. In addition, complex software programs may contain undetected errors or bugs when they are first introduced or as new versions are released. There can be no assurance that errors will not be found in the Company's existing or future products, with the possible result of delays in or loss of market acceptance of these products, diversion of the Company's resources, injury to the Company's reputation and increased service and warranty expenses. RELIANCE ON MICROSOFT TECHNOLOGY The Company's software products are designed for Microsoft technologies, including Windows NT, Windows 95 and SQL Server. In addition, the Company's products utilize other Microsoft technologies, including Internet Information Server, FrontPage, Visual Basic and Visual Basic for Applications. Although the Company believes that Microsoft technologies are and will be widely utilized by Corporate Market businesses, no assurance can be given that these businesses will actually adopt such technologies as anticipated or will not in the future migrate to other computing technologies that the Company does not support. Moreover, the Company's strategy will require that the Company's products and technology be compatible with new developments in Microsoft's technology. RELIANCE ON THIRD-PARTY SUPPLIERS The Company's products utilize certain software licensed to it by third-party software developers. Although the Company believes that there are alternatives for these products, any significant interruption in the supply of such third-party software could have a material adverse impact on the Company's sales unless and until the Company can replace the functionality provided by these products. In addition, the Company is to a certain extent dependent upon such third parties' abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. There can be no assurance that the Company would be able to replace the functionality provided by the third party software currently offered in conjunction with the Company's products in the event that such software becomes obsolete or incompatible with future versions of the Company's products or is otherwise not adequately maintained or updated. The absence of or any significant delay in the replacement of that functionality could have a material adverse effect on the Company's business, results of operations and financial condition. DECLINE IN SALES OF DOS- AND MACINTOSH-BASED PRODUCTS The Company has shifted its focus from a product based on DOS, Macintosh and local area network (LAN) technologies, Great Plains Accounting, to products based on Windows and client/server technologies. As a result of this shift and the decrease in general market demand for DOS- and Macintosh-based products, the Company's revenues from its Great Plains Accounting product have been declining and are expected to decline for the foreseeable future. There can be no assurance that the decline in revenues from sales of Great Plains Accounting will not have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RELIANCE UPON PARTNER DISTRIBUTION CHANNEL; RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION The Company relies exclusively upon its Partner network to provide marketing and sales opportunities. There can be no assurance that the Company's Partners will aggressively market the Company's products or will maintain their relationships with the Company. The failure of the Company to maintain its existing Partner relationships, or to establish new Partner relationships in the future, because of a divergence of interests, or for any other reason, could have a material adverse effect on the Company's business, results of operations and financial condition. 8 The Company's ability to achieve significant revenue growth in the future will depend in large part on adding new Partners and leveraging its relationships with existing Partners. In addition, an integral part of the Company's strategy is to add distributors internationally, who in turn recruit Partners in their territory. The Company is currently investing, and intends to continue to invest, significant resources to develop these channels. There can be no assurance that the Company will be able to leverage relationships with existing Partners and add new Partners and distributors to market the Company's products effectively. The inability to do so could have a material adverse effect on the Company's business, results of operations and financial condition. COMPETITION The market for the Company's products is highly competitive and rapidly changing. The Company's primary market consists of businesses in the Corporate Market. The Company's current and prospective competitors offer a variety of solutions for this market. The Company experiences significant competition and expects substantial additional competition from established and emerging software companies that offer products similar to the Company's products and target the same customers as the Company. In the United States, the Company faces a number of competitors both in the Dynamics C/S+ segment of the Corporate Market, including Platinum Software Corporation, and in the Dynamics segment of the Corporate Market, including Solomon Software, and State of the Art, Inc. In Canada, the Company's primary competitor is Computer Associates International, Inc. (AccPac and AccPac 2000). Outside North America, the Company also faces a number of other competitors, several of which have significant share in their home markets. In addition, the Company competes for Corporate Market business with companies primarily targeting businesses larger than those comprising the Corporate Market; several of these competitors, which principally sell UNIX-based systems, offer or have announced their intention to deliver Windows NT solutions. The Company's products also face competition from providers of industry-specific applications as well as indirect competition from in-house, custom-developed financial management applications. Certain of the Company's competitors have substantially greater financial, marketing or technical resources than the Company. There can be no assurance that other companies have not developed or marketed or will not develop or market products that are superior to those of the Company, that are offered at substantially lower prices than those of the Company or that have or will achieve greater market acceptance than those of the Company. In addition, there can be no assurance that alternative methods of delivering financial management systems will not provide increased competition. DEPENDENCE ON KEY PERSONNEL The Company's future success depends to a significant extent on Douglas J. Burgum, the Company's Chairman of the Board, President and Chief Executive Officer, Raymond A. August, the Company's Chief Technology Officer and Group Vice President, and its other executive officers and certain technical, managerial, sales and marketing personnel. The loss of the services of any of these individuals or group of individuals could have a material adverse effect on the Company's business, results of operations and financial condition. None of the Company's executive officers has entered into an employment contract with the Company, except for Messrs. Burgum and August, whose employment contracts expire in June 1997. If neither the Company nor Mr. August inform the other party of its or his intention not to extend Mr. August's employment contract before April 30, 1997, the term of the employment agreement will be extended to June 1, 1999. Competition for qualified personnel in the software industry is intense. The future success of the Company will depend in large part on its ability to attract and retain qualified management and technical employees, and there can be no assurance that the Company will be able to do so. The Company believes that the continued employment of a number of key management and technical personnel is 9 important to the Company's future success. The Company has from time to time experienced difficulty in locating and retaining candidates with appropriate qualifications. MANAGEMENT OF GROWTH The Company's growth has resulted in an increase in responsibilities placed upon the Company's management and has placed added pressures on the Company's operating and other systems. To manage its growth effectively, the Company will be required to continue to implement additional systems and controls, and to expand, train and manage its employee base. There can be no assurance that the management skills and systems currently in place will be adequate if the Company continues to grow, or that the Company will be able to implement additional systems successfully and in a timely manner as required. In addition, the Company from time to time may seek acquisitions of businesses, products and technologies that are complementary to those of the Company, or that allow the Company to enter new markets. Any such acquisition would place additional strains upon the Company's management resources. See "Business--Employees" and "Management--Executive Officers and Directors." DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT The Company relies on a combination of trade secret, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect its intellectual property rights. There can be no assurance that these protections will be adequate to prevent the Company's competitors from copying or reverse-engineering the Company's products, or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. The Company makes source code available to certain of its Partners and customers. This availability may increase the likelihood of misappropriation or other misuse of the Company's intellectual property. The Company has no patents, and existing copyright laws afford only limited protection for the Company's intellectual property rights and will not protect such rights in the event competitors independently develop products similar to those of the Company. While the Company licenses its Dynamics C/S+ product under signed licenses, the Company licenses its Dynamics and Great Plains Accounting products primarily under "shrink wrap" licenses that are not signed by its licensees. These shrink wrap licenses may be unenforceable under the laws of certain jurisdictions. In addition, the laws of certain countries in which the Company's products are or may be licensed do not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. Although the Company has never been the subject of a material intellectual property dispute, there can be no assurance that a third party will not assert that the Company's technology violates its intellectual property rights in the future. As the number of software products in the Company's target market increases and the functionality of these products further overlap, the Company believes that software developers may become increasingly subject to infringement claims. Any such claims, whether with or without merit, can be time consuming and expensive to defend. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to its current or future products or that any such assertion will not require the Company to enter into royalty arrangements or litigation that could be costly to the Company. INTERNATIONAL SALES AND OPERATIONS The Company sells its products in key international markets in addition to the United States and Canada. The Company has recently entered into distribution arrangements in Western and Eastern Europe, Australasia, Southern Africa, the Middle East and Southeast Asia. As a result of the royalty structure for the Company's international Partner network, the Company's gross margin on international sales is less than its gross margin on domestic sales. The Company's international business may be affected by such factors as local economic and market conditions, political and economic instability, 10 greater difficulty in administering operations, difficulties in enforcing intellectual property and contractual rights, difficulties in tailoring the Company's software products to fit local accounting principles, rules, regulations, language, tax codes and customs, fluctuations in currency exchange rates and the need for compliance with a wide variety of foreign and United States export regulations. There can be no assurance that one or more of these factors will not have a material adverse effect on the Company's international operations and, consequently, the Company's business, results of operations and financial condition. PRODUCT LIABILITY The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of certain jurisdictions. The sale and support of products by the Company and its Partners may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. Furthermore, some of the Company's licenses with customers are governed by laws of jurisdictions other than the United States, and there can be no assurance that purported limitations on liability in these licenses would be enforced were foreign law to govern. A product liability claim brought against the Company could have a material adverse effect upon the Company's business, results of operations and financial condition. NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the offering there has been no public market for the Common Stock. Accordingly, there can be no assurance that an active trading market will develop or be sustained upon completion of the offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the representatives of the Underwriters and may not be indicative of the prices that will prevail in the public market. See "Underwriting." 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. SIGNIFICANT SHAREHOLDERS; ANTI-TAKEOVER CONSIDERATIONS Upon completion of the offering, the Company's directors and executive officers beneficially will own in the aggregate approximately 41.6% of the Company's outstanding Common Stock (plus such additional shares such persons may purchase in the offering). In addition, certain of the Company's other principal shareholders (who are affiliated with certain of the Company's directors and executive officers) beneficially will own in the aggregate approximately 14.0% of the Company's outstanding Common Stock. See "Principal Shareholders." If these shareholders vote together as a group, they will be able to substantially influence the business and affairs of the Company, including the election of individuals to the Company's Board of Directors, and to otherwise affect the outcome of certain actions that require shareholder approval, including the adoption of amendments to the Company's Articles of Incorporation, and certain mergers, sales of assets and other business acquisitions or dispositions. Upon completion of the Offering, the Company will have an authorized class of 30,000,000 shares of undesignated preferred stock, $.01 par value, which may be issued by the Company's Board of Directors on such terms, and with such rights, preferences and designations, as the Company's Board 11 of Directors may determine. In addition, the Company's Bylaws provide for a Board of Directors elected to staggered terms and establish specific procedures for calling meetings of shareholders and appointing and removing members of the Board of Directors. The Company is subject to certain provisions of the Minnesota Business Corporation Act which restrict certain business combinations. Some or all of the foregoing factors and other provisions of the Company's Bylaws could have the effect of discouraging certain attempts to acquire the Company and, as a result, could deprive the Company's shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. See "Description of Capital Stock--Preferred Stock" and "--Provisions of the Company's Restated Articles and Bylaws and the Minnesota Business Corporation Act." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Sales of significant amounts of Common Stock in the public market or the perception that such sales will occur could adversely affect the market price of the Common Stock or the future ability of the Company to raise capital through an offering of its equity securities. Of the 12,769,604 shares of Common Stock to be outstanding upon completion of the offering, the 3,000,000 shares offered hereby will be eligible for immediate sale in the public market without restriction unless (a) the shares are purchased by "affiliates" of the Company within the meaning of Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or (b) such shares are directed shares purchased by Partners in the offering. See "Underwriting." The remaining 9,769,604 shares of Common Stock held by existing shareholders upon completion of the offering will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act. The Company's directors and officers and certain of its shareholders have agreed, and the Company's Partners who purchase directed shares in this offering will agree, that they will not sell, directly or indirectly, any Common Stock without the prior consent of the representatives of the Underwriters for a period of 180 days from the date of this Prospectus. Subject to these lock-up agreements and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market (subject in the case of shares held by affiliates to compliance with certain volume restrictions) as follows: (i) 680,582 shares will be available for immediate sale in the public market on the date of this Prospectus, (ii) 374,181 shares will be eligible for sale 90 days after the date of this Prospectus and (iii) 8,221,970 shares will be eligible for sale upon the expiration of lock-up agreements 180 days after the date of this Prospectus. In addition, certain shareholders, representing approximately 1,793,627 shares of Common Stock, have the right, subject to certain conditions, to include their shares in future registration statements relating to the Company's securities and to cause the Company to register certain Common Stock owned by them. See "Shares Eligible for Future Sale--Registration Rights" and "Underwriting." After the date of this Prospectus, the Company intends to file a Form S-8 registration statement under the Securities Act to register all shares of Common Stock issuable under the Company's stock-based benefit plans. See "Management--Director Compensation" and "--Benefit Plans." Such registration statement is expected to become effective immediately upon filing, and shares covered by that registration statement will thereupon be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates. See "Shares Eligible for Future Sale." NO DIVIDENDS The Company has never paid or declared a dividend on its capital stock and does not anticipate doing so for the foreseeable future. See "Dividend Policy." DILUTION Purchasers of the shares offered hereby will incur an immediate, substantial dilution in net tangible book value per share. See "Dilution." 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock offered by the Company pursuant to this offering are estimated to be $33,000,000 ($38,022,000 if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $12.00 per share after deducting the estimated underwriting discount and offering expenses payable by the Company. The principal purposes of this offering are to increase the Company's equity capital, to create a public market for the Common Stock, to increase the visibility of the Company in the marketplace and to facilitate future access by the Company to public equity markets. The Company expects to use the net proceeds from this offering for general corporate purposes, including the funding of working capital and growth. In addition, the Company anticipates building or leasing a new facility for occupancy beginning in fiscal 1999. The Company expects to finance the new facility with debt financing or through a sale and leaseback transaction. If debt financing is used to finance the facility, the Company anticipates that it will make an equity investment of $3,000,000 to $5,000,000 in cash to partially fund the cost of the facility. If a sale and leaseback transaction is used to finance the facility, the Company anticipates that no material equity investment will be made to fund the facility. The Company may seek acquisitions of businesses, products and technologies that are complementary to those of the Company, and a portion of the net proceeds may be used for such acquisitions. While the Company engages from time to time in discussions with respect to potential acquisitions, the Company has no plans, commitments or agreements with respect to any material acquisitions as of the date of this Prospectus, and there can be no assurance that any such acquisitions will be made. Pending such uses, the Company intends to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings to fund the development and growth of its business. 13 DILUTION The pro forma net tangible book value of the Company at November 30, 1996 was $7,298,328 or $.79 per share of Common Stock, after giving effect to the automatic conversion of all outstanding shares of Preferred Stock into Common Stock in connection with the offering made hereby. Pro forma net tangible book value per share is equal to the Company's total tangible assets (total assets less goodwill and trademarks) less total liabilities, divided by the total number of shares of Common Stock outstanding, including shares of Common Stock issued upon the automatic conversion of the Preferred Stock in connection with the offering made hereby. Pro forma net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the offering made hereby and the pro forma net tangible book value per share of Common Stock immediately after completion of the offering. After giving effect to the sale by the Company of the 3,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share, and after deducting the estimated underwriting discount and offering expenses, the pro forma net tangible book value of the Company as of November 30, 1996 would have been $40,298,328 or $3.30 per share of Common Stock. This represents an immediate increase in such pro forma net tangible book value of $2.51 per share to existing shareholders and an immediate dilution of $8.70 per share to new investors purchasing shares in the offering. If the initial public offer price is higher or lower, the dilution to new investors will be, respectively, greater or less. The following table illustrates this per share dilution:
Assumed initial public offering price per share............................. $ 12.00 Pro forma net tangible book value per share as of November 30, 1996....... $ 0.79 Pro forma increase per share attributable to new investors................ 2.51 --------- Pro forma net tangible book value per share as of November 30, 1996 after offering.................................................................. 3.30 --------- Pro forma net tangible book value dilution per share to new investors....... $ 8.70 --------- ---------
The following table summarizes on a pro forma basis as of November 30, 1996, after giving effect to the automatic conversion of all outstanding shares of Preferred Stock into Common Stock in connection with the offering made hereby, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share by existing shareholders and by new investors (assuming an initial public offering price of $12.00 per share):
SHARES PURCHASED TOTAL CONSIDERATION -------------------------- --------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------- ----------- -------------- ----------- -------------- Existing stockholders(1)..................... 9,201,126 75.4% $ 13,016,946 26.6% $ 1.41 New investors................................ 3,000,000 24.6 36,000,000 73.4 $ 12.00 ------------- ----- -------------- ----- Total.................................... 12,201,126 100.0% $ 49,016,946 100.0% ------------- ----- -------------- ----- ------------- ----- -------------- -----
- -------------- (1) Excludes (a) 571,513 shares of Common Stock issued pursuant to the exercise of options between December 1, 1996 and February 21, 1997 with a weighted average exercise price of $2.41 per share and (b) 1,027,800 shares of Common Stock issuable pursuant to the exercise of options outstanding at February 21, 1997 at a weighted average exercise price of $4.92 per share, of which options to purchase 298,873 shares were then exercisable. If such shares are included or such options are exercised, there will be further dilution to the new investors. Also excludes 1,212,020 shares reserved for issuance under the Company's 1997 Stock Incentive Plan, 1983 Incentive Stock Option Plan and Outside Directors' Stock Option Plan. Includes as outstanding 3,035 shares of Common Stock repurchased by the Company since November 30, 1996. See "Capitalization," "Management--Director Compensation" and "--Benefit Plans" and "Description of Capital Stock." 14 CAPITALIZATION The following table sets forth the pro forma capitalization of the Company as of November 30, 1996 (i) to give effect to the conversion of all shares of Preferred Stock into an aggregate of 1,847,627 shares of Common Stock upon the closing of the offering made hereby (see Note 1 of Notes to Consolidated Financial Statements) and (ii) as adjusted to give effect to the sale of 3,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share and the receipt and application of the proceeds therefrom, after deducting the estimated underwriting discount and offering expenses payable by the Company. See "Use of Proceeds." This information should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Prospectus.
NOVEMBER 30, 1996 ------------------------- PRO FORMA PRO FORMA AS ADJUSTED ----------- ------------ (IN THOUSANDS) Stockholders' equity: Preferred Stock, $.01 par value, 30,000,000 shares authorized, none outstanding....... -- -- Common Stock, $.01 par value, 100,000,000 shares authorized, 9,201,126 shares issued and outstanding, pro forma; and 12,201,126 shares issued and outstanding, pro forma as adjusted(1)...................................................................... $ 92 $ 122 Additional paid-in capital............................................................ 12,925 45,895 Accumulated deficit................................................................... (5,156) (5,156) ----------- ------------ Total stockholders' equity............................................................ 7,861 40,861 ----------- ------------ Total capitalization................................................................ $ 7,861 $ 40,861 ----------- ------------ ----------- ------------
- -------------- (1) Excludes (a) 571,513 shares of Common Stock issued pursuant to the exercise of options between December 1, 1996 and February 21, 1997 and (b) 1,027,800 shares of Common Stock issuable pursuant to the exercise of options outstanding at February 21, 1997, of which options to purchase 298,873 shares were then exercisable. Also excludes 1,212,020 shares reserved for issuance under the Company's 1997 Stock Incentive Plan, 1983 Incentive Stock Option Plan and Outside Directors' Stock Option Plan. Includes as outstanding 3,035 shares of Common Stock repurchased by the Company since November 30, 1996. See "Management--Director Compensation" and "--Benefit Plans" and "Description of Capital Stock." 15 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" and the Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. The selected consolidated statement of operations data set forth below for the years ended May 31, 1994, 1995 and 1996, and the consolidated balance sheet data at May 31, 1995 and 1996 are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this Prospectus and should be read in conjunction with those consolidated financial statements and notes thereto. The selected consolidated statement of operations data presented below for the years ended May 31, 1992 and 1993 and the consolidated balance sheet data at May 31, 1992, 1993 and 1994 are derived from audited financial statements not included elsewhere in this Prospectus. The selected consolidated financial data as of and for the six months ended November 30, 1995 and 1996 have been derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results for the six months ended November 30, 1996 are not necessarily indicative of the results to be expected for the full year or for any future period.
SIX MONTHS ENDED YEAR ENDED MAY 31, NOVEMBER 30, ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License............................................. $ 14,985 $ 20,790 $ 19,165 $ 25,050 $27,078 $ 11,849 $15,133 Service............................................. 6,219 8,080 9,949 12,847 15,193 7,303 9,621 --------- --------- --------- --------- --------- --------- --------- Total revenues...................................... 21,204 28,871 29,114 37,897 42,271 19,152 24,754 Cost of revenues: License............................................. 3,335 3,101 4,997 4,439 4,913 1,810 2,720 Service............................................. 3,445 3,868 5,479 5,622 5,980 2,838 3,649 --------- --------- --------- --------- --------- --------- --------- Total cost of revenues.............................. 6,780 6,969 10,476 10,061 10,893 4,648 6,369 --------- --------- --------- --------- --------- --------- --------- Gross profit...................................... 14,424 21,901 18,638 27,836 31,378 14,504 18,385 Operating expenses: Sales and marketing................................. 9,472 11,582 14,331 14,013 14,477 6,653 9,714 Research and development............................ 2,769 6,021 10,676 9,308 8,876 4,258 4,489 General and administrative.......................... 2,470 2,969 3,607 3,886 4,763 2,178 2,433 --------- --------- --------- --------- --------- --------- --------- Total operating expenses.......................... 14,711 20,572 28,614 27,207 28,116 13,089 16,636 --------- --------- --------- --------- --------- --------- --------- Operating income (loss)............................... (287) 1,329 (9,976) 629 3,262 1,415 1,749 Total other expenses (income)......................... 112 306 381 260 (100) (39) (202) --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes................. (399) 1,023 (10,357) 369 3,362 1,454 1,951 Income tax provision (benefit)(1)..................... 8 102 (27) 45 (4,099) 3 750 --------- --------- --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle......................... (407) 921 (10,330) 324 7,461 1,451 1,201 Cumulative effect of a change in accounting principle........................................... -- -- -- (200) -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income (loss)................................. $ (407) $ 921 $ (10,330) $ 124 $ 7,461 $ 1,451 $ 1,201 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net income per share(2)(3).................. $ .77 $ .12 Pro forma weighted average number of shares and common equivalent shares outstanding(2)(3)................. 9,743,969 9,840,336
NOVEMBER 30, 1996 MAY 31, --------- ----------------------------------------------------- 1992 1993 1994 1995 1996 ACTUAL --------- --------- --------- --------- --------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Assets: Cash and cash equivalents............................ $ 399 $ 1,351 $ 119 $ 2,892 $ 8,256 $ 8,648 Total assets......................................... 7,618 13,407 8,845 15,327 24,361 24,150 Working capital........................................ (4,521) (5,096) (15,400) (4,992) 1,012 2,207 Liabilities and equity: Deferred revenues.................................... 2,574 4,952 6,897 8,027 9,018 7,775 Long-term debt and capital lease obligations, less current portion.................................... 1,249 984 1,281 750 20 -- Mandatorily redeemable convertible preferred stock... -- -- -- 8,300 11,502 11,502 Total stockholders' equity(4)........................ (2,173) (1,011) (11,303) (9,066) (4,812) (3,641) PRO FORMA(3) ----------- CONSOLIDATED BALANCE SHEET DATA: Assets: Cash and cash equivalents............................ $ 8,648 Total assets......................................... 24,150 Working capital........................................ 2,207 Liabilities and equity: Deferred revenues.................................... 7,775 Long-term debt and capital lease obligations, less current portion.................................... -- Mandatorily redeemable convertible preferred stock... -- Total stockholders' equity(4)........................ 7,861
16 - -------------- (1) Net income for the year ended May 31, 1996 includes an income tax benefit of $4.1 million or $.42 per share related to the reversal of a valuation allowance. The reversal reflects the recognition of net operating loss carryforwards and other deferred tax assets and was a result of management's analysis of the Company's current levels of earnings and future outlook, which increased the likelihood of the Company realizing its deferred tax assets. For subsequent periods, the Company has provided for income taxes utilizing federal and state statutory income tax rates. See Note 9 of Notes to Consolidated Financial Statements. (2) For an explanation of the determination of the number of shares used in computing pro forma net income per share, see Note 1 of Notes to Consolidated Financial Statements. (3) Gives effect to the conversion of all shares of the Company's Preferred Stock into an aggregate of 1,847,627 shares of Common Stock upon the closing of the offering made hereby. See Note 1 of Notes to Consolidated Financial Statements. (4) The Company has not declared or paid any dividend for any of the periods presented. See "Dividend Policy." 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto, and the other financial information included elsewhere in this Prospectus. OVERVIEW Great Plains Software is a leading provider of Microsoft Windows NT client/server financial management software for mid-sized businesses. The Company's award-winning products and services automate essential accounting functions and enhance the strategic value of financial information. The Company's products and services are sold and implemented exclusively by its extensive network of Partners throughout the United States, Canada and select international markets. In 1982, the Company began selling Great Plains Accounting (the "heritage product"), which is currently a DOS- and Macintosh-based financial management software system for local area network (LAN) personal computers. In anticipation of the general market shift to Windows and client/server technologies, the Company began developing client/server financial management software systems, and in February 1993, released Dynamics. Dynamics is the Company's client/server product for Corporate Market businesses that need a Windows client/server system that is flexible and cost-effective, but does not require information technology (IT) personnel dedicated to database administration. In July 1994, the Company released Dynamics C/S+, a Windows client/server system for Corporate Market businesses that have high volume processing requirements, complex financial management needs and formal IT departments. The Company made significant investments in research and development in the early 1990s to launch its Windows client/server products. In addition, the Company has made a significant investment in building an experienced and knowledgeable Partner distribution network to market, implement, support and service its Dynamics C/S+ and Dynamics products (together, the "client/server products"). Since the release of the client/server products, the Company's principal source of revenues has shifted from the heritage product to the client/server products. Client/server products accounted for 13.8%, 40.2%, 61.4% and 79.7% of the Company's total revenues for fiscal 1994, 1995 and 1996 and the six months ended November 30, 1996, respectively. The Company's revenues are derived from two principal sources: software license fees ("license fees") and fees for maintenance, technical support, training and consulting services (collectively, "service fees"). The Company recognizes revenue in accordance with Statement of Position 91-1, Software Revenue Recognition. See Note 1 of Notes to Consolidated Financial Statements. License fee revenues are generally recognized upon shipment of the related software product. Fees for the Company's maintenance and support plans are recorded as deferred revenue when billed to the customer and recognized ratably over the term of the maintenance and support agreement, which is typically one year. Fees for the Company's training and consulting services are recognized at the time the services are performed. The Company's client/server customers are required to purchase a one-year maintenance plan at the time the product is acquired. A majority of the client/server customers renew the maintenance plan after the initial term. Under the maintenance plan, the Company provides client/server customers with product upgrades in addition to online assistance and information. The Company's heritage product customers, on the other hand, are not required to purchase a maintenance plan at the time the product is acquired. In addition, the optional heritage product maintenance plan does not include significant product upgrades. The Company has historically released significant upgrades of its heritage product approximately every two years. Prior to fiscal 1996, when heritage product revenues represented the principal source of the Company's revenues, the release of a significant upgrade of the heritage product 18 had a positive impact on revenues in the quarters following release. As a result of the shift to client/server products as the Company's principal source of revenues, the Company expects to experience less fluctuation in total revenues in the event significant upgrades of its heritage product are released. The Company currently sells its products outside the United States and Canada through international Partners and a subsidiary located in the United Kingdom to markets in the following geographic regions: Western and Eastern Europe, Australasia, Southern Africa, the Middle East and Southeast Asia. The Company's client/server products have been sold in approximately 50 countries. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of total revenues represented by certain items reflected in the Company's consolidated statement of operations. RESULTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------- -------------------- 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- AS A PERCENTAGE OF TOTAL REVENUES: Revenues: License...................................................... 65.8% 66.1% 64.1% 61.9% 61.1% Service...................................................... 34.2 33.9 35.9 38.1 38.9 --------- --------- --------- --------- --------- Total revenues............................................. 100.0 100.0 100.0 100.0 100.0 --------- --------- --------- --------- --------- Cost of revenues: License...................................................... 17.2 11.7 11.6 9.4 11.0 Service...................................................... 18.8 14.9 14.2 14.9 14.7 --------- --------- --------- --------- --------- Total cost of revenues..................................... 36.0 26.6 25.8 24.3 25.7 --------- --------- --------- --------- --------- Gross margin............................................... 64.0 73.4 74.2 75.7 74.3 --------- --------- --------- --------- --------- Operating expenses: Sales and marketing.......................................... 49.2 37.0 34.2 34.7 39.2 Research and development..................................... 36.7 24.5 21.0 22.2 18.1 General and administrative................................... 12.4 10.2 11.3 11.4 9.9 --------- --------- --------- --------- --------- Total operating expenses................................... 98.3 71.7 66.5 68.3 67.2 --------- --------- --------- --------- --------- Operating income (loss)........................................ (34.3) 1.7 7.7 7.4 7.1 Income tax provision (benefit)................................. (0.1) 0.1 (9.7) 0.0 3.0 Net income (loss).............................................. (35.5)% 0.3% 17.6% 7.6% 4.9%
REVENUES REVENUES. Revenues increased from $29.1 million in fiscal 1994 to $37.9 million in fiscal 1995 and to $42.3 million in fiscal 1996, representing increases of 30.2% and 11.5%, respectively. Revenues increased from $19.2 million for the six months ended November 30, 1995 to $24.8 million for the six months ended November 30, 1996, representing an increase of 29.2%. These increases in revenues were primarily due to increased demand for the Company's client/server products and related service fees. 19 The following table sets forth for the periods indicated client/server and heritage product revenues, each as a percentage of total revenues:
SIX MONTHS ENDED YEAR ENDED MAY 31, NOVEMBER 30, ------------------------------------- ------------------------ 1994 1995 1996 1995 1996 ----------- ----------- ----------- ----------- ----------- Client/server product revenues............................. 13.8% 40.2% 61.4% 54.8% 79.7% Heritage product revenues.................................. 86.2 59.8 38.6 45.2 20.3
Client/server product revenues, including license and service fees, increased from $4.0 million in fiscal 1994 to $15.2 million in fiscal 1995 and to $25.9 million in fiscal 1996, representing increases of 277.7% and 70.4%, respectively. Client/server product revenues increased from $10.5 million for the six months ended November 30, 1995 to $19.7 million for the six months ended November 30, 1996, representing an increase of 88.1%. The increase in client/server product revenues was offset, in part, by a decrease in revenues from the Company's heritage product. Heritage product revenues decreased from $25.1 million in fiscal 1994 to $22.7 million in fiscal 1995 and to $16.4 million in fiscal 1996, representing decreases of 9.6% and 28.0%, respectively. Heritage product revenues decreased from $8.7 million for the six months ended November 30, 1995 to $5.0 million for the six months ended November 30, 1996, representing a decrease of 42.0%. The decrease in heritage product revenues was primarily due to a decrease in demand for DOS- and Macintosh-based financial management software, which reflects the broader market trend toward Windows and client/server computing. The Company's international revenues increased from $2.0 million in fiscal 1994 to $4.1 million in fiscal 1995 and to $4.4 million in fiscal 1996, representing 6.9%, 10.8% and 10.4% of total revenues, respectively. In addition, international revenues increased from $1.5 million for the six months ended November 30, 1995 to $3.6 million for the six months ended November 30, 1996, representing 7.8% and 14.5% of total revenues, respectively. These increases resulted from the addition of distribution arrangements in international markets. LICENSE. Total license fee revenues increased from $19.2 million in fiscal 1994 to $25.1 million in fiscal 1995 and to $27.1 million in fiscal 1996, representing increases of 30.7% and 8.1%, respectively. Total license fee revenues increased from $11.8 million for the six months ended November 30, 1995 to $15.1 million for the six months ended November 30, 1996, representing an increase of 27.7%. These increases in total license fee revenues are largely attributable to increased market acceptance of the Company's client/server products and a broader client/server product offering. The Company added to its client/server product offering with the release of Dynamics C/S+ in July 1994, the release of a Microsoft SQL Server edition of Dynamics C/S+ in April 1996 and the release of additional functionality and applications for the SQL Server edition in November 1996. Moreover, since the release of the Company's client/server products, the Company has increased its sales, marketing and service capacity. These factors have led to both an increase in the number of client/server software licenses and an increase in the average revenues derived from individual client/server licenses. The increase in client/server product license fee revenues was offset, in part, by a decrease in heritage product license fee revenues. The decrease in heritage product license fees is primarily a result of decreased demand for DOS- and Macintosh-based financial management software. In addition, the Company has historically released significant upgrades of its heritage product approximately every two years, which had a positive impact on heritage product license fee revenues in the quarters following release. A significant upgrade of the heritage product was released in February 1997, which the Company expects to market principally to the Company's installed base of heritage product customers. Notwithstanding the positive impact on revenues this release may have, the Company expects that overall heritage product license fee revenues will continue to decline. In addition, the Company also 20 anticipates that fluctuations in heritage product license fee revenues due to new releases will have a reduced impact on total license fee revenues as heritage product license fee revenues become a smaller portion of total license fee revenues. SERVICE. Service revenues increased from $9.9 million in fiscal 1994 to $12.8 million in fiscal 1995 and to $15.2 million in fiscal 1996, representing increases of 29.1% and 18.3%, respectively. In addition, service revenues increased from $7.3 million for the six months ended November 30, 1995 to $9.6 million for the six months ended November 30, 1996, representing an increase of 31.7%. The increase in the number of licenses for client/server products has resulted in increases in service revenues. Service revenues as a percentage of total revenues were 34.2%, 33.9% and 35.9% for fiscal 1994, 1995 and 1996, respectively. Similarly, service revenues as a percentage of total revenues were 38.1% and 38.9% for the six months ended November 30, 1995 and 1996, respectively. The increases in service revenues largely reflect increases in the installed base of customers and renewals of existing maintenance and support contracts. COSTS AND EXPENSES COST OF LICENSE FEES. Cost of license fees consists primarily of the costs of product manuals, media, shipping and royalties paid to third parties. Cost of license fees decreased from $5.0 million in fiscal 1994 to $4.4 million in fiscal 1995 and then increased to $4.9 million in fiscal 1996, representing 26.1%, 17.7% and 18.1% of total license fee revenues in fiscal 1994, 1995 and 1996, respectively. In addition, cost of license fees increased from $1.8 million for the six months ended November 30, 1995 to $2.7 million for the six months ended November 30, 1996, representing 15.3% and 18.0% of total license fee revenues for such periods, respectively. The decrease in the cost of license fees as a percentage of total license fee revenues in fiscal 1995 is a result of the change in the Company's product mix from the heritage product to the client/server products. The Company's client/server products generate higher license fees per individual license than its heritage product, and, as a result, the cost of license fees as a percentage of total product license fee revenues is lower for the Company's client/server products than for its heritage product. In addition, in fiscal 1995, the Company reduced costs for product packaging and documentation. The increases in cost of license fees in fiscal 1996 and for the six months ended November 30, 1996 are primarily attributable to the overall growth in license fee revenues and an increase in royalties paid to third party vendors. The increase in royalties is primarily due to a new royalty arrangement entered into in the second half of 1996 with a third party for a report writer application that is bundled with the Company's client/server products. The Company anticipates that cost of license fees will increase in dollar amount as license fee revenues increase, but remain relatively constant as a percentage of total license fee revenues. However, in the event that the Company enters into additional royalty arrangements in the future, cost of license fees as a percentage of total license fee revenues may increase. COST OF SERVICES. Cost of services consists of the costs of providing telephone support, training and consulting services to customers and Partners. Cost of services increased from $5.5 million in fiscal 1994 to $5.6 million in fiscal 1995 and to $6.0 million in fiscal 1996, representing 55.1%, 43.8% and 39.4% of total service revenues, respectively. In addition, cost of services increased from $2.8 million for the six months ended November 30, 1995 to $3.6 million for the six months ended November 30, 1996, representing 38.9% and 37.9% of total service revenues, respectively. The increase in cost of services is primarily due to the expansion of the Company's customer and Partner service resources. Cost of services as a percentage of service revenues has decreased as a result of improved efficiency in operations. The Company anticipates that cost of services will increase in dollar amount as service revenues increase, but will remain relatively constant as a percentage of service revenues. SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries, commissions and travel and promotional expenses. Sales and marketing expenses have remained relatively constant 21 at $14.3 million in fiscal 1994, $14.0 million in fiscal 1995 and $14.5 million in fiscal 1996, representing 49.2%, 37.0% and 34.2% of total revenues, respectively. Sales and marketing expenses increased from $6.7 million for the six months ended November 30, 1995 to $9.7 million for the six months ended November 30, 1996, representing 34.7% and 39.2% of total revenues, respectively. The decrease in sales and marketing expenses as a percentage of revenues from fiscal 1994 through fiscal 1996 reflects an increase in sales and marketing productivity and a corresponding increase in revenues derived from the Company's client/server products. Since the beginning of fiscal 1997, however, the Company has increased spending on sales and marketing to promote the Microsoft SQL Server edition of its Dynamics C/S+ product. The increase in sales and marketing expenses and sales and marketing expenses as a percentage of total revenues reflects the hiring of additional sales and marketing personnel, expanded promotional activities and increased commissions relating to the increase in client/server product revenues. In addition, the Company has increased sales and marketing expenditures related to the operation of a United Kingdom sales subsidiary that was acquired in February 1996. RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of compensation of development personnel and depreciation of equipment. The Company has made significant investments in research and development with total expenses of $10.7 million in fiscal 1994, $9.3 million in fiscal 1995 and $8.9 million in fiscal 1996, representing 36.7%, 24.5% and 21.0% of total revenues, respectively. Research and development expenses remained relatively constant at $4.3 million for the six months ended November 30, 1995 and $4.5 million for the six months ended November 30, 1996, representing 22.2% and 18.1% of total revenues, respectively. These research and development expenses were primarily related to the Company's efforts to release additional applications for its client/ server products and the Microsoft SQL Server edition of Dynamics C/S+. More recently, the Company has devoted resources to the development of Internet-enabled applications. The Company anticipates that it will continue to devote substantial resources to its research and development efforts and that research and development expenses will increase in dollar amount in future periods. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of salaries of executive, financial, human resource and information services personnel as well as outside professional fees. General and administrative expenses increased from $3.6 million in fiscal 1994 to $3.9 million in fiscal 1995 and to $4.8 million in fiscal 1996, representing 12.4%, 10.2% and 11.3% of total revenues, respectively. General and administrative expenses increased from $2.2 million for the six months ended November 30, 1995 to $2.4 million for the six months ended November 30, 1996, representing 11.4% and 9.9% of total revenues, respectively. These increases in dollar amounts were primarily due to increased staffing and related expenses necessary to manage and support the expansion of the Company's operations. The Company believes that its general and administrative expenses will increase in dollar amount in the future to support the expansion of its operations and as a result of expenses associated with being a public company. PROVISION (BENEFIT) FOR INCOME TAXES. Provision (benefit) for income taxes was ($27,000), $45,000, and $(4,099,000) in fiscal 1994, 1995 and 1996, respectively. For the six months ended November 30, 1995 and 1996, the Company's provision for income taxes was $3,000 and $750,000, respectively. In fiscal 1994 and 1995, the Company's provision or benefit included the federal alternative minimum tax and state income taxes. The Company incurred a net loss in fiscal 1994 and, consequently, recorded no federal income tax expense for such period. The Company had net operating loss carryforwards for federal income tax purposes of approximately $3.0 million as of May 31, 1996. Prior to May 1996, the Company determined that the realization of the net operating loss carryforward and other deferred tax assets did not meet the recognition criteria under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and, accordingly, a valuation allowance was established to reserve the net operating loss carryforward and other deferred tax assets. For fiscal 1996, the Company recorded a $4.1 million tax benefit related to the reversal of the valuation allowance. This reversal was based on management's analysis of current levels of earnings and its future outlook, which 22 increased the likelihood of the Company realizing its deferred tax assets; thus the valuation allowance was no longer deemed necessary. In the six months ended November 30, 1996, the Company recorded an income tax provision consistent with federal and state statutory income tax rates. The Company expects that the income tax provision will continue to reflect the statutory tax rates. See Note 9 of Notes to Consolidated Financial Statements. SELECTED QUARTERLY OPERATING RESULTS The following table sets forth certain unaudited consolidated financial information for each of the four quarters in the Company's fiscal year ended May 31, 1996 and for the first two quarters in the Company's fiscal year ending May 31, 1997. In management's opinion, this unaudited quarterly information has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented, when read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Prospectus. The Company believes that quarter-to-quarter comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. SELECTED QUARTERLY OPERATING RESULTS
THREE MONTHS ENDED --------------------------------------------------------------------------------- AUGUST 31, NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31, NOVEMBER 30, 1995 1995 1996 1996 1996 1996 ----------- -------------- ------------ --------- ----------- -------------- (IN THOUSANDS) Revenues: License.......................... $ 5,535 $ 6,314 $ 5,943 $ 9,286 $ 6,655 $ 8,478 Service.......................... 3,348 3,954 4,114 3,777 4,413 5,208 ----------- -------------- ------------ --------- ----------- -------------- Total revenues................. 8,883 10,268 10,057 13,063 11,068 13,686 ----------- -------------- ------------ --------- ----------- -------------- Cost of revenues: License.......................... 805 1,004 1,209 1,895 1,170 1,550 Service.......................... 1,330 1,509 1,522 1,619 1,637 2,012 ----------- -------------- ------------ --------- ----------- -------------- Total cost of revenues......... 2,135 2,513 2,731 3,514 2,807 3,562 ----------- -------------- ------------ --------- ----------- -------------- Gross profit................... 6,748 7,755 7,326 9,549 8,262 10,124 ----------- -------------- ------------ --------- ----------- -------------- Operating expenses: Sales and marketing.............. 2,867 3,786 3,473 4,351 4,054 5,660 Research and development......... 1,998 2,260 2,093 2,525 2,172 2,318 General and administrative....... 994 1,184 1,218 1,367 1,224 1,209 ----------- -------------- ------------ --------- ----------- -------------- Total operating expenses....... 5,859 7,230 6,784 8,243 7,450 9,187 ----------- -------------- ------------ --------- ----------- -------------- Operating income................... 889 525 542 1,306 812 937 Other income....................... 3 37 8 52 83 119 ----------- -------------- ------------ --------- ----------- -------------- Income before income taxes..... 892 562 550 1,358 895 1,056 Income tax provision (benefit)..... 3 -- -- (4,102) 344 406 ----------- -------------- ------------ --------- ----------- -------------- Net income......................... $ 889 $ 562 $ 550 $ 5,460 $ 551 $ 650 ----------- -------------- ------------ --------- ----------- -------------- ----------- -------------- ------------ --------- ----------- --------------
The Company's quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially from quarter to quarter in the future. Such fluctuations may result in volatility in the price of the Company's Common Stock. The Company establishes its expenditure levels 23 based on its expectations as to future revenue, and, if revenue levels are below expectations, expenses can be disproportionately high. As a result, a drop in near term demand for the Company's products could significantly affect both revenues and profits in any quarter. In the future, the Company's operating results may fluctuate for this reason or as a result of a number of other factors, including increased expenses, timing of product releases, increased competition, variations in the mix of sales, announcements of new products by the Company or its competitors and capital spending patterns of the Company's customers. The Company's business has experienced and may continue to experience seasonality. In recent years, the Company has recognized a greater percentage of its revenue and operating income in its fourth fiscal quarter than in any of the first three quarters due to a number of factors, including the timing of product releases and the Company's sales incentive programs. Moreover, due to fiscal year-end sales incentive programs, the Company has historically recognized less revenue and operating income in its first fiscal quarter than in the other quarters. As a result of these factors, there can be no assurance that the Company will be able to maintain profitability on a quarterly basis. LIQUIDITY AND CAPITAL RESOURCES The Company has historically funded operations primarily through cash provided by operations and the sale of equity securities. Currently, the Company meets its working capital needs and capital equipment needs with cash provided by operations. Cash provided (used) by operating activities was ($1.7) million, ($2.4) million and $8.3 million for fiscal 1994, 1995 and 1996, respectively. The increase in cash used by operations in fiscal 1995 was primarily due to an increase in accounts receivable and a decrease in accounts payable, offset, in part, by improved profitability. Accounts receivable increased in fiscal 1995 due to the release of a significant, new version of the Company's heritage product in April 1995. The increase in cash provided by operations in fiscal 1996 was primarily due to increased profitability of the Company's operations and an increase in deferred revenues. Cash provided by operating activities for the six-month periods ended November 30, 1995 and 1996 decreased from $2.6 million to $2.1 million. The decrease resulted primarily from a decrease in deferred revenues. The Company's investing activities used cash of $1.7 million, $1.2 million and $2.1 million in fiscal 1994, 1995 and 1996, respectively. For the six months ended November 30, 1995 and 1996, cash used for investing activities was $1.0 million and $1.3 million, respectively. The principal use of cash in investing activities was for capital expenditures related to the acquisition of computer equipment required to support expansion of the Company's operations. The Company anticipates building or leasing a new facility for occupancy beginning in fiscal 1999. The Company currently expects that the new facility, together with related furniture, fixtures and equipment, will cost approximately $15.0 million, and expects to finance this amount with debt financing or through a sale and leaseback transaction. If debt financing is used to finance the facility, the Company anticipates that it will also use $3.0 million to $5.0 million in cash as an equity investment to partially fund the cost of the facility. If a sale and leaseback transaction is used to finance the facility, the Company anticipates that no material equity investment will be made to fund the facility. The building will be located close to the Company's current facilities and will be used to consolidate employees into one building for improved productivity, as well as to accommodate anticipated expansion of the Company's operations. The Company's financing activities provided (used) cash of $2.2 million, $6.3 million and ($.8) million during fiscal 1994, 1995 and 1996 respectively. In fiscal 1995, the cash provided by financing activities included $8.1 million received in connection with the sale of Series B Preferred Stock and $2.0 24 million from the sale of Common Stock to employees, partially offset by $3.8 million of payments on the Company's outstanding line of credit and notes payable. For the six months ended November 30, 1995 and 1996, the Company's financing activities used cash of $.4 million and $.4 million, respectively. For fiscal 1996 and the six months ended November 30, 1995 and 1996, financial activities used cash primarily for payments on capital lease obligations and notes payable. The Company's sources of liquidity at November 30, 1996 consisted principally of cash and cash equivalents of $8.6 million. The Company also has a $5.0 million revolving line of credit facility with a bank. The line of credit expires in November 1997 and borrowings made thereunder are subject to certain covenants. No amounts were outstanding under the line of credit at November 30, 1996. See Note 6 to Consolidated Financial Statements. The Company believes that the proceeds from this offering, cash generated from operations and amounts available under the line of credit will be sufficient to fund its operations for the foreseeable future. 25 BUSINESS Great Plains Software is a leading provider of Microsoft Windows NT client/server financial management software for mid-sized businesses. The Company's award-winning products and services automate essential accounting functions and enhance the strategic value of financial information. The Company's products and services are sold and implemented exclusively by its extensive network of Partners throughout the United States, Canada and select international markets. INDUSTRY BACKGROUND In recent years, businesses of all sizes have been subjected to heightened competitive pressures and rapidly changing market conditions. These pressures and conditions have challenged businesses to increase the speed with which they make decisions, establish closer relationships with customers and suppliers, raise the productivity of employees throughout the business and reduce costs. Many mid-sized and larger businesses are meeting these challenges by leveraging the increased functionality, flexibility and access to information offered by financial management systems based on client/server technologies. In the past, information technology architectures, particularly the centralization of information on mainframe systems and minicomputers, prevented businesses from using their financial management systems for purposes other than maintaining financial records and processing accounting transactions. These systems were based on a centralized processing and reporting model which was inflexible and did not allow effective integration with other systems or ready access to information. With the advent of client/server technologies, however, businesses are better able to use information from their financial management systems to respond to rapidly changing market conditions. The acceptance of client/server systems has been driven by their ability to combine the ease of use and data accessibility of personal computers with the high-volume processing and data storage capabilities of minicomputer and mainframe systems. Client/server-based financial management systems offer real-time information access and distributed processing which enable businesses to increase the speed of decision making and enhance employee productivity. When integrated with Internet technologies, client/server systems provide employees throughout the business and key customers and suppliers with access to critical information. Businesses employing client/server financial management systems can generally be grouped into two market segments: (i) the corporate or middle market (the "Corporate Market") and (ii) the enterprise or high-end market (the "Enterprise Market"). The Corporate Market generally consists of businesses with $1 million to $250 million in revenues and 10 to 2,500 employees. In contrast, the Enterprise Market generally consists of companies with revenues in excess of $250 million and more than 2,500 employees. Although many Corporate Market businesses have formal information technology (IT) departments, Corporate Market companies typically have fewer IT resources than Enterprise Market companies. In addition, whereas Corporate Market businesses have historically employed financial management systems based on LANs, minicomputers and mainframes, Enterprise Market companies have principally used mainframe financial management systems. Businesses in the Enterprise Market were the first to adopt client/server architecture as the standard for new implementations of financial management systems. More recently, businesses in the Corporate Market have also begun to demand financial management systems based on client/server technology. However, client/server financial management systems designed for the Enterprise Market have not been widely implemented by Corporate Market businesses because they are generally too complex and take too long and cost too much to implement. Furthermore, the implementation of client/server financial management systems designed for the Enterprise Market often requires significant business process re-engineering that is overly burdensome for Corporate Market businesses, especially smaller Corporate Market businesses. 26 CORPORATE MARKET FINANCIAL MANAGEMENT SYSTEM NEEDS Corporate Market businesses have a number of key business requirements that are different from those of Enterprise Market businesses. The Company believes that Corporate Market businesses require a client/server financial management system that is cost-effective, designed for Microsoft technologies, easy to customize and use and scalable. Corporate Market businesses generally have fewer IT resources than businesses in the Enterprise Market. As a result, these businesses require cost-effective software solutions from vendors that can provide a substantial amount of assistance during the software system selection and implementation process as well as ongoing local support and service. These businesses also require systems that can be rapidly implemented and are easy to learn, use and modify. In order to ensure ongoing compatibility, supportability and ease of maintenance, many Corporate Market businesses are standardizing on Microsoft technologies, most notably Windows NT, Windows 95 and SQL Server. For example, according to International Data Corporation estimates, Windows NT is the fastest growing server operating system for new client/server applications. Many Corporate Market businesses are requesting a financial management system that takes full advantage of Microsoft technologies. Systems that are 32-bit and native to Windows currently offer the optimal Microsoft-standard solution. Many Corporate Market businesses experience rapid growth and have evolving business models. These businesses require financial management systems that can be customized quickly and cost-effectively to accommodate the constantly changing nature of their business systems and procedures. The Company believes that financial management systems must allow Corporate Market businesses to easily modify windows, to integrate third-party solutions and to quickly write and seamlessly integrate custom applications. Finally, Corporate Market companies require financial management systems that can be scaled up as their businesses grow. This requirement is best met by products that offer broad functionality and scalable processing capabilities, and that have an open and flexible architecture that can easily incorporate additional technologies, including Internet technologies which can extend the availability of information from the financial management system to employees across the business and to key customers and suppliers. THE GREAT PLAINS SOFTWARE SOLUTION The Company designs, develops, markets, sells and supports its client/server financial management products based on the following principles: OPTIMIZE PRODUCTS FOR LEADING TECHNOLOGIES. The Company has consistently focused on identifying leading technologies and integrating them into its products. In particular, the Company's products are designed for Microsoft technologies, including Windows NT, Windows 95, SQL Server, Internet Explorer, Internet Information Server, Visual Basic, Visual Basic for Applications and C++. Due to their flexible 32-bit open architecture, the Company's products can also be integrated with technologies from other leading suppliers, such as Netscape, Citrix Systems, IBM/Lotus and Novell. LEVERAGE PARTNER NETWORK. The Company has made a significant investment in building an experienced, knowledgeable and highly motivated Partner network, which consists of VARs, systems integrators, Big Six and other accounting firms, ISVs and specialized software consultants. The Company's products are sold and implemented exclusively through its extensive network of Partners. The Company believes that its Partners have a significant influence over product choices by customers, and that the Company's relationships with its Partners are essential to the Company's success. Through its Partner network, the Company is able to provide customers with trained and knowledgeable software professionals who are available locally to implement its systems as well as provide ongoing service and 27 technical support. Many of the Partners customize the Company's products to fit individual business needs and develop software applications that integrate with and extend the functionality of the Company's products. PROVIDE AWARD-WINNING SERVICE AND TECHNICAL SUPPORT. The Company believes that prompt and effective service and technical support are essential elements of a complete financial management software solution, and dedicates significant resources to delivering timely, reliable and cost-effective service to its customers and Partners. The Company has received numerous industry awards for its customer and Partner service, including the 1996 Positive Performer Grand National Award for excellence in customer service from Inc. magazine and MCI Communications. MEET BROAD SPECTRUM OF CORPORATE MARKET NEEDS. The Company's client/server product lines, Dynamics C/S+ and Dynamics, are designed to meet the broad spectrum of financial management needs of the Corporate Market. Dynamics C/S+ is designed for businesses in the Corporate Market that have high volume processing requirements, complex financial management needs and formal IT departments. Dynamics is designed for Corporate Market businesses that need a Windows client/server solution that is cost-effective and flexible, but does not require IT personnel dedicated to database administration. Whereas Dynamics C/S+ is designed for Corporate Market businesses that are typically migrating their financial management systems from minicomputers and mainframes, Dynamics is designed for businesses that are migrating from LANs to client/server systems. The Company's customers can easily and cost-effectively upgrade from Dynamics to Dynamics C/S+ as their businesses grow and financial management software needs evolve. ENABLE RAPID IMPLEMENTATION, EASE OF USE AND CUSTOMIZATION. The Company has designed its software for rapid implementation. The Company's products, which are based on the Windows-interface standard, are easy to learn and use. The Company also offers a suite of tools that allow its customers and Partners to easily modify and create windows and reports, to integrate third-party solutions and to quickly write and seamlessly integrate custom applications. In addition, customers and Partners can accomplish similar customization using industry-standard, third-party tools, such as Microsoft Visual Basic and Visual Basic for Applications, Crystal Reports and FRx financial report writer. IMPROVE INFORMATION ACCESS. The architecture and design of the Company's client/server products allow customers to quickly and easily access real-time information. Instead of having to print and analyze reports to locate data, customers can use the extensive "drill down" capabilities of the products to gain online access to information contained throughout the financial management system. In addition, customers can easily transfer information from the Company's client/server products to desktop applications, such as Microsoft Word and Excel, for analysis and dissemination. INTEGRATE AND LEVERAGE INTERNET TECHNOLOGIES. The Company's products employ Internet technologies to facilitate financial reporting, analysis and communication both within an organization and with its customers and suppliers. In addition, Dynamics.Order, the Company's electronic commerce solution, allows customers of Corporate Market businesses to place and track orders over the Internet. The Company believes that enabling easy, cost-effective and security-enhanced communication and information sharing among employees as well as facilitating order placement with customers are important elements of a Corporate Market financial management system. 28 STRATEGY The Company's strategy is to extend its position as a leading provider of Microsoft Windows NT client/server financial management systems to the Corporate Market. The following are the key elements of the Company's strategy: EXTEND TECHNOLOGY LEADERSHIP. The Company has a strong record of technical innovation and leadership and intends to continue to invest in the development of new technologies and products. The Company's client/server product lines, Dynamics C/S+ and Dynamics, were among the first financial management systems in the Corporate Market to receive Microsoft Windows 95 (Dynamics C/S+ and Dynamics) and Microsoft BackOffice (Dynamics C/S+) logo compliance (recognition from Microsoft that they meet the development criteria for Windows 95 as well as Microsoft BackOffice technologies, including Windows NT and SQL Server). The Company believes that its open, componentized, multi-tier client/server architecture is well-suited for the ongoing integration of new technologies. This architecture has allowed the Company to be among the first to market Internet-enabled financial management solutions for Corporate Market businesses. The Company maintains a research team dedicated to assessing new and emerging technologies. In addition, the Company intends to maintain its leadership in providing customization capabilities that are essential to businesses in the Corporate Market. EXPAND AND STRENGTHEN PARTNER NETWORK. The Company believes that its Partner network has been able to penetrate the Corporate Market by providing high-quality, cost-effective marketing, sales and service. Through its channel development and recruiting efforts, as well as its training, certification and performance recognition programs, the Company intends to continue to expand and strengthen this network. For example, the Company recently instituted a program, Center for Organizational Excellence (CORE), which offers Partners increased training, service and support to help them develop and expand their businesses. The program also provides product and curricula offerings to colleges and universities designed to increase the number of graduates familiar with the Company's products. The Company also hosts a number of business and technology conferences each year, including "Stampede," an annual three-day Partner conference in Fargo, where the Company is headquartered, that had over 1,000 Partner participants in 1996. CONTINUE AWARD-WINNING SERVICE AND TECHNICAL SUPPORT. The Company believes that prompt and effective service and technical support are essential elements of a complete financial management software system and are vital to maintaining customer and Partner satisfaction. The Company has received numerous industry awards for its customer and Partner service, and continues to invest in its support infrastructure. For example, the Company is expanding its existing Internet-based technical support to customers and Partners. The Company believes that its initiatives will further increase the timeliness and effectiveness of its service and technical support. SUPPORT DOS-BASED PRODUCTS AND MIGRATE CUSTOMERS TO CLIENT/SERVER. The Company intends to continue to support customers who use its DOS-based product, Great Plains Accounting, and to offer specialized pricing programs and tools to migrate these customers to its client/server products. In addition, the Company has developed and is marketing migration tools for moving customers from competitors' DOS-based accounting systems to its client/server financial management systems. EXPAND GLOBAL PRODUCT OFFERING AND INFRASTRUCTURE. The Company currently sells its products through international Partners and a subsidiary located in the United Kingdom to markets in the following geographic regions: Western and Eastern Europe, Australasia, Southern Africa, the Middle East and Southeast Asia. The Company's client/server products have been sold in approximately 50 countries. The Company intends to expand its global infrastructure by entering into additional international distribution agreements, acquiring certain existing distributors and pursuing the acquisition of related software products or companies. 29 MAINTAIN GREAT PLAINS SOFTWARE VALUES. Great Plains Software is deeply committed to developing and sustaining long-term relationships with its Partners, customers, employees and suppliers. The Company has been built on a Mission Statement and a set of Shared Values that express this commitment. The Company believes that a continued commitment to its Mission Statement and these values results in higher employee, customer and Partner satisfaction. GREAT PLAINS SOFTWARE MISSION STATEMENT To improve the lives and business success of Partners and Customers by providing superior financial management software, services and tools. GREAT PLAINS SOFTWARE SHARED VALUES We must: 1. Foster a close relationship with our Partners and Customers that will result in a better understanding of what they are experiencing; 2. Encourage innovation, independent action, team spirit and personal growth in all employees; 3. Ensure that everything we do reflects exceptional levels of quality; and 4. Demonstrate high integrity in all business relationships. TECHNOLOGY The Company's products leverage key Microsoft technologies and are based on the following strategies: 32-BIT OPTIMIZATION FOR WINDOWS NT AND WINDOWS 95. The Company's client/server products are 32-bit applications optimized for Windows NT and Windows 95, and are among the few financial management systems that can be integrated with Visual Basic for Applications, which the Company has licensed from Microsoft. In addition, as 32-bit applications, the Company's client/server products are among the few financial management systems that support Windows NT on both the desktop and the server, which maximizes the performance and fault tolerance capabilities of Windows NT. MICROSOFT SQL SERVER OPTIMIZATION. Dynamics C/S+ is optimized for the latest releases of Microsoft SQL Server and includes over 4,000 stored procedures to enhance distributed processing, overall performance and data integrity. The Company's implementation of Microsoft SQL Server and Windows NT also enhances data accessibility and system scalability. NATIVE WINDOWS NT AND WINDOWS 95 IMPLEMENTATION. The Company's client/server products are designed to take full advantage of Windows NT and Windows 95 capabilities, unlike "screen scraper" products that have a graphical interface grafted onto DOS-based or legacy software systems. The Company believes that its design philosophy has resulted in products that are easier to use and more intuitive because they adhere closely to the same interface standards as Windows desktop applications. Moreover, as native Windows applications, the Company's client/server products require less memory and enable more efficient multi-tasking than screen-scraper products. COMPONENTIZED FUNCTIONALITY. The business rules, or financial logic, of the Company's products have been designed and developed into "logic components." This "componentization" or "object orientation" of the product allows the Company to use software code multiple times within a product and from product to product, increasing the speed with which new applications and product extensions can 30 be developed. The componentized architecture of the Company's products also allows Company and third-party applications to share a common user interface thereby creating a seamless and easy to use environment for customers. Moreover, the Company makes certain components available to ISV Partners, which facilitates their ability to integrate third party applications into the Company's client/server products. MULTI-TIER CLIENT/SERVER ARCHITECTURE. The multi-tier client/server architecture of the Company's products enhances the processing flexibility and efficiency of its products by allowing processing to occur on the desktop computer, the application server or the database server. In addition, this architecture also enhances scalability and deployment capabilities over wide area networks and the Internet. INTERNET INTEGRATION. The Company has deployed and is continuing to develop Internet products to extend the availability of information from financial management systems to employees across the business and key customers and suppliers. The Company's client/server products take advantage of leading Internet technologies, including Microsoft Internet Explorer, Netscape Navigator, Microsoft Internet Information Server, FrontPage, ActiveX and Java. PRODUCTS The Company's client/server product lines, Dynamics C/S+ and Dynamics, consist of a suite of financial applications and a suite of customization and development tools. The Company also offers a DOS- and Macintosh-based product, Great Plains Accounting. DYNAMICS C/S+ First released in July 1994, Dynamics C/S+ is the Company's client/server financial management system for Corporate Market businesses that have high volume processing requirements, complex financial management needs and formal IT departments. These businesses require the distributed processing and increased throughput delivered by Windows NT, Microsoft SQL Server and the multi-tier architecture of the Company's products. Dynamics C/S+ has received several industry awards and was one of the first client/server financial management systems to receive Microsoft Windows 95 and BackOffice logo compliance. The Dynamics C/S+ implementation of Windows NT allows deployment on either Intel or Digital's Alpha processor technology. DYNAMICS First released in February 1993, Dynamics is the Company's client/server financial management system for Corporate Market businesses that need a Windows client/server solution that is flexible and cost-effective, but does not require IT personnel dedicated to database administration. Dynamics is built on the same foundation as Dynamics C/S+ and leverages leading Microsoft technologies, including Microsoft Windows 95, Windows NT and Visual Basic. Dynamics has received several industry awards and was one of the first client/server financial management applications to receive Windows 95 logo compliance. 31 The following table provides selected information relating to the Dynamics C/S+ and Dynamics client/server product lines:
DYNAMICS C/S+ DYNAMICS --------------------------- --------------------------- INITIAL RELEASE DATE July 1994 February 1993 CURRENT VERSION/ 3.15/November 1996 3.2/March 1997 RELEASE DATE TARGET MARKET: REVENUES $25 to $250 million $1 to $25 million EMPLOYEES 250 to 2,500 10 to 250 CLIENT OPERATING SYSTEMS Windows NT Windows NT Windows 95 Windows 95 Macintosh O/S SERVER OPERATING SYSTEM(S) Windows NT Windows NT (Intel) (Intel and Alpha) Novell NetWare PRIMARY DATABASE Microsoft SQL Server Btrieve Server AVERAGE SYSTEM CUSTOMER $75,000 $10,000 PURCHASE PRICE
CLIENT/SERVER PRODUCT FUNCTIONALITY The Company's client/server product lines, Dynamics C/S+ and Dynamics, consist of a suite of financial applications and a suite of development and customization tools. These suites, which are offered across both product lines, address similar business needs yet provide features and technologies specifically designed for the distinct requirements of Dynamics C/S+ and Dynamics customers. The financial applications offered with both client/server products automate the critical accounting and distribution functions of Corporate Market businesses. These applications can be grouped into two categories: ACCOUNTING APPLICATIONS deliver such essential functionality as general ledger, accounts receivable, accounts payable, invoicing and payroll. In addition, one of the Company's Internet applications, Dynamics.View, provides employees across a business with access to financial information via a Web browser. DISTRIBUTION APPLICATIONS provide inventory management, sales order processing and purchase order processing. In addition, Dynamics.Order, the Company's electronic commerce application, allows customers of Corporate Market businesses to place and track orders over the Internet. The Company's suite of development and customization tools, DynamicTools, allows customers and Partners to customize and extend the functionality of Dynamics C/S+ and Dynamics. Key tools in the DynamicTools suite are Dexterity, Modifier, Visual Basic for Applications, Report Writer, Continuum for Visual Basic and NetTools. Dexterity enables customers and third party developers to create applications that seamlessly integrate with, and have the same look and feel as, the Company's client/server applications. Modifier is used to customize windows and cursor navigation. The Company's implementation of Visual Basic for Applications, under license from Microsoft, allows the Company's client/server products to be integrated with customer-specific or industry-standard applications or easily customized to fit specific customer needs. Report Writer allows for the creation and modification of reports. Continuum for Visual Basic facilitates integration between the Company's client/server products and Microsoft Visual Basic applications through the use of wizards (online instruction guides) and point-and-click operations. NetTools facilitates the integration of the Company's client/server products with leading Internet technologies. 32 GREAT PLAINS ACCOUNTING The Company's Great Plains Accounting product is available for DOS and Macintosh operating systems in LAN and single user environments. Great Plains Accounting includes a suite of financial applications that provides customers with a broad range of features and functions. The Company's most recent version of Great Plains Accounting, Version 9.0, released in February 1997, will be marketed primarily to existing Great Plains Accounting customers. The Company is actively promoting the migration of its Great Plains Accounting customers to its client/server products. The Company's revenues from its Great Plains Accounting product have been declining, and the Company expects that these revenues will continue to decline in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Revenues." SALES AND MARKETING SALES. The Company sells, implements and supports its products exclusively through its Partner network consisting of VARs, specialized software consultants, ISVs, systems integrators and Big Six and other accounting firms. The Company's Partners are independent organizations that perform some or all of the following functions: sales and marketing; systems implementation and integration; software development and customization; and ongoing consulting, training, service and technical support. In many instances, a Partner's primary source of income is derived from selling, implementing and supporting the Company's products. The Company believes that its Partners have a significant influence over product choices by customers and that its relationships with its Partners are an essential element in its marketing, sales and implementation efforts. Through its Partner network, the Company is able to provide customers with trained and knowledgeable software professionals who are available locally to implement its systems as well as provide ongoing service and support. Many of the Company's Partners customize the Company's systems to fit individual business needs and develop industry-specific software applications that integrate with and extend the functionality of the Company's products. The Company actively recruits Partners through channel development groups and has specialized strategies aimed at recruiting and supporting ISVs and accounting firms. Partners are required to undergo extensive training and certification procedures before being authorized to sell and implement the Company's products and must maintain certain standards and sales volumes to retain such authorization. The Company has established cooperative relationships with several international Partners to further the international distribution of its products, which involves localizing and translating its products, locating and training qualified VARs, marketing its products and providing ongoing customer service and technical support. International Partners typically pay localization and translation costs for the Company's software in exchange for distribution rights, while the Company retains ownership of the localized version of the software. The Company and its international distributors have developed localized language versions of its client/server products, including Arabic, Polish, Russian, German and Portuguese, with a Spanish version expected to be released in the second half of fiscal 1997. In addition, the Company has developed localized versions for the United Kingdom, Australia, New Zealand, South Africa and French-speaking Canada. These versions have been modified to satisfy local accounting or tax requirements and include international features, such as compatibility with value-added-tax and European Intrastat reporting requirements, localized charts of accounts, multi-currency capabilities and transaction code analysis. The Company's product architecture is designed to facilitate the translation, localization and maintenance of multilingual, multinational versions. MARKETING. The Company is focused on building market awareness and acceptance of the Company and its products as well as on generating qualified customer and Partner leads. Customer leads are pursued by Partners with assistance from the Company's sales personnel. 33 The Company has a comprehensive marketing strategy with several key components: image and awareness building, direct marketing to both prospective and existing customers, a strong Web presence, broad-scale events with strategic partners and local marketing with Partners. The Company's corporate image strategy includes national advertising in key financial, business and technology publications as well as Web-based advertising. The Company's direct marketing includes ongoing direct mail efforts to existing and prospective customers. For prospective customers, the Company also offers seminars and self-qualifying tools to assist them in selecting client/server financial management systems. Seminars are offered in conjunction with Partners in their local or industry-specific markets. The Company's Web-based marketing is designed to generate new leads for the Company. The Company increases product awareness by sponsoring large scale events and seminars for prospective customers with key industry partners, such as Microsoft, Digital and IBM. Such events have included satellite product launch events and video-teleconference-based technical seminars. Finally, the Company's marketing strategy is designed to take advantage of the Company's Partner network by including cooperative marketing programs designed for Partners' local markets. CUSTOMERS The Company's client/server products offer functionality and scalability to suit a wide range of Corporate Market businesses, from fast-growing entrepreneurial businesses to divisions of large enterprises. In addition, the Company's client/server products, implemented alone or with an industry-specific third party application, have been purchased by companies in a wide variety of industry types, such as: Advertising Healthcare Non-Profit Broadcasting Hospitality Professional Sports Computer Software Information Services Publishing Construction Insurance and Financial Services Retail Distribution Internet Software and Services Telecommunications Education Manufacturing Transportation
CUSTOMER CASE STUDIES The following case studies illustrate the selection, implementation and use of Dynamics C/S+ and Dynamics by certain of the Company's customers. Not every customer implementation of the Company's products achieves the same level of success. DOVER CORPORATION CANADA, LTD. Dover Corporation Canada, Ltd. ("Dover") sells, services and installs elevators, escalators and industrial conveyor belts throughout Canada. Dover has approximately 500 employees in its corporate headquarters and 41 branch offices across Canada. Dover's previous financial management applications were proprietary and approximately 15 years old. Information flow between the corporate and branch offices, including accounting and project management reporting, suffered from a time lag of about 45 days and, as a result, information available at branch offices often differed from information available at headquarters. Dover is replacing its centralized mainframe system with a Dynamics C/S+ solution that will link the financial system in its corporate headquarters with all 41 branch offices. The system presently has about 110 authorized users, with more users being added monthly. 34 In addition to benefiting from the broad functionality inherent in Dynamics C/S+, Dover employees across Canada are gaining online access to information in the Dynamics C/S+ financial management system through a WAN and the Internet. Furthermore, a Great Plains Software Partner has written an industry-specific application using DynamicTools which allows Dover to better manage its remote sales and service force and provide them with real-time integration with Dynamics C/S+. PROTECTION ONE ALARM MONITORING, INC. Protection One Alarm Monitoring, Inc. ("Protection One"), with 953 employees, provides security alarm monitoring services, and sells, installs and services security alarm systems for residential financial management and small business subscribers across the western United States. The company is the largest residential security alarm company in the western United States and ranks among the largest in the country in terms of customer base. Security industry software systems such as the system previously used by Protection One are typically comprised of two or more applications--a financial package and specialized alarm monitoring software. Protection One determined that its existing applications were unable to accomodate its expected future growth. In addition to broad and flexible financial management functionality, Protection One required a system that integrated seamlessly with several custom-developed alarm monitoring applications. The financial management system now used by Protection One integrates Dynamics C/S+ with industry-specific applications developed by a Great Plains Software Partner. In particular, the Partner used the Great Plains Software development tool suite, DynamicTools, to develop a specialized alarm monitoring solution that seamlessly integrates with Dynamics C/S+ to handle the approximately 1.5 million alarm signals a month that Protection One receives. This integrated solution allows appropriate personnel in the organization to respond to customer inquiries and address alarm signals, including life- threatening emergencies, that might arise in the alarm monitoring center, and provides Protection One with a comprehensive and seamlessly integrated financial, administrative and service management system with a common customer database. SBS CORPORATION SBS Corporation ("SBS"), with 39 employees, provides hardware, software and services to financial institutions primarily serving the southeastern United States. SBS offers products and services which enable its customers to provide optical storage, loan document processing, telephone banking and check imaging solutions. The financial management system previously used by SBS was a DOS-based solution that did not automate key processes. For example, sales proposals and quotes were created in Microsoft Word, but information was re-entered as a sale moved forward from proposal to order to billing. This inefficient process made it difficult to monitor the status of a sale and was labor intensive. SBS migrated to a Dynamics solution in July 1995 and reports that it has streamlined processes and measurably increased productivity. SBS relies on the "enter-data-once" design of Dynamics to automate workflow relating to the sales process. The Dynamics Sales Order Processing application provides SBS with the ability to enter data once and use it throughout the sales process, from the quote stage to orders, back orders, invoices and returns. The status of an order can be monitored by any Dynamics user. This workflow design has streamlined processes, improved accuracy and increased staff productivity. In addition, SBS has been able to integrate its Dynamics system with Microsoft Word and Excel. 35 PARTNER CASE STUDIES The Company has made a significant investment in building an experienced, knowledgeable and highly motivated Partner network. The following case studies describe key characteristics and business attributes for three of the Company's larger Partners. Not every Partner has experienced or will experience the same level of success. THE TAYLOR GROUP The Taylor Group sells, implements and supports financial and manufacturing software throughout the northeastern United States. The Taylor Group also develops, markets and supports its own "plug and play" applications that enhance Great Plains Software products. These applications are distributed by 172 VARs around the world that maintain relationships with both The Taylor Group and Great Plains Software. Founded as a single-person business in 1987, The Taylor Group had 36 employees as of December 31, 1996, including support technicians, consultants, systems engineers, programmers and sales and marketing executives. Approximately 60% of the formal training of this staff is obtained through programs offered by Great Plains Software. In 1996, the Taylor Group's revenue was evenly divided among sales of Great Plains Software products, its own software applications that enhance Great Plains Software products and related services. It discontinued offering competing products approximately five years ago. As of December 31, 1996, The Taylor Group was providing service to an installed base of 90 Dynamics customers, 13 Dynamics C/S+ customers and 129 Great Plains Accounting customers. FINANCIAL SYSTEMS CONSULTING, INC. Financial Systems Consulting, Inc. ("FSC") sells, implements and supports financial management software and provides management consulting services in the southwestern United States. In business since 1993, FSC was authorized as a Great Plains Software VAR in November 1995 and currently focuses primarily on Dynamics C/S+. In the year ended December 31, 1996, its first as a Great Plains Software Partner, FSC implemented Dynamics C/S+ for 28 customers. As of December 31, 1996, FSC had 19 employees in offices in Los Angeles, San Diego, San Francisco and Phoenix. Prior to becoming authorized as a Great Plains Software VAR, FSC had been a leading reseller of a competing product. During FSC's first twelve months as a Great Plains Software Partner, approximately 45% of its revenues were derived from the sale of Great Plains Software products, third-party applications that enhance Great Plains Software products and related services. INTEGRATED ACCOUNTING SYSTEMS, INC. Integrated Accounting Systems, Inc. ("IAS") was founded in 1989 as a single-person firm, providing financial management system consulting and implementation services. In 1992, IAS expanded its business to include the resale of financial management software. As of December 31, 1996, IAS had grown to 19 employees and was recognized as one of the fastest growing private companies in the San Francisco Bay Area for 1996. Since its founding, IAS has focused exclusively on Great Plains Software products. In 1996 IAS received approximately 50% of its revenue from service and support and 50% from software sales, of which approximately 10% was derived from the sales of third party applications that integrate with Great Plains Software products. As of December 31, 1996, IAS was providing service to an installed base of 100 Dynamics customers, 6 Dynamics C/S+ customers and 360 Great Plains Accounting customers. 36 CUSTOMER AND PARTNER SERVICE The Company believes that prompt and effective service and technical support is an important component of a complete financial management system and is critical to the long-term satisfaction of its customers and Partners. The Company has received numerous awards for its Partner and customer service, including the 1996 Positive Performer Grand National Award for excellence in customer service from Inc. magazine and MCI Communications. The Company was one of the first personal computer software providers to introduce fee-based support plans and guaranteed telephone response times. The Company also maintains profiles and detailed call histories on each of its customers and Partners. These profiles enable support personnel at the Company to respond more effectively to service inquiries, allow the Company to better forecast which customers are likely to purchase new products or upgraded versions of existing products and assist the Company in developing new applications and features that accurately address the needs of the marketplace. The Company provides service and technical support through a service organization consisting of 128 employees as of January 31, 1997. The Company provides a variety of training, technical support and service programs for customers which supplement the primary support provided by Partners. The Company offers video, teleconference and classroom training as well as technical support through a toll-free number, its Website and onsite consultations. Telephone support calls are handled by professional support personnel and have various guaranteed response times, depending on the type of support plan purchased. Response times as short as 30 minutes are offered. In addition to its technical support programs, customers are offered software maintenance programs for an annual fee. These programs provide customers with product upgrades and online information and assistance. The Company also offers comprehensive training and product support to its Partners to ensure that they provide the necessary levels of technical support and assistance to customers. Finally, the Company offers its Partners a variety of consulting resources for resale to customers, including strategic implementation planning, project management and product customization. RESEARCH AND DEVELOPMENT Since its inception, the Company has made substantial investments in research and development. During the fiscal years 1994, 1995 and 1996, software development expenses were approximately $10.7 million, $9.3 million and $8.9 million, respectively. As of January 31, 1997, the Company had 159 employees engaged in research and development. The Company's research and development efforts employ a standard development process to guide software development through stages of product concept, market requirements analysis, product definition, design specification, coding, testing and release. These efforts are also focused on identifying, developing and integrating leading technologies into its products to better meet customer needs. INTELLECTUAL PROPERTY RIGHTS AND LICENSES The Company regards certain features of its internal operations, software and documentation as its intellectual property. The Company relies on a combination of contract, copyright, trademark and trade secret laws, a mandatory software registration mechanism and other measures to protect its intellectual property. The Company has no patents. The Company believes that, because of the rapid pace of technological change in the computer software industry, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of the Company's employees, frequent product enhancements and the timeliness and quality of support services. It is the Company's policy to file for protection of its basic trademarks and service marks in countries in which the Company sells its products either directly or through its international Partners and in countries in which protection is advisable. Despite these measures there can be no assurance that the Company will be able to fully 37 protect its intellectual property. See "Risk Factors--Dependence on Intellectual Property Rights; Risk of Infringement." The Company provides its products to customers on a "right-to-use" basis under non-exclusive licenses, which generally are nontransferable and have a perpetual term. The Company typically licenses its products solely for the customer's internal operations. COMPETITION The market for the Company's products is highly competitive and rapidly changing. The Company's primary market consists of businesses in the Corporate Market. The Company's current and prospective competitors offer a variety of solutions for this market. The Company experiences significant competition and expects substantial additional competition from established and emerging software companies that offer products similar to the Company's products and target the same customers as the Company. The Company believes it competes on the basis of (i) product features, functionality, performance and price, (ii) the capacity and capabilities of Partners, (iii) the quality of customer and Partner service and technical support, (iv) sales and marketing efforts, (v) new product and technology introductions, and (vi) company image and stability. The Company believes it competes effectively on each of these factors. In the United States, the Company faces a number of competitors both in the Dynamics C/S+ segment of the Corporate Market, including Platinum Software Corporation, and in the Dynamics segment of the Corporate Market, including Solomon Software and State of the Art, Inc. In Canada, the Company's primary competitor is Computer Associates International, Inc. (AccPac and AccPac 2000). Outside North America, the Company also faces competition from a number of other competitors, several of which have significant shares in their home markets. In addition, the Company competes for Corporate Market business with companies primarily targeting the Enterprise Market; several of these competitors, which principally sell UNIX-based systems, offer or have announced their intention to deliver Windows NT solutions. The Company believes that the products from these competitors are neither designed nor priced to meet the needs of the Corporate Market, and that the Company competes effectively against them in the Corporate Market. The Company's products also face competition from providers of industry-specific applications as well as indirect competition from in-house, custom-developed financial management applications. Certain of the Company's competitors have substantially greater financial, marketing or technical resources than the Company. There can be no assurance that other companies have not developed or marketed or will not develop or market products that are superior to those of the Company, that are offered at substantially lower prices than those of the Company, or that have or will achieve greater market acceptance than those of the Company. In addition, there can be no assurance that alternative methods of delivering financial management systems will not provide increased competition. FACILITIES The Company's principal administrative, marketing, production and product development facilities consist of an aggregate of approximately 80,000 square feet at two locations in Fargo, North Dakota. Great Plains Software occupies these sites under lease agreements that expire at various times through June 1998. Total rent expense was approximately $693,000, $894,000 and $871,000 during fiscal 1994, 1995 and 1996, respectively. The Company is currently planning to consolidate its two locations into an expanded facility in the future. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 38 PRODUCTION The principal physical components of the Company's software products are computer media and manuals. The Company prepares master software disks, manuals and packaging materials which are then duplicated by the Company and third party vendors. To date, the Company has not experienced any material difficulties or delays in the manufacture and assembly of its products or material returns due to product defects. EMPLOYEES As of January 31, 1997, the Company had a total of 550 full and part-time employees (equating to 537 full time equivalent employees ("FTEs")), including 313 FTEs in sales, marketing, technical support and consulting services, 159 FTEs in research and development and 65 FTEs in administration. None of the Company's employees are represented by a labor union. Management believes that its relations with the Company's employees are good. LEGAL PROCEEDINGS From time to time, the Company is involved in litigation arising out of operations in the normal course of business. As of the date of this Prospectus, the Company is not a party to any legal proceedings the adverse outcome of which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Company's results of operations or financial position. 39 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages and positions are as follows:
NAME AGE POSITION - ------------------------------- --- ----------------------------------------------------------------------- Douglas J. Burgum.............. 40 Chairman of the Board, President and Chief Executive Officer Raymond A. August.............. 35 Chief Technology Officer and Group Vice President, Dynamics C/S+ Terri F. Zimmerman............. 33 Chief Financial Officer and Group Vice President Michael J. Olsen............... 47 Group Vice President, Corporate Communications Steven K. Sydness.............. 42 Group Vice President, Dynamics Jodi A. Uecker-Rust............ 35 Group Vice President, Heritage Products Brian R. Carey................. 39 Vice President, Business Development Michael A. Slette.............. 40 Vice President, Human Resources and Legal Affairs Bradley J. Burgum.............. 45 Director and Secretary Frederick W. Burgum............ 50 Director William V. Campbell 58 Director Raymond F. Good................ 68 Director Sanjeev K. Mehra............... 38 Director J.A. Heidi Roizen.............. 39 Director Joseph S. Tibbetts, Jr......... 44 Director
DOUGLAS J. BURGUM has served as President of the Company since March 1984, Chief Executive Officer since September 1991 and Chairman of the Board since January 1996. Mr. Burgum was an early investor in the Company, and he initially served as Vice President and a director from March 1983 to March 1984. Before joining the Company, Mr. Burgum was a management consultant in the Chicago office of McKinsey & Company, Inc. Mr. Burgum holds a B.U.S. from North Dakota State University and an M.B.A. from the Stanford University Graduate School of Business. RAYMOND A. AUGUST has served as Chief Technology Officer and Group Vice President, Dynamics C/S+ since June 1996. Previously, he served as Chief Technology Officer and Vice President of Product Strategy from June 1995 to June 1996 and Vice President of Product Development from June 1993 to June 1995. Prior to joining the Company in October 1992, Mr. August was a Senior Manager in the Management Consulting Service Practice of Price Waterhouse LLP in New Jersey and New York. He holds a B.S. in Accounting and Computer Science from the University of South Carolina. Mr. August is a Certified Public Accountant. TERRI F. ZIMMERMAN has served as Chief Financial Officer since February 1997 and Group Vice President since June 1996. Previously, she held the position of Vice President of Finance and Operations from June 1995 to June 1996. Ms. Zimmerman joined the Company as Director of Finance in September 1994. She was previously employed by Deloitte & Touche LLP in Minneapolis as a Senior Manager. Ms. Zimmerman holds a B.A. in Business Administration from the University of North Dakota. Ms. Zimmerman is a Certified Public Accountant. MICHAEL J. OLSEN has served as Group Vice President, Corporate Communications, since June 1996. Mr. Olsen served as Vice President of Corporate Communications from September 1995 to June 1996. From 1994 to 1995, Mr. Olsen was Senior Vice President of Himle Horner, Inc., a Minneapolis-based public relations agency. From 1987 to 1994, he was Vice President of Corporate Communications for National Car Rental System, an international car rental company. Prior to such time, he served in various Senior Public Affairs positions in Washington, D.C. Mr. Olsen holds a B.A. in Speech and Drama from North Dakota State University. 40 STEVEN K. SYDNESS has served as Group Vice President, Dynamics since June 1996. Mr. Sydness served as Vice President of Business Development from June 1995 to June 1996, Vice President of Sales from June 1994 to June 1995 and Vice President of Strategic Planning from June 1993 to June 1994. From February to November of 1992, Mr. Sydness took a leave of absence from the Company during which he was a candidate for the United States Senate. Prior to joining Great Plains Software in January 1987, he was employed by Dr. Henry Kissinger Associates and the management consulting firm McKinsey & Company, Inc. in their New York and Tokyo offices. Mr. Sydness holds a B.A. from Principia College and an M.B.A. from Harvard Business School. JODI A. UECKER-RUST has served as Group Vice President, Heritage Products since June 1996. Ms. Uecker-Rust was Vice President of Employee Services from June 1995 to June 1996, Vice President of Operations, and later Vice President of Operations and Administration from July 1993 to June 1995 and Director of Operations from October 1990 to July 1993. Ms. Uecker-Rust joined the Company in 1984 after being employed by Honeywell Inc. in Minneapolis. She holds a B.S. in Industrial Engineering from North Dakota State University. BRIAN R. CAREY has served as Vice President of Business Development since July 1996. Mr. Carey was Vice President of Product Development from June 1995 to June 1996. He was General Manager and later Vice President and General Manager of the Small Business Systems Unit of the Company from August 1992 to June 1995. Mr. Carey joined the Company in June 1989. Before such time, he was employed by First Interstate Bancorp, where he was Senior Vice President and Manager of the Retail Banking Division. Previously, Mr. Carey was employed by Xerox Corporation in Minneapolis as a Sales Executive. He holds a B.S. in Marketing from Moorhead State University. MICHAEL A. SLETTE has served as Vice President of Human Resources and Legal Affairs since June 1996. Mr. Slette was Vice President of Business Development and Legal Affairs from June 1995 to June 1996 and Vice President of Finance from June 1988 to June 1995. Mr. Slette joined the Company in 1982 and, prior to such time, was employed by the Minneapolis-based accounting firm Adrian S. Helgeson & Co. He holds a B.A. in Business Administration and Accounting from Concordia College. Mr. Slette is a Certified Public Accountant. BRADLEY J. BURGUM has served as a director of the Company since 1984 and as Secretary since January 1996. Mr. Burgum has practiced law in Casselton, North Dakota for 19 years and is currently a shareholder and President of the Burgum & Irby Law Firm, P.C. He has served on the Board of Directors for the Arthur Companies, Inc., a privately-held diversified agribusiness corporation, since 1974. Mr. Burgum holds a B.S. in Business Economics from North Dakota State University and a J.D. from the University of North Dakota School of Law. Mr. Burgum is a Certified Public Accountant. FREDERICK W. BURGUM has served as a director of the Company since 1988. Mr. Burgum has been Chairman of the Board of the Arthur Companies, Inc. since 1984 and has served as its Chief Executive Officer since June 1992. He has served as Senior Vice President and a director of the First State Bank of North Dakota since 1972. Mr. Burgum is a veteran of the United States Army and holds a B.Ph. from the University of North Dakota. WILLIAM V. CAMPBELL has served as a director of the Company since March 1997. Mr. Campbell has been the President and Chief Executive Officer of Intuit Inc. since April 1994. Prior to joining Intuit Inc., Mr. Campbell was President and Chief Executive Officer of GO Corporation, a pen-based computing software company, from January 1991 to December 1993. He was the founder, President and Chief Executive Officer of Claris Corporation, a software subsidiary of Apple Computer, from 1987 to January 1991. Mr. Campbell has also held senior executive positions at Apple Computer and senior management positions at Kodak and J. Walter Thompson, an advertising agency in New York. Mr. Campbell also serves on the Board of Directors of SanDisk, Inc. Mr. Campbell holds both a B.S. and a M.S. in Economics from Columbia University. He is presently a director of the National Football Foundation and Hall of Fame. 41 RAYMOND F. GOOD has served as a director of the Company since 1988. He is an independent executive consultant and a director of the Astrocom Corporation, a publicly-held company based in Minneapolis. From 1986 to 1992, he was a partner of Regis McKenna. Mr. Good has also served as Vice President of Marketing Strategy for Control Data Corporation, President of Heinz USA, Chief Executive Officer of The Pillsbury Consumer Group, and Chairman of the Board and Chief Executive Officer of Munsingwear, Inc. Earlier in his career, he served as a management consultant in the New York office of McKinsey & Company, Inc. Mr. Good is a veteran of the United States Marine Corps. He holds a B.S. from the University of Connecticut and an M.B.A. from Harvard Business School. SANJEEV K. MEHRA has served as a director of the Company since June 1994. He is a Managing Director in the Principal Investment Area of Goldman, Sachs & Co. and serves on the Boards of Directors of several privately-held companies. Prior to joining Goldman, Sachs & Co. in 1986, he was a Research Analyst at McKinsey & Company, Inc. from 1982 to 1984. Mr. Mehra holds a B.A. from Harvard University and an M.B.A. from Harvard Business School. J.A. HEIDI ROIZEN has served as a director of the Company since February 1997. Previously, she served as Vice President of World Wide Developer Relations for Apple Computer from 1996 to 1997 and as Chief Executive Officer of T/Maker Company from 1983 to 1996. Ms. Roizen was a member of the Board of Directors of the Software Publishers Association from 1987 to 1994 and served as President of the association from 1988 to 1990. She is a member of the Stanford University Board of Trustees Nominating Committee and a Public Governor of the Pacific Stock Exchange. Ms. Roizen holds a B.A. in English from Stanford University and an M.B.A. from the Stanford Graduate School of Business. JOSEPH S. TIBBETTS, JR. has served as a director of the Company since October 1996. He has served as Vice President, Finance and Administration, Chief Financial Officer and Treasurer of SeaChange International, Inc., a publicly-held company based in Maynard, Massachusetts, from June 1996 to the present. From November 1976 to June 1996, Mr. Tibbetts was employed as a Certified Public Accountant by Price Waterhouse LLP. He became a Partner of the firm in 1986 and the National Director of its Software Services Group in 1991. Mr. Tibbetts holds a B.S. in Business Administration from the University of New Hampshire and is a graduate of the Stanford Business School Executive Program for Growing Companies. Douglas J. Burgum and Bradley J. Burgum are brothers, and Frederick W. Burgum is their cousin. CLASSES OF DIRECTORS Following this offering, the Board of Directors will be divided into three classes, each of whose members will serve for a staggered three-year term. Messrs. Good and Tibbetts and Ms. Roizen will serve in the class whose term expires in 1997; Messrs. Bradley J. Burgum, Campbell and Mehra will serve in the class whose term expires in 1998; and Messrs. Douglas J. Burgum and Frederick W. Burgum will serve in the class whose term expires in 1999. Upon the expiration of the term of a class of directors, directors in such class will be elected for three-year terms at the annual meeting of shareholders in the year in which such term expires. EXECUTIVE OFFICERS Executive officers of the Company are elected by the Board of Directors on an annual basis and serve until the next annual meeting of the Board of Directors and until their successors have been duly elected and qualified. BOARD COMMITTEES The Company's Board of Directors has established an Audit Committee and a Compensation Committee. The Audit Committee is responsible for nominating the Company's independent accountants for approval by the Board of Directors, reviewing the scope, results and costs of the audit with the Company's independent accountants and reviewing the financial statements of the Company. 42 Messrs. Bradley Burgum (Chairman), Good and Mehra are currently the members of the Audit Committee. The Compensation Committee is responsible for recommending compensation and benefits for the executive officers of the Company to the Board of Directors and for administering the Company's stock plans. Messrs. Good (Chairman), Frederick Burgum and Mehra are currently the members of the Compensation Committee. LIMITATION OF LIABILITY The Company's Amended and Restated Articles of Incorporation (the "Restated Articles") limit the liability of directors in their capacity as directors to the full extent permitted by Minnesota law. Under the Restated Articles and the Minnesota Business Corporation Act, a director of the Company is not liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except (i) for any breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for dividends, stock repurchases and other distributions made in violation of Minnesota law or for violations of the Minnesota securities laws, (iv) for any transaction from which the director derived an improper personal benefit or (v) for any act or omission occurring prior to the effective date of the provision in the Restated Articles limiting such liability. These provisions do not affect the availability of equitable remedies, such as an action to enjoin or rescind a transaction involving a breach of fiduciary duty, although, as a practical matter, equitable relief may not be available. Also, the provisions do not limit the liability of the directors for violations of, or relieve them from the necessity of complying with, the federal securities law. DIRECTOR COMPENSATION Each non-employee director of the Company will receive $1,000 for each meeting of the Board of Directors and $500 for each committee meeting attended and an annual $6,000 retainer paid in quarterly installments. The Company also reimburses non-employee directors for expenses incurred in attending Board meetings. Non-employee directors of the Company will receive stock options under the Company's Outside Directors' Stock Option Plan (the "Directors' Plan"), which will become effective upon consummation of this offering. The Directors' Plan provides that each non-employee director will receive an automatic grant of a nonqualified stock option to purchase 15,000 shares of Common Stock upon initial election to the Board of Directors (vesting in three equal installments on each of the three 12-month anniversaries following the date of grant). In addition, each current non-employee director holding office upon completion of this offering will receive a nonqualified stock option to purchase 3,000 shares (vesting on the 12-month anniversary following the date of grant). An option to purchase 4,000 shares of Common Stock will be granted to each incumbent non-employee director on the date of each annual shareholder meeting beginning with the 1997 annual meeting (vesting in two equal installments on each of the one-month and 12-month anniversaries following the date of grant). Options granted under the Directors' Plan expire five years from the date of grant. The option price for options granted under the Directors' Plan is equal to the fair market value of a share of Common Stock as of the date of grant. The Company has reserved a total of 150,000 shares of Common Stock for issuance under the Directors' Plan, all of which shares are currently available for future grant. On October 29, 1996, the Company granted Joseph S. Tibbetts, Jr. a nonqualified stock option to purchase 20,000 shares of Common Stock. The exercise price of the option granted to Mr. Tibbetts is $6.41 per share, and such option vests in five equal installments on each of the five 12-month anniversaries following the date of grant and expires six years from the date of grant. On February 27, 1997 and March 4, 1997, the Company granted a nonqualified option to purchase 15,000 shares of Common Stock to each of J.A. Heidi Roizen and William V. Campbell, respectively. The exercise price of the options granted to Ms. Roizen and Mr. Campbell will be the initial public offering price of the shares offered hereby. Each such option vests in three equal installments on each of the 12-month anniversaries following the date of grant and expires five years from the date of grant. None of the options granted to Messrs. Tibbetts and Campbell and Ms. Roizen were issued under the Directors' Plan. 43 EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid for services rendered to the Company in all capacities during the year ended May 31, 1996 by (i) the Company's Chief Executive Officer and (ii) the five most highly compensated other executive officers who received annual compensation in excess of $100,000 (together, with the Company's Chief Executive Officer, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------- ANNUAL COMPENSATION SHARES ---------------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS OTHER(1) OPTIONS COMPENSATION(2) - ------------------------------------------ --------- --------- ---------- ------------- --------------- Douglas J. Burgum, Chairman of the Board, President and Chief Executive Officer............. $ 240,000 $ 20,000 -- -- $ 5,600 Raymond A. August, Chief Technology Officer and Group Vice President.................... 180,000 5,000 -- 13,333 2,157 Terri F. Zimmerman, Chief Financial Officer, Group Vice President and Treasurer............................... 115,000 5,000 -- 26,667 13,044 Brian R. Carey, Vice President.......................... 115,000 6,400 -- 13,333 1,617 Steven K. Sydness, Group Vice President.................... 103,000 3,920 -- -- 13,389 Robin Pederson, Former Senior Vice President, Sales and Marketing(3)............................ 172,000 77,156 $ 43,844 266,667 7,866
- -------------- (1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), other compensation in the form of perquisites and other personal benefits has been omitted for each of the Named Executive Officers (except Mr. Pederson), because the aggregate amount of such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total of annual salary and bonuses for each of such Named Executive Officers in fiscal 1996. (2) Such amounts include contributions made by the Company to its 401(k) Profit Sharing Plan on behalf of the Named Executive Officers indicated in the following amounts: Mr. Burgum, $2,800, Mr. August, $2,157; Ms. Zimmerman, $2,044; Mr. Carey, $1,617; Mr. Sydness, $2,389; and Mr. Pederson, $3,819. Such amounts also include the Company's payment of membership fees on behalf of the Named Executive Officers indicated in the following amounts: Mr. Burgum, $2,800; Ms. Zimmerman, $11,000; Mr. Sydness, $11,000; and Mr. Pederson, $4,047. (3) Mr. Pederson served as the Company's Senior Vice President, Sales and Marketing from June 1995 until March 1996. The amount of other annual compensation for Mr. Pederson represents relocation expenses. Of the options to acquire 266,667 shares granted to Mr. Pederson, options relating to 266,654 shares expired upon Mr. Pederson's resignation of employment with the Company in March 1996. 44 OPTION GRANTS The following table summarizes options granted during the year ended May 31, 1996 to the Named Executive Officers: OPTION GRANTS DURING YEAR ENDED MAY 31, 1996
POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED OPTIONS ANNUAL RATES OF STOCK GRANTED TO PRICE APPRECIATION EMPLOYEES IN EXERCISE FOR OPTION TERM(5) OPTIONS FISCAL PRICE EXPIRATION ----------------------------- NAME GRANTED(1)(2) YEAR(3) PER SHARE(4) DATE 5% 10% - ------------------------------- ------------- ------------- ------------- ------------- ------------- ------------- Douglas J. Burgum.............. -- -- -- -- -- -- Raymond A. August.............. 13,333 2.2% $ 5.20 7/25/01 $ 23,569 $ 53,469 Terri F. Zimmerman............. 26,667 4.3 5.44 1/9/02 49,313 111,876 Brian R. Carey................. 13,333 2.2 5.20 7/25/01 23,569 53,469 Steven K. Sydness.............. -- -- -- -- -- -- Robin Pederson(6).............. 266,667 43.1 5.20 7/25/05 -- --
- -------------- (1) Each option represents the right to purchase one share of Common Stock. The options shown in this column are all incentive stock options granted pursuant to the Company's 1983 Incentive Stock Option Plan. The Options shown in this table, excluding options shown for Mr. Pederson (see Note 6 below), become exercisable at a rate of 20% annually over five years from the date of grant. To the extent not already exercisable, the options generally become exercisable in the event of a merger in which the Company is not the surviving corporation or a sale of substantially all of the Company's assets. (2) Subsequent to May 31, 1996, the Company granted options to purchase shares of Common Stock to the Named Executive Officers indicated in the following amounts: Mr. Burgum, 53,333 shares at an exercise price of $7.71 per share, and 50,000 shares (conditioned upon consummation of this offering) at an exercise price equal to the initial public offering price of the shares of Common Stock offered hereby; Mr. August, 13,333 shares at an exercise price of $6.41 per share; Ms. Zimmerman, 40,000 shares at an exercise price of $6.41 per share; and Mr. Sydness, 10,000 shares at an exercise price of $6.41 per share. (3) In fiscal 1996, the Company granted employees options to purchase an aggregate of 619,333 shares of Common Stock. (4) The exercise price may be paid in cash or in shares of Common Stock with a market value equal to the exercise price. (5) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Commission and do not represent the Company's estimate or projection of the Company's future Common Stock prices. These amounts represent certain assumed rates of appreciation in the value of the Company's Common Stock from the fair value on the date of grant. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock and overall stock market conditions. The amounts reflected in the table may not necessarily be achieved. (6) Of the options to acquire 266,667 shares granted to Mr. Pederson, options to acquire 266,654 shares expired upon Mr. Pederson's resignation of employment with the Company in March 1996. 45 YEAR-END OPTION TABLE The following table sets forth certain information concerning options to purchase Common Stock exercised by the Named Executive Officers during fiscal 1996 and the number and value of unexercised stock options held by each of the Named Executive Officers as of May 31, 1996. YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT YEAR-END(2) AT YEAR-END(1) SHARES VALUE ---------------------------- ---------------------------- NAME ACQUIRED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------ ----------- --------- ------------ -------------- ------------ -------------- Douglas J. Burgum............. -- -- 120,000 -- $ 535,050 -- Raymond A. August............. -- -- 34,667 45,333 127,930 $ 128,220 Terri F. Zimmerman............ -- -- 5,333 48,000 12,000 74,000 Brian R. Carey................ 4,000 $ 12,000 5,333 42,667 12,000 96,150 Steven K. Sydness............. -- -- 26,667 26,667 104,175 60,000 Robin Pederson................ 13 16 -- -- -- --
- -------------- (1) There was no public trading market for the Common Stock as of May 31, 1996. Accordingly, as permitted by the rules of the Commission, these values have been calculated on the basis of the fair market value of the Company's Common Stock as of May 31, 1996, as determined by the Board of Directors, less the applicable exercise price. (2) Does not include options to purchase Common Stock granted to Named Executive Officers after May 31, 1996. See "--Option Grants." EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Douglas J. Burgum and Raymond A. August, each of which expires on June 1, 1997. If neither the Company nor Mr. August inform the other party of its or his intention not to extend Mr. August's employment contract before April 30, 1997, the term of the employment agreement will be extended to June 1, 1999. The Company's employment agreement with Mr. Burgum provides that he will serve as Chief Executive Officer of the Company. The Company, at the discretion of its Board of Directors, may provide Mr. Burgum with an annual raise and/or bonus consistent with the Company's practices and subject to Mr. Burgum's performance. Mr. Burgum's current base salary is $252,000. Mr. Burgum is eligible to participate, subject to certain limitations, in the Company's benefit plans for salaried executives. Under the employment agreement, the Board of Directors may terminate Mr. Burgum's employment for cause (as defined in the employment agreement). The employment agreement provides that the Company may terminate Mr. Burgum's employment at any time without cause provided it continues to pay Mr. Burgum's compensation until the later of one year from such termination or June 1, 1997. In addition, the employment agreement also contains nonsolicitation and intellectual property assignment and confidentiality provisions. The Company's employment agreement with Mr. August provides that he will serve as Chief Technology Officer of the Company. The Company's Chief Executive Officer may provide Mr. August with an annual raise and/or bonus consistent with the Company practices and subject to Mr. August's performance. Mr. August's current base salary is $200,000. Mr. August is eligible to participate in the Company's benefit plans for salaried executives. Under the employment agreement, the Company may terminate Mr. August's employment, upon a decision of its Chief Executive Officer, for cause (as defined 46 in the employment agreement). The employment agreement provides that the Company may terminate Mr. August's employment at any time without cause provided it continues to pay, for a two-year period from such termination, Mr. August's annual base compensation, reduced by any income earned by Mr. August from any other source (other than investment income or expense reimbursements) during such two-year period. In addition, the employment agreement also contains noncompetition, nonsolicitation and intellectual property assignment and confidentiality provisions. The Company has an agreement with Ms. Zimmerman pursuant to which she will receive a severance payment equal to her annual base salary in the event her employment with the Company is terminated following a change in control of the Company. Such severance payment will be reduced by any income earned by Ms. Zimmerman from any other source (other than investment income or expense reimbursements) during such one-year period. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the Compensation Committee of the Company's Board of Directors are Messrs. Frederick Burgum, Good and Mehra. There are no compensation committee interlocks which are required to be disclosed by the rules promulgated by the Commission under the Securities Act. BENEFIT PLANS 1997 STOCK INCENTIVE PLAN The Company's 1997 Stock Incentive Plan (the "1997 Incentive Plan") provides for the granting of (a) stock options, including "incentive stock options" ("Incentive Stock Options") meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and stock options that do not meet such requirements ("Nonqualified Stock Options"), (b) stock appreciation rights ("SARs"), (c) restricted stock and restricted stock units, (d) performance awards, (e) dividend equivalents and (f) other stock-based awards. The Company has reserved 1,000,000 shares of Common Stock for issuance under the 1997 Incentive Plan. The 1997 Incentive Plan is administered by the Compensation Committee of the Company's Board of Directors (the "Committee"). The Committee has the authority to establish rules for the administration of the 1997 Incentive Plan; to select the key employees to whom awards are granted; to determine the types of awards to be granted and the number of shares of Common Stock covered by such awards; and to set the terms and conditions of such awards. The Committee may also determine whether the payment of any amounts received under any award shall or may be deferred and may authorize payments representing cash dividends in connection with any deferred award of shares of Common Stock. Awards may provide that upon the grant or exercise thereof the holder will receive shares of Common Stock, cash or any combination thereof, as the Committee shall determine. In order to meet the requirements of Section 162(m) of the Code, the 1997 Incentive Plan contains a limitation on the number of options that may be granted to any single optionee in any one calendar year. The exercise price per share under any stock option or the grant price of any SAR cannot be less than 100% of the fair market value of the Company's Common Stock on the date of the grant of such option or SAR. Options may be exercised by payment in full of the exercise price, either in cash or, at the discretion of the Committee, in whole or in part by the tendering of shares of Common Stock or other consideration having a fair market value on the date the option is exercised equal to the exercise price. Determinations of fair market value under the 1997 Incentive Plan are made in accordance with methods and procedures established by the Committee. The holder of an SAR is entitled to receive the excess of the fair market value (calculated as of the exercise date or, if the Committee shall so determine, as of any time during a specified period before or after the exercise date) of a specified number of shares over the grant price of the SAR. 47 The holder of restricted stock may have all of the rights of a shareholder of the Company, including the right to vote the shares subject to the restricted stock award and to receive any dividends with respect thereto, or such rights may be restricted. Restricted stock may not be transferred by the holder until the restrictions established by the Committee lapse. Holders of restricted stock units have the right, subject to any restrictions imposed by the Committee, to receive shares of Common Stock (or a cash payment equal to the fair market value of such shares) at some future date. Upon termination of the holder's employment during the restriction period, restricted stock and restricted stock units shall be forfeited, unless the Committee determines otherwise. If any shares of Common Stock subject to any award or to which an award relates are not purchased or are forfeited, or if any such award terminates without the delivery of shares or other consideration, the shares previously used for such awards become available for future awards under the 1997 Incentive Plan. Except as otherwise provided under procedures adopted by the Committee to avoid double counting with respect to awards granted in tandem with or in substitution for other awards, all shares relating to awards granted are counted against the aggregate number of shares available for granting awards under the 1997 Incentive Plan. The Board of Directors may amend, alter or discontinue the 1997 Incentive Plan at any time, provided that shareholder approval must be obtained for any change that absent such shareholder approval, (i) would violate any rules or regulations of the National Association of Securities Dealers, Inc. or any securities exchange applicable to the Company, or (ii) would cause the Company to be unable, under the Code, to grant Incentive Stock Options under the 1997 Incentive Plan. Under the 1997 Incentive Plan, the Committee may permit participants receiving or exercising awards, subject to the discretion of the Committee and upon such terms and conditions as it may impose, to surrender shares of Common Stock (either shares received upon the receipt or exercise of the award or shares previously owned by the optionee) to the Company to satisfy federal and state withholding tax obligations. In addition, the Committee may grant, subject to its discretion and such rules as it may adopt, a bonus to a participant in order to provide funds to pay all or a portion of federal and state taxes due as a result of the receipt or exercise of (or lapse of restrictions relating to) an award. On February 27, 1997, an option to purchase 50,000 shares at an exercise price equal to the initial public offering price of the shares offered hereby was granted under the 1997 Incentive Plan to Douglas J. Burgum, conditioned upon consummation of this offering. See "Management--Executive Compensation--Option Grants." Except for such option, no options or other awards have been granted under the 1997 Incentive Plan. 1983 STOCK OPTION PLAN The Company's 1983 Incentive Stock Option Plan, as amended (the "1983 Stock Option Plan"), provides for the grant of options to purchase shares of Common Stock to any full or part-time employee of the Company. Options granted under the 1983 Stock Option Plan may qualify as Incentive Stock Options or may be Nonqualified Stock Options. In connection with the adoption of the Company's 1997 Incentive Plan, the Company will cease granting options under the 1983 Stock Option Plan after consummation of the offering made hereby; however, all stock options granted prior to adoption of the 1997 Incentive Plan remain outstanding in accordance with the 1983 Stock Option Plan. See "--1997 Incentive Plan." The 1983 Stock Option Plan is administered by the Board of Directors or the Committee. The Board or the Committee has the discretion to select the optionees and to establish the terms and conditions of each stock option. The exercise price of an option granted under the 1983 Stock Option Plan must not be less than the fair market value of the Common Stock on the date the option is granted, except that, for a proposed optionee who owns more than 10% of the Company's Common Stock, any Incentive Stock Option granted to such optionee must have an exercise price not less than 110% of the then fair market value. The term of each option is determined by the Board or the Committee, but may not exceed 10 years from the date of grant (or, in the case of an Incentive Stock Option granted to an 48 owner of more than 10% of the Common Stock, five years). The 1983 Stock Option Plan is subject to amendment by the Board of Directors, subject to the restriction that the Board of Directors may not increase the number of shares which may be issued under the 1983 Stock Option Plan, decrease the minimum exercise price of options granted under the 1983 Stock Option Plan, or extend the maximum option term or the term of the 1983 Stock Option Plan, without the approval of the shareholders of the Company. As of February 21, 1997, options to purchase an aggregate of 1,027,800 shares of Common Stock, with a weighted average exercise price of $4.92 per share were outstanding under the 1983 Stock Option Plan. On February 27, 1997, options to purchase an aggregate of 62,020 shares at an exercise price equal to the initial public offering price of the shares offered hereby, were granted under the 1983 Stock Option Plan to employees of the Company, conditioned upon consummation of this offering. EMPLOYEE STOCK PURCHASE PLAN The Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan") will become effective upon consummation of this offering and is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. The Stock Purchase Plan covers an aggregate of 400,000 shares of Common Stock. In order to participate in the Stock Purchase Plan, employees must meet certain eligibility requirements. Participating employees will be able to direct the Company to make payroll deductions of up to 10% of their compensation during a purchase period for the purchase of shares of Common Stock. Each purchase period, with the exception of the initial offering period, will be six months. The Stock Purchase Plan will provide participating employees with the right, subject to certain limitations, to purchase the Company's Common Stock at a price equal to 85% of the lesser of the fair market value of the Company's Common Stock on the first day or the last day of the applicable purchase period, except that the price on the first day of the initial purchase period will be the initial public offering price of the shares of the Common Stock offered hereby. The Stock Purchase Plan will terminate on such date as the Board of Directors may determine, or automatically as of the date on which all of the shares of Common Stock the Company has reserved for purchase under the Stock Purchase Plan have been sold. 401(k) PLAN Effective July 1, 1986, the Company established a 401(k) Profit Sharing Plan (the "401(k) Plan"). The 401(k) Plan covers employees of the Company who have reached the age of 18 and have completed six months and 1,000 hours of service. Eligible employees may begin salary deferrals on the first day following satisfaction of the eligibility requirements, and become eligible to participate in the 401(k) Plan on the next January 1, April 1, July 1 or October 1 thereafter. Pursuant to the 401(k) Plan, participants may elect to reduce their current compensation by up to the lesser of 18% of eligible compensation or the statutorily prescribed annual limit ($9,500 in 1997), and have the amount of such reduction (the "Employee Contribution") contributed to the 401(k) Plan. The trustee under the 401(k) Plan, at the direction of each participant, invests the Employee Contribution in any of six designated investment options. The 401(k) Plan is intended to qualify under Section 401 of the Code. As a result, Employee Contributions to the 401(k) Plan and income earned on all plan contributions are not taxable to employees until withdrawn, and the Employee Contributions are deductible by the Company for federal income tax purposes. The Company may make regular annual contributions ("Regular Contributions") to the 401(k) Plan's trust fund to be invested solely in Common Stock of the Company as determined by the Board of Directors. The Company will also make matching contributions ("Matching Contributions") in an amount equal to 25% of the first 8% of each participant's annual contribution to the 401(k) Plan. Participants are 100% vested in Employee Contributions and Matching Contributions to the 401(k) Plan. The Company's Regular Contributions to the 401(k) Plan vest over five years at a rate of 20% for each year of service. A total of $280,488 in Regular Contributions and Matching Contributions were made by the Company to the 401(k) Plan during the year ended December 31, 1996. 49 CERTAIN TRANSACTIONS Since June 1994, the Company has issued in financing transactions shares of Series B Preferred Stock as follows: in June 1994, the Company issued to certain investment partnerships, of which The Goldman Sachs Group, L.P. are the general partner or managing general partner (collectively, the "GS Partnerships"), 888,576 shares of Series B Preferred Stock at a price of $7.09 per share and a warrant to purchase an additional 752,234 shares of Series B Preferred Stock at a price of $5.32 per share (the "Warrant"); in September 1994, Company issued to the GS Partnerships 282,088 shares of Series B Preferred Stock at a price of $7.09 per share; and in May 1995, the Company issued to the GS Partnerships an additional 174,556 shares of Series B Preferred Stock in exchange for the Warrant. See "Principal Shareholders." The Series B Preferred Stock will convert into an aggregate of 1,793,627 shares of Common Stock upon the consummation of this offering. Pursuant to a Registration Rights Agreement entered into in June 1994 in connection with the sale of Series B Preferred Stock to the GS Partnerships in June 1994 (the "Series B Preferred Stock Financing"), the Company granted the GS Partnerships certain rights to cause the Company to register for sale shares of Common Stock acquired upon conversion of the Series B Preferred Stock. See "Shares Eligible for Future Sale." Pursuant to a Stockholders' Agreement (the "Stockholders' Agreement") entered into in June 1994 in connection with the Series B Preferred Stock Financing, the GS Partnerships have the right to designate one member of the Board of Directors of the Company for so long as the GS Partnerships and its affiliates (including Goldman, Sachs & Co.) own at least 25% of the outstanding shares of Series B Preferred Stock. Pursuant to the Stockholders' Agreement, Sanjeev K. Mehra, a Managing Director in the Principal Investment Area of Goldman, Sachs & Co., an affiliate of the GS Partnerships, serves as one of the Company's directors. In addition, pursuant to the Stockholders' Agreement, the Company agreed that, so long as the GS Partnerships beneficially own 5% or more of the outstanding shares of Series B Preferred Stock, the Company shall, if the Board of Directors of the Company determines that it is in the Company's best interests, endeavor to retain Goldman, Sachs & Co. or an affiliate to perform all financial advisory and investment banking services for the Company for which an investment banking firm is retained, on customary terms and consistent with an arms' length transaction. The foregoing provisions of the Stockholders' Agreement will terminate upon the consummation of this offering. Goldman, Sachs & Co. has entered into an agreement with the Company pursuant to which it has provided from time to time, and expects to provide in the future, investment banking services to the Company for customary fees and commissions. In June 1994, the Company issued to the Arthur Companies, Inc. ("Arthur"), the holder of a majority of the outstanding shares of Common Stock of the Company at such time, 225,000 shares of Series A Preferred Stock at a price of $1.00 per share. Frederick W. Burgum and Bradley J. Burgum, directors of the Company, are principal shareholders and directors of Arthur, and Mr. Frederick W. Burgum is Chairman of the Board and Chief Executive Officer of Arthur. Following the sale of the 225,000 shares of Series A Preferred Stock by the Company to Arthur, all of such shares were transferred to Douglas J. Burgum in exchange for his entire equity interest in Arthur. The Series A Preferred Stock will convert into an aggregate of 54,000 shares of Common Stock upon the consummation of this offering. Frederick W. Burgum owns land outside of Fargo in Barnes Township, North Dakota. The Company, in connection with its evaluation of potential sites for the construction of its planned future operational facility, is considering purchasing or leasing a portion of such property from Mr. Burgum. Any such purchase or lease would be entered into on an arms' length basis. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pursuant to an agreement between the Company and two trusts with respect to which Frederick W. Burgum acts as trustee, the Company made total lease payments of $70,740 to the trusts for 50 50 notebook computers in each of fiscal 1994, 1995 and 1996. The lease agreement relating to the computers expires in March 1997. Raymond F. Good, a director of the Company, was paid a total of $104,700, $53,900 and $36,800 (plus reimbursement of expenses) in fiscal 1994, 1995 and 1996, respectively, pursuant to consulting agreements with the Company. Mr. Good and the Company entered into a new one-year consulting agreement in February 1997. The consulting agreement provides that Mr. Good will receive a fee of $125 per hour for up to 40 hours of consulting services provided to the Company per month. In 1996, Mr. Good exercised an option to purchase 29,333 shares of Common Stock at an exercise price of $1.95 per share. In June 1993, the Company loaned $1.0 million to Arthur at an interest rate of 5% per annum. The entire balance of this loan was repaid in two installments of $800,000 and $200,000 in August 1993 and September 1993, respectively, together with aggregate accrued interest of $13,030. In June 1994, Arthur loaned $1.5 million to the Company at an interest rate of 7.5% per annum. The entire balance of this loan was repaid in June 1994, together with accrued interest of $5,000. During fiscal 1994 and 1995, the Company had loans outstanding from Douglas J. Burgum, Bradley J. Burgum, Frederick W. Burgum and Katherine K. Burgum (a director of the Company at such time) in the principal amounts of $125,000, $125,000, $125,000 and $565,000, respectively. The interest rates on these loans ranged from 7.25% to 8.5% per annum. The loans were repaid prior to the end of fiscal 1995. During fiscal 1994 and 1995, Messrs. Douglas J. Burgum, Bradley J. Burgum and Frederick W. Burgum and Ms. Burgum received total interest payments from the Company with respect to these loans of $16,500, $16,500, $16,500 and $77,381, respectively. 51 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of February 21, 1997 (after giving effect to the conversion of the outstanding shares of Preferred Stock into Common Stock upon the closing of the offering made hereby and as adjusted for the sale of the shares of Common Stock offered hereby) by (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each director and Named Executive Officer of the Company and (iii) all directors and executive officers of the Company as a group.
PERCENTAGE OF OUTSTANDING SHARES -------------------------- NUMBER OF SHARES BEFORE AFTER BENEFICIALLY OWNED(1) OFFERING OFFERING --------------------- ------------ ------------ Frederick W. Burgum(2)............................................... 2,448,168 25.1% 19.2% Douglas J. Burgum(3)................................................. 1,935,171 19.8 15.2 The Goldman Sachs Group, L.P. and related investors(4)............... 1,793,627 18.4 14.0 Bradley J. Burgum(5)................................................. 534,126 5.5 4.2 Julie W. Barner(6)................................................... 508,576 5.2 4.0 Barbara K. Burgum.................................................... 465,385 4.8 3.6 Raymond A. August(7)................................................. 73,501 * * Steven K. Sydness.................................................... 73,333 * * Raymond F. Good...................................................... 36,000 * * Brian R. Carey(8).................................................... 32,000 * * Terri F. Zimmerman(9)................................................ 25,333 * * Robin Pederson....................................................... 13 * * William V. Campbell.................................................. -- -- -- Sanjeev K. Mehra(10)................................................. -- -- -- J. A. Heidi Roizen................................................... -- -- -- Joseph S. Tibbetts, Jr............................................... -- -- -- All directors and executive officers as a group (14 persons)......... 5,348,368 54.3 41.6
- ---------------- * Less than 1% (1) Beneficial ownership is determined in accordance with rules of the Commission, and includes generally voting power and/or investment power with respect to securities. Shares of Common Stock subject to options currently exercisable or exercisable within 60 days of the date hereof ("Currently Exercisable Options") are deemed outstanding for computing the percentage beneficially owned by the person holding such options but are not deemed outstanding for computing the percentage beneficially owned by any other person. Except as indicated by footnote, the Company believes that the persons named in this table, based on information provided by such persons, have sole voting and investment power with respect to the shares of Common Stock indicated. (2) Includes shares held by certain members of Frederick W. Burgum's household that are beneficially owned by Mr. Burgum. His address is 1701 S.W. 38th Street, Fargo, North Dakota 58103. (3) Includes shares held by certain members of Douglas J. Burgum's household that are beneficially owned by Mr. Burgum. His address is 1701 S.W. 38th Street, Fargo, North Dakota 58103. (4) Represents shares owned by certain investment partnerships, of which affiliates of the GS Partnerships are the general partner or managing general partner. Includes 1,577,523 shares held of record by GS Capital Partners, L.P.; 109,900 shares held of record by Bridge Street Fund 1994, L.P.; and 106,204 shares held of record by Stone Street Fund 1994, L.P. The GS Partnerships disclaim beneficial ownership of the shares owned by such investment partnerships to the extent attributable to partnership interests therein held by persons other than the GS Partnerships and its affiliates. Each of such 52 investment partnerships shares voting and investment power with certain of its respective affiliates. The address of the GS Partnerships is 85 Broad Street, New York, New York 10004. (5) Includes shares held by certain members of Bradley J. Burgum's household that are beneficially owned by Mr. Burgum. His address is 1701 S.W 38th Street, Fargo, North Dakota 58103. (6) Ms. Barner's address is 1701 S.W. 38th Street, Fargo, North Dakota 58103. (7) Includes 50,660 shares issuable pursuant to Currently Exercisable Options. (8) Includes 2,667 shares issuable pursuant to Currently Exercisable Options. (9) Includes 22,000 shares issuable pursuant to Currently Exercisable Options. (10) Does not include 1,793,627 shares held by the GS Partnerships. DESCRIPTION OF CAPITAL STOCK GENERAL Effective upon the filing of the Amended and Restated Articles of Incorporation prior to this offering, the authorized capital stock of the Company will consist of 100,000,000 shares of Common Stock, $.01 par value per share, and 30,000,000 shares of preferred stock, $.01 par value per share (the "preferred stock"), which may be issued in one or more classes. COMMON STOCK As of February 21, 1997, there were 9,769,604 shares of Common Stock outstanding and held of record by 238 shareholders, assuming the conversion of all shares of the Preferred Stock into an aggregate of 1,847,627 shares of Common Stock upon the closing of the offering made hereby. Based upon the number of shares outstanding as of that date and after giving effect to the issuance of the 3,000,000 shares of Common Stock offered by the Company hereby, there will be 12,769,604 shares of Common Stock outstanding upon the closing of this offering. Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding preferred stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of the Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares offered by the Company in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which the Company may designate and issue in the future. Upon the closing of this offering, there will be no shares of preferred stock outstanding. 53 PREFERRED STOCK Upon filing of the Restated Articles, the Board of Directors will be authorized, subject to certain limitations prescribed by law, without further shareholder approval, to issue from time to time up to an aggregate of 30,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Risk Factors--Significant Shareholders; Anti-Takeover Considerations." STOCK OPTIONS As of February 21, 1997, options to purchase a total of 1,027,800 shares of Common Stock at a weighted average exercise price of $4.92 per share were outstanding under the 1983 Stock Option Plan, and a total of 1,212,020 shares were reserved for future option grants under the 1983 Stock Option Plan, the 1997 Incentive Plan and the Directors' Plan. See "Management--Director Compensation" and "-- Benefit Plans." All options granted under the 1983 Stock Option Plan, the 1997 Incentive Plan and the Directors' Plan provide for antidilution adjustments in the event of certain mergers, consolidations, reorganizations, recapitalizations, stock dividends, stock splits or other changes in the corporate structure of the Company. PROVISIONS OF THE COMPANY'S RESTATED ARTICLES AND BYLAWS AND THE MINNESOTA BUSINESS CORPORATION ACT The existence of authorized but unissued preferred stock described above, and certain provisions of the Restated Articles, the Company's Bylaws and Minnesota law described below, could have an anti-takeover effect. These provisions are intended to provide management flexibility, to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and in the policies formulated by the Board of Directors and to discourage an unsolicited takeover of the Company if the Board of Directors determines that such a takeover is not in the best interests of the Company and its shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire the Company which could deprive the Company's shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. Pursuant to the Company's Bylaws, the Board of Directors of the Company is divided into three classes serving staggered three-year terms. As a result, at least two shareholders' meetings will generally be required for shareholders to effect a change in control of the Board of Directors. In addition, the Company's Bylaws contain provisions that establish specific procedures for calling meetings of shareholders and appointing and removing members of the Board of Directors. Section 302A.673 of the Minnesota Business Corporation Act generally prohibits any business combination by the Company, or any subsidiary of the Company, with any shareholder which purchases 10% or more of the Company's voting shares (an "interested shareholder") within four years following such interested shareholder's share acquisition date, unless the business combination is approved by a committee of all of the disinterested members of the Board of Directors of the Company before the interested shareholder's share acquisition date. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock will be Norwest Bank Minnesota, National Association. 54 SHARES ELIGIBLE FOR FUTURE SALE Upon the closing of this offering, the Company will have an aggregate of 12,769,604 shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options to purchase Common Stock. Of these shares, the 3,000,000 shares sold in this offering are freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except (i) for shares purchased by Partners pursuant to the directed share program and (ii) that any shares held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144"), may generally only be sold in compliance with the limitations of Rule 144 described below. The remaining 9,769,604 shares of Common Stock are deemed "restricted securities" as defined under Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. Subject to the lock-up agreements described below and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market (subject in the case of shares held by affiliates to compliance with certain volume restrictions) as follows: (i) 680,582 shares will be available for immediate sale in the public market on the date of this Prospectus, (ii) 374,181 shares will be eligible for sale 90 days after the date of this Prospectus and (iii) 8,221,970 shares will be eligible for sale upon the expiration of lock-up agreements 180 days after the date of this Prospectus. In general, under Rule 144 as it will be in effect beginning April 29, 1997, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 127,696 shares immediately after this offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from an affiliate of the Company, such affiliates' holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. Rule 701 promulgated under the Securities Act provides that shares of Common Stock acquired pursuant to written plans such as the 1983 Stock Option Plan may be resold by persons other than affiliates, beginning 90 days after the date of this Prospectus, subject only to the manner of sale provisions of Rule 144, and by affiliates, beginning 90 days after the date of this Prospectus, subject to all provisions of Rule 144 except its one-year minimum holding period. Shortly after the date of this Prospectus, the Company intends to file a Form S-8 registration statements under the Securities Act to register all shares of Common Stock issuable under the 1983 Stock Option Plan, the 1997 Incentive Plan, the Directors' Plan and the Stock Purchase Plan (collectively, the "Stock Plans"). See "Management--Director Compensation" and "--Benefit Plans." Such registration statement is expected to become effective immediately upon filing, and shares covered by that registration statement will thereupon be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates. Prior to this offering, there has not been any public market for the Common Stock of the Company, and no prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market could 55 adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through the sale of its equity securities. All directors and officers and certain shareholders of the Company (holding an aggregate of 8,714,841 shares of Common Stock) have agreed, and all Partners purchasing directed shares in this offering will be required to agree, that they will not, without the prior written consent of the representatives of the Underwriters, sell or otherwise dispose of any shares of Common Stock or options to acquire shares of Common Stock during the 180-day period following the date of this Prospectus. See "Underwriting." The Company has agreed not to sell or otherwise dispose of any shares of Common Stock during the 180-day period following the date of the Prospectus, except the Company may issue, and grant options to purchase, shares of Common Stock under the Stock Plans. In addition, the Company may issue shares of Common Stock in connection with any acquisition of another company if the terms of such issuance provide that such Common Stock shall not be resold prior to the expiration of the 180-day period referenced in the preceding sentence. See "Risk Factors--Shares Eligible for Future Sale; Registration Rights." REGISTRATION RIGHTS Following the closing of the offering made hereby, the GS Partnerships will be entitled to certain rights with respect to the registration of the shares of Common Stock held by them under the Securities Act. See "Principal Shareholders." Under the terms of the agreement between the Company and the GS Partnerships, beginning three months after this offering, the GS Partnerships have the right, subject to certain conditions and limitations, to require the Company to file a registration statement under the Securities Act in order to register all or part of their shares of Common Stock. The Company may in certain circumstances defer such registrations and the underwriters have the right, subject to certain limitations, to limit the number of shares included in such registrations. In the event that the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders, the GS Partnerships are entitled to include their shares of Common Stock in such registration, subject to certain marketing and other limitations. Generally, the Company is required to bear the expense of all such registrations. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Hale and Dorr LLP, Boston, Massachusetts. EXPERTS The consolidated balance sheet and the related consolidated statements of operations, of stockholders' deficit and of cash flows of the Company at May 31, 1995 and 1996 and for each of the two years in the period ended May 31, 1996 included in this prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The statements of operations, of stockholders' deficit and of cash flows of the Company for the year ended May 31, 1994 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 56 GREAT PLAINS SOFTWARE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Price Waterhouse LLP............................................ F-2 Report of Ernst & Young LLP............................................... F-3 Consolidated Balance Sheets as of May 31, 1995 and 1996 and as of November 30, 1996 (unaudited).................................................... F-4 Consolidated Statement of Operations for the years ended May 31, 1994, 1995 and 1996 and for the six months ended November 30, 1995 and 1996 (unaudited)............................................................. F-5 Consolidated Statement of Stockholders' Deficit for the years ended May 31, 1994, 1995 and 1996 and for the six months ended November 30, 1996 (unaudited)............................................................. F-6 Consolidated Statement of Cash Flows for the years ended May 31, 1994, 1995 and 1996 and for the six months ended November 30, 1995 and 1996 (unaudited)............................................................. F-7 Notes to Consolidated Financial Statements................................ F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Great Plains Software, Inc. The four-for-three stock split described in Note 14 of the consolidated financial statements has not been consumated at March 4, 1997. When it has been consumated, we will be in the position to furnish the following report: "In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of Great Plains Software, Inc. and its subsidiary at May 31, 1995 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above." PRICE WATERHOUSE LLP Minneapolis, Minnesota July 19, 1996 F-2 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Great Plains Software, Inc. We have audited the accompanying statements of operations, stockholders' deficit and cash flows of Great Plains Software, Inc. for the year ended May 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations of Great Plains Software, Inc. and its cash flows for the year ended May 31, 1994. ERNST & YOUNG LLP Minneapolis, Minnesota July 22, 1994 F-3 GREAT PLAINS SOFTWARE, INC. CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1996 ---------------------------- MAY 31, PRO FORMA -------------------------- STOCKHOLDERS' 1995 1996 ACTUAL EQUITY ------------ ------------ ------------ -------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................... $ 2,891,749 $ 8,256,393 $ 8,648,022 Accounts receivable, net.................................... 5,722,292 5,263,588 4,357,640 Inventories................................................. 796,339 454,595 316,207 Prepaid expenses and other assets........................... 940,324 538,555 827,765 Deferred income taxes....................................... -- 4,150,000 3,877,000 ------------ ------------ ------------ Total current assets...................................... 10,350,704 18,663,131 18,026,634 Property and equipment, net................................... 4,976,146 5,143,075 5,627,000 Goodwill, net................................................. -- 555,051 496,624 ------------ ------------ ------------ Total assets.............................................. $ 15,326,850 $ 24,361,257 $ 24,150,258 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable............................................ $ 1,264,983 $ 1,827,509 $ 2,045,721 Accrued expenses............................................ 4,362,813 4,798,977 4,095,610 Salaries and wages payable.................................. 357,692 415,169 466,069 Commissions payable......................................... 421,587 764,514 936,861 Deferred revenue............................................ 8,027,560 9,018,094 7,774,910 Current portion of long-term debt and capital lease obligations............................................... 863,405 827,238 500,000 Income taxes payable........................................ 45,000 -- -- ------------ ------------ ------------ Total current liabilities................................. 15,343,040 17,651,501 15,819,171 Deferred income taxes......................................... -- -- 470,000 Long-term debt and capital lease obligations, less current portion..................................................... 749,757 19,652 -- ------------ ------------ ------------ Total liabilities......................................... 16,092,797 17,671,153 16,289,171 Commitments and contingencies (Note 8) Mandatorily redeemable convertible preferred stock: 10,000,000 authorized preferred shares, Series B, at redemption value of $6.17, $8.55 and $8.55, 1,345,220 shares issued and outstanding; pro forma-none outstanding..................... 8,300,007 11,501,631 11,501,631 -- Stockholders' equity (deficit): Convertible preferred stock: 10,000,000 authorized preferred shares; Series A, par value $.01, 225,000 shares issued and outstanding; pro forma-none outstanding............... 198,800 198,800 198,800 -- Pro forma preferred stock; $0.01 par value; 30,000,000 shares authorized, no shares issued or outstanding........ -- -- -- -- Common stock, par value $.01 per share: 40,000,000 shares authorized; issued and outstanding shares--7,346,552, 7,359,765 and 7,353,499, respectively: 100,000,000 shares authorized pro forma; 9,201,126 shares issued and outstanding............................................... 73,465 73,597 73,535 $ 92,011 Additional paid-in capital.................................. 4,479,782 1,273,414 1,242,980 12,924,935 Accumulated deficit......................................... (13,818,001) (6,357,338) (5,155,859) (5,155,859) ------------ ------------ ------------ -------------- Total stockholders' equity (deficit)...................... (9,065,954) (4,811,527) (3,640,544) 7,861,087 ------------ ------------ ------------ -------------- Total liabilities and stockholders' equity (deficit)...... $ 15,326,850 $ 24,361,257 $ 24,150,258 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to the consolidated financial statements. F-4 GREAT PLAINS SOFTWARE, INC. CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS YEAR ENDED MAY 31, ENDED NOVEMBER 30, ---------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Net revenues: License.......................................... $ 19,164,990 $ 25,050,021 $ 27,077,689 $ 11,849,455 $ 15,133,099 Service.......................................... 9,949,444 12,847,061 15,193,666 7,302,865 9,620,911 ------------ ------------ ------------ ------------ ------------ 29,114,434 37,897,082 42,271,355 19,152,320 24,754,010 ------------ ------------ ------------ ------------ ------------ Cost of revenues: License.......................................... 4,997,118 4,438,875 4,913,431 1,809,631 2,719,447 Service.......................................... 5,479,344 5,621,969 5,979,858 2,838,608 3,649,359 ------------ ------------ ------------ ------------ ------------ 10,476,462 10,060,844 10,893,289 4,648,239 6,368,806 ------------ ------------ ------------ ------------ ------------ Gross profit................................... 18,637,972 27,836,238 31,378,066 14,504,081 18,385,204 ------------ ------------ ------------ ------------ ------------ Operating expenses: Sales and marketing.............................. 14,331,752 14,013,041 14,477,354 6,652,837 9,714,037 Research and development......................... 10,675,811 9,308,431 8,876,114 4,257,981 4,489,347 General and administrative....................... 3,606,772 3,886,134 4,762,994 2,178,466 2,432,753 ------------ ------------ ------------ ------------ ------------ Total operating expenses....................... 28,614,335 27,207,606 28,116,462 13,089,284 16,636,137 ------------ ------------ ------------ ------------ ------------ Operating income (loss)............................ (9,976,363) 628,632 3,261,604 1,414,797 1,749,067 Interest expense................................... 274,051 290,368 197,203 84,069 32,346 Related party interest expense..................... 90,842 36,039 -- -- -- Other (income) expense, net........................ 15,938 (66,982) (297,262) (123,040) (234,758) ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes.............. (10,357,194) 369,207 3,361,663 1,453,768 1,951,479 Income tax provision (benefit)..................... (26,813) 45,000 (4,099,000) 3,000 750,000 ------------ ------------ ------------ ------------ ------------ Income (loss) before cumulative effect of change in accounting principle............... (10,330,381) 324,207 7,460,663 1,450,768 1,201,479 Cumulative effect of change in accounting principle........................................ -- (200,000) -- -- -- ------------ ------------ ------------ ------------ ------------ Net income (loss).............................. $(10,330,381) $ 124,207 $ 7,460,663 $ 1,450,768 $ 1,201,479 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Unaudited pro forma net income per share........... $ 0.77 $ 0.12 ------------ ------------ ------------ ------------ Shares used in computing unaudited pro forma net income per share................................. 9,743,969 9,840,336 ------------ ------------ ------------ ------------
See accompanying notes to the consolidated financial statements. F-5 GREAT PLAINS SOFTWARE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SERIES A PREFERRED COMMON STOCK ------------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- Balance May 31, 1993.............................. -- -- 6,769,315 $ 67,693 Exercise of stock options....................... -- -- 21,120 211 Repurchase and retirement of common stock....... -- -- (531) (5) Net loss........................................ -- -- -- -- -------------- -------------- -------------- -------------- Balance May 31, 1994.............................. -- -- 6,789,904 67,899 Exercise of stock options....................... -- -- 77,333 773 Repurchase and retirement of common stock....... -- -- (7,832) (79) Sale of common stock, less offering costs of $50,137....................................... -- -- 487,147 4,872 Sale of Series A preferred stock net of issuance costs of $26,200.............................. 225,000 $ 198,800 -- -- Increase to carrying value of mandatorily redeemable preferred stock.................... -- -- -- -- Net income...................................... -- -- -- -- -------------- -------------- -------------- -------------- Balance May 31, 1995.............................. 225,000 198,800 7,346,552 73,465 Exercise of stock options....................... -- -- 32,013 320 Repurchase and retirement of common stock....... -- -- (18,800) (188) Increase to carrying value of mandatorily redeemable preferred stock.................... -- -- -- -- Net income...................................... -- -- -- -- -------------- -------------- -------------- -------------- Balance May 31, 1996.............................. 225,000 198,800 7,359,765 73,597 Exercise of stock options (unaudited)........... -- -- 2,667 27 Repurchase and retirement of common stock (unaudited)................................... -- -- (8,933) (89) Net income (unaudited).......................... -- -- -- -- -------------- -------------- -------------- -------------- Balance November 30, 1996 (unaudited)............. 225,000 $ 198,800 7,353,499 $ 73,535 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- ADDITIONAL PAID-IN ACCUMULATED CAPITAL DEFICIT TOTAL -------------- -------------- -------------- Balance May 31, 1993.............................. $ 2,532,953 $ (3,611,827) $ (1,011,181) Exercise of stock options....................... 42,262 -- 42,473 Repurchase and retirement of common stock....... (3,609) -- (3,614) Net loss........................................ -- (10,330,381) (10,330,381) -------------- -------------- -------------- Balance May 31, 1994.............................. 2,571,606 (13,942,208) (11,302,703) Exercise of stock options....................... 136,222 -- 136,995 Repurchase and retirement of common stock....... (32,522) -- (32,601) Sale of common stock, less offering costs of $50,137....................................... 1,961,115 -- 1,965,987 Sale of Series A preferred stock net of issuance costs of $26,200.............................. -- -- 198,800 Increase to carrying value of mandatorily redeemable preferred stock.................... (156,639) -- (156,639) Net income...................................... -- 124,207 124,207 -------------- -------------- -------------- Balance May 31, 1995.............................. 4,479,782 (13,818,001) (9,065,954) Exercise of stock options....................... 73,324 -- 73,644 Repurchase and retirement of common stock....... (78,068) -- (78,256) Increase to carrying value of mandatorily redeemable preferred stock.................... (3,201,624) -- (3,201,624) Net income...................................... -- 7,460,663 7,460,663 -------------- -------------- -------------- Balance May 31, 1996.............................. 1,273,414 (6,357,338) (4,811,527) Exercise of stock options (unaudited)........... 6,772 -- 6,799 Repurchase and retirement of common stock (unaudited)................................... (37,206) -- (37,295) Net income (unaudited).......................... -- 1,201,479 1,201,479 -------------- -------------- -------------- Balance November 30, 1996 (unaudited)............. $ 1,242,980 $ (5,155,859) $ (3,640,544) -------------- -------------- -------------- -------------- -------------- --------------
See accompanying notes to the consolidated financial statements. F-6 GREAT PLAINS SOFTWARE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS YEAR ENDED MAY 31, ENDED NOVEMBER 30, -------------------------------------- ------------------------ 1994 1995 1996 1995 1996 ------------ ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net income (loss)............................... $(10,330,381) $ 124,207 $ 7,460,663 $ 1,450,768 $ 1,201,479 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Cumulative effect of change in accounting principle................................. -- 200,000 -- -- -- Depreciation and amortization............... 2,450,735 1,861,185 1,921,175 879,156 921,224 Deferred income taxes....................... -- -- (4,150,000) -- 743,000 Changes in operating assets and liabilities: Accounts receivable....................... 2,337,144 (3,666,099) 458,704 1,396,589 905,948 Inventories............................... (293,465) 9,806 341,744 122,013 138,388 Prepaid expenses and other assets......... (13,795) (540,448) 401,769 135,132 (289,210) Income tax receivable..................... (85,642) 85,642 -- -- -- Accounts payable and accrued expenses..... 3,287,789 (1,975,187) 498,690 45,738 (485,156) Salaries, wages and commissions payable... (872,782) 335,942 388,679 (175,246) 223,247 Deferred revenue.......................... 1,945,224 1,130,293 990,534 (1,198,979) (1,243,183) Income taxes payable...................... (93,359) 45,000 (45,000) (45,000) -- ------------ ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities............................ (1,668,532) (2,389,659) 8,266,958 2,610,171 2,115,737 ------------ ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment............. (1,744,262) (1,154,608) (1,990,284) (1,005,622) (1,346,723) Purchase of foreign subsidiary, net of cash..... -- -- (122,539) -- -- ------------ ----------- ----------- ----------- ----------- Net cash used by investment activities.... (1,744,262) (1,154,608) (2,112,823) (1,005,622) (1,346,723) ------------ ----------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of notes payable and long-term debt................................ 1,159,108 132,424 -- -- -- Principal payments on notes payable and long term debt..................................... (987,076) (1,560,925) (197,264) (112,455) (99,335) Net borrowings (payments) on line of credit..... 2,250,000 (2,250,000) -- -- -- Principal payments on capital lease obligations................................... (279,305) (417,475) (587,615) (210,103) (247,554) Repurchases of common stock..................... (3,614) (32,601) (78,256) (53,834) (37,295) Proceeds from the sale of preferred stock....... -- 8,342,168 -- -- -- Proceeds from issuance of common stock.......... 42,473 2,102,982 73,644 -- 6,799 ------------ ----------- ----------- ----------- ----------- Net cash (used) provided by financing activities.............................. 2,181,586 6,316,573 (789,491) (376,392) (377,385) ------------ ----------- ----------- ----------- ----------- Increase in cash.................................. (1,231,208) 2,772,306 5,364,644 1,228,157 391,629 Cash and cash equivalents at beginning of period.......................................... 1,350,651 119,443 2,891,749 2,891,749 8,256,393 ------------ ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period........ $ 119,443 $ 2,891,749 $ 8,256,393 $ 4,119,906 $ 8,648,022 ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- Schedule of noncash investing and financing activities: Property and equipment acquired under capital lease agreements.............................. $ 356,164 $ 304,805 $ 18,607 -- -- Interest paid................................... $ 360,153 $ 329,871 $ 196,675 $ 87,525 $ 47,940
See accompanying notes to the consolidated financial statements. F-7 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS INFORMATION Great Plains Software, Inc. is a leading provider of Microsoft Windows NT client/server financial management software for mid-sized businesses. Its products and services automate essential accounting functions and enhance the strategic value of financial information. The Company's products and services are sold and implemented exclusively by its network of independent sales and support organizations throughout the United States, Canada and select international markets. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION POLICY AND FOREIGN CURRENCY TRANSLATIONS The consolidated financial statements include the accounts of the Company and its subsidiary in the United Kingdom. All significant intercompany accounts and transactions have been eliminated in consolidation. The functional currency of the subsidiary has been determined to be the U.S. dollar. Therefore, all transaction gains and losses resulting from fluctuations in currency exchange rates are included in operating results. EXPORT SALES Export sales represent 10.8% and 10.4% of total revenues for the years ended May 31, 1995 and 1996 respectively. All export sales are denominated in US dollars. INTERIM FINANCIAL INFORMATION In the opinion of management, the Company has made all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition of the Company as of November 30, 1996 and the results of operations and cash flows for the six months ended November 30, 1995 and 1996, as presented in the accompanying unaudited consolidated financial statements. All data as of such date and for such periods included herein are unaudited. RECLASSIFICATIONS Certain amounts in the 1994 financial statements have been reclassified to conform with the 1995 and 1996 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less and which are readily convertible to cash. F-8 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company grants credit to customers in the ordinary course of business. The Company invests its cash with high quality financial institutions. No single customer or region represents a significant concentration of credit risk. CHANGE IN ACCOUNTING PRINCIPLE The Company adopted Statement of Accounting Standards No. 112 requiring accrual accounting for the expected cost of providing certain disability benefits. The cumulative effect of this change in accounting principle at the beginning of fiscal 1995 was $200,000 and is shown in the consolidated statement of operations. REVENUE RECOGNITION AND DEFERRED REVENUE Software license fees are recognized upon shipment less a reserve for estimated future returns based on historical experience. Revenue from support and maintenance service contracts are recorded as deferred revenue when billed and recognized ratably over the contract period. Other service revenue such as training and consulting services are recognized as the services are performed. Prior to 1996 the Company provided credits or coupons in association with the sale of one product as an inducement to customers to purchase future products or releases. Revenue equal to the coupon value was deferred until used or expired. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, short-term receivables, long-term debt, capital lease obligations and payables for which their current carrying amounts approximate fair market value. Additionally, based upon the borrowing rates currently available to the Company for debt agreements with similar terms and average maturities, the carrying amount of debt approximates its fair market value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Major improvements are capitalized while maintenance and repairs are expensed currently. Depreciation is computed using the straight-line method based on the estimated useful lives of 3 to 5 years for computer equipment and 5 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the lesser of the terms of the related leases or estimated useful life. Purchased computer software, which is used internally, is amortized over a five year period using the straight-line method. Amortization expense is included with depreciation expense in the cash flow statement. INCOME TAXES Income taxes are accounted for under the liability method in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities reduced by valuation allowances as necessary. F-9 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING The Company accrues, at the time of sales, an estimated liability for qualified advertising expenses incurred by value added resellers and independent sales support organizations for which the Company has agreed to reimburse such parties. Advertising costs are expensed as incurred. Advertising expense was approximately $2,354,000, $2,061,000 and $1,487,000 for the years ended May 31, 1994, 1995 and 1996, 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 product is established. The period between achieving technological feasibility and the general availability of such software has been short. Consequently costs otherwise capitalizable after technological feasibility is achieved are generally expensed because they are insignificant to both total assets and pre-tax results of operations. UNAUDITED PRO FORMA NET INCOME PER SHARE Unaudited pro forma net income per share is based on the unaudited pro forma weighted average number of shares of common stock and common equivalent shares outstanding for the period. The unaudited pro forma weighted average number of shares assumes the conversion of the Company's Series A Convertible Preferred Stock and the Series B Mandatorily Redeemable Convertible Preferred Stock into 1,847,627 shares of common stock effective June 1, 1995. Because of the significant impact of the assumed conversion on the Company's capital structure and earnings per share, historical earnings per share has been excluded from the financial statements as they are not considered meaningful. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, options granted with exercise prices below the initial public offering (IPO) price during the 12-month period preceding the date of the initial filing of the Registration Statement have been included in the calculation of pro forma net income per share, using the treasury stock method based on the IPO price, as if the options were outstanding for all periods presented. 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. PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED) If the offering contemplated by this Prospectus is consummated, all of the Series A Convertible Preferred Stock and the Series B Mandatorily Redeemable Convertible Preferred Stock outstanding at the closing date will be converted into shares of common stock. The unaudited pro forma stockholders' equity as of November 30, 1996, reflects the conversion of all outstanding convertible preferred stock at November 30, 1996 into 1,847,627 shares of common stock. RECENTLY ISSUED ACCOUNTING STANDARDS Effective June 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The adoption of this standard had no material effect on the Company's financial statements. In October 1995, SFAS No. 123, "Accounting for F-10 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--BUSINESS INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock-Based Compensation," was issued. Management has adopted this standard effective June 1, 1996 by means of disclosure of the pro forma effect of the compensation components of stock-based compensation. The Company's 1997 annual report to shareholders will include the disclosure required by this new standard. NOTE 2--BUSINESS COMBINATION During fiscal 1996, the Company acquired a division of Kewill Systems PLC, a United Kingdom software sales and service provider, for $634,264 consisting of cash and the assumption of certain liabilities in a transaction accounted for as a purchase. Accordingly, the results of operations of this division have been consolidated with those of the Company from its date of acquisition. The net assets acquired were recorded at their estimated fair market values with the excess allocated to goodwill, as follows: Software rights acquired......................................... $ 50,000 Goodwill......................................................... 584,264 --------- $ 634,264 --------- ---------
The goodwill associated with this transaction is being amortized on a straight line basis over five years. The recoverability of unamortized goodwill is assessed on an ongoing basis by comparing anticipated undiscounted cash flows to net book value. Goodwill is presented net of accumulated amortization of $29,213 at May 31, 1996. Pro forma operating results are not presented as the effect is immaterial. NOTE 3--ACCOUNTS RECEIVABLE Accounts receivable, net of allowances, consist of the following:
MAY 31, ------------------------------ 1995 1996 -------------- -------------- Gross accounts receivable..................................... $ 7,073,073 $ 7,121,386 Less allowance for doubtful accounts.......................... (254,841) (666,551) Less allowance for returns.................................... (1,095,940) (1,191,247) -------------- -------------- $ 5,722,292 $ 5,263,588 -------------- -------------- -------------- --------------
F-11 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--PROPERTY AND EQUIPMENT Property and equipment consists of the following:
MAY 31, ------------------------------ 1995 1996 -------------- -------------- Furniture and fixtures....................................... $ 1,440,086 $ 1,443,427 Computers and equipment...................................... 9,833,777 10,784,823 Leasehold improvements....................................... 322,727 331,392 Purchased software for internal use.......................... 782,501 1,094,280 -------------- -------------- 12,379,091 13,653,922 Less accumulated depreciation and amortization............... (7,402,945) (8,510,847) -------------- -------------- $ 4,976,146 $ 5,143,075 -------------- -------------- -------------- --------------
Depreciation expense for the years ended May 31, 1994, 1995 and 1996 was $1,382,220, $1,512,782 and $1,892,310, respectively. The Company leases equipment under long-term lease agreements which are classified as capital leases. Property and equipment includes the following leased property:
MAY 31, --------------------------- 1995 1996 ------------- ------------ Property and equipment........................................... $ 1,814,484 $ 350,521 Less accumulated amortization.................................... (1,139,615) (149,613) ------------- ------------ $ 674,869 $ 200,908 ------------- ------------ ------------- ------------
NOTE 5--ACCRUED EXPENSES Accrued expenses consist of the following:
MAY 31, ---------------------------- 1995 1996 ------------- ------------- Accrued vacation payable........................................ $ 839,873 $ 904,498 Co-op advertising accrual....................................... 1,092,502 855,907 Other........................................................... 2,430,438 3,038,572 ------------- ------------- $ 4,362,813 $ 4,798,977 ------------- ------------- ------------- -------------
NOTE 6--LINE OF CREDIT The Company has a $5,000,000 revolving line of credit facility with a bank which provides for interest at prime. Substantially all of the Company's assets are pledged as collateral on the line of credit which expires on November 15, 1997 and is subject to certain covenants, all of which had been complied with at May 31, 1996. There were no amounts outstanding at May 31, 1995 or 1996. F-12 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
MAY 31, -------------------------- 1995 1996 ------------- ----------- Various capital lease obligations with interest rates varying from 4.8% to 11.9%, at May 31, 1996, maturities through October 1997, repayable in monthly installments and secured by the related equipment....................................................... $ 816,562 $ 247,554 Term loans bearing interest ranging from 8.0% to 9.5%, at May 31, 1996, repayable in monthly installments ranging from $4,500 to $6,500 plus accrued interest through December 1996, secured by various assets and guaranteed by certain stockholders........... 273,087 82,600 Note payable to a third party bearing interest at 1.25% over the prime rate (9.5% as of May 31, 1996). The principal amount is due in four quarterly installments to commence upon demand...... 500,000 500,000 Other notes....................................................... 23,513 16,736 ------------- ----------- 1,613,162 846,890 Current portion of long-term debt................................. 863,405 827,238 ------------- ----------- $ 749,757 $ 19,652 ------------- ----------- ------------- -----------
Maturities of long-term debt and capital lease obligations by fiscal year are approximately as follows: fiscal 1997--$827,238; fiscal 1998--$10,529 and fiscal 1999--$9,123. In addition to these maturities, future interest to be paid under capital lease obligations at May 31, 1996 was approximately $52,757. NOTE 8--COMMITMENTS AND CONTINGENCIES LEASE OBLIGATIONS Rental expense incurred for operating leases of office facilities and office equipment was approximately $693,000 in 1994, $894,000 in 1995 and $871,000 in 1996. The rent expense for the years ended May 31 1994, 1995 and 1996 include $70,740 for computer equipment leased from stockholders. Future minimum rental payments as of May 31, 1996 for noncancelable operating leases with initial or remaining terms in excess of one year is payable as follows: fiscal 1997--$813,000 and fiscal 1998--$688,000. EMPLOYEE STOCK--RIGHT OF FIRST REFUSAL The Company has a right of first refusal to repurchase shares of common stock from stockholder employees who leave the Company or violate any terms of agreements with the Company. The price per share is determined based on a defined calculation. 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. F-13 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--INCOME TAXES Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
MAY 31, ------------------------------ 1995 1996 -------------- -------------- Deferred tax liabilities: Tax depreciation in excess of financial reporting........... $ 500,000 $ 470,000 -------------- -------------- Total deferred tax liabilities............................ 500,000 470,000 -------------- -------------- Deferred tax assets: Accounts receivable allowances.............................. 511,000 687,000 Deferred revenue............................................ 2,002,000 1,342,000 Cooperative advertising accrual............................. 404,000 317,000 Sales tax accrual........................................... 259,000 211,000 Net operating loss carryforward............................. 1,542,000 950,000 Research and development credit carryforward................ 572,000 573,000 Alternative minimum tax credit carryforward................. 133,000 160,000 Investment tax credit carryforward.......................... 63,000 63,000 Vacation and other.......................................... 506,000 317,000 -------------- -------------- Total deferred tax assets................................. 5,992,000 4,620,000 Valuation allowance........................................... (5,492,000) -- -------------- -------------- Net deferred tax assets................................... 500,000 4,620,000 -------------- -------------- Total net deferred income taxes............................... $ -- $ 4,150,000 -------------- -------------- -------------- --------------
The provision (benefit) for income taxes is summarized as follows:
YEAR ENDED MAY 31, ---------------------------------------------- 1994 1995 1996 -------------- -------------- -------------- Current income taxes: Federal......................................... $ (2,536,000) $ 1,261,000 $ 595,000 State........................................... (281,813) 110,000 48,000 Net operating loss carry forward................ 2,791,000 (1,326,000) (592,000) -------------- -------------- -------------- (26,813) 45,000 51,000 Deferred income taxes: Federal......................................... (3,460,000) 157,000 1,233,000 State........................................... (305,000) 20,000 109,000 -------------- -------------- -------------- (3,765,000) 177,000 1,342,000 Increase (decrease) in valuation allowance........ 3,765,000 (177,000) (5,492,000) -------------- -------------- -------------- $ (26,813) $ 45,000 $ (4,099,000) -------------- -------------- -------------- -------------- -------------- --------------
F-14 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--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:
YEAR ENDED MAY 31, -------------------------------------------- 1994 1995 1996 -------------- ------------ -------------- Expected tax provision (benefit) at statutory rate............................................ $ (3,521,000) $ 126,000 $ 1,143,000 State income taxes, net of federal tax effect..... (342,000) 12,000 111,000 Change in valuation allowance..................... 3,765,000 (177,000) (5,492,000) Other............................................. 71,187 84,000 139,000 -------------- ------------ -------------- Total......................................... $ (26,813) $ 45,000 $ (4,099,000) -------------- ------------ -------------- -------------- ------------ --------------
At May 31, 1996, the Company had available for tax purposes net operating loss carryforwards of approximately $2,973,000 which could be used to offset taxable income through May 2010. Income tax credit carryforwards included in deferred tax assets generally expire through May 2010. At May 31, 1994 and 1995, the Company had determined that the realization of the net operating loss carryforward and other deferred tax assets did not meet the recognition criteria under SFAS No. 109, and, accordingly, a valuation allowance was established for the tax benefit of these items. The valuation allowance was reversed during 1996 due primarily to the utilization of a portion of the net operating loss carryforwards, and on the basis of an analysis performed by management which considered all available evidence, both positive and negative, as well as the weight and importance of such evidence. As a result of this analysis, management believed it was more likely than not that these tax benefits would be realized in the future, and, accordingly, reversed the remaining valuation allowance in the fourth quarter of fiscal 1996. F-15 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--INCENTIVE STOCK OPTION PLAN The Company adopted an Employee Incentive Stock Option Plan for certain key employees in 1983. At May 31, 1996, 2,066,667 shares of common stock had been reserved for issuance or grant under this plan. The options are granted to employees at 100% of the fair market value on the date of grant. The fair market value, rate of exercisability and expiration dates of the options granted are determined by the Board of Directors at the time of grant. Options generally vest ratably over five years from date of grant and expire six years after grant. The following summary of outstanding options and shares reserved under the Plan is as follows:
OPTION PRICE OPTIONS RANGE EXPIRATION OUTSTANDING PER SHARE DATE ------------ ----------------- -------------- Outstanding at May 31, 1993................... 1,040,000 $1.70 to $2.72 1995 - 1999 Granted..................................... 52,000 $3.41 Exercised................................... (21,120) $1.96 to $2.42 Canceled/expired............................ (97,333) $2.42 to $2.55 ------------ Outstanding at May 31, 1994................... 973,547 $1.70 to $3.41 1995 - 1999 Granted..................................... 187,433 $4.16 Exercised................................... (77,333) $1.70 to $2.55 Canceled/expired............................ (20,000) $1.96 to $4.16 ------------ Outstanding May 31, 1995...................... 1,063,647 $1.96 to $4.16 1997 - 2001 Granted..................................... 619,333 $5.20 to $6.41 Exercised................................... (32,013) $1.96 to $2.57 Canceled/expired............................ (321,320) $2.57 to $5.20 ------------ Outstanding May 31, 1996...................... 1,329,647 $1.96 to $6.41 1997 - 2002 ------------ ------------
As of May 31, 1996 there were currently exercisable options outstanding covering 775,567 shares, exercisable at prices ranging from $1.96 to $4.16. NOTE 11--EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution 401(k) Profit Sharing Plan covering substantially all employees. The Company currently matches 25% of each participants' 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, 1994, 1995 and 1996 was approximately $186,000, $230,000 and $251,000, respectively. NOTE 12--RELATED PARTY TRANSACTIONS NOTE PAYABLE TO STOCKHOLDER In June 1994, the Company received a $1,500,000 loan from a stockholder bearing interest at 7.25%. The entire balance plus accrued interest of $5,000 was repaid in June 1994. F-16 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--RELATED PARTY TRANSACTIONS (CONTINUED) As of May 31, 1994, the Company had outstanding a series of unsecured notes aggregating $940,000 with stockholders of the Company. These notes had interest rates ranging from 7.25% to 8.5% during 1995 and were paid off as of May 31, 1995. Interest expense of $90,842 and $36,039 was recorded on these notes during fiscal 1994 and 1995, respectively. A director of the Company was paid $104,700, $53,900 and $36,800 in 1994, 1995 and 1996 (plus reimbursement of expenses), respectively, for consulting services rendered to the Company pursuant to consulting agreements with the Company. STOCK OPTION GRANT BY PRINCIPAL STOCKHOLDERS In April 1995, certain principal common stockholders granted to an officer/director of the Company an option to purchase 711,156 shares of common stock directly from them at an exercise price of $4.16 per share (fair market value at date of grant). Certain events, including a decision by the Board of Directors to initiate an initial public offering, accelerate the vesting period. NOTE 13--STOCKHOLDERS' EQUITY SERIES A CONVERTIBLE PREFERRED STOCK In June 1994, the Company sold 225,000 shares of $.01 par value Series A Convertible Preferred Stock (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 Convertible Preferred Stock. In the event of a public offering (a "Qualified Public Offering") with aggregate proceeds of at least $10,000,000 and the issuance of 15% of the resulting outstanding shares of the Company, the Series A Preferred Stock shall be automatically converted to shares of common stock. The holder of the Series A Preferred Stock is not entitled to dividends or other distributions, has preference over common stock upon liquidation and has the right to elect one director. 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 (Series B Preferred Stock) and warrants. On June 24, 1994, at the first closing, the Company sold 888,576 of $.01 par value Series B Preferred Stock and contingent warrants to purchase an additional 752,234 shares of Series B Preferred Stock for an aggregate purchase price of $6,300,004. On September 22, 1994, the second closing, the Company sold an additional 282,088 shares of Series B Preferred Stock for an aggregate purchase price of $2,000,004. During May 1995, the Company and the holders of the Series B Preferred Stock agreed to reprice the previously issued shares of Series B Preferred Stock and eliminate the warrants. The Company issued an additional 174,556 shares of Series B Preferred Stock in return for the cancellation of the warrants. Thus, the total Series B Preferred Stock sold in the three transactions was 1,345,220 shares at an average price of $6.17. Holders of the Series B Preferred Stock may convert their shares into 1,793,627 shares of common stock at any time after the date of issuance. The holders of Series B Preferred Stock also have the right to require the Company to redeem their shares at any time after June 24, 1998 at a price of $6.17 per share F-17 GREAT PLAINS SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13--STOCKHOLDERS' EQUITY (CONTINUED) or, if higher, the fair market value of such shares if the Company has not undertaken a Qualified Public Offering. The Company carries this Series B Preferred Stock at fair value which management considers to equal $6.17 and $8.55 per share at May 31, 1995 and 1996, respectively. In the event of a Qualified Public Offering, the Series B Preferred Stock shall be automatically converted to 1,793,627 shares of common stock. The holders of the Series B Convertible Preferred Stock are not entitled to dividends or other distributions and have preference over common stock upon liquidation. NOTE 14--SUBSEQUENT EVENTS The Board of Directors met on February 20, 1997 and took the following actions in connection with the initial public offering of shares of the Company's common stock: (a) authorized a four-for-three stock split of the issued and outstanding common stock of the Company, in the form of a stock dividend, to be effective immediately prior to the public offering (all references to common stock amounts, shares, per share data and preferred stock conversion rights included in the financial statements and these notes have been adjusted to give retroactive effect to the stock split); (b) authorized an increase in capital stock to 100,000,000 shares of $0.01 par value common stock and 30,000,000 shares of $0.01 par value preferred stock to be both contingent and effective upon stockholder approval and the first closing of the initial public offering of common stock; (c) waived, subject to the successful closing of an initial public offering, the Company's contractual rights of first refusal and the rights to repurchase with regard to shares of common stock issued to employees of the Company; and (d) authorized the 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 Director's Stock Option Plan providing for the grant of nonqualified stock options to nonemployee directors of the Company. F-18 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company have agreed to sell to each of the Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs & Co., Hambrecht & Quist LLC and Piper Jaffray Inc. are acting as representatives, has severally agreed to purchase from the Company the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES OF UNDERWRITER COMMON STOCK - ----------------------------------------------------------------------------- --------------- Goldman, Sachs & Co.......................................................... Hambrecht & Quist LLC........................................................ Piper Jaffray Inc............................................................ --------------- Total........................................................................ 3,000,000 --------------- ---------------
Under the terms and conditions of the Underwriting Agreement, the Underwriters are committed to take and pay for all of the shares offered hereby, if any are taken. The Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the representatives. The Company has granted the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 450,000 additional shares of Common Stock to cover over-allotments, if any. If the Underwriters exercise their over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 3,000,000 shares of Common Stock offered. The Company has agreed that, subject to certain exceptions, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of the Prospectus, it will not offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or of any other securities of the Company (other than pursuant to the Stock Plans) which are substantially similar to the shares of Common Stock or which are convertible or exchangeable into securities which are substantially similar to the shares of Common Stock without the prior written consent of the representatives, except for the shares of Common Stock offered in connection with the offering. In addition, the Company may issue shares of Common Stock in connection with any acquisition of another company if the terms of such issuance provide that such Common Stock shall not be resold prior to the expiration of the 180-day period referenced in the preceding sentence. The representatives of the Underwriters have informed the Company that they do not expect sales to accounts over which the Underwriters exercise discretionary authority to exceed 5% of the total number of shares of Common Stock offered hereby. Prior to the offering, there has been no public market for the shares of Common Stock. The initial public offering price will be negotiated among the Company and the representatives. Among the factors U-1 to be considered in determining the initial public offering price of the Common Stock, in addition to prevailing market conditions, will be the Company's historical performance, estimates of business potential and earnings prospects for the Company, an assessment of the Company's management and the consideration of the above factors in relation to market valuation of companies in related businesses. Certain of Goldman, Sachs & Co.'s affiliates own 1,793,627 shares of Common Stock, representing 18.4% of the outstanding Common Stock of the Company and, upon completion of the offering, will own approximately 14.0% of the outstanding Common Stock. See "Principal Shareholders." Such affiliates are subject to the 180-day lock-up that applies to other shareholders as described above. Subject to the lock-up provisions described above, Goldman, Sachs & Co. and their affiliates will be permitted to engage in stabilization, brokerage and ordinary course of business transactions and will be permitted to sell Common Stock and related securities in connection with market-making transactions from time to time, both during and after the 180-day period. See "Shares Eligible for Future Sale." The Company has been advised by Goldman, Sachs & Co. that, subject to applicable laws and regulations, Goldman, Sachs & Co. currently intend to make a market in the Common Stock following completion of the offering. However, they are not obligated to do so and any market-making may be discontinued at any time without notice. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act. There can be no assurance that an active trading market will develop or be sustained following the completion of the offering. See "Risk Factors-- No Prior Market; Possible Volatility of Stock Price". Goldman, Sachs & Co. has entered into an agreement with the Company pursuant to which it has provided from time to time, and expects to provide in the future, investment banking services to the Company for customary fees and commissions. A representative of Goldman, Sachs & Co. serves as a member of the Board of Directors of the Company. See "Certain Transactions." At the request of the Company, the Underwriters have reserved shares of the Common Stock offered hereby for sale at the public offering price to Partners, directors, officers and employees of the Company and certain other persons. Such Partners, directors, officers, employees and other persons will purchase, in the aggregate, less than 15% of the Common Stock offered hereby, of which approximately 10% are expected to be purchased by Partners. The number of shares available to the general public will be reduced to the extent that individuals purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same terms as the other shares offered by this Prospectus. Partners who purchase such reserved shares will be required to execute a lock-up agreement with the representatives of the Underwriters pursuant to which they will agree that, without the prior written consent of the representatives of the Underwriters, they will not sell or otherwise dispose of any shares of Common Stock during the 180-day period following the date of this Prospectus. Under Rule 2720 of the National Association of Securities Dealers, Inc. (the "NASD"), the Company may be deemed to be an affiliate of Goldman Sachs & Co. For a description of certain relationships between Goldman Sachs and its affiliates and the Company, see "Management," "Certain Transactions" and "Principal Shareholders." The offering is being conducted in accordance with Rule 2720, which provides that, among other things, when an NASD member participates in the underwriting of an affiliate's equity securities, the initial public offering price can be no higher than that recommended by a "qualified independent underwriter" meeting certain standards. In accordance with this requirement, Hambrecht & Quist LLC will serve in such role and will recommend a price in compliance with the requirements of Rule 2720. Hambrecht & Quist LLC will receive compensation from the Company in the amount of $ for serving in such role. In connection with the offering, Hambrecht & Quist LLC in its role as qualified independent underwriter has performed due diligence investigations and reviewed and U-2 participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus is a part. In addition, the Underwriters may not confirm sales to any accounts over which they exercise discretionary authority without the prior specific written approval by the customer. During and after the offering, the Underwriters may purchase and sell Common Stock in the open market. These transactions may include overallotment, stabilizing transactions and purchases to cover syndicate short positions created in connection with the offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members or other broker-dealers in respect of the Common Stock sold in the offering for their account may be reclaimed by the syndicate if such securities are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock, which may be higher than the price that might otherwise prevail in the open market. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise, and these activities, if commenced, may be discontinued at any time. As permitted by Rule 103 under the Exchange Act, Underwriters or prospective Underwriters that are market makers ("passive market makers") in the Common Stock may make bids for or purchases of Common Stock in the Nasdaq National Market until such time, if any, when a stabilizing bid for such securities has been made. Rule 103 generally provides that (a) a passive market maker's net daily purchases of the Common Stock may not exceed 30% of its average daily trading volume in such securities for the two full consecutive calendar months (or any 60 consecutive days ending within the 10 days) immediately preceding the filing date of the registration statement of which this Prospectus forms a part, (b) a passive market maker may not effect transactions or display bids for the Common Stock at a price that exceeds the highest independent bid for the Common Stock by persons who are not passive market makers and (c) bids made by passive market makers must be identified as such. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act. U-3 Graphic and Text Appearing on Inside Back Cover of Prospectus: This page contains a picture of a hand with the index finger pointing upward. In circular patterns, emanating from the point of the index finger are the following words and phrases: Windows NT; Client/Server; Leading Technologies; Customer Service; Internet; Ease of Use; Partner Network; Openness; Global Markets. Also, in rows across the page, are repeating patterns of 0 1 0 1. - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. -------------- TABLE OF CONTENTS
PAGE ---- Additional Information.................................................... 3 Prospectus Summary........................................................ 4 Risk Factors.............................................................. 7 Use of Proceeds........................................................... 13 Dividend Policy........................................................... 13 Dilution.................................................................. 14 Capitalization............................................................ 15 Selected Consolidated Financial Data...................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 18 Business.................................................................. 26 Management................................................................ 40 Certain Transactions...................................................... 50 Principal Shareholders.................................................... 52 Description of Capital Stock.............................................. 53 Shares Eligible for Future Sale........................................... 55 Legal Matters............................................................. 56 Experts................................................................... 56 Index to Consolidated Financial Statements................................ F-1 Underwriting.............................................................. U-1
-------------- THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 3,000,000 SHARES GREAT PLAINS SOFTWARE, INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) [LOGO] GOLDMAN, SACHS & CO. HAMBRECHT & QUIST PIPER JAFFRAY INC. REPRESENTATIVES OF THE UNDERWRITERS - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following fees and expenses will be paid by the Company in connection with the issuance and distribution of the securities registered hereby and do not include underwriting commissions and discounts. All such expenses, except for the SEC registration and NASD fees, are estimated. SEC registration fee............................................. $ 13,591 NASD filing fee.................................................. 4,985 Nasdaq National Market listing fee............................... 50,000 Legal fees and expenses.......................................... 200,000 Accounting fees and expenses..................................... 75,000 Transfer Agent's and Registrar's fees............................ 15,000 Printing and engraving expenses.................................. 100,000 Miscellaneous.................................................... 21,424 --------- Total........................................................ $ 480,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 302A.521 of the Minnesota Statutes provides that a corporation shall indemnify any person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of such person against judgments, penalties, fines (including, without limitation, excise taxes assessed against such person with respect to any employee benefit plan), settlements and reasonable expenses, including attorneys' fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts or omissions of such person complained of in the proceeding, such person (1) has not been indemnified therefor by another organization or employee benefit plan for the same judgments, penalties or fines; (2) acted in good faith; (3) received no improper personal benefit and Section 302A.255 (with respect to director conflicts of interest), if applicable, has been satisfied; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions in such person's official capacity for the corporation, reasonably believed that the conduct was in the best interests of the corporation, or in the case of acts or omissions in such person's official capacity for other affiliated organizations, reasonably believed that the conduct was not opposed to the best interests of the corporation. Section 302A.521 also requires payment by a corporation, upon written request, of reasonable expenses in advance of final disposition of the proceeding in certain instances. A decision as to required indemnification is made by a disinterested majority of the Board of Directors present at a meeting at which a disinterested quorum is present, or by a designated committee of the Board, by special legal counsel, by the shareholders or by a court. Provisions regarding indemnification of officers and directors of the Company to the extent permitted by Section 302A.521 are contained in the Company's Bylaws as they will be amended immediately upon closing of the offering (Exhibit 3.3 hereto), each of which is incorporated herein by reference. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since January 1, 1994, the Company has issued and sold the following securities that were not registered under the Securities Act: In June 1994, the Company issued 225,000 shares of Series A Preferred Stock to The Arthur Companies, Inc. ("Arthur"), the holder of a majority of the outstanding shares of Common Stock of Company at such time, for $225,000 in cash. These shares were subsequently transferred to Douglas J. Burgum, the Chairman of the Board, President and Chief Executive Officer of the Company, in exchange for shares of capital stock of Arthur held by Mr. Burgum with a fair market value of $225,000. The Series A II-1 Preferred Stock will convert into an aggregate of 54,000 shares of Common Stock upon the consummation of this offering. In June 1994, the Company issued to certain investment partnerships affiliated with the Goldman Sachs Group, L.P. (the "GS Partnerships"), 888,576 shares of Series B Preferred Stock at a price of $7.09 per share and a warrant (the "Warrant") to purchase an additional 752,234 shares of Series B Preferred Stock at a price of $5.32 per share. In September 1994, the Company issued to the GS Partnerships, 282,088 shares of Series B Preferred Stock at a price of $7.09 per share. In May 1995, the Company issued to the GS Partnerships 174,556 shares of Series B Preferred Stock in exchange for the Warrant. During the period from September 1994 to December 1994, the Company issued to its employees an aggregate of 487,147 shares of Common Stock at a purchase price of $4.16 per share pursuant to an employee incentive stock sale program. During the period from January 1, 1994 through February 21, 1997, the Company issued and sold 696,860 shares of Common Stock to employees at prices ranging from $1.70 to $5.44 per share upon exercise of stock options granted pursuant to the Company's 1983 Incentive Stock Option Plan. The sales of the above securities were deemed to be exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act or Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering, or pursuant to Rule 701 promulgated under the Securities Act. The recipients of the securities in each such transaction represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Company or otherwise, to information about the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION - ----------- ---------------------------------------------------------------------------------------------- 1.1* Underwriting Agreement 3.1 Articles of Incorporation of the Company (current) 3.2 Amended and Restated Articles of Incorporation of the Company (as proposed to be effective upon closing of the offering) 3.3 Amended Bylaws of the Company 4.1 Form of Certificate of Common Stock 5.1* Opinion of Dorsey & Whitney LLP 10.1 Lease Agreement, dated October 1, 1983, as amended, between the Company and West Acres Office Park 10.2 Lease Agreement, dated April 20, 1994, between the Company and Norwest Bank North Dakota, N.A. 10.3 Lease Agreement, dated May 2, 1994, as amended, between the Company and Blue Cross Blue Shield of North Dakota and Lincoln Mutual Life and Casualty Insurance Co. 10.4 1983 Incentive Stock Option Plan, as amended 10.5 1997 Stock Incentive Plan 10.6 Outside Directors' Stock Option Plan 10.7 1997 Employee Stock Purchase Plan 10.8 Non-Incentive Stock Option Agreement, dated April 9, 1991, between the Company and Raymond F. Good
II-2 10.9 Employment Agreement, dated June 24, 1994, between the Company and Douglas J. Burgum 10.10 Employment Agreement, dated June 24, 1994, between the Company and Raymond A. August 10.11 Registration Rights Agreement, dated as of June 24, 1994, between the Company and the holders of registerable securities named therein 10.12 Limited Liability Company Agreement, dated as of February 20, 1996, between the Company and Douglas J. Burgum 10.13* Agreement between the Company and Terri F. Zimmerman 10.14* Agreement between the Company and Raymond F. Good 23.1 Consent of Price Waterhouse LLP 23.2 Consent of Ernst & Young LLP 23.3 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1) 24.1 Powers of Attorney 27.1 Financial Data Schedule
- -------------- * To be filed by amendment. (b) Financial Statement Schedules SCHEDULE II--SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS AND RESERVES All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant further undertakes that: (1) It will provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (3) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fargo, State of North Dakota, on March 5, 1997. GREAT PLAINS SOFTWARE, INC. By: /s/ DOUGLAS J. BURGUM ---------------------------------------- Douglas J. Burgum CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on March 5, 1997.
SIGNATURE TITLE - ---------------------------------------- ---------------------------------------- /s/ DOUGLAS J. BURGUM Chairman of the Board, President and - ---------------------------------------- Chief Executive Officer (principal Douglas J. Burgum executive officer) /s/ TERRI F. ZIMMERMAN Chief Financial Officer, Group Vice - ---------------------------------------- President (principal financial officer Terri F. Zimmerman and principal accounting officer) BRADLEY J. BURGUM* Director FREDERICK W. BURGUM* Director - ---------------------------------------- Director William V. Campbell RAYMOND F. GOOD* Director SANJEEV MEHRA* Director J. A. HEIDI ROIZEN* Director JOSEPH S. TIBBETTS, JR.* Director
*By: /s/ DOUGLAS J. BURGUM ------------------------- Douglas J. Burgum ATTORNEY-IN-FACT II-4 EXHIBIT INDEX
NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 1.1* Underwriting Agreement 3.1 Articles of Incorporation, as amended, of the Company (current) 3.2 Amended and Restated Articles of Incorporation of the Company (as proposed to be effective upon closing of the Offering) 3.3 Amended Bylaws of the Company 4.1 Form of Certificate of Common Stock 5.1* Opinion of Dorsey & Whitney LLP 10.1 Lease Agreement, dated October 1, 1983, as amended, between the Company and West Acres Office Park 10.2 Lease Agreement, dated April 20, 1994, between the Company and Norwest Bank North Dakota, N.A. 10.3 Lease Agreement, dated May 2, 1994, as amended, between the Company and Blue Cross Blue Shield of North Dakota and Lincoln Mutual Life and Casualty Insurance Co. 10.4 1983 Incentive Stock Option Plan, as amended 10.5 1997 Stock Incentive Plan, including form of option agreement 10.6 Outside Directors' Stock Option Plan 10.7 1997 Employee Stock Purchase Plan 10.8 Non-Incentive Stock Option Agreement, dated April 9, 1991, between the Company and Raymond F. Good 10.9 Employment Agreement, dated June 24, 1994, between the Company and Douglas J. Burgum 10.10 Employment Agreement, dated June 24, 1994, between the Company and Raymond A. August 10.11 Registration Rights Agreement, dated as of June 24, 1994, between the Company and the holders of registerable securities named therein 10.12 Limited Liability Company Agreement, dated as of February 20, 1996, between the Company and Douglas J. Burgum 10.13* Agreement between the Company and Terri F. Zimmerman 10.14* Agreement between the Company and Raymond F. Good 23.1 Consent of Price Waterhouse LLP 23.2 Consent of Ernst & Young LLP 23.3 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1) 24.1 Powers of Attorney 27.1 Financial Data Schedule
- -------------- * To be filed by amendment. EX-3.1 2 ARTICLES OF INCORP, AMENDED, OF CO CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF GREAT PLAINS SOFTWARE, INC. I, Bradley Burgum, the Secretary of Great Plains Software, Inc., a Minnesota corporation (the "Corporation"), do hereby certify that at a meeting of the shareholders of the Corporation duly called and held on January 26, 1995 in accordance with the laws of the State of Minnesota and the Second Amended and Restated Articles of Incorporation and bylaws of the Corporation, that the following resolution effecting a amendment of the Corporation's Second Amended and Restated Articles of Incorporation was approved by the shareholders of the Corporation and that such resolution has not been subsequently modified or rescinded: RESOLVED, that the Second Amended and Restated Articles of Incorporation of the Company be amended to add an Article 6 to read in full as follows: "ARTICLE 6. CONTROL SHARE ACQUISITIONS The Corporation shall not be subject to the provisions of Section 302A.671 of the Minnesota Business Corporation Act." IN WITNESS WHEREOF, I have executed this certificate as of this 26th day of January, 1995. /s/ Bradley Burgum -------------------------- Bradley Burgum, Secretary SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF GREAT PLAINS SOFTWARE, INC ARTICLE 1. NAME The name of the Corporation is Great Plains Software, Inc. ARTICLE 2. REGISTERED OFFICE The name and address of the registered agent and office of the Corporation in Minnesota is CT Corporation System, 405 Second Avenue South, Minneapolis, Minnesota 55401. ARTICLE 3. CAPITAL STOCK 3.1 AUTHORIZED CAPITAL STOCK. The total number of shares of capital stock that the Corporation is authorized to issue shall be 40,000,000 shares, consisting of 30,000,000 shares of common stock, par value $0.01 per share ("Common Stock"), and 10,000,000 shares of preferred stock, par value $0.01 per share ("Preferred Stock"). 3.2 COMMON STOCK. All shares of Common Stock shall be voting shares and shall be entitled to one vote per share. Holders of Common Stock shall not be entitled to cumulate their votes in the election of directors and shall not be entitled to any preemptive rights to acquire shares of any class or series of capital stock of the Corporation. Subject to any preferential rights of holders of Preferred Stock, holders of Common Stock shall be entitled to receive their pro rata shares, based upon the number of shares of Common Stock held by them, of such dividends or other distributions as may be declared by the Board of Directors from time to time and of any distribution of the assets of the Corporation upon its liquidation, dissolution or winding up, whether voluntary or involuntary (such events being herein referred to as a "Liquidation"). 3.3 PREFERRED STOCK. The Board of Directors of the Corporation is hereby authorized to provide, by resolution or resolutions adopted by such Board, for the issuance of Preferred Stock from time to time in one or more classes and/or series, to establish the designation and number of shares of each such class or series, and to fix the relative rights and preferences of the shares of each such class or series, all to the full extent permitted by Minnesota Statutes, Section 302A.401, or any successor provision. Without limiting the generality of the foregoing, the Board of Directors is authorized to provide that shares of a class or series of Preferred Stock: A-1 (a) are entitled to cumulative, partially cumulative or noncumulative dividends or other distributions payable in cash, capital stock or indebtedness of the Corporation or other property, at such times and in such amounts as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions; (b) are entitled to a preference with respect to payment of dividends over one or more other classes and/or series of capital stock of the Corporation; (c) are entitled to a preference with respect to any distribution of assets of the Corporation upon its Liquidation over one or more other classes and/or series of capital stock of the Corporation in such amount as is set forth in the Board resolutions establishing such class or series or as is determined in a manner specified in such resolutions; (d) are redeemable or exchangeable at the option of the Corporation and/or on a mandatory basis for cash, capital stock or indebtedness of the Corporation or other property, at such times or upon the occurrence of such events, and at such prices, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions; (e) are entitled to the benefits of such sinking fund, if any, as is required to be established by the Corporation for the redemption and/or purchase of such shares by the Board resolutions establishing such class or series; (f) are convertible at the option of the holders thereof into shares of any other class or series of capital stock of the Corporation, at such times or upon the occurrence of such events, and upon such terms, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions; (g) are exchangeable at the option of the holders thereof for cash, capital stock or indebtedness of the Corporation or other property, at such times or upon the occurrence of such events, and at such prices, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions; (h) are entitled to such voting rights, if any, as are specified in the Board resolutions establishing such class or series (including, without limiting the generality of the foregoing, the right to elect one or more directors voting alone as a single class or series or together with one or more other classes and/or series of Preferred Stock, if so specified by such Board resolutions) at all times or upon the occurrence of specified events; and A-2 (i) are subject to restrictions on the issuance of additional shares of Preferred Stock of such class or series or of any other class or series, or on the reissuance of shares of Preferred Stock of such class or series or of any other class or series, or on increases or decreases in the number of authorized shares of Preferred Stock of such class or series or of any other class or series. Without limiting the generality of the foregoing authorizations, any of the rights and preferences of a class or series of Preferred Stock may be made dependent upon facts ascertainable outside the Board resolutions establishing such class or series, and may incorporate by reference some or all of the terms of any agreements, contracts or other arrangements entered into by the Corporation in connection with the issuance of such class or series, all to the full extent permitted by Minnesota Statutes. Unless otherwise specified in the Board resolutions establishing a class or series of Preferred Stock, holders of a class or series of Preferred Stock shall not be entitled to cumulate their votes in any election of directors in which they are entitled to vote and shall not be entitled to any preemptive rights to acquire shares of any class or series of capital stock of the Corporation. ARTICLE 4. WRITTEN ACTION BY DIRECTORS An action required or permitted to be taken at a meeting of the Board of Directors of the Corporation may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by all of the directors unless the action need not be approved by the shareholders of the Corporation, in which case the action may be taken by a written action signed by the number of directors that would be required to take the same action at a meeting of the Board of Directors of the Corporation at which all of the directors were present. ARTICLE 5. DIRECTOR LIABILITY To the fullest extent permitted by the Minnesota Business Corporation Act as the same exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of the foregoing provisions of this Article 5 by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. A-3 CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF GREAT PLAINS SOFTWARE, INC. I, Joe Peltier, the Secretary of Great Plains Software, Inc., a Minnesota corporation (the "Corporation"), do hereby certify that at a meeting of the Board of Directors of the Corporation held on June 21, 1994 the following resolution effecting the creation of a series of preferred stock designated as "Series A Convertible Preferred Stock" was duly approved by the Board of Directors of the Corporation and that such resolution has not been subsequently modified or rescinded: RESOLVED, that the Corporation shall authorize the creation of a series of shares of preferred stock designated as "Series A Convertible Preferred Stock" and will reserve 225,000 of the Corporation's authorized but unissued shares of preferred stock, par value $.01 per share, for issuance under such series; FURTHER RESOLVED, that the shares of Series A Convertible Preferred Stock shall be entitled to the relative rights and preferences described in the attached Exhibit A. I further certify that the document attached hereto and marked Exhibit A and entitled "Great Plains Software, Inc. Certificate of Designation for Series A Convertible Preferred Stock" is a true and correct copy of the document referred to in the foregoing resolutions. IN WITNESS WHEREOF, I have executed this certificate as of this 21st day of June, 1994. /s/ Joe Peltier --------------------------------------- Joe Peltier, Secretary EXHIBIT A GREAT PLAINS SOFTWARE, INC. ---------------------------- CERTIFICATE OF DESIGNATIONS FOR SERIES A CONVERTIBLE PREFERRED STOCK ---------------------------- 1. DESIGNATION; NUMBER OF SHARES. A series of shares of preferred stock, par value $.01 per share, of the Corporation shall be designated as "Series A Convertible Preferred Stock" (the "Series A Convertible Preferred Stock"), and the number of shares constituting the Series A Convertible Preferred Stock shall be 225,000. The Series A Convertible Preferred Stock shall have a par value of $.01 per share. 2. NO CUMULATIVE VOTING; NO PREEMPTIVE RIGHTS. Holders of Series A Convertible Preferred Stock shall not be entitled to any preemptive rights or to cumulate their votes in any election of directors. 3. RANK. The Series A Convertible Preferred Stock shall rank prior to all of the common stock, par value $.01 (the "Common Stock"), of the Corporation, now outstanding or hereafter issued, as to the distribution of the assets of the Corporation upon its liquidation, dissolution or winding up, whether voluntary or involuntary (such events being herein referred to as a "Liquidation"). 4. NO DIVIDENDS OR OTHER DISTRIBUTIONS. The Corporation shall not pay or declare any dividends or make any other distributions on its outstanding Common Stock or preferred stock, par value $.01 per share (the "Preferred Stock", which Preferred Stock includes the Series A Convertible Preferred Stock) so long as any shares of Series A Convertible Preferred Stock remain outstanding. This Section 4 shall not be deemed to apply to any distribution of assets upon the Liquidation of the Corporation. 5. LIQUIDATION PREFERENCE. In the event of a Liquidation of the Corporation, the holders of Series A Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation an amount equal to $1.00 per share, and no more, before any payment shall be made or any assets distributed to the holders of Common Stock or any other capital stock of the Corporation ranking junior to A-1 the rights of the Series A Convertible Preferred Stock upon the Liquidation of the Corporation (such Common Stock and other capital stock being referred to herein collectively as "Junior Liquidation Stock"); PROVIDED, HOWEVER, that such rights shall accrue to the holders of Series A Convertible Preferred Stock only in the event that the Corporation's payments with respect to the preferences of the holders of capital stock of the Corporation ranking senior to the rights to the Series A Convertible Preferred Stock upon the Liquidation of the Corporation (such senior capital stock being referred to herein as "Senior Liquidation Stock") are fully met. The entire assets of the Corporation available for distribution after the preferences of any Senior Liquidation Stock upon the Liquidation of the Corporation are fully met shall be distributed ratably among the holders of the Series A Convertible Preferred Stock and any other capital stock of the Corporation which ranks on a parity with the Series A Convertible Preferred Stock upon the Liquidation of the Corporation in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). After payment in full of the preference of the shares of the Series A Convertible Preferred Stock upon the Liquidation of the Corporation, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Corporation. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities or other property will be deemed a Liquidation of the Corporation for purposes of this Section 5. 6. CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK (a) AT OPTION OF HOLDERS. Holders of Series A Convertible Preferred Stock may, at any time after June 15, 1997 and at their option upon surrender of the certificates therefor, convert any or all of their shares of Series A Convertible Preferred Stock into fully paid and nonassessable shares of Common Stock (and such other securities and property as they may be entitled to, as hereinafter provided) at any time after issuance thereof. The right of holders of Series A Convertible Preferred Stock to convert their shares shall be exercised by surrendering for such purpose to the Corporation or any transfer agent for the Series A Convertible Preferred Stock, and at such other office or offices, if any, as the Board of Directors may designate, certificates representing shares to be converted, duly endorsed in blank or accompanied by proper instruments of transfer. Upon the surrender of certificates representing shares of Series A Convertible Preferred Stock to be converted, duly endorsed or accompanied by proper instruments of transfer as provided above, the person converting such shares shall be deemed to be the holder of record of the Common Stock (and such other securities and property as the holders of Series A Convertible Preferred Stock may be entitled to upon the conversion thereof, as hereinafter provided) issuable upon such conversion, and all rights with respect to the shares surrendered shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets as herein provided. A-2 (b) MANDATORY. In the event a primary or secondary sale of shares of Common Stock to the public pursuant to a registered public offering under the Securities Act of 1933, as amended, shall be consummated where both (i) the proposed aggregate public offering price of the shares of Common Stock so registered is at least $10,000,000 (based on the fair value estimated by the underwriters) and (ii) as a result of such offering the public (including for this purpose all purchasers in the underwriting irrespective of any relationship with the Corporation) will own 15% or more of the shares of Common Stock then issued and outstanding (such event being herein referred to as a "Conversion Event"), the Series A Convertible Preferred Stock shall be automatically converted into fully paid and nonassessable shares of Common Stock (and such other securities and property as the holders of Series A Convertible Preferred Stock may be entitled to upon the conversion thereof, as hereinafter provided). The Corporation shall give prompt notice of such mandatory conversion by first class mail, postage prepaid, to the holders of record of Series A Convertible Preferred Stock, addressed to such holders at their last address as shown on the stock books of the Corporation. The date of such mandatory conversion (the "Conversion Date") shall be the date of consummation of the Conversion Event. Each notice of mandatory conversion shall specify the Conversion Date; the then-effective Conversion Rate (as such term is hereinafter defined); that the holders of Series A Convertible Preferred Stock were deemed to have become holders of record of Common Stock (and such other securities and property as the holders of Series A Convertible Preferred Stock may be entitled to upon the conversion thereof, as hereinafter provided) on the Conversion Date and that, from and after the Conversion Date, the Series A Convertible Preferred Stock was no longer considered outstanding, and that all rights with respect to the shares of Series A Convertible Preferred Stock so converted terminated on the Conversion Date, except the right to receive Common Stock or other securities, cash or other assets as herein provided. Any notice that is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not a holder of Series A Convertible Preferred Stock receives such notice; and failure so to give such notice, or any defect in such notice, to the holders of any shares of Series A Convertible Preferred Stock shall not affect the validity of the mandatory conversion of such Series A Convertible Preferred Stock. On and after the Conversion Date, each holder of shares of Series A Convertible Preferred Stock shall surrender the certificate evidencing such shares to the Corporation, or its agent, at the place designated in such notice and shall thereupon be entitled to receive the Common Stock or other securities, cash or other assets receivable in exchange therefor. Notwithstanding that the certificates evidencing any shares of Series A Convertible Preferred Stock mandatorily converted into Common Stock shall not have been surrendered after the Conversion Date, such shares shall no longer be deemed outstanding, and the holders thereof shall be deemed to have become holders of record of Common Stock A-3 (and such other securities and property as the holders of Series A Convertible Preferred Stock may be entitled to upon the conversion thereof, as hereinafter provided) on the Conversion Date. (c) CONVERSION RATE. Each share of Series A Convertible Preferred Stock shall be convertible at the office of the Corporation or any transfer agent for the Series A Convertible Preferred Stock, and at such other office or offices, if any, as the Board of Directors may designate, into that number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) as shall be equal to the Conversion Rate, determined as hereinafter provided, in effect at the time of conversion. Shares of Series A Convertible Preferred Stock may initially be converted into full shares of Common Stock at the rate of .18 shares of Common Stock for each share of Series A Convertible Preferred Stock, subject to adjustment from time to time as provided in Section 7 (such conversion rate, as so adjusted from time to time, being referred to herein as the "Conversion Rate"). (d) TAXES. The Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock or other securities or property upon conversion of Series A Convertible Preferred Stock in a name other than that of the holder of the shares of Series A Convertible Preferred Stock being converted, nor shall the Corporation be required to issue or deliver any such shares or other securities or property unless and until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of any such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. (e) RESERVATION OF SHARES. A number of shares of the authorized but unissued Common Stock sufficient to provide for the conversion of the Series A Convertible Preferred Stock outstanding upon the basis herein provided shall at all times be reserved by the Corporation, free from preemptive rights, for such conversion. If the Corporation shall issue any securities or make any change in its capital structure that would change the number of shares of Common Stock into which each share of the Series A Convertible Preferred Stock shall be convertible as herein provided, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Series A Convertible Preferred Stock on the new basis. The Corporation shall comply with all securities laws regulating the offer and delivery of shares of Common Stock upon conversion of the Series A Convertible Preferred Stock and shall use its best efforts to list such shares on any national securities exchange on which the Common Stock is listed or to have such shares admitted for quotation on the NASDAQ National Market if the Common Stock is admitted for quotation thereon. A-4 (f) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of Series A Convertible Preferred Stock but, in lieu of any fraction of a share of Common Stock that would otherwise be issuable in respect of the aggregate number of such shares surrendered for conversion at one time by the same holder, the Corporation shall pay in cash an amount equal to the product of (a) the Closing Price of a share of Common Stock (as defined in the next sentence) on the last trading day before the Conversion Date and (b) such fraction of a share. The "Closing Price" for each day shall be the last reported sale price regular way or, in case no sale takes place on such day, the average of the closing bid and asked prices regular way on such day, in either case as reported on the New York Stock Exchange Composite Tape, or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange, on the NASDAQ National Market, or, if the Common Stock is not admitted for quotation on the NASDAQ National Market, the average of the high bid and low asked prices on such day as recorded by the National Association of Securities Dealers, Inc. through NASDAQ, or, if the National Association of Securities Dealers, Inc. through NASDAQ shall not have reported any bid and asked prices for the Common Stock on such day, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm selected from time to time by the Corporation for such purpose, or, if no such bid and asked prices can be obtained from any such firm, the fair market value of one share of the Common Stock on such day as determined in good faith by the Board of Directors of the Corporation. 7. ADJUSTMENTS TO CONVERSION RATE. Notwithstanding anything in this Section 7 to the contrary, no change in the Conversion Rate shall be made until the cumulative effect of the adjustments called for by this Section 7 since the date of the last change in the Conversion Rate would change the Conversion Rate by more than 1%. However, once the cumulative effect would result in such a change, then the Conversion Rate shall be changed to reflect all adjustments called for by this Section 7 and not previously made. Subject to the foregoing, the Conversion Rate shall be adjusted from time to time as follows: (a) CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. In case of any consolidation or merger of the Corporation with any other corporation (other than a wholly owned subsidiary of the Corporation), or in case of any sale or transfer of all or substantially all of the assets of the Corporation, or in case of any share exchange pursuant to which all of the outstanding shares of Common Stock are converted into other securities or property, the Corporation shall, prior to or at the time of such transaction, make appropriate provision or cause appropriate provision to be made so that holders of each share of Series A Convertible Preferred Stock then outstanding shall have the right thereafter to convert such share of Series A A-5 Convertible Preferred Stock into the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock into which such shares of Series A Convertible Preferred Stock could have been converted (determined without regard to the limitation on optional conversion set forth in Section 6(a)) immediately prior to the effective date of such consolidation, merger, sale, transfer or share exchange. If in connection with any such consolidation, merger, sale, transfer or share exchange, each holder of shares of Common Stock is entitled to elect to receive either securities, cash or other assets upon completion of such transaction, the Corporation shall provide or cause to be provided to each holder of Series A Convertible Preferred Stock the right to elect the securities, cash or other assets into which the Series A Convertible Preferred Stock held by such holder shall be convertible after completion of any such transaction on the same terms and subject to the same conditions applicable to holders of the Common Stock (including, without limitation, notice of the right to elect, limitations on the period in which such election shall be made and the effect of failing to exercise the election). (b) SUBDIVISIONS, COMBINATIONS AND RECLASSIFICATIONS. In case the Corporation shall (i) subdivide its outstanding Common Stock into a greater number of shares, (ii) combine the shares of its outstanding Common Stock into a smaller number of shares or (iii) issue by reclassification of its Common Stock any shares of its capital stock, then in each such case the Conversion Rate in effect immediately prior thereto shall be proportionately adjusted so that the holder of any Series A Convertible Preferred Stock thereafter surrendered for conversion shall be entitled to receive, to the extent permitted by applicable law, the number and kind of shares of capital stock of the Corporation that such holder would have owned or have been entitled to receive after the happening of such event had such Series A Convertible Preferred Stock been converted immediately prior to the record date for such event (or if no record date is established in connection with such event, the effective date for such action). An adjustment pursuant to this subparagraph (b) shall become effective immediately after the record date in the case of a stock dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (c) RIGHTS AND WARRANTS. In case the Corporation shall issue rights or warrants to all holders of the Common Stock entitling such holders on the record date referred to below to subscribe for or purchase Common Stock at a price per share less than the Closing Price of the Common Stock (as defined in Section 6) on the record date related to such issuance (the "Current Market Price"), then in each such case the Conversion Rate in effect on such record date shall be adjusted in accordance with the formula A-6 O + N C1 = C x --------- O + N x P ----- M where C1 = the adjusted Conversion Rate. C = the current Conversion Rate. O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock offered. P = the offering price per share of the additional shares. M = the Current Market Price per share of Common Stock on the record date. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants. If all of the shares of Common Stock subject to such rights or warrants have not been issued when such rights or warrants expire, then the Conversion Rate shall promptly be readjusted to the Conversion Rate that would be in effect had the adjustment upon the issuance of such rights or warrants been made on the basis of the actual number of shares of Common Stock issued upon the exercise of such rights or warrants. (d) ROUNDING. All calculations hereunder shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. (e) SUBSEQUENT ADJUSTMENTS. In the event that at any time, as a result of an adjustment made pursuant to subparagraph (a) or (b) above, the holder of any Series A Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive securities, cash or assets other than Common Stock, the number or amount of such securities or property so receivable upon conversion shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in subparagraphs (a) through (d) above. Except as otherwise provided above in this Section 7, no adjustment in the Conversion Rate shall be for distributions or dividends declared and paid or payable on the Common Stock. (f) NOTICES. Whenever the Conversion Rate is adjusted as herein provided, the Corporation shall give prompt notice by mail to the holders of record of the outstanding Series A Convertible Preferred Stock of such adjustment, which notice shall set forth the adjustment and the new Conversion Rate. Notwithstanding the foregoing, failure by the Corporation to give such notice or a defect in such notice shall not affect the binding nature of such corporate action of the Corporation. A-7 If the Corporation shall propose to take any of the actions specified in subparagraphs (a), (b) or (c) of this Section 7 at any time after June 15, 1997 and the taking of such action would result in any adjustment in the Conversion Rate, the Corporation shall cause a notice to be mailed at least 30 days prior to the date on which the books of the Corporation will close or on which a record will be taken for such action (or if no record date is established in connection with such action, the effective date of such action) to the holders of record of the outstanding Series A Convertible Preferred Stock on the date of such notice. Such notice shall specify the action proposed to be taken by the Corporation and the date as of which holders of record of the Common Stock shall participate in any such actions or be entitled to exchange their Common Stock for securities or other property, as the case may be. Failure by the Corporation to give such notice or any defect in such notice shall not affect the validity of the transaction. (g) EXCEPTIONS. Notwithstanding any other provision of this Section 7, no adjustment in the Conversion Rate need be made (A) for a transaction referred to in subparagraphs (a), (b) or (c) of this Section 7 if holders of Series A Convertible Preferred Stock are to participate in the transaction or distribution on such a basis and with such notice as the Board of Directors determines in good faith to be fair to the holders of the Series A Convertible Preferred Stock and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction or (B) after the Series A Convertible Preferred Stock becomes convertible solely into cash (and no interest shall accrue on the cash); PROVIDED, HOWEVER, that any determination by the Board of Directors pursuant to clause (A) above shall require the concurrence of the director elected by the holders of the Series A Convertible Preferred Stock pursuant to Section 8(b)(i). 8. VOTING RIGHTS. (a) GENERAL. Except as otherwise required by law, the holders of the Series A Convertible Preferred Stock shall vote together with the holders of the Common Stock on all matters (including without limitation the matters described in Section 8(b)(ii) and the election of directors by the holders of the Common Stock) submitted to a vote of the shareholders of the Corporation. Each share of Series A Convertible Preferred Stock shall be entitled to 10 votes on any such matter. (b) SEPARATE VOTING BY HOLDERS OF SERIES A CONVERTIBLE PREFERRED STOCK. In addition to the voting rights set forth in Section 8(a), the holders of the Series A Convertible Preferred Stock shall be entitled to a separate class vote with respect to the following matters: A-8 (i) ELECTION OF DIRECTORS. The holders of the Series A Convertible Preferred Stock will be entitled to vote for and elect one member of the Corporation's Board of Directors. Such right of the holders of Series A Convertible Preferred Stock to vote for the election of a director may be exercised at any annual meeting of the holders of Series A Convertible Preferred Stock (which annual meeting shall generally be held in conjunction with any annual meeting of the holders of the Common Stock) or at any special meeting called for such purpose or at any adjournment thereof until there shall no longer be any shares of Series A Convertible Preferred Stock outstanding, at which time the term of office of the director so elected shall terminate automatically. If at any such annual or special meeting or any adjournment thereof the holders of a majority of the then outstanding shares of Series A Convertible Preferred Stock entitled to vote in such election shall be present or represented by proxy, then the holders of 50% of the shares of Series A Convertible Preferred Stock present at the meeting and entitled to vote shall be entitled to elect the director described above. The director so elected shall serve until the next annual meeting or until such director's successor shall be elected and shall qualify, unless the term of office of the person so elected as director shall have terminated by virtue of the conversion or redemption of all outstanding shares of Series A Convertible Preferred Stock. In case of any vacancy occurring with respect to the director so elected by the holders of Series A Convertible Preferred Stock, the holders of the shares of Series A Convertible Preferred Stock may, at a special meeting of such holders, elect a successor to hold office for the unexpired term of the director whose place shall be vacant. In the event of any inconsistency between the provisions of this Section 8(b)(i) and the bylaws of the Corporation, the provisions of this Section 8(b)(i) shall be controlling. (ii) SENIOR AND PARITY CAPITAL STOCK. Without the consent or affirmative vote of the holders of at least 50% of the outstanding shares of Series A Convertible Preferred Stock, the Corporation shall not authorize, create or issue any shares of any other class or series of capital stock ranking senior to or on a parity with the Series A Convertible Preferred Stock as to dividends or upon the Liquidation of the Corporation. The affirmative vote or consent of the holders of at least 50% of the outstanding shares of the Series A Convertible Preferred Stock shall be required for any amendment, alteration or repeal, whether by merger or consolidation or otherwise, of the Second Restated Articles of Incorporation (including any certificate of designations establishing any class or series of Preferred Stock of the Corporation) if the amendment, alteration or repeal adversely affects the rights or preferences of the Series A Convertible Preferred Stock; PROVIDED, HOWEVER, that any increase in the authorized Preferred Stock of the Corporation or the creation and issuance of any other capital stock of the A-9 Corporation ranking junior to the Series A Convertible Preferred Stock shall not be deemed to materially affect such powers, preferences or special rights. 9. STATUS OF SERIES A CONVERTIBLE PREFERRED STOCK UPON RETIREMENT. Shares of Series A Convertible Preferred Stock which are acquired or redeemed by the Corporation or converted into shares of Common Stock shall return to the status of authorized and unissued shares of Preferred Stock of the Corporation without designation as to series. Upon the acquisition or redemption by the Corporation or conversion of all outstanding shares of Series A Convertible Preferred Stock, all provisions of this Certificate of Designation shall cease to be of further effect. Upon the occurrence of such event, the Board of Directors of the Corporation shall have the power, and without shareholder action, to cause Restated Articles of Incorporation of the Corporation or other appropriate documents to be prepared and filed with the Secretary of State of the State of Minnesota that reflect the removal of all provisions of this Certificate of Designation relating to the Series A Convertible Preferred Stock. STATE OF MINNESOTA DEPARTMENT OF STATE FILED JUN 22 1994 /S/ JOAN ANDERSON GROWE Secretary of State A-10 STATE OF MINNESOTA DEPARTMENT OF STATE I hereby certify that this is a true and complete copy of the document as filed for record in this office. DATED: June 22 1994 ------------- /s/ Joan Anderson Growe - ------------------------ Secretary of State BY /s/ M. Meck ---------------------- CERTIFICATE OF DESIGNATION OF SERIES B CONVERTIBLE PREFERRED STOCK OF GREAT PLAINS SOFTWARE, INC. I, Bradley Burgum, the Secretary of Great Plains Software, Inc., a Minnesota corporation (the "Corporation"), do hereby certify that: (i) at a meeting of the Board of Directors of the Corporation held on June 23, 1994 the following resolution effecting the creation of a series of preferred stock designated as "Series B Convertible Preferred Stock" was duly approved by the Board of Directors of the Corporation; (ii) that the creation of such Series was duly consented to by the holder of all of the outstanding shares of Series A Convertible Preferred Stock of the Corporation on June 22, 1994; and (iii) that such resolution and consent remain in full force and effect and have not been subsequently modified or rescinded: RESOLVED, that the Corporation shall authorize the creation of a series of shares of preferred stock designated as "Series B Convertible Preferred Stock" and will reserve 1,922,898 of the Corporation's authorized but unissued shares of preferred stock, par value $.01 per share, for issuance under such series; FURTHER RESOLVED, that the shares of Series B Convertible Preferred Stock shall be entitled to the relative rights and preferences described in the attached Exhibit A. I further certify that the document attached hereto and marked Exhibit A and entitled "Great Plains Software, Inc. Certificate of Designation for Series B Convertible Preferred Stock" is a true and correct copy of the document referred to in the foregoing resolutions. IN WITNESS WHEREOF, I have executed this certificate as of this 23rd day of June, 1994. /s/ Bradley Burgum ---------------------------------- Bradley Burgum, Secretary EXHIBIT A GREAT PLAINS SOFTWARE, INC. --------------------------- CERTIFICATE OF DESIGNATIONS FOR SERIES B CONVERTIBLE PREFERRED STOCK --------------------------- 1. DESIGNATION; NUMBER OF SHARES. A series of shares of preferred stock, par value $.01 per share, of the Corporation shall be designated as "Series B Convertible Preferred Stock" (the "Series B Convertible Preferred Stock"), and the number of shares constituting the Series B Convertible Preferred Stock shall be 1,922,898. The Series B Convertible Preferred Stock shall have a par value of $.01 per share. 2. NO CUMULATIVE VOTING; NO PREEMPTIVE RIGHTS. Holders of Series B Convertible Preferred Stock shall not be entitled to any preemptive rights or to cumulate their votes in any election of directors. 3. RANK. The Series B Convertible Preferred Stock shall rank prior to all of the common stock, par value $.01 (the "Common Stock"), of the Corporation, now outstanding or hereafter issued, as to the distribution of the assets of the Corporation upon its liquidation, dissolution or winding up, whether voluntary or involuntary (such events being herein referred to as a "Liquidation"). The Series B Convertible Preferred Stock shall rank on a parity with the outstanding Series A Convertible Preferred Stock, par value $.01 per share (the "Series A Convertible Preferred Stock"), of the Corporation as to the distribution of the assets of the Corporation upon its Liquidation. 4. NO DIVIDENDS OR OTHER DISTRIBUTIONS. The Corporation shall not pay or declare any dividends or make any other distributions on its outstanding Common Stock or preferred stock, par value $.01 per share (the "Preferred Stock," which Preferred Stock includes the Series B Convertible Preferred Stock and the Series A Convertible Preferred Stock) so long as any shares of Series B Convertible Preferred Stock remain outstanding. This Section 4 shall not be deemed to apply to any distribution of assets upon the Liquidation of the Corporation. A-1 5. LIQUIDATION PREFERENCE. In the event of a Liquidation of the Corporation, the holders of Series B Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation an amount equal to $7.09 per share, and no more, before any payment shall be made or any assets distributed to the holders of Common Stock or any other capital stock of the Corporation ranking junior to the rights of the Series B Convertible Preferred Stock upon the Liquidation of the Corporation (such Common Stock and other capital stock being referred to herein collectively as "Junior Liquidation Stock"); PROVIDED, HOWEVER, that such rights shall accrue to the holders of Series B Convertible Preferred Stock only in the event that the Corporation's payments with respect to the preferences of the holders of capital stock of the Corporation ranking senior to the rights of the Series B Convertible Preferred Stock upon the Liquidation of the Corporation (such senior capital stock being referred to herein as "Senior Liquidation Stock") are fully met the entire assets of the Corporation available for distribution after the preferences of any Prior Liquidation Stock upon the Liquidation of the Corporation are fully met shall be distributed ratably among the holders of the Series B Convertible Preferred Stock and any other capital stock of the Corporation which ranks on a parity with the Series B Convertible Preferred Stock, including without limitation the Series A Convertible Preferred Stock, upon the Liquidation of the Corporation in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). After payment in full of the preference of the shares of the Series B Convertible Preferred Stock upon the Liquidation of the Corporation, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Corporation. Neither a consolidation or merger of the Corporation with another corporation or a sale or transfer of all or part of the Corporation's assets for cash, securities or other property will be deemed a Liquidation of the Corporation for purposes of this Section 5. 6. CONVERSION OF SERIES B CONVERTIBLE PREFERRED STOCK (a) AT OPTION OF HOLDERS. Holders of Series B Convertible Preferred Stock may, at their option upon surrender of the certificates therefor, convert any or all of their shares of Series B Convertible Preferred Stock into fully paid and nonassessable shares of Common Stock (and such other securities and property as they may be entitled to, as hereinafter provided) at any time after issuance thereof. The right of holders of Series B Convertible Preferred Stock to convert their shares shall be exercised by surrendering for such purpose to the Corporation or any transfer agent for the Series B Convertible Preferred Stock, and at such other office or offices, if any, as the Board of Directors may designate, certificates representing shares to be converted, duly endorsed in blank or accompanied by proper instruments of transfer. Upon the surrender of certificates representing shares of Series B Convertible Preferred Stock to be converted, duly endorsed or accompanied by proper instruments of transfer as provided above, the person converting such shares shall be deemed to be the holder of record of the Common Stock (and such A-2 other securities and property as the holders of Series B Convertible Preferred Stock may be entitled to upon the conversion thereof, as hereinafter provided) issuable upon such conversion, and all rights with respect to the shares surrendered shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets as herein provided. (b) MANDATORY. In the event a primary or secondary sale of shares of Common Stock to the public pursuant to a registered public offering under the Securities Act of 1933, as amended, shall be consummated where both (i) the proposed aggregate public offering price of the shares of Common Stock so registered is at least $10,000,000 (based on the fair value estimated by the underwriters) and (ii) as a result of such offering the public (including for this purpose all purchasers in the underwriting irrespective of any relationship with the Corporation) will own 15% or more of the shares of Common Stock then issued and outstanding (such event being herein referred to as a "Conversion Event"), the Series B Convertible Preferred Stock shall be automatically converted into fully paid and nonassessable shares of Common Stock (and such other securities and property as the holders of the Series B Convertible Preferred Stock may be entitled to upon the conversion thereof, as hereinafter provided). The Corporation shall give prompt notice of such mandatory conversion by first class mail, postage prepaid, to the holders of record of Series B Convertible Preferred Stock, addressed to such holders at their last addresses as shown on the stock books of the Corporation. The date of such mandatory conversion (the "Conversion Date") shall be the date of consummation of the Conversion Event. Each notice of mandatory conversion shall specify the Conversion Date; the then-effective Conversion Rate (as such term is hereinafter defined); that the holders of Series B Convertible Preferred Stock were deemed to have become holders of record of Common Stock (and such other securities and property as the holders of Series B Convertible Preferred Stock may be entitled to upon the conversion thereof, as hereinafter provided) on the Conversion Date and that, from and after the Conversion Date, the Series B Convertible Preferred Stock was no longer considered outstanding; and that all rights with respect to the shares of Series B Convertible Preferred Stock so converted terminated on the Conversion Date, except the right to receive Common Stock or other securities, cash or other assets as herein provided. Any notice that is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not a holder of Series B Convertible Preferred Stock receives such notice; and failure so to give such notice, or any defect in such notice, to the holders of any shares of Series B Convertible Preferred Stock shall not affect the validity of the mandatory conversion of such Series B Convertible Preferred Stock. On and after the Conversion Date, each holder of shares of Series B Convertible Preferred Stock shall surrender the certificate evidencing such shares to the Corporation, or its agent, at the place designated in such notice and shall thereupon be entitled to receive the Common Stock or other A-3 securities, cash or other assets receivable in exchange therefor. Notwithstanding that the certificates evidencing any shares of Series B Convertible Preferred Stock mandatorily converted into Common Stock shall not have been surrendered after the Conversion Date, such shares shall no longer be deemed outstanding, and the holders thereof shall be deemed to have become holders of record of Common Stock (and such other securities and property as the holders of Series B Convertible Preferred Stock may be entitled to upon the conversion thereof, as hereinafter provided) on the Conversion Date. (c) CONVERSION RATE. Each share of Series B Convertible Preferred Stock shall be convertible at the office of the Corporation or any transfer agent for the Series B Convertible Preferred Stock, and at such other office or offices, if any, as the Board of Directors may designate, into that number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) as shall be equal to the Conversion Rate, determined as hereinafter provided, in effect at the time of conversion. Shares of Series B Convertible Preferred Stock may initially be converted into full shares of Common Stock at the rate of one share of Common Stock for each share of Series B Convertible Preferred Stock, subject to adjustment from time to time as provided in Section 7 (such conversion rate, as so adjusted from time to time, being referred to herein as the "Conversion Rate"). (d) TAXES. The Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock or other securities or property upon conversion of Series B Convertible Preferred Stock in a name other than that of the holder of the shares of Series B Convertible Preferred Stock being converted, nor shall the Corporation be required to issue or deliver any such shares or other securities or property unless and until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of any such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. (e) RESERVATION OF SHARES. A number of shares of the authorized but unissued Common Stock sufficient to provide for the conversion of the Series B Convertible Preferred Stock outstanding upon the basis herein provided shall at all times be reserved by the Corporation, free from preemptive rights, for such conversion. If the Corporation shall issue any securities or make any change in its capital structure that would change the number of shares of Common Stock into which each share of the Series B Convertible Preferred Stock shall be convertible as herein provided, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Series B Convertible Preferred Stock on the new basis. The Corporation shall comply with all securities laws regulating the offer and delivery of shares of A-4 Common Stock upon conversion of the Series B Convertible Preferred Stock and shall use its best efforts to list such shares on any national securities exchange on which the Common Stock is listed or to have such shares admitted for quotation on the NASDAQ National Market if the Common Stock is admitted for quotation thereon. (f) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of Series B Convertible Preferred Stock but, in lieu of any fraction of a share of Common Stock that would otherwise be issuable in respect of the aggregate number of such shares surrendered for conversion at one time by the same holder, the Corporation shall pay in cash an amount equal to the product of (a) the Closing Price of a share of Common Stock (as defined in the next sentence) on the last trading day before the Conversion Date and (b) such fraction of a share. The "Closing Price" for each day shall be the last reported sale price regular way or, in case no sale takes place on such day, the average of the closing bid and asked prices regular way on such day, in either case as reported on the New York Stock Exchange Composite Tape, or, if the Common Stock is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading any national securities exchange, on the NASDAQ National Market, if the Common Stock is not admitted for quotation on the NASDAQ National Market, the average of the high bid and low asked prices on such day as recorded by the National Association of Securities Dealers, Inc. through NASDAQ, or, if the National Association of Securities Dealers, Inc. through NASDAQ shall not have reported any bid and asked prices for the Common Stock on such day, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm selected from time to time by the Corporation for such purpose, or, if no such bid and asked prices can be obtained from any such firm, the fair market value of one share of the Common Stock on such day as determined in good faith by the Board of Directors of the Corporation. 7. ADJUSTMENTS TO CONVERSION RATE. Notwithstanding anything in this Section 7 to the contrary, no change in the Conversion Rate shall be made until the cumulative effect of the adjustments called for by this Section 7 since the date of the last change in the Conversion Rate would change the Conversion Rate by more than 1%. However, once the cumulative effect would result in such a change, then the Conversion Rate shall be changed to reflect all adjustments called for by this Section 7 and not previously made. Subject to the foregoing, the Conversion Rate shall be adjusted from time to time as follows: (a) CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. In case of any consolidation or merger of the Corporation with any other corporation (other than a wholly owned subsidiary of the Corporation), or in case of any sale or transfer of all or substantially all of the assets of the Corporation, or in case of any share exchange A-5 pursuant to which all of the outstanding shares of Common Stock are converted into other securities or property, the Corporation shall, prior to or at the time of such transaction, make appropriate provision or cause appropriate provision to be made so that holders of each share of Series B Convertible Preferred Stock then outstanding shall have the right thereafter to convert such share of Series B Convertible Preferred Stock into the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock into which such shares of Series B Convertible Preferred Stock could have been converted immediately prior to the effective date of such consolidation, merger, sale, transfer or share exchange. If in connection with any such consolidation, merger, sale, transfer or share exchange, each holder of shares of Common Stock is entitled to elect to receive either securities, cash or other assets upon completion of such transaction, the Corporation shall provide or cause to be provided to each holder of Series B Convertible Preferred Stock the right to elect the securities, cash or other assets into which the Series B Convertible Preferred Stock held by such holder shall be convertible after completion of any such transaction on the same terms and subject to the same conditions applicable to holders of the Common Stock (including, without limitation, notice of the right to elect, limitations on the period in which such election shall be made and the effect of failing to exercise the election). (b) SUBDIVISIONS, COMBINATIONS AND RECLASSIFICATIONS. In case the Corporation shall (i) subdivide its outstanding Common Stock into a greater number of shares, (ii) combine the shares of its outstanding Common Stock into a smaller number of shares or (iii) issue by reclassification of its Common Stock any shares of its capital stock, then in each such case the Conversion Rate in effect immediately prior thereto shall be proportionately adjusted so that the holder of any Series B Convertible Preferred Stock thereafter surrendered for conversion shall be entitled to receive, to the extent permitted by applicable law, the number and kind of shares of capital stock of the Corporation that such holder would have owned or have been entitled to receive after the happening of such event had such Series B Convertible Preferred Stock been converted immediately prior to the record date for such event (or if no record date is established in connection with such event, the effective date for such action). An adjustment pursuant to this subparagraph (b) shall become effective immediately after the record date in the case of a stock dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (c) RIGHTS AND WARRANTS. In case the Corporation shall issue rights or warrants to all holders of the Common Stock entitling such holders on the record date referred to below to subscribe for or purchase Common Stock at a price per share less than the Closing Price of the Common Stock (as defined in Section 6) on the record date related to such issuance (the "Current Market Price"), then in each A-6 such case the Conversion Rate in effect on such record date shall be adjusted in accordance with the formula O + N C1 = C x ----------- O + N x P ----- M where C1 = the adjusted Conversion Rate. C = the current Conversion Rate. O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock offered. P = the offering price per share of the additional shares. M = the Current Market Price per share of Common Stock on the record date. Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants. If all of the shares of Common Stock subject to such rights or warrants have not been issued when such rights or warrants expire, then the Conversion Rate shall promptly be readjusted to the Conversion Rate that would be in effect had the adjustment upon the issuance of such rights or warrants been made on the basis of the actual number of shares of Common Stock issued upon the exercise of such rights or warrants. (d) ROUNDING. All calculations hereunder shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. (e) SUBSEQUENT ADJUSTMENTS. In the event that at any time, as a result of an adjustment made pursuant to subparagraph (a) or (b) above, the holder of any Series B Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive securities, cash or assets other than Common Stock, the number or amount of such securities or property so receivable upon conversion shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in subparagraphs (a) through (d) above. Except as otherwise provided above in this Section 7, no adjustment in the Conversion Rate shall be for distributions or dividends declared and paid or payable on the Common Stock. (f) NOTICES. Whenever the Conversion Rate is adjusted as herein provided, the Corporation shall give prompt notice by mail to the holders of record of the outstanding Series B Convertible Preferred Stock of such adjustment, which notice shall set forth the adjustment and the new Conversion Rate. Notwithstanding the foregoing, failure by the Corporation to give such notice or a A-7 defect in such notice shall not affect the binding nature of such corporate action of the Corporation. Whenever the Corporation shall propose to take any of the actions specified in subparagraphs (a), (b) or (c) of this Section 7 that would result in any adjustment in the Conversion Rate, the Corporation shall cause a notice to be mailed at least 30 days prior to the date on which the books of the Corporation will close or on which a record will be taken for such action (or if no record date is established in connection with such action, the effective date of such action) to the holders of record of the outstanding Series B Convertible Preferred Stock on the date of such notice. Such notice shall specify the action proposed to be taken by the Corporation and the date as of which holders of record of the Common Stock shall participate in any such actions or be entitled to exchange their Common Stock for securities or other property, as the case may be. Failure by the Corporation to give such notice or any defect in such notice shall not affect the validity of the transaction. (g) EXCEPTIONS. Notwithstanding any other provision of this Section 7, no adjustment in the Conversion Rate need be made (A) for a transaction referred to in subparagraphs (a), (b) or (c) of this Section 7 if holders of Series B Convertible Preferred Stock are to participate in the transaction or distribution on such a basis and with such notice as the Board of Directors determines in good faith to be fair to the holders of the Series B Convertible Preferred Stock and appropriate in light of the basis and notice on which holders of Common Stock participate in the transaction or (B) after the Series B Convertible Preferred Stock becomes convertible solely into cash (and no interest shall accrue on the cash); PROVIDED, HOWEVER, that any determination by the Board of Directors pursuant to clause (A) above shall require the concurrence of at least one of the directors elected by the holders of the Series B Convertible Preferred Stock pursuant to Section 8(b)(i). 8. VOTING RIGHTS. (a) GENERAL. Except as otherwise required by law and Section 8(b), the holders of the Series B Convertible Preferred Stock shall vote together with the holders of the Common Stock on all matters submitted to a vote of the shareholders of the Corporation. Each share of Series B Convertible Preferred Stock shall be entitled to a number of votes (calculated to the nearest 1/100th of a vote) equal to the number of shares of Common Stock into which such share of Series B Convertible Preferred Stock was convertible on the record date for determining the shareholders entitled to vote on any such matter. (b) SEPARATE VOTING BY HOLDERS OF SERIES B CONVERTIBLE PREFERRED STOCK. The holders of the Series B Convertible Preferred Stock shall vote as a separate class with respect to the following matters: A-8 (i) ELECTION OF DIRECTORS. If the number of directors elected by the holders (the "Current Holders") of the Common Stock and the Series A Convertible Preferred Stock to the Board is six or less, the holders of the Series B Convertible Preferred Stock will be entitled to vote for and elect one additional director. If the number of Directors elected by the Current Holders to the Board is more than six, the holders of the Series B Convertible Preferred Stock shall be entitled to vote for and elect two additional directors. Such right of the holders of Series B Convertible Preferred Stock to vote for the election of directors may be exercised at any annual meeting of the holders of Series B Convertible Preferred Stock (which annual meeting shall generally be held in conjunction with any annual meeting of the holders of the Common Stock) or at any special meeting called for such purpose or at any adjournment thereof until there shall no longer be any shares of Series B Convertible Preferred Stock outstanding, at which time the term of office of the director or directors so elected shall terminate automatically. If at any such annual or special meeting or any adjournment thereof the holders of a majority of the then outstanding shares of Series B Convertible Preferred Stock entitled to vote in such election shall be present or represented by proxy, then the holders of 75% of the shares of Series B Convertible Preferred Stock then outstanding and entitled to vote shall be entitled to elect the number of additional directors set forth above. The director or directors so elected shall serve until the next annual meeting or until their successor or successors shall be elected and shall qualify, unless the term of office of the person or persons so elected as director shall have terminated by virtue of the conversion or redemption of all outstanding shares of Series B Convertible Preferred Stock. In case of any vacancy occurring among the director or directors so elected by the holders of Series B Convertible Preferred Stock, the holders of 75% of the shares of Series B Convertible Preferred Stock then outstanding and entitled to vote for the election of directors may, at a special meeting of such holders, elect a successor or successors to hold office for the unexpired terms of the director or directors whose places shall be vacant. In the event of any inconsistency between the provisions of this Section 8(b)(i) and the bylaws of the Corporation, the provisions of this Section 8(b)(i) shall be controlling. (ii) SENIOR AND PARITY CAPITAL STOCK. Without the consent or affirmative vote of the holders of at least 75% of the outstanding shares of Series B Convertible Preferred Stock, the Corporation shall not authorize, create or issue any shares of any other class or series of capital stock ranking senior to or on a parity with the Series B Convertible Preferred Stock as to dividends or upon the Liquidation of the Corporation. The affirmative vote or consent of the holders of at least 75% of the outstanding shares of the Series B Convertible Preferred Stock shall be required for any amendment, A-9 alteration or repeal, whether by merger or consolidation or otherwise, of the Second Restated Articles of Incorporation (including any certificate of designations establishing any class or series of Preferred Stock of the Corporation) if the amendment, alteration or repeal adversely affects the rights or preferences of the Series B Convertible Preferred Stock; PROVIDED, HOWEVER, that any increase in the authorized Preferred Stock of the Corporation or the creation and issuance of any other capital stock of the Corporation ranking junior to the Series B Convertible Preferred Stock shall not be deemed to materially affect such powers, preferences or special rights. (iii) CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. Without the consent or affirmative vote of the holders of at least 75% of the outstanding shares of Series B Convertible Preferred Stock, the Corporation shall not engage in any transaction that would result in an adjustment of the Conversion Rate pursuant to Section 7(a) or would change the securities into which the shares of Series B Convertible Preferred Stock are convertible. 9. STATUS OF SERIES B CONVERTIBLE PREFERRED STOCK UPON RETIREMENT. Shares of Series B Convertible Preferred Stock which are acquired or redeemed by the Corporation or converted into shares of Common Stock shall return to the status of authorized and unissued shares of Preferred Stock of the Corporation without designation as to series. Upon (i) the acquisition or redemption by the Corporation or conversion of all outstanding shares of Series B Convertible Preferred Stock (unless the Warrants are then outstanding) or (ii) the occurrence of the event described in Section 6(b), all provisions of this Certificate of Designation shall cease to be of further effect. Upon the occurrence of any of such events, the Board of Directors of the Corporation shall have the power, and without shareholder action, to cause Restated Articles of Incorporation of the Corporation or other appropriate documents to be prepared and filed with the Secretary of State of the State of Minnesota that reflect the removal of all provisions of this Certificate of Designation relating to the Series B Convertible Preferred Stock. [SEAL] STATE OF MINNESOTA DEPARTMENT OF STATE FILED JUN 24 1994 /s/ Joan Anderson Growe Secretary of State A-10 STATE OF MINNESOTA DEPARTMENT OF STATE I hereby certify that this is a true and complete copy of the document as filed for record in this office. DATED June 24, 1994 ------- -- /s/ Joan Anderson Growe ------------------------ Secretary of State BY /s/ M. Meck ------------------------ EX-3.2 3 AMENDED AND RESTATED ART OF INC OF THE CO. THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION OF GREAT PLAINS SOFTWARE, INC. ARTICLE 1. NAME The name of the corporation is Great Plains Software, Inc. ARTICLE 2. REGISTERED OFFICE The address of the registered agent and office of the corporation in Minnesota is CT Corporation Systems, 405 Second Avenue South, Minneapolis, Minnesota 55401. ARTICLE 3. AUTHORIZED SHARES 3.1 AUTHORIZED CAPITAL STOCK. The total number of shares of capital stock that the Corporation is authorized to issue shall be 130,000,000 shares, consisting of 100,000,000 shares of common stock, par value $0.01 per share ("Common Stock"), and 30,000,000 shares of preferred stock, par value $0.01 per share ("Preferred Stock"). 3.2 COMMON STOCK. All shares of Common Stock shall be voting shares and shall be entitled to one vote per share. Holders of Common Stock shall not be entitled to cumulate their votes in the election of directors and shall not be entitled to any preemptive rights to acquire shares of any class or series of capital stock of the Corporation. Subject to any preferential rights of holders of Preferred Stock, holders of Common Stock shall be entitled to receive their pro rata shares, based upon the number of shares of Common Stock held by them, of such dividends or other distributions as may be declared by the Board of Directors from time to time and of any distribution of the assets of the Corporation upon its liquidation, dissolution or winding up, whether voluntary or involuntary (such events being herein referred to as a "Liquidation"). 3.3 PREFERRED STOCK. The Board of Directors of the Corporation is hereby authorized to provide, by resolution or resolutions adopted by such Board, for the issuance of Preferred Stock from time to time in one or more classes and/or series, to establish the designation and number of shares of each such class or series, and to fix the relative rights and preferences of the shares of each such class or series, all to the full extent permitted by Minnesota Statutes, Section 302A.401, or any successor provision. Without limiting the generality of the foregoing, the Board of Directors is authorized to provide that shares of a class or series of Preferred Stock: (a) are entitled to cumulative, partially cumulative or noncumulative dividends or other distributions payable in cash, capital stock or indebtedness of the Corporation or other property, at such times and in such amounts as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions; -1- (b) are entitled to a preference with respect to payment of dividends over one or more other classes and/or series of capital stock of the Corporation; (c) are entitled to a preference with respect to any distribution of assets of the Corporation upon its Liquidation over one or more other classes and/or series of capital stock of the Corporation in such amount as is set forth in the Board resolutions establishing such class or series or as is determined in a manner specified in such resolutions; (d) are redeemable or exchangeable at the option of the Corporation and/or on a mandatory basis for cash, capital stock or indebtedness of the Corporation or other property, at such times or upon the occurrence of such events, and at such prices, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions; (e) are entitled to the benefits of such sinking fund, if any, as is required to be established by the Corporation for the redemption and/or purchase of such shares by the Board resolutions establishing such class or series; (f) are convertible at the option of the holders thereof into shares of any other class or series of capital stock of the Corporation, at such times or upon the occurrence of such events, and upon such terms, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions; (g) are exchangeable at the option of the holders thereof for cash, capital stock or indebtedness of the Corporation or other property, at such times or upon the occurrence of such events, and at such prices, as are set forth in the Board resolutions establishing such class or series or as are determined in a manner specified in such resolutions; (h) are entitled to such voting rights, if any, as are specified in the Board resolutions establishing such class or series (including, without limiting the generality of the foregoing, the right to elect one or more directors voting alone as a single class or series or together with one or more other classes and/or series of Preferred Stock, if so specified by such Board resolutions) at all times or upon the occurrence of specified events; and (i) are subject to restrictions on the issuance of additional shares of Preferred Stock of such class or series or of any other class or series, or on the reissuance of shares of Preferred Stock of such class or series or of any other class or series, or on increases or decreases in the number of authorized shares of Preferred Stock of such class or series or of any other class or series. Without limiting the generality of the foregoing authorizations, any of the rights and preferences of a class or series of Preferred Stock may be made dependent upon facts ascertainable outside the Board resolutions establishing such class or series, and may incorporate by reference some or all of the terms of any agreements, contracts or other arrangements entered into by the -2- Corporation in connection with the issuance of such class or series, all to the full extent permitted by Minnesota Statutes. Unless otherwise specified in the Board resolutions establishing a class or series of Preferred Stock, holders of a class or series of Preferred Stock shall not be entitled to cumulate their votes in any election of directors in which they are entitled to vote and shall not be entitled to any preemptive rights to acquire shares of any class or series of capital stock of the Corporation. ARTICLE 4. WRITTEN ACTION BY DIRECTORS An action required or permitted to be taken at a meeting of the Board of Directors of the corporation may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by all of the directors unless the action need not be approved by the shareholders of the corporation, in which case the action may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by the number of directors that would be required to take the same action at a meeting of the Board of Directors of the corporation at which all of the directors were present. ARTICLE 5. DIRECTOR LIABILITY To the fullest extent permitted by the Minnesota Business Corporation Act as the same exists or may hereafter be amended, a director of the corporation shall not be liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of the foregoing provisions of this Article 5 by the shareholders of the corporation shall not adversely affect any rights or protection of a director of the corporation existing at the time of repeal or modification. ARTICLE 6. MINNESOTA CONTROL SHARE ACQUISITION STATUTE The corporation shall not be subject to the provisions of the Minnesota Control Share Acquisition Statute (Minnesota Statutes, Section 302A.671), or any successor provision. -3- EX-3.3 4 AMENDED BYLAWS OF CO AMENDED AND RESTATED BYLAWS OF GREAT PLAINS SOFTWARE, INC. ARTICLE I. OFFICES, CORPORATE SEAL Section 1.01. REGISTERED OFFICE. The registered office of the corporation in Minnesota shall be that set forth in the Articles of Incorporation or in the most recent amendment of the Articles of Incorporation or resolution of the directors filed with the Secretary of State of Minnesota changing the registered office. Section 1.02. OTHER OFFICES. The corporation may have such other offices, within or without the State of Minnesota, as the directors shall, from time to time, determine. Section 1.03. CORPORATE SEAL. The corporation shall have no seal. ARTICLE II. MEETINGS OF SHAREHOLDERS Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided otherwise by Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any place, within or without the State of Minnesota, as may from time to time be designated by the directors and, in the absence of such designation, shall be held at the registered office of the corporation in the State of Minnesota. The directors shall designate the time of day for each meeting and, in the absence of such designation, every meeting of shareholders shall be held at ten o'clock a.m. Section 2.02. REGULAR MEETINGS. (a) A regular meeting of the shareholders shall be held on such date as the Board of Directors shall by resolution establish. (b) At the regular meeting the shareholders, voting as provided in the Articles of Incorporation and these Bylaws, shall elect qualified successors for directors whose terms have expired or are due to expire within six months after the date of the meeting, and shall transact such other business as may properly come before them. (c) To be properly brought before a regular meeting of shareholders, business must be (1) specified in the notice of the meeting, (2) directed to be brought before the meeting by the Board of Directors or (3) proposed at the meeting by a shareholder who (i) was a shareholder of record at the time of giving of notice provided for in these Bylaws, (ii) is entitled to vote at the meeting and (iii) gives prior notice of the matter, which must otherwise be a proper -1- matter for shareholder action, in the manner herein provided. For business to be properly brought before a regular meeting by a shareholder, the shareholder must give written notice to the Secretary of the corporation so as to be received at the principal executive offices of the corporation not later than the close of business on the fifteenth day following the day on which the notice of the regular meeting was mailed to shareholders. Such notice shall set forth (1) the name and record address of the shareholder and of the beneficial owner, if any, on whose behalf the proposal will be made, (2) the class and number of shares of the corporation owned by the shareholder and beneficially owned by the beneficial owner, if any, on whose behalf the proposal will be made, (3) a brief description of the business desired to be brought before the regular meeting and the reasons for conducting such business, and (4) any material interest in such business of the shareholder and the beneficial owner, if any, on whose behalf the proposal is made. The chair of the meeting may refuse to acknowledge any proposed business not made in compliance with the foregoing procedure. Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders may be held at any time and for any purpose and may be called by the Chief Executive Officer, the Chief Financial Officer, any two directors, or by a shareholder or shareholders holding 10% or more of the shares entitled to vote on the matters to be presented to the meeting, except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by 25% or more of the voting power of all shares entitled to vote. A shareholder or shareholders holding the requisite percentage of the voting power of all shares entitled to vote may demand a special meeting of the shareholders by written notice of demand given to the Chief Executive Officer or Chief Financial Officer of the corporation and containing the purposes of the meeting. Within 30 days after receipt of demand by one of those officers, the Board of Directors shall cause a special meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, at the expense of the corporation. Special meetings shall be held on the date and at the time and place fixed by the Chief Executive Officer or the Board of Directors, except that a special meeting called by or at demand of a shareholder or shareholders shall be held in the county where the principal executive office is located. The business transacted at a special meeting shall be limited to the purposes stated in the notice of the meeting. Section 2.04. QUORUM, ADJOURNED MEETINGS. The holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, those present may adjourn to such day as they shall, by majority vote, agree upon, and a notice of such adjournment shall be mailed to each shareholder entitled to vote at least 5 days before such adjourned meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present, the shareholders may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. -2- Section 2.05. VOTING. At each meeting of the shareholders every shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the Articles of Incorporation or statute provide otherwise, shall have one vote for each share having voting power registered in such shareholder's name on the books of the corporation. Jointly owned shares may be voted by any joint owner unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. All questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote except if otherwise required by statute, the Articles of Incorporation, or these Bylaws. Section 2.06. RECORD DATE. The Board of Directors may fix a time, not exceeding 60 days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. If the Board of Directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the 20th day preceding the date of such meeting. Section 2.07. NOTICE OF MEETINGS. There shall be mailed to each shareholder, shown by the books of the corporation to be a holder of record of voting shares, at his or her address as shown by the books of the corporation, a notice setting out the time and place of each regular meeting and each special meeting, except where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment, which notice shall be mailed at least five days prior thereto; except that notice of a meeting at which an agreement of merger or exchange is to be considered shall be mailed to all shareholders of record, whether entitled to vote or not, at least fourteen days prior thereto. Every notice of any special meeting called pursuant to Section 2.03 hereof, shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purpose stated in the notice. The written notice of any meeting at which a plan of merger or exchange is to be considered shall so state such as a purpose of the meeting. A copy or short description of the plan of merger or exchange shall be included in or enclosed with such notice. Section 2.08. WAIVER OF NOTICE. Notice of any regular or special meeting may be waived by any shareholder either before, at or after such meeting orally or in a writing signed by such shareholder or a representative entitled to vote the shares of such shareholder. A shareholder, by his or her attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. Section 2.09. WRITTEN ACTION. Any action which might be taken at a meeting of the shareholders may be taken without a meeting if done in writing and signed by all of the shareholders entitled to vote on that action. -3- ARTICLE III. DIRECTORS Section 3.01. GENERAL POWERS. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors, except as otherwise permitted by statute. Section 3.02. NUMBER, QUALIFICATION AND TERM OF OFFICE. The Board of Directors shall consist of one or more directors. The number of directors shall be fixed by resolution of the Board of Directors and thereafter shall be increased or decreased from time to time by resolution of the Board of Directors or the shareholders. Directors need not be shareholders. The directors shall be divided into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the 1997 annual meeting of shareholders, the term of office of the second class to expire at the 1998 annual meeting of shareholders and the term of office of the third class to expire at the 1999 annual meeting of shareholders. At each annual meeting of shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected to hold office for a term of three consecutive years. Each director of the corporation shall serve until such director's successor shall have been elected and shall qualify, or until the earlier death, resignation, removal or disqualification of such director. Section 3.03. BOARD MEETINGS. Meetings of the Board of Directors may be held from time to time at such time and place within or without the State of Minnesota as may be designated in the notice of such meeting. Section 3.04. CALLING MEETINGS - NOTICE. Meetings of the Board of Directors may be called by the Chairman of the Board by giving at least twenty-four hours' notice, or by any other director by giving at least five days' notice, of the date, time and place thereof to each director by mail, telephone, telegram or in person. If the day or date, time and place of a meeting of the Board of Directors has been announced at a previous meeting of the Board, no notice is required. Notice of an adjourned meeting of the Board of Directors need not be given other than by announcement at the meeting at which adjournment is taken. Section 3.05. WAIVER OF NOTICE. Notice of any meeting of the Board of Directors may be waived by any director either before, at, or after such meeting orally or in a writing signed by such director. A director, by his or her attendance at any meeting of the Board of Directors, shall be deemed to have waived notice of such meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting. Section 3.06. QUORUM. A majority of the directors holding office immediately prior to a meeting of the Board of Directors shall constitute a quorum for the transaction of business at such meeting. -4- Section 3.07. ABSENT DIRECTORS. A director may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Directors. If such director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 3.08. CONFERENCE COMMUNICATIONS. Any or all directors may participate in any meeting of the Board of Directors, or of any duly constituted committee thereof, by any means of communication through which the directors may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, such directors participating pursuant to this Section 3.08 shall be deemed present in person at the meeting, and the place of the meeting shall be the place of origination of the conference communication. Section 3.09. VACANCIES; NEWLY CREATED DIRECTORSHIPS. Vacancies in the Board of Directors of this corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by a majority of the remaining directors of the Board although less than a quorum; newly created directorships resulting from an increase in the authorized number of directors by action of the Board of Directors as permitted by Section 3.02 may be filled by a two-thirds vote of the directors serving at the time of such increase; and each director elected pursuant to this Section 3.09 shall be a director until such director's successor is elected by the shareholders at their next regular or special meeting. Section 3.10. REMOVAL. Any director may be removed from office, but only for cause, by the affirmative vote of the shareholders holding a majority of the shares entitled to vote at an election of directors. In the event that a director is so removed, a new director shall be elected at the same meeting. A director named by the Board of Directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of the removal. In the event that the entire Board or any one or more directors be so removed, new directors shall be elected at the same meeting. Section 3.11. COMMITTEES. A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the Board in the management of the business of the corporation to the extent provided in the resolution. A committee shall consist of one or more persons, who need not be directors, appointed by affirmative vote of a majority of the directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the Board of Directors. -5- A majority of the members of the committee present at a meeting is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in a resolution approved by the affirmative vote of a majority of the directors present. Section 3.12. WRITTEN ACTION. Any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by a majority of the directors or committee members, unless the Articles provide otherwise and the action need not be approved by the shareholders. Section 3.13. COMPENSATION. Directors who are not salaried officers of this corporation shall receive such fixed sum per meeting attended, such fixed annual sum and any such other compensation as shall be determined, from time to time, by resolution of the Board of Directors. The Board of Directors may, by resolution, provide that all directors shall receive their expenses, if any, of attendance at meetings of the Board of Directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. ARTICLE IV. OFFICERS Section 4.01. NUMBER. The officers of the corporation shall consist of a Chairman of the Board (if one is elected by the Board), a Chief Executive Officer, Chief Financial Officer, a Secretary (if one is elected by the Board) and such other officers and agents as may, from time to time, be elected or appointed by the Board of Directors. Any number of offices may be held by the same person. Section 4.02. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The Board of Directors shall elect or appoint, by resolution approved by the affirmative vote of a majority of the directors present, from within or without their number, the Chief Executive Officer, Chief Financial Officer and such other officers as may be deemed advisable, each of whom shall have the powers, rights, duties, responsibilities, and terms in office provided for in these Bylaws or a resolution of the Board of Directors not inconsistent therewith. The Chief Executive Officer, the Chief Financial Officer and all other officers who may be directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship. Section 4.03. REMOVAL AND VACANCIES. Any officer may be removed from his or her office by the Board of Directors at any time, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy among the officers of the corporation by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors. Section 4.04. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is elected, shall preside at all meetings of the shareholders and directors and shall have such other duties as may be prescribed, from time to time, by the Board of Directors. -6- Section 4.05. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be the chief executive officer and shall have general active management of the business of the corporation. In the absence of the Chairman of the Board, he or she shall preside at all meetings of the shareholders and directors. He or she shall see that all orders and resolutions of the Board of Directors are carried into effect. He or she shall execute and deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation unless the authority to execute and deliver is required by law to be exercised by another person or is expressly delegated by the Articles or Bylaws or by the Board of Directors to some other officer or agent of the corporation. He or she shall maintain records of and, whenever necessary, certify all proceedings of the Board of Directors and the shareholders, and in general, shall perform all duties usually incident to the office of the Chief Executive Officer. He or she shall have such other duties as may, from time to time, be prescribed by the Board of Directors. Section 4.06. PRESIDENT. The President, if one is elected, shall have such powers and shall perform such duties as may be prescribed by the Board of Directors or by the Chief Executive Officer. Section 4.07. VICE PRESIDENT. Each Vice President, if one or more are elected, shall have such powers and shall perform such duties as may be specified in the Bylaws or prescribed by the Board of Directors or by the Chief Executive Officer. In the event of the absence or disability of the Chief Executive Officer or the President, Vice Presidents shall succeed to their powers and duties in the order designated by the Board of Directors. Section 4.08. SECRETARY. The Secretary, if one is elected, shall be secretary of and shall attend all meetings of the shareholders and Board of Directors and shall record all proceedings of such meetings in the minute book of the corporation. He or she shall give proper notice of meetings of shareholders and directors. He or she shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the Chief Executive Officer. Section 4.09. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be the chief financial officer and shall keep accurate financial records for the corporation. He or she shall deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositaries as the Board of Directors shall, from time to time, designate. He or she shall have power to endorse, for deposit, all notes, checks and drafts received by the corporation. He or she shall disburse the funds of the corporation, as ordered by the Board of Directors, making proper vouchers therefor. He or she shall render to the Chief Executive Officer and the directors, whenever requested, an account of all his or her transactions as Chief Financial Officer and of the financial condition of the corporation, and shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the Chief Executive Officer. -7- Section 4.10. TREASURER. The Treasurer, if one is elected, shall be responsible for the treasury operations of the corporation and shall be perform such other duties as may be prescribed by the Board of Directors, the Chief Executive Officer and the Chief Financial Officer. Section 4.11. COMPENSATION. The officers of this corporation shall receive such compensation for their services as may be determined, from time to time, by resolution of the Board of Directors. ARTICLE V. SHARES AND THEIR TRANSFER Section 5.01. CERTIFICATES FOR SHARES. All shares of the corporation shall be certificated shares. Every owner of shares of the corporation shall be entitled to a certificate, to be in such form as shall be prescribed by the Board of Directors, certifying the number of shares of the corporation owned by such shareholder. The certificates for such shares shall be numbered in the order in which they shall be issued and shall be signed, in the name of the corporation, by the Chief Executive Officer and by the Secretary or an Assistant Secretary or by such officers as the Board of Directors may designate. If the certificate is signed by a transfer agent or registrar, such signatures of the corporate officers may be by facsimile if authorized by the Board of Directors. Every certificate surrendered to the corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 5.04. Section 5.02. ISSUANCE OF SHARES. The Board of Directors is authorized to cause to be issued shares of the corporation up to the full amount authorized by the Articles of Incorporation in such amounts as may be determined by the Board of Directors and as may be permitted by law. No shares shall be allotted except in consideration of cash or other property, tangible or intangible, received or to be received by the corporation under a written agreement, of services rendered or to be rendered to the corporation under a written agreement, or of an amount transferred from surplus to stated capital upon a share dividend. At the time of such allotment of shares, the Board of Directors making such allotments shall state, by resolution, their determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are allotted. Section 5.03. TRANSFER OF SHARES. Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or the shareholder's legal representative, or the shareholder's duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares. The corporation may treat as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation. Section 5.04. LOSS OF CERTIFICATES. Except as otherwise provided by Minnesota Statutes Section 302A.419, any shareholder claiming a certificate for shares to be lost, stolen or -8- destroyed shall make an affidavit or that fact in such form as the Board of Directors shall require and shall, if the Board of Directors so requires, give the corporation a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the Board of Directors, to indemnify the corporation against any claim which may be made against it on account of the reissue of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed. ARTICLE VI. DIVIDENDS, RECORD DATE Section 6.01. DIVIDENDS. Subject to the provisions of the Articles of Incorporation, of these Bylaws, and of law, the Board of Directors may declare dividends whenever, and in such amounts as, in its opinion, are deemed advisable. Section 6.02. RECORD DATE. Subject to any provisions of the Articles of Incorporation, the Board of Directors may fix a date not exceeding 120 days preceding the date fixed for the payment of any dividend as the record date for the determination of the shareholders entitled to receive payment of the dividend and, in such case, only shareholders of record on the date so fixed shall be entitled to receive payment of such dividend notwithstanding any transfer of shares on the books of the corporation after the record date. The Board of Directors may close the books of the corporation against the transfer of shares during the whole or any part of such period. ARTICLE VII. BOOKS AND RECORDS, FISCAL YEAR Section 7.01. SHARE REGISTER. The Board of Directors of the corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the Board: (1) a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder; and (2) a record of the dates on which certificates or transaction statements representing shares were issued. Section 7.02. OTHER BOOKS AND RECORDS. The Board of Directors shall cause to be kept at its principal executive office, or, if its principal executive office is not in Minnesota, shall make available at its registered office within ten days after receipt by an officer of the corporation of a written demand for them made by a shareholder or other person authorized by Minnesota Statutes Section 302A.461, originals or copies of: (1) records of all proceedings of shareholders for the last three years; -9- (2) records of all proceedings of the Board for the last three years; (3) its articles and all amendments currently in effect; (4) its bylaws and all amendments currently in effect; (5) financial statements required by Minnesota Statutes Section 302A.463 and the financial statement for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; (6) reports made to shareholders generally within the last three years; (7) a statement of the names and usual business addresses of its directors and principal officers; (8) any shareholder voting or control agreements of which the corporation is aware; and (9) such other records and books of account as shall be necessary and appropriate to the conduct of the corporate business. Section 7.03. FISCAL YEAR. The fiscal year of the corporation shall be determined by the Board of Directors. ARTICLE VIII. LOANS, GUARANTEES, SURETYSHIP The corporation may lend money to, guarantee an obligation of, become a surety for, or otherwise financially assist a natural or legal person if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the directors present and: (1) is in the usual and regular course of business of the corporation; (2) is with, or for the benefit of, a related corporation, an organization in which the corporation has a financial interest, an organization with which the corporation has a business relationship, or an organization to which the corporation has the power to make donations; (3) is with, or for the benefit of, an officer or other employee of the corporation or a subsidiary, including an officer or employee who is a director of the corporation or a subsidiary, and may reasonably be expected, in the judgment of the Board, to benefit the corporation; or -10- (4) has been approved by the affirmative vote of the holders of two-thirds of the outstanding shares. The loan, guarantee, surety contract or other financial assistance may be with or without interest, and may be unsecured, or may be secured in the manner as a majority of the directors approve, including, without limitation, a pledge of or other security interest in shares of the corporation. Nothing in this section shall be deemed to deny, limit, or restrict the powers of guaranty or warranty of the corporation at common law or under a statute of the State of Minnesota. ARTICLE IX. INDEMNIFICATION OF CERTAIN PERSONS The corporation shall indemnify such persons, for such expenses and liabilities, in such manner, under such circumstances, and to such extent as permitted by Minnesota Statutes Section 302A.521, as now enacted or hereafter amended. ARTICLE X. AMENDMENTS These Bylaws may be amended or altered by a vote of the majority of the whole Board of Directors at any meeting provided that notice of such proposed amendment shall have been given in the notice given to the directors of such meeting. Such authority in the Board of Directors is subject to the power of the shareholders to change or repeal such Bylaws by a majority vote of the shareholders present or represented at any regular or special meeting of shareholders called for such purpose, and the Board of Directors shall not make or alter any Bylaws fixing a quorum for meetings of shareholders, prescribing procedures or removing directors or filling vacancies in the Board of Directors, or fixing the number of directors or their classifications, qualifications, or terms of office, except that the Board of Directors may adopt or amend any Bylaw to increase their number. ARTICLE XI. SECURITIES OF OTHER CORPORATIONS Section 11.01. VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer shall have full power and authority on behalf of the corporation (a) to attend any meeting of security holders of other corporations in which the corporation may hold securities and to vote such securities on behalf of this corporation; (b) to execute any proxy for such meeting on behalf of the corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of this corporation. At such meeting, the Chief Executive Officer shall possess and may exercise any and all rights and powers incident to the ownership of such securities that the corporation possesses. The Board of Directors may, from time to time, grant such power and authority to one or more other persons and may remove such power and authority from the Chief Executive Officer upon any other person or persons. -11- Section 11.02. PURCHASE AND SALE OF SECURITIES. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may, from time to time, confer like powers upon any other person or persons. -12- EX-10.1 5 LEASE AGREEMENT BETWEEN CO AND WEST ACRES L E A S E Landlord: West Acres Office Park Tenant: Great Plains Software, Inc. Dated: October 1, 1983 Commencement Date: October 1, 1983 WEST ACRES OFFICE PARK LEASE TABLE OF CONTENTS Paragraph Page --------- ---- ACCEPTANCE OF PREMISES . . . . . . . . . . . . . . . . 10 4 ACCESS TO PREMISES . . . . . . . . . . . . . . . . . . 39 16 ACCORD AND SATISFACTION. . . . . . . . . . . . . . . . 46 19 ADDITIONAL HOLDINGS TO BE CONSTRUCTED. . . . . . . . . 55 20 ADJACENT EXCAVATION. . . . . . . . . . . . . . . . . . 56 20 ALTERATIONS AND IMPROVEMENTS . . . . . . . . . . . . . 14 5 ASSIGNMENT & SUBLETTING. . . . . . . . . . . . . . . . 13 4 ATTORNMENT . . . . . . . . . . . . . . . . . . . . . . 30 10 BASE RENT. . . . . . . . . . . . . . . . . . . . . . . 6 3 BROKERAGE. . . . . . . . . . . . . . . . . . . . . . . 51 19 BUILDING . . . . . . . . . . . . . . . . . . . . . . . 8 4 COMMENCEMENT AND TERM. . . . . . . . . . . . . . . . . 4 3 COMMON AREA. . . . . . . . . . . . . . . . . . . . . . 3 3 COMMON AREAS DEFINED . . . . . . . . . . . . . . . . . 20 8 CONDEMNATION OF LESS THAN FEE. . . . . . . . . . . . . 34 13 CONSENT AND APPROVAL . . . . . . . . . . . . . . . . . 47 19 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . 7 3 CONTROL OF COMMON AREAS. . . . . . . . . . . . . . . . 19 7 DAMAGE OR DESTRUCTION. . . . . . . . . . . . . . . . . 32 11 DEFAULT--RIGHT TO RE-ENTER . . . . . . . . . . . . . . 35 14 EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . 33 13 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . 48 19 i Paragraph Page --------- ---- ESTOPPEL CERTIFICATE . . . . . . . . . . . . . . . . . 29 10 EXCUSE FOR NONPERFORMANCE. . . . . . . . . . . . . . . 9 4 EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . 60 21 GLASS. . . . . . . . . . . . . . . . . . . . . . . . . 27 10 GOVERNMENTAL REGULATIONS . . . . . . . . . . . . . . . 12 4 HOLDING OVER . . . . . . . . . . . . . . . . . . . . . 41 18 INCREASE IN INSURANCE PREMIUMS . . . . . . . . . . . . 26 9 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . 23 8 JANITORIAL SERVICE . . . . . . . . . . . . . . . . . . 52 20 LEASE YEAR . . . . . . . . . . . . . . . . . . . . . . 5 3 LEGAL EXPENSES . . . . . . . . . . . . . . . . . . . . 38 16 LOSS AND DAMAGE. . . . . . . . . . . . . . . . . . . . 40 17 MAINTENANCE AND REPAIRS. . . . . . . . . . . . . . . . 16 5 NO OPTION. . . . . . . . . . . . . . . . . . . . . . . 57 21 NO PARTNERSHIP RELATION. . . . . . . . . . . . . . . . 49 19 NON-EXCLUSIVE USE. . . . . . . . . . . . . . . . . . . 21 8 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 50 19 OPTION TO CURE DEFAULT . . . . . . . . . . . . . . . . 45 19 OPTION TO RENEW. . . . . . . . . . . . . . . . . . . . 59 21 OWNERSHIP OF IMPROVEMENTS AND FIXTURES . . . . . . . . 15 5 PREMISES . . . . . . . . . . . . . . . . . . . . . . . 1 2 QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . 43 18 RECORDING--SHORT FORM LEASE. . . . . . . . . . . . . . 58 21 RIGHT TO RELET . . . . . . . . . . . . . . . . . . . . 36 15 ii Paragraph Page --------- ---- RIGHT TO RELOCATE. . . . . . . . . . . . . . . . . . . 54 20 RIGHT TO TERMINATE . . . . . . . . . . . . . . . . . . 37 16 RULES AND REGULATIONS. . . . . . . . . . . . . . . . . 18 7 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . 53 20 SUBORDINATION. . . . . . . . . . . . . . . . . . . . . 31 11 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . 42 18 SURRENDER OF PREMISES. . . . . . . . . . . . . . . . . 17 6 TENANT'S FIRE INSURANCE. . . . . . . . . . . . . . . . 24 9 TENANT'S LIABILITY INSURANCE . . . . . . . . . . . . . 22 8 USE OF PREMISES. . . . . . . . . . . . . . . . . . . . 2 2 UTILITIES AND CHARGES. . . . . . . . . . . . . . . . . 28 10 WAIVER OF DEFAULT. . . . . . . . . . . . . . . . . . . 44 18 WAIVER OF SUBROGATION. . . . . . . . . . . . . . . . . 25 9 WASTE OR NUISANCE. . . . . . . . . . . . . . . . . . . 11 4 iii LEASE INDENTURE OF LEASE made this lst day of October, 1983, by and between WEST ACRES OFFICE PARK, a North Dakota general partnership, (called "WAOP" or the "Landlord"), whose post office address is 1701 38th Street South, Fargo, North Dakota, and GREAT PLAINS SOFTWARE, INC. (the "Tenant"), whose post office address is 1701 38th Street South, Fargo, North Dakota 58103 WITNESSETH: 1. PREMISES. In consideration of the rents, covenants, conditions and agreements reserved and contained in this lease, and to be performed on the part of the Tenant, Landlord demises and leases to Tenant, and Tenant hires and leases from Landlord, those certain premises and facilities located in the West Acres Office Park Building ("Building") in Fargo, North Dakota, which premises consist of: (a) Office space on the lower level of the building, including 1,276 square feet, (b) Office space on the main floor of the building, including 9,267 square feet, (c) Four parking spaces in the underground parking facility of the building. All called the "Leased Premises." But reserving and excepting to Landlord the use of the exterior walls and the roof, for such maintenance and repairs as normally may be required, and the right to install, maintain, use, repair and replace pipes, ducts, conduits and wire leading through the Leased Premises in locations which will not materially interfere with Tenant's use thereof and serving other parts of the Building. The location of the Leased Premises are outlined and marked on the attached plan of the lower level and main floor of the Building, marked Exhibit "A" and made a part of this lease. 2. USE OF PREMISES. Tenant shall occupy and use the Leased Premises solely for its offices plus shipping and production. Tenant shall occupy the Leased Premises at the commencement of the lease term, and shall occupy said premises therein continuously and uninterruptedly for the purpose above-stated. Tenant shall not use or permit, or suffer the use of, the Leased Premises for any other purpose. 3. COMMON AREA. The use and occupation by the Tenant of the Leased Premises shall include the use in common with others entitled thereto of the open parking areas, service roads, sidewalks, walkways, landscaped areas and all other common areas and facilities now completed or to be completed; subject, however, to the terms and conditions of this lease and to reasonable rules and regulations for the use thereof as prescribed from time to time by Landlord. Landlord shall provide adequate open parking areas for customers, business invitees of Tenant and other tenants. In addition, GPS shall have right to use west sidewalk for UPS and semi truck deliveries. 4. COMMENCEMENT AND TERM. The term of this lease and Tenant's obligation to pay rent hereunder shall commence on October 1, 1983, (the commencement date) and unless sooner terminated as permitted by this lease or by law shall end at midnight on the last day of the 12th calendar month following the lease commencement date. 5. LEASE YEAR. The term "lease year" means a period of twelve consecutive full calendar months. The first lease year shall begin on the date of commencement of the lease term if that date shall occur on the first day of a calendar month; if not, then the first lease year shall commence upon the first day of the calendar month next following the day of commencement of the lease term. Each succeeding lease year shall commence upon the anniversary of the date of the first lease year. 6. BASE RENT. Beginning with the rent commencement date of this lease, the Tenant shall pay the Landlord a fixed annual base rent as follows: (a) For the 1,276 square feet on the lower level, $6.00 per square foot (b) For the 9,267 square feet located on the main floor level of the building, $7.50 per square foot. The fixed annual base rent shall be paid to the Landlord in equal monthly installments of $6,430 in advance on the first day of each month during the term of this lease. 7. CONSTRUCTION. Landlord aqrees to perform the fit up improvements of the interior of Tenant's Leased Premises as follows: construct appropriate dividing walls, lay carpeting and paint or recover the walls to the extent of $2.50 per square foot. Tenant agrees to -3- reimburse Landlord for the cost of improvements exceeding the allowance of $2.50 per square foot. Landlord shall submit an itemized list of all costs. 8. BUILDING. Landlord hereby reserves the right at any time to make alterations or additions to the building in which the Leased Premises are contained and to build adjoining the same; provided, however, that any improvements to be made in accordance with this paragraph shall not substantially interfere with the Tenant's use of the Leased Premises. 9. EXCUSE FOR NONPERFORMANCE. Anything in this lease to the contrary notwithstanding, if performance of any act or obligation is prevented or delayed by an Act of God, war, labor disputes, or other cause or causes beyond the reasonable control of Landlord or Tenant, the time for the performance of the act or obligation will be extended for the period that such act or performance is delayed or prevented by any such cause. This provision shall not operate to excuse Tenant from prompt payment of rent, additional rent or any other payment or payments required by the terms of this lease. 10. ACCEPTANCE OF PREMISES. Occupancy by Tenant of the Leased Premises, pursuant to the terms of this lease, shall constitute an acknowledgment by Tenant that the Leased Premises are in the condition called for by the lease and that Landlord has performed all of Landlord's work with respect thereto, except for such items which are not completed or do not conform to the terms of this lease or any exhibit and as to which Tenant shall have given notice to Landlord within thirty (30) days after Tenant assumes occupancy. Any disagreement which may arise between Landlord and Tenant with reference to the work to be performed by either of them shall be resolved by arbitration. 11. WASTE OR NUISANCE. The Tenant shall not commit or suffer to be committed any waste upon the Leased Premises or any nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the Leased Premises may be located. 12. GOVERNMENTAL REGULATIONS. Tenant shall, at Tenant's sole cost and expense, comply with and faithfully observe all of the rules, regulations, ordinances, laws and requirements of county, municipal, state, federal and other applicable governmental authorities, present or future, which affect the occupancy or use of, or carrying on of Tenant's business or profession in the Leased Premises. 13. ASSIGNMENT & SUBLETTING. Tenant shall not assign this lease in whole or in part, nor sublet all or -4- any part of the Leased Premises, or grant licenses or concessions therein without the prior written consent of Landlord in each instance. The consent of Landlord shall not be unreasonably withheld. Notwithstanding any assignment or subletting, Tenant shall remain fully liable on this lease and shall not be released from performing any of its terms, covenants and conditions. 14. ALTERATIONS AND IMPROVEMENTS. Without first obtaining Landlord's written approval and consent and delivering to Landlord at the time approval is sought, the drawing and specifications for any proposed work, Tenant shall not make, cause to be made, or contract for any alterations, additions, or improvements to be made on the Leased Premises, or to install therein any fixture, floor covering, interior or exterior lighting, plumbing fixtures, or other structural changes or additions to the premises. 15. OWNERSHIP OF IMPROVEMENTS AND FIXTURES. All alterations, installations, additions and improvements made upon the Leased Premises by either party shall, unless Landlord otherwise elects (by giving notice thereof to Tenant not less than thirty (30) days prior to the expiration or other termination of this lease), become the property of the Landlord and shall remain upon and be surrendered with the Leased Premises as a part thereof at the expiration or sooner termination of this lease. Movable furniture, fixtures and other personal property installed by the Tenant at its expense shall remain its property and may be removed at any time, provided Tenant promptly repairs any damage caused by such removal. Tenant shall not place or suffer to be placed or maintained anywhere in the Leased Premises or on any exterior door, wall or window of the Leased Premises any sign, or advertising matter or other thing of any kind, and will not place or maintain any decoration, lettering, or advertising matter on the glass of any window or door of the Leased Premises without first obtaining Landlord's written approval and consent. Signs shall be harmonious to the general architectural treatment of the office space in the Building and must comply with sign criteria specified by Landlord in preliminary drawings and specifications. Tenant further agrees to maintain such sign, decorations, lettering, advertising matter or other things as may be approved in good condition and repair at all times. 16. MAINTENANCE AND REPAIRS. With respect to maintenance and repairs Tenant agrees as follows: (a) Throughout the term of this lease, the Tenant, shall, at its sole expense, take good care of the -5- Leased Premises, maintain them in neat and good order, condition and repair; make good any injury or breakage done by Tenant or Tenant's agents, employees or licensees; and make all necessary interior repairs thereto--ordinary wear and tear excepted. All repairs made by the Tenant shall be at least equal in quality and class to the original work. It shall not, however, be the obligation of the Tenant to perform cleaning and routine daily maintenance which shall be the obligation of the Landlord as provided in paragraph 52 hereof. If the Landlord is required to make repairs to structural portions of the building by reason of Tenant's negligent acts or omission to act, or if Tenant refuses under the terms of this lease, to the reasonable satisfaction of Landlord after ten (10) days' written notice, then Landlord may make such repairs or conduct such maintenance without liability to Tenant for any loss or damage that may accrue to Tenant's property or to the Tenant's business, profession or other use of the Leased Premises, and upon completion thereof and presentation of a statement therefor, Tenant shall pay Landlord as additional rent at the time the next rental payment is due, the Landlord's cost and expenses of making such repairs or conducting such maintenance, plus fifteen percent (15%) for overhead and supervision. (b) The Tenant shall not be obligated to make any repair which is occasioned by defective materials or workmanship in the construction of the building or in any of the Landlord's improvements required by this lease and such repairs shall be made by the Landlord at its own expense. The Landlord during the term of this lease and any renewal or extension thereof, shall keep the structural supports and exterior walls of the building, including windows, doors and passageways from the lobby, street and parking area leading to the Leased Premises and the adjacent sidewalks and entrance lobby, in good order and repair and free of snow, ice, rubbish and all obstructions. The Landlord shall maintain in good working order and repair all plumbing, toilet facilities and other fixtures and equipment installed for the general supply of hot and cold water, heat, air conditioning and electricity as provided for in paragraph 28 of this lease. 17. SURRENDER OF PREMISES. At the expiration of the tenancy hereby created, Tenant shall surrender the Leased Premises in as good condition and order as they were when Tenant took possession, ordinary wear and tear and damage by casualty excepted, and shall return all keys for the Leased Premises to Landlord and shall inform Landlord of all combinations on locks, safes and vaults, if any, in the Leased Premises. Tenant shall at its expense remove all fixtures, furniture, signs and any alterations or improvements made by Tenant as to which Landlord shall have made the election as provided in the article entitled -6- "Ownership of Improvements and Fixtures," before surrendering the Leased Premises as stated in this lease and shall repair any damage to the Leased Premises caused thereby. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this lease. 18. RULES AND REGULATIONS. Landlord reserves the right to promulgate such reasonable rules and regulations relating to the building, common areas and facilities, and any part or parts thereof as Landlord may deem appropriate and for the best interests of the tenants for the common use of the Building. Tenant agrees to abide by such rules which shall be uniformly applied and to cooperate in their observance. The rules and regulations, and any amendments or additions that may be made from time to time, shall be effective and become binding upon Tenant upon delivery of a copy of them to Tenant. 19. CONTROL OF COMMON AREAS. All common areas and other facilities (as hereafter defined), provided by Landlord in or about the Building, for the general use, in common, of tenants, their officers, agents, employees, clients, customers, and invitees shall be subject to the exclusive control and management of Landlord, and Landlord shall have the right from time to time to promulgate and enforce reasonable rules and regulations as it may deem appropriate, with respect to all facilities and areas mentioned in this paragraph which shall apply equally and without discrimination to all tenants and permittees. Landlord shall have the right to construct, maintain and operate lighting facilities on all said areas and improvements; to police the same; to change the area, level, location, and arrangement of such facilities; to close all or any portion of such areas or facilities to such extent as may, in the opinion of Landlord's counsel, be legally sufficient to prevent a dedication thereof or the accrual of any rights to any person or the public therein; to close temporarily all or any portion of the facilities; and to do and perform such other acts in said areas and improvements as in the use of good business judgment, Landlord shall determine to be advisable with a view of the improvement of the convenience and use thereof by Tenants, their officers, agents, employees, clients, customers, and invitees. Landlord will operate and maintain the common facilities referred to in this paragraph in such manner as it, in its sole discretion, shall determine and shall have full right and authority to employ and discharge all personnel with respect thereto; provided, however, that the common areas shall be available to the Tenant and its clients, customers, or invitees at all reasonable times. -7- 20. COMMON AREAS DEFINED. "Common areas and common facilities," whether such terms are used individually or collectively, mean all areas, space, equipment, signs and special services provided by Landlord for the common or joint use and benefit of the occupants of the Building and their officers, employees, agents, clients, customers and other invitees, including without limitation, the stairs, washrooms, utility rooms, hallways, and elevators. 21. NON-EXCLUSIVE USE. All common areas and facilities not within the Leased Premises shall be used and occupied by Tenant under a non-exclusive right, in common with Landlord and all other Tenants in the Building, and if the amount of such areas be diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. 22. TENANT'S LIABILITY INSURANCE. Tenant shall during the entire lease term, keep in full force and effect at its own cost, a policy of public liability and property damage insurance with respect to the Leased Premises and the business or profession operated by Tenant and any of its subtenants in which the limits of public liability for bodily injury or death shall be not less than $250,000 per person, and not less than $500,000 per accident, and not less than $100,000 property damage in one accident. The insurance policy shall name Landlord, and any person, firms or corporations, if any, designated by it, as an assured, and shall contain a clause that the insurer will not cancel or change the insurance without first giving the Landlord at least thirty (30) days' prior written notice. The insurance shall be in a responsible company qualified to do business in North Dakota, as approved by Landlord, and a copy of the policy or a certificate of insurance shall be delivered to Landlord. 23 . INDEMNIFICATION. Except for claims arising out of acts caused by the affirmative negligence of the Landlord or its representatives, Tenant covenants and agrees to indemnify, defend and save Landlord harmless from and against any and all injury, loss, claims, actions, damages, liability, costs and expense, including reasonable attorneys fees, in connection with loss of life, personal or bodily injury, damage to property, or litigation arising from or out of any occurrence in, upon or at the Leased Premises or the occupancy or use by Tenant of the Leased Premises, or occasioned anywhere wholly or in part by any act, neglect, or omission of Tenant, its agents, contractors, employees, servants, lessees or concessionaires. -8- 24. TENANT'S FIRE INSURANCE. Tenant agrees that during the entire term of this lease it will procure and keep in full force and effect at its own cost, fire and extended coverage insurance including vandalism and malicious mischief, to cover all of Tenant's fixtures, furniture, furnishings, equipment, not part of Tenant's Improvement, as herein defined, to the extent of an amount equal to at least their actual cash value. Insurance coverage for those installations and improvements which form a part of Tenant's Improvement, as herein defined, shall be carried by the Landlord in an amount sufficient to prevent the Landlord from becoming a co-insurer under the terms of the applicable policies, but, in any event, in an amount not less than ninety percent (90%) of the full insurable value as determined from time to time. The term "full insurable value" shall mean actual replacement cost without deduction for physical depreciation. Such insurance shall be issued by financially responsible insurers duly authorized to do business in this state. 25. WAIVER OF SUBROGATION. Each of the parties hereto releases the other from any claim for recovery for any loss or damage to any of its property which is insured under valid and collectible insurance policies, to the extent of any recovery collectible under such insurance. It is further agreed that this waiver shall apply only when permitted by the applicable insurance policy. 26. INCREASE IN INSURANCE PREMIUMS. [OMITTED] -9- 27. GLASS. Tenant agrees to replace all glass when broken if such breakage is the result of the negligence of the Tenant, its employees, invitees or licensees. 28. UTILITIES AND CHARGES. Landlord agrees to furnish water, electricity, sewer and any other utility used or consumed in or about the Leased Premises during the term of this lease. Landlord agrees to furnish air conditioning and heat to the Leased Premises at Landlord's expense for the term of the lease. It is agreed that in maintaining temperature levels in connection with both heat and air conditioning, Tenant agrees that Landlord may follow governmental recommendations as to such temperature levels made in the interest of energy conservation. 29. ESTOPPEL CERTIFICATE. Landlord and Tenant each agree it will, at any time and from time to time, within ten (10) business days following written notice by the other party hereto specifying that it is given pursuant to this provision, execute, acknowledge and deliver to the party who gave such notice a statement in writing certifying that this lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified, and stating the modifications), and the dates to which the rent and any other payments due hereunder from Tenant have been paid in advance, if any, and stating whether or not to the best of knowledge of the signer of such certificate the other party is in default in performance of any covenant, agreement or condition contained in this lease, and if so, specifying each such default of which the signer may have knowledge. The failure of either party to execute, acknowledge and deliver to the other a statement in accordance with the foregoing provisions within the ten (10) day period shall constitute an acknowledgment by the party given such notice, which may be relied upon by any person holding or proposing to acquire an interest in the Building or the Leased Premises or this lease from or through the other party, that this lease is unmodified and in full force and effect and that the rent has been duly and fully paid to and including the respective due dates immediately preceding the date of such notice and shall constitute, as to any person entitled as stated in this paragraph to rely upon such statements, a waiver of any default which may exist prior to the date of such notice. 30. ATTORNMENT. Tenant shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage or deed of trust made by Landlord covering the Leased -10- Premises, attorn in writing to the mortgagee or purchaser at such foreclosure sale and recognize such purchaser as Landlord under this lease. 31. SUBORDINATION. Tenant agrees that this lease shall be subordinated to any mortgages or trust deeds that may hereafter be placed upon said Leased Premises and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements, and extensions thereof provided that the mortgagee or trustee thereunder shall agree to recognize Tenant's rights under this lease as long as Tenant is not in default hereunder. Tenant further agrees that upon notification by Landlord or mortgagee to Tenant, this lease shall be or become prior to any mortgages or deeds of trust that may heretofore or hereafter be placed on said Leased Premises. Tenant shall execute and deliver whatever instruments may be required for the above purposes, and failing to do so after demand in writing, does hereby make, constitute and irrevocably appoint Landlord as its attorney-in-fact and in its name, place, and stead so to do. This lease may not be further modified without the consent of any such mortgagee or trustee. Additionally, Tenant agrees to execute estoppel certificates, from time to time, in form and consent reasonably satisfactory to such mortgagee or trustee. 32. DAMAGE OR DESTRUCTION. With respect to damage or destruction, the following provisions shall govern: (a) Landlord's obligation. If the Leased Premises shall be partially or totally destroyed or damaged by fire or other insured casualty so as to become partially or totally untenantable, the same shall be repaired or rebuilt as soon as reasonably possible at the expense of Landlord, unless Landlord shall elect not to repair or rebuild as provided hereafter in subparagraph (b), and should there be a substantial interference with Tenant's business or profession, a just and proportionate part of the base rent, and of the additional rents, except that portion of additional rent designated Tenant's Improvement shall be abated until the premises are repaired or rebuilt. (b) Landlord's Election. If (i) the Leased Premises or the building in which the Leased Premises are located, shall be destroyed or damaged by fire or other insured casualty to the extent of fifty percent (50%), or more of the cost of replacement thereof under the coverage of Landlord's insurance (notwithstanding that the Leased Premises may be unaffected by such fire or other occurrence), or (ii) if the Leased Premises or the building in which they are located shall be partially or totally destroyed by a cause or casualty other than one covered by -11- Landlord's insurance, then, in any event, Landlord may, if it so elects, rebuild or put said Leased Premises and building in good condition and fit for occupancy within a reasonable time after such destruction or damage (with an equitable and proportionate adjustment of rent, as provided in the foregoing paragraph (a), until the premises are ready for occupancy), or it may give notice terminating this lease as of a date not later than thirty (30) days after such damage or destruction. If Landlord elects to restore, repair or rebuild, it shall within sixty (60) days after such damage or destruction, give Tenant notice of its intention to restore, repair or rebuild and then shall proceed with reasonable speed to make the repairs or reconstruction. Unless Landlord elects to terminate this lease, this lease shall remain in full force and effect; provided, however, that Tenant shall have the right to terminate this lease, upon not less than sixty (60) days' written notice to Landlord, if Landlord shall not have commenced the repair or restoration of the Leased Premises within one hundred twenty (120) days after its notice of election to repair, restore, or rebuild, or if Landlord shall not have restored, repaired or rebuilt the Leased Premises suitable for Tenant's use and occupancy within one (1) year after the fire or other casualty (excluding time lost because of strikes, material shortages, Acts of God, or other causes beyond Landlord's control). (c) Landlord and Tenant Work. If Landlord shall elect or be obligated to repair or rebuild because of any damage or destruction, Landlord's obligation shall be limited to rebuilding or restoring the Leased Premises to a good condition and fit for occupancy substantially the same as prior to the damage or destruction including the restoration, replacement and rebuilding of Tenant's Improvement as herein defined; and Tenant shall be obligated to fully repair or replace all of its fixtures, furniture, equipment and other personal property, not specifically designated Tenant's Improvement, to the extent that the same are covered by insurance as provided for in this lease. (d) Mortgagee as Landlord. In the event that any mortgagee of the premises shall become the owner of the premises by virtue of a judgment of foreclosure or deed in lieu of foreclosure and such mortgagee thereby becomes Landlord, such mortgagee as Landlord, shall have no obligation to repair or rebuild the building of which the Leased Premises are a part in the event of damage or destruction as provided for in this paragraph 32, any provisions in the previous paragraphs of this lease to the contrary notwithstanding. Provided, however, that in the event a mortgagee becomes Landlord it shall notify Tenant in writing of its decision not to repair or rebuild and thereafter Tenant shall have the right to terminate this -12- lease pursuant to the provisions of paragraph 32(b) and further that this provision shall have no effect on the obligation of the Landlord to make the repairs and provide the maintenance as provided for in this lease under normal conditions. 33. EMINENT DOMAIN. If the whole of the Leased Premises shall be taken by any authority under the power of eminent domain, then the terms of this lease shall cease as of the day possession shall be taken by such public authority, and rent shall be paid up to that date with a proportionate refund by Landlord of such rent (including additional rents) as shall have been paid in advance. If more than forty percent (40%) of the Leased Premises shall be taken by any public authority under the power of eminent domain, then the Tenant shall have the option of terminating this lease as of the day possession shall be taken by public authority and rent shall be paid to that date. In the event Tenant elects to remain in possession, or if less than forty percent (40%) shall be so taken, all of the terms herein provided shall continue in effect except that rent shall be proportionately and equitably abated, and Landlord shall make all necessary repairs or alterations to the building of which the Leased Premises are a part in order to render it tenantable. All damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the Leased Premises, shall be the property of the Landlord, whether such damages shall be awarded as compensation for diminution in value of the leasehold or to the fee of the building or land upon which the Leased Premises are a part; provided, however, that Landlord shall not be entitled to the award made to Tenant for loss of business, depreciation to or cost of removal of stock and fixtures owned by the Tenant. Provided further, however, that in the event the whole of the demised premises shall be taken and this lease terminated, the Tenant shall have no further obligation to the Landlord for that portion of the additional rent designated the cost of Tenant's Improvement as herein defined. 34. CONDEMNATION OF LESS THAN FEE. In the event of a condemnation of a leasehold interest in all or a portion of the Leased Premises without the condemnation of the fee simple title also, this lease shall not terminate and such condemnation shall not excuse Tenant from full performance of all of its covenants hereunder, but Tenant in such event shall be entitled to present or pursue against the condemning authority its claim for and to receive all compensation or damages sustained by it by reason of such condemnation, and Landlord's right to recover compensation or damages shall be limited to compensation for and damages, if any, to its reversionary interest. It being understood, however, that during such time as Tenant shall be out of possession of the Leased Premises by reason of -13- such condemnation, the lease shall not be subject to forfeiture for failure to observe and perform those covenants not calling for the payment of money. In the event the condemning authority shall fail to keep the premises in the state of repair required hereunder, to perform any other covenant not calling for the payment of money, Tenant shall have ninety (90) days after the restoration of possession to it within which to carry out its obligations under such covenant or covenants. At any time after such condemnation proceedings are commenced, Tenant agrees upon request of Landlord to assign to Landlord all compensation and damages payable by the condemnor to Tenant, to be held by the Landlord in escrow as security for the full performance of Tenant's covenants hereunder. Interest earned an such funds held in escrow shall accrue to the benefit of the Tenant. The compensation and damages received pursuant to said assignment shall be applied first to the payments of rents and all other sums from time to time payable by Tenant pursuant to the terms of this lease as such sums fall due, and the remainder, if any, shall be payable to Tenant at the end of the term hereof or on restoration of possession to Tenant, whichever shall first occur, it being understood and agreed that such assignment shall not relieve Tenant of any of its obligations under this lease with respect to such rents and other sums except as the same shall be actually received by Landlord. 35. DEFAULT--RIGHT TO RE-ENTER. Timely payment of rent is an essential part of this lease. In the event of any failure of Tenant to pay any rental due hereunder when due; or any failure to keep and perform any other of the terms, conditions, covenants or agreements of this lease as covenanted and agreed to be observed or performed by the Tenant, the Landlord, prior to taking any other action, shall give the Tenant written notice specifying the default or defaults. Tenant shall have ten (10) days after receipt of such notice to correct any rental default and thirty (30) days to correct any other default or defaults. In the event such defaults shall continue after written notice of such default or violation shall have been given to Tenant, or if Tenant or an agent of Tenant's shall falsify any report required to be furnished to Landlord pursuant to the terms of this lease or if Tenant or any guarantor of this lease shall become bankrupt or insolvent, or file any debtor proceedings, including a petition in bankruptcy; or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's or any such guarantors property, or makes an assignment for the benefit of creditors, or petitions for or enters into any arrangements, or if Tenant shall abandon or vacate the Leased Premises or suffer this lease to be taken under any writ of execution, then Landlord, besides other rights or remedies it may have, -14- shall have the immediate right of re-entry and may remove all persons and property from the Leased Premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of the Tenant, all without service of notice or resort to legal process and without being deemed guilty of trespass, or become liable for any loss or damage which may be occasioned thereby and without such re-entry working a forfeiture of the rents due and to be paid or any of the covenants, agreements and conditions to be kept and performed by the Tenant for the full term of this lease; provided that if the default be of such nature that it cannot be reasonably cured within said thirty (30) day period, the Tenant shall in good faith have promptly commenced the curing of such default within such period, then Tenant may be deemed not in default hereunder if it shall diligently proceed to cure such default within any grace period expressly allowed by the Landlord. In the event the leased premises are sub-let by Tenant and should any default occur requiring notice as provided for in this paragraph, Landlord agrees that it will furnish Tenant with a copy of such notice at the same time it is sent to any sub-Tenant. If such default is not corrected by the sub-Tenant during the specified period, Tenant shall have an additional period of ten (10) days to correct the default and, upon correction of such default, Tenant shall have the right and option to resume actual possession of the premises as the Tenant under this lease for the unexpired term. 36. RIGHT TO RELET. Should Landlord elect to re-enter, as above provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this lease or it may, from time to time without terminating this lease, make such alterations and repairs as may be necessary in order to relet the Leased Premises, and relet said Leased Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this lease) and at such rental and upon such other terms and -15- conditions as Landlord in its sole discretion may deem advisable. Upon each such reletting all rentals received by Landlord from the reletting shall be applied, first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage and attorney's fees and costs of such alterations and repairs; third, to the payment of all rents due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rents as the same may become due and payable hereunder. If such rentals received from such reletting during any month be less than those required to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such reentry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this lease unless a written notice of such termination be given by Landlord to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. 37. RIGHT TO TERMINATE. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this lease for such previous breach. Should Landlord at any time terminate this lease for any breach, it may, in addition to any other remedies it may have, recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the Leased Premises, reasonable attorney's fees, and including the worth at the time of such termination of the excess, if any, of the amount of the base rent as well as tax and insurance rent, common area charges and all other additional rents reserved in this lease for the remainder of the stated term over the then reasonable rental value of the Leased Premises for the remainder of the stated term, all of which amounts shall be immediately due and payable from Tenant to Landlord. 38. LEGAL EXPENSES. In case suit shall be brought for recovery of possession of the Leased Premises, for the recovery of any rents or any other amount due under the provisions of this lease, or because of the breach of any other covenant herein contained on the part of Tenant to be kept or performed, and a breach shall be established, Tenant shall pay to Landlord all expenses incurred therefor, including reasonable attorney's fees. 39. ACCESS TO PREMISES. Landlord or its agents shall have the right to enter the Leased Premises at all reasonable times to examine the same, to show them to prospective purchasers or lessees of the building, and to make such repairs, alterations, improvements or additions in the Leased Premises or the building of which it is a -16- part as may be necessary, and Landlord shall be allowed to take all material into and upon said premises that may be required therefor without the same constituting an eviction of Tenant in whole or in part, and the rent shall in no wise abate while said repairs, alterations, improvements or additions are being made, by reason of loss or interruption of business of Tenant because of the performance of any such work. Nothing herein contained shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair of the building or of the Leased Premises, except as otherwise herein specifically provided. During the three months prior to the expiration of this lease Landlord may show the premises to prospective tenants and place upon the premises the usual notices "To Let" and "For Rent" which notices Tenant shall permit to remain thereon without molestation. If during the last month of the term Tenant shall have removed all or substantially all of its property therefrom, Landlord may immediately enter and alter, renovate or redecorate the premises without elimination or abatement of rent or other compensation and such action shall have no effect upon this lease. 40. LOSS AND DAMAGE. Landlord, its agents and employees shall not be liable for, and Tenant waives all claims for, loss or damage to Tenant's business or damage to person or property sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence (unless caused by or resulting from the negligence of Landlord, its agents, servants or employees) in or upon the Leased Premises or the building of which it is a part, or any other area of the Building, including but not limited to claims for damage resulting from any equipment, machinery or appurtenances becoming out of repair; injury done or occasioned by wind; any defect in or failure of plumbing, heating, ventilating or air conditioning equipment, electric wiring or installation thereof, gas, water and steam pipes, stairs, porches, railings or walks; brcken glass; the backing up, overflowing or leaking of any sewer pipe or downspout; the bursting, leaking or running of any tank, tub, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about such building or Leased Premises; the escape of steam or hot water; water, snow or ice being upon or coming through the roof, skylight, trapdoor, stairs, doorways, show windows, walks or any other place upon doorways, show windows, walks or any other place upon or near such building or the Leased Premises or otherwise; the falling of any fixture, plaster, tile or stucco; and any act, omission or negligence of other tenants, licensees or of any other persons in or occupants of said -17- building or of adjoining or contiguous buildings, or of owners or occupants of adjacent or contiguous property of the Building. Tenant shall give immediate notice to Landlord or its agent in case of fire, accident, casualty, or other untoward incident in the Leased Premises or in the building of which the premises are a part, and of any defects therein or in any fixtures or equipment. 41. HOLDING OVER. Any holding over after the expiration of the term of this lease, with the consent of the Landlord, shall be construed to be a tenancy from month to month at the rents herein specified (prorated on a monthly basis) and shall otherwise be on the terms and conditions herein specified, as far as applicable. 42. SUCCESSORS. All rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the respective heirs, executors, administrators, successors, and assigns of the said parties; and if there shall be more than one tenant, they shall all be bound jointly and severally by the terms, covenants, conditions and agreements herein. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord in writing as hereinbefore provided. 43. QUIET ENJOYMENT. Upon payment by the Tenant of the rents herein provided and upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Leased Premises and appurtenances for the lease term without hindrance or interruption by Landlord or any other person lawfully claiming by, through or under Landlord, subject, nevertheless, to the other terms and conditions of this lease, and to all mortgages and underlying leases of record to which this lease may be or become subject or subordinate. 44. WAIVER OF DEFAULT. The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any existing or preceding breach by Tenant of any term, covenant or condition of this lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord's knowledge of such preceding or existing breach at the time of acceptance of such rent. No covenant, term, or condition of this lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by Landlord. -18- 45. OPTION TO CURE DEFAULT. Except as otherwise provided for herein, Landlord may, at its option, elect to cure at any time, without notice, any default by Tenant under this lease; and whenever Landlord so elects, and if not otherwise expressly provided for in this lease, all costs and expenses incurred by Landlord in curing a default, including, without limitation, reasonable attorney's fees, together with interest an the amount of costs and expenses so incurred at the rate of ten percent (10%) per annum, shall be paid by Tenant to Landlord on demand, and shall be recoverable as additional rent. 46. ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this lease provided. 47. CONSENT AND APPROVAL. Whenever under this lease the consent or approval of either party hereto is required by the other party, such consent or approval shall not be unreasonably withheld or delayed. 48. ENTIRE AGREEMENT. This lease and the exhibits now or hereafter attached (as provided herein) and forming a part hereof, set forth all the covenants, promises, agreements, conditions or understandings, either oral or written, between them other than are herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. 49. NO PARTNERSHIP RELATION. Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint adventurer or a member of a joint enterprise with Tenant. 50. NOTICES. Any notice, demand, request or other instrument required to be given under this lease shall be delivered in person or sent by United States certified mail, postage prepaid, and shall be addressed: (a) if to Landlord, at the address first hereinabove given or at such other address as it may designate by written notice, and (b) if to Tenant, at the Leased Premises or at such other address as Tenant shall designate by written notice. 51. BROKERAGE. Each of the parties represents and warrants that there are no claims for brokerage -19- commissions or finder's fees in connection with the execution of this lease, except as listed below, and each of the parties agrees to indemnify the other against, and hold it harmless from, all liabilities arising from any such claim (including, without limitation, the cost of attorney fees in connection therewith) except as follows: NONE 52. JANITORIAL SERVICE. The Landlord at its expense shall provide daily general janitorial services for the Leased Premises Monday through Friday, except for holidays. 53. SEVERABILITY. If any term, covenant or condition of this lease shall, to any extent, be invalid or unenforceable, the remainder of this lease, or the application of such term, covenant or condition to person or circumstances other than those in respect to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this lease shall be valid and be enforced to the fullest extent permitted by law. 54. RIGHT TO RELOCATE. The purpose of the site plan attached hereto as Exhibit "B" is to show the approximate location of the leased premises in the Office Park. Landlord reserves the right at any time to relocate the building or buildings, automobile parking areas, excess road, utility facilities and other common areas and facilities shown on said site plan. The relative location of the leased premises in the Office Park will be maintained as much as reasonably possible. 55. ADDITIONAL BUILDINGS TO BE CONSTRUCTED. It is contemplated by Landlord, and understood by Tenant, that the building wherein the leased premises are constructed which, when all four are completed, will constitute an integrated office complex of four buildings. In making this statement Landlord does not warrant that all or any of the additional office buildings will actually be constructed nor does it state that it will be the actual owner of any or all of the additional office buildings. The statement concerning additional construction is made purely for purposes of mutual understanding and clarity. Wherever in this lease the term, "Office Park" is used and particularly in reference with its use in connection with its share of tax increases, insurance increases, operating costs adjustment, and common area costs, refers only to the building in which the leased premises are situated. 56. ADJACENT EXCAVATION. If any excavation or other building operation shall be made upon land adjacent to the leased premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause -20- such excavation, or construction, license to enter upon the leased premises for the purpose of doing such work as Landlord shall deem necessary to preserve the wall or the building of which the leased premises form a part from injury or damage and to support the same by proper foundations, without any claim for damages or indemnification against Landlord or diminution or abatement of rent. 57. NO OPTION. This submission of this lease for examination does not constitute a reservation of or option for the Leased Premises and this lease becomes effective as a lease only upon execution and delivery thereof by Landlord and Tenant. 58. RECORDING--SHORT FORM LEASE. Tenant shall not record this lease without the written consent of Landlord; however, upon the request of either party the other party shall join in the execution of a memorandum or so-called "short form" of this lease for the purposes of recordation after Tenant shall open for business. Said memorandum or short form of lease shall describe the parties, the Leased Premises and the term of this lease and shall incorporate this lease by reference. 59. OPTION TO RENEW. Landlord grants to Tenant one separate one (1) year option to renew this lease after expiration of the original term, subject to rental adjustment as provided for in this paragraph. To exercise this option, Tenant must give Landlord written notice of its intention to renew this lease at least sixty (60) days before the expiration of the lease. The rent for the additional option year shall be determined by increasing the annual base rent payable during the initial term of the lease, upwardly in direct proportion to the percentage of change in the "All-Urban Consumer Price Index" as published for Minneapolis, Minnesota by the Bureau of Labor Statistics, United States Department of Labor or such other recognized governmental publication which states the Consumer Price Index. The base year shall be the index as it existed on September 30, 1983, and the base shall be used for the option year by comparing it to the September 30, 1984 index. AFR means "adjusted fixed rent." The formula for determining the AFR for the option year shall be as follows: AFR = Base Rent x CPI in pertinent year --------------------- CPI in base year 60. EXHIBITS. The exhibits listed in this article and attached or to be attached to this lease are hereby incorporated in and made a part of this lease. -21- Exhibit A. Floor Plan. (Paragraph 1) Exhibit B. Site Plan. (Paragraph 54) Exhibit C. Rules and Regulations of Office Park. IN WITNESS WHEREOF, the parties have signed this agreement as of the day and year first above written. In Presence of: WEST ACRES OFFICE PARK - -------------------------------------------------------------------------------- /s/ Dennis L. Fuhrman By /s/ Mark B. Foss - ------------------------- -------------------------- Mark B. Foss, a general partner Landlord GREAT PLAINS SOFTWARE, INC. /s/ Michael A. Slette By /s/ Douglas J. Burgum - ------------------------- ---------------------------- Douglas J. Burgum, President 4/18/84 /s/ Michael A. Slette Attest /s/ Joe Peltier - -------------------------- ------------------------- Secretary Tenant -22- FLOOR PLAN OF LEASED PREMISES (Floor Plan Attached) EXHIBIT A SITE PLAN OF WAOP (Site Plan Attached) EXHIBIT B RULES AND REGULATIONS OF OFFICE PARK EXHIBIT C WEST ACRES OFFICE PARK 1701 38TH STREET SW AMENDMENT FARGO ND 58103 --------- THIS AMENDMENT IS TO BE ATTACHED AND WILL CONSTITUTE A PART OF THE LEASE DATED OCTOBER 1, 1983, BY AND BETWEEN WEST ACRES OFFICE PARK (HEREAFTER REFERRED TO AS WAOP, A PARTNERSHIP) AS LANDLORD AND GREAT PLAINS SOFTWARE, INC. (HEREAFTER REFERRED TO AS GPS) AS TENANT, COVERING THE CONTINUING LEASING OF OFFICE SPACE IN THE WAOP BUILDING. AS HEREIN STATED, GPS SHALL CONTINUE TO LEASE THE FOLLOWING OFFICE SPACE UNTIL JUNE 30, 1995 AT THE INDICATED RATES: TOTAL SQUARE COST PER MONTHLY AREA DESCRIPTION FEET SQUARE FOOT RENTAL - ---------------- ------------ ------------ ------------ BASEMENT: 1. nw corner 741 $7.00 $432 2. northwest (foss small repro) 520 $7.00 303 3. west conf room 300 $7.00 175 4. northeast 1,275 $7.00 744 5. southwest corner 1,276 $7.00 744 6. south middle 280 $7.00 163 MAIN: 7. north 5,355 $10.85 4,842 8. southwest corner 3,912 $10.85 3,537 TOP: 9. north 5,354 $10.85 4,841 10. south 7,825 $10.85 7,075 ----------- ----------- SUBTOTALS 26,838 $22,857 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 $23,082 -------- -------- ADDITIONALLY, WAOP AND GPS HAVE AGREED TO THE FOLLOWING: A. AN ANNUAL OPERATING COST ADJUSTMENT SHALL BE IN EFFECT WHICH WILL CONSIST OF THE DIFFERENCE BETWEEN EACH CALENDAR YEAR'S EXPENSE LESS THE BASE YEAR OF 1992 FOR THE FOLLOWING ITEMS ONLY: (PRORATED BASED UPON SQUARE FOOTAGE) UTILITIES JANITORIAL REAL ESTATE TAXES SUPPLIES B. THERE SHALL BE A SIX MONTH LEASE TERMINATION NOTIFICATION BY GPS OR THE LEASE SHALL AUTOMATICALLY RENEW FOR ONE ADDITIONAL YEAR. C. GPS TO PAY 1/2 THE COSTS OF PAVING THE WEST PARKING LOT, WITH A CREDIT AGAINST RENT FOR ANY YEAR THEREAFTER AT THE % OF CREDIT EQUAL TO THE OCCUPANCY DURING ANY YEAR THEREAFTER IN RELATION TO THE OCCUPANCY SQUARE FOOTAGE AS OF DECEMBER 31, 1992 TIMES THE 1/2 AMOUNT PAID BY GPS. (TO CONTINUE THEREAFTER UNTIL THE AMOUNT PAID BY GPS IS FULLY RECOVERED.) D. THIS AGREEMENT SHALL BE RETROACTIVE TO JANUARY 1, 1993 AND SHALL CONTINUE THROUGH JUNE 30, 1995. WEST ACRES OFFICE PARK GREAT PLAINS SOFTWARE, INC BY /s/ Dennis L. Fuhrman BY /s/ Douglas J. Burgum ----------------------------- ----------------------------------- landlord tenant DENNIS L FUHRMAN, GENERAL PARTNER DOUGLAS J BURGUM, PRESIDENT WITNESS /s/ Michael A. Slette WITNESS /s/ JoDee Geist ------------------------ ------------------------- DATED THIS 20 DAY OF JULY, 1993. -- ---- WEST ACRES OFFICE PARK AMENDMENT TO LEASE DATED OCTOBER 1, 1983 1701 38TH STREET SW ---------------------------------------- FARGO ND 58103 THIS AMENDMENT IS TO BE ATTACHED AND WILL CONSTITUTE A PART OF THE LEASE DATED OCTOBER 1, 1983, BY AND BETWEEN WEST ACRES OFFICE PARK (HEREAFTER REFERRED TO AS WAOP, A PARTNERSHIP) AS LANDLORD AND GREAT PLAINS SOFTWARE, INC. (HEREAFTER REFERRED TO AS GPS) AS TENANT, COVERING THE CONTINUING LEASING OF OFFICE SPACE IN THE WAOP BUILDING. AS HEREIN STATED, GPS SHALL CONTINUE TO LEASE THE FOLLOWING OFFICE SPACE UNTIL DECEMBER 31, 1998 AT THE INDICATED RATES:
TOTAL SQUARE COST PER MONTHLY AREA DESCRIPTION FEET SQUARE FOOT RENTAL - ---------------- ---- ----------- ------ BASEMENT: 1. nw corner 741 $7.63 $471 2. northwest (foss small repro) 520 $7.63 331 3. west conf room 300 $7.63 191 4. northeast 1,275 $7.63 811 5. southwest corner 1,276 $7.63 811 6. south middle 280 $7.63 178 MAIN: 7. north 5,355 $12.50 5,578 8. southwest corner 3,912 $12.50 4,075 TOP: 9. north 5,354 $12.50 5,577 10. south 7,825 $12.50 8,151 --------- --------- TOTALS 26,838 Total Sq. Feet $26,172 Per Month --------- --------- --------- ---------
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 $26,397 ------ ------
ADDITIONALLY, WAOP AND GPS HAVE AGREED TO THE FOLLOWING: - ------------------------------------------------------ A. This amendment shall be effective July 1, 1996, and continue thru June 30, 1998. B. The rent shall be adjusted at each annual anniversary date by the change in the Midwest Consumer Price Index as of March 31, 1996...not to exceed 3% annually. C. WAOP shall perform the following maintenance... 1. Update bathrooms 3. Eliminate basement sewer odor 2. Paint hallways, where needed 4. Add additional landscaping D. There will no longer be an annual operating cost adjustment clause. E. WAOP shall reimburse GPS for their 50% share of the parking lot paving as per the amendment dated July 20, 1993...consisting of $15,000. F. GPS must give notice no later than January 1, 1998, if they plan on vacating these premises on or before June 30, 1998. WEST ACRES OFFICE PARK GREAT PLAINS SOFTWARE, INC. BY /s/ D. Fuhrman BY /s/ Jodi Uecker-Rust -------------------------------- ------------------------------- (as Landlord) (as Tenant) DENNIS L FUHRMAN, GENERAL PARTNER JODI UECKER-RUST WITNESS /s/ A. Hogue WITNESS /s/ Lorraine Elliott --------------------------- -------------------------- DATED THIS 6TH DAY OF August, 1996. EX-10.2 6 LEASE AGR BETWEEN CO AND NORWEST - ------------------------------------------------------------------------------- [Logo] Norwest Bank North Dakota, N.A. Jodi Uecker-Rust Great Plains Software 1701 38th St. S.W. Fargo, ND 58103 Dear Jodi: We have received your request to renew your Lease Agreement with Norwest for the space located at 901 40th Street SW, Fargo, North Dakota. Norwest agrees to accept you request for renewal for a term of one (1) year. The rental rate will remain at $3,258.33 monthly. The new expiration date of the Lease is May 31, 1997. This is the only option to renew contained in the Lease Agreement. Should Great Plains wish to extend past the new expiration date of May 31, 1997, please allow sufficient time, 120 days, to negotiate a new Lease Agreement prior to expiration of the existing Lease. Sincerely, /s/ Rick Gartner Rick Gartner Vice President NORWEST LEASE WITH GREAT PLAINS SOFTWARE TABLE OF CONTENTS ARTICLE PAGE 1. Basic Lease Information 3 2. Premises 4 3. Term 4 4. Acceptance of Premises 5 5. Rent 5 6. Operating Cost 5 7. Rentable Area 6 8. Use 6 9. Business Hours 6 10. Repairs by Lessor 6 11. Repairs by Lessee 7 12. Alterations 7 13. Termination 7 14 Signs 8 15. Access 8 16. Utilities and Services 8 17. Assignment and subletting 10 18. Fire and casualty 10 19. Subrogation 11 20. Liability 11 21. Insurance 11 22. Eminent Domain 12 23. Holding Over 12 24. Quiet Enjoyment 12 25. Events of Default 13 26. Default 13 27. Subordination of Lease 14 28. Novation in Event of Sale or Transfer 14 29. Notices 14 30. Rules and Regulations 15 31. Government/Legal Action 15 32. Light and Air 15 33. Brokerage Fees 15 34. Force Majeure 15 35. Substitute Premises 16 36. Miscellaneous Taxes 16 37. Estoppel Certificate 16 38. Miscellaneous 17 39. Invalidity of Particular Provisions 17 40. Governing Law 17 Signatures 18 EXHIBITS Demised Space Exhibit A Lessee Improvement Agreement B Building Rules & Regulations C 2 LEASE AGREEMENT ("LEASE") This Lease, is made and entered into this 20th day of April, 1994 by and between Lessor and Lessee as described in Article 1.A. and Article 1.B. 1. BASIC LEASE INFORMATION: The following basic lease information is a part of this Lease, but does not constitute the entire Lease. Lessee acknowledges that it has read all exhibits which are a part hereof and agrees that this Lease, including the basic lease information and all exhibits reflect the entire understanding and reasonable expectations of Lessor regarding the Premises. Lessee also acknowledges that it has had the opportunity to review this Lease prior to execution with legal counsel and/or such other advisors as Lessee deems appropriate. In addition to the terms which are defined elsewhere in this Lease, the following defined terms are used in this Lease: A. LESSOR: Norwest Bank North Dakota, N.A. ------------------------------------------------------ 406 Main Avenue ------------------------------------------------------ Fargo, ND 58126 ------------------------------------------------------ B. LESSEE: Great Plains Software ------------------------------------------------------ 1701 38th Street SW ------------------------------------------------------ Fargo, ND 58103 ------------------------------------------------------ C. LEASED PREMISES: The Rentable Area, as defined in Article 7, located within the Building, as defined in Article 1. D., consisting of approximately 4,600 usable square feet as shown on Exhibit A to this Lease. D. BUILDING: The building which is located at: 901 40th Street SW, Fargo, ND 58103, known as Village Square Office Park. E. LEASE TERM: 2 Years and 0 Months, beginning on the Commencement Date, as defined in Article 1. F, and ending on the Expiration Date, as defined in Article 1. G. This Agreement may be renewed by Lessee, with Lessors concurrence, for one (1) additional term of one (1) year. In order to renew the Agreement for the additional term, Lessee must provide Lessor with written notice of its election to renew at least one-hundred twenty (120) days prior to the expiration of the current term. Lessor upon receipt of notice to renew, will promptly notify Lessee if Lessor elects not to renew this agreement. F. COMMENCEMENT DATE: June 1, 1994 ------------------------------------------------ G. EXPIRATION DATE: May 31, 1996 ------------------------------------------------ H. SECURITY DEPOSIT: 0 ------------------------------------------------ I. MONTHLY RENT: $3,258.33 per month equaling an annual rent of $39,100 3 J. LEASE PAYMENT ADDRESS: Norwest Bank North Dakota, N.A. ---------------------------------------------------------- 406 Main Avenue ---------------------------------------------------------- Finance Dept. M.S. 7038 ---------------------------------------------------------- Fargo, ND 58126 ---------------------------------------------------------- K. USE: For use as: GENERAL OFFICE --------------------------------------------------- L. BUILDING POWER STANDARDS: Electrical distribution systems for power and lighting to the Leased Premises and special electrical systems are not to exceed 6 watts per square foot. M. PROPERTY: That certain parcel of land on which the Building is located situated in the County of Cass State of North Dakota, and legally described as follows: E 110, Lot 1, Block 5, W 240, Lot 2 N. LESSOR NOTIFICATION ADDRESS: Norwest Bank North Dakota, N.A. ---------------------------------------------------------- 406 Main Avenue ---------------------------------------------------------- Properties Department M.S. 7041 ---------------------------------------------------------- Fargo, ND 58126 ---------------------------------------------------------- If any other provision of this Lease contradicts any definition in this Article, the other provision will prevail. The following exhibits are attached to this Lease and are made parts of this Lease: Exhibit A - Leased Premises Exhibit B - Lessee Improvement Agreement Exhibit C - Building Rules and Regulations Addendum 2. LEASED PREMISES: In consideration of the obligation of Lessee to pay rent as herein provided, and in consideration of the other terms, provisions and covenants hereof, Lessor hereby demises and leases to Lessee, and Lessee hereby takes from Lessor, the Leased Premises as described in Article 1. C., which is located in the Building as described in Article 1. D., together with all rights, privileges, easements, appurtenances and immunities belonging to or in any way pertaining to the Leased Premises, and together with the right to use in common with Lessor and other lessees in the Building, and its and their employees, agents, representatives and invitees, any common areas and facilities of the Building. 3. LEASE TERM: The Lease Term shall be as described in Article 1. E. . 4 4. ACCEPTANCE OF PREMISES: Lessee acknowledges that it has inspected the Leased Premises and accepts it in its present condition as suitable for the purpose for which it is leased, and further acknowledges that no representations as to the repair of the Leased Premises nor promises to alter, remodel or improve the Leased Premises have been made by Lessor, except as may be provided on Exhibit B attached hereto and incorporated herein. In the event there are leasehold improvements which are to be completed by Lessor, and Lessor does not complete leasehold improvements and deliver possession of the Leased Premises on or before said Commencement Date, or if Lessor is unable for reasons beyond Lessor's control to deliver possession of the Leased Premises by such date, Lessor shall not thereby be deemed to be in default hereunder, and shall not thereby be liable to Lessee for any loss, damage, cost and expense suffered or incurred by Lessee, nor shall the Commencement Date of the Lease or the Lease Term of the Lease be affected or changed thereby, and Lessee agrees to accept possession of the Leased Premises at such time as Lessor is able to tender the same; provided, however, that Lessor hereby waives payment of Monthly Rent, as defined in Article 5, covering any period prior to the tendering of possession to Lessee hereunder, except as otherwise provided on Exhibit B attached hereto. Lessee shall pay a Security Deposit as described in Article 1. H., upon execution of this Lease. Said Security Deposit shall be held by Lessor during the Lease Term of this Lease. On the condition that the Leased Premises have been returned to Lessor in condition required by this Lease and all obligations of Lessee hereunder have been complied with by the Lessee, Lessor shall return the Security Deposit without interest to Lessee upon expiration of this Lease. If such conditions have not been complied with, Lessor may use said Security Deposit for the purpose of fulfilling said conditions. 5. MONTHLY RENT: Lessee shall pay to Lessor during the Lease Term a Monthly Rent as described in Article 1. I. plus any Additional Rent as herein defined and as adjusted from time to time in accordance with the provisions of this Lease, payable in advance on the first day of each month during the Lease Term in lawful money of the United States to Lessor without any deduction or set off whatsoever, at the Lease Payment Address as described in Article 1. J.. Additional Rent is hereby defined as, but not limited to, charges for services above building standards and late charges. Appropriate adjustment of Lessee's Additional Rent shall be made on the basis of actual cost, without markup, for disproportionate services (whether greater or lesser than standard services) to Lessee or to other lessees. 6. OPERATING COST: Subject to Article 16, operating costs are included as part of Monthly Rent and will not be treated in any other fashion. 7. RENTABLE AREA: Rentable Area shall be determined by Building Owners and Managers Association ("BOMA") standards for measuring floor area in office buildings as follows: A. Rentable Area of a single tenancy floor, whether above or below grade shall be computed by measuring to the inside finish of permanent outer Building walls, or from the glass line 5 where at lease 50% of the outer Building wall is glass. Rentable Area shall include all area within the outside walls, excluding stairs, elevator shafts, flues, pipe shafts, vertical ducts, air conditioning rooms, fan rooms, janitor closets, and such other rooms and their enclosing walls not actually available to the Lessee for furnishings and personnel. Toilet rooms within and exclusively serving only that floor shall be included in Rentable Area. B. Rentable Area for a partial floor shall include all space within the demising walls (measured from the midpoint of demising walls and in the case of exterior walls, measured as set forth in (7 A) above), excluding vertical penetrations such as building stairs, fire towers, elevator shafts, flues, vents, stacks, pipe shafts, and vertical ducts, plus Lessee's proportionate share of the common areas such as lobbies, corridors, toilet and mechanical rooms, telephone and electrical closets, and service areas in the Building. Vertical penetrations which are for a specific use of Lessee, such as special stairs or elevators, shall be included as Rentable Area. No deductions from Rentable Area will be made for columns or projections necessary to the support of the Building. 8. USE: The Leased Premises shall be used for the purpose as described in Article 1. K. No part of the Leased Premises shall be used for any purpose which constitutes a nuisance or which is illegal, offensive, termed hazardous by insurance companies or which may make void or voidable any insurance on the Building or which may increase the premiums therefor, or which will interfere with the general safety, comfort and convenience of the Lessor or other lessees of the Building. There shall be no sale of food or beverages by any means without the prior written consent of Lessor. LESSEE SHALL NOT PERMIT INTOXICATING LIQUORS TO BE KEPT OR SOLD IN THE LEASED PREMISES. It is understood that Lessor may occupy portions of the Building in the conduct of the Lessor's business. In such event, all references herein to other lessees of the Building shall be deemed to include Lessor as an occupant or lessee. 9. BUSINESS HOURS: Business Hours used herein shall mean the hours the Lessor is customarily open for business, Traditional Holidays, as herein defined, excepted. The following dates shall constitute Traditional Holidays as said term is used in this Lease: (1) New Year's Day (2) Memorial Day (3) Independence Day (4) Labor Day (5) Thanksgiving Day (6) Christmas Day If in the case a different day shall be observed other than the respective day above-described, then that day which constitutes the day generally observed by national banks in the city in which the Leased Premises is located, shall constitute the Traditional Holiday under this Lease. 10. REPAIRS BY LESSOR: Lessor shall at its expense maintain in good repair, reasonable wear and tear excepted, only the roof, foundation and the structural soundness of the exterior 6 walls of the Building and those portions of the plumbing, heating, air conditioning, and electrical systems located within, but not serving exclusively, the Leased Premises. Lessee shall repair and pay for any damage caused by the act or negligence of Lessee or Lessee's employees, agents, representatives, customers or invitees, or caused by Lessee's default hereunder. The term "walls" as used herein shall not include windows, glass or plate glass doors. Lessee shall immediately give Lessor written notice of defect or need for repairs, after which Lessor shall have reasonable opportunity to repair same or cure such defect. Lessor's liability hereunder shall be limited to the cost of such repairs or curing of such defects. 11. REPAIRS BY LESSEE: Lessee shall at its own cost and expense maintain all other parts of the Leased Premises in good repair, reasonable wear and tear excepted, and shall take good care of the Leased Premises and its fixtures and permit no waste of any kind. Lessee will keep the whole of the Leased Premises in a safe, clean, and sanitary condition, and will at the expiration of the Lease Term or other termination of this Lease, surrender the same to Lessor in the same order and condition as said Leased Premises was in at the commencement of the Lease Term, reasonable wear and tear excepted. 12. ALTERATIONS: Lessee shall not make any alterations of, or additions to, the Leased Premises without the prior written consent of Lessor. Lessee will not permit any mechanics', laborers' or material men's liens to stand against the Leased Premises, Building or the Property for any labor or material furnished to or for the account of Lessee, or claimed to have been so furnished in connection with any work performed or claimed to have been performed in, or about the Leased Premises. Notwithstanding anything to the contrary contained in this Lease, Lessor shall in all events have the right to prescribe the weight and position of any safes and other heavy equipment placed in or on the Leased Premises by Lessee. Any and all damage or injury to the Leased Premises or the Building caused by moving the property of Lessee in or out of the Leased Premises, or due to the same being in or on the Leased Premises, shall be repaired by Lessee at its sole cost and expense. No equipment, fixtures, furniture or other bulky matter will be received into or carried in the Building, except at such places and in such manner as approved by Lessor, and all moving of Lessee's property in or out of the Leased Premises shall be done only after Lessee has received Lessor's consent and then under the direct control and supervision of Lessee. 13. TERMINATION: At the termination of this Lease, Lessee shall, if Lessor so elects, remove all alterations and additions erected by Lessee, other than those identified on Exhibit B attached hereto and incorporated herein, and restore the Leased Premises to its original condition. If not so removed by Lessee such improvements shall be delivered up to the Lessor with the Leased Premises. All movable office furnishings and trade fixtures installed by Lessee may be removed by Lessee at the termination of this Lease if Lessee so elects, and shall be removed if required by Lessor. All such removal and restoration shall be accomplished in a good and workmanlike manner so as not to damage the primary structure or structural qualities of the Leased Premises and Building. Personal property remaining in the Leased Premises at the expiration of the Lease Term or other termination of this Lease shall be deemed abandoned, and 7 Lessor may dispose of the same in a manner Lessor deems most expedient. Lessee shall reimburse Lessor for any expenses incurred by Lessor with respect to removal or storage of abandoned property and with respect to restoring said Leased Premises to good order, condition and repair. If the Leased Premises are not surrendered at the end of the Lease Term or sooner termination thereof, Lessee shall indemnify Lessor against loss or liability resulting from delay by Lessee in so surrendering the Leased Premises, including, without limitation, claims made by any succeeding tenants founded on such delay and any attorneys' fees resulting therefrom. Lessee shall promptly surrender all keys for the Leased Premises to Lessor at the place then fixed for the payment of rent and shall inform Lessor of combinations on any vaults, locks and safes on the Leased Premises. 14. SIGNS: Lessee shall not display, inscribe, print, maintain, or affix any signs or other advertising matter or material on the Property, or on the exterior of the Building or on the interior of the Building, or in any window of the Building or the Leased Premises, without the prior written consent of the Lessor. The Lessor shall have the right to install and maintain a sign or signs on the Property, or on the exterior or interior of the Building. The Lessor shall have the right to change the name or street address of the Building. 15. ACCESS: Lessor, its agents and representatives shall be entitled to keep pass keys to the Leased Premises and, upon reasonable notice, shall have the right to enter and inspect the Leased Premises at reasonable times, and in the case of emergency at any time and without notice, for the purpose of ascertaining the condition thereof or in order to make such repairs as may be required to be made by Lessor under the terms of this Lease or as Lessor may deem necessary. During the period that is six (6) months prior to the end of the Lease Term hereof, unless notified by Lessee of it's intent to extend said Lease, Lessor and Lessor's agents and representatives shall have the right to enter the Leased Premises at reasonable times for the purpose of showing the Leased Premises and shall have the right to display on the Leased Premises a sign which indicates that the Leased Premises are available. Any such entry by Lessor shall never be deemed an eviction or disturbance of Lessee's possession of the Leased Premises, or render Lessor liable to Lessee for damages, or relieve Lessee from performance of Lessee's obligations under this Lease. The right of entry reserved shall not be deemed to impose any greater obligation on Lessor to clean, maintain, repair or change the Leased Premises than is specifically provided in this Lease. The Lessor, its agents and representatives may at any time in case of emergency enter the Leased Premises and do such acts as Lessor may deem proper in order to protect the Leased Premises, the Property, the Building, or any occupants of the Building. 16. UTILITIES AND SERVICES: A. AIR CONDITIONING AND HEAT: Lessor shall furnish air conditioning and heat to the Leased Premises for normal purposes only during Business Hours. Lessee agrees not to use any apparatus or device, in or upon or about the Leased Premises, which in any way 8 may increase the amount of such services usually furnished or supplied to the Leased Premises, and Lessee further agrees not to connect any apparatus or device with the conduits or pipes, or other means, by which such services are supplied, for the purpose of using additional or unusual amounts of such services, without the prior written consent of Lessor. Should Lessee use such services to excess or request the use of such services at other than Business Hours, Lessor reserves the right to charge for such services. which shall be payable as Additional Rent. Should Lessee fail to make payment upon demand of Lessor, such failure shall constitute a breach of the obligation to pay Additional Rent under this Lease and shall entitle Lessor the rights hereinafter granted for such breach. B. ELECTRICAL SERVICE: Lessor shall maintain electrical facilities to provide sufficient power for typewriters and other office machines of similar low electrical consumption, but not including electricity required for electronic data processing equipment or special lighting which is in excess of Building Power Standards as described in Article 1. L. Lessee will obtain prior written approval from Lessor before installing electrical equipment including but not limited to electrical heating, refrigeration equipment, electronic data processing machines, or machines or equipment using current which will in any way increase the amount of electricity normally furnished for use in a general office space. Lessee will pay for the additional electricity, any installation cost, and any other costs associated with the additional use. C. KEYS: Lessor shall furnish Lessee with two (2) keys for each door entering the Leased Premises. Additional keys ordered by Lessee will be at the expense of Lessee. All such keys shall remain the property of the Lessor. No additional locks shall be allowed on any door of the Leased Premises without Lessor's written permission, and Lessee shall not make, or permit to be made, any duplicate keys, except those approved or furnished by Lessor. Upon termination of this Lease, Lessee shall surrender to Lessor all keys to the Leased Premises, and give to Lessor the combination of all locks for safes, safe cabinets and vault doors, if any, which will remain in the Leased Premises. D. ELEVATORS: If the Building has a passenger elevator which provides service to the Leased Premises, Lessor shall furnish passenger elevator service whenever the Building is open. Lessor shall have the right to stop the operation of said elevators whenever alterations, improvements or repairs therein or in the machinery or appliances connected therewith shall be necessary or desirable and shall not be liable for damages for any such stoppage of service. E. JANITORIAL: Lessor shall furnish such janitor service as, in the sole judgment of Lessor, is necessary for the comfortable use and occupancy of the Leased Premises, except on Saturdays, Sundays and Traditional Holidays. All janitorial services shall be performed in accordance with work schedules established by the Lessor. Providing that the amount of trash (paper waste) does not exceed what would be customary for a general office of the size of the Leased Premises, trash removal shall be furnished by the Lessor. If Lessee has a significant increase in paper waste or periodically disposes of large containers, additional costs incurred by the Lessor for the Lessee's actions shall be passed back to the Lessee as Additional Rent. Failure to reimburse Lessor for said costs will be 9 considered a default under the terms of this Lease. If the Lessor implements a trash recycling program which affects the janitorial service as provided under this Lease, and Lessor provides at it's cost the necessary equipment to participate, Lessee will participate in said program. F. WATER: Lessor shall provide water for drinking, lavatory and toilet purposes only. G. WASTE: Lessee shall not waste electricity, water, heat or air conditioning or any other utility, and shall cooperate fully with Lessor to insure the most effective operation of the Building's heating and air conditioning, which shall include closing venetian blinds and drapes and keeping all windows closed when air conditioning is in use, and shall refrain from attempting to adjust any controls other than room thermostats, if any, installed for Lessee's use. H. TEMPORARY INTERRUPTION OF SERVICES: Lessor shall not be liable to Lessee, its agents, employees, representatives, customers or invitees for any inconvenience, loss or damage or for any injury to any person or property caused by or resulting from any casualties, riots, strikes, picketing, accidents, breakdowns or any cause beyond Lessor's reasonable control, or from any temporary failure or lack of services and Lessee shall indemnify Lessor and hold Lessor harmless from any claim or damage because of such inconvenience, loss, damage or injury. No variation, interruption or failure of such services incident to the making of repairs, alterations or improvements or due to casualties, riots, strikes, picketing, accidents, breakdowns or any cause beyond Lessor's reasonable control or temporary failure or lack of such services shall be deemed an eviction of Lessee or relieve Lessee from any of Lessee's obligations hereunder. 17. ASSIGNMENT AND SUBLETTING: Lessee shall not have the right to assign this Lease, or to sublet the whole or any part of the Leased Premises without the prior written consent of Lessor, which shall not be unreasonably withheld. Upon each request made by Lessee to Lessor for Lessor's consent hereunder, Lessee shall pay to Lessor a processing fee not to exceed, in each instance, $250.00. Notwithstanding any permitted assignment or subletting, Lessee shall at all times remain fully responsible and liable for the payment of the Monthly Rent and Additional Rent herein specified and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. Lessor shall have the right to assign any of its rights under this Lease, and upon any such assignment, and provided that the assignee assumes all of Lessor's obligations hereunder, Lessor shall be relieved of any and all such obligations. 18. FIRE AND CASUALTY: If the Building or any part thereof is damaged or destroyed by fire or other casualty, the Lessor shall have the right to terminate this Lease, provided it gives written notice thereof to the Lessee within ninety (90) days after such damage or destruction. Such notice shall state Lessor's intention to terminate this Lease not less than ninety (90) days after Lessee's receipt of such notice. If a portion of the Leased Premises is damaged by fire or other casualty and this Lease is not thereby terminated, the Lessor shall, at its expense, restore the Leased Premises exclusive of any improvements or other changes made to the Leased Premises by Lessee, to as near the condition which existed immediately prior to such damage or destruction as 10 reasonably possible, and Monthly Rent shall abate during such period of time as the Leased Premises are untenantable in the proportion that the untenantable portion of the Leased Premises bears to the entire Leased Premises. The Lessor shall not be responsible to the Lessee for damage to, or destruction of, any furniture, equipment, improvements or other changes made by the Lessee in, on or about the Leased Premises regardless of cause of damage or destruction. 19. SUBROGATION: Lessor and Lessee each hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property caused by fire or any of the extended coverage casualties covered by the insurance maintained hereunder even if such loss or damage shall have been caused by the fault or negligence of the other party, provided, however, that this release shall be applicable and in force and effect only with respect to loss or damage occurring during such times as the releasor's insurance policies shall contain a clause or endorsement to the effect that any release shall not adversely affect or impair said policies or prejudice the right of the releasor to recover thereunder. Lessor and Lessee each agree that it will request its insurance carrier to include in its policies such a clause or endorsement. 20. LIABILITY: With the exception of those claims arising out of Lessor's gross negligence or willful misconduct, Lessor shall not be liable to Lessee, or those claiming through or under Lessee, for injury, death or property damage occurring in, on, or about the Property, the Building, the Leased Premises and appurtenances thereto, and Lessee shall indemnify Lessor and hold it harmless from any claim or damage arising out of any injury, death or property damage occurring in, on or about the Leased Premises to Lessee or an employee, customer or invitee of Lessee. 21. INSURANCE: A. Lessor agrees to purchase in advance, and to carry in full force and effect the following insurance: 1) "All risk" property insurance coverage on the Building, exclusive of Lessee's leasehold improvements, in such amount as Lessor deems prudent. 2) Comprehensive general public liability insurance covering the Property, in a combined single limit amount of not less than $2,000,000.00, and written on an "occurrence" basis. B. Lessee agrees to purchase in advance, and to carry in full force and effect the following insurance: 1) "All risk" property insurance covering the full replacement value of all of Lessee's leasehold improvements, trade fixtures and personal property within the Leased Premises. 2) Comprehensive general public liability insurance covering all acts of Lessee, its employees, agents, representatives and guests on or about the Leased Premises, containing 11 a contractual liability endorsement, in a combined single limit amount of not less than $2,000,000.00 and written on an "occurrence" basis. 3) All policies must contain a clause which requires the insurer to provide thirty (30) days notice to Lessor prior to cancellation of the policy. C. In addition, if at any time Lessee allows said insurance to lapse, Lessor, upon notification, can place said insurance on behalf of Lessee and immediately bill Lessee for the amount of the insurance premium. Any such premium will become a part of the Additional Rent owing at the time the premium is billed and will qualify for all rights of collection as afforded by this Lease. 22. EMINENT DOMAIN: If the entire Building is taken by eminent domain, this Lease shall automatically terminate as of the date of taking. If a portion of the Building is taken by eminent domain, Lessor shall have the right to terminate this Lease by giving written notice thereof to Lessee within ninety (90) days after the date of taking. Such notice shall state Lessor's intention to terminate this Lease not less than ninety (90) days after Lessee's receipt of such notice. If a portion of the Leased Premises is taken by eminent domain and this Lease is not thereby terminated, Lessor shall, at its expense, restore the Leased Premises, exclusive of any improvements or other changes made to the Leased Premises by Lessee, to as near the condition which existed immediately prior to the date of taking as reasonably possible, and Monthly Rent shall abate during such period of time as the Leased Premises are untenantable, in the proportion that the untenantable portion of the Leased Premises bears to the entire Leased Premises. All damages awarded for a taking under the power of eminent domain, whether for the whole or a part of the Leased Premises, shall belong to, and be the property of, Lessor, whether such damages shall be awarded as compensation for diminution in value to the leasehold estate hereby created or to the fee of the Leased Premises provided, however, that Lessor shall not be entitled to any award made to Lessee for loss of business, fair value of, and cost of removal of stock and fixtures. The term "eminent domain" shall include the exercise of any similar governmental power and any purchase or other acquisition in lieu of condemnation. 23. HOLDING OVER: Should Lessee, or any of its successors in interest, hold over the Leased Premises or any part thereof, after the expiration of the Lease Term, such holding over shall constitute and be construed as a tenancy from month-to-month only. The inclusion of the preceding sentence shall not be construed as Lessor's permission for Lessee to hold over. The monthly rent during such month-to-month tenancy shall be at one and one half (1 1/2) times the amount set forth in Article 1. I. 24. QUIET ENJOYMENT: Lessor represents and warrants that it has full right and authority to enter into this Lease and that Lessee, upon paying the Monthly Rent and Additional Rent herein set forth and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold and enjoy the Leased Premises for the Lease Term without hindrance or molestation from the Lessor, subject to the term and provisions of this Lease. 12 25. EVENTS OF DEFAULT: The following events shall be deemed to be events of default by Lessee under this Lease: A. Lessee shall fail to pay any installments of the Monthly Rent herein provided or any other charge payable hereunder within five (5) days of the respective due date. B. Lessee shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. C. Lessee shall file or have filed against it a petition under any section or chapter of the United States Bankruptcy Code, as amended, or under any similar law or statute of the United States or any state thereof, or Lessee shall be adjudged bankrupt or insolvent in proceedings filed against Lessee thereunder. D. A receiver or trustee shall be appointed for all or substantially all of the assets of Lessee. E. Lessee shall desert or vacate any substantial portion of the Leased Premises. F. Lessee shall fail to comply with any term, provision or covenant of this Lease (other than the foregoing in this Article 25) and shall not cure such failure within ten (10) days of receiving written notice of failure thereof to Lessee. 26. DEFAULT: Lessee hereby agrees that if an Event of Default occurs, then, in addition to all other rights and remedies available to Lessor by law or by other provisions hereof, at Lessor's option, Lessor may annul and cancel this Lease as to all future rights of Lessee. Lessee further agrees that in case of any such termination Lessee will indemnify the Lessor against all loss of Monthly Rent and Additional Rent and other damage which Lessor may incur by reason of such termination, including, but not limited to, costs of restoring and repairing the Leased Premises and putting the same in Rentable condition, costs of renting the Leased Premises to another tenant, loss or diminution of rents and other damage which Lessor may incur by reason of such termination and all reasonable attorneys fees and expenses incurred in enforcing any of the terms of this Lease. Neither acceptance of Monthly Rent or Additional Rent by Lessor, with or without knowledge of breach, nor failure of Lessor to take action on account of any breach hereof, or to enforce its rights hereunder shall be deemed a waiver of any breach, and absent written notice or consent, said breach shall be a continuing one. In the event Lessee fails to pay any installment of Monthly Rent or Additional Rent hereunder as and when such installment is due, or any other charge payable hereunder as and when such charge is due, Lessee, if permitted by law, shall pay to Lessor on demand a late charge in an amount equal to five percent (5%) of such installment or other charge, or $25.00, whichever is greater, and failure to pay such late charge within ten (10) days after demand therefore shall be an Event of Default hereunder. The provision for such late charge shall be in addition to all Lessor's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Lessor's remedies in any manner. 13 27. SUBORDINATION OF LEASE: The rights of the Lessee under this Lease shall be and are subject and subordinate at all times to all ground leases, and or underlying Leases, if any, now or hereafter in force against the Building, and to the lien of any mortgage or mortgages now or hereafter in force against such leases and/or the Building, and to all advances made or hereafter to be made upon the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, that Lessee's rights under this Lease and possession of the Leased Premises shall not be disturbed so long as tenancy is not in default hereunder. This Paragraph 27 is self- operative and no further instrument of subordination shall be required. In confirmation of such subordination Lessee shall promptly execute such further instruments as may be requested by the Lessor. Lessee at the option of any mortgagees, or the Lessor under any such ground lease or underlying leases, agrees to attorn to such mortgagee or Lessor in the event of a foreclosure sale or deed in lieu thereof or termination by the Lessor of any such lease. Failure of the Lessee to execute any of the above instruments within fifteen (15) days upon written request to do so by the Lessor, shall constitute a breach of this Lease and the Lessor will be entitled to, at its option; i) execute, acknowledge and deliver any such instrument on behalf of Lessee as Lessee's attorney-in-fact (Lessee hereby constituting and irrevocably appointing Lessor as Lessee's attorney-in-fact for such purpose) and/or, ii) cancel this Lease and terminate the Lessee's interest therein. 28. NOVATION IN EVENT OF SALE OR TRANSFER: In the event of the sale of the Property or the Building or the transfer of the title thereto, Lessor shall be relieved of all of the covenants and obligations created by this Lease, except as to breaches thereof occurring prior to such sale or transfer, and such sale or transfer shall automatically result in the purchaser or transferee assuming and agreeing to carry out all of the covenants and obligations of Lessor herein from and after such sale or transfer. 29. NOTICES: Each provision of this Lease or of any applicable governmental laws, ordinances, regulations and other requirements with referenced to the sending, mailing or delivery of any notice or the making of any payment by Lessor to Lessee or by Lessee to Lessor shall be deemed to be complied with, when and if, the following steps are taken: A. All payments required to be made by Lessee to Lessor hereunder shall be payable to Lessor at the address set forth in Article 1. J. or at such other addresses Lessor may specify from time to time by written notice delivered in accordance herewith. B. Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered, whether actually received or not, when deposited in the United States mail, postage prepaid, certified or registered mail, addressed to the parties hereto at the respective addresses set out opposite their names as shown in Article 1. N. for Lessor, and 1. B. for Lessee, or at such other address as they have theretofore specified by written notice delivered in accordance herewith: C. Any notice of document required or permitted to be delivered hereunder by Lessor to Lessee also shall be deemed to be delivered if and when delivered personally to Lessee at the Leased Premises. 14 30. RULES AND REGULATIONS: Lessee shall observe such rules and regulations as set forth in Exhibit C which from time to time may be put in effect by Lessor for the general safety, comfort and convenience of Lessor, occupants and tenants of the Building. 31. GOVERNMENTAL/LEGAL ACTION: Wherever in this Lease any terms, covenants or conditions are required to be kept or performed by the Lessor, the Lessor shall be deemed to have kept and performed such terms, covenants and conditions notwithstanding any action taken by the Lessor, if such action is pursuant to any governmental regulations, requirements, directives or requests, or if the Lessor deems such action to be for the benefit of our national interest or the general public. A. Without limiting the generality of the foregoing, the Lessor may reduce the quantity and quality of all utility and other services and impose such regulations as the Lessor deems necessary in order to conserve energy, and may change the normal hours of operation of the Building. Utility in the sense of this paragraph includes, but is not limited to heating, cooling, electricity, water and all the sources of energy needed to provide such. B. Throughout the Term of this Lease, Lessee shall observe and comply with all governmental codes, laws, requirements, rules, orders, ordinances and regulations, and orders or recommendations of insurance carriers or fire insurance rating organizations applicable to the Leased Premises or the business conducted therein, hereinafter called "Legal Requirements", whether or not any work necessary to be done in order to comply with such Legal Requirements be ordinary, extraordinary or otherwise, is required by any existing or future Legal Requirement, or is within the present contemplation of Lessor and Lessee, including, but not limited to, any demolition, reconstruction, alteration or repair of any part of the Leased Premises. It is the intention of the parties that Lessee shall and does hereby assume the entire responsibility of complying with all Legal Requirements which affect the Leased Premises. If any alterations are required, they shall be completed in accordance with Article 12. 32. LIGHT AND AIR: Lessee has no right to light or air over the Property or any premises adjoining the Building. 33. BROKERAGE FEES: Lessee represents and warrants that it has dealt with no broker, agent or other person in connection with this Lease and Lessee hereby indemnifies and holds harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Lessee with regard to this Lease. The provisions of this paragraph shall survive the expiration or termination of this Lease. 34. FORCE MAJEURE: If either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lockouts, labor troubles, 15 inability to procure material, failure of power, restrictive governmental laws or regulations, riots, insurrection, war or other reason of a like nature not the fault of the party delayed in performing work or doing acts required under this Lease, the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. Notwithstanding the foregoing, the provisions of this Article 34 shall at no time operate to excuse Lessee from any obligations for payment of Monthly Rent, Additional Rent or any other payments required by the terms of this Lease when same are due, and all such amounts shall be paid when due. 35. SUBSTITUTE PREMISES: If the Leased Premises contain an area of 2,000 square feet or less, Lessor shall have the right at any time during the Lease Term hereof, upon giving Lessee not less than sixty (60) days prior written notice, to provide and furnish Lessee with space elsewhere in the Building of approximately the same size as the Leased Premises and remove and place Lessee in such space, with Lessor to pay all reasonable costs and expenses incurred as a result of such relocation of Lessee. Should Lessee refuse to permit Lessor to move Lessee to such new place at the end of said sixty (60) day period, Lessor shall have the right, but not the obligation, to cancel and terminate this Lease effective ninety (90) days from the date of original notification by Lessor. If Lessor moves Lessee to such new space, this Lease and each and all of its terms, covenants and conditions shall remain in full force and effect and shall be deemed applicable to such new space, and such new space shall thereafter be deemed to be the Leased Premises as though Lessor and Lessee had entered into an express written amendment of this Lease with respect thereto; provided, however, that Monthly Rent payable hereunder shall be increased or decreased, as the case may be, by the product of the difference in the number of square feet of Rentable Area in such new place and the number of square feet of Rentable Area in the Leased Premises subject to this Lease immediately prior to such move times the Monthly Rent prior to such move divided by the Rentable Area of the Leased Premises prior to such move. 36. MISCELLANEOUS TAXES: Lessee shall pay prior to delinquency all taxes assessed against or levied upon its fixtures, furnishing, equipment and personal property of Lessee located in the Leased Premises, if nonpayment thereof shall or would give rise to a lien on the Property, the Building or any part thereof, and when possible, Lessee shall cause said fixtures, furnishings, equipment and personal property to be assessed and billed separately from the property of Lessor. In the event any or all of Lessee's fixtures, furnishings, equipment and personal property shall be assessed and taxed with the property of Lessor, Lessee shall pay to Lessor its share of such taxes within ten (10) days after delivery to Lessee by Lessor of a statement in writing setting forth the amount of such taxes applicable to Lessee's fixtures, furnishings, equipment or personal property. 37. ESTOPPEL CERTIFICATE: Lessee agrees, within ten (10) days after request of Lessor, to deliver to Lessor, or Lessor's designee,, including without limitation, the present or any future holder of any mortgage(s) and/or deed(s) or trust and/or ground lease(s) and/or underlying lease(s) on the Leased Premises, or any prospective purchaser of the Property, Leased Premises or the Building, an estoppel certificate stating that this Lease is in full force and effect, the date to which Monthly Rent, Additional Rent and other charges have been paid, the unexpired Lease Term, whether or not Lessor is in default hereunder, and the nature of any such default, and such other matters pertaining to this Lease as may be reasonably requested by Lessor. 16 If Lessee fails or refuses to execute, acknowledge and deliver any such instrument within fifteen (15) days after written demand, Lessor will be entitled to execute, acknowledge and deliver any such instrument on behalf of Lessee as Lessee's attorney-in-fact (Lessee hereby constituting and irrevocably appointing Lessor as Lessee's attorney-in-fact for such purpose). 38. MISCELLANEOUS: A. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. B. The terms, provisions and covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns, except as otherwise herein expressly provided. C. Failure of Lessor to insist, in any or more instances, upon strict performance of any term, covenant or condition of this Lease, or to exercise any option herein contained shall not be construed as a waiver, or a relinquishment for the future, or such term, covenant, condition or option, but the same shall continue and remain in full force and effect. The receipt by Lessor of Monthly Rent and Additional Rent with knowledge of a breach in any of the terms, covenants or conditions of the Lease to be kept or performed by Lessee shall not be deemed waiver of such breach, and Lessor shall not be deemed to have waived any provision of this Lease unless expressed in writing and signed by Lessor. 39. INVALIDITY OF PARTICULAR PROVISIONS: If any clause or provision of this Lease is or becomes illegal, invalid, or unenforceable because of present or future laws or any rule or regulation of any governmental body or entity, effective during its term, the intention of the parties hereto is that the remaining parts of this Lease shall not be affected thereby unless such illegality, invalidity, or unenforceability is, in the sole determination of Lessor, essential to the rights of both parties in which event Lessor has the right to terminate this Lease on written notice to Lessee. 40. GOVERNING LAW: This lease shall be governed by and interpreted under the laws of the state in which the Leased Premises is located. 17 IN WITNESS WHEREOF, THE LESSOR AND LESSEE HAVE EXECUTED THIS LEASE ON THE DAY AND YEAR FIRST WRITTEN ABOVE LESSOR: LESSEE: BY: NORWEST BY: /s/ Jodi Uecker-Rust ----------------------------- ------------------------------ ITS: ITS: Vice President, Operations ----------------------------- ------------------------------ BY: /s/ Rick Gartner BY: ----------------------------- ------------------------------ ITS: Vice President ITS: ----------------------------- ------------------------------ 18 LEASED PREMISES [Floor Plan] EXHIBIT A 19 LESSEE IMPROVEMENT AGREEMENT There are no improvements warranted or implied in conjunction with this Lease. Lessee has accepted the Leased Premises "as is". EXHIBIT B 20 BUILDING RULES AND REGULATIONS: At times, it may be necessary to implement certain operating rules to govern occupancy of the Building in a manner which is beneficial to the occupants of the Building including both Lessor and Lessee. A true, correct and complete copy of the Rules and Regulations for the Building as of the date of this Lease is as follows below. 1. The sidewalks, driveways, parking areas, entries, passages, stairways and elevators shall not be obstructed by Lessee, its agents, contractors, licensees or invitees or used by them for any purpose other than ingress and egress to and from the Leased Premises. 2. Furniture, equipment or supplies shall be moved in or out of the Building only upon the stairway or entrance designated by Lessor and then only during such hours and in such manner as may be prescribed by Lessor. 3. Subject to Lessor's written approval, Lessee shall not place upon any portion of a floor in the Leased Premises a floor load exceeding fifty (50) pounds per square foot. 4. Lessee assumes responsibility for protecting the Leased Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Leased Premises closed and secured after normal Business Hours. 5. No animals shall be allowed anywhere in the Leased Premises or Building at any time except those necessary to aid the disabled. 6. Lessee shall not allow anything to be placed on the outside window ledges of the Building, nor shall anything be thrown by Lessee, it agents or employees, out of the windows or doors, or down the stairways, elevator shaft, or skylights of the Building. 7. Lessee, it agents, contractors, licensees or invitees will cooperate with the Lessor in the removal and temporary parking of any vehicles to allow for maintenance of any parking lots associated with the Property, Building or Leased Premises. EXHIBIT C 21 EX-10.3 7 LEASE AGREEMENT DATED MAY 2, 1994, AS AMENDED LEASE THIS LEASE, Made this 2nd day of May, 1994 by and between BLUE CROSS BLUE SHIELD OF NORTH DAKOTA, A CORPORATION and LINCOLN MUTUAL LIFE AND CASUALTY INS. CO., A CORPORATION whose post office address is 711 Second Avenue North, P.O. Box 1918, Fargo, North Dakota 58107, (hereinafter referred to as "Landlord" whether one or more) and GREAT PLAINS SOFTWARE INC, A CORPORATION, whose post office address is 1701 38th Street Southwest, Fargo, North Dakota, (hereinafter referred to as "Tenant"). WITNESSETH, that the Landlord hereby leases to the Tenant, upon the terms herein set forth, those certain premises in the City of Fargo, County of Cass, and State of North Dakota, more fully described as follows, to-wit: Approximately 23,366 square feet located in the Village Square Office Park (hereinafter "Office Park") and illustrated on attached Exhibit 1 a floor plan with this portion of the leased premises outlined in red. and Approximately 9,231 square feet located in the Village Square Office Park (hereinafter "Office Park") and illustrated on attached Exhibit 1 a floor plan with this portion of the leased premises outlined in green. and Approximately 15,874 square feet located in the Village Square Office Park (hereinafter "Office Park") and illustrated on attached Exhibit 1 a floor plan with this portion of the leased premises outlined in blue. (Hereinafter be referred to as the "Premises") 1. NEW LEASE. This Lease supersedes any and all prior leases or memorandums of lease by and between the Landlord and Tenant pertaining to the Premises or any portion thereof. 2. COMMON AREA USE. The use and occupation by the Tenant of the Premises shall include the non-exclusive use, in common with others entitled thereto, of the Common Areas located in and about the Office Park the present boundaries of which are depicted on an attached site plan marked Exhibit 2 (hereinafter Common Areas). Tenant's use of the Common Areas shall be subject to the limitations and restrictions set forth in this Lease and further subject to reasonable rules and regulations for the use of Common/Areas as adopted from time to time by Landlord. 3. BUILDING CHANGES. Landlord hereby reserves the absolute right, which will, however, be reasonably exercised, at any time and from time to time, to make alterations or additions to, and to build basements or additional stories on the buildings comprising the Office Park, including without limitation, the building in which the Premises is contained, and to build adjoining the same. Landlord also reserves the right to construct other buildings or improvements upon the property upon which the Office Park is located from time to time and to make alterations thereof or additions thereto and to build basements or additional stories on any such building or buildings and to build adjoining same. 4. RIGHT TO RELOCATE. The purpose of the floor plan attached hereto as Exhibit 1 and the site plan attached as Exhibit 2 is to show the approximate location of the Premises in the Office Park. Landlord reserves the right, which will, however, be reasonably exercised, at any time to add to and relocate the various buildings, automobile parking areas, access roads, utility facilities, walk ways and other Common Areas and facilities shown on said Exhibits. The relative location of the Premises in the Office Park will be maintained as much as reasonably possible. 5. ACCEPTANCE OF PREMISES. TENANT ACKNOWLEDGES THAT TENANT HAS EXAMINED THE PREMISES AND THAT IT IS IN THE CONDITION CALLED FOR BY THIS LEASE AND THAT LANDLORD HAS PERFORMED ALL OF LANDLORD'S REQUIRED WORK, IF ANY, WITH RESPECT THERETO. If such work is all completed the Exhibit shall be marked "NONE". TENANT AGREES THAT THE PREMISES AND ANY IMPROVEMENTS OR PERSONAL PROPERTY LEASED, TRANSFERRED OR SOLD UNDER OR IN CONNECTION WITH THIS LEASE ARE LEASED, TRANSFERRED OR SOLD, AS IS, WITH ALL FAULTS AND WITHOUT ANY EXPRESS OR IMPLIED WARRANTIES INCLUDING WARRANTIES OF MERCHANTABILITY. 6. LANDLORD'S ACCESS TO PREMISES. Landlord or its agents shall have the right to enter the Premises at all reasonable times to examine the same, to show them to prospective purchasers or tenants of the building, and to make such repairs, alterations, improvements or additions in the Premises or the building of which it is a part as may be necessary, and Landlord shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction of Tenant in whole or in part, and rent shall in no wise abate while said repairs, alterations, improvements, or additions are being made, by reason of loss or interruption of business of Tenant because of the performance of any such work. Nothing herein contained shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair of the building or of the Premises, except as otherwise herein specifically provided. During the six months prior to the expiration of this Lease - 2 - Landlord may show the Premises to prospective tenants and place upon the Premises the usual notices "To Let" or "For Rent" which notices Tenant shall permit to remain thereon without molestation. If during the last month of the term Tenant shall have removed all or substantially all of its property therefrom, Landlord may immediately enter and alter, renovate or redecorate the Premises without elimination or abatement of rent or other compensation and such action shall have no effect upon this Lease. Landlord agrees not to inspect any portion of the Premises or any materials contained therein which are clearly and conspicuously marked CONFIDENTIAL by the Tenant. If access to any portion of the Premises so marked is required by Landlord, it shall obtain the prior written consent of the Tenant and Tenant shall be present on the occasion of such examination. 7. QUIET ENJOYMENT. Upon payment by the Tenant of the rents herein provided, and upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Premises for the term of this Lease without hindrance or interruption by Landlord or any other person lawfully claiming by, through or under Landlord, subject, nevertheless, to the other terms and conditions of this Lease, and to all mortgages and underlying leases of record to which this Lease is, or may be or become subject or subordinate. 8. TERM AND COMMENCEMENT DATE. This lease is for a term beginning April 1, 1994 and ending on June 30, 1996. 9. RENTAL. The TENANT agrees to pay the LANDLORD rental of $25,768.00 per- month in advance on the day of each month during the term of this lease. If this lease does not commence on the first of the month TENANT shall pay a pro rata share of a month's rental for the period proceeding the first of the following month. TENANT shall pay a late payment fee of fifteen percent (15%) of the delinquent payment or fifteen dollars ($15.00) which ever is less. 10. RENT. Rent shall be calculated upon the basis of $6.25 per square foot of space within the Premises. Said amount shall be paid in twelve equal monthly installments in advance each lease year with the first monthly installment due the first day of the first calendar month following the commencement date. On the commencement date the Tenant shall pay a pro rated rental based upon the number of days remaining in the month in which the commencement date occurs. Such pro rated sum shall be equal to one-twelfth of the annual rent times a fraction, the numerator of which is the number of the days in such month on or after the Commencement Date of this Lease, and the denominator of which is the total number of days in such month. - 3 - 11. LEASE YEAR. The term "Lease Year" means each consecutive period of twelve (12) full calendar months during the term of this Lease commencing on the Commencement Date, if that date shall occur on the first day of a calendar month; if not, then the first Lease Year shall commence upon the first day of the first calendar month following the Commencement Date. Each succeeding Lease Year shall commence upon the anniversary date of the first Lease Year. 12. VERIFICATION OF TERM - FLOOR AREA - RENT. When the Commencement Date has been determined, Landlord and Tenant shall execute and deliver a statement, in duplicate, specifying the Commencement Date, the actual number of square feet of floor area in the Premises, and, the rent payable under this Lease, which completed statement shall be attached to and constitute a part of this Lease, as Exhibit 3. In determining the floor area of the Premises and all other areas in the Office Park which are available from time to time for the exclusive use and occupancy by a tenant of Landlord: i) measurements from outside walls and store fronts shall be made from the exterior of the wall or store front; ii) measurements from walls adjacent to other leasable areas of the Office Park shall be made from the mid-point of the wall; iii) each two square feet of basement space shall be counted as one square foot of floor area; iv) if any portion of mezzanine or upper floor space is used for displaying or selling merchandise, each two square feet of the floor area of the entire mezzanine or upper floor space shall be counted as one square foot of floor area, otherwise the entire area of mezzanine or upper floor space will be excluded from floor area. Failure of Landlord and Tenant to execute Exhibit 3 shall not affect either party's obligations under this Lease. 13. USE OF LEASED PREMISES: Tenant shall occupy and use the Premises solely for the purpose of conducting its computer software business and all reasonably related activities. 14. ALTERATIONS AND IMPROVEMENTS. Without first obtaining Landlord's written approval and consent Tenant shall not make, cause to be made, or contract for any alterations, additions, or improvements to the Premises, or to install therein any trade fixture, exterior sign, floor covering, interior or exterior lighting, plumbing fixtures, heating and air conditioning equipment, shades or awnings, or make any changes to the store front, or other structural changes or additions to the Premises or mechanical systems serving the Premises. At the time Tenant requests Landlord's consent for any such improvement, alteration, or addition, Tenant shall deliver to Landlord Tenant's drawings and specifications for the proposed work, together with all other documentation required by Landlord's then current design criteria. All work undertaken must be in accordance with Landlord's design criteria in effect at the time the improvement or modification is made. The consent required in this paragraph shall not be - 4 - unreasonably withheld and the Landlord shall act upon such requests within a reasonable time. It is specifically understood that the Landlord will install the following improvements and Tenant will consent thereto subject to reviewing the plans and cost thereof: (a) Demising wall - between Tenant's space and common area. (b) Additional rest rooms. (c) HVAC equipment to provide for adequate heating and cooling for 150-200 people and 1 1/2 personal computers per person. Tenant shall pay the first $15,000.00 of the total cost of constructing and installing items (a) through (c) and Landlord will pay the excess provided it has approved the plans and total cost. Tenant shall be fully responsible for the cost of all alterations and improvements other than specified above. 15. OWNERSHIP OF IMPROVEMENTS AND FIXTURES. All alterations, installations, additions and improvements made upon or for the benefit of the Premises by either party shall, unless Landlord otherwise elects (by giving notice thereof to Tenant not less than thirty days prior to the expiration or other termination of this Lease), become the property of Landlord and shall remain upon and be surrendered with the Premises as a part thereof at the expiration or sooner termination of this Lease. Movable furniture, trade fixtures and other personal property (including but not limited to furniture, power poles and electrical cabling track) not affixed to the Premises which is acquired by Tenant at its expense shall remain its property and may be removed at any time, provided Tenant promptly repairs any damage caused by such removal. 16. SIGNS - DISPLAYS. Tenant will not place or suffer to be placed or maintained anywhere in the Office Park or on any exterior door, wall or window of the Premises any sign, awning or canopy, or advertising matter or other thing of any kind, and will not place or maintain any decoration, lettering or advertising matter on the glass of any window or door of the Premises without first obtaining Landlord's written approval and consent. Prior to the Commencement Date Tenant shall, at its expense, install all signs required by and in compliance with Landlord's design criteria. Tenant further agrees to maintain such sign, awning, canopy, decoration, lettering, advertising matter or other thing as may be approved in good condition and repair at all times. - 5 - 17. REAL ESTATE TAXES AND INSURANCE PREMIUMS. The Landlord will pay all real estate taxes and special assessments in regard to the Office Park including the Premises. 18. TENANT'S FIRE INSURANCE. Tenant agrees that during the entire term of this lease Tenant will procure and keep in full force and effect at Tenant's own expense fire and extended coverage insurance on Tenant's own property including Tenant's leasehold improvements. Landlord agrees to keep the building housing the leased premises insured for fire and extended coverage but the amount of such insurance shall be in the sole discretion of Landlord. 19. LIABILITY INSURANCE. Tenant shall, during the entire lease term, keep in full force and effect at Tenant's own cost a policy of public liability and property damage insurance with respect to the Premises in which the limits of public liability for bodily injury or death shall not be less than $1,000,000.00 single limit. The insurance policy shall name Landlord and any persons, firms or corporations designated by Landlord as an insured and shall contain a clause that the insurer will not cancel or change the insurance without first giving the Landlord at least ten (10) days prior written notice. The insurance shall be in a responsible company qualified to do business in the State of North Dakota, approved by Landlord and a copy of the policy or certificate of insurance shall be delivered to Landlord. 20. UTILITIES AND JANITORIAL SERVICES. The Tenant will pay all heat and utilities including but not limited to water, garbage, sewage and electricity used or consumed in and about the Premises or provided in connection therewith and for janitorial services in the leased premises EXCEPT Landlord will pay the electricity for HVAC. The Landlord will provide control by Tenant of temperature control/setting of HVAC system. 21. REPAIRS AND MAINTENANCE - LANDLORD'S OBLIGATION. Landlord shall, within a reasonable period after receipt of written notice from Tenant, make or cause to be made necessary structural repairs to the exterior foundations and exterior walls of the Premises (but excluding the exterior of, and the frames surrounding all windows, doors, plate glass, storefronts and signs) and shall keep or cause to be kept in good order, condition and repair the exterior walls, foundations and roofs of the buildings constituting the Office Park, except for reasonable wear and tear. 22. REPAIRS AND MAINTENANCE - TENANT'S OBLIGATION. Tenant shall, at its expense, keep, replace and maintain the Premises (including maintenance of storefronts, exterior entrances and signs, all glass, and show window moldings) and all partitions, doors, store fronts, fixtures, equipment and appurtenances thereof (including lighting, heating and plumbing fixtures, interior walls, interior surfaces of exterior walls, and any air handling equipment or air - 6 - conditioning system) in clean, neat and good order, condition and repair (including reasonably periodic painting and decorating), damage by unavoidable casualty excepted. If Landlord is required to make repairs to said structural portions by reason of Tenant's, its agents' or employees' acts or omission to act, or if Tenant refuses or neglects to repair, maintain or replace property as required hereunder to the reasonable satisfaction of Landlord after ten days written notice, then Landlord may make such repairs or modifications without liability to Tenant for any loss or damage that may accrue to Tenant's merchandise, fixtures, or other property or to Tenant's business by reason thereof, and upon completion thereof and presentation of bill therefor, Tenant shall pay Landlord, as additional rent, at the time the next rent payment is due, the Landlord's cost and expense for making such repairs, plus 15% for overhead and supervision. Landlord and Landlord's agents shall be entitled at any reasonable time to enter, inspect and examine the Premises for the purpose of verifying Tenant's compliance with this Section. 23. PLATE GLASS. Tenant agrees to replace all plate glass and all other glass, if and when broken on said Premises. However, Tenant shall not be liable for plate glass if destroyed through negligence of the Landlord or its agents or servants and the Tenant shall have the right of insuring the plate glass if it so desires. 24. COMMON AREAS DEFINED. Common areas are defined as the parking areas, streets, fire corridors, driveways, walkways, curbs, gutters, drainage areas, landscaped areas, access roads, retaining walls, truck serviceways or tunnels, loading docks, pedestrian malls, (enclosed or open), courts, stairs, escalators, elevators, ramps and sidewalks, comfort and first aid stations, customer service areas, washrooms, management offices, utility rooms, community hall or auditorium, bus stops, and parcel pick-up stations, and the like, designated by Landlord for common use or benefit of tenants, occupants and other patrons of the Office Park and their employees, agents, servants, customers and other invitees. Common Areas may be located either within the Office Park or on land adjacent to the Office Park which is made available for the common use or benefit of tenants of the Office Park. 25. CONTROL OF ALL COMMON AREAS. All Common Areas and other common facilities provided by Landlord are for the general use or benefit, in common with other tenants, their officers, agents, employees, customers, and invitees and shall be subject to the exclusive control and management of Landlord, and Landlord shall have the right from time to time to promulgate and enforce reasonable rules and regulations, as it may deem appropriate, with respect to all Common Areas which shall apply equally and without discrimination to all tenants and permittees. Landlord shall have the right to construct, maintain and operate lighting facilities on - 7 - all said areas and improvements; to police the same; to change the area, level, location and arrangement of parking areas and other Common Area facilities; to build multi-story or underground parking facilities; to restrict parking by tenants, their officers, agents and employees to employee parking areas; to enforce parking charges (by operation of meters or otherwise), with appropriate provisions for free parking ticket validating by tenants; to construct, remove, and modify utility lines within the Common Areas; to grant easements through Common Areas; to close all or any portion of said areas or facilities to such extent as may, in the opinion of Landlord's counsel, be legally sufficient to prevent a dedication thereof or the accrual of any rights to any person or the public therein; to grant occupants of adjacent properties and others access easements to Common Areas and the right to use all Common Areas; to close temporarily all or any portion of the parking areas or common facilities, to regulate non-customer parking; to allow concessions, kiosks, mall shows and displays (provided the same do not substantially interfere with the access to the Premises) and to do and perform such other acts in and to said areas and improvements as in the use of good business judgment, Landlord shall determine to be advisable with a view to the improvement of the convenience and use thereof by tenants, their officers, agents, employees, invitees, and customers. Landlord will operate and maintain the common facilities referred to above in such manner as it, in its sole discretion, shall determine and shall have full right and authority to employ and discharge all personnel with respect thereto. It is specifically agreed that the Landlord will make available adequate parking for customers and employees on a non-reserved basis in the North parking lot adjacent to the Office Park. At no time will the Landlord request additional payment for non-reserved parking for employees. 26. NON-EXCLUSIVE USE OF COMMON AREAS. Tenant's right to use all Common Areas is a non-exclusive right, in common with Landlord, all other tenants in the Office Park, and all other to whom Landlord may through easements, operating agreements, leases, or agreement, authorize to use the Common Areas. 27. MODIFICATION OF COMMON AREAS. Landlord reserves the absolute right to designate additional land or improvements as Common Areas, withdraw land or improvements from Common Areas, to sell or lease areas formerly designated as Common Areas, to change the boundaries of Common Areas, and to construct, modify and remove buildings or other improvements on Common Areas. If the area of such Common Areas is diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. Landlord agrees, however, to provide within the limits of the Office Park, parking area or areas - 8 - in a sufficient amount to meet all applicable governmental laws, codes and regulations. 28. INDEMNIFICATION. Tenant covenants and agrees to indemnify, defend and save Landlord harmless from and against any and all injury, loss, claims, damages, liability, costs and expenses, including reasonable attorney's fees, in connection with loss of life, personal or bodily injury, damage to property, or litigation arising from or out of any occurrence, in, upon or at the Premises or occasioned anywhere wholly or in part by any act, neglect or omission of Tenant or Tenant's agents. 29. WASTE OR NUISANCE. Tenant shall not commit or suffer to be committed any waste upon the Premises or any nuisance or other act or thing which may disturb the quiet enjoyment of any other persons in the area, including but not limited to neighbors of the Tenant. 30. GOVERNMENTAL REGULATION AND RESTRICTIVE COVENANTS. Tenant shall, at Tenant's sole cost and expense, comply with and faithfully observe all of the rules, regulations, ordinances, laws and requirements of county, municipal, state, federal and other applicable governmental authorities, present or future, which affect the occupancy of use of the Premises. 31. ASSIGNMENT AND SUBLETTING. The Tenant may not assign this lease or sublease in whole or in part the Premises without the prior written consent of the Landlord. In the event the Landlord grants written consent to the Tenant for assignment or sublease, the Tenant shall, in any event, remain liable for the performance of all of the covenants of this lease. The consent required in this section shall not be unreasonably withheld. 32. CHANGE OF OWNERSHIP. If Tenant is a corporation, partnership, business trust, or other form of business association at any time during the term of this Lease, and there exists any transfer by sale, assignment, bequest, inheritance, operation of law or other disposition so as to result in the loss of or a change in the voting control of Tenant by the person or persons owing a majority of the voting control prior to such transfer, such change shall be considered a Transfer of this Lease under Section 29 and any such transfer without the written consent of Landlord shall constitute an event of default under this Lease. The provisions of this Section shall not apply to a corporation whose entire outstanding voting stock is listed on a national securities exchange or to a corporation if at least eighty (80) percent of the entire outstanding voting stock is owned by another corporation whose entire outstanding voting stock is listed on a national securities exchange. A "national securities exchange", as referred to herein, shall have the same meaning as defined in the Securities Exchange Act of 1934, as amended. - 9 - 33. WAIVER OF SUBROGATION. Landlord and Tenant each hereby release and waive any and all rights of recovery from each other and their respective officers, employees, agents and representatives for loss of or damages to their respective property or the property of others under their respective control, arising from any cause insured under any policy of fire and extended coverage insurance carried by such party to the extent such loss or damage is recoverable under such policy (an "Insured Loss") and without regard to the negligence of the other party that may have contributed to the loss or damage. Tenant further agrees to release all other occupants of the Office Park under lease or operating agreement with Landlord, their officers, employees, agents and representatives from any and all rights of recovery from such other parties for loss of or damages to Tenant's property or the property of others under Tenant's control, arising from any Insured Loss, under any policy of insurance carried by Tenant, provided that such party has a similar waiver in its lease. Under no circumstances shall Landlord be obligated to obtain similar provisions in agreements with other occupants of the Office Park or incur any liability for the failure to procure or insure that other stores have similar provisions in their leases or operating agreements with Landlord. 34. DAMAGE AND DESTRUCTION - LANDLORD'S OBLIGATION. If the Premises is partially or totally destroyed or damaged by fire or other insured casualty so as to become partially or totally untenantable, Landlord shall repair and rebuild the same as required by Section 34, except that Landlord shall have no obligation to repair and rebuild if: i) Landlord is unable to obtain all necessary permits and approvals therefor, including, without limitation, permits and approvals required from any agency or body administering environmental laws, rules or regulations; ii) Landlord terminates this Lease as authorized by Section 33; or iii) Tenant is in default under this Lease. 35. DAMAGE AND DESTRUCTION - OPTION TO TERMINATE. If (a) the Office Park, or the Premises, shall be destroyed or damaged by fire or other insured casualty to the extent of 25% or more of the cost of replacement thereof under the coverage of Landlord's insurance (notwithstanding that the Premises may be unaffected by such fire or other occurrence), or (b) if the Premises shall be partially or totally destroyed during the last three years of the term of this Lease, or (c) if the Office Park or the Premises shall be partially or totally destroyed by a cause or casualty other than one covered by Landlord's insurance, or (d) if Landlord's mortgagee shall require that the insurance proceeds be applied against the principal balance of Landlord's mortgage, then in such event, Landlord, may, if it so elects, rebuild the Premises, or it may give notice terminating this Lease as of a date not later than sixty (60) days after such damage or destruction. If Landlord elects to restore, repair or rebuild the Premises, Landlord shall, - 10 - within sixty days after such damage or destruction, give Tenant notice of its intention to restore, repair or rebuild the Premises and then shall proceed with reasonable speed to make the repairs to or to rebuild the Premises. Unless Landlord elects to terminate this Lease, this Lease shall remain in full force and effect, provided, however, that Tenant shall have the right to terminate this Lease, upon not less than sixty days written notice to Landlord, if Landlord shall not have restored, repaired or rebuilt the Premises suitable for Tenant's use and occupancy within two years after the fire or other casualty (excluding time lost because of strikes, material shortages, Acts of God, or other causes beyond Landlord's control). 36. DAMAGE AND DESTRUCTION - LANDLORD'S RECONSTRUCTION. If Landlord shall elect or be obligated to repair or rebuild the Premises because of any damage or destruction, Landlord shall reconstruct the shell of the Premises to substantially the condition as it existed prior to the damage or destruction, provided that Landlord shall not be required to make any repairs to the extent such repairs are not fully covered by the insurance proceeds attributable to the Premises actually received by Landlord under insurance policies carried by Landlord, and subject to Tenant's obligation under Section 35. For the purposes of this provision, the shell of the Premises shall include the structural framing material, roof, unfinished concrete floor slab, side walls and a rear wall with exposed masonry or exposed studs extending from the floor slab to roof deck. Landlord shall make sanitary sewer, storm sewer, water and electrical service available to the Premises to the extent provided prior to the damage or destruction. All work to be performed by Landlord shall be done in such manner that upon completion thereof, that portion of the Premises repaired or rebuilt shall contain substantially the same amount of floor area as immediately prior to the damage or destruction. Tenant agrees to cooperate and assist Landlord in the restoration and reconstruction of the Premises. 37. DAMAGE AND DESTRUCTION - TENANT'S RECONSTRUCTION. If Landlord does not elect to terminate this Lease as provided in Section 33, Tenant shall, at its own cost and expense promptly and diligently commence to fully repair, replace and restore those portions of the Premises Landlord is not required to repair under Section 34, including, but without limitation, all walls, partitions, doors, floor coverings, painting and decorating, store front, plumbing and electrical systems and fixtures, telephone, heating, ventilating and cooling facilities, signs and other leasehold improvements (whether or not constructed by tenant), trade fixtures, furnishings, equipment, merchandise, signs and other personal property to a condition equal to, or better than, that existing prior to its damage or destruction. All construction shall be in accordance with plans and specifications approved by Landlord which satisfy Landlord's then current design criteria. - 11 - 38. DAMAGE AND DESTRUCTION - INSURANCE PROCEEDS. All proceeds payable from Landlord's insurance policies with respect to the Premises shall belong to and shall be payable to Landlord. If Landlord does not elect to terminate this Lease, as provided in Section 33, Landlord shall, subject to the rights of Landlord's mortgagee, disburse and apply so much of any insurance recovery as shall be necessary to pay and reimburse Landlord for the costs incurred by Landlord with respect to Landlord's restoration work referred to in Section 34. 39. DAMAGE AND DESTRUCTION - TENANT'S OBLIGATIONS - RENT ADJUSTMENT. Should the Premises be rendered totally or partially untenantable as a result of any fire or other insured casualty, a just and proportionate part of the rent, but not of additional rents shall be abated until the earlier of: i) sixty (60) days after completion by Landlord of the restoration work Landlord is required to perform under Section 34, or ii) Tenant's reopening of the Premises for normal business following such fire or other casualty, or iii) the date the Premises would have been open for normal business had Tenant promptly and diligently proceeded to complete its reconstruction under Section 35; or iv) in the event Landlord terminates this Lease, until the date of termination. If rent is abated shall be computed upon the basis of the rent as abated. Tenant shall continue the operation of its business to the extent reasonably practicable from the standpoint of good business during any period of reconstruction or repair of the Premises. In no event shall Landlord be liable for interruption to the business of Tenant or for damage to or repair, reconstruction or restoration of any items belonging to Tenant or within the Premises. 40. CONDEMNATION - CONTINUATION OF LEASE. If title to the whole of the Premises shall be conveyed or condemned by right of eminent domain for any public or quasi-public use, then this Lease shall cease and terminate as of the date that possession is taken by the condemning authority. If less than all of the area of the Premises shall be so taken under eminent domain, the term of this Lease shall cease only with respect to the part so taken or conveyed, as of the day possession shall be taken by such authority; provided, however, that if the area taken amounts to more than 25% of the floor area of the Premises, either party shall have the right to terminate this Lease upon notice in writing within 30 days after such taking of possession. If more than 50% of the floor area of the building in which the Premises are located shall be so condemned or conveyed, whether or not any portion of the Premises shall be taken or conveyed, or if more than 25% of the total floor area in the Office Park shall be so condemned or conveyed, or if so much of the parking areas and Common Area facilities shall be so taken or conveyed that a reasonable number of parking spaces and sufficient other Common Area facilities, necessary, in Landlord's judgment, for the continued effective operation of the Office Park shall not be available for use by tenants and patrons of the Office - 12 - Park, or if required by Landlord's mortgagee, or if Landlord's mortgage requires the condemnation award to be applied to Landlord's loan, then, in any such event, Landlord may, by notice in writing to Tenant delivered on or before the day of surrendering possession to the condemning authority, terminate this Lease, and rent shall be paid or refunded as of the date of termination. Tenant shall have no claim against Landlord for the bonus value of any unexpired portion of the term of this Lease. 41. CONDEMNATION - RENTAL OBLIGATION AFTER TAKING. In the event this lease should terminate by reason of any taking or conveyance as aforesaid of the Premises or the Office Park, or any portion thereof, Tenant shall pay rent to the day when possession shall be taken by such authority, with an appropriate refund by Landlord of such rent as may have been paid in advance for a period subsequent to such date. If this Lease shall continue in effect as to any portion of the Premises not so taken or conveyed, the rent shall be reduced to a fair and equitable amount based on the floor area of the Premises remaining after such taking (or conveyance) as compared to the floor area in the Premises prior to such taking, and all additional rents shall thereafter be computed on the basis of such remaining floor area. 42. CONDEMNATION - RESTORATION. If this Lease shall continue, Landlord shall, subject to the limitations set forth below, make all necessary repairs or alterations so as to constitute the portion of the remaining building a complete architectural unit, and the remaining Premises a complete operating unit. Landlord shall also restore or replace the parking areas and other common facilities as nearly as practicable to the area and condition they were in prior to any such taking. There shall be no abatement of rent during such repairs and restoration except to the extent otherwise provided above. Landlord's obligation under this Section shall be limited to an equitable portion of the condemnation award paid to Landlord and not applied by Landlord's mortgagee to the reduction of debt. 43. CONDEMNATION - RIGHT TO AWARD. All compensation awarded or paid for any taking or conveyance, as aforesaid, whether for the whole or a part of the Premises or otherwise, shall be the property of Landlord, whether such compensation shall be awarded as compensation for diminution in the value of the leasehold or of the fee, and Tenant hereby assigns to Landlord all of Tenant's right, title and interest in and to any and all such compensation. Tenant shall have the right to claim and recover from the condemning authority, but not from Landlord, (except to the extent that any compensatory items of Tenant's damages are specifically included in Landlord's condemnation award), such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of any and all damage to Tenant's business by reason of the condemnation and for or on account of any cost or loss to which - 13 - Tenant might be put in repairing, restoring or removing Tenant's merchandise, furniture, and trade fixtures, as well as for the unamortized cost (amortized on a straight line basis over the term of this Lease) of Tenant's leasehold improvements to the extent Landlord has not contributed to the cost thereof. 44. CONDEMNATION OF LESS THAN A FEE. In the event of a condemnation of a leasehold interest in all or a portion of the Premises without the condemnation of the fee simple title also, this Lease shall not terminate and such condemnation shall not excuse Tenant from full performance of all of its covenants hereunder, but Tenant in such event shall be entitled to present or pursue against the condemning authority its claim and to receive all compensation or damages sustained by it by reason of such condemnation, and Landlord's right to recover compensation or damages shall be limited to compensation for and damages, if any, to its reversionary interest; it being understood, however, that during such time as Tenant shall be out of possession of the Premises by reason of such condemnation, this Lease shall not be subject to forfeiture for failure to observe and perform those covenants not calling for the payment of money. In the event the condemning authority shall fail to keep the Premises in the state of repair required hereunder, or to perform any other covenant not calling for the payment of money, Tenant shall have ninety days after the restoration of possession to it within which to carry out its obligations under such covenant or covenants. During such time as Tenant shall be out of possession of the Premises by reason of such leasehold condemnation, Tenant shall pay to Landlord, in lieu of rent provided for hereunder, and in addition to any other payments required of Tenant hereunder, an annual rent equal to the average annual rent paid by Tenant for the period from the commencement of the term until the condemning authority shall take possession, or during the preceding three full calendar years, whichever period is shorter. At any time after such condemnation proceedings are commenced, Tenant agrees, upon request of Landlord, to assign to Landlord all compensation and damages payable by the condemnor to Tenant, to be held without liability for interest thereon as security for the full performance of Tenant's covenants hereunder, such compensation and damages received pursuant to said assignment to be applied first to the payment of rents and all other sums from time to time payable by Tenant pursuant to the terms of this Lease as such sums fall due, and the remainder, if any, to be payable to Tenant at the end of the term hereof or on restoration of possession to Tenant, whichever shall first occur, it being understood and agreed that such assignment shall not relieve Tenant of any of its obligations under this Lease with respect to such rents and other sums except as the same shall be actually received by Landlord. 45. HAZARDOUS MATERIALS - DEFINITION. Tenant covenants and agrees that Tenant shall at all times from and after delivery of - 14 - possession of the Premises to Tenant, be responsible and liable for, and be in complete and strict compliance with, all "Governmental" laws, ordinances, rules and regulations relating to "Environmental Protection", "Environmental Matters" and "Industrial Hygiene" (as such terms are hereinafter defined) arising, directly or indirectly, out of the use of "Hazardous Materials" in, on, under or about the Premises or the Office Park by Tenant, its agents, servants, employees, licensees, contractors, subtenants and concessionaires. The term "Governmental" as used herein shall include, without limitation, federal, state, and local governments, and political subdivisions and regulatory agencies of federal, state, and local governments. The term "Hazardous Materials" as used herein shall include, without limitation, whether now or subsequently listed in any Governmental listing or publication defining hazardous materials' substances defined as: 'hazardous substances', 'hazardous materials, or toxic substances' in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, ET SEQ.; the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, ET SEQ.; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, ET SEQ.; and any subsequent amendments thereto, or replacement statutes thereof and ordinances, rules and regulations adopted and publications promulgated pursuant to said laws. The terms "Environmental Protection", "Environmental Matters" and "Industrial Hygiene" as used herein shall include, without limitation, any matter which affects the environment or which may affect the environment, the use of sophisticated electrical and/or mechanical equipment, chemical, electrical, radiological or nuclear processes, radiation, sonar and sound equipment, use of lasers, and laboratory analysis and materials. Tenant shall be deemed to be (1) the person in control, (2) an operator of the Premises and (3) the person in charge with respect to the Premises for purposes of reporting requirements under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended. Tenant agrees (i) that should it or its agents, servants, employees, licensees, contractors, subtenants or concessionaires know of the release or threatened release of any Hazardous Materials, in, on, under or about the Premises, including, without limitation, the release or threatened release of any Hazardous Materials in connection with Tenant's work, or in connection with any alterations, replacements, installations, improvements and/or additions made by Tenant to the Premises or any part thereof during the term of this Lease, that it will promptly notify Landlord of such release or threatened release, and (ii) that it will provide all warnings of exposure to Hazardous Materials in, on, under or about the Premises, as required by law, including, but not limited to, all laws hereinabove referred to in this Section as the same may be amended from time to time, all ordinances, rules and regulations adopted and publications promulgated thereunder, and all future laws or case decisions to the same effect. - 15 - 46. HAZARDOUS MATERIALS - COMPLIANCE WITH LAWS. Tenant further covenants and agrees, at its sole cost and expense, to procure, maintain in effect, and comply with all conditions of any and all permits, licenses, and approvals issued by governmental agencies for Tenant's use of Hazardous Materials in, on, under or about the Premises. Tenant shall prior to any use of the Premises affecting Environmental Protection, Environmental Matters and Industrial Hygiene or involving the use of Hazardous Materials, in, on, under or about the Premises, notify Landlord in writing of the intended use of such Hazardous Materials and promptly provide Landlord evidence of compliance with all Governmental laws, ordinances, rules and regulations pertaining to such use. Tenant shall in all respects handle, treat, deal with and manage any and all Hazardous Materials in, on, under or about the Premises in strict conformity with all applicable Governmental laws, ordinances, rules and regulations relating to Hazardous Materials, Environmental Protection and Industrial Hygiene. 47. HAZARDOUS MATERIALS - ENVIRONMENTAL AUDIT AND REMOVAL. Landlord shall have the right, upon written notice to Tenant ("Landlord's Notice"), at any time and from time to time during the term of this Lease, including, without limitation, (i) prior to the expiration or earlier termination of the term of this Lease, or (ii) in conjunction with a proposed assignment of this Lease or a proposed sublease of all or a part of the Premises requested by Tenant pursuant to the provisions of this Lease (in which event, Tenant's satisfaction of its obligations under this Section shall be a condition precedent to Landlord's consent to any such proposed assignment or sublease), to require Tenant, at its sole cost and expense, to cause an environmental audit and survey (the "Survey") to be made of the Premises, not later than fifteen (15) days following Landlord's Notice, by an environmental consulting firm (the "Consulting Firm") approved and/or designated by Landlord to determine whether the Premises contains any Hazardous Materials. Tenant shall, upon completion of such Survey, promptly furnish to Landlord a copy of such Survey prepared by the Consulting Firm. In the event said Survey shall disclose the presence of Hazardous Materials in, on, under or about the Premises, and if Landlord determines, based upon the original approved plans for Tenant's Work, or on the basis of any subsequent plans and specifications submitted to Landlord pursuant to the terms of this Lease, or on the basis of other information and data available to Landlord, that the existence of said Hazardous Materials arose out of or is in any way connected with the construction, use, manufacture, storage, sale, release or disposal of Hazardous Materials or products containing Hazardous Materials by Tenant, its agents, servants, employees, licensees, contractors, subtenants or concessionaires during the period of Tenant's occupancy of the Premises (the "Tenant Installed Hazardous Materials"), (i) Tenant shall, at its sole cost and expense, cause all of said Tenant Installed Hazardous Materials to be removed from in, on, under or about the Premises - 16 - and transported from the Office Park for use, storage or disposal in compliance with all applicable laws by a hazardous materials abatement contractor (the "Abatement Contractor") licensed in the state in which the Office Park is located and approved by Landlord. In the event such removal and disposal of the Tenant Installed Hazardous Materials is performed by Tenant after the expiration or earlier termination of the term of this Lease, Tenant shall be deemed to be occupying the Premises as a licensee at a monthly charge in an amount equal to average rent for the last twelve months of the term of this Lease, which sum shall be charged to Tenant by Landlord until the date Landlord receives certification from the Abatement Contractor that all Tenant Installed Hazardous Materials have been removed from in, on, under or about the Premises and transported from the Office Park for use, storage or disposal, or (ii) Landlord may, at its sole option upon written notice to Tenant, cause all of said Tenant Installed Hazardous Materials to be removed from in, on, under or about the Premises and transported from the Office Park for use, storage or disposal, in compliance with all applicable laws, by a hazardous materials abatement contractor selected by Landlord, in which event, the costs and expenses of such removal and disposal, as reasonably estimated by Landlord, shall be paid to Landlord by Tenant, as additional rent, within ten (10) days after receipt of an invoice therefor. In the event Tenant fails to timely perform its obligations under this Section, Landlord shall have the right (but shall not be obligated) to perform Tenant's obligations under this Section, in which event, Tenant shall pay to Landlord, as additional rent, promptly, upon demand, the costs and expenses thereof; provided, however, in the event Landlord performs Tenant's obligations hereunder after the expiration or earlier termination of the term of this Lease, Tenant shall pay to Landlord, in addition to the foregoing costs and expenses, a monthly charge in an amount equal to the monthly charge determined pursuant to the provisions of this Section from the date of expiration or earlier termination of the term of this Lease until the date Landlord has completed Tenant's obligations under this Section. Landlord and Tenant agree that the foregoing monthly charge represents a reasonable estimate of the financial losses suffered by Landlord by Tenant's failure to timely perform its obligations under this Section. In the event that the environmental audit and survey does not disclose the existence of any hazardous materials and the report by the Consulting Firm further states that the request for the audit and survey (Survey) was requested by Landlord without any reasonable factual basis for the belief that such hazardous material did exist then and in that event the cost of the audit and survey (Survey) shall be paid by the Landlord. 48. HAZARDOUS MATERIALS - LANDLORD'S APPROVAL. Tenant shall not - 17 - take any remedial action in response to the presence of Hazardous Materials in, on, under or about the Premises, nor enter into any settlement agreement, consent decree or other compromise in respect to any Claims [as such term is hereinafter defined in Section 43 relating to Hazardous Materials in any way connected with the Premises], without first notifying Landlord of Tenant's intention to do so and affording Landlord ample opportunity to appear, intervene or otherwise appropriately assert Landlord's interest with respect thereto. 49. HAZARDOUS MATERIALS - INDEMNITY. Without limiting anything herein contained Tenant shall indemnify and hold Landlord harmless from and against any and all claims, demands, losses, liabilities, penalties, damages, costs and expenses, including without limitation, attorneys' fees and costs (collectively "Claims"), arising out of or in any way connected with the use, manufacture, storage, sale, release or disposal of Hazardous Materials or products containing Hazardous Materials by Tenant, its agents, servants, employees, licensees, contractors, subtenants or concessionaires in, on, under or about the Premises during the period of its occupancy of the Premises including, without limitation; (i) any Claim by a federal, state or local Governmental agency or a private citizen arising out of or in any way connected with the environmental condition of the Premises; (ii) any Claim by any successor tenant, its agents, servants, employees, licensees, contractors, subtenants or concessionaires, arising out of or in any way connected with the environmental condition of the Premises; and (iii) the cost of any required or necessary repair, cleanup or detoxification and the preparation of any closure or other required plans in connection therewith. The indemnity obligations of Tenant under this Section shall survive the expiration or earlier termination of the term of this Lease. 50. DEFAULT AND REMEDIES - EVENTS OF DEFAULT. Any one or more of the following occurrences shall constitute an event of default under this Lease by Tenant: (a) The failure of the Tenant to pay any rental, or additional rental of any kind or nature due hereunder within five (5) days after the same shall be due; (b) The bankruptcy or insolvency of the Tenant or any guarantor of this Lease, or the filing of any debtor proceedings, including petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or any portion of Tenant's or any such guarantor's property, or the making or assignment for the benefit of creditors, or the petitioning or entering into an arrangement by the Tenant or any guarantor of this Lease; (c) The vacation or abandonment by the Tenant of the Premises - 18 - for a period of five (5) days; (d) The taking by any party of this Lease by writ of execution or similar process; (e) The failure of the Tenant to keep or perform any of the terms, conditions, covenants or agreements of this Lease covenanted and agreed to be observed or performed by Tenant, not otherwise specified as a default or event of default, for more than 30 days after written notice of such default or violation shall have been given to Tenant, provided that if the default be of such a nature that it cannot be reasonably cured within said thirty day period, and Tenant shall in good faith have promptly commenced the curing of such default within such period, then Tenant shall be deemed not in default hereunder if it shall diligently proceed to cure such default within the grace period expressly allowed by Landlord in writing. 51. DEFAULT AND REMEDIES - REMEDIES FOR DEFAULT. In the event of the occurrence of an event of default, as defined in Section 48, in addition to all other rights and remedies available to Landlord under this Lease or under law, Landlord shall have the following remedies: (a) At any time following an event of default, Landlord may, at Landlord's option, elect to terminate this Lease by written notice to Tenant specifying Landlord's intention to terminate this Lease, which notice may, but need not be, included in a notice of intention to evict or pleading in an eviction action. Notice may be served personally or by certified mail or in any manner authorized for service of any pleading or notice of intention to evict. Following service of the notice of termination, Tenant shall have the right to reinstate this Lease by paying to Landlord all rent and additional rentals, late charges and all other fees and charges payable under this Lease and curing all other events of default under this Lease, by no later than 11:59 p.m. of the third business day following either: i) personal delivery of notice of termination to Tenant's manager or assistant manager; ii) the expiration of one full day after mailing of notice of termination; or iii) such later day as specified by Landlord in the notice of termination. For the purpose of this provision, a "business day" shall be each Monday through Friday, inclusive, other than any federally recognized banking holiday for New Years, Christmas, Memorial Day, Independence Day, Fourth of July or Thanksgiving. Landlord shall be under no obligation to reinstate this Lease if Tenant fails to cure all events of default within the time and in the manner required herein. Unless Tenant reinstates this Lease in the time and in the manner provided above, termination of this Lease will be effective, without further notice and without the necessity of any legal suit - 19 - or action, upon the expiration of the period Tenant is allowed to reinstate this Lease. Delivery of Landlord's notice of termination under this provision is intended to satisfy any common law requirements relating to service of notice of default or demand for payment of rents prior to terminating a lease, and no further notice to quit, vacate, demand or legal process shall be necessary to terminate this Lease, whether or not any additional notice may be required by law as a condition to obtaining a judicial order evicting Tenant from the Premises. Following the effective time of termination, Tenant shall have no further interest in the Premises or in this Lease, or any right to rents or profits generated by Landlord from the Premises and, subject to Landlord's right to recover damages as hereinafter provided. Tenant shall not be liable to Landlord for rent or additional rents which first accrue after the effective date of termination. Rents and other charges paid to Landlord for the post-termination use or occupancy of all or any portion of the Premises shall not reduce Tenant's obligations to pay all rents and other charges which accrued prior to the effective date of termination. No attempt by Tenant to cure defaults under this Lease following expiration of the time to cure defaults shall be valid. Landlord's acceptance of rent following expiration of the period of curing a default shall not, unless otherwise agreed by Landlord in writing, constitute reinstatement of this Lease, and any post-termination rental payments received or recovered by Landlord shall be applied by Landlord to satisfy Tenant's obligations under this Lease, without affecting the termination of this Lease. (b) At any time following an event of default, Landlord, shall, at its option, have the immediate right to re-enter the Premises, with or without legal process, and without terminating the Lease. Should Landlord elect to re-enter, it may take such steps as it deems necessary to secure the Premises and to exclude Tenant and its agents and employees therefrom; make such alterations and repairs as may be necessary in order to relet the Premises; and relet the Premises or any part thereof, on behalf of Tenant, for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental and upon such other terms and conditions as Landlord, in its sole discretion, may deem advisable. Notwithstanding re-entry by Landlord, and until termination of this Lease, Tenant's obligations under this Lease shall remain in full force and effect and, unless Landlord has agreed to lease or otherwise convey all or any portion of the Premises, Tenant shall have the right to reinstate this Lease and retake possession of the Premises by curing all events of default and paying all late charges and legal fees due under this Lease. Any rents collected by Landlord following re-entry shall be applied as provided hereafter. To the extent that for any month after reentry, but prior to termination, Landlord receives net rents, as - 20 - defined below, in excess of Tenant's rental obligation for such month, the excess shall be held by Landlord as security for Tenant's future obligations to Landlord under this Lease, and upon satisfaction of those obligations, shall be applied to the reduction of Tenant's past due obligations to Landlord. Following re-entry, Landlord shall have no obligation to relet the Premises or otherwise mitigate Tenant's damages. In the event, notwithstanding this provision, any court were to impose on Landlord the obligation to mitigate Tenant's damages subsequent to re-entry, Landlord shall not be required to give preference to reletting the Premises over any other vacancies in the Office Park, and Landlord may condition the reletting of the Premises on, among other reasonable conditions, any one or more of the following: i) the payment of a fair market rate of rent for the Premises, whether or not that rate is in excess of the amounts reserved to Landlord under this Lease; ii) the compliance by the prospective tenant with the use clause and all other material covenants and agreements in this Lease (except those which cannot legally be performed by anyone other than Tenant); iii) the making of repairs and improvements to the Premises necessary to place it in first-class condition; iv) the provision of a security deposit or guaranty. Re-entry by Landlord solely for the purpose of securing the Premises and without any effort by Landlord to relet the Premises after Tenant's abandonment or vacation of the Premises, shall not impose any obligation on Landlord to mitigate damages. (c) In the event of the occurrence of an event of default, Landlord shall have a lien on all of Tenant's trade fixtures, and all other of Tenant's personal property located on the Premises to secure the payment of all rents due from Tenant to Landlord under this Lease and all other loss and damage suffered by Landlord as the result of Tenant's default. Following an event of default, Landlord may, with or without terminating this Lease or re-entering the Premises, take possession of such fixtures and personal property, and, in its sole discretion, sell the same at any public or private sale without notice to Tenant and apply the proceeds thereof first to the costs of such sale, including reasonable attorney's fees, and second, to all rentals and other charges due from Tenant to Landlord under this Lease. Any balance remaining after satisfying all amounts due and owing from Tenant to Landlord under this Lease, shall, within a reasonable time, be paid to the Tenant at its address set forth herein. (d) Following the occurrence of an event of default, Landlord shall be entitled to bring an action to enforce any bond, guaranty, or other collateral agreements, with or without bringing any prior action against Tenant. 52. DEFAULT AND REMEDIES - RECOVERY OF RENT AND REMOVAL. In addition to all other rights and remedies of Landlord provided by - 21 - law and under this Lease, following an event of default, Landlord shall have the right to recover from Tenant, Tenant's successors and assigns, and any co- obligor, surety or guarantor, or other party legally responsible for Tenant's obligations under this Lease, all or any portion of Tenant's obligations under this Lease in the following amounts: (a) Rent, additional rents, legal fees, and all other charges owing by Tenant to Landlord under this Lease prior to the effective date of termination or re-entry; plus, (b) Damages subsequent to termination of the Lease equal the excess of all rent, additional rents reserved under this Lease reduced to present value to the date of the termination, over the rental value of the Premises for the remaining term of this Lease; plus, (c) For any period subsequent to re-entry but prior to termination of this Lease rent, additional rents, legal fees and other charges reserved under this Lease, as defined below, accrued as of the date of judgment, less the net rentals received by Landlord from the reletting of all or any portion of the Premises, after deducting Landlord's costs of reletting the Premises, including without limitation, leasing commissions, brokerage fees, costs of repairs, improvements or modifications made to the Premises, legal fees, and other costs incurred by Landlord in reletting the Premises; plus, (d) All direct and consequential damages, cost, expense, or loss suffered by Landlord as a proximate result of the breach by Tenant of any provision of this Lease for which Landlord is not fully compensated under subsection (a), plus, (e) Interest on all rents and damages at the rate provided in Section 54. 53. DEFAULT AND REMEDIES - INTEREST ON AMOUNT OVERDUE. If any installment of rent or additional rents, or any other amounts due hereunder from Tenant to Landlord shall not be received by Landlord within ten (10) days after the amount is due, Tenant shall pay the Landlord interest on the unpaid balance overdue at a rate equal to the maximum amount permitted to be charged by the Landlord to the Tenant under North Dakota law, or one and one-half percent per month on the overdue balance, whichever is less, plus any attorney's fees and other costs of collection as provided in this Lease. The charging or acceptance of such interest by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies granted hereunder. 54. DEFAULT AND REMEDIES - LEGAL EXPENSE. If any case, suit or - 22 - proceeding shall be brought by Landlord for recovery of possession of the Premises, or recovery of any rents or any other amount due under this Lease, or otherwise as the result of the breach by Tenant of any other obligation under this Lease, and if such a breach shall be established, Tenant shall be required to pay to Landlord all expenses incurred as a result thereof, including reasonable attorney's fees. 55. DEFAULT AND REMEDIES - WAIVER OF DEFAULT. The waiver by Landlord of any breach of any term, covenant or condition herein contained or the doing of any matter or payment of any sum by Landlord not required of Landlord by the terms hereof shall not be deemed to be a waiver or amendment of that term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition herein. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any existing or preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding or existing breach at the time of acceptance of such rent. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by Landlord. 56. DEFAULT AND REMEDIES - OPTION TO CURE DEFAULT. Landlord may, at its option, elect to cure at any time, without notice, (except as otherwise provided) , any default by Tenant under this Lease; and whenever Landlord so selects, and if not otherwise expressly provided for in this Lease, all costs and expenses incurred by Landlord in curing a default, including, without limitation, reasonable attorney's fees, together with interest on the amount of costs and expenses so incurred at the rate of eighteen percent (18%) per annum or the highest legal rate provided by law to be charged to Tenant, whichever is lower, shall be paid by Tenant to Landlord on demand, and shall be recoverable as additional rent. 57. DEFAULT AND REMEDIES - ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. 58. DEFAULT AND REMEDIES - REMEDIES CUMULATIVE. All remedies provided by Landlord under this Lease are intended to be cumulative, and any one or more may be exercised by Landlord, at its option. The exercise by Landlord of any remedy reserved to Landlord under this Lease or provided by law is not intended to be - 23 - exclusive of any other available remedy or remedies, but each and every such remedy shall be in addition to every other remedy now or hereafter existing at law, in equity or by statute. 59. RULES AND REGULATIONS. Landlord reserves the right to promulgate such reasonable rules and regulations relating to the Premises, Common Areas and the Office Park, and any part or parts thereof, as Landlord may deem appropriate and for the best interests of the tenants. Tenant agrees to abide by such rules, which shall be uniformly applied, and to cooperate in their observance. Landlord shall also have the authority to establish in the rules and regulations reasonable fines and penalties for violations of the rules and regulations applicable to tenants of the Office Park. The rules and regulations, and any amendments or additions that may be made from time to time, shall be effective and become binding upon Tenant upon delivery of a copy of them to Tenant. Tenant shall be responsible for compliance by its employees, agents and contractors with all rules and regulations adopted by Landlord. Attached as Exhibit 4 is a copy of the regulations in effect as of the date hereof. 60. PROTECTION OF LENDERS - ESTOPPEL CERTIFICATE. Landlord and Tenant each agree that they will, at any time and from time to time, within ten (10) business days following written notice by the other party hereto specifying that it is given pursuant to this provision, execute, acknowledge and deliver to the party who gave such notice a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified, and stating the modifications) , and the dates to which the rent and any other payments due hereunder from Tenant have been paid in advance, if any, and stating whether or not, to the best of knowledge of the signer of such certificate, the other party is in default in performance of any covenant, agreement or condition contained in this Lease, and, if so, specifying each such default of which the signer may have knowledge. The failure of either party to execute, acknowledge and deliver to the other a statement in accordance with the foregoing provisions within the ten (10) day period shall constitute an acknowledgement by the party given such notice, which may be relied on by any person holding or proposing to acquire an interest in the Office Park or the Premises or this Lease from or through the other party, that this Lease is unmodified and in full force and effect and that the rent has been duly and fully paid to and including the respective due dates immediately preceding the date of such notice and shall constitute, as to any person entitled as aforesaid to rely upon such statements, a waiver of any default which may exist prior to the date of such notice. 61. PROTECTION OF LENDERS - ATTORNMENT. Tenant shall, in the - 24 - event any proceedings are brought for the foreclosure of, or in the event of exercise of power of sale under, any mortgage or deed of trust made by Landlord covering the Premises, attorn in writing to the mortgagee or purchaser at such foreclosure sale and recognize such purchaser as Landlord under this Lease. 62. PROTECTION OF LENDERS - SUBORDINATION. This Lease and all of Tenant's rights hereunder shall be subject and subordinate to any and all ground leases or underlying leases or subleases that include the Premises, including, without limitation, a sale leaseback lease or leaseback leases to which Landlord is or may become a party as a tenant or a subtenant, and to the lien of all mortgages, in all amounts and all advances thereon, which may now or hereafter become a lien on the Premises, and to all renewals, replacements, modifications, consolidations and extensions thereof; provided, however, Tenant agrees that any such lessor or mortgagee may elect to have this Lease be made superior to any such ground or underlying lease or the lien of its mortgage, and in the event of such election and upon notification by Landlord or such lessor or mortgagee to Tenant to that effect, this Lease shall be deemed superior to said ground or underlying lease or to the lien of any such mortgage, whether or not this Lease is recorded or whether this Lease is recorded prior or subsequent to the date of recording of said ground or underlying lease or mortgage. This Lease shall also be subordinate and subject to the provisions of any easements and operating agreements affecting the Office Park. Tenant agrees to provide any such mortgagee or lessor whose name and address has been provided to Tenant with written notice of any default by Landlord under this Lease. The curing of any Landlord default by such mortgagee or lessor shall be treated as curing and performance by Landlord. Upon request of Landlord, Tenant will within fifteen (15) days thereafter execute an agreement confirming that this Lease and Tenant's rights thereunder are subordinate to the lien or interest of any mortgage, trust deed, ground or other underlying lease or other instrument resulting from any other method of financing or refinancing (including any sale and leaseback) now or hereafter in force against the Office Park or the land or buildings of which the Premises are a part or against any buildings hereafter placed upon the land of which the Premises are a part, and to all advances made or hereafter to be made upon the security thereof, provided, however, that such mortgagee or lessor will agree that, in the event any action is taken to foreclose the lien of the mortgage or terminate any ground lease, this Lease and all rights of the Tenant under its terms to use and quiet possession of the Premises, including, but not limited to, easements, appurtenances and Common Areas and facilities in the Office Park, shall not be disturbed and shall continue in full force and effect so long as Tenant shall faithfully discharge each and every obligation on its part to be kept and performed under the terms of this Lease. - 25 - 63. ENTIRE AGREEMENT. This Lease and the exhibits now or hereafter attached (as provided herein) and forming a part hereof, set forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Premises or matters related thereto, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them other than are herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. 64. CAPTIONS. The captions used as headings for the various subject matters appearing in this Lease are used only as a matter of convenience to help find subject matters and are not to be construed as part of the Lease provisions nor in determining the intent of the parties to this Lease. 65. NO PARTNERSHIP RELATION. Landlord is not intended to be in any way or for any purpose a partner of Tenant in the conduct of its business, or otherwise, or joint adventurer, or a member of a joint enterprise with Tenant. 66. SEVERABILITY. If any term, covenant or condition of this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to person or circumstances other than those in respect to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. 67. NO OPTION. The submission of this Lease for examination does not constitute a reservation of or option for the Premises and this Lease becomes effective as a Lease only upon execution and delivery thereof by Landlord and Tenant. 68. RECORDING. Tenant shall not record this Lease without the written consent of Landlord. 69. HOLDING OVER. Any holding over after the expiration of the term of this lease or any renewal thereof with the consent of the Landlord, shall be construed to be a tenancy from month-to-month at the rents herein specified (pro-rated on a monthly basis) and shall otherwise be on the terms and conditions herein specified, so far as applicable. 70. SUCCESSORS. All rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the respective successors and assigns of the said parties; and they shall all be bound jointly and severally by the terms, covenants, conditions and agreements herein. No rights, however, shall inure to the benefit of any assignee of Tenant unless the - 26 - assignment to such assignee has been approved by the Landlord in writing as hereinbefore provided. 71. OPTION TO RENEW. The Tenant shall have the option to renew the Lease for an additional five-year period. Tenant shall give written notice of its intention to renew the Lease at least ninety (90) days prior to the expiration of the initial term of the Lease. If intention to renew is not received by the Landlord, the Landlord has no obligation to renew the Lease with the Tenant. All of the terms and conditions of the Lease shall remain the same during the renewal period, if any, except for the amount of rent to be paid by the Tenant. 72. RENT DURING RENEWAL PERIOD. The rental during the renewal period shall be negotiated in good faith by Landlord and Tenant. Any actual increase shall consider, among other things, the following factors: The cost of funds to Landlord; changes in consumer prices; increased utility costs for the common areas; increased repair and maintenance charges as to both the common areas and other portion of the Office Park for which Landlord is responsible. Despite these statements (such being only for information purposes) regarding the method by which Landlord would request an increased rental during any renewal period, Landlord is not bound to any requirements as to demands for increased rent. IN WITNESS WHEREOF, the parties hereto have executed this lease as of the day and year first above written. Landlord: Blue Cross Blue Shield of North Dakota, a corporation By /s/ Robert Clark --------------------------------- Its: Executive V.P., Operations -------------------------- Landlord: Lincoln Mutual Life and Casualty Ins. Co., a corporation By /s/ J. Scott Koltes --------------------------------- Its: President -------------------------- - 27 - Tenant: Great Plains Software, Inc., a corporation By Jodi Uecker-Rust ------------------------------------- Its: Vice President, Operations ------------------------------ - 28 - EXHIBIT 1 - Floor Plan of Village Square Office Park with the leased premises outlined in red, green and blue. EXHIBIT 2 - The floor plan of Village Square Office Park depicting the Common Areas with such outlined in red. EXHIBIT 3 - Verification of Term - Floor Area - Village Square Office Park. EXHIBIT 4 - Rules and regulations relating to Village Square Office Park as of date of lease to which this exhibit is attached. - 29 - [FLOOR PLAN] EXHIBIT 3 VERIFICATION OF TERM; VERIFICATION OF SQUARE FOOTAGE; and VERIFICATION OF MONTHLY AMOUNT OF AMORTIZED FIXED IMPROVEMENTS This form is completed by the parties hereto pursuant to the requirements of the Lease dated the ____ day of _______________, 1994, between BLUE CROSS BLUE SHIELD OF NORTH DAKOTA, A CORPORATION and LINCOLN MUTUAL LIFE AND CASUALTY INS. CO., A CORPORATION and GREAT PLAINS SOFTWARE, INC. AGREED: For Tenant_________________________ For Landlord_____________________________ ___________________________________ _________________________________________ EXHIBIT 4 RULES AND REGULATIONS [LETTERHEAD] August 10, 1994 Ms. Jodi Uecker-Rust GREAT PLAINS SOFTWARE, INC. 1701 38th. St. S.W. FARGO, ND 58103 Dear Jodi, Reference is made to the Lease dated May 2, 1994 (the "Lease") by and between Great Plains Software, Inc. (GPS), Blue Cross Blue Shield of North Dakota (BCBSND) and Lincoln Mutual Life and Casualty Insurance Company (LMLCIC). As was agreed, BCBSND paid for Landlord and Tenant improvements during Phase III at Village Square Office Park. The Tenant, GPS, agreed to Reimburse BCBSND for all tenant improvements. Tenant improvements are summarized in the attached letter from Tracy Aksamit, AIA, Project Architect, dated March 14, 1994. The total of Tenant improvements is $132,424 dollars. Great Plains Software, Inc. agrees to pay an additional $6,500 per month to the rent beginning August 1, 1994 and for the next 22 months as outlined in the attached amortization schedule based on an interest rate of eight percent. The final additional payment will be in the amount of $6,298.00. If the lease is terminated for any reason prior to the ending date of June 30, 1996, the remaining unpaid principal will be due immediately. BLUE CROSS BLUE SHIELD GREAT PLAINS SOFTWARE, INC. OF NORTH DAKOTA By: /s/ Michael B. Unhjem By: /s/ Jodi Uecker-Rust ------------------------------ ------------------------------ Michael B. Unhjem Title: VP Operations Its President and CEO --------------------------- LINCOLN MUTUAL LIFE AND CASUALTY INSURANCE COMPANY By: /s/ J. Scott Koltes ------------------------------ J. Scott Koltes Its President [LETTERHEAD] March 14, 1994 Scott Koltes Lincoln Mutual Life PO Box 1918 Fargo, ND 58107 Re: Village Square Office Park Fargo, ND #9116-9, #9116-10 Dear Mr. Koltes: Per your request the following is an accounting of the pay requests for work done at Village Square Office Park by YHRSRW projects #9116-9 and #9116-10. MinKo Construction Grant's Mechanical Fritz Electric ------------------ ------------------ -------------- Landlord Tenant Landlord Landlord Tenant #9116-9 09/23/93 21,190 10/27/93 6,024 10,708 11/04/93 24,041 5,997 12/01/93 15,966 28,384 12/03/93 20,556 17,203 12/28/93 20,497 18,950 12/29/93 91,216 157 12/30/93 1,635 01/07/94 8,236 14,642 01/25/94 5,512 28,157 #9116-10 01/07/94 2,230 01/21/94 6,153 2,110 ---------------------------------------------------------------------- 91,796 76,460 95,118 30,226 55,964 Scott Koltes March 14, 1994 Page 2 Should you have any questions or comments, please do not hesitate to contact this writer. Sincerely, Yeater Hennings Ruff Shultz Rokke Welch By /s/ Tracy Aksamit -------------------- Tracy Aksamit, Project Architect PROJ\9116-9\Koltes * * * AMORTIZATION SCHEDULE * * * TOTAL PAYMENTS: 22 INTEREST: 8 % PRINCIPAL: $132,424.00 PAYMENT # PAYMENT INTEREST PRINCIPAL BALANCE 1 $6,500.00 $882.83 $5,617.17 $126,806.83 2 $6,500.00 $845.38 $5,654.62 $121,152.21 3 $6,500.00 $807.68 $5,692.32 $115,459.89 4 $6,500.00 $769.73 $5,730.27 $109,729.62 5 $6,500.00 $731.53 $5,768.47 $103,961.15 6 $6,500.00 $693.07 $5,806.93 $98,154.22 7 $6,500.00 $654.36 $5,845.64 $92,308.59 8 $6,500.00 $615.39 $5,884.61 $86,423.98 9 $6,500.00 $576.16 $5,923.84 $80,500.14 10 $6,500.00 $536.67 $5,963.33 $74,536.80 11 $6,500.00 $496.91 $6,003.09 $68,533.72 12 $6,500.00 $456.89 $6,043.11 $62,490.61 13 $6,500.00 $416.60 $6,083.40 $56,407.21 14 $6,500.00 $376.05 $6,123.95 $50,283.26 15 $6,500.00 $335.22 $6,164.78 $44,118.48 16 $6,500.00 $294.12 $6,205.88 $37,912.60 17 $6,500.00 $252.75 $6,247.25 $31,665.36 18 $6,500.00 $211.10 $6,288.90 $25,376.46 19 $6,500.00 $169.18 $6,330.82 $19,045.63 20 $6,500.00 $126.97 $6,373.03 $12,672.60 21 $6,500.00 $84.48 $6,415.52 $6,257.09 22 $6,298.80 $41.71 $6,257.09 $0.00 TOTAL AMOUNT REPAID: $142,798.80 TOTAL INTEREST: $10,374.80 LEASE AMENDMENT This is an Amendment to the Lease dated May 2, 1994 between Blue Cross Blue Shield of North Dakota and Lincoln Mutual Life and Casualty Insurance Company ("Landlord") and Great Plains Software, Inc. ("Tenant"). Said Amendment is in accordance with paragraph 63 of the Lease. In the event that any provision of the Lease is inconsistent with any provision contained in this Amendment, the provision(s) of this Amendment shall control. Tenant acknowledges and agrees that on November 7, 1995, the term of the Lease was extended to June 30, 1999, as amended below, and that rent for the Premises was increased by $467 per month for a total monthly rent of $26,235. Said extension and rent increase was a result of improvements made to the Premises by Landlord. Said improvements included the addition of a ceiling, changing the heating and ventilation systems, smoke alarms and the sprinkling system in the area adjoining Union State Bank. In consideration of the terms of this Amendment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree to amend the Lease as follows: In accordance with paragraph 3, Landlord will improve the Premises by adding ceilings to approximately 28,255 square feet with necessary changes to the heating air conditioning, ventilation, sprinkler and alarm systems. Landlord will also add standard lighting fixtures with standard florescent bulbs and add windows on the north and east side of the northeast area of leased space. Paragraphs 8, 9 and 10 are amended to reflect the additional rent due from Tenant for said improvements, the effective date of the new rent and the new termination date of the Lease. Effective March 1, 1997, or when the remodeling work is completed, whichever is sooner. Tenant's rent will increase by $3,037 per month for a total monthly rent of $29,272 per month. Said rent will be paid by Tenant until the termination of the Lease on June 30, 1998. Tenant may terminate the Lease by giving six months written notice to Landlord of Tenant's intent to terminate. Said notice shall be sent to Landlord by certified mail, return receipt requested. Paragraphs 20 and 21 are amended to add that all repairs and maintenance of the rest rooms dedicated to Tenant are the responsibility of Tenant. Tenant is also responsible for the janitorial services of the former "public" restrooms. Landlord is responsible for the repair and maintenance of the fixtures and drains of said "public" rest rooms. All drains that require mechanical cleaning or water jet cleaning will be the responsibility of Landlord. Tenant will contact Blue Cross Blue Shield of North Dakota Building Services Department @ 282-1010 (available 24 hours per day), for maintenance work that is the responsiblity of Landlord. Page 1 Paragraph 22 is amended to add the following: Rooftop air handlers that are used by both Tenant and Landlord Common Areas will be the responsibility of Landlord for general maintenance, upkeep and repair. Major repairs (compressors, fan assemblies, filter dryers, condenser coils, evaporator coils, component refrigerant lines, heat exchangers, combustion chambers) and major control components, excluding individual room and area controls, will be the responsibility of Landlord for Roof Top Units ("RTU") 1-13. General repairs (filter changes, seasonal operational adjustment of thermostats, operating ranges and service calls related to comfort level issues associated with minor failures of RTU's 1-13), adjustment and routine maintenance or RTU's 1-13 are the responsibility of Tenant. RTU's 15-18 are used by both Tenant and the VSOP Common Areas and are the responsibility of Landlord. Repair and maintenance of light fixtures (bulbs, ballasts' lenses and general electrical wiring and switches) are the responsibility of Tenant. Dated this _______ day of ________________, 1996. Landlord: Blue Cross Blue Shield of North Dakota By: ______________________________ Its: _____________________________ Landlord: Lincoln Mutual Life and Casualty Insurance Company By: /s/ J. Scott Koltes ---------------------- Its: President -------------------- Tenant: Great Plains Software, Inc. By: /s/ Terri F. Zimmerman ------------------------- Its: TERRI F. ZIMMERMAN GROUP VICE PRESIDENT FINANCE AND OPERATIONS ----------------------- Page 2 EX-10.4 8 1983 INCENTIVE STOCK OPTION PLAN, AS AMENDED GREAT PLAINS SOFTWARE, INC. 1983 INCENTIVE STOCK OPTION PLAN 1. PURPOSE OF THE PLAN This Incentive Stock Option Plan (the "Plan") is intended to promote the interests of Great Plains Software, Inc., a Minnesota corporation (the "Company"), by providing the employees of the Company and any subsidiaries acquired or established at any time in the future, who are largely responsible for the management, growth and protection of the business, with incentives and rewards to encourage them to continue in the employ of the Company or its subsidiaries, if any. It is intended that the options issued pursuant to this Plan shall constitute incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1954, as amended, as in effect prior to January 1, 1987 (the "1954 Code"), or Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), whichever is applicable. The Plan shall be interpreted and administered so as to satisfy the requirements of Section 422A of the 1954 Code or Section 422 of the Code, whichever is applicable. References in the Plan to Section 422 of the Code shall include Section 422A of the 1954 Code, as applicable. 2. ADMINISTRATION OF THE PLAN The Plan shall be administered by a committee of the Board of Directors of the Company consisting of one or more persons (the "Committee"). The Committee shall from time to time designate the employees of the Company and its subsidiaries, if any, who shall be granted stock options under the Plan and the number of shares of stock to be optioned to each such employee. Subject to the terms and conditions of the Plan, the Committee shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary and further including, with no limitation on the generality of the foregoing, the authority to accelerate the exercisability of all or any part of any option granted under the Plan which was not made immediately and fully exercisable under the terms of its original grant. Decisions of the Committee shall be final and binding on all parties who have an interest in the Plan. 3. ELIGIBILITY FOR PARTICIPATION The persons who shall be eligible to receive options pursuant to the Plan shall be such key employees (including officers, whether or not they are directors) of the Company or its subsidiaries, if any, as the Committee shall select from time to time. "Subsidiary" means any corporation of which the Company owns, directly or indirectly, stock with more than 50% of the total voting power of all classes of stock of such corporation. 4. STOCK SUBJECT TO THE PLAN Under this Plan, options may be granted for the Company's Common Stock, par value $.01 per share (the "Common Stock"). Shares issued upon exercise of options may be either newly issued shares or treasury shares, at the discretion of the Company. The aggregate number of shares of Common Stock which may be issued under the Plan shall not exceed 1,550,000. If any outstanding option under the Plan for any reason expires or is terminated, the shares of Common Stock allocable to the unexercised portion of such option may again be subject to an option under the Plan. The limitation on the number of shares of Common Stock which may be issued under the Plan or for which options may be granted to each employee shall be subject to adjustment as provided in Section 5(d) of the Plan. A person who has been granted an incentive stock option under this Plan may be granted an additional option or options under the Plan if the Committee shall so determine; provided, however, that (a) for incentive stock options granted before January 1, 1987, the aggregate fair market value (determined as of the time the option is granted) of the Common Stock for which any employee may be granted such incentive stock options in any calendar year (under all plans described in subsection (b)(8) of Section 422A of the Code of his employer corporation and its parent and subsidiary corporations) shall not exceed $100,000 plus any unused carryover to such year, determined in the manner set forth in Section 422A(c)(4) of the Code, and (b) for incentive stock options granted after December 31, 1986, to the extent the aggregate fair market value (determined at the time the incentive stock option is granted) of the Common Stock with respect to which all incentive stock options are exercisable for the first time by an employee during any calendar year (under all plans described in subsection (d) of Section 422 of the Code of his employer corporation and its parent and subsidiary corporations) exceeds $100,000, such options shall be treated as options which do not qualify as incentive stock options within the meaning of Section 422 of the Code. 5. TERMS AND CONDITIONS OF OPTIONS Stock options granted pursuant to the Plan shall be authorized by action of the Committee and shall be evidenced by option agreements in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: -2- (a) OPTION PRICE The option price of any option granted under the Plan shall be not less than 100% of the fair market value of the Common Stock on the date of the grant of such option. For purposes of the preceding sentence and for all other valuation purposes under the Plan, the fair market value per share of Common Stock shall be as reasonably determined by the Committee, but shall not be less than the average of the closing representative bid and asked prices of the Common Stock as reported on the National Association of Securities Dealers Automated Quotation System, if applicable, or, if the Common Stock is then traded on a national securities exchange, the closing price of the Common Stock on such exchange on the date as of which fair market value is being determined. If on the date of grant of any option under the Plan the Common Stock is not publicly traded, the Committee shall make a good faith attempt to satisfy the option price requirement of this Section 5(a) and in connection therewith shall take such action as it deems necessary or advisable, including obtaining and relying on the opinion of one or more completely independent and well-qualified experts as to the fair market value of such Common Stock and such other facts and circumstances as it deems relevant. (b) TERM AND EXERCISE OF OPTIONS (1) Each option granted under the Plan shall be exercisable on such date or dates, during such period (not exceeding ten years) and for such number of shares of Common Stock as shall be determined by the Committee and set forth in the stock option agreement with respect to such option. (2) Any option granted under the Plan may be exercised by notifying the Company in writing of such exercise prior to the termination of such option. The option price for the number of shares of Common Stock for which the option is exercised shall become immediately due and payable; provided, however, that in lieu of cash an optionee may, with the approval of the Committee, exercise his or her option by tendering to the Company Common Stock owned by such optionee (and with the certificates therefor registered in his or her name) having a fair market value equal to the cash exercise price of the shares of Common Stock being purchased. (3) No option granted hereunder before January 1, 1987 shall be exercisable while there is outstanding (within the meaning of the Code Section 422A(c)(7)) any incentive stock option to purchase stock of the Company or a parent or subsidiary corporation or a predecessor corporation of any of them which was granted to the optionee prior to the grant of such option hereunder. -3- (4) During the lifetime of the optionee, the option shall be exercisable only by such optionee and shall not be assignable or transferable by such optionee otherwise than by will or the laws of descent and distribution. (c) EFFECT OF TERMINATION OF EMPLOYMENT (1) In the event that an optionee shall cease to be employed by the Company or its subsidiaries, if any, for any reason the option shall be automatically terminated as of the date of such termination of employment; provided that the Committee, in its discretion, may provide in any option granted pursuant to this Plan that in the event that an optionee shall cease to be employed by the Company or its subsidiaries, if any, for any reason other than his or her gross or willful misconduct or death or disability, such optionee shall have the right to exercise the option at any time within one month after such termination of employment to the extent of the full number of shares he or she was entitled to purchase under the option on the date of termination, subject to the condition that no option shall be exercisable after the expiration of the term of the option. (2) In the event that an optionee shall cease to be employed by the Company or its subsidiaries, if any, by reason of his or her gross or willful misconduct during the course of his or her employment, including but not limited to wrongful appropriation of funds of his or her employer or the commission of a gross misdemeanor or felony, the option shall be terminated as of the date of such misconduct. (3) If the optionee shall die while in the employ of the Company or a subsidiary, if any, or within one month after termination of employment for any reason other than gross or willful misconduct, or become disabled (within the meaning of Code Section 22(e)(3)) while in the employ of the Company or a subsidiary, if any, and such optionee shall not have fully exercised the option, such option may be exercised at any time within twelve months after such death or disability by the executors, administrators or guardians of the optionee, as applicable, or by any person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of shares such optionee was entitled to purchase under the option on the date of such death or disability, subject to the condition that no option shall be exercisable after the expiration of the term of the option. (d) ADJUSTMENT UPON CHANGES IN STOCK If any change is made in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, split-up, combination of shares, exchange of shares, change in corporate structure or otherwise, appropriate adjustments shall be made as to the maximum number of -4- shares subject to the Plan and the number of shares or other consideration and option prices relating to outstanding options. (e) RIGHTS AS A STOCKHOLDER No person shall have any rights as a stockholder with respect to any shares of Common Stock subject to an option granted pursuant to the Plan until the date of the issuance of a stock certificate to such optionee for such shares. (f) 10% SHAREHOLDER RULE Notwithstanding any other provision in the Plan, if at the time an option is otherwise to be granted pursuant to the Plan the optionee owns directly or indirectly (within the meaning of Code Section 424(d)) Common Stock of the Company possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations, if any (within the meaning of Code Section 422(b)(6)), the option price of any option granted to such optionee pursuant to the Plan shall be not less than 110% of the fair market value of the Common Stock determined as described herein, and such option by its terms shall not be exercisable after the expiration of five years from the date such option is granted, all in accordance with the requirements of Code Section 422(c)(5). 6. SECURITIES MATTERS The exercise of any option granted hereunder shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws. The employee desiring to exercise an option may be required by the Company, as a condition of the effectiveness of any exercise of an option granted hereunder, to agree in writing that all Common Stock to be acquired pursuant to such exercise shall be held for his or her own account without a view to any further distribution thereof, that the certificates for such shares shall bear an appropriate legend to that effect and that such shares will not be transferred or disposed of except in compliance with applicable federal and state laws. The Company may, in its sole discretion, defer the effectiveness of any exercise of an option granted hereunder in order to allow the issuance of Common Stock pursuant thereto to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. The Company shall be under no obligation to effect the registration pursuant to the Securities Act of 1933 of any Common Stock to be issued hereunder or to effect similar compliance under any state laws. -5- The Company shall inform the optionee in writing of its decision to defer the effectiveness of the exercise of an option granted hereunder. During the period that the effectiveness of the exercise of an option has been deferred, the optionee may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect thereto. 7. AMENDMENT OF THE PLAN The Board of Directors of the Company may suspend or discontinue the Plan or revise or amend it in any respect whatsoever; provided, however, that without approval of the shareholders of the Company no revision or amendment shall (a) increase the number of shares subject to the Plan, except as provided in Section 5(d), (b) extend the term of the Plan, (c) extend the term for which options may be granted beyond ten years, (d) reduce the option price at which options may be granted to less than 100% of the fair market value of the Common Stock on the date of the grant, or (e) in any other fashion cause the options granted hereunder to fail to qualify as incentive stock options within the meaning of Code Section 422. 8. EFFECTIVE DATE AND TERM OF PLAN The Plan was adopted by the Board of Directors of the Company on August 15, 1983, and was approved by the stockholders of the Company within 12 months thereof. The Plan was amended by the Board of Directors of the Company on December 15, 1986 and April 9, 1991 and thereafter, to the extent necessary, approved by the stockholders of the Company. The Plan was further amended by the Board of Directors on December 15, 1994 to increase the number of shares of Common Stock subject to the Plan and to extend the term of the Plan, and such amendments to the Plan were thereafter approved by the stockholders of the Company. The Plan was further amended on September 26, 1995 to increase the number of shares of Common Stock subject to the Plan, and such amendment to the Plan shall be approved by the stockholders of the Company within 12 months of September 26, 1995. The Plan shall terminate on December 15, 2004; PROVIDED, HOWEVER, that such termination shall in no way affect options granted prior thereto and then outstanding. Options may be granted under the Plan at any time prior to the termination of the Plan. -6- EX-10.5 9 1997 STOCK INCENT PLAN FINAL 2/13/97 GREAT PLAINS SOFTWARE, INC. 1997 STOCK INCENTIVE PLAN SECTION 1. PURPOSE; EFFECT ON PRIOR PLANS. (a) PURPOSE. The purpose of the Great Plains Software, Inc. 1997 Stock Incentive Plan (the "Plan") is to promote the interests of Great Plains Software, Inc. (the "Company") and its shareholders by aiding the Company in attracting and retaining personnel capable of assuring the future success of the Company, to offer such personnel incentives to put forth maximum efforts for the success of the Company's business and to afford such personnel an opportunity to acquire a proprietary interest in the Company. (b) EFFECT ON PRIOR PLAN. From and after the date on which the Company's shareholders approve this Plan, no awards or stock options shall be granted under the Prior Plan. All outstanding stock options granted prior to the date on which the Company's shareholders approve this Plan shall remain outstanding in accordance with the terms of the Prior Plan. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent or Other Stock-Based Award granted under the Plan. (c) "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder. (e) "Committee" shall mean a committee of the Board of Directors of the Company designated by such Board to administer the Plan, which shall consist of members appointed from time to time by the Board of Directors and shall be comprised of not less than two directors. Each member of the Committee shall be a "Non-Employee Director" within the meaning of Rule 16b-3 and an "outside director" within the meaning of Section 162(m) of the Code. The Committee may be the Compensation Committee of the Board of Directors, provided that the requirements of this Section are met. (f) "Company" shall mean Great Plains Software, Inc., a Minnesota corporation, and any successor corporation. (g) "Dividend Equivalent" shall mean any right granted under Section 6(d) of the Plan. (h) "Effective Date" shall mean the later of (i) the date on which the Plan is approved by the shareholders of the Company and (ii) the date on which the Company's registration statement relating to its initial public offering of Shares is declared effective by the Securities and Exchange Commission. (i) "Eligible Person" shall mean any employee, officer, director, consultant or independent contractor providing services to the Company or any Affiliate who the Committee determines to be an Eligible Person. (j) "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. (k) "Incentive Stock Option" shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision. (l) "Non-Qualified Stock Option" shall mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option. (m) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. (n) "Other Stock-Based Award" shall mean any right granted under Section 6(f) of the Plan. (o) "Participant" shall mean an Eligible Person designated to be granted an Award under the Plan. (p) "Performance Award" shall mean any right granted under Section 6(c) of the Plan. (q) "Person" shall mean any individual, corporation, partnership, association or trust. (r) "Plan" shall mean this 1997 Stock Incentive Plan, as amended from time to time. (s) "Prior Plan" shall mean the Company's 1983 Incentive Stock Option Plan, as amended. (t) "Reload Option" shall mean any Option granted under Section 6(a)(iv) of the Plan. (u) "Restricted Stock" shall mean any Share granted under Section 6(b) of the Plan. (v) "Restricted Stock Unit" shall mean any unit granted under Section 6(b) of the Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date. (w) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or any successor rule or regulation. (x) "Shares" shall mean shares of Common Stock, $.01 par value, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan. (y) "Stock Appreciation Right" shall mean any right granted under Section 6(e) of the Plan. SECTION 3. ADMINISTRATION. (a) POWER AND AUTHORITY OF THE COMMITTEE. The Plan shall be administered by the Committee. Subject to the express provisions of the Plan and to applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of Options or the lapse of restrictions relating to Restricted Stock or other Awards; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or the Committee; (viii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (ix) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Participant, any holder or beneficiary of any Award and any employee of the Company or any Affiliate. (b) DELEGATION. The Committee may delegate its powers and duties under the Plan to one or more officers of the Company or any Affiliate or a committee of such officers, subject to such terms, conditions and limitations as the Committee may establish in its sole discretion; PROVIDED, HOWEVER, that the Committee shall not delegate its powers and duties under the Plan (i) with regard to officers or directors of the Company or any Affiliate who are subject to Section 16 of the Securities Exchange Act of 1934, as amended or (ii) in such a manner as would cause the Plan not to comply with the requirements of Section 162(m) of the Code. SECTION 4. SHARES AVAILABLE FOR AWARDS. (a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(d), the number of Shares available for granting Awards under the Plan shall be equal to 1,000,000. In addition, any Shares granted under the Plan which are forfeited back to the Company because of the failure to meet an Award contingency or condition shall again be available for delivery pursuant to new Awards granted under the Plan. Any Shares covered by an Award (or portion of an Award) granted under the Plan, which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. Likewise, any Shares that are used by a Participant as full or partial payment to the Company of the purchase price relating to an Award, or in connection with satisfaction of tax obligations relating to an Award in accordance with the provisions of Section 8 of the Plan, shall again be available for granting Awards under the Plan. Further, Shares issued under the Plan through the settlement, assumption or substitution of outstanding awards or obligations to grant future awards as a condition of the Company acquiring another entity shall not reduce the maximum number of Shares available for delivery under the Plan. (b) ACCOUNTING FOR AWARDS. For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan. (c) INCENTIVE STOCK OPTIONS. Notwithstanding the foregoing, the number of Shares available for granting Incentive Stock Options under the Plan shall not exceed 1,000,000, subject to adjustment as provided in the Plan and Section 422 or 424 of the Code or any successor provisions. (d) ADJUSTMENTS. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or other property) which thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or other property) subject to outstanding Awards and (iii) the purchase or exercise price with respect to any Award; PROVIDED, HOWEVER, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number. (e) AWARD LIMITATIONS UNDER THE PLAN. No Eligible Person may be granted any Award or Awards, the value of which Awards are based solely on an increase in the value of the Shares after the date of grant of such Awards, for more than 200,000 Shares, subject to adjustment as provided in the Plan during any one calendar year. The foregoing limitation specifically includes the grant of any "performance-based" Awards within the meaning of Section 162(m) of the Code. SECTION 5. ELIGIBILITY. Any Eligible Person, including any Eligible Person who is an officer or director of the Company or any Affiliate, shall be eligible to be designated a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributions to the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant. Notwithstanding the foregoing, an Incentive Stock Option may only be granted to full or part-time employees (which term as used herein includes, without limitation, officers and directors who are also employees) and an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a "subsidiary corporation" of the Company within the meaning of Section 424(f) of the Code or any successor provision. SECTION 6. AWARDS. (a) OPTIONS. The Committee is hereby authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) EXERCISE PRICE. The purchase price per Share purchasable under an Option shall be determined by the Committee; PROVIDED, HOWEVER, that such purchase price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option. (ii) OPTION TERM. The term of each Option shall be fixed by the Committee. (iii) TIME AND METHOD OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, promissory notes, other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price) in which, payment of the exercise price with respect thereto may be made or deemed to have been made. (iv) RELOAD OPTIONS. The Committee may grant Reload Options, separately or together with another Option, pursuant to which, subject to the terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 or any other applicable law, the Participant would be granted a new Option when the payment of the exercise price of a previously granted option is made by the delivery of Shares owned by the Participant pursuant to Section 6(a)(iii) hereof or the relevant provisions of another plan of the Company, and/or when Shares are tendered or forfeited as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of an Option, which new Option would be an Option to purchase the number of Shares not exceeding the sum of (A) the number of Shares so provided as consideration upon the exercise of the previously granted option to which such Reload Option relates and (B) the number of Shares, if any, tendered or withheld as payment of the amount to be withheld under applicable tax laws in connection with the exercise of the option to which such Reload Option relates pursuant to the relevant provisions of the plan or agreement relating to such option. Reload Options may be granted with respect to Options previously granted under the Plan or any other stock option plan of the Company, and may be granted in connection with any Option granted under the Plan or any other stock option plan of the Company at the time of such grant. Such Reload Options shall have a per share exercise price equal to the Fair Market Value as of the date of grant of the new Option. Any Reload Option shall be subject to availability of sufficient Shares for grant under the Plan. (b) RESTRICTED STOCK AND RESTRICTED STOCK UNITS. The Committee is hereby authorized to grant Awards of Restricted Stock and Restricted Stock Units to Participants with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) RESTRICTIONS. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property with respect thereto or with respect to a Restricted Stock Unit), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate. Shares of Restricted Stock shall contain a restriction providing for a vesting period of not less than one year. (ii) STOCK CERTIFICATES. Any Restricted Stock granted under the Plan shall be evidenced by issuance of a stock certificate or certificates or may be in the form of a bookkeeping entry, which certificate or certificates shall be held by the Company and which bookkeeping entry shall be evidenced in the records of the Company's transfer agent in an account maintained for the Participant. Such certificate or certificates, or entries on the records of the transfer agent, as the case may be, shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted. (iii) FORFEITURE; DELIVERY OF SHARES. Except as otherwise determined by the Committee, upon termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and all Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; PROVIDED, HOWEVER, that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units. Any Share representing Restricted Stock that is no longer subject to restrictions shall be delivered to the holder thereof promptly after the applicable restrictions lapse or are waived or applicable restrictions shall be lifted from the records of the transfer agent, as the case may be. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, such Shares shall be issued and delivered to the holders of the Restricted Stock Units. (c) PERFORMANCE AWARDS. The Committee is hereby authorized to grant Performance Awards to Participants subject to the terms of the Plan and any applicable Award Agreement. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award Agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award and any other terms and conditions of any Performance Award shall be determined by the Committee. (d) DIVIDEND EQUIVALENTS. The Committee is hereby authorized to grant to Participants Dividend Equivalents under which such Participants shall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee. Subject to the terms of the Plan and any applicable Award Agreement, such Dividend Equivalents may have such terms and conditions as the Committee shall determine. (e) STOCK APPRECIATION RIGHTS. The Committee is hereby authorized to grant Stock Appreciation Rights to Participants subject to the terms of the Plan and any applicable Award Agreement. A Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive upon exercise thereof the excess of (i) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right; PROVIDED, HOWEVER, that such grant price may be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right if such right is granted to replace a stock option of the Company based on the excess of the Fair Market Value of a Share over the exercise price of such stock option. Subject to the terms of the Plan and any applicable Award Agreement, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate. (f) OTHER STOCK-BASED AWARDS. The Committee is hereby authorized to grant to Participants such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan; PROVIDED, HOWEVER, that such grants must comply with Rule 16b-3 and applicable law. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of such Awards. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(f) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including without limitation, cash, Shares, promissory notes, other securities, other Awards or other property or any combination thereof), as the Committee shall determine, the value of which consideration, as established by the Committee, shall not be less than 100% of the Fair Market Value of such Shares or other securities as of the date such purchase right is granted. (g) GENERAL. (i) NO CASH CONSIDERATION FOR AWARDS. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law. (ii) AWARDS MAY BE GRANTED SEPARATELY OR TOGETHER. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate other than the Plan. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (iii) FORMS OF PAYMENT UNDER AWARDS. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, (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 said Award, (iv) authorization for the Company to retain from the total number of Shares as to which the Award is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price of said Award, (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). Such payments or transfers may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments. (iv) LIMITS ON TRANSFER OF AWARDS. Except as otherwise provided in any applicable Award Agreement (other than an Award Agreement relating to an Incentive Stock Option) pursuant to terms determined by the Committee, no Award and no right under any Award shall be transferable by a Participant otherwise than by will or by laws of descent and distribution and shall be exercisable during the Participant's lifetime only by the Participant or, if permissible under applicable law, by the Participant's guardian or legal representative. Except as otherwise provided in any applicable Award Agreement, no Award or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate. (v) TERM OF AWARDS. The term of each Award shall be for such period as may be determined by the Committee. (vi) RESTRICTIONS; SECURITIES EXCHANGE LISTING. All certificates for Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. If the Shares or other securities are traded on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award unless and until such Shares or other securities have been admitted for trading on such securities exchange. SECTION 7. AMENDMENT AND TERMINATION; ADJUSTMENTS. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (a) AMENDMENTS TO THE PLAN. The Board of Directors of the Company may amend, alter, suspend, discontinue or terminate the Plan; PROVIDED, HOWEVER, that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the shareholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval: (i) would violate the rules or regulations of the National Association of Securities Dealers, Inc. or the New York Stock Exchange or any other securities exchange that are applicable to the Company; or (ii) would cause the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan. (b) AMENDMENTS TO AWARDS. The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. The Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, without the consent of the Participant or holder or beneficiary thereof, except as otherwise herein provided. (c) CORRECTION OF DEFECTS, OMISSIONS AND INCONSISTENCIES. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect. SECTION 8. INCOME TAX WITHHOLDING; TAX BONUSES. (a) WITHHOLDING. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. In order to assist a Participant in paying all or a portion of the federal and state taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. (b) TAX BONUSES. The Committee, in its discretion, shall have the authority, at the time of grant of any Award under this Plan or at any time thereafter, to approve cash bonuses to designated Participants to be paid upon their exercise or receipt of (or the lapse of restrictions relating to) Awards in order to provide funds to pay all or a portion of federal and state taxes due as a result of such exercise or receipt (or the lapse of such restrictions). The Committee shall have full authority in its discretion to determine the amount of any such tax bonus. SECTION 9. GENERAL PROVISIONS. (a) NO RIGHTS TO AWARDS. No Eligible Person, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons, Participants or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to any Participant or with respect to different Participants. (b) AWARD AGREEMENTS. No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company. (c) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (d) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (e) GOVERNING LAW. The validity, construction and effect of the Plan or any Award, and any rules and regulations relating to the Plan or any Award, shall be determined in accordance with the laws of the State of Minnesota. (f) SEVERABILITY. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect. (g) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (h) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated. (i) HEADINGS. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (j) OTHER BENEFITS. No compensation or benefit awarded to or realized by any Participant under the Plan shall be included for the purpose of computing such Participant's compensation under any compensation-based retirement, disability, or similar plan of the Company unless required by law or otherwise provided by such other plan. SECTION 10. SECTION 16(b) COMPLIANCE. The Plan is intended to comply in all respects with Rule 16b-3 or any successor provision, as in effect from time to time and in all events the Plan shall be construed in accordance with the requirements of Rule 16b-3. If any Plan provision does not comply with Rule 16b-3 as hereafter amended or interpreted, the provision shall be deemed inoperative. The Board, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to participants who are officers or directors subject to Section 16 of the Securities and Exchange Act of 1934, as amended, without so restricting, limiting or conditioning the Plan with respect to other participants. SECTION 11. SHAREHOLDER APPROVAL; EFFECTIVE DATE OF THE PLAN. The Plan shall be subject to approval by the shareholders of the Company prior to the Effective Date. If the Plan is approved by the Company's shareholders, the Plan shall be effective as of the Effective Date. SECTION 12. TERM OF THE PLAN. Awards shall only be granted under the Plan during a ten-year period beginning on the effective date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond the end of such ten-year period, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board of Directors of the Company to amend the Plan, shall extend beyond the end of such period. EX-10.6 10 OUTSIDE DIRECTOR'S STOCK OPTION PLAN 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. (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. (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 in two equal installments, on each of the one-month anniversary of the date of grant and the one-year anniversary of the date of grant. (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. 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. 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 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 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. EX-10.7 11 1997 EMPLOYEE STOCK PURCHASE PLAN GREAT PLAINS SOFTWARE, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN ARTICLE I. INTRODUCTION Section 1.01 PURPOSE. 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 (the "Company"), 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. Section 1.02 RULES OF INTERPRETATION. It is intended that the Plan 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. Section 1.03 DEFINITIONS. For purposes of the Plan, the following terms will have the meanings set forth below: (a) "ACCELERATION DATE" means the earlier of the date of stockholder approval or approval by the Company's Board of Directors of (i) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Company Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which stockholders of the Company immediately prior to the merger have the same proportionate ownership of stock in the surviving corporation immediately after the merger; (ii) any sale, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (iii) any plan of liquidation or dissolution of the Company. (b) "AFFILIATE" means any subsidiary corporation of the Company, as defined in Section 424(f) of the Code, whether now or hereafter acquired or established. (c) "COMMITTEE" means the committee described in Section 10.01. (d) "COMMON STOCK" means the Company's Common Stock, $.01 par value, as such stock may be adjusted for changes in the stock or the Company as contemplated by Article XI herein. (e) "COMPANY" means Great Plains Software, Inc., a Minnesota corporation, and its successors by merger or consolidation as contemplated by Article XI herein. (f) "CURRENT COMPENSATION" means all salary and wages paid for purposes of Section 415(c)(3) of the Code by the Company to a Participant in accordance with the terms of his or her employment. (g) "EFFECTIVE DATE" means the date on which the Company's registration statement relating to its initial public offering of Common Stock is declared effective by the Securities and Exchange Commission. (h) "FAIR MARKET VALUE" as of a given date means such value of the Common Stock as reasonably determined by the Committee, but shall not be less than (i) the closing price of the Common Stock as reported for composite transactions if the Common Stock is then traded on a national securities exchange or (ii) the last sale price if the Common Stock is then quoted on the Nasdaq National Market; provided, however, that the Fair Market Value on the Effective Date shall be the initial public offering price set forth on the cover of the final prospectus used in connection with the Company's initial public offering of Common Stock. If on a given date the Common Stock are not traded on an established securities market, the Committee shall make a good faith attempt to satisfy the requirements of this Section 1.03 and in connection therewith shall take such action as it deems necessary or advisable. (i) "PARTICIPANT" means a Permanent Full-Time Employee who is eligible to participate in the Plan under Section 2.01 and who has elected to participate in the Plan. (j) "PARTICIPATING AFFILIATE" means an Affiliate which has been designated by the Committee in advance of the Purchase Period in question as a corporation whose eligible Permanent Full-Time Employees may participate in the Plan. (k) "PERMANENT FULL-TIME EMPLOYEE" means an employee of the Company or a Participating Affiliate as of the first day of a Purchase Period, including an officer or director who is also an employee, but excluding an employee whose customary employment is less than 20 hours per week. (l) "PLAN" means the Great Plains Software, Inc. 1997 Employee Stock Purchase Plan, as amended, the provisions of which are set forth herein. (m) "PURCHASE PERIOD" means any of the approximate six-month periods beginning on the first business day in January and July, as appropriate, and ending on the last business day in June and December, respectively; provided, however, that the initial Purchase Period will commence on the Effective Date and will terminate on the last business day preceding the first business day in January or July, as appropriate, immediately following the Effective Date, and that the then current Purchase Period will end upon the occurrence of an Acceleration Date. (n) "STOCK PURCHASE ACCOUNT" means the account maintained on the books and records of the Company recording the amount received from each Participant through payroll deductions made under the Plan and from the Company through matching contributions. ARTICLE II. ELIGIBILITY AND PARTICIPATION Section 2.01 ELIGIBLE EMPLOYEES. 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. Subject to the provisions of Article VI, each such employee will continue to be eligible to participate in the Plan so long as he or she remains a Permanent Full-Time Employee. Section 2.02 ELECTION TO PARTICIPATE. An eligible Permanent Full-Time Employee may elect to participate in the Plan for a given Purchase Period by filing with the Company, in advance of that Purchase Period and in accordance with such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company for such purpose (which authorizes regular payroll deductions from Current Compensation beginning with the first payday in that Purchase Period and continuing until the employee withdraws from the Plan or ceases to be eligible to participate in the Plan). Section 2.03 LIMITS ON STOCK PURCHASE. No employee shall be granted any right to purchase Common Stock hereunder if such employee, immediately after such a right to purchase is granted, would own, directly or indirectly, within the meaning of Section 423(b)(3) and Section 424(d) of the Code, Common Stock possessing 5% or more of the total combined voting power or value of all the classes of the capital stock of the Company. Section 2.04 VOLUNTARY PARTICIPATION. 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. ARTICLE III. PAYROLL DEDUCTIONS, COMPANY CONTRIBUTIONS AND STOCK PURCHASE ACCOUNT Section 3.01 DEDUCTION FROM PAY. The form described in Section 2.02 will permit a Participant to elect payroll deductions of any multiple of 1% but not less than 1% or more than 10% of such Participant's Current Compensation for each pay period, subject to such other limitations as the Committee in its sole discretion may impose. A Participant may cease making payroll deductions at any time, subject to such limitations as the Committee in its sole discretion may impose. Section 3.02 COMPANY CONTRIBUTIONS. The Company may, in the sole discretion of the Committee, 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 as provided in Section 3.03. Section 3.03 CREDIT TO ACCOUNT. Payroll deductions will be credited to the Participant's Stock Purchase Account on each payday, and Company contributions will be credited to the Participant's Stock Purchase Account on the last business day of the Purchase Period at the time of and in connection with the purchase of shares of Common Stock in accordance with Articles IV and V hereof. Section 3.04 INTEREST. 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. Section 3.05 NATURE OF 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). Section 3.06 NO ADDITIONAL CONTRIBUTIONS. A Participant may not make any payment into the Stock Purchase Account other than the payroll deductions made pursuant to the Plan. ARTICLE IV. RIGHT TO PURCHASE SHARES Section 4.01 NUMBER OF SHARES. Each Participant will have the right to purchase on the last business day of the Purchase Period all, but not less than all, of the largest number of whole shares of Common Stock that can be purchased at the price specified in Section 4.02 with the entire credit balance in the Participant's Stock Purchase Account, subject to the limitations that (a) no more than 1,250 shares of Common Stock may be purchased under the Plan by any one Participant for a given Purchase Period and (b) in accordance with Section 423(b)(8) of the Code, no more than $25,000 in Fair Market Value (determined at the beginning of each Purchase Period) of Common Stock and other stock may be purchased under the Plan and all other employee stock purchase plans (if any) of the Company and the Affiliates by any one Participant for any calendar year. If the purchases for all Participants would otherwise cause the aggregate number of shares of Common Stock to be sold under the Plan to exceed the number specified in Section 10.03, each Participant shall be allocated a pro rata portion of the Common Stock to be sold. Section 4.02 PURCHASE PRICE. 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 each case rounded up to the next higher full cent. ARTICLE V. EXERCISE OF RIGHT Section 5.01 PURCHASE OF STOCK. On 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 (subject to the limitations of Section 4.01), unless the Participant has filed with the Company, in advance of that date and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company which requests the distribution of the entire credit balance in cash. Section 5.02 CASH DISTRIBUTIONS. Any amount remaining in a Participant's Stock Purchase Account after the last business day of a Purchase Period will be paid to the Participant in cash within 30 days after the end of that Purchase Period. Section 5.03 NOTICE OF ACCELERATION DATE. The Company shall use its best efforts to notify each Participant in writing at least ten days prior to any Acceleration Date that the then current Purchase Period will end on such Acceleration Date. ARTICLE VI. WITHDRAWAL FROM PLAN; SALE OF STOCK Section 6.01 VOLUNTARY WITHDRAWAL. A Participant may, in accordance with such terms and conditions as the Committee in its sole discretion may impose, withdraw from the Plan and cease making payroll deductions by filing with the Company a form provided for this purpose. In such event, the entire credit balance in the Participant's Stock Purchase Account will be paid to the Participant in cash within 30 days, provided that in no event shall any Participant be entitled to withdraw from such Account any Company contributions credited to such Account at the end of the Purchase Period pursuant to Section 3.03. 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. Section 6.02 DEATH. Subject to such terms and conditions as the Committee in its sole discretion may impose, upon the death of a Participant, no further amounts shall be credited to the Participant's Stock Purchase Account. Thereafter, on the last business day of the Purchase Period during which such Participant's death occurred and in accordance with Section 5.01, the entire credit balance in such Participant's Stock Purchase Account will be used to purchase Common Stock, unless such Participant's estate has filed with the Company, in advance of that day and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company which elects to have the entire credit balance in such Participant's Stock Account distributed in cash within 30 days after the end of that Purchase Period or at such earlier time as the Committee in its sole discretion may decide, provided that in no event shall any Participant's estate be entitled to receive from such Account any Company contributions credited to such Account at the end of the Purchase Period pursuant to Section 3.03. Each Participant, however, may designate one or more beneficiaries who, upon death, are to receive the Common Stock or the amount that otherwise would have been distributed or paid to the Participant's estate and may change or revoke any such designation from time to time. No such designation, change or revocation will be effective unless made by the Participant in writing and filed with the Company during the Participant's lifetime. Unless the Participant has otherwise specified the beneficiary designation, the beneficiary or beneficiaries so designated will become fixed as of the date of the death of the Participant so that, if a beneficiary survives the Participant but dies before the receipt of the payment due such beneficiary, the payment will be made to such beneficiary's estate. Section 6.03 TERMINATION OF EMPLOYMENT. Subject to such terms and conditions as the Committee in its sole discretion may impose, upon a Participant's normal or early retirement with the consent of the Company under any pension or retirement plan of the Company or Participating Affiliate, no further amounts shall be credited to the Participant's Stock Purchase Account. Thereafter, on the last business day of the Purchase Period during which such Participant's approved retirement occurred and in accordance with Section 5.01, the entire credit balance in such Participant's Stock Purchase Account will be used to purchase Common Stock, unless such Participant has filed with the Company, in advance of that day and subject to such terms and conditions as the Committee in its sole discretion may impose, a form provided by the Company which elects to receive the entire credit balance in such Participant's Stock Purchase Account in cash within 30 days after the end of that Purchase Period, provided that (i) in no event shall any Participant be entitled to receive from such Account any Company contributions credited to such Account at the end of the Purchase Period pursuant to Section 3.03, and (ii) such Participant shall have no right to purchase Common Stock in the event that the last day of such a Purchase Period occurs more than three months following the termination of such Participant's employment with the Company by reason of such an approved retirement. In the event of any other termination of employment (other than death) with the Company or a Participating Affiliate, participation in the Plan will cease on the date the Participant ceases to be a Permanent Full-Time Employee for any reason. In such event, the entire credit balance in such Participant's Stock Purchase Account will be paid to the Participant in cash within 30 days, provided that in no event shall any Participant be entitled to receive from such Account any Company contributions credited to such Account at the end of the Purchase Period pursuant to Section 3.03. For purposes of this Section 6.03, a transfer of employment to any Affiliate, or a leave of absence which has been approved by the Committee, will not be deemed a termination of employment as a Permanent Full-Time Employee. ARTICLE VII. NONTRANSFERABILITY Section 7.01 NONTRANSFERABLE RIGHT TO PURCHASE. The right to purchase Common Stock hereunder may not be assigned, transferred, pledged or hypothecated (whether by operation of law or otherwise), except as provided in Section 6.02, and will not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition or levy of attachment or similar process upon the right to purchase will be null and void and without effect. Section 7.02 NONTRANSFERABLE ACCOUNT. Except as provided in Section 6.02, 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. ARTICLE VIII. STOCK CERTIFICATES Section 8.01 DELIVERY. Promptly after the last day of each Purchase Period and subject to such terms and conditions as the Committee in its sole discretion may impose, the Company will cause to be delivered to or for the benefit of the Participant a certificate representing the Common Stock purchased on the last business day of such Purchase Period. Section 8.02 SECURITIES LAWS. The Company shall not be required to issue or deliver any certificate representing Common Stock prior to registration under the Securities Act of 1933, as amended, or registration or qualification under any state law if such registration is required. The Company shall use its best efforts to accomplish such registration (if and to the extent required) not later than a reasonable time following the Purchase Period, and delivery of certificates may be deferred until such registration is accomplished. Section 8.03 COMPLETION OF PURCHASE. A Participant shall have no interest in the Common Stock purchased until a certificate representing the same is issued to or for the benefit of the Participant. Section 8.04 FORM OF OWNERSHIP. The certificates representing Common Stock issued under the Plan will be registered in the name of the Participant or jointly in the name of the Participant and another person, as the Participant may direct on a form provided by the Company. ARTICLE IX. EFFECTIVE DATE, AMENDMENT AND TERMINATION OF PLAN Section 9.01 EFFECTIVE DATE. The Plan was approved by the Board of Directors on February 13, 1997 and shall be approved by the stockholders of the Company prior to the Effective Date. Section 9.02 PLAN COMMENCEMENT. The initial Purchase Period under the Plan will commence on the Effective Date. Thereafter, each succeeding Purchase Period will commence and terminate in accordance with Section 1.03(l). Section 9.03 POWERS OF BOARD. The Board of Directors may amend or discontinue the Plan at any time. No amendment or discontinuation of the Plan, however, shall without stockholder approval be made that: (i) absent such stockholder approval, would cause Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Act") to become unavailable with respect to the Plan, (ii) requires stockholder approval under any rules or regulations of the National Association of Securities Dealers, Inc. or any securities exchange that are applicable to the Company, or (iii) permit the issuance of Common Stock before payment therefor in full. Section 9.04 AUTOMATIC TERMINATION. Subject to the last sentence of Section 4.01, the Plan shall automatically terminate when all of the shares of Common Stock provided for in Section 10.03 have been sold. ARTICLE X. ADMINISTRATION Section 10.01 THE COMMITTEE. 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 within the meaning of Rule 16b-3 under the Act. 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, provided that the requirements of the first sentence of this Section 10.01 are met. Section 10.02 POWERS OF COMMITTEE. Subject to the provisions of the Plan, the Committee shall have full authority to administer the Plan, including authority to interpret and construe any provision of the Plan, to establish deadlines by which the various administrative forms must be received in order to be effective, and to adopt such other rules and regulations for administering the Plan as it may deem appropriate. The Committee shall have full and complete authority to determine whether all or any part of the Common Stock acquired pursuant to the Plan shall be subject to restrictions on the transferability thereof or any other restrictions affecting in any manner a Participant's rights with respect thereto but any such restrictions shall be contained in the form by which a Participant elects to participate in the Plan pursuant to Section 2.02. Decisions of the Committee will be final and binding on all parties who have an interest in the Plan. Section 10.03 STOCK TO BE SOLD. The Common Stock to be issued and sold under the Plan may be treasury shares or authorized but unissued shares, or the Company may purchase Common Stock in the market for sale under the Plan. Except as provided in Section 11.01, the aggregate number of shares of Common Stock to be sold under the Plan will not exceed 400,000 shares. Section 10.04 NOTICES. Notices to 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 ARTICLE XI. ADJUSTMENT FOR CHANGES IN STOCK OR COMPANY Section 11.01 STOCK DIVIDEND OR RECLASSIFICATION. If the outstanding shares of Common Stock are increased, decreased, changed into or exchanged for a different number or kind of securities of the Company, or shares of a different par value or without par value, through reorganization, recapitalization, reclassification, stock dividend, stock split, amendment to the Company's Certificate of Incorporation, reverse stock split or otherwise, an appropriate adjustment shall be made in the maximum numbers and kind of securities to be purchased under the Plan with a corresponding adjustment in the purchase price to be paid therefor. Section 11.02 MERGER OR CONSOLIDATION. If the Company is merged into or consolidated with one or more corporations during the term of the Plan, appropriate adjustments will be made to give effect thereto on an equitable basis in terms of issuance of shares of the corporation surviving the merger or of the consolidated corporation, as the case may be. ARTICLE XII. APPLICABLE LAW 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. EX-10.8 12 NON-INCENTIVE STOCK OPTION AGREEMENT NON-INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, made this 9th day of April, 1991 by and between Great Plains Software, Inc., a Minnesota corporation (the "Company"), and Raymond F. Good, a director of the Company (the "Optionee"). The Company wishes to grant a stock option to the Optionee and has taken all necessary actions to grant the following option. Accordingly, in consideration of the agreement hereinafter set forth, the parties hereto hereby agree as follows: 1. GRANT OF OPTION The Company hereby grants to the Optionee the right and option (an "option") to purchase all or any part of an aggregate of 11,000 shares of Common Stock, par value $.01 per share, of the Company (the "Common Stock") at the price of $5.21 per share on the terms and conditions set forth herein. This option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. TERM AND EXERCISE (a) This option shall in all events terminate six (6) years from the date of grant. (b) Subject to the provisions of subparagraph (c) below, this option may be exercised only as follows: (i) during the first year from the date of grant of this option, this option may not be exercised; (ii) after the date one year from the date of grant, this option may be exercised with respect to one fifth of the total number of shares of Common Stock to which this option relates, (iii) after the date two years from the date of grant, this option may be exercised with respect to an additional one-fifth of the total number of shares of Common Stock to which this option relates; (iv) after the date three years from the date of grant, this option may be exercised with respect to an additional one-fifth of the total number of shares of Common Stock to which this option relates; (v) after the date four years from the date of grant, this option may be exercised with respect to an additional one-fifth of the total number of shares of Common Stock to which this option relates; and (vi) after the date five years from the date of grant, this option may be exercised with respect to the remaining one-fifth of the total number of shares of Common Stock to which this option relates. In the event that the Optionee does not purchase in any of the above-described periods the full number of shares of Common Stock to which he or she is entitled under this option, the Optionee may, subject to the terms and conditions of Section 3 hereof, purchase such remaining shares at any subsequent time during the term of this option. During the lifetime of the Optionee, this option shall be exercisable only by the Optionee and shall not be transferable by the Optionee otherwise than by will or the laws of descent and distribution. (c) Notwithstanding subparagraph (b) above, this option shall automatically become exercisable in full in the event, and on the date, that the Company enters into any agreement to sell, lease or otherwise dispose of all or substantially all of its assets, or to consolidate or merge into any other corporation or entity. 3. EFFECT OF CEASING TO BE A DIRECTOR (a) Except as otherwise provided in subparagraphs (b) and (c) below, in the event that the Optionee shall cease to be a director of the Company or its subsidiaries, if any, for any reason, the Board of Directors of the Company may, in its absolute discretion, terminate this option as of the date of such cessation or any date thereafter. (b) In the event that the Optionee shall cease to be a director of the Company or its subsidiaries, if any, by reason of his or her gross or willful misconduct during the course of his or her directorship, including but not limited to the commission of a gross misdemeanor or felony, this option shall be terminated as of the date of such misconduct. (c) If the Optionee shall die while a director of the Company or a subsidiary, if any, or become disabled (within the meaning of Code Section 22(e)(3)) while a director of the Company or a subsidiary, if any, and the Optionee shall not have fully exercised this option, this option may be exercised at any time within twelve months after such death or disability by the executors, administrators or guardians of the Optionee, as applicable or by any person or persons to whom this option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of shares the Optionee was entitled to purchase under this option on the date of such death or disability, subject to the condition that this option shall not be exercisable after the expiration of the term hereof. 4. MANNER OF EXERCISE (a) This option can be exercised only by the Optionee or other proper party (as set forth in Section 3 hereof) within the option period by delivering written notice to the Company at its principal office in Fargo, North Dakota, stating the number of shares of Common Stock as to which this option is being exercised and accompanied by payment in full of the option price for all shares designated in the notice. -2- (b) The Optionee may pay the option price in cash or by bank check, certified check or personal check or, with the approval of the Board of Directors, by delivering to the Company Common Stock owned by him or her (and with the certificates therefor registered in his or her name) having a fair market value equal to the option price. For these purposes, the fair market value of the Common Stock shall be the average of the closing representative bid and asked prices of the Common Stock as reported on the National Association of Securities Dealers Automated Quotation System, if applicable, or, if the Common Stock is then traded on a national securities exchange, the closing price of the Common Stock on such exchange, or, if the Common Stock is not publicly traded, as otherwise reasonably determined by the Company. 5. ADJUSTMENTS If the Optionee exercised all or any portion of this option subsequent to any change in the number of shares or character of the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend or otherwise, the Optionee shall then receive for the aggregate price paid on such exercise of this option the number and type of securities or other consideration which he or she would have received if this option had been exercised prior to the event changing the number or character of outstanding shares. 6. SECURITIES LAW MATTERS The Optionee hereby represents and agrees that any shares which he may acquire pursuant to the exercise of this option will be acquired for Optionee's own account, for long-term investment purposes and not with a view toward the distribution or sale thereof. Optionee acknowledges that under the terms of the Plan to which this Agreement is subject, effectiveness of any exercise hereof and the issuance of shares to the Optionee upon any such exercise of this option may be delayed in order to permit the Company to comply at such time with relevant federal and state securities laws in connection with such issuance. The Optionee acknowledges that the Company is not, and will at no time be, under any obligation to Optionee to register any shares issued upon exercise hereof under any federal or state securities laws and that, consequently: (a) at the time of acquisition such shares may not be registered under either federal or applicable state securities laws, (b) the Company will be relying upon the foregoing investment representation of Optionee in agreeing to issue such shares to Optionee; (c) the transferability of such shares may be subject to restrictions imposed by all applicable federal and state securities laws on unregistered shares and (d) the certificates evidencing such shares may be imprinted with an appropriate legend setting forth such restrictions on transferability. -3- 7. RESTRICTION ON TRANSFER OF SHARES Optionee shall not sell, transfer, exchange, pledge or otherwise dispose of or encumber any of the shares which the Optionee has acquired pursuant to this option unless Optionee shall first offer to sell such shares to the Company in accordance with Section 8 of this Agreement. 8. RIGHT OF FIRST REFUSAL If Optionee wishes to dispose of or encumber any of the shares which Optionee has acquired pursuant to this option, Optionee shall deliver written notice to the Company, which notice shall specify the person to whom such shares are to be disposed of or encumbered, the purchase price or other consideration to be received by the Optionee for such shares, and the terms upon which such purchase price or other consideration is to be paid. The delivery of such written notice to the Company shall constitute an irrevocable offer by the Optionee to sell such shares to the Company upon the same terms and conditions as are specified in the notice or, at the Company's option, on the terms and conditions set forth in Section 9 hereof. The Company may accept such offer by delivering a written acceptance to Optionee within 60 days after receipt of the written notice from Optionee. If the Company elects to accept such offer, the purchase of the shares shall be closed within 30 days upon the same terms and conditions as are specified in Optionee's written notice, or upon the terms set forth in Section 9, if the Company selects that option. If the Company elects not to accept such offer or if the Company allows such offer to expire without being accepted, Optionee shall be able to dispose of or encumber such shares on the terms specified in the written notice to the Company to the person identified therein. If such transaction is not consummated within 90 days, such shares shall again be subject to the restrictions and the purchase option described in this Section 8. 9. ADDITIONAL REPURCHASE RIGHTS (a) Upon the occurrence of any one of the following events (the "Option Events"), the Company shall have the irrevocable right and option to repurchase all, but not less than all, of the shares which Optionee acquired pursuant to this option: (i) In the event of the death of Optionee; (ii) In the event that Optionee ceases to be a director of the Company for any reason whatsoever, whether such cessation is voluntary, involuntary, with or without cause; -4- (iii) In the event that Optionee attempts to transfer any of such shares in violation of the provisions of Section 7 hereof; or (iv) In the event that persons holding a majority of the outstanding shares of the Company's capital stock notify Optionee, in writing, that they wish to sell their shares to a bona fide third party who has offered to purchase such shares, and Optionee does not within 15 days after receipt of such notice, notify Company and the other shareholders that Optionee will sell shares on substantially the same terms as specified in the notice from the majority shareholders. The Company shall exercise its repurchase right under this Section 9, if at all, by delivery of a written notice of exercise to Optionee within 60 days after the later of (i) the date of occurrence of the relevant Option Events or (ii) the date that the Company receives notice of the occurrence of such Option Event. The closing of the repurchase of such shares shall take place within 30 days after delivery of the notice of exercise to the Optionee, and at the closing the Company shall make payment of the purchase price for such shares against tender by the Optionee of the certificates evidencing such shares, which certificates shall be duly endorsed in blank. (b) The repurchase price payable for the shares pursuant to this Section 9 shall be as follows: (i) if the date of occurrence of the Option Event is on or before the first anniversary of the date such shares were acquired by exercise of this option (the "Exercise Date"), the repurchase price per share shall be an amount equal to the purchase price per share paid to acquire the shares upon exercise of this option, subject to appropriate adjustment for the occurrence of any event set forth in Section 5 above after the Exercise Date; (ii) if the date of occurrence of the Option Event is after the first anniversary of the Exercise Date but on or before the second anniversary of the Exercise Date, the repurchase price per share shall be equal to 60% of Net Sales Per Share (as defined below); (iii) if the date of occurrence of the Option Event is after the second anniversary of the Exercise Date but on or before the third anniversary of the Exercise Date, the repurchase price per share shall be equal to 70% of Net Sales Per Share (as defined below); and -5- (iv) if the date of occurrence of the Option Event is after the third anniversary of the Exercise Date, the repurchase price per share shall be equal to 75% of Net Sales Per Share (as defined below). For purposes of this Section 9(b), "Net Sales Per Share" as of the date of occurrence of the Option Event shall equal the quotient obtained by dividing (i) the net sales of the Company (defined as gross revenues minus returns) for the period made up of the twelve consecutive calendar months immediately preceding the calendar month during which the Option Event occurred, as conclusively shown by the unaudited monthly financial statements of the Company for such twelve months, by (ii) the total number of shares of capital stock of the Company outstanding on the date of occurrence of the Option Events as conclusively shown by the official stock record of the Company. 10. LEGEND The Optionee agrees that each certificate representing shares which the Optionee (or other proper party as set forth in Section 3 hereof) may acquire pursuant to exercise of this option may be imprinted with a legend describing the transfer restrictions and repurchase rights set forth in this Agreement. 11. DEFINITION OF SHARES As used in Sections 7, 8 and 9 hereof, references to shares which the Optionee has acquired pursuant to this option shall be deemed to include, in addition to the shares of Common Stock, $.01 par value, described in Section 1 hereof and acquired by Optionee, any securities received in respect of such shares in a stock split, stock dividend, reorganization, reclassification or recapitalization or in a merger or consolidation involving the Company or a sale of all or substantially all of the Company's assets. 12. MISCELLANEOUS (a) Neither the granting of this option, nor this Agreement nor any action taken pursuant to this Agreement shall constitute, or be evidence of, any agreement or understanding, express or implied, that the Company will retain Optionee as a director for any period of time, or at any particular rate of compensation. Optionee shall have none of the rights of a stockholder with respect to shares of Common Stock subject to this option until such shares shall have been issued to him or her upon exercise of this option. (b) The Company shall at all times during the term of this option reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of this Agreement. -6- (c) In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it upon the exercise of this option, and in order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee. (d) This Agreement shall be construed and enforced in accordance with the laws of the State of North Dakota. (e) This Agreement evidences the entire understanding and agreement of the parties hereto relative to the purchase of the shares by the Optionee. This Agreement supersedes any and all other agreements and understandings, whether written or oral, relative to the matters discussed herein. This Agreement may only be amended by a written document signed by both of the parties hereto. (f) The parties hereto agree that the shares relating to this Agreement constitute a unique asset and that it is impossible to measure in money the damages that will accrue to the Company in the event that Optionee fails to comply with the obligations and commitments hereunder. Accordingly, in the event an action is instituted by the Company to enforce the provisions of this Agreement, the Company may proceed by specific performance, and Optionee hereby waives the claim or defense therein that the Company has an adequate remedy at law. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the date first set forth above. GREAT PLAINS SOFTWARE, INC. By /s/ Michael A Slette ------------------------- Its V.P. Finance ------------------------- /s/ Raymond F. Good ------------------------- Raymond F. Good -7- EX-10.9 13 DOUGLAS J. BURGUM EMPLOYMENT AGREEMENT 6/24/94 EMPLOYMENT AGREEMENT Great Plains Software, Inc. ("Great Plains") and Douglas J. Burgum ("Executive"), President and Chief Executive Officer ("CEO") of Great Plains, enter into this Employment Agreement ("Agreement") with respect to the terms and conditions of Executive's employment with Great Plains. WHEREAS, Executive has served as a Director, the President and CEO of Great Plains; WHEREAS, Executive desires to continue his employment as President and CEO of Great Plains and to obtain the new rights in the terms and conditions of his employment set forth in this Agreement; WHEREAS, GS Capital Partners, L.P. and certain other affiliates of The Goldman Sachs Group, L.P. (collectively, "Goldman Sachs") have agreed to make a substantial capital investment into Great Plains by purchasing certain Great Plains convertible preferred stock in reliance on the acknowledgments and promises Executive has made in this Agreement and because Executive has agreed to assume the contractual obligations set forth in this Agreement; NOW THEREFORE, in consideration of the promises and mutual covenants contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Great Plains and Executive agree as follows: I. DESCRIPTION OF DUTIES. Executive shall perform all duties normally attendant to his position and such duties as Great Plains may from time-to-time prescribe. Throughout the period of employment, Executive shall devote his full-time efforts during normal business hours to the business and affairs of Great Plains, and shall perform his assigned duties diligently, faithfully and to the full extent of his abilities. Executive shall at all times perform his duties with undivided loyalty and shall not knowingly perform any act contrary to Great Plains' best interests. II. TERM OF EMPLOYMENT. A. Subject to the provisions of Section VI of this Agreement, Great Plains shall employ Executive as President and CEO of Great Plains from the date of execution of this Agreement to and including June 1, 1997. This period shall hereinafter be referred to as the "Term". B. Executive acknowledges that this Term of employment constitutes a valuable benefit of employment to which he was not entitled prior to execution of this Agreement. III. EXCLUSIVITY OF EMPLOYMENT. Executive represents and warrants that there are no agreements or arrangements, whether written or oral, in effect which would prevent him from rendering exclusive services to Great Plains during the Term hereof, and that he has not made and will not make any commitment, agreement or arrangement, or do any act in conflict with this Agreement. Executive shall devote his full employment energies, interest, abilities and time to the performance of obligations hereunder. Executive shall not, without the prior written consent of the Board of Directors of Great Plains render to others any service of any kind for compensation, or engage in any business activity that interferes with Executive's performance of his duties or in any other way conflicts with Employer's best interests, regardless of whether it is pursued for gain or profit. IV. COMPENSATION. A. Provided that Executive has kept and performed all of his obligations hereunder Great Plains shall pay to Executive a base salary in the amount of One Hundred Sixty Seven Thousand and no/100 dollars ($167,000.00) per annum during the Term of this Agreement, to be paid in accordance with Great Plains' normal payroll practices and subject to such deductions or withholdings as are required by law for taxes and similar charges. Executive shall receive the above-named salary at his regular rate of pay for all hours worked by him in a week regardless of the number of hours he may work. Great Plains may, at the sole discretion of its Board of Directors, provide Executive with an annual raise and/or bonus consistent with Great Plains' annual raise and/or bonus practices and subject to the performance of Executive. B. The compensation herein provided for Executive shall constitute full payment for the services of Executive rendered to Great Plains. Executive shall not receive any additional compensation for extraordinary services unless such services, prior to their rendition, are authorized by the Board of Directors of Great Plains in writing. C. Employer shall provide to Executive an automobile for use in the performance of his duties under this Agreement and shall reimburse Executive for all reasonable costs associated with the use of the automobile for performance of his duties under this Agreement. -2- D. Employer shall annually afford Executive four (4) weeks of paid vacation available to the Executive at the beginning of each fiscal year. V. EXECUTIVE BENEFITS AND EXPENSE REIMBURSEMENT. A. Executive shall be eligible to participate in Great Plains' benefits plans for salaried executives including, but not limited to, medical, life, accidental death and dismemberment and short and long term disability insurance. Great Plains retains the right to cancel, alter, or amend any of its employee benefit plans and other fringe benefits which Executive may receive or may have received. B. Executive shall be entitled to reimbursement for expenses reasonably incurred by Executive in connection with the performance of his duties during the Term, upon presentation of evidence reasonably satisfactory to Great Plains of the amounts and nature of such expenses. VI. TERMINATION. A. Great Plains may terminate this Agreement upon a decision of the Board of Directors (1) on Executive's death; (2) after ten-days advance written notice, upon Executive's incapacity or inability to perform his assigned duties and responsibilities for ninety (90) consecutive days because of an impairment of Executive's physical or mental health that prevents him from performing any of the essential functions of his job; or (3) after fourteen-days advance written notice, for "cause". "Cause" shall mean: (a) Executive's material breach of any of the terms of this Agreement; (b) Executive's refusal or failure to comply with reasonable lawful orders or directives issued by the Board of Directors of Great Plains consistent with this Agreement, if such refusal or failure is repeated after notice of refusal or failure; (c) Executive's commission of a felony or any act or crime of theft, dishonesty or moral turpitude; or (d) Executive's material violation of any statutory or common law duty of loyalty to Great Plains. B. If Great Plains terminates this Agreement upon Executive's death, upon his incapacity or inability, or for "cause" as defined in this Section, or if Executive voluntarily resigns from his employment with Great Plains during the Term of this Agreement, Executive and his beneficiaries shall not be entitled to any -3- continued base salary, bonus, or benefits except as required under the law or under the terms of the benefits plans as existing on the date of termination or resignation. C. Employer may terminate this Agreement at any time without "cause" as defined in this Section before expiration of the Term of this Agreement, provided that if Great Plains terminates this Agreement without "cause" and not because of Executive's death or incapacity or inability as defined in this Section, Great Plains shall pay to Executive the base salary as set forth in Section IV of this Agreement until June 1, 1997, or one (1) year following written notice of termination, whichever is later. Such payments shall be made in accordance with Great Plains' normal payroll practices as if Great Plains continues to employ Executive. VII. CONFIDENTIAL INFORMATION. A. Executive acknowledges that the successful development, distribution and marketing of Great Plains' current and future products, including but not limited to its current and future financial accounting software products, require substantial time and expense. Such efforts generate for Great Plains secret information and other valuable and proprietary information (collectively, "Confidential Information") which gives Great Plains significant business advantages over others in the software industry who do not have such information. Confidential Information includes, but is in no way limited to, the following: (1) Information relating to the software source and object code, source code design and configuration, algorithms, user-interface design and lay-out, development plans, development tools and development techniques and methods of Great Plains' current and future software products; (2) Information relating to the development, lay-out and design of user manuals and documentation for Great Plains' current and future software products; (3) Information relating to the advertising and marketing plans, and pricing plans and formulae for Great Plains' current and future products; (4) Contracts and negotiation strategies and practices involved in the sale and distribution of Great Plains' current and future products; (5) Information relating to current and prospective value-added resellers and other distribution intermediaries (collectively, "Partners") with which Great Plains has developed, or will attempt to develop, a -4- business relationship, including but not limited to lists of Partners and Partner contacts; (6) Information relating to current and prospective user-customers of Great Plains, including but not limited to user-customer lists and user-customer service and support data; and (7) Processes, techniques, methods, policies and practices involved in the training and development of the personnel of Great Plains. B. Executive acknowledges that during the course of his employment with Great Plains he has used and obtained, and will continue to use and obtain, knowledge of such Confidential Information. Executive acknowledges that Great Plains has significant business advantages over its competitors in the software industry due to Great Plains' Confidential Information and relationships with its Partners. VIII. RELATIONSHIPS WITH PARTNERS. Executive acknowledges that Great Plains has undertaken substantial time and expense in developing its business relationship with its Partners, that Great Plains has obtained valuable and proprietary information relating to each of its Partners' unique needs, wishes and concerns, and that Great Plains has developed substantial goodwill with its Partners as a result of these efforts. Executive additionally acknowledges that he has obtained and used this valuable and proprietary information and has participated in, and/or directly supervised, the development of Great Plains' relationships with its Partners. IX. PROTECTION OF CONFIDENTIAL INFORMATION. Executive agrees to undertake the following obligations which he acknowledges to be reasonably designed to protect Great Plains' legitimate business interests without restricting or restraining his post-employment professional, trade and business opportunities: A. In the event that his employment with Great Plains ends for any reason and whether voluntarily or involuntarily, Executive will immediately turn over to Great Plains all of its property, whether in original or copied form, including but not limited to files, lists, contracts, notes, manuals, reports, records, tapes, films, graphics, charts, computer programs and other forms of computer media, or other documents or things containing, in any form in whole or in part, any of Great Plains' Confidential Information; -5- B. During his employment with Great Plains, and after the voluntary or involuntary cessation of his employment with Great Plains for any reason, Executive agrees forever (1) to hold in confidence; and (2) not at any time, in any way, directly or indirectly, to use for his own benefit or the benefit of some other person, firm, corporation or other entity, or to divulge, disclose or communicate to any person, firm, corporation or other entity; any Confidential Information unless with the written consent of Great Plains or unless at that time the information has become generally and lawfully known to Great Plains' competitors. This provision shall in no way be interpreted to preclude Executive from using, divulging, disclosing or communicating Confidential Information as required in the fulfillment of his duties as an employee of Great Plains. X. NON-SOLICITATION OF EMPLOYEES. Executive acknowledges that Great Plains has devoted considerable time and expense to the training and development of its employees. He also acknowledges that Great Plains' employees use and have substantial exposure to Great Plains' Confidential Information. Accordingly, in the event that his employment with Great Plains ends for any reason and whether voluntarily or involuntarily, he will not for a period of two (2) years after the cessation of his employment induce, or assist in the inducement of, any management or other key employee away from Great Plains or from the faithful discharge of any of the employee's contractual, fiduciary or other obligations to serve Great Plains with undivided loyalty. XI. PROTECTION OF NEW IDEAS. Executive acknowledges that any and all inventions, discoveries, improvements and patentable or copyrightable works (collectively, "New Ideas") that are initiated, conceived or made by him during his employment with Great Plains and that relate to the business or activities of Great Plains are the property solely of Great Plains, whether or not reduced to writing or practice during the period of his employment. Executive agrees that he has disclosed as of the date of execution of this Agreement, and he will continue promptly to disclose, to Great Plains all New Ideas that he initiated, conceived or made, either alone or in conjunction with others. Executive agrees that he will assign to Great Plains all of his rights and interest in any such New Ideas and will, upon request by Great Plains, and at its expense, execute any and all applications, assignments or other -6- instruments that Great Plains may deem necessary to apply for and obtain patents of the United States or any foreign country or to protect otherwise and keep protected the interest of Great Plains in any New Ideas. Executive's obligations under this paragraph shall continue until fulfilled, shall not be affected by the cessation of his employment with Great Plains and shall be binding on his assigns, executors, administrators and/or other legal representatives to the extent that any of them can fulfill those left unfulfilled by Executive. XII. REMEDIES. A. Executive agrees that the services to be rendered by him pursuant to this Agreement, and the acknowledgments, rights and privileges granted to Great Plains by him pursuant to this Agreement, are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and that a breach by him of any of the terms of this Agreement will cause great and irreparable injury and damage to Great Plains. Accordingly, Executive agrees that, in the event that he breaches any term of this Agreement, Great Plains shall have a right to equitable relief, including, but not limited to a temporary restraining order, preliminary injunction, permanent injunction and/or order of specific performance, as a remedy to enforce this Agreement. Executive agrees that Great Plains shall be entitled to the remedies of injunction, specific performance and other equitable relief as available under applicable law to prevent a threatened or potential breach of this Agreement by him. Executive and Great Plains agree to reimburse the prevailing party in any legal proceeding for all costs and expenses including reasonable attorneys' fees incurred in connection with the enforcement of his or its rights under any provision of this Agreement. B. Executive agrees that Great Plains may file any litigation relating to the enforcement of this Agreement in the Fourth Judicial District Minnesota District Court or the United States District Court for the District of Minnesota. For purposes of the enforcement of this Agreement, Executive consents to the personal jurisdiction of the federal and state courts within the State of Minnesota. XIII. ASSIGNS AND SUCCESSORS. Executive agrees that Great Plains' rights under this Agreement shall inure to the benefit of and shall be binding upon its successors and assigns. In the event of the merger or consolidation of Great Plains with any other corporation or corporations, the sale by Great Plains of a major portion of its assets, or of its business and good will, or any other corporate reorganization involving Great Plains, this Agreement may be assigned and transferred to such successor in interest as an asset of Great Plains. -7- XIV. INTEGRATION AND MODIFICATION OF AGREEMENT. This Agreement, and the Shareholders' Agreement executed contemporaneously with this Agreement contain the entire understanding of the parties and supersede all prior written or oral agreements, representations or understandings. This Agreement may be modified only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought. XV. WAIVER. Great Plains' failure to insist upon strict compliance with any of the terms, conditions or covenants expressed in this Agreement shall not be deemed a waiver of such term, condition or covenant, or any other term, condition or covenant, nor shall any waiver or relinquishment of any right or power under this Agreement at one time or times be deemed a waiver or relinquishment of such right or power or any other right or power at any other time or times. XVI. INTERPRETATION OF TERMS. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law; but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. XVII. MEDIATION OF DISPUTES. Executive shall not initiate legal proceedings of any nature in any forum against Great Plains or any of its directors, officers or employees, relating in any way to this Agreement, Executive's employment with Great Plains, or the termination of his employment, until 30 days after Great Plains receives written notice from Executive of the specific nature of any purported claims and the amount of any purported damages. Executive further agrees that in the event that Great Plains submits Executive's claim to the American Arbitration Association or the Center for Public Resources for nonbinding mediation prior to the expiration of such 30-day period, Executive may not institute legal proceedings until the earlier of: (A) the completion of mediation efforts with the good faith participation of Executive in such efforts; or (B) 90 days after the date on which Great Plains received written notice of Executive's claim. * * * -8- The parties have read, understand, and freely accept all of the provisions in this Agreement. The parties represent that each has sought and received independent legal advice from an attorney of its or his choice with respect to the meaning of the provisions in this Agreement. DOUGLAS J. BURGUM GREAT PLAINS SOFTWARE, INC. /s/ Douglas J. Burgum By: /s/ Michael A. Slette - -------------------------------- ------------------------------ Dated: June 24, 1994 Dated: June 24, 1994 --------------- ---------------- Moorhead, Minnesota Moorhead, Minnesota -9- EX-10.10 14 RAYMOND AUGUST EMPLOYMENT AGREEMENT 6/24/1994 EMPLOYMENT AGREEMENT Great Plains Software, Inc. ("Great Plains") and Ray August ("Executive"), Vice President, Research and Development ("VPRD") of Great Plains, enter into this Employment Agreement ("Agreement") with respect to the terms and conditions of Executive's employment with Great Plains. WHEREAS, Executive has served as the VPRD of Great Plains; WHEREAS, Executive desires to continue his employment as VPRD of Great Plains and to obtain the new rights in the terms and conditions of his employment set forth in this Agreement; WHEREAS, GS Capital Partners, L.P. and certain other affiliates of The Goldman Sachs Group, L.P. (collectively, "Goldman Sachs") have agreed to make a substantial capital investment into Great Plains by purchasing certain Great Plains convertible preferred stock in reliance on the acknowledgments and promises Executive has made in this Agreement and because Executive has agreed to assume the contractual obligations set forth in this Agreement; NOW THEREFORE, in consideration of the promises and mutual covenants contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Great Plains and Executive agree as follows: I. DESCRIPTION OF DUTIES. Executive shall perform all duties normally attendant to his position and such duties as Great Plains may from time-to-time prescribe. Throughout the period of employment, Executive shall devote his full-time efforts during normal business hours to the business and affairs of Great Plains, and shall perform his assigned duties diligently, faithfully and to the full extent of his abilities. Executive shall at all times perform his duties with undivided loyalty and shall not knowingly perform any act contrary to Great Plains' best interests. II. TERM OF EMPLOYMENT. A. Subject to the provisions of Section VI of this Agreement, Great Plains shall employ Executive as VPRD of Great Plains from the date of execution of this Agreement to and including June 1, 1997. This period shall hereinafter be referred to as the "Term". Unless a party hereto shall give notice of non- renewal to the other party hereto prior to April 30, 1997, the Term shall be automatically extended to June 1, 1999. B. Executive acknowledges that this Term of employment constitutes a valuable benefit of employment to which he was not entitled prior to execution of this Agreement. III. EXCLUSIVITY OF EMPLOYMENT. Executive represents and warrants that there are no agreements or arrangements, whether written or oral, in effect which would prevent him from rendering exclusive services to Great Plains during the Term hereof, and that he has not made and will not make any commitment, agreement or arrangement, or do any act in conflict with this Agreement. Executive shall devote his full employment energies, interest, abilities and time to the performance of obligations hereunder. Executive shall not, without the prior written consent of the Board of Directors of Great Plains render to others any service of any kind for compensation, or engage in any business activity that interferes with Executive's performance of his duties or in any other way conflicts with Employer's best interests, regardless of whether it is pursued for gain or profit. IV. COMPENSATION. A. Provided that Executive has kept and performed all of his obligations hereunder, Great Plains shall pay to Executive a Base Salary (adjusted as provided below, the "Base Salary") in the amount of One Hundred Fifty Thousand and no/100 dollars ($150,000.00) per annum during the Term of this Agreement, to be paid in accordance with Great Plains' normal payroll practices and subject to such deductions or withholdings as are required by law for taxes and similar charges. Executive shall receive the above-named salary at his regular rate of pay for all hours worked by him in a week regardless of the number of hours he may work. Great Plains' Chief Executive Officer, after consultation with Executive, may provide Executive with an annual raise in the Base Salary and/or bonus consistent with Great Plains' annual raise and/or bonus practices and subject to the performance of Executive. B. The compensation herein provided for Executive shall constitute full payment for the services of Executive rendered to Great Plains. Executive shall not receive any additional compensation for extraordinary services unless such services, prior to their rendition, are authorized by the Board of Directors of Great Plains in writing. 2 C. Employer shall pay Executive Four Hundred and No/100 Dollars ($400.00) per month as reasonable costs associated with the use of an automobile for performance of his duties under this Agreement. D. Employer shall annually afford Executive four (4) weeks of paid vacation available to the Executive at the beginning of each fiscal year. V. EXECUTIVE BENEFITS AND EXPENSE REIMBURSEMENT. A. Executive shall be eligible to participate in Great Plains' benefits plans for salaried executives including, but not limited to, medical, life, accidental death and dismemberment and short and long term disability insurance. Great Plains retains the right to cancel, alter, or amend any of its employee benefit plans and other fringe benefits which Executive may receive or may have received. B. Executive shall be entitled to reimbursement for expenses reasonably incurred by Executive in connection with the performance of his duties during the Term, upon presentation of evidence reasonably satisfactory to Great Plains of the amounts and nature of such expenses. VI. TERMINATION. A. Great Plains may terminate this Agreement upon a decision of the Chief Executive officer of Great Plains (1) on Executive's death; (2) after fourteen-days advance written notice, upon Executive's incapacity or inability to perform his assigned duties and responsibilities for ninety (90) consecutive days because of an impairment of Executive's physical or mental health that prevents him from performing any of the essential functions of his job; or (3) after fourteen-days advance written notice, for "cause". "Cause" shall mean: (a) Executive's material breach of any of the terms of this Agreement; (b) Executive's refusal or failure to comply with reasonable lawful orders or directives issued by the Board of Directors or the President of Great Plains consistent with this Agreement, if such refusal or failure is repeated after notice of refusal or failure; (c) Executive's commission of a felony or any act or crime of theft, dishonesty or moral turpitude; or (d) Executive's material violation of any statutory or common law duty of loyalty to Great Plains. 3 B. If Great Plains terminates this Agreement upon Executive's death, upon his incapacity or inability, or for "cause" as defined in this Section, or if Executive voluntarily resigns from his employment with Great Plains during the Term of this Agreement, Executive and his beneficiaries shall not be entitled to any continued Base Salary, bonus, or benefits except as required under the law or under the terms of the benefits plans as existing on the date of termination or resignation. C. Employer may terminate this Agreement at any time without "cause" as defined in this Section before expiration of the Term of this Agreement, provided that if Great Plains terminates this Agreement without "cause" and not because of Executive's death or incapacity or inability as defined in this Section, Great Plains shall pay to Executive the following for two (2) years following written notice of termination: the Base Salary as set forth in Section IV of this Agreement less any earned income ("Earned Income") that Executive receives from any other source (other than investment income or reimbursement for expenses) during such two-year period. Such payments shall be made in accordance with Great Plains' normal payroll practices as if Great Plains continues to employ Executive. In the event that Executive is entitled to compensation under this Paragraph No. VI.C., Great Plains may reasonably require that Executive certify his employment and income status on a monthly basis during the two-year period after his employment with Great Plains ends. VII. Confidential Information. A. Executive acknowledges that the successful development, distribution and marketing of Great Plains' current and future products, including but not limited to its current and future financial accounting software products, require substantial time and expense. Such efforts generate for Great Plains secret information and other valuable and proprietary information (collectively, "Confidential Information") which gives Great Plains significant business advantages over others in the software industry who do not have such information. Confidential Information includes, but is in no way limited to, the following: (1) Information relating to the software source and object code, source code design and configuration, algorithms, user-interface design and lay-out, development plans, development tools and development techniques and methods of Great Plains' current and future software products; (2) Information relating to the development, lay-out and design of user manuals and documentation for Great Plains' current and future software products; 4 (3) Information relating to the advertising and marketing plans, and pricing plans and formulae for Great Plains' current and future products; (4) Contracts and negotiation strategies and practices involved in the sale and distribution of Great Plains' current and future products; (5) Information relating to current and prospective value-added resellers and other distribution intermediaries (collectively, "Partners") with which Great Plains has developed, or will attempt to develop, a business relationship, including but not limited to lists of Partners and Partner contacts; (6) Information relating to current and prospective user-customers of Great Plains, including but not limited to user-customer lists and user-customer service and support data; and (7) Processes, techniques, methods, policies and practices involved in the training and development of the personnel of Great Plains. B. Executive acknowledges that during the course of his employment with Great Plains he has used and obtained, and will continue to use and obtain, knowledge of such Confidential Information. Executive acknowledges that Great Plains has significant business advantages over its competitors in the software industry due to Great Plains' Confidential Information and relationships with its Partners. VIII. RELATIONSHIPS WITH PARTNERS. Executive acknowledges that Great Plains has undertaken substantial time and expense in developing its business relationship with its Partners, that Great Plains has obtained valuable and proprietary information relating to each of its Partners' unique needs, wishes and concerns, and that Great Plains has developed substantial goodwill with its Partners as a result of these efforts. Executive additionally acknowledges that he has obtained and used this valuable and proprietary information and has participated in, and/or directly supervised, the development of Great Plains' relationships with its Partners. IX. PROTECTION OF CONFIDENTIAL INFORMATION. Executive agrees to undertake the following obligations which he acknowledges to be reasonably designed to protect Great Plains' legitimate business interests without restricting or 5 restraining his post-employment professional, trade and business opportunities: A. In the event that his employment with Great Plains ends for any reason and whether voluntarily or involuntarily, Executive will immediately turn over to Great Plains all of its property, whether in original or copied form, including but not limited to files, lists, contracts, notes, manuals, reports, records, tapes, films, graphics, charts, computer programs and other forms of computer media, or other documents or things containing, in any form in whole or in part, any of Great Plains' Confidential Information; B. During his employment with Great Plains, and after the voluntary or involuntary cessation of his employment with Great Plains for any reason, Executive agrees forever (1) to hold in confidence; and (2) not at any time, in any way, directly or indirectly, to use for his own benefit or the benefit of some other person, firm, corporation or other entity, or to divulge, disclose or communicate to any person, firm, corporation or other entity; any Confidential Information unless with the written consent of Great Plains or unless at that time the information has become generally and lawfully known to Great Plains' competitors. This provision shall in no way be interpreted to preclude Executive from using, divulging, disclosing or communicating Confidential Information as required in the fulfillment of his duties as an employee of Great Plains. C. Executive agrees that after the date of cessation of his employment with Great Plains (hereinafter, the "Cessation Date"), whatever the reason for such cessation of employment, whether voluntarily or involuntarily and whether before or after the expiration of the Term, he will not during the Non Competition Period (as such period is defined below): (1) Control or own (directly or indirectly) more than 2% of any outstanding capital stock of any corporation other than Great Plains which has engaged, is engaged, or which intends to become engaged, in the business of developing, producing, manufacturing, marketing and/or selling in the United States, Canada or the United Kingdom any financial accounting software product; or 6 (2) Serve as (a) an officer, director, contractor, agent, advisor or employee of any corporation wherever located; or (b) a member, contractor, agent, advisor or employee of any partnership wherever located; or (c) an owner, contractor, agent, advisor or employee of any other business entity wherever located which has engaged, is engaged, or which intends to become engaged, in the business of designing, developing, producing, manufacturing, marketing, selling and/or supporting in the United States, Canada or the United Kingdom any financial accounting software product. However, if a company has divisions or subsidiaries that do not engage as described above in the business of financial accounting software products, Executive may work for that division or subsidiary. As used in this Agreement, the term "Non-Competition Period" shall mean (i) if the Cessation Date occurs during the Term, two years; and (ii) if the Cessation Date occurs after the Term, such period of time, not to exceed two years, as Great Plains continues to pay Executive the Base Salary less any Earned Income. X. NON-SOLICITATION OF EMPLOYEES. Executive acknowledges that Great Plains has devoted considerable time and expense to the training and development of its employees. He also acknowledges that Great Plains, employees use and have substantial exposure to Great Plains' Confidential Information. Accordingly, in the event that his employment with Great Plains ends for any reason and whether voluntarily or involuntarily, he will not for a period of two (2) years after the cessation of his employment induce, or assist in the inducement of, any management or other key employee away from Great Plains or from the faithful discharge of any of the employee's contractual, fiduciary or other obligations to serve Great Plains with undivided loyalty. XI. PROTECTION OF NEW IDEAS. Executive acknowledges that any and all inventions, discoveries, improvements and patentable or copyrightable works 7 (collectively, "New Ideas") that are initiated, conceived or made by him during his employment with Great Plains and that relate to the business or activities of Great Plains are the property solely of Great Plains, whether or not reduced to writing or practice during the period of his employment. Executive agrees that he has disclosed as of the date of execution of this Agreement, and he will continue promptly to disclose, to Great Plains all New Ideas that he initiated, conceived or made, either alone or in conjunction with others. Executive agrees that he will assign to Great Plains all of his rights and interest in any such New Ideas and will, upon request by Great Plains, and at its expense, execute any and all applications, assignments or other instruments that Great Plains may deem necessary to apply for and obtain patents of the United States or any foreign country or to protect otherwise and keep protected the interest of Great Plains in any New Ideas. Executive's obligations under this paragraph shall continue until fulfilled, shall not be affected by the cessation of his employment with Great Plains and shall be binding on his assigns, executors, administrators and/or other legal representatives to the extent that any of them can fulfill those left unfulfilled by Executive. XII. REMEDIES. A. Executive agrees that the services to be rendered by him pursuant to this Agreement, and the acknowledgments, rights and privileges granted to Great Plains by him pursuant to this Agreement, are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and that a breach by him of any of the terms of this Agreement will ca-use great and irreparable injury and damage to Great Plains. Accordingly, Executive agrees that, in the event that he breaches any term of this Agreement, Great Plains shall have a right to equitable relief, including, but not limited to a temporary restraining order, preliminary injunction, permanent injunction and/or order of specific performance, as a remedy to enforce this Agreement. Executive agrees that Great Plains shall be entitled to the remedies of injunction, specific performance and other equitable relief as available under applicable law to prevent a threatened or potential breach of this Agreement by him. Executive and Great Plains agree to reimburse the prevailing party in any legal proceeding for all costs and expenses including reasonable attorneys' fees incurred in connection with the enforcement of his or its rights under any provision of this Agreement. B. Executive agrees that Great Plains may file any litigation relating to the enforcement of this Agreement in the Fourth Judicial District Minnesota District Court or the United States District Court for the District of Minnesota. For purposes of the enforcement of this Agreement, Executive consents 8 to the personal jurisdiction of the federal and state courts within the State of Minnesota. XIII. ASSIGNS AND SUCCESSORS. Executive agrees that Great Plains' rights under this Agreement shall inure to the benefit of and shall be binding upon its successors and assigns. In the event of the merger or consolidation of Great Plains with any other corporation or corporations, the sale by Great Plains of a major portion of its assets, or-of its business and good will, or any other corporate reorganization involving Great Plains, this Agreement may be assigned and transferred to such successor in interest as an asset of Great Plains. XIV. INTEGRATION AND MODIFICATION OF AGREEMENT. This Agreement and the Stock Option Agreements dated October 29, 1992, and July 14, 1993, contain the entire understanding of the parties and supersede all other written or oral agreements, representations or understandings. This Agreement may be modified only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought. XV. WAIVER. Great Plains, failure to insist upon strict compliance with any of the terms, conditions or covenants expressed in this Agreement shall not be deemed a waiver of such term, condition or covenant, or any other term, condition or covenant, nor shall any waiver or relinquishment of any right or power under this Agreement at one time or times be deemed a waiver or relinquishment of such right or power or any other right or power at any other time or times. XVI. INTERPRETATION OF TERMS. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 9 Executive's claim to the American Arbitration Association or the Center for Public Resources for nonbinding mediation prior to the expiration of such 30-day period, Executive may not institute legal proceedings until the earlier or: (A) the completion of mediation efforts with the good faith participation of Executive in such efforts; or B) 90 days after the date on which Great Plains received written notice of Executive's claim. * * * The parties have read, understand, and freely accept all of the provisions in this Agreement. The parties represent that each has sought and received independent legal advice from an attorney of its or his choice with respect to the meaning of the provision in this Agreement. RAY AUGUST GREAT PLAINS SOFTWARE, INC. /s/ Raymond August By: Michael A. Slette - ---------------------------- -------------------------- Dated: June 24, 1994 Dated: June 24, 1994 ---------------------- ----------------------- Moorhead, Minnesota Moorhead, Minnesota 10 EX-10.11 15 REG RIGHTS AGREEMENT BETWEEN CO AND HOLDERS OF REG - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REGISTRATION RIGHTS AGREEMENT DATED AS OF JUNE 24, 1994 BY AND AMONG GREAT PLAINS SOFTWARE, INC. AND THE HOLDERS OF REGISTRABLE SECURITIES NAMED ON THE SIGNATURE PAGES HERETO - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- This Table of contents is not part of the Agreement to which it is attached but is inserted for convenience only. Page ---- Section 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. DEMAND REGISTRATION RIGHTS. . . . . . . . . . . . . . . . . . 6 (a) DEMANDS FOR REGISTRATION. . . . . . . . . . . . . . . . . . . 6 (b) LIMITATIONS ON DEMAND REGISTRATIONS . . . . . . . . . . . . . 7 (c) REGISTRATION STATEMENT FORM . . . . . . . . . . . . . . . . . 7 (d) REGISTRATION EXPENSES . . . . . . . . . . . . . . . . . . . . 7 (e) PRIORITY IN CUTBACK REGISTRATIONS . . . . . . . . . . . . . . 8 (f) PREEMPTION OF DEMAND REGISTRATION . . . . . . . . . . . . . . 8 Section 3. PIGGYBACK REGISTRATIONS . . . . . . . . . . . . . . . . . . . 8 (a) RIGHT TO INCLUDE REGISTRABLE SECURITIES . . . . . . . . . . . 8 (b) REGISTRATION EXPENSES . . . . . . . . . . . . . . . . . . . . 9 (c) PRIORITY IN CUTBACK REGISTRATIONS . . . . . . . . . . . . . . 9 Section 4. REGISTRATION PROCEDURES . . . . . . . . . . . . . . . . . . . 9 Section 5. UNDERWRITTEN OFFERINGS. . . . . . . . . . . . . . . . . . . . 14 (a) UNDERWRITTEN OFFERINGS IN CONNECTION WITH DEMAND REGISTRATION 14 (b) UNDERWRITTEN PIGGYBACK OFFERINGS. . . . . . . . . . . . . . . 15 Section 6. HOLDBACK AGREEMENTS . . . . . . . . . . . . . . . . . . . . . 16 (a) BY THE HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 16 (b) BY THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . 16 (a) INDEMNIFICATION BY THE COMPANY. . . . . . . . . . . . . . . . 16 (b) INDEMNIFICATION BY THE SELLERS. . . . . . . . . . . . . . . . 17 (c) NOTICES OF CLAIMS . . . . . . . . . . . . . . . . . . . . . . 18 (d) CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . 19 (e) OTHER INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . 20 (f) INDEMNIFICATION PAYMENTS. . . . . . . . . . . . . . . . . . . 20 Section 8. COVENANTS RELATING TO RULE 144. . . . . . . . . . . . . . . . 20 Section 9. NO EXISTING AGREEMENTS. . . . . . . . . . . . . . . . . . . . 21 Section 10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 21 (a) NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (b) ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 22 (c) AMENDMENT; TERMINATION. . . . . . . . . . . . . . . . . . . . 22 (d) WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (e) CONSENTS AND WAIVERS BY HOLDERS . . . . . . . . . . . . . . . 23 (f) NO THIRD PARTY BENEFICIARY. . . . . . . . . . . . . . . . . . 23 (g) SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . 23 (h) HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (i) INVALID PROVISIONS. . . . . . . . . . . . . . . . . . . . . . 23 (j) REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (k) GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 24 (l) COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . 24 REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT dated as of June 24, 1994 is made and entered into by and among Great Plains Software, Inc., a Minnesota corporation (the "Company"), and the Persons named on the signature pages hereto as Investors (the "Investors"). Capitalized terms not otherwise defined herein have the meanings set forth in SECTION 1. WHEREAS, simultaneously herewith the Company is issuing and selling, and the Investors are purchasing from the Company, 888,576 shares and the Company is agreeing to issue and sell and the Investors are agreeing to purchase from the Company, upon the satisfaction of certain conditions, an additional 282,088 shares of Series B Convertible Preferred Stock, par value $.01 (collectively, the "Series B Preferred Stock"), and Warrants (the "WARRANTS") to purchase 752,234 shares of Series B Preferred Stock pursuant to the Preferred Stock and Warrant Purchase Agreement dated the date hereof (the "STOCK PURCHASE AGREEMENT") among the Company and the Investors; WHEREAS, in order to induce the Investors to enter into the Stock Purchase Agreement and to purchase shares of Series B Preferred Stock and Warrants, the Company is entering into this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. (a) Except as otherwise specifically indicated, the following terms will have the following meanings for all purposes of this Agreement: "AGREEMENT" means this Registration Rights Agreement, as the same shall be amended from time to time. "ARTICLES OF INCORPORATION" means the Second Amended and Restated Articles of Incorporation (including the Certificates of Designations establishing the Series A Convertible Preferred Stock of the Company and the Series B Preferred Stock). "BOARD" means the Board of Directors of the Company. "BUSINESS DAY" means any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City. "COMMISSION" means the United States Securities and Exchange Commission, or any successor governmental agency or authority. "COMMON STOCK" means the Common Stock, par value $.01 per share, of the Company, as constituted on the date hereof, and any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock. "COMPANY" has the meaning ascribed to it in the preamble. "CUTBACK REGISTRATION" means any Demand Registration or Piggyback Registration to be effected as an underwritten Public Offering in which the Managing Underwriter with respect thereto advises the Company and the Requesting Holders in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Securities) exceeds the number which can be sold in such offering without a reduction in the selling price anticipated to be received for the securities to be sold in such Public Offering. "DEMAND FOR REGISTRATION" has the meaning ascribed to it in SECTION 2(a). "DEMAND REGISTRATION" means any registration of Registrable Securities under the Securities Act effected pursuant to a Demand for Registration in accordance with SECTION 2. "EFFECTIVE REGISTRATION" means, subject to the last sentence of SECTION 2(f), a Demand Registration which (i) has been declared or ordered effective in accordance with the rules of the Commission, and (ii) has been kept effective for the period of time contemplated by SECTION 4(b). Notwithstanding the foregoing, a registration that does not become effective after it has been filed with the Commission solely by reason of the refusal to proceed of the Holders demanding or requesting such registration shall be deemed to be an Effective Registration for purposes of this Agreement. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "HOLDER" means the holder of Registrable Securities, provided that all references in this Agreement to the Holders shall be deemed to include holders of shares of Series B Preferred Stock, and each such Holder shall be deemed to hold the number of Shares that are at the time issuable upon the conversion of the shares of Series B Preferred Stock held by such Holder pursuant to the terms of the Articles of Incorporation; PROVIDED, HOWEVER, that unless a Person (i) is an Investor or (ii) -2- holds Shares (assuming the conversion of any shares of Series B Preferred Stock held by such Person into Shares) that constitute at least 3% of the Total Shares, such Person shall not be deemed to be a Holder or to hold Registerable Securities. "INDEMNIFIED PARTY" means a party entitled to indemnity in accordance with SECTION 7. "INDEMNIFYING PARTY" means a party obligated to provide indemnification in accordance with SECTION 7. "INSPECTORS" has the meaning ascribed to it in SECTION 4(j). "INVESTORS" has the meaning ascribed to it in the preamble. "LOSSES" has the meaning ascribed to it in SECTION 7(a). "MANAGING UNDERWRITER" means, with respect to any underwritten Public Offering, the lead managing underwriter for such offering. "NASD" means the National Association of Securities Dealers, Inc. "NOTICE OF DEMAND FOR REGISTRATION" has the meaning ascribed to it in SECTION 2(a). "NOTICE OF PIGGYBACK REGISTRATION" has the meaning ascribed to it in SECTION 3(a). "PERSON" means any natural person, corporation, general partnership, limited partnership, proprietorship, other business organization, trust, union or association. "PIGGYBACK REGISTRATION" means any registration of equity securities of the Company under the Securities Act other than (i) a registration in respect of a dividend reinvestment or similar plan for stockholders of the Company or on (ii) a registration on Form s-4 or Form S-8 promulgated by the Commission (or any successor or similar forms thereto) or any other form for a limited purpose, whether for sale for the account of the Company or for the account of any holder of securities of the Company (other than Registrable Securities), including a registration by the Company under the circumstances described in SECTION 2(f). "PUBLIC OFFERING" means any offering of Shares to the public, either on behalf of the Company or any of its securityholders, pursuant to an effective registration statement under the Securities Act. -3- "QUALIFIED INDEPENDENT UNDERWRITER" means an underwriter meeting the requirements of Section 2(1) of Schedule E to the NASD By-Laws as the same may be amended from time to time. "QUALIFYING HOLDER" means any Holder who, alone or together with one or more other Holders, holds Registrable Securities that constitute at least twelve percent (12%) of the Total Shares. "RECORDS" has the meaning ascribed to it in SECTION 4(n). "REGISTRABLE SECURITIES" means the Shares at any time outstanding or subject to issuance upon conversion of the shares of Series B Preferred Stock into Shares pursuant to the terms of the Articles of Incorporation and that are owned by any of the Investors (or any Person that acquires such Shares or such Series B Preferred Stock from any such Investor). Once issued, Shares shall cease to be Registrable Securities when (x) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (y) they shall have been distributed to the public pursuant to Rule 144, or (z) they shall have ceased to be outstanding. "REGISTRATION EXPENSES" means all expenses incident to the Company's performance of or compliance with its obligations under this Agreement to effect the registration of Registrable Securities in a Demand Registration or a Piggyback Registration, including, without limitation, all registration, filing, securities exchange listing and NASD fees, all registration, filing, qualification and other fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, the reasonable fees and disbursements of a single counsel and single firm of accountants retained by the Holders of a majority of the Registrable Securities being registered (provided that the fees and disbursements of such counsel and accountants for which the Company shall be responsible shall not exceed $50,000 and the Company shall be responsible for such fees and disbursements only in the case of the first Demand Registration or, if the first Demand Registration has not occurred, in the case of a Piggyback Registration following the election by the Company to effect an underwritten primary registration in lieu of a Demand Registration, as contemplated by SECTION 2(f), premiums and other costs of any policies of insurance against liabilities arising out of the Public Offering of the Registrable Securities being registered obtained by the Company (it being understood that the Company shall have no obligation to obtain such insurance) and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and -4- commissions and transfer taxes, if any, in respect of Registrable Securities, which discounts, commissions, and taxes in respect of Registrable Securities shall in any Demand or Piggyback Registration be payable by the Holders thereof PRO RATA among such Holders in proportion to the number of Registrable Securities being sold by them. "REQUEST FOR REGISTRATION" means a written request by a Holder to the Company for registration of Registrable Securities in response to a Notice of Demand for Registration or a Notice of Piggyback Registration, which request shall specify the Registrable Securities intended to be disposed of and the intended method of disposition thereof. "REQUESTING HOLDERS" means, with respect to any registration, the Holders demanding or requesting to have Registrable Securities included in a registration in accordance with Section 2 or 3. "RULE 144" means Rule 144 promulgated by the Commission under the Securities Act, and any successor provision thereto. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SERIES B PREFERRED STOCK" has the meaning ascribed to it in the first recital to this Agreement. "SHARES" means the shares of Common Stock. "STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement of even date herewith by and among the parties thereto. "TOTAL SHARES" means the sum of (x) the issued and outstanding Shares at the date of this Agreement and (y) the Shares issuable upon conversion of the Series B Preferred Stock (assuming that all authorized shares of Series B Preferred Stock are outstanding) at the date of this Agreement. "WARRANT" has the meaning ascribed to it in the first recital of this Agreement. (b) Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms "hereof," "herein," "hereby, herewith," and derivative or similar words refer to this entire Agreement; and (iv) the term "Section" refers to the specified Section -5- of this Agreement. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. SECTION 2. DEMAND REGISTRATION RIGHTS. (a) DEMANDS FOR REGISTRATION. At any time after the third anniversary of the date hereof or such earlier time as the Company shall have effected a Public Offering, any Qualifying Holder may demand that the Company use its best efforts to effect the registration under the Securities Act of all or part of such Qualifying Holder's Registrable Securities. Such demand-for registration (a "DEMAND FOR REGISTRATION") shall be in writing, delivered to the Company in accordance with SECTION 11(a), and shall specify the number of Registrable Securities to be registered and the intended method of disposition thereof. No later than fifteen (15) Business Days after receipt of such Demand for Registration, the Company shall give written notice (a "NOTICE OF DEMAND FOR REGISTRATION") of such Demand for Registration to all other Holders, and shall use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Securities included in the Demand for Registration, and (ii) all other Registrable Securities as to which any Holder has delivered to the Company a Request for Registration within fifteen (15) Business Days after the giving of the Notice of Demand for Registration, all to the extent required to permit the disposition of the Registrable Securities so to be registered in accordance with the methods of disposition specified. At the request of the Holders of a majority of the Registrable Securities to be registered, the method of disposition of all Registrable Securities included in such registration shall be an underwritten offering effected in accordance with SECTION 5(a). Notwithstanding the foregoing, the Company may postpone taking action with respect to a Demand Registration or may require that Holders of Registrable Securities cease making sales under an effective registration for a reasonable period of time (not exceeding one hundred eighty (180) days, in the case of a Demand Registration, and not exceeding ninety (90) days, in the case of an effective registration) if, in the good faith opinion of the Board, effecting the registration or allowing such sales would adversely affect or require the premature disclosure of a material financing, acquisition, disposition of assets or stock, merger or other comparable transaction or would require the Company to make public disclosure of information the public disclosure of which would have a material adverse effect upon the Company, PROVIDED that the Company shall not delay such action or require such cessation pursuant to this sentence more than once in any twelve (12) month period. Subject to SECTION 2(e), the Company may include in such registration securities for sale for its own account. Neither the Company nor any Holder shall have the right to include any securities -6- in a registration statement to be filed as part of a Demand Registration unless (i) such securities are of the same class as the Registrable Securities to be included in the Demand for Registration (or another class of securities is to be sold by the Company for its own account and a majority of the demanding Holders consent to such inclusion in writing), and (ii) if such Demand Registration is an underwritten offering, the Company and such other Holders agree in writing to sell, subject to SECTION 2(e), their securities on the same terms and conditions as apply to the Registrable Securities being sold pursuant to the Demand for Registration. (b) LIMITATIONS ON DEMAND REGISTRATIONS. Notwithstanding anything herein to the contrary, the Company shall not be required to honor a Demand for Registration if: (i) the Registrable Securities to be so registered represent less than twelve percent (12%) of the Total Shares; (ii) the proposed aggregate Public Offering price for the Registrable Securities included in the Demand for Registration is less than $10 million based on the fair value estimated by the underwriters in the case of an initial Public Offering or the then-current market price of the Common Stock in the case of a Public Offering other than an initial Public Offering; or (iii) such Demand for Registration is received by the Company less than ninety (90) days following the effective date of any previous registration of Registrable Securities other than on Form S-8 (or successor form thereto), regardless of whether any Holder exercised its rights under this Agreement with respect to such registration. (c) REGISTRATION STATEMENT FORM. Demand Registrations shall be on such appropriate registration form selected by the Company as shall be reasonably acceptable to the Holders of a majority of the Registrable Securities to which such registration relates, and shall permit the disposition of such Registrable Securities in accordance with the intended method or methods specified by the Holders participating therein. (d) REGISTRATION EXPENSES. The Company will pay all Registration Expenses incurred in connection with the first Demand Registration. The Registration Expenses incurred in connection with any subsequent Demand Registrations shall be allocated among all Persons (including the Company) on whose behalf securities of the Company are included in such registration, PRO RATA on the basis of the respective amounts of the securities then being registered on their behalf. -7- (e) PRIORITY IN CUTBACK REGISTRATIONS. If a Demand Registration becomes a Cutback Registration, the Company shall include in such registration only the amount of securities which any Managing Underwriter advises the Company can be sold in such offering without a reduction in the selling price anticipated to be received for the securities to be sold in such Public Offering. Securities shall be included in such offering in the following order of priority: (i) FIRST, the Registrable Securities included in the Demands for Registration or the Requests for Registration PRO RATA among the Holders making such Demands for Registration or Requests for Registration in proportion to the number of Registrable Securities included in their Demands for Registration or Requests for Registration, and (ii) SECOND, the securities of the Company included in such registration by the Company for sale for its own account. (f) PREEMPTION OF DEMAND REGISTRATION. Notwithstanding anything to the contrary contained herein, and without limitation as to the rights of the Company to include in a Demand Registration securities for sale for its own account as provided in SECTION 2(a), at any time within thirty (30) days after receiving a Demand for Registration, the Company may elect to effect an underwritten primary registration in lieu of the Demand Registration. If the Company so elects, the Company shall give prompt written notice to all Holders of its intention to effect such a registration and shall afford Holders the rights contained in SECTION 3 with respect to Piggyback Registrations; the Demands for Registration shall be deemed to have been withdrawn; and such primary registration shall not be deemed to be an Effective Registration. SECTION 3. PIGGYBACK REGISTRATIONS. (a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. Notwithstanding any limitation contained in SECTION 2, if the Company at any time proposes after the date hereof to effect a Piggyback Registration, including a registration in lieu of a Demand Registration pursuant to SECTION 2(f), it will each such time give prompt written notice (a "NOTICE OF PIGGYBACK REGISTRATION") to all Holders of its intention to do so and of such Holders' rights under this SECTION 3, which Notice of Piggyback Registration shall include a description of the intended method of disposition of such securities. If any Holder delivers a Request for Registration to the Company within fifteen (15) Business Days after the date of the Notice of Piggyback Registration, the Company will use its best efforts to include in the registration statement relating to such Piggyback Registration all Registrable Securities which the Company has been so requested to register. Notwithstanding the foregoing, if, at any time after giving a Notice of Piggyback Registration and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Holder and, thereupon, (i) in the case of a determination not -8- to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any Qualifying Holder to demand that such registration be effected as a Demand Registration under SECTION 1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities for the same period as the delay in registering such other securities. Subject to the provisions of SECTION 2(f), no registration effected under this SECTION 3 shall relieve the Company of its obligations to effect a Demand Registration under SECTION 2. (b) REGISTRATION EXPENSES. The Company will pay all Registration Expenses incurred in connection with each Piggyback Registration. (c) PRIORITY IN CUTBACK REGISTRATIONS. If a Piggyback Registration becomes a Cutback Registration, the Company will include in such registration the amount of the securities which the Managing Underwriter advises the Company can be sold in such offering without a reduction in the selling price anticipated to be received for the securities to be sold in such Public Offering: (i) FIRST, the securities proposed by the Company to be sold for its own account; and (ii) SECOND, the Registrable Securities included in the Requests for Registration of Requesting Holders, PRO RATA among such Requesting Holders in proportion to the number of Registrable Securities included in their Requests for Registration. Any securities so excluded shall be withdrawn from and shall not be included in such Piggyback Registration. SECTION 4. REGISTRATION PROCEDURES. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act pursuant to SECTION 2 or SECTION 3, the Company will use its best efforts to effect the registration and sale of such Registrable Securities in accordance with the intended methods of disposition thereof specified by the Holders participating therein. Without limiting the foregoing, the Company in each such case will, as expeditiously as possible: (a) prepare and file with the Commission (in the case of a Demand Registration), the requisite registration statement to effect such registration (including such audited financial statements as may be required by the Securities Act or the rules and regulations promulgated thereunder) and use its best efforts to cause such registration statement to become effective; PROVIDED, that as far in advance as practical before filing such registration statement or any amendment -9- thereto, the Company will furnish to counsel for the Requesting Holders' copies of reasonably complete drafts of all such documents proposed to be filed (including exhibits), and any such Holder shall have the opportunity to object to any information pertaining solely to such Holder that is contained therein and the Company will make the corrections reasonably requested by such Holder with respect to such information prior to filing any such registration statement or amendment; (b) prepare and file with the Commission such amendments and supplements to such registration statement and any prospectus used in connection therewith as may be necessary to maintain the effectiveness of such registration statement and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities included in such registration statement, in accordance with the intended methods of disposition thereof, until the earlier of (i) such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement and (ii) one hundred eighty (180) days after such registration statement becomes effective; (c) promptly notify each Requesting Holder and the underwriter or underwriters, if any: (i) when such registration statement or any prospectus used in connection therewith, or any amendment or supplement thereto, has been filed and, with respect to such registration statement or any post- effective amendment thereto, when the same has become effective; (ii) of any written request by the Commission for amendments or supplements to such registration statement or prospectus; (iii) of the notification to the Company by the Commission of its initiation of any proceeding with respect to the issuance by the Commission of, or of the issuance by the Commission of, any stop order suspending the effectiveness of such registration statement; and (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the applicable securities or blue sky laws of any jurisdiction; (d) furnish to each seller of Registrable Securities included in such registration statement such number of conformed copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits and documents incorporated by reference), such number of copies of the prospectus contained in such registration statement (including each preliminary -10- prospectus and any summary prospectus) and any other prospectus filed under Rule 424 promulgated under the Securities Act relating to such Holder's Registrable Securities, and such other documents, as such seller may reasonably request to facilitate the disposition of its Registrable Securities; (e) use its best efforts to register or qualify all Registrable Securities included in such registration statement under such other securities or blue sky laws of such jurisdictions as each Holder thereof shall reasonably request within fifteen (15) days following the original filing of such registration statement and to keep such registration or qualification in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Holders except that the Company shall not for any such purpose be required (i) to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this paragraph (e) be obligated to be so qualified, (ii) to consent to general service of process in any such jurisdiction or (iii) to subject itself to taxation in any such jurisdiction by reason of such registration or qualification; (f) use its best efforts to cause all Registrable Securities included in such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable each Holder thereof to consummate the disposition of such Registrable Securities; (g) to the extent any of the following are obtained by or furnished to the Company or the underwriters, furnish to each Requesting Holder a signed counterpart, addressed to such Holder (and the underwriters, if any), of (i) an opinion of counsel for the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten Public Offering, dated the date of any closing under the underwriting agreement), and (ii) a "cold comfort" letter, dated the effective date of such registration statement (and, if such registration includes an underwritten Public Offering, dated the date of any closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, in each case covering the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants letter, with respect to events subsequent to the date of such financial statements, as are covered in the opinion of issuer's counsel and in the accountants' letter delivered to the underwriters in the underwritten Public Offering; -11- (h) notify each Holder whose Registrable Securities are included in such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which any prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and at the request of any such Holder promptly prepare and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (i) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months but not more than eighteen (18) months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and not file any amendment or supplement to such Registration Statement or prospectus to which any such seller or any Requesting Holder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (j) make available for inspection by any Requesting Holder and any attorney, accountant or other agent retained by such Holder (collectively, the "INSPECTORS"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "RECORDS") reasonably necessary to enable the Inspectors to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration statement; (k) provide a transfer agent and registrar for all Registrable Securities included in such registration statement not later than the effective date of such registration statement; and (l) use its best efforts to cause all Registrable Securities included in such registration statement to be listed, upon official notice of issuance, on any securities exchange on which any of the securities of the same class as the Registrable Securities are then listed. -12- The Company may require each Holder whose Registrable Securities are being registered to, and each such Holder, as a condition to including Registrable Securities in such registration, shall, furnish the Company and the underwriters with such information and affidavits regarding such Holder and the distribution of such securities as the Company and the underwriters may from time to time reasonably request in writing in connection with such registration. At any time during the effectiveness of any registration statement covering Registrable Securities offered by a Holder, if such Holder becomes aware of any change materially affecting the accuracy of the information contained in such registration statement or the prospectus (as then amended or supplemented) relating to such Holder, it will immediately notify the Company of such change. Upon receipt of any notice from the Company of the happening of any event of the kind described in paragraph (h) of this SECTION 4, each Holder will forthwith discontinue such Holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such Holder receives the copies of the supplemented or amended prospectus contemplated by paragraph (h) of this SECTION 4 and, if so directed by the Company, shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period referred to in paragraph (b) of this SECTION 4 shall be extended by a number of days equal to the number of days during the period from and including the giving of notice pursuant to paragraph (h) of this SECTION 4 and to and including the date when each Holder whose Registrable Securities are included in such registration statement receives the copies of the supplemented or amended prospectus contemplated by paragraph (h) of this SECTION 4. SECTION 5. UNDERWRITTEN OFFERINGS. If a Demand for Registration is made pursuant to SECTION 2, or if the Company at any time proposes to register any of its securities in a Piggyback Registration or otherwise, and, in either case, the securities included in such registration are to be distributed by or through one or more underwriters, such securities shall be distributed by or through, and the Company shall enter into a firm commitment underwriting agreement in customary form with, (i) a Managing Underwriter, (ii) such other underwriters, reasonably satisfactory to the Company, as may be selected by the Managing Underwriter to assist or participate in the distribution, and (iii) if a Qualified Independent Underwriter is required for such registration pursuant to Schedule E to the NASD By-Laws or otherwise, a Qualified Independent Underwriter. (a) UNDERWRITTEN OFFERINGS IN CONNECTION WITH DEMAND REGISTRATION. If a Demand for Registration is made pursuant to SECTION 2 and the -13- distribution of the Registrable Securities included in such Demand for Registration is to be underwritten, the underwriting agreement shall include, among other provisions, indemnities to the effect and to the extent provided in SECTION 7. The Holders whose Registrable Securities are to be distributed by such underwriters shall be parties to such underwriting agreement. No Requesting Holder may participate in such underwritten offering unless such Holder agrees to sell its Registrable Securities on the basis provided in such underwriting agreement and completes and executes all questionnaires, powers of attorney, indemnities and other documents reasonably required under the terms of such underwriting agreement. If any Requesting Holder disapproves of the terms of an underwriting, such Holder may elect to withdraw therefrom and from such registration by notice to the Company and the Managing Underwriter, and each of the remaining Requesting Holders shall be entitled to increase the number of Registrable Securities being registered to the extent of the Registrable Securities so withdrawn (i) in the case of a Cutback Registration, in accordance with the priorities set forth in SECTION 2(e) and (ii) in all other cases in the proportion which the number of Registrable Securities being registered by such remaining Requesting Holder bears to the total number of Registrable Securities being registered by all such remaining Requesting Holders. (b) UNDERWRITTEN PIGGYBACK OFFERINGS. If the Company at any time proposes to register any of its securities in a Piggyback Registration and such securities are to be distributed by or through one or more underwriters, the Company will, subject to the provisions of SECTION 3(c), use its best efforts, if requested by any Holder whose Registrable Securities are included in such registration to arrange for such underwriters to include the Registrable Securities to be offered and sold by such Holder among the securities to be distributed by such underwriters, and such Holders shall be obligated to sell their Registrable Securities in such Piggyback Registration through such underwriters on the same terms and conditions as apply to the other Company securities to be sold by such underwriters in connection with such Piggyback Registration. The Holders whose Registrable Securities are to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriter or underwriters. No Requesting Holder may participate in such underwritten offering unless such Holder agrees to sell its Registrable Securities on the basis provided in such underwriting agreement and completes and executes all questionnaires, powers of attorney, indemnities and other documents reasonably required under the terms of such underwriting agreement. If any Requesting Holder disapproves of the terms of an underwriting, such Holder may elect to withdraw therefrom and from such registration by notice to the Company and the Managing Underwriter, and each of the remaining Requesting Holders shall be entitled to increase the number of Registrable Securities being registered to the extent of the Registrable Securities so withdrawn (i) in the case of a Cutback Registration, in accordance with the priorities set forth in SECTION 3(c) and (ii) in all other cases in the proportion which the number of Registrable Securities being registered by such remaining -14- Requesting Holder bears to the total number of Registrable Securities being registered by all such remaining Requesting Holders. SECTION 6. HOLDBACK AGREEMENTS. (a) BY THE HOLDERS. Unless the Managing Underwriter (or, in the case of a non-underwritten Public Offering, the Company) otherwise agrees, no Holder shall effect any public sale or distribution (including a sale under Rule 144) of any Registrable Securities, or any securities convertible into or exchangeable or exercisable for Registrable Securities, during such period of time as is sufficient and appropriate, in the opinion of the Managing Underwriter (or, in the case of a non-underwritten Public Offering, the Company), in order to complete the sale and distribution of the securities included in such registration, except as part of such registration statement, whether or not such Holder participates in such registration. (b) BY THE COMPANY. Unless any Managing Underwriter otherwise agrees, the Company shall not effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the fourteen (14) days prior to and the ninety (90) days after the effective date of the registration statement filed in connection with an underwritten offering made pursuant to a Demand Registration or a Piggyback Registration (or for such shorter period of time as is sufficient and appropriate, in the opinion of any Managing Underwriter or, if there is no Managing Underwriter, the Company, in order to complete the sale and distribution of the securities included in such registration), except as part of such underwritten registration and except pursuant to registrations on Form S-4 or Form S-8 promulgated by the Commission (or any successor or similar forms thereto). SECTION 7. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. The Company shall, to the full extent permitted by law, indemnify and hold harmless each seller of Registrable Securities included in any registration statement filed in connection with a Demand Registration or a Piggyback Registration, its directors, officers, and partners, and each other Person, if any, who controls any such seller within the meaning of the Securities Act, against any losses, claims, damages, expenses or liabilities, joint or several (together, "Losses"), to which such seller or any such director, officer, partner or controlling Person may become subject under the Securities Act or otherwise, insofar as such Losses (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or -15- necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, and the Company will reimburse such seller and each such director, officer, partner and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such Loss (or action or proceeding in respect thereof); PROVIDED, that the Company shall not be liable in any such case to the extent that any such Loss (or action or proceeding in respect thereof) arises out of or is based upon (i) an untrue statement or alleged untrue statement or omission or alleged omission made in any such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such seller specifically stating that it is for use in the preparation thereof, or (ii) such seller's failure to send or give a copy of the final prospectus to the Persons asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, partner or controlling Person, and shall survive the transfer of such securities by such seller. The Company shall also indemnify each other Person who participates (including as an underwriter) in the offering or sale of Registrable Securities, their officers and directors, and partners, and each other Person, if any, who controls any such participating Person within the meaning of the Securities Act to the same extent as provided above with respect to sellers of Registrable Securities. (b) INDEMNIFICATION BY THE SELLERS. Each Holder whose Registrable Securities are included or are to be included in any registration statement filed in connection with a Demand Registration or a Piggyback Registration, as a condition to including Registrable Securities in such registration statement, shall, to the full extent permitted by law, indemnify and hold harmless the Company, its directors and officers, and each other Person, if any, who controls the Company within the meaning of the Securities Act, against any Losses to which the Company or any such director or officer or controlling Person may become subject under the Securities Act or otherwise, insofar as such Losses (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, if such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such seller specifically stating that it is for use in the preparation of -16- such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; PROVIDED, HOWEVER, that the obligation to provide indemnification pursuant to this SECTION 7(b) shall be several, and not joint and several, among such Indemnifying Parties on the basis of the number of Registrable Securities of each such Indemnifying Party included in such registration statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling Person and shall survive the transfer of such securities by such seller. Such Holders shall also indemnify each other Person who participates (including as an underwriter) in the offering or sale of Registrable Securities, their officers and directors and each other Person, if any, who controls any such participating Person within the meaning of the Securities Act to the same extent as provided above with respect to the Company. (c) NOTICES OF CLAIMS. Promptly after receipt by an Indemnified Party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding paragraph (a) or (b) of this SECTION 7, such Indemnified Party shall, if a claim in respect thereof is to be made against an Indemnifying Party pursuant to such paragraphs, give written notice to the latter of the commencement of such action, PROVIDED that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under the preceding paragraphs of this SECTION 7, except to the extent that the Indemnifying Party is actually prejudiced by such failure to give notice. In case any such action is brought against an Indemnified Party, the Indemnifying Party shall be entitled to participate in and, unless, in the reasonable judgment of any Indemnified Party, a conflict of interest between such Indemnified Party and any Indemnifying Party exists with respect to such claim, to assume the defense thereof, jointly with any other Indemnifying Party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such Indemnified Party, and after notice from the Indemnifying Party to such Indemnified Party of its election so to assume the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; PROVIDED that the Indemnified Party may participate in such defense at the Indemnified Party's expense; and PROVIDED FURTHER that the Indemnified Party or Indemnified Parties shall have the right to employ one counsel to represent it or them if, in the reasonable judgment of the Indemnified Party or Indemnified Parties, it is advisable for it or them to be represented by separate counsel by reason of having legal defenses which are different from or in addition to those available to the Indemnifying Party, and in that event the reasonable fees and expenses of such one counsel shall be paid by the Indemnifying Party. If the Indemnifying Party is not entitled to, or elects not to, assume the defense of a claim, it will not be obligated to pay the fees and expenses of more than one counsel for the Indemnified Parties with respect to such claim, unless in the reasonable judgment of any Indemnified Party a -17- conflict of interest may exist between such Indemnified Party and any other Indemnified Parties with respect to such claim, in which event the Indemnifying Party shall be obligated to pay the fees and expenses of such additional counsel for the Indemnified Parties or counsels. No Indemnifying Party shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation without the consent of the Indemnified Party. No Indemnifying Party shall be subject to any liability for any settlement made without its consent. (d) CONTRIBUTION. If the indemnity and reimbursement obligation provided for in any paragraph of this SECTION 7 is unavailable or insufficient to hold harmless an Indemnified Party in respect of any Losses (or actions or proceedings in respect thereof) referred to therein, then the Indemnifying Party shall contribute to the amount paid or payable by the Indemnified Party as a result of such Losses (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other hand in connection with statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations. If the allocation provided by the immediately preceding sentence is unavailable for any reason, then the Indemnifying Party shall contribute to the amount paid or payable by the Indemnified Party as a result of such Losses (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect not only the relative fault of, but also the relative benefits received by, the Indemnifying Party on the one hand and the Indemnified Party on the other hand in connection with statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party or the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this paragraph were to be determined by PRO RATA allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this paragraph. The amount paid by an Indemnified Party as a result of the Losses referred to in the first sentence of this paragraph shall be deemed to include any legal and other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any Loss which is the subject of this paragraph. No Indemnified Party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution -18- from the Indemnifying Party if the Indemnifying Party was not guilty of such fraudulent misrepresentation. (e) OTHER INDEMNIFICATION. Indemnification similar to that specified in the preceding paragraphs of this SECTION 7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. The provisions of this SECTION 7 shall be in addition to any other rights to indemnification or contribution which an Indemnified Party may have pursuant to law, equity, contract or otherwise. (f) INDEMNIFICATION PAYMENTS. The indemnification required by this SECTION 7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Losses are incurred. SECTION 8. COVENANTS RELATING TO RULE 144. If at any time the Company is required to file reports in compliance with either Section 13 or Section 15(d) of the Exchange Act, the Company will (a) file reports in compliance with the Exchange Act and (b) comply with all rules and regulations of the Commission applicable in connection with the use of Rule 144 and take such other actions and furnish each Holder with such other information as such Holder may reasonably require in order to avail itself of such rule or any other rule or regulation of the Commission allowing such Holder to sell any Registrable Securities without registration. SECTION 9. NO EXISTING AGREEMENTS. The Company represents and warrants to each other party hereto that there is not in effect on the date hereof any agreement by the Company (other than this Agreement) pursuant to which any holders of securities of the Company have a right to cause the Company to register or qualify such securities under the Securities Act or any securities or blue sky laws of any jurisdiction. SECTION 10. MISCELLANEOUS. (a) NOTICES. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally, by courier or by facsimile transmission or mailed (first class postage prepaid) to the parties at the addresses or facsimile numbers set forth below. -19- (i) If to the Company, to: Great Plains Software, Inc. 1701 Southwest 38th Street Fargo, North Dakota 58103 Attention: Chief Financial Officer Facsimile: (701) 281-3752 with copy to: Dorsey & Whitney 220 South Sixth Street Minneapolis, Minnesota 55402 Attention: Jay L. Swanson, Esq. Facsimile: (612) 340-8738 (ii) if to the Investors or any of them, to: Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 Attention: Carla Skodinski Facsimile: (212) 902-3000 with copy to: Sidley & Austin One First National Plaza Chicago, Illinois 60603 Attention: Thomas A. Cole, Esq. Facsimile: (312) 853-7036 All such notices, requests and other communications will (x) if delivered personally or by courier to the address provided in this SECTION 10(a), be deemed given upon delivery, (y) if delivered by facsimile transmission to the facsimile number provided in this SECTION 10(a), be deemed given when receipt of transmission has been orally confirmed by the sending party, and (z) if delivered by first class or registered mail in the manner described above to the address as provided in this SECTION 10(a), be deemed given three (3) Business Days after deposit in the United States Mail (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties hereto. -20- (b) ENTIRE AGREEMENT. This Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter hereof, and contains the sole and entire agreement between the parties hereto with respect to the-subject matter hereof. (c) AMENDMENT; TERMINATION. This Agreement may be amended, supplemented or modified only by a written instrument (which may be executed in any number of counterparts) duly executed by or on behalf of each of the Company and the Holders of two-thirds (2/3) or more of the Registrable Securities then outstanding or subject to issuance. This Agreement shall be deemed terminated and shall be of no further force and effect, except for the provisions of SECTION 7, which provisions shall survive such termination, at such time as there are no Holders or any Persons who hold Registrable Securities, whichever is earlier. (d) WAIVER. Subject to paragraph (e) of this Section 11, any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same term or condition of this Agreement on any future occasion. (e) CONSENTS AND WAIVERS BY HOLDERS. Any consent of Holders pursuant to this Agreement, and any waiver by Holders of any provision of this Agreement, shall be in writing (which may be executed in any number of counterparts) and may be given or taken by the Holders of two-thirds (2/3) or more of the Registrable Securities then outstanding or subject to issuance, and any such consent or waiver so given or taken will be binding on all the Holders. (f) NO THIRD PARTY BENEFICIARY. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person other than any Person entitled to indemnification under SECTION 7. (g) SUCCESSORS AND ASSIGNS. The registration rights contained in this Agreement shall be transferable by any Holder to any Person that acquires Registrable Securities from such Holder (excluding any Person that acquires such Registrable Securities in a transaction pursuant to which such securities cease to be Registrable Securities). -21- (h) HEADINGS. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. (i) INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (i) such provision will be fully severable, (ii) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (iii) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom and (iv) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. (j) REMEDIES. Except as otherwise expressly provided for herein, no remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter if, existing at law or in equity or by statute or otherwise. The election of any one or more remedies by any party hereto shall not constitute a waiver by any such party of the right to pursue any other available remedies. Damages in the event of breach of this Agreement by any party hereto or any of their respective successors or permitted assigns would be difficult, if not impossible, to ascertain, and it is therefore agreed that each such Person, in addition to and without limiting any other remedy or right it may have, will have the right to an injunction or other equitable relief in any court of competent jurisdiction, enjoining any such breach, and enforcing specifically the terms and provisions hereof and each party hereto, on its own behalf and behalf of its respective successors and permitted assigns, hereby waives any and all defenses it may have on the ground of lack of jurisdiction or competence of the court to grant such an injunction or other equitable relief. The existence of this right will not preclude any such Person from pursuing any other rights and remedies at law or in equity which such Person may have. (k) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota applicable to a contract executed and performed therein, without giving effect to the conflicts of laws principles thereof. -22- (l) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by each party hereto, or the duly authorized officer of each party hereto, as the case may be, as of the date first above written. GREAT PLAINS SOFTWARE, INC. By: ----------------------------------------- President INVESTORS GS CAPITAL PARTNERS, L.P., A DELAWARE LIMITED PARTNERSHIP By: GS Advisors, L.P., its general partner By: GS Advisors, Inc., its general partner By: ----------------------------------------- BRIDGE STREET FUND 1994, L.P., A DELAWARE LIMITED PARTNERSHIP By: Stone Street Performance Corp., its managing general partner By: ----------------------------------------- STONE STREET FUND 1994, L.P., A DELAWARE LIMITED PARTNERSHIP By: Stone Street Performance Corp., its general partner By: ----------------------------------------- -23- EX-10.12 16 EXHIBIT 10.12 GREAT PLAINS SOFTWARE U.K., LLC LIMITED LIABILITY COMPANY AGREEMENT FEBRUARY 20, 1996 TABLE OF CONTENTS Article I. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1. Name. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2. Principal Place of Business . . . . . . . . . . . . . . . 1 Section 1.3. Names and Addresses of Members. . . . . . . . . . . . . . 2 Section 1.4. Term of Existence . . . . . . . . . . . . . . . . . . . . 2 Section 1.5. Agent for Service of Process. . . . . . . . . . . . . . . 2 Section 1.6. Duties of Members . . . . . . . . . . . . . . . . . . . . 2 Section 1.7. Duties of Managers. . . . . . . . . . . . . . . . . . . . 2 Article II. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Article III. Purpose and Character of the Business. . . . . . . . . . . . . . . . . 4 Article IV. Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 4.1. Place and Time of Meetings. . . . . . . . . . . . . . . . 4 Section 4.2. Annual Meetings . . . . . . . . . . . . . . . . . . . . . 4 Section 4.3. Special Meetings. . . . . . . . . . . . . . . . . . . . . 4 Section 4.4. Quorum, Adjourned Meetings. . . . . . . . . . . . . . . . 4 Section 4.5. Organization. . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.6. Order of Business . . . . . . . . . . . . . . . . . . . . 5 Section 4.7. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.8. Inspectors of Election. . . . . . . . . . . . . . . . . . 5 Section 4.9. Certain Actions . . . . . . . . . . . . . . . . . . . . . 6 Section 4.10. Notices of Meetings. . . . . . . . . . . . . . . . . . . 6 Section 4.11. Proxies. . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 4.12. Waiver of Notice . . . . . . . . . . . . . . . . . . . . 7 Section 4.13. Consents . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 4.14. Member List. . . . . . . . . . . . . . . . . . . . . . . 7 Article V. New Members; Units; Securities . . . . . . . . . . . . . . . . . . . . 7 Section 5.1. Admission of New Members. . . . . . . . . . . . . . . . . 7 Section 5.2. Issuance of Units . . . . . . . . . . . . . . . . . . . . 8 Article VI. Management and Operation of Company Business . . . . . . . . . . . . . . . 8 Section 6.1. Authority of the Members. . . . . . . . . . . . . . . . . 8 Section 6.2. Board of Managers . . . . . . . . . . . . . . . . . . . . 8 -i- Section 6.3. Number, Qualification; Term of Office; Vote . . . . . . . 8 Section 6.4. Initial Board . . . . . . . . . . . . . . . . . . . . . . 9 Section 6.5. Place of Meetings . . . . . . . . . . . . . . . . . . . . 9 Section 6.6. Special Meetings. . . . . . . . . . . . . . . . . . . . . 9 Section 6.7. Meetings Held Upon Member Demand. . . . . . . . . . . . . 9 Section 6.8. Adjournments. . . . . . . . . . . . . . . . . . . . . . . 9 Section 6.9. Notice of Meetings. . . . . . . . . . . . . . . . . . . . 9 Section 6.10. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 6.11. Absent Members . . . . . . . . . . . . . . . . . . . . . 10 Section 6.12. Conference Communications. . . . . . . . . . . . . . . . 10 Section 6.13. Removal. . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 6.14. Acts of Managers . . . . . . . . . . . . . . . . . . . . 10 Section 6.15. Written Action . . . . . . . . . . . . . . . . . . . . . 10 Section 6.16. Proxies. . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 6.17. Committees . . . . . . . . . . . . . . . . . . . . . . . 11 Section 6.18. No Fiduciary Duty. . . . . . . . . . . . . . . . . . . . 11 Section 6.19. Compensation . . . . . . . . . . . . . . . . . . . . . . 11 Article VII. Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.1. Number. . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.2. Election, Term of Office and Qualifications . . . . . . . 11 Section 7.3. Removal and Vacancies . . . . . . . . . . . . . . . . . . 11 Section 7.4. Chair . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 7.5. President . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 7.6. Secretary . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 7.7. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 7.8. Duties of Other Officers. . . . . . . . . . . . . . . . . 12 Section 7.9. Compensation. . . . . . . . . . . . . . . . . . . . . . . 13 Article VIII. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 8.1. Indemnification . . . . . . . . . . . . . . . . . . . . . 13 Section 8.2. Indemnification Procedures; Survival. . . . . . . . . . . 14 Article IX. Certificates; Transfers. . . . . . . . . . . . . . . . . . . . . . . . 15 Section 9.1. Certificates for Units. . . . . . . . . . . . . . . . . . 15 Section 9.2. Loss of Certificates. . . . . . . . . . . . . . . . . . . 15 Section 9.3. Registration, Transfer and Exchange . . . . . . . . . . . 15 Section 9.4. Restriction on Transfers. . . . . . . . . . . . . . . . . 16 Section 9.5. Transfer by Legal Process . . . . . . . . . . . . . . . . 16 Section 9.6. Resignation . . . . . . . . . . . . . . . . . . . . . . . 16 Section 10.1. Books; Place; Access . . . . . . . . . . . . . . . . . . 16 -ii- Section 10.2. Financial Information. . . . . . . . . . . . . . . . . . 16 Section 10.3. Tax Information. . . . . . . . . . . . . . . . . . . . . 17 Section 10.4. Tax Elections. . . . . . . . . . . . . . . . . . . . . . 17 Section 10.5. Tax Matters Partner. . . . . . . . . . . . . . . . . . . 17 Article XI. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 11.1. Procedure Applicable to All Amendments . . . . . . . . . 19 Section 11.2. Voting Requirement . . . . . . . . . . . . . . . . . . . 19 Section 11.3. Approval by Members. . . . . . . . . . . . . . . . . . . 19 Article XII. Approval of Reorganizations and Bankruptcy . . . . . . . . . . . . . . 20 Article XIII. Dissolution and Liquidation. . . . . . . . . . . . . . . . . . . . . . 20 Section 13.1. Events Causing Dissolution . . . . . . . . . . . . . . . 20 Section 13.2. Continuation of Business . . . . . . . . . . . . . . . . 21 Section 13.3. Liquidation and Winding Up . . . . . . . . . . . . . . . 21 Section 13.4. Compliance with Timing Requirements of Regulations . . . 21 Article XIV. Representations, Warranties of the Members . . . . . . . . . . . . . . 22 Section 14.1. Representations and Warranties of the Members. . . . . . 22 Article XV. Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 15.1. Initial Capital Contributions. . . . . . . . . . . . . . 23 Section 15.2. No Right to Return of Contribution.. . . . . . . . . . . 23 Section 15.3. Additional Capital Contributions . . . . . . . . . . . . 23 Section 15.4. Loans to the Company; No Interest on Capital . . . . . . 23 Section 15.5. Creditor's Interest in the Company . . . . . . . . . . . 23 Section 15.6. Liability of Members . . . . . . . . . . . . . . . . . . 24 Section 15.7. Capital Accounts . . . . . . . . . . . . . . . . . . . . 24 Article XVI. Allocation of Income, Gains and Losses; Distributions to Members . . . . . . . . . . . . . . . . . . . . . . . 25 Section 16.1. Allocation of Income, Profits, Gains, Losses and Credits 25 Section 16.2. Other Allocation Rules . . . . . . . . . . . . . . . . . 25 Section 16.3. Limitation on Loss Allocation. . . . . . . . . . . . . . 25 Section 16.4. Special Allocations. . . . . . . . . . . . . . . . . . . 26 Section 16.5. Curative Allocations . . . . . . . . . . . . . . . . . . 27 Section 16.6. Tax Allocations: Section 704(c) of the Code . . . . . . 28 -iii- Section 16.7. Distributions to Members . . . . . . . . . . . . . . . . 28 Article XVII. Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 17.1. Additional Actions and Documents . . . . . . . . . . . . 28 Section 17.2. Arbitration. . . . . . . . . . . . . . . . . . . . . . . 28 Section 17.3. Notice . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 17.4. Severability . . . . . . . . . . . . . . . . . . . . . . 29 Section 17.5. Survival . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 17.6. Waivers. . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 17.7. Exercise of Rights . . . . . . . . . . . . . . . . . . . 29 Section 17.8. Binding Effect . . . . . . . . . . . . . . . . . . . . . 29 Section 17.9. Limitation on Benefits of this Agreement. . . . . . . . 29 Section 17.10. Waiver of Partition. . . . . . . . 30 Section 17.11. Entire Agreement . . . . . . . . . 30 Section 17.12. Pronouns . . . . . . . . . . . . . 30 Section 17.13. Headings . . . . . . . . . . . . . 30 Section 17.14. Governing Law. . . . . . . . . . . 30 Section 17.15. Execution in Counterparts. . . . . 30 -iv- LIMITED LIABILITY COMPANY AGREEMENT OF GREAT PLAINS SOFTWARE U.K., LLC THIS LIMITED LIABILITY COMPANY AGREEMENT made and entered into as of this 20th day of FEBRUARY 1996, by and between the persons named on Schedule A attached hereto (hereinafter, such persons are referred to collectively as the "Members" and individually as a "Member"); WITNESSETH THAT: WHEREAS, the undersigned have caused the formation of Great Plains Software U.K., LLC, a Delaware limited liability company (the "Company"), of which the undersigned constitute all of the initial Members; and WHEREAS, the undersigned have received and approved the business plan of the Company; NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Members agree as follows: Article I. GENERAL The parties hereto do hereby agree that this Agreement shall constitute the "limited liability company agreement" of the Company within the meaning of Section 18-101(7) of the Delaware Limited Liability Company Act, as amended (the "Act"), and hereby adopt, approve and ratify the execution and filing in the office of the Secretary of State of the State of Delaware of the certificate of formation of the Company by Frederic F. Hillier, an individual resident of the State of Minnesota, on February 20, 1996 (the "Certificate of Formation") and acknowledge, approve and ratify his designation as an "authorized person" of the Company in the Certificate of Formation as contemplated by Section 18-201(a) of the Act. The parties agree that the Agreement shall be effective as of the date of filing of the Certificate of Formation in the office of the Secretary of State and that they shall comply with the provisions and requirements of the Act and that the Act shall govern the rights, duties and obligations of the Members, except as otherwise expressly stated herein. Section 1.1. NAME. The name of the Company shall be and the business shall be conducted under the name of "Great Plains Software U.K., LLC" Section 1.2. PRINCIPAL PLACE OF BUSINESS. The location of the principal place of business of the Company shall be Knyvett House, The Causeway, Staines, Middlesex TW183BA or such other place in the United Kingdom as the Board of Managers may from time to time determine (the "Principal Office"). Section 1.3. NAMES AND ADDRESSES OF MEMBERS. The names and addresses of the Members are as set forth in Schedule A. Section 1.4. TERM OF EXISTENCE. The Company shall be formed as of the time of the filing of the Certificate of Formation in the Office of the Secretary of State of Delaware and its existence shall continue until the fiftieth anniversary of the filing of the Certificate of Formation of the Company, unless earlier terminated, dissolved or liquidated in accordance with the provisions of this Agreement. Section 1.5. AGENT FOR SERVICE OF PROCESS. The name and address of the agent for service of process is, until changed by the Board of Managers, The Corporate Trust Company, located at Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. Section 1.6. DUTIES OF MEMBERS. The only duties of the Members to the Company or to each other in respect of the Company shall be those established in this Agreement, and there shall be no other express or implied duties of the Members to the Company or to each other in respect of the Company. Section 1.7. DUTIES OF MANAGERS. Each Manager shall owe duties of care and loyalty to the Company and the Members. A Manager shall not be personally liable to the Company or the Members for monetary damages for breach of fiduciary duty as a Manager except (a) for any breach of the Manager's duty of loyalty to the Company or the Members; (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; or (c) for any transaction from which such Manager derived an improper personal benefit. Article II. DEFINITIONS Unless the context otherwise specifies or requires, the terms defined in this Article II shall, for the purposes of this Agreement, have the meanings herein specified. Certain other capitalized terms used herein are defined elsewhere in the Agreement. "ACT" is defined in the introduction to Article I. "AGREEMENT" means this Limited Liability Company Agreement, as it may be amended or supplemented from time to time. -2- "BOARD OF MANAGERS" means the Board of Managers of the Company established pursuant to Article VI. "CAPITAL ACCOUNTS" means the capital accounts maintained by the Company for each Member in respect of such Member's Units. The Capital Accounts shall be maintained in accordance with the capital accounting rules of Section 704 of the Code. "CAPITAL CONTRIBUTION" means the amount of money or the fair market value of any property (as agreed by the Members as of the date of contribution) contributed to the Company by any Member. "CODE" means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. All references in this Agreement to a section of the Code or the Treasury Regulations shall be considered to include any subsequent amendment or replacement of that section. "COMPANY" means Great Plains Software U.K., LLC, the Delaware limited liability company formed pursuant to the filing of the Certificate of Formation in Delaware and the terms of this Agreement. "COMPANY ASSETS" means all assets and property, whether tangible or intangible and whether real, personal or mixed, at any time owned by the Company. "FISCAL YEAR" means the 12-month accounting period of the Company ending on May 31 of each year, or such other date as the Board of Managers may determine from time to time. "MANAGER" is defined in Section 6.3. "MEMBERS" means the Persons executing this Agreement until they cease to be Members and the Persons which are hereafter admitted to the Company as Members in accordance with this Agreement. "MEMBER SUPERMAJORITY" means 60% of the number of Units entitled to vote. "NAMED OFFICERS" is defined in Section 7.1. "PERSON" means any natural person, corporation, limited liability company, association, partnership (whether general or limited), joint venture, proprietorship, governmental agency, trust, estate, association, custodian, nominee or any other individual or entity, whether acting in an individual, fiduciary, representative or other capacity. -3- "PRINCIPAL OFFICE" is defined in Section 1.2. "REORGANIZATION" means (x) any consolidation or merger of the Company with or into any other Person, whether or not the Company is the surviving entity, (y) any exchange or other transaction pursuant to which outstanding Units are converted into other securities, property or money or (z) any sale, transfer or other disposition of all or substantially all of the Company's assets in a single transaction or a series of related transactions. A dissolution or liquidation of the Company pursuant to Article XIII will not constitute a "Reorganization" within the meaning of this Agreement. "TRANSFER" is defined in Section 9.4. "TREASURY REGULATIONS" or "TREAS. REG." refers to the regulations promulgated by the United States Treasury Department under the Code. "UNITS" means the interest of the Members in the Company, which Units represent the ownership interest of the Members in the Company. Article III. PURPOSE AND CHARACTER OF THE BUSINESS The purpose and character of the business of the Company shall be to sell and distribute the products of Great Plains Software, Inc., a Minnesota corporation, in the United Kingdom and to undertake and carry on any and all other lawful business, purpose or activity permitted under the Act and approved by the Board of Managers. Article IV. MEMBERS Section 4.1. PLACE AND TIME OF MEETINGS. Meetings of the Members shall be held at the Principal Office or such other location as decided by the Members from time to time. In the absence of a designation of time, meetings shall be held at 10:00 a.m. Any or all Members may participate in any meeting of Members by any means of conference communication through which all Members may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, Members participating pursuant to this provision shall be deemed present in person at the meeting, and the place of the meeting shall be the place of origination of the conference communication. Section 4.2. ANNUAL MEETINGS. The annual meeting of the Members for the appointment of Managers and for the transaction of any other business as -4- may properly come before the meeting shall be held in April of each year on such business day as the Board of Managers shall determine from time to time. Section 4.3. SPECIAL MEETINGS. Special meetings of the Members for any purpose or purposes shall be called by the Secretary at the written demand of (x)a majority of all Managers, (y) the Chair or (z) Members owning not less than 35% of the Units outstanding. Such demand shall state the purpose or purposes of the proposed meeting. Within ten days after the Secretary shall receive a proper demand to call a meeting, he or she shall cause a meeting to be duly called on a business day determined by the Secretary within 70 days of the date of receipt of such request. Business transacted at any special meeting shall be limited to the purpose or purposes stated in the demand. Section 4.4. QUORUM, ADJOURNED MEETINGS. Members owning a majority of the Units outstanding shall constitute a quorum for the transaction of business at any annual or special meeting of the Members. If a quorum is not present at a meeting, the Members present and entitled to vote shall adjourn to such day as they shall agree upon by a vote of the majority in voting interest present and entitled to vote. Notice of any adjourned meeting need not be given if the date, time and place thereof are announced at the meeting at which the adjournment is taken. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present, the Members may continue to transact business until adjournment notwithstanding the withdrawal of enough Members to leave less than a quorum. Section 4.5. ORGANIZATION. At each meeting of the Members, the Chair or, in his or her absence, the chair chosen by a majority in voting interest of the Members present and entitled to vote shall act as chair; and the Secretary or, in his or her absence, any person whom the chair of the meeting shall appoint, shall act as secretary of the meeting. Section 4.6. ORDER OF BUSINESS. The order of business at each meeting of the Members shall be determined by the chair of the meeting, but such order of business may be changed by the vote of a majority in voting interest of the Members present and entitled to vote. Section 4.7. VOTING. Subject to any different voting rights that may be established for any Unit or class or series of Units, each Member entitled to vote at a meeting of Members or entitled to express consent in writing to action without a meeting shall have one vote for each Unit having voting rights registered in his, her or its name on the books of the Company. All questions at a meeting shall be decided by a majority vote of the number of Units entitled to vote represented at the -5- meeting at the time of the vote except where otherwise required by the Act or this Agreement. Persons holding Units in a fiduciary capacity shall be entitled to vote the Units so held. If Units stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons shall have the same fiduciary relationship respecting the same Units, unless the Secretary shall have been given written notice to the contrary and shall have been furnished with a copy of the instrument or order appointing them or creating a relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) if only one shall vote, his, her or its act shall bind all; (ii) if more than one shall vote, the act of the majority voting shall bind all; and (iii) if more than one shall vote, but the votes shall be evenly split on any particular matter, then, except as otherwise required by law, each person may vote the Units in question proportionately. Section 4.8. INSPECTORS OF ELECTION. At each meeting of the Members, the chair of such meeting shall appoint two inspectors of election, who shall be natural persons. Each inspector of election so appointed shall execute the duties of an inspector of election at such meeting with strict impartiality and according to the best of his or her ability. Such inspectors of election shall take charge of the ballots at such meeting and after the balloting on any question shall count the ballots cast and make a report in writing to the secretary of the meeting of the results. An inspector of election need not be a Member, and any officer or employee of the Company may be an inspector of election on any question other than a vote for or against his or her election to any position with the Company or on any other question in which he or she may be directly interested. Section 4.9. CERTAIN ACTIONS. In addition to the actions specified in other provisions of this Agreement, the following actions shall require the approval or authorization of a Member Supermajority: (a) The approval of any Reorganization, any other merger or consolidation to which the Company or a Subsidiary is a party or the acquisition of another business by the Company; (b) The authorization or issuance of any additional Units; (c) The purchase by the Company of any Unit or an agreement to do so; PROVIDED, HOWEVER, that the Member whose Units are subject to purchase shall have no vote in such matter; (d) The granting of any material lien, charge or encumbrance upon any of the Company's assets; -6- (e) The borrowing of money; (f) The making of any distributions to the Members; and (g) The appointment of the certified public accountants and any attorneys for the Company. Section 4.10. NOTICES OF MEETINGS. Every Member shall furnish the Secretary with a post office address at which notices of meetings and requests for consents to action without a meeting and all other communications may be mailed to him, her or it. A written notice of each annual and special meeting of Members shall be given not less than ten nor more than 60 days before the date of such meeting to each Member by delivering such notice to him, her or it personally or depositing the same in the United States mail, postage prepaid, directed to him, her or it at the post office address shown upon the records of the Company. Service of notice is complete upon mailing. Personal delivery to any officer of a corporation or association or to any member of a partnership is delivery to such corporation, association or partnership. Every notice of a meeting of Members shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. Section 4.11. PROXIES. Each Member entitled to vote at a meeting of Members or consent to action without a meeting may authorize another Person or Persons to act for him, her or it by proxy by an instrument executed in writing and filed with the Secretary. If any such instrument designates two or more Persons to act as proxies, any proxy may exercise all of the powers conferred by such written instrument unless the instrument shall otherwise provide. No proxy shall be valid for more than one year from the date of its execution. Subject to the above, any proxy may be revoked if an instrument revoking it or a proxy bearing a later date is filed with the Secretary. Section 4.12. WAIVER OF NOTICE. Notice of any annual or special meeting may be waived either before, at or after such meeting in writing signed by the Member entitled to the notice. Attendance by a Member at a meeting shall constitute a waiver of notice of such meeting, unless the Member objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. Section 4.13. CONSENTS. Any action that may be taken at a meeting of the Members may be taken without a meeting and without a vote but only pursuant to the consent procedures of this Section 4.13. A majority of all Managers, the Chair or Members owning not less than 35% of the Units outstanding may demand in -7- writing that the Secretary request consents of the Members for any proper purpose or purposes. Such demand shall state the purpose or purposes of the proposed consents. Within ten days after the Secretary shall receive a proper demand to request consents, he or she shall cause a request for consent and related consent form to be mailed to each Member by delivering such documents to him, her or it personally or depositing the same in the United States mail, postage prepaid, directed to him, her or it at the post office address shown upon the records of the Company. Any action shall be approved if consents to such action in writing, setting forth the actions so taken, shall be signed by the Members owning outstanding Units having not less than the minimum number of votes that would be required to authorize or take such action at a meeting at which all Units entitled to vote thereon were present and voted and filed with the Secretary. Notice of the taking of the action without a meeting shall be given to all Members. The action shall become effective upon the mailing of such notice, but no earlier than five days after the date of mailing of requests for such consents by the Secretary. Section 4.14. MEMBER LIST. The Secretary shall prepare, at least ten days before each meeting of Members and in connection with any request for consents, a complete list of the Members entitled to vote at such meeting or express consent, arranged in alphabetical order and showing the address of each Member and the number of Units registered in the name of each Member. Such list shall be open to the examination of any Member for any purpose germane to the meeting or such consents, during ordinary business hours, for a period of at least ten days prior to the meeting or in the case of consents after the mailing of requests therefor, at the Principal Office. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any Member who is present. Article V. NEW MEMBERS; UNITS; SECURITIES Section 5.1. ADMISSION OF NEW MEMBERS. The Members may from time to time admit additional Members to the Company upon the issuance of new Units pursuant to Section 5.4 or upon a transfer in compliance with Section 9.4. All Members shall be required to have an interest in the Company represented by one or more Units. Unless otherwise authorized by the Members in accordance with this Article V, all Units shall be of one class and series, entitled to vote and with equal rights and preferences in all matters, and the profits and losses, and distributions of cash or other assets, of the Company shall be allocated among the Members of the Company in proportion to the number of Units held by the Members. The Members, by amendment to this Agreement approved by not less than a Member Supermajority, may fix (i) the relative rights and preferences of different classes and series of the Units and (ii) may authorize the issuance of -8- securities convertible into, or exchangeable for, and options, warrants and rights to purchase, Units. Section 5.2. ISSUANCE OF UNITS. The Members may issue additional Units from time to time to existing or new Members. Units may be issued for any consideration, including, without limitation, cash or other property, tangible or intangible, received or to be received by the Company or services rendered or to be rendered to the Company. At the time of authorization of the issuance of additional Units, the Members shall state, by resolution, their determination of the fair value to the Company in monetary terms of any consideration other than cash for which Units are to be issued. Unless the Members otherwise determine by a vote of not less than a Member Supermajority, Members holding Units shall have the preemptive right to subscribe for additional Units, securities convertible into or exchangeable for Units, and options, warrants and rights to purchase Units. Upon any proposed issuance of such securities, the Board of Managers shall give notice of the proposed issuance to holders of Units, and such holders shall have the right to subscribe for such securities for the cash purchase price stated in such notice on a PRO RATA basis, with the right to oversubscribe for any securities that would otherwise be unsubscribed because of the failure of one or more Members to subscribe for their PRO RATA amount. Any securities remaining unsubscribed after 30 days from the date of such notice may be sold at a cash purchase price not less than the cash purchase price stated in such notice. Article VI. MANAGEMENT AND OPERATION OF COMPANY BUSINESS Section 6.1. AUTHORITY OF THE MEMBERS. Except as otherwise expressly provided herein, no Member shall have any authority to act for, or to assume any obligations or responsibility on behalf of, or bind any other Member or the Company. Each of the Members represents, warrants and agrees that it shall disclose in writing to all third parties with whom such Member is in contact concerning the affairs or the business of the Company that such Member does not have any authority to act for, or to assume any obligations or responsibilities on behalf of, the Company unless expressly authorized by the Board of Managers. Section 6.2. BOARD OF MANAGERS. The business and affairs of the Company shall be managed by or under the authority of the Board of Managers, except as otherwise required by the Act or this Agreement. Section 6.3. NUMBER, QUALIFICATION; TERM OF OFFICE; VOTE. The number of members of the Board of Managers shall be up to four (4) (each a "Manager"). The Managers shall be elected from time to time by the Members. Each -9- of the Managers shall hold office until such Manager's successor shall have been elected, or until the earlier death, resignation, removal or disqualification of such Manager. Each Manager shall have one vote in all matters to come before the Board of Managers. Section 6.4. INITIAL BOARD. The initial Board of Managers shall be comprised of the following individuals: Terri Zimmerman Steve Sydness Section 6.5. PLACE OF MEETINGS. Meetings of the Board of Managers shall be held at the principal executive office of the Company or at such other place as may be agreed by the members of such Board from time to time. Section 6.6. SPECIAL MEETINGS. A special meeting of the Board of Managers may be called for any purpose or purposes at any time by the Chair or by any Member who holds at least 35% of the outstanding Units and who shall demand such special meeting by written notice given to the Chair specifying the purposes of such meeting. Section 6.7. MEETINGS HELD UPON MEMBER DEMAND. Within five (5) business days after the Chair receives a valid demand for a meeting of the Board of Managers from a Member, it shall be the duty of the Chair to cause a special or regular meeting of Board of Managers, as the case may be, to be duly called and held on notice no later than five (5) business days after receipt of such demand. If the Chair fails to cause such a meeting to be called and held as required by this Section 6.7, the Member or Members making the demand may call the meeting by giving notice as provided in Section 6.9 at the expense of the Company. Section 6.8. ADJOURNMENTS. Any meeting of the Board of Managers may be adjourned from time to time to another date, time and place. If any meeting of the Board of Managers is so adjourned, no notice as to such adjourned meeting need be given if the date, time and place at which the meeting will be reconvened are announced at the time of adjournment. Section 6.9. NOTICE OF MEETINGS. Unless otherwise required by law, written notice of each meeting of the Board of Managers, stating the date, time and place and, in the case of a special meeting, the purpose or purposes, shall be given at least five (5) days and not more than ninety (90) days prior to the meeting to every member of the Board of Managers. A member of the Board of Managers may waive notice of the date, time, place and purpose or purposes of a meeting of the Board of Managers. A waiver of notice is effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a -10- member of the Board of Managers at a meeting is a waiver of notice of that meeting, unless the member objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. Section 6.10. QUORUM. Members of the Board of Managers representing 51% of all votes held by the members of the Board of Managers shall constitute a quorum for the transaction of business at each meeting of the Board of Managers. Section 6.11. ABSENT MEMBERS. A member of the Board of Managers may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Managers. If such member is not present at the meeting, such consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but such consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the member has consented or objected. Section 6.12. CONFERENCE COMMUNICATIONS. Any or all of the members of the Board of Managers may participate in any meeting of the Board of Managers, or of any duly constituted committee thereof, by any means of communication through which such members may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, members of the Board of Managers participating pursuant to this Section 7.11 shall be deemed present in person at the meeting; and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique. Section 6.13. REMOVAL. Any member of the Board of Managers may be removed from office at any time, with or without cause, by the action of the Member or Members who appointed such member; PROVIDED, HOWEVER, that such removal shall be without prejudice to any contract rights of such member pursuant to any employment or other agreement between such member and the appointing Member(s) or the Company. Section 6.14. ACTS OF MANAGERS. Except as otherwise provided herein, the Board of Managers shall take action by the affirmative vote of those Managers who have the power to vote 51% of all votes held by the Managers, and any such act shall be deemed to be the action of the Board of Managers for all purposes of this Agreement and the Act. -11- Section 6.15. WRITTEN ACTION. Any action which might be taken at a meeting of the Board of Managers, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by a number of the members of the Board of Managers, or committee members, whose approval would be sufficient to approve the action at a meeting at which all of the members of the Board of Managers (or such committee) were present. Section 6.16. PROXIES. A member of the Board of Managers may cast or authorize the casting of a vote by filing a written appointment of a proxy with the Chair at or before the meeting at which the appointment is to be effective. The member may sign or authorize the written appointment by telegram, cablegram or other means of electronic transmission setting forth or submitted with information sufficient to determine that the member authorized such transmission. Any copy, facsimile, telecommunication or other reproduction of the original of either the writing or transmission may be used in lieu of the original, PROVIDED that it is a complete and legible reproduction of the entire original. Section 6.17. COMMITTEES. (a) A resolution approved by the Board of Managers may establish committees having the authority of the Board of Managers in the management of the business of the Company to the extent provided in the resolution. A committee shall consist of one or more Persons, who need not be members of the Board of Managers. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the Board of Managers. (b) A majority of the members of a committee present at a meeting is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in the resolution of the Board of Managers creating the committee. Section 6.18. NO FIDUCIARY DUTY. Persons serving on the Board of Managers shall not constitute a fiduciary any Member(s) or the Company. No Person serving on the Board of Managers shall incur any personal liability in such capacity to the Members or the creditors of the Company. Section 6.19. COMPENSATION. Members of the Board of Managers shall not be compensated by the Company for serving in such capacity. The Company shall bear the expenses, if any, incurred by each Member's respective representatives in attending meetings of the Board of Managers. -12- Article VII. OFFICERS Section 7.1. NUMBER. The officers of the Company, all of whom shall be natural persons, shall consist of a Chair, a President, a Secretary and a Treasurer ("Named Officers"), and any other officers and agents as the Board of Managers by a majority vote of all Managers may designate from time to time. Any person may hold two or more offices. Section 7.2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. At each annual meeting of the Board of Managers, all officers shall be elected. Such officers shall hold office until the next annual meeting of the Managers or until their successors are elected and qualified, or until such office is eliminated by amendment of this Agreement, in the case of the Named Officers, or a vote of the majority of all Managers, in the case of officers other than Named Officers. An officer who is a Manager shall hold office until the election and qualification of his or her successor even though he or she may cease to be a Manager. Section 7.3. REMOVAL AND VACANCIES. Any officer may be removed from his or her office with or without cause upon a vote of a majority of the total number of Managers. Such removal shall be without prejudice to the contract rights of the person so removed. A vacancy among the officers by death, resignation, removal or otherwise shall be filled for the unexpired term by the Board of Managers, unless such office is eliminated. Section 7.4. CHAIR. The Chair shall preside at all meetings of the Members and Managers and shall have such other duties as may be prescribed, from time to time, by the Board of Managers. The Chair shall be a Manager and shall be elected by the Board of Managers. Section 7.5. PRESIDENT. (a) DAY-TO-DAY OPERATIONS. The Company shall be managed by a President. The Board of Managers delegates to the President the authority to oversee and supervise the Company's business. Except as otherwise provided in this Agreement, the President shall be authorized to determine all questions relating to the day-to-day conduct, operation and management of the business of the Company. The President shall be responsible to the Board of Managers. (b) GENERAL. The President shall be entitled to delegate such part of his or her duties as he or she may deem reasonable or necessary in the conduct of the business of the Company to one or more employees of the Company, who shall each have such duties and authority as shall be determined from time to time by the -13- President or as may be set forth in any agreement between such employee and the Company. (c) ELECTION. The President shall be elected by the Board of Managers and shall receive such compensation as may be determined from time to time by the Board of Managers or as shall be set forth in any written agreement approved by the Board of Managers. Section 7.6. SECRETARY. The Secretary shall be secretary of and shall attend all meetings of the Members and Board of Managers and shall record all proceedings of such meetings in the minute book of the Company. He or she shall give proper notice of meetings of Members and the Board of Managers. He or she shall perform such other duties as may from time to time be prescribed by the Board of Managers. Section 7.7. TREASURER. The Treasurer shall keep or cause to be kept accurate accounts of all moneys of the Company received or disbursed. He or she shall deposit or cause to be deposited all moneys, drafts and checks in the name of and to the credit of the Company in such banks and depositaries as the Board of Managers shall from time to time designate. He or she shall have power to endorse or cause to be endorsed for deposit or collection all notes, checks and drafts received by the Company. He or she shall disburse or cause to be disbursed the funds of the Company as ordered by the President, making proper vouchers therefor. He or she shall render to the Board of Managers whenever required an account of all his or her transactions as Treasurer and of the financial condition of the Company and shall perform such other duties as may from time to time be prescribed by the Board of Managers. Section 7.8. DUTIES OF OTHER OFFICERS. The duties of such other officers and agents as the Board of Managers may designate shall be set forth in the resolution creating such office or agency or by subsequent resolution. Section 7.9. COMPENSATION. The officers, agents and employees of the Company shall receive such compensation for their services as may be determined from time to time by the Board of Managers or as shall be set forth in a written agreement. -14- Article VIII. INDEMNIFICATION Section 8.1. INDEMNIFICATION. (a) To the fullest extent permitted by law, each Manager and Named Officer (individually, an "Indemnitee") shall be indemnified, held harmless and defended by the Company from and against any and all losses, claims, damages, liabilities, whether joint or several, expenses (including legal fees and expenses), judgments, fines and other amounts paid in settlement, incurred or suffered by such Indemnitee, as a party or otherwise, in connection with any threatened, pending or completed claim, demand, action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal, arising out of or in connection with the business or the operation of the Company and by reason of the Indemnitee's status as a Manager or Named Officer regardless of whether the Indemnitee continues to be a Manager or Named Officer of the Company at the time any such loss, claim, damage, liability or other expense is paid or incurred if (i) the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in the best interests of the Company and, with respect to any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful, (ii) the Indemnitee's conduct did not constitute intentional misconduct or a material breach of the terms of this Agreement and (iii) the Indemnitee's conduct did not involve a transaction from which the Manager or Named Officer derived an improper personal benefit. The termination of any action, suit or proceeding by judgment, order, settlement or upon a plea of NOLO CONTENDERE, or its equivalent, shall not, of itself, create a presumption that the Indemnitee acted in a manner contrary to the standards specified in clauses (i), (ii) or (iii) of this Section 8.1(a). (b) To the fullest extent permitted by law, expenses incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding subject to this Section 7.1 shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Indemnitee to repay such amount unless it is determined that such Indemnitee is entitled to be indemnified therefor pursuant to this Section 8.1. (c) The indemnification provided by this Section 8.1 shall be in addition to any other rights to which any Indemnitee may be entitled under any other agreement, pursuant to any vote of the Managers, as a matter of law or otherwise, and shall inure to the benefit of the heirs, legal representatives, successors, assigns and administrators of the Indemnities. -15- (d) Any indemnification under this Section 8.1 shall be satisfied solely out of the assets of the Company and no Indemnitee shall have any recourse against any Member with respect to such indemnification. (e) An Indemnitee shall not be denied indemnification in whole or in part under this Section 8.1 merely because the Indemnitee had an interest in the transaction with respect to which the indemnification applies, if the transaction was not otherwise prohibited by the terms of this Agreement and the conduct of the Indemnitee satisfied the conditions set forth in Section 8.1(a). (f) The Company may, but shall have no obligation to, purchase and maintain insurance covering any potential liability of the Indemnitees for any actions or omissions for which indemnification is permitted hereunder, including such types of insurance (including extended coverage liability and casualty and workers' compensation) as would be customary for any person engaged in a similar business, and may name the Indemnitees as additional insured parties thereunder. Section 8.2. INDEMNIFICATION PROCEDURES; SURVIVAL. (a) Promptly after receipt by an Indemnitee of notice of the commencement of any action that may result in a claim for indemnification pursuant to Section 8.1, the Indemnitee shall notify the Company in writing within 30 days thereafter; PROVIDED, HOWEVER, that any omission so to notify the Company will not relieve it of any liability for indemnification hereunder as to the particular item for which indemnification may then be sought (except to the extent that the failure to give notice shall have been materially prejudicial to the Company) nor from any other liability that it may have to any Indemnitee. (b) An Indemnitee shall have the right to employ separate counsel in any action as to which indemnification may be sought under any provision of this Agreement and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnitee unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company has failed to assume the defense thereof and employ counsel within a reasonable period of time after being given the notice required above or (iii) the Indemnitee shall have been advised by its counsel that representation of such Indemnitee and other parties by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them. It is understood, however, that the Company shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys at any time for all such Indemnitees having actual or potential differing interests with the -16- Company, unless but only to the extent the Indemnitees have actual or potential differing interests with each other. (c) The Company shall not be liable for any settlement of any such action effected without its written consent, but if settled with such written consent, or if there is a final judgment against the Indemnitee in any such action, the Company agrees to indemnify and hold harmless the Indemnitee to the extent provided above from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (d) The indemnification obligations set forth in Section 8.1 and this Section 8.2 shall survive the termination of this Agreement. Article IX. CERTIFICATES; TRANSFERS Section 9.1. CERTIFICATES FOR UNITS. All Units of the Company shall be certificated Units. Each Member shall be entitled to a certificate, to be in such form as shall be prescribed by the Board of Managers, certifying the number of Units of the Company owned by such Member. The certificates for such Units shall be numbered in the order in which they shall be issued and shall be signed, in the name of the Company, by such officers as the Board of Managers may designate. Every certificate surrendered to the Company for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided for in Section 9.2. Section 9.2. LOSS OF CERTIFICATES. Any Member claiming a certificate for Units to be lost, stolen or destroyed shall make an affidavit of that fact in such form as the Board of Managers shall require and shall, if the Board of Managers so requires, give the Company a bond of indemnity in form, in an amount and with one or more sureties satisfactory to the Board of Managers, to indemnify the Company against any claim which may be made against it on account of the reissue of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of Units as the one alleged to have been lost, stolen or destroyed. -17- Section 9.3. REGISTRATION, TRANSFER AND EXCHANGE. (a) The Company shall keep at the Principal Office a register in which shall be entered the names and addresses of the Members and all Transfers of outstanding Units. (b) Subject to this Article IX, each Unit, whether originally or in substitution for, or upon transfer, exchange or other issuance of any Unit shall be registered on the effective date of the Transfer, exchange or other issuance; PROVIDED, HOWEVER, that no registration of any Transfer not made in compliance with this Article IX shall be made in the register. (c) Transfer of Units on the books of the Company may be authorized only by the Member named in the certificate, the Member's legal representative or the Member's duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such Units. The Company may treat as the absolute owner of Units of the Company the person or persons in whose name Units are registered on the books of the Company. Section 9.4. RESTRICTION ON TRANSFERS. In addition to any restrictions imposed by the federal securities laws and any applicable state securities or "blue-sky" laws, no Member may sell, assign, pledge, transfer, convey or otherwise dispose of (including through any merger, share exchange or consolidation) (collectively, "Transfer") all or any part of any Unit, whether for consideration or not, and no Transferee thereof shall have any rights in the Company or be or have any rights as a Member with respect to all or any part of any such Interest attempted to be Transferred, and any such attempted Transfer of all or any part of an Interest shall be entirely null and void, unless (i) the Members agree to continue the business of the Company pursuant to Section 13.1(d) if all of the Units of such Member are to be Transferred and (ii) Members holding at least 51% of the Units that are not being Transferred consent to the Transfer and the admission of such Transferee as a Member if such Transfer is to a Person, other than the Company, who is not then a Member. The appropriate Company records and any certificates representing the Units shall be noted to prevent any Transfers in violation of this Section 9.4. Section 9.5. TRANSFER BY LEGAL PROCESS. Upon any involuntary Transfer of all or any portion of the Units of a Member pursuant to a levy of execution, foreclosure of pledge, garnishment, attachment, divorce decree, bankruptcy or other legal process (or by operation of law resulting from the death, disability, liquidation, dissolution or winding-up of a Member), such Member shall cease to be a Member, but any successor in title to the transferred Units shall have no right to become a Member except in compliance with Section 9.4. If such successor does not become a Member, such successor shall be merely an assignee within the meaning of Section 18-702(b)(1) of the Act. -18- Section 9.6. RESIGNATION. No Member shall be entitled to resign or retire from the Company prior to the dissolution and winding up of the Company pursuant to Article XIII hereof without the unanimous consent of the other Members of the Company. Article X. BOOKS OF ACCOUNT; REPORTS AND FISCAL MATTERS Section 10.1. BOOKS; PLACE; ACCESS. The Chair, or the Treasurer if one is appointed, shall maintain books of account on behalf of the Company at the Principal Office or such other place as may be designated by the Board of Managers. All Members shall at all reasonable times have access to and the right to inspect the same. Section 10.2. FINANCIAL INFORMATION. The Chair, or the treasurer if one is appointed, shall cause to be prepared and delivered to each of the Members summary financial information with respect to each of the first three quarters of each Fiscal Year. Such quarterly financial information shall be provided to the Members not later than forty-five (45) days following the end of each quarter of the Fiscal Year. The Chair, or the treasurer if one is appointed, also shall cause to be prepared and delivered to each of the Members an annual financial report that shall describe in reasonable detail the financial and business activities of the Company and include the financial statements of the Company for the previous Fiscal Year. Such annual financial report shall be provided to the Members not later than ninety (90) days following each Fiscal Year-end and shall not be audited unless the Board of Managers otherwise decides. Section 10.3. TAX INFORMATION. Within ninety (90) days after the close of each Fiscal Year, all necessary tax information shall be transmitted to all Members. Section 10.4. TAX ELECTIONS. All elections required or permitted to be made by the Company under the Code, shall be made by the "TMP" (as such term is defined in Section 10.5) in consultation with the Company's accountants and attorneys. In the event of a transfer of all or part of the Interest of any Member, the Company may, in the sole discretion of the TMP, elect pursuant to Section 754 of the Code to adjust the basis of the Company Assets. Section 10.5. TAX MATTERS PARTNER. Great Plains Software, Inc., represented by Terri Zimmerman, shall act as the tax matters partner (the "TMP"), as such term is defined in Section 6231(a)(7) of the Code, and the TMP is hereby authorized to and shall represent the Company in connection with all examinations of the Company's affairs by tax authorities, including resulting administrative and judicial proceedings. The Members and the TMP shall use all reasonable efforts to -19- comply with the responsibilities outlined in this Section 10.5 and in Sections 6222 through 6231 of the Code (including any Treasury Regulations thereunder and any successor or amendatory provisions thereto for which a tax matters partner is designated). (a) TMP NOTICES. Each Member shall furnish the TMP with such information (including information specified in Section 6230(e) of the Code) as the TMP may reasonably request to permit the TMP to provide the Internal Revenue Service with sufficient information to allow proper notice to the Members in accordance with Section 6223 of the Code. The TMP shall keep each Member informed of those administrative and judicial proceedings for the adjustment at the Company level of Company items required by Section 6223(g) of the Code and the Treasury Regulations thereunder, and such other matters as the TMP, in its sole discretion, deems appropriate. (b) INCONSISTENT TAX TREATMENT. Each Member shall notify the TMP in the event its treatment of any Company item on its federal income tax return is inconsistent with the treatment of that item on any return filed by or in any records of the Company within thirty (30) days of the date such Member's return is filed. (c) REQUESTS FOR TAX ADJUSTMENTS. No Member shall file, pursuant to Section 6227 of the Code, a request for an administrative adjustment of limited liability company items for any Company taxable year without first notifying each other Member. If each other Member agrees with the requested adjustment, the TMP shall file the request for administrative adjustment on behalf of the Company. If unanimous consent of the Members is not obtained within thirty (30) days, or within the period required to file timely the request for administrative adjustment, if shorter, any Member, including the TMP (on behalf of the Company), may file a request for administrative adjustment on its own behalf. (d) TAX PROCEEDINGS. The TMP, in its sole discretion, shall negotiate with the Internal Revenue Service on behalf of the Company during all aspects of the tax proceeding, including without limitation the examination, appeals and litigation process. Any Member who intends to file a petition under Sections 6226, 6228, or other sections of the Code with respect to any Company item, or other tax matters involving the Company, shall give reasonable notice to each of the other Members of such intention and the nature of the contemplated proceeding. In the case where the TMP is the Member intending to file such petition, the TMP, in its sole discretion, shall choose the forum in which such petition will be filed. If any Member intends to seek review of any court decision rendered as a result of a proceeding instituted under the preceding part of this paragraph (d) of Section 10.5, such Member shall notify each of the other Members of such intended action. In accordance with its duty to act in good faith, the TMP may choose to pursue or forego settlement, litigation or any other proceedings. -20- (e) TAX SETTLEMENTS. The TMP shall have the authority to bind any Member to a settlement agreement without obtaining the written concurrence of any such Member who would be bound by such agreement. Any Member (other than the TMP) who enters into a settlement agreement with the Secretary of the Treasury with respect to any partnership items, as defined by Section 6231(a)(3) of the Code, shall notify the Members of such settlement agreement and its terms within ninety (90) days from the date of settlement. (f) TMP EXPENDITURES, FEES AND INDEMNIFICATION. Subject to Section 4.9(g), the TMP may engage such legal counsel, certified public accountants, or others (including, without limitation, experts) on behalf of the Company as it may determine to be necessary and appropriate. Any other Member may engage other legal counsel, certified public accountants, or others on such other Member's own behalf and at such other Member's sole cost and expense. Any reasonable item of expense, including but not limited to fees and expenses for legal counsel, certified public accountants, and others (including, without limitation, experts) that the TMP incurs on behalf of the Company in connection with any audit, assessment, litigation, or other proceeding regarding any partnership item, shall constitute expenses of the Company. In the event that the Company does not have adequate cash or other assets to pay such items of expense, the TMP shall not be obligated to make capital contributions or loans to fund such expenses, and the TMP shall be free to resign as the tax matters partner of the Company pursuant to Section 10.5(g) hereof. The Company shall indemnify the TMP pursuant to ArticleVIII hereof. (g) RESIGNATION OF TMP. The TMP may resign as tax matters partner at any time upon the filing of a signed statement with the Internal Revenue Service in accordance with Temp. Treas. Reg. Section 301.6231(a)(7)-1T(i) (or any successor provision thereto). The successor tax matters partner shall be determined pursuant to Temp. Treas. Reg. Sections 301.6231(a)(7)-1T (or any successor provision thereto). (h) SURVIVAL OF TMP PROVISIONS. The provisions of this Section 10.5, including without limitation the obligation to pay fees and expenses and the indemnification obligations described in Section 10.5(f) hereof, shall survive the termination of the Company or the termination of any Member's interest in the Company and shall remain binding on the Company for a period of time necessary to resolve with the Internal Revenue Service, the Department of the Treasury or any state taxing authority any and all matters regarding the federal or state income taxation of the Company for the applicable tax year(s). -21- Article XI. AMENDMENT Section 11.1. PROCEDURE APPLICABLE TO ALL AMENDMENTS. The Certificate of Formation and this Agreement may be amended by the Board of Managers at any duly called meeting. Any such amendment shall be binding on all of the Members. Each amendment to this Agreement shall be appropriately designated in a document included within the minute book of the Company indicating the change made, the date of any necessary approval and an appropriate certification by the Secretary. The Secretary shall provide notice of all such amendments to each Member. There shall be no amendment or rescission of any portion of this Agreement by implication. Any amendment may be prospective in nature. Section 11.2. VOTING REQUIREMENT. Any amendment or repeal of any portion of the Certificate of Formation or this Agreement shall require the vote of not less than a majority of the Managers in addition to any approval of Members required by Section 11.3. No amendment of Sections 8.1 or 8.2 shall be effective as to any particular Indemnitee without the consent of the Indemnitee affected thereby. Section 11.3. APPROVAL BY MEMBERS. Any amendment or repeal of the following provisions of the Certificate of Formation or this Agreement shall require the vote of not less than a Member Supermajority: (a) Certificate of Formation: Article 1 Article 4 Article 5 Article 6 -22- (b) This Agreement: Section 1.1--Name Section 1.4--Duration Section 1.5--Duties of Members Section 1.6--Duties of Managers Section 4.1--Place and Time of Meetings Section 4.7--Voting Section 4.9--Certain Actions Section 5.4--Issuance of Units Section 9.4--Restrictions on Transfer Section 13.1--Events Causing Dissolution Article XI--Amendment Article XII--Approval of Reorganizations and Bankruptcy Article XII. APPROVAL OF REORGANIZATIONS AND BANKRUPTCY Without the vote of a Member Supermajority (i) the Company shall not engage in any Reorganization or (ii) commence any proceedings or the filing of any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other federal or state bankruptcy, insolvency or similar law. Article XIII. DISSOLUTION AND LIQUIDATION Section 13.1. EVENTS CAUSING DISSOLUTION. The Company shall be dissolved only upon the occurrence of any of the following events: (a) The expiration of the term set forth in the Certificate of Formation; (b) The sale, exchange or any other disposition of all or substantially all of the Company Assets; (c) The unanimous consent of the Members; (d) The death, insanity, expulsion, bankruptcy, retirement, resignation or dissolution of a Member or the occurrence of any other event (including any Transfer, redemption or forfeiture of all of the Units of such Member) which terminates the continued membership of a Member in the Company unless the business of the Company is continued by the consent of such of the remaining Members who hold the right to vote at least 51% of the Interests held -23- by all of the remaining Members within ninety (90) days following the date the occurrence of any such event; or (e) The entry of a decree of judicial dissolution under Section 18-802 of the Act. Section 13.2. CONTINUATION OF BUSINESS. If, upon dissolution of the Company for any reason described in Section 13.1(d) hereof, the business of the Company is continued without liquidation and without the winding up of the affairs of the Company pursuant to the terms thereof, title to Company Assets shall be vested in the company continuing the business and the allocation and distribution rules set forth herein shall continue as set forth herein. Upon such dissolution, no Member, nor any legal representative of any Member, shall have the right to an account of its Interest or its Capital Account as against the Company continuing the business, and no Member, nor any legal representative of any Member, shall have the right to have the value of its Interest or Capital Account as of the date of dissolution ascertained or have any right as a creditor or otherwise with respect to the value of its Interest. Section 13.3. LIQUIDATION AND WINDING UP. If dissolution of the Company should be caused by reason of (i) any of the events set forth in paragraphs (a), (b), (c), (e) or (f) of Section13.1 hereof or (ii) any of the events set forth in paragraph (d) of Section 13.1 hereof and the business of the Company is not continued pursuant to the terms of such paragraph (d), the Company shall be liquidated and the Person designated at such time by the Board of Managers (or other Person or Persons designated by a decree of court) shall wind up the affairs of the Company. The Person or Persons winding up the affairs of the Company shall promptly proceed to the liquidation of the Company Assets and, in settling the accounts of the Company, the Company Assets shall be distributed in the following order of priority: (a) To creditors (excluding any Member and the Chair if they are creditors), to the extent otherwise permitted by law, in satisfaction of liabilities of the Company (whether by payment or the making of reasonable provision for payment thereof), other than liabilities for which reasonable provision for payment has been made and liabilities for distributions to Members under Section 5.7 hereof; (b) To the repayment of outstanding loans from a Member to the Company; (c) The balance, if any, to the Members in accordance with their positive Capital Account balances, after giving effect to all allocations of gain or loss in accordance with Article XVI hereof. -24- Section 13.4. COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS. In the event the Company is liquidated within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article XI to the Members who have positive Capital Account balances in compliance with Treas. Reg. Section 1.704-1(b)(2)(ii)(b)(2). Article XIV. REPRESENTATIONS, WARRANTIES OF THE MEMBERS Section 14.1. REPRESENTATIONS AND WARRANTIES OF THE MEMBERS. Each of the Members represents and warrants as of the date of this Agreement to each of the other Members and the Company as follows: (a) The Units being acquired by such Member are being purchased for such Member's own account and not with a view to, or for sale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Such Member understands that such Units have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration and prospectus delivery requirements thereof and that the reliance of the Company and others upon such exemptions is predicated in part by the representations and warranties of such Member contained herein. (b) Such Member has the requisite power and authority (whether corporate or otherwise) and legal capacity to enter into, and to carry out its obligations under, this Agreement. (c) The execution and delivery by such Member of this Agreement and the consummation by such Member of the transactions contemplated hereby have been duly authorized prior to the date of this Agreement by all necessary action on the part of such Member. (d) This Agreement has been duly executed and delivered by such Member and constitutes a valid and binding obligation enforceable against such Member in accordance with its terms. (e) Such Member is not subject to, or obligated under, any provision of (i) any agreement, arrangement or understanding, (ii) any license, franchise or permit or (iii) any law, regulation, order, judgment or decree that would be breached or violated, or in respect of which a right of termination or acceleration or any encumbrance on any of such Member's assets would be created, by such Member's execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, EXCEPT for such agreements as to which a Member has previously obtained the consent of the other party or parties thereto. -25- (f) No authorization, consent or approval of, waiver or exemption by, or filing or registration with, any public body, court, third party or authority is necessary on such Member's part, which has not previously been obtained by such Member for the consummation of the transactions contemplated by this Agreement. (g) No person or entity has or will have, as a result of any act or omission by such Member any right, interest or valid claim against the Company or any other Member for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. Article XV. CAPITAL Section 15.1. INITIAL CAPITAL CONTRIBUTIONS. On the date of the execution of this Agreement, the Members shall make the Capital Contributions indicated opposite their respective names on Schedule A. In exchange for such Capital Contributions, the Members shall receive the Units set forth opposite their respective names on Schedule A. Section 15.2. NO RIGHT TO RETURN OF CONTRIBUTION. No Member shall have the right to the withdrawal or to the return of his, her or its Capital Contribution, except upon the dissolution and liquidation of the Company pursuant to Article XI. Section 15.3. ADDITIONAL CAPITAL CONTRIBUTIONS. In the event that the Members who hold the power to vote a majority of the Units at any time or from time to time determine that contributions to the capital of the Company are necessary to the conduct of the Company's activities, each of the Members shall promptly make a cash contribution to the capital of the Company equal to his share (determined in proportion to the number of Units held by each Member) of such additional funds. As additional funds are needed for the conduct of the Company's business, if one Member is unable to or otherwise does not contribute his share of such funds to the Company, the funds advanced by the other Members shall be regarded as a loan in accordance with Section15.4. Section 15.4. LOANS TO THE COMPANY; NO INTEREST ON CAPITAL. The Members may, but are not obligated to, make loans to the Company from time to time, as authorized by the Board of Managers. Any such loans shall not be treated as Capital Contributions to the Company for any purpose hereunder nor entitle such Member to any increase in its share of the profits and losses and cash distributions of the Company, but the Company shall be obligated to such Member for the amount of any such loans pursuant to the terms thereof, as the same are determined by the Board of Managers and such Member. Interest with respect to the outstanding -26- amount of any loans made by a Member to the Company shall accrue and be payable at such times and at such rate as shall be determined by the Board of Managers and such Member. All scheduled principal and interest payments with respect to any loans from a Member to the Company pursuant to this Section 15.9 shall be repaid prior to any distributions to any Members pursuant to Section 16.7. No interest shall be paid on any Capital Contribution to the Company or on any balance in any Capital Account. Section 15.5. CREDITOR'S INTEREST IN THE COMPANY. No creditor who makes a loan to the Company shall have or acquire at any time as a result of making the loan any direct or indirect interest in the profits, capital or property of the Company, other than such interest as may be accorded to a secured creditor. Notwithstanding the foregoing, this provision shall not prohibit in any manner whatsoever a secured creditor from participating in the profits of operation or gross or net sales of the Company or in the gain on sale or refinancing of the Company, all as may be provided in its loan or security agreements. Section 15.6. LIABILITY OF MEMBERS. Except as otherwise provided in the Act, no Member, as such, shall have any personal liability whatsoever to the Company, any of the other Members or any of the creditors of the Company for the debts, liabilities, contracts or other obligations of the Company or any of the Company's losses beyond, with respect to a Member, such Member's Capital Contribution and, solely to the extent and for the period required by applicable law, the amount of such Member's Capital Contribution which is returned to it. Each Unit, on issuance, shall be fully paid and, except as set forth in Section 15.2, not subject to assessment for additional Capital Contributions. No Member shall be required to lend any funds to the Company as a condition to admission or continued membership of such Member in the Company. It is the intent of the Members that (i) no distribution to any Member (other than a distribution upon the dissolution and liquidation of the Company) shall be deemed a withdrawal of capital, even if such distribution represents, for Federal income tax purposes or otherwise (in full or in part), a distribution of depreciation or any other non-cash item accounted for as a loss or deduction from or offset to the Company's income, and (ii) no Member shall be obligated to pay any such amount to or for the account of the Company or any creditor of the Company. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any distribution made by the Company to a Member constitutes a withdrawal of capital, any obligation under applicable law to return the same or any portion thereof to or for the account of the Company or its creditors shall be the obligation of such Member. Section 15.7. CAPITAL ACCOUNTS. A separate Capital Account shall be maintained for each Member. It is intended that the Capital Accounts of the Members will be maintained in accordance with the capital accounting rules of -27- Treas. Reg. Section 1.704-1(b)(2)(iv) and the provisions of this Agreement relating to the maintenance of Capital Accounts shall be interpreted and applied in a manner consistent therewith. In the event the Board of Managers shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with such Treasury Regulation, the Board of Managers may make such modification, provided that any such modifications shall not materially alter the economic agreement of the Members. In general, the Capital Account of a Member shall be initially credited with the value of its Capital Contribution to the Company in respect of its Units. The Capital Account of a Member shall further be credited by the value of any additional Capital Contributions to the Company made by such Member from time to time in respect of its Interest, shall be debited by the amount of any cash distributions made by the Company to such Member on account of any such Interest and shall be credited with the amount of income and gains and debited with the amount of losses of the Company allocated to such Member in accordance with the terms of Article V hereof. In all instances, the capital accounting rules in Treas. Reg. Section 1.704-1(b)(2)(iv) will determine the proper debits or credits to the Capital Accounts of the Members. The Board of Managers may, at its option, increase or decrease the Capital Accounts of the Members to reflect a revaluation of Company Assets on the Company's books at the times when, pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv), such adjustments may occur. The adjustments will, if made, be made in accordance with such Treasury Regulation, including allocating taxable items, as computed for book purposes, to the Capital Accounts as prescribed in such Treasury Regulation. In the case of the transfer of all or a part of the Interest of a Member, the Capital Account of the transferor Member attributable to the transferred Interest will carry over to the transferee Member. In the case of termination of the Company pursuant to Section 708 of the Code, the rules of Treas. Reg. Section 1.704-1(b)(2)(iv) shall govern adjustments to the Capital Accounts. If there are any adjustments to Company Assets as a result of Sections 732, 734 or 743 of the Code, the Capital Accounts of the Members shall be adjusted as provided in Treas. Reg. Section 1.704-1(b)(2)(iv)(m). Article XVI. ALLOCATION OF INCOME, GAINS AND LOSSES; DISTRIBUTIONS TO MEMBERS The Members agree that the income, profits, gains, losses and tax credits of the Company shall be allocated, and cash distributions of the Company shall be made, as follows: Section 16.1. ALLOCATION OF INCOME, PROFITS, GAINS, LOSSES AND CREDITS. After giving effect to the special allocations set forth in Section 16.4 hereof, and subject to Section 16.3 hereof, all income, profits, gains, losses and tax credits of the -28- Company shall be allocated to each of the Members holding Units in proportion to their respective Units in the Company. Section 16.2. OTHER ALLOCATION RULES. In the event of any changes in Units during a Fiscal Year, all income, profits, gains, losses and tax credits from operations of the Company during such Fiscal Year, using such methods of accounting for depreciation and other items as the Board of Managers determines to use for federal income tax purposes, shall be allocated to each Member holding an Interest based on its varying interest in the Company during such operating year in accordance with Section 706 of the Code. The Board of Managers shall determine in accordance with Section 706 of the Code whether to prorate items of income and deduction according to the portion of the Fiscal Year for which a Member held an Interest or whether to close the books on an interim basis and divide such operating year into two or more segments. Section 16.3. LIMITATION ON LOSS ALLOCATION. Notwithstanding anything in Section 16.1 hereof, no allocation of loss may be made to a Member if such loss would cause a Member to have a negative balance in its Capital Account, after such Capital Account is credited by any amounts which the Member is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentences of Treas. Reg. Section 1.704-2(g)(1) and Treas. Reg. Section 1.704-2(i)(5) and debited by the items described in Treas. Reg. Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing limitation is intended to comply with the provisions of Treas. Reg. Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. In addition, the Members with deficit Capital Account balances resulting in whole or in part from allocations of loss or deduction attributable to nonrecourse indebtedness shall be allocated income or gain in an amount no less than the "minimum gain" and at a time no later than the time at which the "minimum gain" is reduced below the sum of such deficit Capital Account balances or as soon thereafter as possible. Section 16.4. SPECIAL ALLOCATIONS. The following special allocations shall be made in the following order: (a) MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, notwithstanding any other provision of this Article V, if there is a net decrease in Company minimum gain during any Fiscal Year, each Capital Account shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent years) in an amount equal to the associated Member's share of the net decrease in Company minimum gain (within the meaning of Treasury Regulations Sections 1.704-2(b)(2) and 1.704-2(d)) determined in accordance with Treasury Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to the Capital Account of each -29- Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 16.4(a) is intended to comply with the minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (b) MEMBER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4), notwithstanding any other provision of this Article XVI, if there is a net decrease in Member nonrecourse debt minimum gain, as defined in Treasury Regulations Section 1.704-2(i)(2) and determined pursuant to Treasury Regulations Section 1.704-2(i)(3), attributable to a Member nonrecourse debt, as defined in Treasury Regulations Section 1.704-2(b)(4), during any Fiscal Year, the Capital Account of each Member who has a share of the Member nonrecourse debt minimum gain attributable to such Member nonrecourse debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such Fiscal Year (and if necessary, subsequent Fiscal Years) in an amount equal to such Member's share of the net decrease in Member nonrecourse debt minimum gain attributable to such Member nonrecourse debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to the Capital Account of each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations 1.704-2(i)(4) and 1.704-2(j)(2). This Section 16.4(b) is intended to comply with the minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. (c) QUALIFIED INCOME OFFSET. If a Member unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), and such unexpected adjustment, allocation or distribution puts such Member's Capital Account into a deficit balance or increases such deficit balance determined after such account is credited by any amounts which the Member is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and debited by the items described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) and for all other allocations tentatively made pursuant to this Article V as if this Section 16.4(c) were not in this Agreement, the Capital Account of such Member shall be allocated items of Company income and gain in an amount and manner sufficient to eliminate such deficit or increase as quickly as possible. It is intended that this Section 16.4(c) shall meet the requirement that this Agreement contain a "qualified income offset" as defined in Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and this Section shall be interpreted and applied consistently therewith. -30- (d) NONRECOURSE DEDUCTIONS. Nonrecourse deductions, within the meaning of Treasury Regulations Section 1.704-2(b)(1), for any Fiscal Year or other period shall be specially allocated among the Capital Accounts of the Members in proportion to their respective Units. (e) MEMBER NONRECOURSE DEDUCTIONS. Any Member nonrecourse deductions, within the meaning of Treasury Regulations Sections 1.704-2(i)(1) and 1.704-2(i)(2), for any Fiscal Year or other period shall be specially allocated to the Capital Account of the Member who bears the economic risk of loss with respect to the Member nonrecourse debt to which such Member nonrecourse deductions are attributable in accordance with Treasury Regulations Section 1.704-2(i). (f) SECTION 754 ADJUSTMENT. To the extent an adjustment to the adjusted tax basis of any Company Asset pursuant to Code Sections 732, 734(b) or 743(b) is required, pursuant to Treasury Regulations Sections 1.704-1(b)(2)(iv)(m)(2) or (4), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the Company Asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Sections of the Treasury Regulations. Section 16.5. CURATIVE ALLOCATIONS. The allocations set forth in Sections 16.4(a), (b), (c), (d), (e) and (f) hereof (the "Regulatory Allocations") are intended to comply with certain requirements of the Treasury Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss, or deduction pursuant to this Section 16.5. Therefore, notwithstanding any other provision of this Article V (other than the Regulatory Allocations), the Board of Managers shall make such offsetting special allocations of Company income, gain loss, or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Sections 16.1 and 16.2 hereof. In exercising its discretion under this Section 16.5, the Board of Managers shall take into account future Regulatory Allocations under Sections 16.4(a) and (b) hereof that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 16.4(e) and (f) hereof. Section 16.6. TAX ALLOCATIONS: SECTION 704(c) OF THE CODE. In accordance with Section 704(c) of the Code, income, gain, loss and deduction with respect to any property contributed to the Company shall, solely for tax purposes, be allocated among the Capital Accounts of the Members so as to take account of any -31- variation between the adjusted basis of such property to the Company for income tax purposes and its book value, in the same manner as such variations are treated under Section 704(c) of the Code. Any elections or other decisions related to such allocations shall be made by the Board of Managers in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 16.6 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of income, gain, loss or deduction pursuant to any provision of this Agreement. Section 16.7. DISTRIBUTIONS TO MEMBERS. Subject to any restrictions imposed by the Act (including but not limited to Section 18-607(a) thereof), any distributions by the Company shall be made to the Members as of a record date determined by the Board of Managers (which date shall not be less than ten (10) nor more than forty-five (45) days before the date of the distribution) in accordance with their respective Units, but no less frequently than once per year. Article XVII. MISCELLANEOUS PROVISIONS Section 17.1. ADDITIONAL ACTIONS AND DOCUMENTS. Each of the Members hereby agrees to take or cause to be taken such further actions, to execute, acknowledge, deliver and file, or cause to be executed, acknowledged, delivered and filed such further documents and instruments, and to use all reasonable efforts to obtain such consents, as may be necessary or as may be reasonably requested in order to fully effectuate the purposes, terms and conditions of this Agreement. Section 17.2. ARBITRATION. All disputes hereunder shall be submitted to arbitration in Minneapolis, Minnesota in accordance with the rules of the American Arbitration Association then in existence. The decision of such arbitration panel shall be final and binding on the parties thereto and may be enforced in any court of competent jurisdiction. Section 17.3. NOTICE. Any notice, demand, consent, authorization or other communication which any Member is required or may desire to give to or make upon the other Members pursuant to this Agreement shall be in writing and shall be effective, valid and duly given if mailed by regular mail, postage prepaid, personally delivered or sent by facsimile, receipt acknowledged; if to the Company, to the principal office of the Company set forth in Section 1.2 hereof or to such other address as the Company shall notify the Members in writing; and if to the Members, to their respective addresses set forth in ScheduleA hereof or in the register maintained by the Company, or to such other address as any such Member may hereafter designate by notice in writing to the Chair and Company. Each notice, demand, request or communication which shall be delivered, mailed or transmitted -32- in the manner described above shall be deemed sufficiently given, served, sent or received for all purposes at such time as it is delivered to the addressee or at such time as delivery is refused by the addressee upon presentation. Section 17.4. SEVERABILITY. The invalidity of any one or more provisions hereof or of any other agreement or instrument given pursuant to or in connection with this Agreement shall not affect the remaining portions of this Agreement or any such other agreement or instrument or any part thereof; and in the event that one or more of the provisions contained herein or therein should be invalid, or should operate to render this Agreement or any such other agreement or instrument invalid, this Agreement and such other agreements and instruments shall be construed as if such invalid provisions had not been inserted. Section 17.5. SURVIVAL. It is the express intention and agreement of the Members that all covenants, agreements, statements, representations, warranties and indemnities made in this Agreement shall survive the execution and delivery of this Agreement. Section 17.6. WAIVERS. Neither the waiver by a Member of a breach of or a default under any of the provisions of this Agreement, nor the failure of a Member, on one or more occasions, to enforce any of the provisions of this Agreement or to exercise any right, remedy or privilege hereunder shall thereafter be construed as a waiver of any such provisions, rights, remedies or privileges hereunder. Section 17.7. EXERCISE OF RIGHTS. No failure or delay on the part of a Member or the Company in exercising any right, power or privilege hereunder and no course of dealing between the Members or between a Member and the Company shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any other rights or remedies which a Member or the Company would otherwise have at law or in equity or otherwise. Section 17.8. BINDING EFFECT. Subject to any provisions hereof restricting assignment, this Agreement shall be binding upon and shall inure to the benefit of the Members and their respective successors and permitted assigns. Section 17.9. LIMITATION ON BENEFITS OF THIS AGREEMENT. It is the explicit intention of the Members that no person or entity other than the Members and the Company is or shall be entitled to bring any action to enforce any provision of this Agreement against any Member or the Company, and that the covenants, undertakings and agreements set forth in this Agreement shall be solely for the -33- benefit of, and shall be enforceable only by, the Members (or their respective heirs, legal representatives, successors and assigns as permitted hereunder) and the Company; PROVIDED, HOWEVER, that the Indemnitees shall, as intended third-party beneficiaries thereof, be entitled to the enforcement of Sections 8.1 and 8.2 hereof, but only as insofar as the obligations sought to be enforced thereunder are those of the Company. Section 17.10. WAIVER OF PARTITION. The Members agree that the Company Assets are not and will not be suitable for partition. The Members hereby waive any right of partition or any right to take any action that otherwise might be available to them for the purpose of severing their relationship with the Company or interest in assets held by the Company from the interest of the other Members. Section 17.11. ENTIRE AGREEMENT. This Agreement contains the entire agreement among the Members with respect to the matters contained herein, and supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein. Section 17.12. PRONOUNS. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or entity may require. Section 17.13. HEADINGS. Article and Section headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof. Section 17.14. GOVERNING LAW. This Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the laws of the State of Delaware (but not including the choice of law rules thereof). Section 17.15. EXECUTION IN COUNTERPARTS. To facilitate execution, this Agreement may be executed in as many counterparts as may be required; and it shall not be necessary that the signatures of, or on behalf of, each party, or that the signatures of all Persons required to bind any party, appear on each counterpart; but it shall be sufficient that the signature of, or on behalf of, each party, or that the signatures of the Persons required to bind any party, appear on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in making proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of, or on behalf of, all of the parties hereto. -34- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. GREAT PLAINS SOFTWARE, INC. By /s/ Michael A. Slette --------------------------------------- Its V.P. Human Resources & Legal Affairs ------------------------------------ /s/ Douglas Burgum ------------------------------------------ Douglas Burgum -35- SCHEDULE A Name and Address of Capital Agreed Fair Member Contribution Market Value Units ------ ------------ ------------ ------- Great Plains Software, Inc. Cash $50,000 99 Douglas Burgum Cash $ 500 1 S-1 EX-23.1 17 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated July 19, 1996 relating to the financial statements of Great Plains Software, Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the two years ended May 31, 1996 listed under Item 16(b) of this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included this schedule. We also consent to the reference to us under the heading "Experts" in such prospectus. PRICE WATERHOUSE LLP Minneapolis, Minnesota March 4, 1997 EX-23.2 18 CONSENT OF ERNST & YOUNG EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated July 22, 1994, in the Registration Statement (Form S-1, No. 333- ) and related Prospectus of Great Plains Software, Inc. for the registration of 3,450,000 shares of its common stock. ERNST & YOUNG LLP Minneapolis, Minnesota March 4, 1997 EX-24.1 19 POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Douglas J. Burgum, Terri F. Zimmerman and Michael A. Slette, with full power to each to act without the other, his true and lawful attorney-in-fact and agent with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the Registration Statement on Form S-1 of Great Plains Software, Inc. (the "Company") relating to the sale of shares of the Company's Common Stock that may be sold by the Company in an underwritten initial public offering and any or all amendments or post-effective amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to file the same with such state commissions and other agencies as necessary, granting unto each such attorney- in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed on this ____ day of February 1997, by the following persons: /s/ Douglas J. Burgum ------------------------ Douglas J. Burgum /s/ Bradley J. Burgum ------------------------ Bradley J. Burgum /s/ Frederick W. Burgum ------------------------ Frederick W. Burgum /s/ Raymond F. Good ------------------------ Raymond F. Good /s/ Sanjeev Mehra ------------------------ Sanjeev Mehra /s/ Joseph Tibbets, Jr. ------------------------ Joseph Tibbets, Jr. /s/ Terri F. Zimmerman ------------------------ Terri F. Zimmerman /s/ J. A. Heidi Roizen ------------------------ J. A. Heidi Roizen EX-27. 20 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GREAT PLAINS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS YEAR MAY-31-1996 MAY-31-1996 JUN-01-1996 JUN-01-1995 NOV-30-1996 MAY-31-1996 8,648,022 8,256,393 0 0 4,864,611 4,798,977 506,971 855,907 316,207 454,595 18,026,634 18,663,131 15,000,645 13,653,922 9,373,645 8,510,847 24,150,258 24,361,257 15,819,171 17,651,501 0 0 11,501,631 11,501,631 198,800 198,800 73,535 73,597 (3,912,879) (5,083,942) 24,150,258 24,361,257 24,754,010 42,271,355 24,754,010 42,271,355 6,368,806 10,893,289 6,368,806 10,893,289 16,636,137 28,116,462 (69,055) 430,830 32,346 197,203 1,951,479 3,361,663 750,000 (4,099,000) 1,201,479 7,460,663 0 0 0 0 0 0 1,201,479 7,460,663 0.12 0.77 0.12 0.77 Earnings per share represents unaudited pro forma net income per share calculated using a weighted average number of shares of common stock and common equivalant shares outstanding assuming the converson of preferred stock into 1,847,627 shares of common stock effective June 1, 1995.
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