<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 March 31, 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 May 8, 1996
was 9,544,059 shares.
<PAGE>
FOURTH SHIFT CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets at 2
March 31, 1996 and December 31, 1995
Consolidated Statements of Operations 3
for the three months ended March 31, 1996
and 1995
Consolidated Statements of Cash Flows 4
for the three months ended March 31, 1996 and 1995
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
---- ----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents............ $ 6,244 $ 7,058
Accounts receivable, net............. 9,407 10,129
Inventories.......................... 1,040 778
Prepaid expenses..................... 949 864
Current portion of note receivable... 762 566
---------- -----------
Total current assets............ 18,402 19,395
FURNITURE, FIXTURES AND EQUIPMENT, net.... 3,717 2,997
NOTE RECEIVABLE........................... 1,738 1,934
GOODWILL, net............................. 147 168
---------- -----------
TOTAL ASSETS $ 24,004 $ 24,494
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 450 $ 441
Current portion of deferred gain on sale of
subsidiary................ 578 566
Accounts payable........................... 2,512 2,125
Accrued expenses........................... 4,296 6,180
Deferred revenue........................... 8,389 8,273
---------- -----------
Total current liabilities............. 16,225 17,585
CAPITAL LEASE OBLIGATIONS AND EQUIPMENT LOAN.... 771 275
DEFERRED GAIN ON SALE OF SUBSIDIARY............. 1,738 1,934
---------- -----------
SHAREHOLDERS' EQUITY:
Common stock............................... 96 94
Additional paid-in capital................. 29,631 29,222
Accumulated deficit........................ (24,457) (24,616)
---------- -----------
Total shareholders' equity............ 5,270 4,700
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 24,004 $ 24,494
========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31
------------------------
1996 1995
--------- ---------
(Unaudited)
REVENUE:
Software license............................. $ 4,388 $ 3,579
Service...................................... 5,518 4,265
Third-party products......................... 666 342
--------- ---------
Total revenue........................... 10,572 8,186
--------- ---------
OPERATING EXPENSES:
Cost of licenses............................. 585 500
Cost of services............................. 2,524 1,908
Cost of third-party products................. 485 202
Selling, general and administrative.......... 4,881 4,634
Product development.......................... 1,943 1,358
--------- ---------
Total operating expenses................ 10,418 8,602
--------- ---------
Operating profit (loss)......................... 154 (416)
Other income (expense), net...................... 43 (19)
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES............. 197 (435)
Provision for income taxes................... 71 59
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS......... 126 (494)
DISCONTINUED OPERATIONS:
Loss from discontinued operations............. - (2,931)
Net gain on sale of discontinued operations... 184 -
--------- ---------
Total discontinued operations................ 184 (2,931)
--------- ---------
NET INCOME (LOSS) ............................... $ 310 $ (3,425)
========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations......................... $ 0.01 $ (0.05)
Discontinued operations....................... 0.02 (0.32)
--------- ---------
Net income (loss)............................. $ 0.03 $ (0.37)
========= =========
SHARES USED IN PER COMMON SHARE COMPUTATION...... 9,673 9,335
========= =========
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)
THREE MONTHS ENDED
MARCH 31
------------------------
1996 1995
--------- ---------
(Unaudited)
OPERATING ACTIVITIES:
Net income (loss) $ 310 $ (3,425)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 392 307
Gain on sale of discontinued operations (184) -
Loss from discontinued operations - 2,931
Other (139) 34
Change in current operating items:
Accounts receivable, net 722 440
Inventories (262) (62)
Prepaid expenses (85) (178)
Accounts payable 387 (1,300)
Accrued expenses (1,634) 255
Deferred revenue 116 1,203
--------- ---------
Net cash provided by (used in) operating
activities (377) 205
--------- ---------
INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (834) (815)
--------- ---------
FINANCING ACTIVITIES:
Payments of long-term obligations (102) (143)
Borrowings on line of credit 350 2,200
Repayments on line of credit borrowings - (2,200)
Proceeds on issuance of common stock, net 149 41
--------- ---------
Net cash provided by (used in)
financing activities 397 (102)
--------- ---------
CASH USED IN DISCONTINUED OPERATIONS - (1,722)
--------- ---------
Net change in cash and cash equivalents (814) (2,434)
CASH AND CASH EQUIVALENTS:
Beginning of period 7,058 6,771
--------- ---------
End of period $ 6,244 $ 4,337
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during each period for-
Income taxes $ 22 $ 27
Interest 49 7
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FOURTH SHIFT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1996 and 1995
and for the three 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 month period ended
March 31, 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 March 1996, the Company borrowed $350,000 from its existing line of
credit to finance the purchase of capital equipment. Subsequent to March
31,1996, the Company refinanced the borrowing as part of a $1,500,000 long-term
equipment facility. The facility bears interest at 9.5%, payable monthly, and
matures April 2000. The facility contains restrictive covenants which include
the maintenance of minimum tangible net worth and profitability levels as well
as certain financial ratios.
3. 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. In accordance with Statement No.
123, 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.
4. In the first quarter ended March 31, 1996, the Company recognized a gain of
$184,000 related to the receipt of a principal payment in April 1996 on the
related note receivable recorded in connection with the sale of its subsidiary
Just In Time Enterprise Systems, Inc. in December 1995.
5
<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
expenditures in sales, marketing and research and development, growth in
revenue, needs for capital expenditures 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;
-- fluctuations in quarterly operating results caused by fluctuations in
the computer industry, buying patterns and general economic
conditions;
-- the dependence of the Company on revenue from sales of MSS;
-- the effects of changes in technology and standards in the computer
industry;
-- significant competition among developers and marketers of industrial
software;
-- the increasing size of the Company's international operations,
particularly in Asia;
-- ability of the Company to manage expansion of international
distribution channels;
-- the dependence of the MSS product line on a 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 $310,000 or $.03 per
share for the quarter ended March 31, 1996, compared to a net loss of $3,425,000
or $.37 per share for the quarter ended March 31, 1995. The net income reported
in the first quarter of 1996 was attributable to increased revenues, the
continued profitability of the Manufacturing Software System (MSS) product line
and a $184,000 gain realized on the sale of discontinued operations.
TOTAL REVENUE increased 29% to $10,572,000 during the three months ended
March 31, 1996 from $8,186,000 during the comparable period in 1995 as outlined
below.
6
<PAGE>
SOFTWARE LICENSE REVENUE are fees paid by customers for the right to use
the Company's software systems. Software license revenue increased $809,000 or
23% to $4,388,000 from $3,579,000 during the same quarter in 1995. The increase
is primarily attributable to greater visibility of the Company's products,
continued growth and penetration in foreign markets, particularly the Pacific
Rim and Europe and increases in the Company's direct sales force.
SERVICE REVENUE includes customer support fees, training, consulting,
installation and project management. Service revenue increased 29% to
$5,518,000 from $4,265,000 during the same quarter in 1995. Increased service
revenue is a direct result of the expansion of the current customer base,
increases in customer support subscription fees, 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. 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 PRODUCTS 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 products revenue
increased 95% to $666,000 in the first quarter of 1996, up from $342,000 for the
same period last year. The increase is directly related to increases in 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 also
contributed to the revenue increase in the first quarter.
COST OF LICENSES increased to $585,000 in the first quarter of 1996 from
$500,000 in the same period of 1995. As a percentage of total software license
revenue, cost of licenses was 13% in the first quarter of 1996 compared to 14%
for the prior year comparable period. The decrease in percent of revenue from
1996 to 1995 is due to lower net distribution costs, offset by increases in
royalty costs paid to third-party software suppliers whose products are embedded
in and distributed with the MSS product.
COST OF SERVICES increased to $2,524,000 for the three months ended March
31, 1996 from $1,908,000 in the same period of 1995. As a percentage of service
revenue, cost of services were 46% for the first quarter of 1996 and 45% for the
first quarter of 1995. The slight increase in cost of services as a percentage
of service revenue primarily relates to higher costs of services associated with
the Asia market growth offset by the sale of lower cost consulting products
which were introduced in the first quarter of 1996.
COST OF THIRD-PARTY PRODUCTS increased to $485,000 or 73% of third-party
product revenue in the first quarter of 1996 from $202,000 or 59% of third-party
product revenue in the same period of 1995. The increase in cost of third-party
products as a percentage of third-party products revenue is primarily due to the
inclusion of certain costs associated with the writing, supporting and
maintenance of the interface between certain companion products and the MSS
product, combined with increased fixed personnel costs.
7
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE expense increased 5% to $4,881,000 for
the three month period ended March 31, 1996 up from $4,634,000 for the three
month period ended March 31, 1995. As a percentage of total revenue, selling,
general and administrative expense decreased to 46% of total revenue from 57%
for the periods presented. The increase in the amount from 1995 to 1996 relates
to the addition of selling personnel 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 first
quarter is due to efforts being made to control and better target marketing
costs and an overall increase in total revenue from 1995 to 1996. The Company
has also experienced a 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 somewhat offset by increased
administrative costs associated with the continued expansion in the Asia market.
The Company intends 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 March 31, 1996
increased to $1,943,000 from $1,358,000 for the three months ended March 31,
1995. As a percentage of total revenue, product development increased to 18% of
total revenue compared to 17% in the same period of 1995. The increase in the
first quarter is a direct result of increased headcount and support resources
associated with the development of the Company's next generation product, Fourth
Shift OBJECTS Enterprise Software -TM-, which is being designed using object-
oriented technology and is targeted for a "beta" release in the third quarter of
1996. Additionally, in the first quarter, the Company 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 does not have any material fixed commitments for capital
expenditures in research and development. The Company believes that product
development spending is critical to the continuing success of the Company's
products and intends to continue to invest heavily in research and development.
PROVISION FOR INCOME TAXES. During 1996, the Company's effective tax rate
was slightly higher than the federal statutory rate of 34% primarily as a result
of foreign income taxes. The provision for income taxes for the three month
period ended March 31, 1996 and 1995 was comprised principally of state and
foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1996, the Company's cash decreased
$814,000 to $6,244,000.
Cash used for operating activities was $377,000 for the three months ended March
31, 1996. The primary uses of cash from operating activities were decreases in
accrued expenses of $1,634,000 and increases in inventories of $262,000. These
uses were offset by decreases in accounts receivable of $722,000, increases in
accounts payable of $387,000, increases in deferred revenue of $116,000 and the
reported net income of $310,000, as adjusted to eliminate depreciation and
amortization of $392,000 and the net gain of $184,000 recorded on the sale of
discontinued operations. The net decrease in accrued expenses and accounts
8
<PAGE>
payable resulted from the payment of amounts accrued at year-end associated with
fourth quarter 1995 growth. The increase in inventories relates primarily to
the purchase of product components associated with Release 5.1 which will be
distributed to existing customers as product updates. The decrease in accounts
receivable is a result of management's effort to reduce the Company's investment
in accounts receivable.
Cash used for investing activities was $834,000 which related to the purchase of
furniture, fixtures and computer equipment associated with the growth of foreign
subsidiaries and the expansion of the domestic sales network and development
effort.
Cash provided by financing activities was $397,000. During the first quarter,
the Company borrowed $350,000 from its existing line of credit to finance the
purchase of capital equipment. Subsequent to March 31,1996, the Company
refinanced the borrowing as part of a $1,500,000 long-term equipment facility.
The facility bears interest at 9.5%, payable monthly, and matures April 2000.
The facility contains restrictive covenants which include the maintenance of
minimum tangible net worth and profitability levels as well as certain financial
ratios. In addition, the Company received $149,000 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 $6,244,000 of cash and cash
equivalents on hand at March 31, 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. The Company plans to
consistently generate positive cash flows from operations; however, if this does
not occur, then the Company may need to seek additional funds through equity or
debt financing.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The annual meeting of shareholders of Fourth Shift Corporation was held at
3:30 PM on Tuesday May 7, 1996. Shareholders holding 8,504,200 shares, or
approximately 89.14 % of the outstanding shares, were represented at the meeting
by proxy or in person. Matters submitted at the meeting for vote by the
shareholders were as follows:
a. Election of Directors
The following nominees were elected to serve as members of the Board of
Directors until the annual meeting of shareholders in 1999 or until such time as
a successor may be elected:
TABULATION OF VOTES
---------------------
FOR WITHHELD
--------- --------
J. H. Caldwell 8,429,789 74,411
P. Isaacson 8,428,918 75,282
b. Approval of an amendment to the Fourth Shift Corporation 1993 Stock
Incentive Plan
Shareholders approved the amendment to the Fourth Shift Corporation 1993
Stock Incentive Plan by a vote of 5,413,585 shares, or 56.7 % of the outstanding
shares in favor, 698,663 shares against, 9,573 shares abstained, and 2,382,379
shares present or represented by proxy but not voted. The amendment increased
the number of shares available for issuance under such plan by 1,200,000 shares
to 2,250,000 shares.
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
The Company filed a Form 8-K as of January 12, 1996 reporting the pro-
forma effects of the disposition of its Just In Time Enterprise
System, Inc. subsidiary which was sold in December 1995.
10
<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
May 10, 1996
/s/ DAVID G. LATZKE
-------------------------
David G. Latzke
Vice President and Chief Financial Officer
(principal financial officer)
11
<PAGE>
EXHIBIT 11.1
FOURTH SHIFT CORPORATION
CALCULATION OF NET INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31
------------------
1996 1995
------ --------
Net Income (loss) $310 ($3,425)
======= ========
Weighted average number of common and common equivalent
shares outstanding:
Weighted average number of common shares
outstanding 9,517 9,335
Dilutive effect of stock options after application
of the treasury stock method 156 - (1)
------- --------
9,673 9,335
======= ========
Net Income (loss) per common share $0.03 ($0.37)
======= ========
(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 from Fourth
Shift Corporation's Consolidated Balance Sheet for the period ended 3/31/96
and Consolidated Statements of Operations for the three month period ended
3/31/96 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,244
<SECURITIES> 0
<RECEIVABLES> 9,407<F1>
<ALLOWANCES> 0
<INVENTORY> 1,040
<CURRENT-ASSETS> 18,402
<PP&E> 3,717<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,004
<CURRENT-LIABILITIES> 16,225
<BONDS> 771
0
0
<COMMON> 96
<OTHER-SE> 5,174
<TOTAL-LIABILITY-AND-EQUITY> 24,004
<SALES> 5,054
<TOTAL-REVENUES> 10,572
<CGS> 1,070
<TOTAL-COSTS> 3,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 197
<INCOME-TAX> 71
<INCOME-CONTINUING> 126
<DISCONTINUED> 184
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310
<EPS-PRIMARY> .03
<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>
