<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________ to __________
Commission file number: 0-21992
_________________________
FOURTH SHIFT CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1437794
(state or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
_________________________
7900 INTERNATIONAL DRIVE
SUITE 450
MINNEAPOLIS, MN 55425
(612) 851-1500
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
The number of shares outstanding of the Registrant's Common Stock on
November 6, 1996 was 9,605,009 shares.
<PAGE>
FOURTH SHIFT CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets at 2
September 30, 1996 and December 31, 1995
Consolidated Statements of Operations 3
for the three and nine months ended September
30, 1996 and 1995
Consolidated Statements of Cash Flows 4
for the nine months ended September 30, 1996
and 1995
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------- --------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents.................... $ 5,661 $ 7,058
Accounts receivable, net..................... 11,272 10,129
Inventories.................................. 701 778
Prepaid expenses............................. 1,087 864
Current portion of note receivable........... 796 566
--------- --------
Total current assets......................... 19,517 19,395
FURNITURE, FIXTURES AND EQUIPMENT, net........... 5,075 2,997
NOTE RECEIVABLE.................................. 1,331 1,934
SOFTWARE DEVELOPMENT COSTS, net 595 -
GOODWILL, net.................................... 105 168
--------- --------
TOTAL ASSETS $ 26,623 $ 24,494
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease
obligations and equipment loan.............. $ 564 $ 441
Current portion of deferred gain on sale of
subsidiary.................................. 814 566
Accounts payable............................. 2,706 2,125
Accrued expenses............................. 4,334 6,180
Deferred revenue............................. 8,586 8,273
--------- --------
Total current liabilities.................... 17,004 17,585
CAPITAL LEASE OBLIGATIONS AND EQUIPMENT
LOAN............................................. 1,831 275
DEFERRED GAIN ON SALE OF
SUBSIDIARY....................................... 1,120 1,934
--------- --------
SHAREHOLDERS' EQUITY:
Common
stock............................................ 96 94
Additional paid-in capital................... 29,862 29,222
Accumulated deficit.......................... (23,290) (24,616)
--------- --------
Total shareholders' equity................... 6,668 4,700
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 26,623 $ 24,494
--------- --------
--------- --------
The accompanying notes are an integral part of these
consolidated balance sheets.
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<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
1996 1995 1996 1995
------- -------- ------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Software license. ........................ $ 5,277 $ 4,112 $ 15,679 $ 12,200
Service................................... 6,139 4,454 17,304 13,128
Third-party software and other............ 475 415 1,903 1,124
-------- ------- -------- --------
Total revenue........................... 11,891 8,981 34,886 26,452
-------- ------- -------- --------
OPERATING EXPENSES:
Cost of licenses.......................... 744 513 2,137 1,663
Cost of services.......................... 2,873 2,185 8,022 6,007
Cost of third-party software and other.... 426 279 1,471 736
Selling, general and administrative....... 5,641 4,537 15,987 13,680
Product development....................... 2,020 1,282 6,277 4,063
Restructuring charge...................... - - - 149
-------- ------- -------- --------
Total operating expenses................ 11,704 8,796 33,894 26,298
-------- ------- -------- --------
Operating profit ........................... 187 185 992 154
Other income (expense), net................. 2 (67) 41 (114)
-------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES.......... 189 118 1,033 40
Provision for income taxes.............. 27 54 178 183
-------- ------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS.... 162 64 855 (143)
DISCONTINUED OPERATIONS:
Loss from discontinued operations......... - (9) - (7,807)
Net gain on sale of discontinued
operations............................... 193 - 565 -
-------- ------- -------- --------
Total discontinued operations........... 193 (9) 565 (7,807)
-------- ------- -------- --------
NET INCOME (LOSS)........................... $ 355 $ 55 $ 1,420 $(7,950)
-------- ------- -------- --------
-------- ------- -------- --------
EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations..................... $ 0.02 $ 0.01 $ 0.09 $ (0.02)
Discontinued operations................... 0.02 (0.00) 0.05 (0.83)
-------- ------- -------- --------
Net income (loss)......................... $ 0.04 $ 0.01 $ 0.14 $ (0.85)
-------- ------- -------- --------
-------- ------- -------- --------
SHARES USED IN PER COMMON SHARE COMPUTATION. 9,969 9,560 9,852 9,350
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
1996 1995
-------- ----------
(Unaudited)
OPERATING ACTIVITIES:
Net income (loss) $ 1,420 $ (7,950)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Loss from discontinued operations - 7,807
Depreciation and amortization 1,301 947
Restructuring charge - 149
Gain on sale of discontinued operations (565) -
Other (43) (4)
Change in current operating items:
Accounts receivable, net (1,143) 559
Inventories 77 428
Prepaid expenses (223) (343)
Accounts payable 581 (2,720)
Accrued expenses (1,426) 456
Deferred revenue 313 2,051
-------- ----------
Net cash provided by operating activities 292 1,380
-------- ----------
INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (2,798) (1,214)
Proceeds from sale of discontinued operations 372 -
Capitalized software development costs (595) -
-------- ----------
Net cash used in investing activities (3,021) (1,214)
-------- ----------
FINANCING ACTIVITIES:
Payments of long-term obligations (400) (342)
Borrowings on equipment facility and capital leases 1,561 477
Borrowings on line of credit 850 2,200
Repayments of line of credit borrowings (850) (2,200)
Proceeds on issuance of common stock 171 56
-------- ----------
Net cash provided by financing activities 1,332 191
-------- ----------
CASH USED IN DISCONTINUED OPERATIONS - (3,384)
-------- ----------
Net change in cash and cash equivalents (1,397) (3,027)
CASH AND CASH EQUIVALENTS:
Beginning of period 7,058 6,771
-------- ----------
End of period $ 5,661 $ 3,744
-------- ----------
-------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during each period for-
Income taxes $ 57 $ 34
Interest 159 95
-------- ----------
-------- ----------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases $ 518 $ 87
-------- ----------
-------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
<PAGE>
FOURTH SHIFT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. The accompanying interim consolidated financial statements have been
prepared by Fourth Shift Corporation (the "Company"), without audit, in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission.
The unaudited consolidated financial statements as of September 30, 1996 and
1995 and for the three month and nine month periods then ended include, in
the opinion of management, all adjustments, consisting solely of normal
recurring adjustments, necessary for a fair presentation of the financial
results for the respective interim periods. The results of operations for
the three and nine month periods ended September 30, 1996 are not necessarily
indicative of results of operations to be expected for the entire fiscal year
ending December 31, 1996. The accompanying interim consolidated financial
statements have been prepared under the presumption that users of the interim
consolidated financial information have either read or have access to the
audited consolidated financial statements for the year ended December 31,
1995. Accordingly, certain footnote disclosures which would substantially
duplicate the disclosures contained in the December 31, 1995 audited
consolidated financial statements have been omitted from these interim
consolidated financial statements. It is suggested that these interim
consolidated financial statements be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 1995 and
the notes thereto.
2. In April 1996, the Company entered into a $1,500,000 long-term equipment
facility with a bank to finance the purchase of capital equipment. The
facility bears interest at 9.25% and is payable monthly. Principal payments
are payable in thirty-six equal monthly installments starting in May 1997
through April 2000. In September 1996, the Company entered into an
additional $600,000 long-term equipment facility to finance the purchase of
capital equipment in connection with international expansion. The facility
bears interest at 9.5% which is payable monthly. Principal payments are
payable in thirty-six equal monthly installments starting in October 1997
through September 2000. These facilities contain restrictive covenants which
include the maintenance of minimum tangible net worth and profitability
levels as well as certain financial ratios. Total borrowings on equipment
facilities as of September 30, 1996 are $1,561,000.
In addition, in November 1996, the Company renewed and increased its line of
credit agreement from $3,000,000 to $5,000,000, through November 1997.
Borrowings are collateralized by the Company's accounts receivable and all
other assets of the Company and bear interest at prime plus 1.25%. There
were no borrowings outstanding on this line at September 30, 1996.
3. In the quarter ended September 30, 1996, the Company recognized a gain
of $193,000 related to the receipt of a principal payment in October 1996 on
the note receivable from the sale of its former subsidiary, Just In Time
Enterprise Systems, Inc. For the nine month period ended September 30, 1996,
the Company recognized a gain of $565,000 in connection with this sale.
-5-
<PAGE>
4. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," certain software development costs are capitalized upon
the establishment of technological feasibility. Costs incurred prior to the
establishment of technological feasibility and development costs incurred to
improve and enhance existing software are charged to expense as incurred. In
the quarter ended September 30, 1996, the Company capitalized $595,000 of
development costs related to the development of its next generation product,
Fourth Shift OBJECTS Enterprise Software -TM- . These capitalized costs will
be amortized to expense over the product's estimated economic life, not to
exceed five years, beginning at the time the product is available for general
release in 1997.
5. Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement No. 123"), issued in October 1995 and
effective for fiscal years beginning after December 15, 1995, encourages, but
does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board
opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"),
but requires pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting had been applied. The Company has
elected to continue to measure compensation cost under APB No. 25 and comply
with the pro forma disclosure requirements. This election will have no
impact on the Company's results of operations or financial position.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations has been prepared under the presumption that users of
the interim consolidated financial statements have either read or have access
to the Company's annual report for the year ended December 31, 1995.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The following
Management's Discussion and Analysis contains various "forward looking
statements" within the meaning of federal securities laws which represent
management's expectations or beliefs concerning future events, including
statements regarding anticipated sales, marketing and research and
development expenditures, growth in revenue, capital requirements and the
sufficiency of cash to meet operating expenses. These, and other forward
looking statements made by the Company, must be evaluated in the context of a
number of factors that may affect the Company's financial condition and
results of operations, including the following:
-- the ability of the Company to timely complete the anticipated
development milestones for its new Fourth Shift OBJECTS Enterprise
Software -TM- product line and the degree of market acceptance of the
product once developed;
-- fluctuations in quarterly operating results caused by changes in the
computer industry, buying patterns and general economic conditions;
-- the dependence of the Company on revenue from sales of its
Manufacturing Software System (MSS) product;
-- the effects of changes in technology and standards in the computer
industry;
-- the significant competition among developers and marketers of
industrial software;
-- the increasing size of the Company's international operations,
particularly in Asia;
-- the ability of the Company to manage expansion of international
distribution channels;
-- the dependence of the MSS product line on a third-party database
management system; and
-- evolving standards regarding intellectual property protection for
software products in general.
RESULTS OF OPERATIONS
NET INCOME (LOSS). The Company recorded net income of $355,000 or $.04
per share for the quarter ended September 30, 1996, compared to net income of
$55,000 or $.01 per share for the quarter ended September 30, 1995. For the
nine month period ended September 30, 1996, the Company recorded net income
of $1,420,000 or $.14 per share as compared to a net loss of $7,950,000 or
$.85 per share in the year-ago period. The net income reported in the three
and nine month periods of 1996 was attributable to increased revenues,
especially in the European and Asian geographical regions, and the continued
profitability of the Manufacturing Software
-7-
<PAGE>
System (MSS) product line. In addition, the Company recorded a $193,000 gain
on the sale of discontinued operations in the third quarter of 1996. The net
loss for the nine month period ended September 30, 1995 resulted primarily
from operating losses incurred by the Company's former subsidiary, Just In
Time Enterprise Systems, Inc., which was sold in December 1995.
TOTAL REVENUE increased 32% to $11,891,000 during the three months
ended September 30, 1996 from $8,981,000 during the comparable period in
1995. For the nine months ended September 30, 1996, total revenue increased
32% to $34,886,000 from $26,452,000 compared to the comparable period in
1995, as outlined below.
SOFTWARE LICENSE REVENUE are fees paid by customers for the right to
use the Company's software systems. Software license revenue increased
$1,165,000 or 28% to $5,277,000 during the third quarter of 1996 from
$4,112,000 during the same period in 1995 and increased $3,479,000 or 29% to
$15,679,000 for the nine month period ended September 30, 1996 from
$12,200,000 during the same period in 1995. The increase is primarily
attributable to continued growth and penetration of the Company's products in
foreign markets, particularly the Pacific Rim and Europe, increases in the
Company's direct sales force and increases relating to the second quarter
introduction of Windows NT product offerings.
SERVICE REVENUE includes customer support fees, training, consulting,
installation and project management. Service revenue increased 38% to
$6,139,000 during the third quarter of 1996 from $4,454,000 during the same
period in 1995 and increased 32% to $17,304,000 for the nine month period
ended September 30, 1996 from $13,128,000 during the same period in 1995.
Increased service revenue is a direct result of the expansion of the current
customer base, additional subscribers to the Company's customer support
program and ongoing efforts by the Company's professional services
organization to standardize and promote its consulting and training
offerings, especially in Asia. In addition, service revenue increased over
the prior year due to increases relating to the Company's technical
consulting service program and the addition of new professional service
product offerings.
THIRD-PARTY SOFTWARE AND OTHER REVENUE is derived principally from the
resale of third-party software licenses (companion products) along with
limited hardware sales. These companion products have been integrated to
function with the MSS software and extend the functionality of MSS.
Third-party software and other revenue increased 14% to $475,000 during the
third quarter of 1996 from $415,000 during the same period in 1995 and
increased 69% to $1,903,000 for the nine month period ended September 30,
1996 from $1,124,000 during the same period in 1995. The increase is
directly related to increases in MSS license revenue since software licenses
of third-party vendors are often licensed in conjunction with the licensing
of the MSS product. In addition, increases in the variety of companion
products made available to customers as well as additional acceptance of
companion products by the existing installed base contributed to the revenue
increase in 1996.
COST OF LICENSES increased to $744,000 in the third quarter of 1996
from $513,000 in the same period of 1995. As a percentage of total software
license revenue, cost of licenses was 14% for the third quarter of 1996 and
12% for the third quarter of 1995. The increase in cost of licenses as a
percentage of license revenue is primarily due to increases in royalty costs
paid to third-party software suppliers whose products are embedded in and
distributed with the MSS product. As a percentage of license revenue, cost
of licenses was 14% for both the September 30, 1996 and 1995 nine month
periods.
-8-
<PAGE>
COST OF SERVICES increased to $2,873,000 in the third quarter of 1996
from $2,185,000 in the same period of 1995. As a percentage of service
revenue, cost of services was 47% for the third quarter of 1996 and 49% for
the third quarter of 1995. The decrease in cost of services as a percentage
of service revenue primarily relates to the sale of higher margin consulting
products which were first introduced in 1996, increases in the delivery of
lower cost, on-site training and increases in service productivity. This was
offset by increases in costs of services associated with the growth of the
Asia market. As a percentage of service revenue, cost of services was 46% for
the nine month periods ended September 30, 1996 and 1995.
COST OF THIRD-PARTY SOFTWARE AND OTHER increased to $426,000 or 90% of
third-party software and other revenue in the third quarter of 1996 from
$279,000 or 67% of third-party software and other revenue in the same period
of 1995. The cost of third-party software and other as a percentage of
third-party software and other revenue for the nine month period ended
September 30, 1996 was 77% compared to 65% for the same period in 1995. The
increase in cost of third-party software as a percentage of third-party
software revenue is due to changes in the mix of software and hardware
products sold in the third quarter, combined with increased fixed personnel
costs and the inclusion of certain costs associated with the writing,
supporting and maintenance of the interface between certain companion
products and the MSS product.
SELLING, GENERAL AND ADMINISTRATIVE expense increased to $5,641,000 or
47% of total revenue for the three month period ended September 30, 1996 from
$4,537,000 or 51% of total revenue for the three month period ended September
30, 1995. Selling, general and administrative expense for the nine months
ended September 30, 1996 was $15,987,000 or 46% of total revenue compared to
$13,680,000 or 52% of total revenue for the same period in 1995. The dollar
increase in the amount from 1995 to 1996 relates to the addition of selling
personnel and commissions earned in connection with the Company's efforts to
expand its market penetration in North America and international markets,
particularly Asia. The decrease as a percentage of total revenue in the
third quarter is the direct result of increases in sales force productivity.
The Company has also experienced an overall decrease in general and
administrative costs in North America as a result of the concerted efforts
made by management to control and reduce such costs. These decreases were
partially offset by increased administrative costs associated with the
continued expansion in the Asia and European markets. The Company intends to
continue to increase its selling and marketing expenditures to generate
current and future growth in software license and service revenues.
PRODUCT DEVELOPMENT expense for the three months ended September 30,
1996 increased to $2,020,000 from $1,282,000 for the three months ended
September 30, 1995. As a percentage of total revenue, product development
increased to 17% of total revenue compared to 14% in the same period of 1995.
Product development expense for the nine month period ended September 30,
1996 was $6,277,000 or 18% of total revenue compared to $4,063,000 or 15% of
total revenue for the same period in 1995. The overall increase in 1996 is a
direct result of increased headcount and support resources associated with
the development of the Company's object-oriented, communications-centric
product, Fourth Shift OBJECTS Enterprise Software -TM- ("OBJECTS"), which is
being designed using object-oriented technology. The first release of
OBJECTS was shipped to beta sites for testing in the third quarter of 1996.
During 1996, the Company also completed several significant user enhancements
associated with MSS product Release 5.2, including an additional language,
additional functionality for average actual costing, development of enhanced
graphical user interface features and functionality, Windows NT support for
TCP/IP communication protocol, and a new on-line documentation system
delivered on CD-ROM. The Company's product development activities are
conducted internally and consist primarily of software development -- the
design, implementation and quality assurance of application code. The
Company believes that product development is critical to the continuing
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<PAGE>
success of the Company's products and intends to continue to invest heavily
in research and development.
Under Statement of Financial Accounting Standards No. 86 ("SFAS No. 86"),
"Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," capitalization of computer software development costs is
to begin upon the establishment of technological feasibility, limited to the
net realizable value of the software product, and cease when the software is
available for general release to customers.
Since mid-1995, the Company has been investing significant resources in the
development of OBJECTS and completed a working model of OBJECTS in July 1996.
OBJECTS will be enhanced during the remainder of 1996 and is expected to be
available for general release in 1997. The Company believes that the
object-oriented framework being developed is highly reusable and that its
economic life will be in excess of five years. Accordingly, the Company
capitalized $595,000 of development costs associated with the object-oriented
framework in accordance with SFAS No. 86 in the third quarter of 1996. The
Company also intends to capitalize the development of certain "core" OBJECTS
application servers that will likely have an economic life in excess of one
year. The Company anticipates that approximately $1.5 to $2.0 million of
software development costs will be capitalized in 1996. These costs will be
amortized to expense over a period not to exceed five years, beginning at the
time the product is available for general release in 1997.
PROVISION FOR INCOME TAXES. During 1996, the Company's effective tax
rate was lower than the federal statutory rate of 34% as a result of the
utilization of net operating loss carryforwards to offset U.S. taxable
income. The provision for income taxes for the three and nine month periods
ended September 30, 1996 and 1995 was comprised principally of state and
foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, the Company's cash and cash
equivalents decreased $1,397,000 to $5,661,000.
Cash provided by operating activities was $292,000 for the nine months ended
September 30, 1996. The primary source of cash from operating activities was
net income of $1,420,000, adjusted for depreciation and amortization of
$1,301,000 and the net gain of $565,000 recorded on the sale of discontinued
operations and increases in deferred revenue of $313,000. These sources were
offset by increases in accounts receivable of $1,143,000, net decreases in
accounts payable and accrued expenses of $845,000 and increases in prepaid
expenses of $223,000. The increase in accounts receivable is a direct result
of increased sales. The net decrease in accrued expenses and accounts
payable resulted from the payment of amounts accrued at year-end associated
with fourth quarter 1995 seasonal growth.
The Company used $3,021,000 of cash in investing activities during the nine
months ended September 30, 1996, primarily to purchase furniture, fixtures
and computer equipment associated with the growth of foreign subsidiaries and
the expansion of the domestic sales network and development effort and to
finance research and development activities that were capitalized for
financial reporting purposes. These cash uses were offset by principal
payments totaling $372,000 received in connection with the sale of its former
subsidiary, Just In Time Enterprise Systems, Inc. in December 1995.
-10-
<PAGE>
Financing activities generated $1,332,000 of cash during the nine months
ended September 30, 1996 primarily through borrowings under the Company's
capital lease and equipment financing arrangements. In April 1996, the
Company entered into a $1,500,000 long-term equipment facility with a bank to
finance the purchase of capital equipment. The facility bears interest at
9.25% and is payable monthly. Principal payments are payable in thirty-six
equal monthly installments starting in May 1997 through April 2000. In
September 1996, the Company entered into an additional $600,000 long-term
equipment facility to finance the purchase of capital equipment in connection
with international expansion. The facility bears interest at 9.5% and is
payable monthly. Principal payments are payable in thirty-six equal monthly
installments starting in October 1997 through September 2000. The facilities
contain restrictive covenants which include the maintenance of minimum
tangible net worth and profitability levels as well as certain financial
ratios. Total borrowings on equipment facilities through September 30, 1996
were $1,561,000 and repayments on borrowings were $400,000. In addition, in
November 1996, the Company renewed and increased its line of credit agreement
from $3,000,000 to $5,000,000, through November 1997. There were no
borrowings outstanding on this line at September 30, 1996. The Company also
received $171,000 in proceeds in connection with the exercise of stock
options.
The Company does not have any material scheduled commitments for capital
expenditures. The Company believes that the $5,661,000 of cash and cash
equivalents on hand at September 30, 1996, together with anticipated cash flows
from operations and the Company's available line of credit will be sufficient to
fund operating cash needs over the next twelve months.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1 - Calculation of net income (loss) per common share
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1996.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fourth Shift Corporation
November 8, 1996
/s/ DAVID G. LATZKE
------------------------------------------
David G. Latzke
Vice President and Chief Financial Officer
(principal financial officer)
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<PAGE>
EXHIBIT 11.1
FOURTH SHIFT CORPORATION
CALCULATION OF NET INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------- ----------------
1996 1995 1996 1995
----- ----- ----- ------
<S> <C> <C> <C> <C>
Net Income (loss) $355 $55 $1,420 ($7,950)
----- ----- ----- ------
----- ----- ----- ------
Weighted average number of common and common equivalent
shares outstanding:
Weighted average number of common shares outstanding 9,601 9,363 9,554 9,350
Dilutive effect of stock options after application
of the treasury stock method 368 197 298 - (1)
----- ----- ----- ------
Shares used in per common share computation 9,969 9,560 9,852 9,350
----- ----- ----- ------
Net income (loss) per common share $0.04 $0.01 $0.14 ($0.85)
----- ----- ----- ------
----- ----- ----- ------
</TABLE>
(1) Shares related to these options are not included in the per share
calculation as they are antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM FOURTH SHIFT
CORPORATION'S CONSOLIDATED BALANCE SHEET FOR THE PERIOD ENDED 9/30/96 AND
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED 9/30/96
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,661
<SECURITIES> 0
<RECEIVABLES> 11,272<F1>
<ALLOWANCES> 0
<INVENTORY> 701
<CURRENT-ASSETS> 19,517
<PP&E> 5,075<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,623
<CURRENT-LIABILITIES> 17,004
<BONDS> 1,831
0
0
<COMMON> 96
<OTHER-SE> 6,572
<TOTAL-LIABILITY-AND-EQUITY> 26,623
<SALES> 17,582
<TOTAL-REVENUES> 34,886
<CGS> 3,608
<TOTAL-COSTS> 11,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271
<INCOME-PRETAX> 1,033
<INCOME-TAX> 178
<INCOME-CONTINUING> 855
<DISCONTINUED> 565
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,420
<EPS-PRIMARY> .14
<EPS-DILUTED> 0
<FN>
<F1>These asset values represent amounts net of allowance for doubtful
accounts.
<F2>These asset values represent amounts net of accumulated depreciation.
</FN>
</TABLE>
