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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction 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 of (I.R.S. Employer Identification Number)
incorporation or organization)
Suite 450
7900 International Drive
Minneapolis, Minnesota 55425
(Address of principal executive office)
(612) 851-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
the Form 10-K. [ ]
As of February 28, 1997, the aggregate market value of the registrant's Common
Stock, $.01 par value, held by nonaffiliates of the registrant was $40,490,000
(based on the closing sale price of common stock as of February 28, 1997 as
quoted on the Nasdaq National Market).
As of February 28, 1997, there were 9,684,104 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The responses to items 5,6,7 and 8 herein are incorporated by reference to
certain information in the Company's Annual Report to Shareholders for the
year ended December 31, 1996. The responses to items 10, 11, 12 and 13 herein
are incorporated by reference to certain information in the Company's
Definitive Proxy Statement for its Annual Meeting of Shareholders to be held
May 7, 1997.
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PART I
ITEM 1. BUSINESS.
GENERAL
Fourth Shift Corporation (the "Company") is a developer and marketer of
client/server-based application software for industrial planning and management
processes. The Company's principal product, the Fourth Shift-Registered
Trademark- Manufacturing Software System ("MSS"), is a family of integrated
manufacturing and financial management applications for intermediate-sized sites
of manufacturing and distribution enterprises. The MSS system operates in a
Windows NT open computing environment. Founded in 1982, the Company
reincorporated in Minnesota in 1984. In 1985, the Company introduced the first
modules of the MSS product line.
The period from 1992 through 1996 was a period of steady growth for the
Company. The Company both expanded the range of services it offers with the MSS
product line and the geography it covers. From 1992 to 1993, revenue increased
45%, as the Company introduced six new modules of MSS, began selling third party
software that is compatible with MSS and established a new subsidiary in the
People's Republic of China. Revenue increased approximately 15% in 1994 as the
Company worked to expand sales both domestically and internationally, instituted
new service programs, introduced CD-Rom based training aids, and introduced the
release of MSS that combined domestic and international versions of the MSS
product into a single version with increased functionality. Importantly, the
Company also began the design of its next generation product in 1994--the Fourth
Shift OBJECTS Enterprise Software. Total revenue continued to expand during
1995, increasing 24% over 1994, as the breadth of the MSS product line
continued to expand and the Company's sales continued to grow internationally in
Asia and the Pacific Rim. The Company introduced a graphical user interface
providing full Windows operability and a release of a version of MSS for the
Windows NT operating system in 1995, together with new modules designed to
provide sales order processing and cash management functions. Revenues from the
Company's subsidiary in the People's Republic of China increased more than 175%
in 1995 as a result of increased market penetration in the People's Republic of
China and further expansion into Singapore and Malaysia.
The Company's operations during the period from 1993 to 1995 were affected
by attention devoted to a product line, the Just In Time Enterprise System
("JIT"), that was acquired in December 1992 and sold in December 1995. JIT is a
series of information management software modules for industrial companies
involved in aerospace and defense and contract manufacturing which operate in
the UNIX/Oracle environment. Acquired from a start-up company in Texas, the
Company devoted substantial resources, including some of the proceeds from the
initial public offering of its common stock completed in July 1993, to improving
the JIT code and instituting sales and development procedures designed to
improve the profitability of the product line. Because of its drain on Company
resources, the product line (which was developed and marketed through a wholly-
owned subsidiary) was sold to the Interactive Group, Inc. ("IGI"). The JIT
operations are included in the Company's financial statements as discontinued
operations.
Total revenue from continuing operations expanded during 1996, both
domestically and internationally, increasing 32% over 1995. North American
revenue grew 25% over 1995 while international revenue grew by 51%. The North
American growth was achieved through sales and marketing expansion and increased
product and service offerings. MSS product enhancements (introduced in late-
1995) included the development of a graphical user interface providing full
Windows operability and a release of a version of MSS for the Windows NT
operating system. The Company continued to expand its international operations
in 1996. Revenues from the Company's subsidiary in the People's Republic of
China increased 70% over 1995 as a result of increased market penetration in
China and further expansion into southeast Asia. The business in Europe showed
renewed growth in 1996, with revenues increasing by 32% over 1995. This was
accomplished through expanded sales and marketing efforts, particularly in
Continental Europe. In addition, in September 1996 the Company opened
subsidiary offices in Johannesburg and Port Elizabeth South Africa, increasing
the Company's global presence.
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In 1995, the Company significantly expanded its investment in the
development of its next generation product. These efforts continued to grow
in 1996, taking shape as Fourth Shift OBJECTS Enterprise Software-Registered
Trademark- (OBJECTS). OBJECTS is designed as a communications-centric,
object-oriented enterprise software system enabling multi-site manufacturing
and distribution companies to globally interconnect via local-area-network,
wide-area-network, dial-up line, the internet, or wireless. OBJECTS is
currently in beta testing and is expected to be shipped to customers in 1997.
(See additional discussion under Products-OBJECTS Enterprise Software).
PRODUCTS - MSS
The Company's principal product, the Fourth Shift-Registered Trademark-
Manufacturing Software System ("MSS"), provides client/server computing in the
DOS/Windows/Windows NT/NetWare open system environments and an integrated
approach to the industrial planning and control processes known as MRP II. A
customer can combine any number of software modules within this product line to
provide on-line access to real-time information for MRP, bills of material,
capacity requirements planning, master production scheduling and financial
management. Information is communicated consistently among the various
functional modules of MSS through a common database, facilitating the automatic
updating of common information used by all applications. Using this system, a
customer manage inventory to significantly reduce carrying costs, manage
material ordering to limit manufacturing shortages, manage manufacturing to
reduce finished goods surpluses or shortages, immediately access information
necessary to communicate customer order scheduling on-line, monitor overall
manufacturing and problem areas to maximize efficiency and quickly produce
financial reports that are consistent with manufacturing records.
MSS is a family of more than 40 integrated manufacturing, accounting, sales
and information management applications and third party products designed to
support decision-making in an industrial company. MSS is designed for and
primarily sold to intermediate-sized manufacturing and distribution companies
and "stand-alone" sites of larger companies, that are in need of a broadly
functional but easily implemented, off-the-shelf application system for up to
and beyond 100 users. MSS is sold with a shrink-wrap license in standardized
modules with extensive documentation and training aids. MSS is modular, so
users can begin with fundamental applications and add more specialized
functionality as their requirements evolve and grow.
In 1994, the Company introduced Mentor-TM-, a self-paced interactive CD-ROM
training tool. This product is a critical component of the Company's
performance support strategy which supplements standard training classes while
serving as an update class for the occasional user. Mentor-TM- provides users
with constant interaction through hands-on exercises and includes over 200 job
function-oriented lessons covering manufacturing, finance, order processing and
system administration.
The Company believes that the following features of MSS allow it to compete
successfully with other LAN-based products: (i) MSS is an integrated and
flexible system designed to allow fast, multi-user access to data; (ii) MSS
includes over 40 integrated application modules and third party products that
have been refined to provide broad, deep functionality in MRP II applications,
including international features such as multiple currency and language
translation capabilities; (iii) MSS applications generally require fewer
keystrokes and screens per task than comparable products; (iv) MSS can be
rapidly and easily implemented through a standardized process using extensive
training aids, both interactive CD-ROM and classroom; (v) MSS is easy to use and
offers seamless integration with off-the-shelf word processing, electronic mail,
spreadsheet and other applications, (vi) MSS is offered with a comprehensive
support program with local, national and international support organizations,
and (vii) MSS is designed to encourage business process reengineering and
efficiency in its customers' manufacturing processes.
MSS is designed for use with the DOS/Windows/Windows NT/NetWare operating
environments on both LANs and wide area networks and supports industry standard
networking protocols. The integrated system of MSS modules allows a customer to
communicate consistent priorities through a common database and on-line
inquiries and updates, establishing a framework in which an entire organization
can work together. MSS also provides a means to interface MSS with third-party
applications through the MSS connectivity modules. The Company licenses a
number of third-party software products that have been designed to operate with
MSS.
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The following is a list of current MSS product line offerings:
<TABLE>
<CAPTION>
MANUFACTURING MODULES FINANCIAL MODULES THIRD-PARTY PRODUCTS
- --------------------- ----------------- --------------------
<S> <C> <C>
Approved Vendor Sourcing Accounts Payable Data Net, data collection system VisiBar,
Bills of Material Accounts Receivable & Invoicing collection system
Co-Products Manufacturing General Ledger Integrated EDI System
Inventory Control Payroll Connection Finite Capacity Planning
Lot Trace/Serialization Product Costing Rules-Based Configurator
Management Reports General Ledger Restructuring Cash Collection & Management
Manufacturing Order Management Package Cycle Counting/Inventory
Material Management/Analysis Multi-Currency Management Management
Material Requirements Planning (MRP) Cash Management Manufacturing Variance Analysis
Operations Performance Message Analysis & Reporting
Purchasing Formula Management
Repetitive Manufacturing SYSTEM-WIDE MODULES Remote Communications
Shop Floor Tracking and Reporting ------------------- Customer Service System
Configuration Paperless Document Management
Executive Information System(EIS) Electronic Business Forms
SALES ACTIVITY MODULES System Control Automated Timekeeping
- ---------------------- Framework for Windows Quote Management
Sales Analysis Engineering Change Order
Rules Based Pricing CIM CONNECTIVITY MODULES Management
Custom Products ------------------------
Sales Order Processing Customizer
Shipping Data Export
Data Import
</TABLE>
The MANUFACTURING MODULES provide on-line information enabling users to
solve material shortage, excess inventory and manufacturing efficiency
problems. The Inventory Control Module, which maintains and provides inventory
status information, is the basic building block for all other manufacturing
applications. It works with the MRP Module, which calculates the optimum
manufacturing plan based on continual updates from other modules, with the Bills
of Material Module, which maintains information relating to the materials,
resources and tools necessary to manufacture each product, and the Manufacturing
Order Management Module, which verifies component availability, picks materials
and calculates material usage variances.
The function of these modules can be further enhanced for use in specific
manufacturing environments with the Repetitive Manufacturing Module, the Co-
Products Manufacturing Module or the Custom Products Module. In addition, the
Purchasing Module helps buyers manage vendor relationships, the Lot
Trace/Serialization Module provides detailed material and finished goods
tracking and the Material Management/Analysis Module allows for simulations and
engineering-change control.
The SALES ACTIVITY MODULES address customer service issues. The Sales
Order Processing Module gives customer service representatives on-line support
for entering and tracking orders. Representatives can act on credit problems
and reschedule orders to meet changing delivery dates. The Rules Based Pricing
Module further extends order entry functionality to allow the user to create
pricing models for individual customers or buying groups. Using the Shipping
Module, users can prepare, record and track shipping information to improve shop
room efficiency, monitor the shipping process and create shipping lists, labels
and airbills. The Custom Products Module helps plan and control make-to-order
and engineer-to-order products enabling users to estimate and track job costs,
control inventory, provide quotes and configure products on-line.
The FINANCIAL MODULES are tightly integrated with the manufacturing and
sales activity modules so that financial transactions are automatically created
as a result of business activity. The General Ledger Module provides
comprehensive management of a company's financial position and generates
financial reports. The Accounts Payable Module handles processing of supplier
invoices from invoice entry to check printing and reconciliation. The Accounts
Receivable & Invoicing Module processes customer invoices and payments, tracks
current and aged receivables, handles service charges and helps resolve billing
questions. The Product Costing Module helps ensure that costs are accurately
developed and maintained, and contains flexible tools for analysis and
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simulation. The Multi-Currency Management Module offers exchange rate tracking
and allows transactions to be stated in the trading partners' currency. The
Cash Management Module allows customers to track cash transactions and banking
activity while providing period-end reconciliations of cash activity.
The SYSTEM-WIDE MODULES extend and enhance the manufacturing, sales
activity and financial modules. The Configuration Module and System Controls
Modules are used to tailor the MSS modules to each customer's needs, and
contains key features such as audit trails, multi-language support, VAT tax,
system-wide security and Novel or Windows NT support. The EIS Module provides
decision makers a key performance measurement tool that displays a quick
overview of the state of the entire business. The Framework for Windows Module
allows Open Database Connectivity ("ODBC") access to the MSS database via ODBC
enabled applications, i.e., MICROSOFT CORPORATION'S OFFICE SUITE OF PRODUCTS.
In addition, the Framework for Windows Module also provides graphical user
interface support to the core MSS Modules.
The CIM CONNECTIVITY MODULES provide the capability to interface third-
party applications, either commercial applications or user-developed
applications, to the MSS database. The CIM Customizer Module allows the user to
extend the MSS applications by imbedding other application software into the
processing flow of the MSS system.
The typical customer licenses between $40,000 and $75,000 of MSS software.
MSS license revenue totaled $22,947,000 for the year ended December 31, 1996, or
approximately 47% of the overall revenue of the Company.
THIRD-PARTY PRODUCTS. The Company also licenses, implements and supports
third-party software and hardware products which have been integrated to
function with the MSS software. These products extend the functionality of
Fourth Shift's software and provide a broader solution to Fourth Shift clients.
At December 31, 1996, the Company had 12 agreements with various third-party
software and hardware vendors to sell third-party products. Third-party
products revenue totaled $2,541,000 during the year ended December 31, 1996.
PRODUCTS - OBJECTS ENTERPRISE SOFTWARE
Fourth Shift OBJECTS Enterprise Software will be the industry's first
communications-centric, extensible and open enterprise software system designed
to meet the growing needs of decentralized manufacturing and distribution
enterprises worldwide. It will provide the benefits of autonomous site
operations and the ability to consolidate information at the enterprise level.
OBJECTS will extend the functionality of MSS by providing real-time information
to operations around the globe by way of the Internet. In addition, OBJECTS
message bus architecture will allow it to operate with in-place legacy systems,
enabling the software to be implemented into the enterprise in an evolutionary
manner without replacing all existing systems at once.
Based on Microsoft Windows NT platform, OBJECTS will incorporate TIBCO's
industry leading TIB (The Information Bus) publish and subscribe middleware as
the messaging backbone for enterprise-wide communications. The unique publish-
subscribe middleware enables event-driven information exchange among distributed
applications throughout the enterprise, unifying all business processes. Using
a subject-based addressing scheme, publish-subscribe communications technology
enables users to receive information they need without requesting it and without
knowledge of its location. The Information Bus has been the de facto standard
for information integration in the data-intensive financial services market for
more than a decade.
The first components of OBJECTS are currently in beta testing and the
Company is planning for a general release in 1997.
SERVICES
The Company offers a broad range of services for its MSS product line,
including a comprehensive customer support program, implementation consulting,
network-related technical consulting, custom software
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development and extensive training programs. Such services constituted 48%,
49%, and 46% of the Company's revenue from continuing operations during 1996,
1995, and 1994, respectively.
CUSTOMER SUPPORT PROGRAM. The Company offers a standardized customer
support program ("CSP") for MSS. CSP is a comprehensive, fee-based program
designed to help customers obtain the maximum benefit from their business
management software. CSP subscribers pay an annual fee equal to 15% of the
current list price of the modules licensed. Approximately 80% of the currently
active users of MSS products subscribe to CSP. The Company believes CSP is a
stable and reliable source of revenue which the Company intends to continue to
emphasize to its new and existing customer base.
Included among the materials and services furnished through CSP are new
product releases, telephone technical and application support, a software tool
kit, an electronic bulletin board, and newsletter and application notes.
Updated and enhanced versions of the Company's software products are provided to
CSP subscribers as part of the annual subscription fee. Telephone support calls
are handled by manufacturing, financial and technical experts in the United
States, United Kingdom and Peoples Republic of China.
PROFESSIONAL SERVICES. The Company offers implementation consulting and
training for use of its MSS products, as well as custom software development
services. Implementation consulting services, available on a fee basis, include
implementation planning, project management and specialized custom training.
The Company offers a special implementation workshop designed to ease the MSS
implementation process, a readiness audit to identify problems prior to using
the system, business reviews to maximize the utility of the system once
installed and several benchmarking tests to measure performance against
competitors.
The Company offers a series of classroom and individual on-site training
options. Training includes classroom instruction at the Company's offices in
the United States, United Kingdom and Peoples Republic of China and at
authorized training centers or at customer sites. Customers may also purchase
Mentor-TM-, the self-paced interactive CD-Rom training module, to supplement
standard training classes while serving as an update class for the occasional
user. The Company continues to expand and develop its training offerings.
The Company also offers, on a limited basis, custom software development
services to meet specific customer requirements, and to integrate MSS with a
customer's existing computer systems and/or third-party software providers.
MARKETS
MSS is licensed primarily to mid-sized manufacturing companies, or business
units of larger manufacturing companies, that generate more than $5 million of
revenue annually and require up to approximately 100 simultaneous users. In
addition, MSS is licensed to manufacturing sites of Fortune 500 companies. MSS
is used by discrete manufacturers, which assemble or machine parts into finished
products, and by process manufacturers, which mix, separate and otherwise
combine or control ingredients to create finished products. It has broad
application and use in the electronics, industrial, machinery, medical device,
transportation, metal fabrication, food processing and chemical industries. MSS
is currently licensed for use in over 2,600 customer sites worldwide.
SALES AND MARKETING
The Company sells its products and services through a direct sales force
and value-added resellers in major markets and through sales agents in secondary
markets. The Company maintains regional sales offices located in San Diego, Los
Angeles, San Jose and San Ramon, California; Atlanta, Georgia; Boston,
Massachusetts; Chicago, Illinois; Cleveland, Ohio; Dallas, Texas; and
Piscataway, New Jersey, in addition to its headquarters located in Minneapolis,
Minnesota. The Company sells directly through wholly owned subsidiaries in the
United Kingdom, Mexico, the People's Republic of China, South Africa, Malaysia,
Singapore; and through distributors in Europe, Africa, the Middle-East, and
Asia. During 1996, approximately 87% of the Company's software license revenue
from continuing operations was generated through direct sales personnel and 13%
was generated through resellers
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and agents. Of such software license revenues, approximately 61% was
generated in North America and 39% was generated abroad. See footnote 11
included in the Company's 1996 Annual Report to Shareholders for information
as to revenue and operating income from continuing operations generated by
each of the significant geographic areas in which the Company does business.
The Company's direct sales personnel are compensated on a salary plus
commission basis with commissions paid monthly, in contrast to the quarterly
commission plans often present in the software industry. This monthly
commission plan assists the Company in managing the level of its sales activity
throughout the quarter. The Company's reseller agreements generally provide
that sales will be made by authorized resellers on a nonexclusive basis from
offices within a designated territory. The agreements obligate the Company to
license to the end-user through a value added reseller (VAR) at specified prices
and to provide training to each reseller. The Company also maintains a staff of
systems consultants who offer pre- and post-sales support to the sales force and
to customers.
The Company markets its products through advertising campaigns in national
trade periodicals, direct mail and telemarketing. These efforts are
supplemented by listings in relevant directories and trade show and conference
appearances. The Company also receives leads from its hardware and services
vendors, customers and various accounting and consulting firms. To encourage
familiarity with its products by the next generation of business executives, the
Company has established a program through which it licenses its software to
educational institutions at a substantial discount. Currently over 115
institutions of higher education have licensed MSS systems under this program.
Sales cycles for the Company's products vary substantially based on the
degree of integration, consulting and training required and also on the status
of the customer's implementation of a hardware system. The MSS sales cycle is
usually four to six months from the time an initial sales presentation is made
to a customer until the software is delivered and licensed. MSS products are
typically shipped within 48 hours of receipt of order. Generally 20-30% of the
price is paid when the order is made and the balance is due 30 days after
delivery of the product.
STRATEGIC ARRANGEMENTS
Part of the Company's sales and marketing strategy is to build and develop
relationships with companies that the Company believes will play an important
role in the successful marketing of the Company's products. These companies
include system software suppliers (such as Microsoft Corporation and TIBCO,
Inc.), hardware vendors (such as Compaq Computer Corporation and Tricord
Systems, Inc.) and database companies (such as Micro Data Base Systems, Inc.,
Microsoft Corporation and Oracle Corporation). The Company uses products from
system software suppliers to develop the Company's application software
products. The suppliers also serve as technical references for future
prospects. Under arrangements with hardware vendors, the Company is authorized
to resell certain products in conjunction with the sale of the Company's
products. Arrangements with database companies allow the Company to sublicense
database management systems with its products and to provide fee-based support
for licensees.
PRODUCT DEVELOPMENT
The Company intends to continue to invest heavily in research and
development. During the years ended December 31, 1996, 1995, and 1994, the
Company recorded research and development expenses from continuing operations of
$8,674,000, $5,732,000 and $2,817,000, respectively. In addition, beginning in
third quarter of 1996, the Company began to capitalize development costs related
to OBJECTS. In 1996 the Company capitalized $1,820,000 related to the
development of OBJECTS functionality and related modules that had reached
technological feasibility. During 1996, the Company continued to develop and
enhance the MSS product while investing significant resources in the development
of OBJECTS.
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The computer industry is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements. The Company's future success will depend upon its ability to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and achieve market acceptance. In particular, the Company believes it must
continue to respond quickly to users' needs for broad functionality and
multiplatform support and to advances in hardware and operating systems. 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
revenues. In the past, the Company has experienced delays in the introduction
of new products and product enhancements. These development efforts are
dependent upon the availability of adequate cash to fund them. See "Item 7.
Management's Discussion of Financial Position and Results of Operations." There
can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely basis or that the
Company will not experience significant delays in the future, which could have a
material adverse effect on the Company's results of operations. In addition,
there can be no assurance that new products or product enhancements developed by
the Company will achieve market acceptance.
COMPETITION
The computer industry is intensely competitive and rapidly changing. Due
to the flexibility of the Company's products, the Company's competitors range
from providers of high-end industrial application software for use on mainframes
and minicomputers to providers of low-end application software for use on
microcomputers and LANs. Because of the wide functionality of the Company's
product line, competitors include providers of financial and business
application software as well as industrial and manufacturing resource planning
software. The Company competes with its competitors generally on the basis of
product features and functions, product architecture, the ability to run on a
variety of industry standard platforms, technical support and other related
services, ease of product integration with third-party application software and
price/performance. The ability to address thoroughly the requirements for
various forms (discrete, process, etc.) of manufacturing, efficiency of the user
interfaces and commands, computational speed and responsiveness, support for
application integration, extensive training materials, and established local
support and training are key competitive factors with respect to MSS.
MSS currently competes primarily in the market for microcomputer-based MRP
II software. The Company's primary competitors in this market include QAD,
Inc., Symix Systems, Inc., Micro MRP Visual and Dataworks. In addition, there
are a number of smaller, regional companies that produce MRP II software for
microcomputers. The Company believes that purchases in this market are based
primarily on hardware platform and operating system (DOS/Windows/Windows
NT/NetWare for LANs versus UNIX systems), functionality, application integration
and industry reviews. The Company believes that the MSS product line competes
favorably in the portion of this market intended for DOS/Windows/Windows
NT/NetWare operating systems and LANs.
The Company's products compete indirectly with providers of financial and
accounting software for microcomputers and other specialized applications in the
markets it serves. Competition from this market arises primarily when a
customer is seeking only a very narrow solution and the Company believes its
products compete favorably with such products on the basis of broad
functionality and complete vertical integration.
Many of the Company's competitors have greater financial, marketing and
technological resources than the Company. There can be no assurance that other
companies have not developed or marketed or will not develop or market software
products that are superior to those of the Company, that are offered at
substantially lower prices than those of the Company or that have achieved or
will achieve greater market acceptance than those of the Company.
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INTELLECTUAL PROPERTY
The Company has registered its "FOURTH SHIFT" , "FOURTH SHIFT OBJECTS
ENTERPRISE SOFTWARE", "MSS", and "MENTOR" trademark for software services and
products with the United States Patent and Trademark Office and with the
equivalent offices of most foreign countries in which it does business.
The Company regards its software as proprietary in that title to and
ownership of the software reside exclusively with the Company. The Company
attempts to protect its rights with a combination of trademark, copyright,
employee and third-party nondisclosure agreements. Despite these precautions,
it may be possible for unauthorized parties to copy or reverse-engineer portions
of the Company's products. While the Company's competitive position could
conceivably be threatened by its inability to protect its proprietary
information, the Company believes that copyright and trademark protection are
less important to the Company's success than other factors such as the
knowledge, ability and experience of the Company's personnel, name recognition
and ongoing product development and support.
The Company's software products are licensed to end users under a
perpetual, nontransferable, nonexclusive license that stipulates which modules
can be used and how many concurrent users may use them. The Company relies
primarily on "shrink wrap" licenses for the protection of MSS. A "shrink wrap"
license agreement is a printed license agreement included in the packaged MSS
software that sets forth the terms and conditions under which the licensee can
use the product, and binds the licensee by its acceptance and license of MSS to
such terms and conditions. Shrink wrap licenses typically are not signed by the
licensee and therefore may be unenforceable under the laws of certain
jurisdictions.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs could become increasingly the subject of infringement claims.
Although the Company's products have never been the subject of an infringement
claim, there can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertion will not
require the Company to enter into royalty arrangements or result in costly
litigation.
PRODUCTION
The principal materials and components used in the Company's software
products include computer media, user manuals and training guides. The Company
prepares master software disks, user manuals and packaging. In some cases, the
Company uses third party vendors to duplicate disks containing its software and
to print the Company's user manuals, packaging and related materials. 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 December 31, 1996, the Company had 483 full-time employees, including
128 in sales and marketing, 134 in software programming and documentation, 144
in customer support services and 77 in finance and administration. The
Company's employees are not represented by any collective bargaining
organization and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Minneapolis, Minnesota,
in a leased facility consisting of roughly 58,000 square feet, occupied under a
lease expiring October 31, 1998. Approximately 11,000 square feet of this space
is subleased to IGI through January 1997. The Company also leases 15,400 square
feet, approximately 8,700 square feet of which is subleased to a third-party, of
space for a second principal office in San Ramon, California pursuant to leases
expiring in June 1997 and August 1999. The Company leases additional facilities
for domestic operations in San Diego, Los Angeles and San Jose, California;
Atlanta, Georgia; Boston,
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Massachusetts; Chicago, Illinois; Cleveland, Ohio; Dallas, Texas; Nashua, New
Hampshire and Piscataway, New Jersey. The Company also leases facilities and
offices for its international operations in London, Mexico City,
Johannesburg, Port Elizabeth, Malaysia, Taiwan, Singapore and in Beijing,
Tianjin, Guangzhou, Nanjing, Shenzhen and Shanghai of the People's Republic
of China. The Company believes that its existing facilities are adequate to
meet its current needs and that suitable additional or alternative space will
be available as needed to accommodate expansion of corporate operations and
for additional sales offices. See Note 8 of Notes to Consolidated Financial
Statements for information regarding the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. As of the date
of this filing, neither the Company nor any of its subsidiaries is a party to
any legal proceedings, the adverse outcome of which, in management's opinion,
would have a material adverse effect on the Company's results of operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
EXECUTIVE OFFICERS
Marion Melvin Stuckey, age 58, is the founder of the Company and has been the
Chief Executive Officer and Chairman of the Company since 1982. Prior to
forming the Company, Mr. Stuckey was an executive officer of Control Data
Corporation ("CDC"), a multinational computer hardware, peripherals and services
company, from 1975 to 1982. Prior to that Mr. Stuckey served in various sales,
marketing and management positions at IBM from 1960 to 1975.
Jimmie H. Caldwell, age 57, has been President, Chief Operating Officer and a
Director of the Company since 1984. Prior to that time, Mr. Caldwell served in
various positions at CDC from 1964 to 1984 and held the position of Vice
President of Operations for CDC's Peripheral Products Company when he left to
join the Company.
Allen S. Peterson, age 53, joined the Company in February 1990 as Vice
President, Reseller Sales and moved to Vice President, Sales and Marketing in
May 1991, to Vice President-General Manager of MSS Operations in October 1993,
and to Executive Vice President in 1995. Prior to joining the Company, Mr.
Peterson was Vice President of Sales and Marketing for Speech Plus, a speech
technology start-up company, from February 1986 to January 1990. Prior to that
time he worked in various industries, including eleven years at IBM.
David G. Latzke, age 37, has been Vice President and Chief Financial Officer
since April 1994. Mr. Latzke joined the Company as director of special projects
in April 1993. From 1982 until April 1993, Mr. Latzke was a manager with the
Audit and Business Advisory Division of Arthur Andersen LLP
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 is incorporated by reference to the
information under the caption "Price Range of Common Stock" of the Company's
Annual Report to Shareholders for the year ended December 31, 1996.
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ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated by reference to the
information under the caption "Selected Consolidated Financial Data"of the
Company's Annual Report to Shareholders for the year ended December 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 is incorporated by reference to the
information under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Company's Annual Report to
Shareholders for the year ended December 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following is incorporated by reference to the Company's Annual Report to
Shareholders for the year ended December 31, 1996:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to executive officers is
included under a separate caption entitled "Executive Officers" in Part I of the
Form 10-K. The information with respect to directors is incorporated by
reference to the information under the caption "Election of Directors-Nominees"
of the Company's definitive proxy statement for its May 7, 1997 Annual Meeting
of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information under the captions "Election of Directors-Director Compensation" and
"Executive Compensation--Summary Compensation Table," " --Stock Options," and
"--Long-Term Incentive Plan Awards" of the Company's definitive proxy statement
for its May 7, 1997 Annual Meeting of Shareholders.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under caption "Security Ownership of Certain Beneficial Owners and
Management" of the Company's definitive proxy statement for its May 7, 1997
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Election of Directors-Director Compensation" of
the Company's definitive proxy statement for its May 7, 1997 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements
1. See the Financial Statement information contained in Item 8 of this Form
10-K
2. Financial Statement Schedules
No Financial Statement Schedules are required
b. Reports on Form 8-K:
None
c. Exhibits
Exhibit No. Description
- ----------- ------------
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 4.1 of the Company's 10-Q
for the quarter ended March 31, 1994)
3.2 Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.2 to the Company's Form 10-K for the year ended
December 31, 1994)
4.1 Form of Certificate for Common Stock (incorporated by reference
to Exhibit 4.1 of Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed June 28, 1993 (File No. 33-63012))
10.1 1989 Stock Option Plan (incorporated by reference to Exhibit 10.4
of the Company's Registration Statement of Form S-1 filed May 19,
1993 (File No. 33-63012))
10.2 Fourth Shift Corporation 1994 Employee Stock Purchase Plan, as
amended (incorporated by reference to Exhibit 10.5 to the
Company's 10-K for the year ended December 31, 1994)
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<PAGE>
10.3 Fourth Shift Corporation 1993 Stock Incentive Plan, as amended
(incorporated by reference to Exhibit 10.6 to the Company's 10-K
for the year ended December 31, 1994)
10.4 Office Lease dated as of December 18, 1992 among the Company and
International Plaza Joint Venture, as amended (incorporated by
reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1 filed May 19, 1993 (File No. 33-63012))
10.5 Purchase and Sale Agreement, dated December 15, 1995, between
Fourth Shift Corporation and Interactive Group, Inc. (incorporated
by reference to Exhibit 2.1 to the Company's 8-K dated as of
December 15, 1995)
10.6 Titanium Runtime Distribution License Agreement dated June 20, 1995
between Fourth Shift Corporation and Micro Data Base Systems, Inc.
(incorporated by reference to Exhibit 10.8 to the Company's 10-K
for the year ended December 31, 1995)
10.7 Loan and Security Agreement dated as of September 20, 1995 between
Fourth Shift Corporation and Silicon Valley Bank (incorporated by
reference to Exhibit 10.9 to the Company's 10-K for the year
ended December 31, 1995)
*10.8 Severance Pay Agreement dated April 16, 1996 between the Company
and Marion Melvin Stuckey
*10.9 Severance Pay Agreement dated April 16, 1996 between the Company
and Jimmie H. Caldwell
*10.10 Severance Pay Agreement dated April 16, 1996 between the Company
and Allen S. Peterson
*10.11 Severance Pay Agreement dated April 16, 1996 between the Company
and David G. Latzke
10.12 Amendment No. 1 to Loan and Security Agreement dated as of March
29, 1996 between Fourth Shift Corporation and Silicon Valley Bank
10.13 Amendment No. 2 to Loan and Security Agreement dated as of April
26, 1996 between Fourth Shift Corporation and Silicon Valley Bank
10.14 Amendment No. 3 to Loan and Security Agreement dated as of
September 24, 1996 between Fourth Shift Corporation and Silicon
Valley Bank
10.15 Amendment No. 4 to Loan and Security Agreement dated as of
November 6, 1996 between Fourth Shift Corporation and Silicon
Valley Bank
10.16 License Agreement dated as of March 30, 1996 between Fourth Shift
Corporation and Teknekron Software Systems, Inc. (a.k.a. TIBCO)
11.1 Computation of Earnings Per Share
13.0 Incorporated pages of the Company's Annual Report to Shareholders
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<PAGE>
23.1 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule (For SEC use only)
__________________
*Management contract or compensatory plan.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 22, 1997.
Fourth Shift Corporation
By: /s/ MARION MELVIN STUCKEY
---------------------------------
Marion Melvin Stuckey
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
Name Position Date
----- -------- ----
/s/ MARION MELVIN STUCKEY Chairman, Chief Executive Officer, March 22, 1997
- -------------------------- (principal executive officer) and
Marion Melvin Stuckey Director
/s/ JIMMIE H. CALDWELL President, Chief Operating Officer March 26, 1997
- -------------------------- and Director
Jimmie H. Caldwell
/s/ DAVID G. LATZKE Vice President and Chief Financial March 26, 1997
- ------------------------- Officer, Treasurer and Secretary
David G. Latzke (principal financial officer)
/s/ MICHAEL J. WILDES Corporate Controller (principal March 26, 1997
- ------------------------- accounting officer)
Michael J. Wildes
/s/ MICHAEL J. ADAMS Director March 26, 1997
- -------------------------
Michael J. Adams
/s/ DAVID J. ALLIO Director March 26, 1997
- -------------------------
David J. Allio
/s/ TONY J. CHRISTIANSON Director March 26, 1997
- -------------------------
Tony J. Christianson
/s/ ROBERT M. PRICE Director March 26, 1997
- -------------------------
Robert M. Price
/s/ PORTIA ISAACSON Director March 26, 1997
- -------------------------
Portia Isaacson
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<PAGE>
FOURTH SHIFT CORPORATION
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- ---------------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 4.1 of the Company's 10-Q
for the quarter ended March 31, 1994)
3.2 Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.2 to the Company's Form 10-K for the year ended
December 31, 1994)
4.1 Form of Certificate for Common Stock (incorporated by reference
to Exhibit 4.1 of Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed June 28, 1993 (File No. 33-63012))
10.1 1989 Stock Option Plan (incorporated by reference to Exhibit
10.4 of the Company's Registration Statement of Form S-1 filed
May 19, 1993 (File No. 33-63012))
10.2 Fourth Shift Corporation 1994 Employee Stock Purchase Plan, as
amended (incorporated by reference to Exhibit 10.5 to the
Company's 10-K for the year ended December 31, 1994)
10.3 Fourth Shift Corporation 1993 Stock Incentive Plan, as amended
(incorporated by reference to Exhibit 10.6 to the Company's 10-K
for the year ended December 31, 1994)
10.4 Office Lease dated as of December 18, 1992 among the Company and
International Plaza Joint Venture, as amended (incorporated by
reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1 filed May 19, 1993 (File No. 33-63012))
10.5 Purchase and Sale Agreement, dated December 15, 1995, between
Fourth Shift Corporation and Interactive Group, Inc. (incorporated
by reference to Exhibit 2.1 to the Company's 8-K dated as of
December 15, 1995)
10.6 Titanium Runtime Distribution License Agreement dated June 20, 1995
between Fourth Shift Corporation and Micro Data Base Systems, Inc.
(incorporated by reference to Exhibit 10.8 to the Company's 10-K for
the year ended December 31, 1995)
10.7 Loan and Security Agreement dated as of September 20, 1995 between
Fourth Shift Corporation and Silicon Valley Bank (incorporated by
reference to Exhibit 10.9 to the Company's 10-K for the year ended
December 31, 1995)
*10.8 Severance Pay Agreement dated April 16, 1996 between the Company and
Marion Melvin Stuckey
*10.9 Severance Pay Agreement dated April 16, 1996 between the Company and
Jimmie H. Caldwell
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<PAGE>
*10.10 Severance Pay Agreement dated April 16, 1996 between the Company and
Allen Peterson
*10.11 Severance Pay Agreement dated April 16, 1996 between the Company and
David Latzke
10.12 Amendment No. 1 to Loan and Security Agreement dated as of March 29,
1996 between Fourth Shift Corporation and Silicon Valley Bank
10.13 Amendment No. 2 to Loan and Security Agreement dated as of April 26,
1996 between Fourth Shift Corporation and Silicon Valley Bank
10.14 Amendment No. 3 to Loan and Security Agreement dated as of September
24, 1996 between Fourth Shift Corporation and Silicon Valley Bank
10.15 Amendment No. 4 to Loan and Security Agreement dated as of November 6,
1996 between Fourth Shift Corporation and Silicon Valley Bank
10.16 License Agreement dated as of March 30, 1996 between Fourth Shift
Corporation and Teknekron Software Systems, Inc. (a.k.a. TIBCO)
11.1 Computation of Earnings Per Share
13.0 Incorporated pages of the Company's Annual Report to Shareholders
23.1 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule (For SEC use only)
</TABLE>
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<PAGE>
EXHIBIT 10.8
SEVERANCE PAY AGREEMENT
This Agreement is made as of the 16th day of April, 1996, between
Fourth Shift Corporation, 7900 International Drive, International Plaza, Suite
450, Bloomington, MN 55425 (hereinafter called the "Company") and M. M. Stuckey
(hereinafter called "Executive"), residing at 46 Red Birch Court, Danville,
California 94506.
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the financial
arrangements that the Company will provide to the Executive upon Executive's
separation from employment with the Company or with a subsidiary of the Company
or one of its subsidiaries under the circumstances described herein; and
WHEREAS, this Agreement is adopted in the belief that it is in the
best interests of the Company and its shareholders to provide stable conditions
of employment for Executive, thereby minimizing personnel turnover and enhancing
the Company's and its subsidiaries' ability to recruit highly qualified people.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive notwithstanding the possibility, threat or occurrence of
a bid to take over control of the Company, and to induce Executive to remain in
the employ of the Company or the subsidiary of the Company with which Executive
is employed (the "Subsidiary"), and for other good and valuable consideration,
the Company and Executive agree as follows:
1. TERM OF AGREEMENT.
This Agreement shall be for a two-year term commencing on the date
hereof and shall be automatically renewed for an additional two-year term
thereafter unless canceled in writing by either party hereto at least 60 days
prior to expiration of the initial or any renewal term; provided that this
Agreement shall continue for at least two years after a Change of Control that
occurs during the term of this Agreement.
2. TERMINATION OF EMPLOYMENT.
(i) If a Change in Control (as defined in Section 3(i) hereof) occurs
during the term of this Agreement and any of the following events occur within
two years after such Change of Control, (x) all stock options in the Company (or
its successor as a result of the Change of Control) held by the terminated
Executive shall be accelerated so that they are fully exercisable by the
terminated Executive for the period after termination specified in such stock
options and (y) the terminated Executive shall be entitled to receive the cash
payment provided in Section 4 hereof:
(a) the Company or the Subsidiary, as the case may be, shall
have exercised its right to terminate the Executive without cause; or
(b) the Executive shall have voluntarily exercised his option to
terminate his employment for Good Reason (as defined in Section 3(ii)
hereof). Notice of election of this option must identify the
Executive who desires to terminate his employment and set forth in
reasonable detail the facts and circumstances claimed to constitute
Good Reason.
(ii) From and after the date of a Change in Control, the Company and
the Subsidiary shall have the right to terminate Executive from employment at
any time during the term of this Agreement for Cause (as defined in Section
3(iii) hereof), by written notice to the Executive, specifying the particulars
of the conduct of
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<PAGE>
Executive forming the basis for such termination, and Executive shall not be
entitled to any payment pursuant to Section 4 for termination for Cause.
(iii) From and after the date of a Change in Control during the
term of this Agreement, Executive shall not be removed from employment with the
Company or the Subsidiary, as the case may be, except as provided in Section
2(i) or (ii) hereof or as a result of Executive's Disability (as defined in
Section 3(iv) hereof) or his death. Executive's rights upon termination of
employment prior to a Change in Control or after the expiration of the term of
this Agreement shall be governed by the standard employment termination policy
applicable to Executive in effect at the time of termination.
Any notice given by Executive pursuant to this Section 2 shall be
effective five (5) business days after the date it is given by Executive.
3. DEFINITIONS
(i) A "Change in Control" shall mean the occurrence of any of the
following events as a result of a transaction or series of transactions:
(a) a change in control of the Company of a nature required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), whether or not the Company is then subject to such
reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding
securities;
(c) individuals who at the date hereof constitute the Board of
Directors of the Company cease to constitute a majority thereof,
PROVIDED THAT such change is the direct or indirect result of a proxy
fight and contested election for positions on the Board; or
(d) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in control
of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events:
(a) the assignment to Executive of employment responsibilities
which are not of comparable responsibility and status as the
employment responsibilities held by Executive immediately prior to a
Change in Control;
(b) a reduction by the Company or by the Subsidiary, as the case
may be, in Executive's compensation (including targeted bonus
compensation) as in effect immediately prior to a Change in Control;
(c) the Company's or the Subsidiary's requiring Executive to be
based anywhere other than within fifty (50) miles of Executive's
office location immediately prior to a Change in Control, except for
requirements of temporary travel on the Company's business to an
extent substantially consistent with Executive's business travel
obligations immediately prior to a Change in Control;
(d) except to the extent otherwise required by applicable law,
the failure by the Company or the Subsidiary to continue in effect any
benefit or compensation plan, stock ownership plan, stock purchase
plan, bonus plan, life insurance plan, health-and-accident plan or
disability plan in which Executive is participating immediately prior
to a Change in Control (or plans providing Executive with
substantially similar benefits), the taking of any action by the
Company or the Subsidiary which would adversely affect Executive's
participation in, or
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<PAGE>
materially reduce Executive's benefits under, any of such plans or
deprive Executive of any material fringe benefit enjoyed by
Executive immediately prior to such Change in Control, or the
failure by the Company or the Subsidiary to provide Executive with
the number of paid vacation days to which Executive is entitled
immediately prior to such Change in Control in accordance with the
Company's or such Subsidiary's vacation policy as then in effect; or
(e) the failure by the Company to obtain, as specified in
Section 6(i) hereof an assumption of the obligations of the Company to
perform this Agreement by any successor to the Company.
Notwithstanding the foregoing, none of the forgoing events shall be considered
"Good Reason" if it occurs in connection with the Executive's death or
disability.
(iii) "Cause" shall mean termination by the Company or the
Subsidiary, as the case may be, of Executive's employment based upon (a) the
willful and continued failure by Executive substantially to perform his duties
and obligations (other than any such failure resulting from his incapacity due
to physical or mental illness) or (b) the willful engaging by Executive in
misconduct which is materially injurious to the Company or any of its
subsidiaries, monetarily or otherwise. For purposes of this paragraph, no act,
or failure to act, on Executive's part shall be considered "willful" unless
done, or omitted to be done, by Executive in bad faith and without reasonable
belief that his action or omission was in the best interests of the Company and
its subsidiaries.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Executive for a disability benefit under the long-term disability
plan of the Company or the Subsidiary.
4. BENEFITS UPON TERMINATION UNDER SECTION 2(i)
Upon the termination of the employment of Executive pursuant to
Section 2(i) hereof, Executive shall be entitled to receive the benefits
specified in this Section 4. The amounts due to Executive under subparagraphs
(a) and (b) of this Section 4 shall be paid to Executive not later than one
business day prior to the date that the termination of Executive's employment
becomes effective.
(a) The Company shall pay to Executive (i) the full base salary
earned by him and unpaid through the date that the termination of Executive's
employment becomes effective, at the rate in effect at the time written notice
of termination (voluntary or involuntary) was given, (ii) any amount earned by
Executive as a bonus with respect to the fiscal year of the Company preceding
the termination of his employment if such bonus has not theretofore been paid to
Executive, (iii) an amount equal to a pro rata portion, based on number of days
elapsed, of the bonus Executive would have earned for the year in which
termination is effective, assuming for such purposes that the Company achieves
targeted performance, and (iii) an amount representing credit for any vacation
earned or accrued by him but not taken;
(b) In lieu of any further base salary payments to Executive for
periods subsequent to the date that the termination of Executive's employment
becomes effective, the Company shall pay as severance pay to Executive a lump-
sum cash amount equal to three (3) times Executive's average annualized cash
compensation for the period consisting of the Executive's most recent five
taxable years ending before the date on which a Change in Control occurs (or
such portion of such period during which Executive performed services for the
Company); subject, however, to the restriction that the Executive shall not be
entitled to receive any amount pursuant to this Agreement which constitutes an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, or any successor provision or regulations
promulgated thereunder. In case of uncertainty as to whether some portion of a
payment might constitute an excess parachute payment, the Company shall
initially make the payment to the Executive and Executive agrees to refund to
the Company any amounts ultimately determined to be excess parachute payments;
and
(c) The Company shall also pay to Executive all legal fees and
expenses incurred by Executive in seeking to obtain or enforce any right or
benefit provided to Executive by this Agreement, including any and all expenses
of arbitration in accordance with Section 12 below.
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<PAGE>
Executive shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise. The
amount of any payment or benefit provided in this Section 4 shall not be reduced
by any compensation earned by Executive as a result of any employment by another
employer.
5. SUCCESSORS; BINDING AGREEMENT; ASSIGNMENT.
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive terminated his
employment after a Change in Control for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Executive and Executive may not
assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. MODIFICATION; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. NOTICE. All notices, requests, demands and all other
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular, certified or registered mail, return
receipt requested, at the address of the other party, as follows:
If to the Company, to:
Fourth Shift Corporation
7900 International Drive
International Plaza
Suite 450
Bloomington, MN 55425
Attn: Controller
If to Executive, to:
M. M. Stuckey
46 Red Birch Court
Danville, California 94506
Either party hereto may change its address for purposes of this Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.
9. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstances shall to any extent be invalid
or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or
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<PAGE>
unenforceable shall not be affected thereby, and each term and provision of this
Agreement shall be valid and enforceable to the fullest extent permitted by law.
10. HEADINGS. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. GOVERNING LAW/ARBITRATION. This Agreement has been executed and
delivered in the State of Minnesota and shall in all respects be governed by,
and construed and enforced in accordance with, the laws of the State of
Minnesota, including all matters of construction, validity and performance.
Notwithstanding the foregoing, any dispute as to the occurrence of a "Change of
Control," or as to "Good Reason," shall be settled by final and binding
arbitration in accordance with the Center for Public Resources Rules for Non-
Administered Arbitration of Business Disputes in effect as of the date of this
Agreement by a sole arbitrator. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. Section 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The place of arbitration shall be Minneapolis, Minnesota. The
arbitrator is empowered to award damages in excess of compensatory damages.
13. ENTIRE AGREEMENT. This Agreement supersedes any and all other
oral or written agreements or policies made relating to the subject matter
hereof; PROVIDED THAT, this Agreement shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in accordance
with their terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in its name by a duly authorized officer, and Executive has hereunto
set his hand, all as of the date first written above.
Fourth Shift Corporation
By /s/ JIMMIE H. CALDWELL
------------------------
Its PRESIDENT
--------------------
/s/ M.M. STUCKEY
---------------------------
M. M. Stuckey
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<PAGE>
EXHIBIT 10.9
SEVERANCE PAY AGREEMENT
This Agreement is made as of the 16th day of April, 1996, between
Fourth Shift Corporation, 7900 International Drive, International Plaza, Suite
450, Bloomington, MN 55425 (hereinafter called the "Company") and Jimmie H.
Caldwell (hereinafter called "Executive"), residing at 6209 St. Albans Circle,
Edina, Minnesota 55436.
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the financial
arrangements that the Company will provide to the Executive upon Executive's
separation from employment with the Company or with a subsidiary of the Company
or one of its subsidiaries under the circumstances described herein; and
WHEREAS, this Agreement is adopted in the belief that it is in the
best interests of the Company and its shareholders to provide stable conditions
of employment for Executive, thereby minimizing personnel turnover and enhancing
the Company's and its subsidiaries' ability to recruit highly qualified people.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive notwithstanding the possibility, threat or occurrence of
a bid to take over control of the Company, and to induce Executive to remain in
the employ of the Company or the subsidiary of the Company with which Executive
is employed (the "Subsidiary"), and for other good and valuable consideration,
the Company and Executive agree as follows:
1. TERM OF AGREEMENT.
This Agreement shall be for a two-year term commencing on the date
hereof and shall be automatically renewed for an additional two-year term
thereafter unless canceled in writing by either party hereto at least 60 days
prior to expiration of the initial or any renewal term; provided that this
Agreement shall continue for at least two years after a Change of Control that
occurs during the term of this Agreement.
2. TERMINATION OF EMPLOYMENT.
(i) If a Change in Control (as defined in Section 3(i) hereof) occurs
during the term of this Agreement and any of the following events occur within
two years after such Change of Control, (x) all stock options in the Company (or
its successor as a result of the Change of Control) held by the terminated
Executive shall be accelerated so that they are fully exercisable by the
terminated Executive for the period after termination specified in such stock
options and (y) the terminated Executive shall be entitled to receive the cash
payment provided in Section 4 hereof:
(a) the Company or the Subsidiary, as the case may be, shall
have exercised its right to terminate the employee without cause; or
(b) the Executive shall have voluntarily exercised his option to
terminate his employment for Good Reason (as defined in Section 3(ii)
hereof). Notice of election of this option must identify the
Executive who desires to terminate his employment and set forth in
reasonable detail the facts and circumstances claimed to constitute
Good Reason.
(ii) From and after the date of a Change in Control, the Company and
the Subsidiary shall have the right to terminate Executive from employment at
any time during the term of this Agreement for Cause (as defined in Section
3(iii) hereof), by written notice to the Executive, specifying the particulars
of the conduct of Executive forming the basis for such termination, and
Executive shall not be entitled to any payment pursuant to Section 4 for
termination for Cause.
(iii) From and after the date of a Change in Control during the
term of this Agreement, Executive shall not be removed from employment with the
Company or the Subsidiary, as the case may be, except
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as provided in Section 2(i) or (ii) hereof or as a result of Executive's
Disability (as defined in Section 3(iv) hereof) or his death. Executive's
rights upon termination of employment prior to a Change in Control or after
the expiration of the term of this Agreement shall be governed by the standard
employment termination policy applicable to Executive in effect at the time of
termination.
Any notice given by Executive pursuant to this Section 2 shall be
effective five (5) business days after the date it is given by Executive.
3. DEFINITIONS
(i) A "Change in Control" shall mean the occurrence of any of the
following events as a result of a transaction or series of transactions:
(a) a change in control of the Company of a nature required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), whether or not the Company is then subject to such
reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding
securities;
(c) individuals who at the date hereof constitute the Board of
Directors of the Company cease to constitute a majority thereof,
PROVIDED THAT such change is the direct or indirect result of a proxy
fight and contested election for positions on the Board; or
(d) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in control
of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events:
(a) the assignment to Executive of employment responsibilities
which are not of comparable responsibility and status as the
employment responsibilities held by Executive immediately prior to a
Change in Control;
(b) a reduction by the Company or by the Subsidiary, as the case
may be, in Executive's compensation (including targeted bonus
compensation) as in effect immediately prior to a Change in Control;
(c) the Company's or the Subsidiary's requiring Executive to be
based anywhere other than within fifty (50) miles of Executive's
office location immediately prior to a Change in Control, except for
requirements of temporary travel on the Company's business to an
extent substantially consistent with Executive's business travel
obligations immediately prior to a Change in Control;
(d) except to the extent otherwise required by applicable law,
the failure by the Company or the Subsidiary to continue in effect any
benefit or compensation plan, stock ownership plan, stock purchase
plan, bonus plan, life insurance plan, health-and-accident plan or
disability plan in which Executive is participating immediately prior
to a Change in Control (or plans providing Executive with
substantially similar benefits), the taking of any action by the
Company or the Subsidiary which would adversely affect Executive's
participation in, or materially reduce Executive's benefits under, any
of such plans or deprive Executive of any material fringe benefit
enjoyed by Executive immediately prior to such Change in Control, or
the failure by the Company or the Subsidiary to provide Executive with
the number of paid vacation days to which Executive is entitled
immediately prior to such Change in Control in accordance with the
Company's or such Subsidiary's vacation policy as then in effect; or
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(e) the failure by the Company to obtain, as specified in
Section 6(i) hereof an assumption of the obligations of the Company to
perform this Agreement by any successor to the Company.
Notwithstanding the foregoing, none of the forgoing events shall be considered
"Good Reason" if it occurs in connection with the Executive's death or
disability.
(iii) "Cause" shall mean termination by the Company or the
Subsidiary, as the case may be, of Executive's employment based upon (a) the
willful and continued failure by Executive substantially to perform his duties
and obligations (other than any such failure resulting from his incapacity due
to physical or mental illness) or (b) the willful engaging by Executive in
misconduct which is materially injurious to the Company or any of its
subsidiaries, monetarily or otherwise. For purposes of this paragraph, no act,
or failure to act, on Executive's part shall be considered "willful" unless
done, or omitted to be done, by Executive in bad faith and without reasonable
belief that his action or omission was in the best interests of the Company and
its subsidiaries.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Executive for a disability benefit under the long-term disability
plan of the Company or the Subsidiary.
4. BENEFITS UPON TERMINATION UNDER SECTION 2(i)
Upon the termination of the employment of Executive pursuant to
Section 2(i) hereof, Executive shall be entitled to receive the benefits
specified in this Section 4. The amounts due to Executive under subparagraphs
(a) and (b) of this Section 4 shall be paid to Executive not later than one
business day prior to the date that the termination of Executive's employment
becomes effective.
(a) The Company shall pay to Executive (i) the full base salary
earned by him and unpaid through the date that the termination of Executive's
employment becomes effective, at the rate in effect at the time written notice
of termination (voluntary or involuntary) was given, (ii) any amount earned by
Executive as a bonus with respect to the fiscal year of the Company preceding
the termination of his employment if such bonus has not theretofore been paid to
Executive, (iii) an amount equal to a pro rata portion, based on number of days
elapsed, of the bonus Executive would have earned for the year in which
termination is effective, assuming for such purposes that the Company achieves
targeted performance, and (iii) an amount representing credit for any vacation
earned or accrued by him but not taken;
(b) In lieu of any further base salary payments to Executive for
periods subsequent to the date that the termination of Executive's employment
becomes effective, the Company shall pay as severance pay to Executive a lump-
sum cash amount equal to two (2) times Executive's average annualized cash
compensation for the period consisting of the Executive's most recent five
taxable years ending before the date on which a Change in Control occurs (or
such portion of such period during which Executive performed services for the
Company); subject, however, to the restriction that the Executive shall not be
entitled to receive any amount pursuant to this Agreement which constitutes an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, or any successor provision or regulations
promulgated thereunder. In case of uncertainty as to whether some portion of a
payment might constitute an excess parachute payment, the Company shall
initially make the payment to the Executive and Executive agrees to refund to
the Company any amounts ultimately determined to be excess parachute payments;
and
(c) The Company shall also pay to Executive all legal fees and
expenses incurred by Executive in seeking to obtain or enforce any right or
benefit provided to Executive by this Agreement, including any and all expenses
of arbitration in accordance with Section 12 below.
Executive shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise. The
amount of any payment or benefit provided in this Section 4 shall not be reduced
by any compensation earned by Executive as a result of any employment by another
employer.
5. SUCCESSORS; BINDING AGREEMENT; ASSIGNMENT.
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(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive terminated his
employment after a Change in Control for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Executive and Executive may not
assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. MODIFICATION; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. NOTICE. All notices, requests, demands and all other
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular, certified or registered mail, return
receipt requested, at the address of the other party, as follows:
If to the Company, to:
Fourth Shift Corporation
7900 International Drive
International Plaza
Suite 450
Bloomington, MN 55425
Attn: Controller
If to Executive, to:
Jimmie H. Caldwell
6209 St. Albans Circle
Edina, Minnesota 55436
Either party hereto may change its address for purposes of this Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.
9. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstances shall to any extent be invalid
or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10. HEADINGS. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
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<PAGE>
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. GOVERNING LAW/ARBITRATION. This Agreement has been executed and
delivered in the State of Minnesota and shall in all respects be governed by,
and construed and enforced in accordance with, the laws of the State of
Minnesota, including all matters of construction, validity and performance.
Notwithstanding the foregoing, any dispute as to the occurence of a "Change of
Control," or as to "Good Reason," shall be settled by final and binding
arbitration in accordance with the Center for Public Resources Rules for Non-
Administered Arbitration of Business Disputes in effect as of the date of this
Agreement by a sole arbitrator. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. Section 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The place of arbitration shall be Minneapolis, Minnesota. The
arbitrator is empowered to award damages in excess of compensatory damages.
13. ENTIRE AGREEMENT. This Agreement supersedes any and all other
oral or written agreements or policies made relating to the subject matter
hereof; PROVIDED THAT, this Agreement shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in accordance
with their terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in its name by a duly authorized officer, and Executive has hereunto
set his hand, all as of the date first written above.
Fourth Shift Corporation
By /s/ M.M. STUCKEY
-------------------------------
Its Chief Executive Officer
-------------------------
/s/ JIMMIE H. CALDWELL
-------------------------------
Jimmie H. Caldwell
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EXHIBIT 10.10
SEVERANCE PAY AGREEMENT
This Agreement is made as of the 16th day of April, 1996, between
Fourth Shift Corporation, 7900 International Drive, International Plaza, Suite
450, Bloomington, MN 55425 (hereinafter called the "Company") and Allen S.
Peterson (hereinafter called "Executive"), residing at 675 Old Jonas Hill Road,
Lafayette, California 94549.
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the financial
arrangements that the Company will provide to the Executive upon Executive's
separation from employment with the Company or with a subsidiary of the Company
or one of its subsidiaries under the circumstances described herein; and
WHEREAS, this Agreement is adopted in the belief that it is in the
best interests of the Company and its shareholders to provide stable conditions
of employment for Executive, thereby minimizing personnel turnover and enhancing
the Company's and its subsidiaries' ability to recruit highly qualified people.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive notwithstanding the possibility, threat or occurrence of
a bid to take over control of the Company, and to induce Executive to remain in
the employ of the Company or the subsidiary of the Company with which Executive
is employed (the "Subsidiary"), and for other good and valuable consideration,
the Company and Executive agree as follows:
1. TERM OF AGREEMENT.
This Agreement shall be for a two-year term commencing on the date
hereof and shall be automatically renewed for an additional two-year term
thereafter unless canceled in writing by either party hereto at least 60 days
prior to expiration of the initial or any renewal term; provided that this
Agreement shall continue for at least two years after a Change of Control that
occurs during the term of this Agreement.
2. TERMINATION OF EMPLOYMENT.
(i) If a Change in Control (as defined in Section 3(i) hereof) occurs
during the term of this Agreement and any of the following events occur within
two years after such Change of Control, (x) all stock options in the Company (or
its successor as a result of the Change of Control) held by the terminated
Executive shall be accelerated so that they are fully exercisable by the
terminated Executive for the period after termination specified in such stock
options and (y) the terminated Executive shall be entitled to receive the cash
payment provided in Section 4 hereof:
(a) the Company or the Subsidiary, as the case may be, shall
have exercised its right to terminate the Executive without cause; or
(b) the Executive shall have voluntarily exercised his option to
terminate his employment for Good Reason (as defined in Section 3(ii)
hereof). Notice of election of this option must identify the
Executive who desires to terminate his employment and set forth in
reasonable detail the facts and circumstances claimed to constitute
Good Reason.
(ii) From and after the date of a Change in Control, the Company and
the Subsidiary shall have the right to terminate Executive from employment at
any time during the term of this Agreement for Cause (as defined in Section
3(iii) hereof), by written notice to the Executive, specifying the particulars
of the conduct of Executive forming the basis for such termination, and
Executive shall not be entitled to any payment pursuant to Section 4 for
termination for Cause.
(iii) From and after the date of a Change in Control during the
term of this Agreement, Executive shall not be removed from employment with the
Company or the Subsidiary, as the case may be, except
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<PAGE>
as provided in Section 2(i) or (ii) hereof or as a result of Executive's
Disability (as defined in Section 3(iv) hereof) or his death. Executive's
rights upon termination of employment prior to a Change in Control or after
the expiration of the term of this Agreement shall be governed by the
standard employment termination policy applicable to Executive in effect at
the time of termination.
Any notice given by Executive pursuant to this Section 2 shall be
effective five (5) business days after the date it is given by Executive.
3. DEFINITIONS
(i) A "Change in Control" shall mean the occurrence of any of the
following events:
(a) a change in control of the Company of a nature required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), whether or not the Company is then subject to such
reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding
securities;
(c) individuals who at the date hereof constitute the Board of
Directors of the Company cease to constitute a majority thereof,
PROVIDED THAT such change is the direct or indirect result of a proxy
fight and contested election for positions on the Board; or
(d) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in control
of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events:
(a) the assignment to Executive of employment responsibilities
which are not of comparable responsibility and status as the
employment responsibilities held by Executive immediately prior to a
Change in Control;
(b) a reduction by the Company or by the Subsidiary, as the case
may be, in Executive's compensation (including targeted bonus
compensation) as in effect immediately prior to a Change in Control;
(c) the Company's or the Subsidiary's requiring Executive to be
based anywhere other than within fifty (50) miles of Executive's
office location immediately prior to a Change in Control, except for
requirements of temporary travel on the Company's business to an
extent substantially consistent with Executive's business travel
obligations immediately prior to a Change in Control;
(d) except to the extent otherwise required by applicable law,
the failure by the Company or the Subsidiary to continue in effect any
benefit or compensation plan, stock ownership plan, stock purchase
plan, bonus plan, life insurance plan, health-and-accident plan or
disability plan in which Executive is participating immediately prior
to a Change in Control (or plans providing Executive with
substantially similar benefits), the taking of any action by the
Company or the Subsidiary which would adversely affect Executive's
participation in, or materially reduce Executive's benefits under, any
of such plans or deprive Executive of any material fringe benefit
enjoyed by Executive immediately prior to such Change in Control, or
the failure by the Company or the Subsidiary to provide Executive with
the number of paid vacation days to which Executive is entitled
immediately prior to such Change in Control in accordance with the
Company's or such Subsidiary's vacation policy as then in effect; or
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<PAGE>
(e) the failure by the Company to obtain, as specified in
Section 6(i) hereof an assumption of the obligations of the Company to
perform this Agreement by any successor to the Company.
Notwithstanding the foregoing, none of the forgoing events shall be considered
"Good Reason" if it occurs in connection with the Executive's death or
disability.
(iii) "Cause" shall mean termination by the Company or the
Subsidiary, as the case may be, of Executive's employment based upon (a) the
willful and continued failure by Executive substantially to perform his duties
and obligations (other than any such failure resulting from his incapacity due
to physical or mental illness) or (b) the willful engaging by Executive in
misconduct which is materially injurious to the Company or any of its
subsidiaries, monetarily or otherwise. For purposes of this paragraph, no act,
or failure to act, on Executive's part shall be considered "willful" unless
done, or omitted to be done, by Executive in bad faith and without reasonable
belief that his action or omission was in the best interests of the Company and
its subsidiaries.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Executive for a disability benefit under the long-term disability
plan of the Company or the Subsidiary.
4. BENEFITS UPON TERMINATION UNDER SECTION 2(i)
Upon the termination of the employment of Executive pursuant to
Section 2(i) hereof, Executive shall be entitled to receive the benefits
specified in this Section 4. The amounts due to Executive under subparagraphs
(a) and (b) of this Section 4 shall be paid to Executive not later than one
business day prior to the date that the termination of Executive's employment
becomes effective.
(a) The Company shall pay to Executive (i) the full base salary
earned by him and unpaid through the date that the termination of Executive's
employment becomes effective, at the rate in effect at the time written notice
of termination (voluntary or involuntary) was given, (ii) any amount earned by
Executive as a bonus with respect to the fiscal year of the Company preceding
the termination of his employment if such bonus has not theretofore been paid to
Executive, (iii) an amount equal to a pro rata portion, based on number of days
elapsed, of the bonus Executive would have earned for the year in which
termination is effective, assuming for such purposes that the Company achieves
targeted performance, and (iii) an amount representing credit for any vacation
earned or accrued by him but not taken;
(b) In lieu of any further base salary payments to Executive for
periods subsequent to the date that the termination of Executive's employment
becomes effective, the Company shall pay as severance pay to Executive a lump-
sum cash amount equal to one (1) times Executive's average annualized cash
compensation for the period consisting of the Executive's most recent five
taxable years ending before the date on which a Change in Control occurs (or
such portion of such period during which Executive performed services for the
Company); subject, however, to the restriction that the Executive shall not be
entitled to receive any amount pursuant to this Agreement which constitutes an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, or any successor provision or regulations
promulgated thereunder. In case of uncertainty as to whether some portion of a
payment might constitute an excess parachute payment, the Company shall
initially make the payment to the Executive and Executive agrees to refund to
the Company any amounts ultimately determined to be excess parachute payments;
and
(c) The Company shall also pay to Executive all legal fees and
expenses incurred by Executive in seeking to obtain or enforce any right or
benefit provided to Executive by this Agreement, including any and all expenses
of arbitration in accordance with Section 12 below.
Executive shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise. The
amount of any payment or benefit provided in this Section 4 shall not be reduced
by any compensation earned by Executive as a result of any employment by another
employer.
5. SUCCESSORS; BINDING AGREEMENT; ASSIGNMENT.
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(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive terminated his
employment after a Change in Control for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Executive and Executive may not
assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. MODIFICATION; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. NOTICE. All notices, requests, demands and all other
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular, certified or registered mail, return
receipt requested, at the address of the other party, as follows:
If to the Company, to:
Fourth Shift Corporation
7900 International Drive
International Plaza
Suite 450
Bloomington, MN 55425
Attn: Controller
If to Executive, to:
Allen S. Peterson
675 Old Jonas Hill Road
Lafayette, California 94549
Either party hereto may change its address for purposes of this Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.
9. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstances shall to any extent be invalid
or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10. HEADINGS. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
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<PAGE>
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. GOVERNING LAW/ARBITRATION. This Agreement has been executed and
delivered in the State of Minnesota and shall in all respects be governed by,
and construed and enforced in accordance with, the laws of the State of
Minnesota, including all matters of construction, validity and performance.
Notwithstanding the foregoing, any dispute as to the occurrence of a "Change of
Control," or as to "Good Reason," shall be settled by final and binding
arbitration in accordance with the Center for Public Resources Rules for Non-
Administered Arbitration of Business Disputes in effect as of the date of this
Agreement by a sole arbitrator. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. Section 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The place of arbitration shall be Minneapolis, Minnesota. The
arbitrator is empowered to award damages in excess of compensatory damages.
13. ENTIRE AGREEMENT. This Agreement supersedes any and all other
oral or written agreements or policies made relating to the subject matter
hereof; PROVIDED THAT, this Agreement shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in accordance
with their terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in its name by a duly authorized officer, and Executive has hereunto
set his hand, all as of the date first written above.
Fourth Shift Corporation
By/s/ JIMMIE H. CALDWELL
---------------------------
Its PRESIDENT
------------------
/s/ ALLEN S. PETERSON
---------------------------
Allen S. Peterson
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EXHIBIT 10.11
SEVERANCE PAY AGREEMENT
This Agreement is made as of the 16th day of April, 1996, between
Fourth Shift Corporation, 7900 International Drive, International Plaza, Suite
450, Bloomington, MN 55425 (hereinafter called the "Company") and David G.
Latzke (hereinafter called "Executive"), residing at 311 Sinnen Circle,
Chanhassen, Minnesota 55317.
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the financial
arrangements that the Company will provide to the Executive upon Executive's
separation from employment with the Company or with a subsidiary of the Company
or one of its subsidiaries under the circumstances described herein; and
WHEREAS, this Agreement is adopted in the belief that it is in the
best interests of the Company and its shareholders to provide stable conditions
of employment for Executive, thereby minimizing personnel turnover and enhancing
the Company's and its subsidiaries' ability to recruit highly qualified people.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive notwithstanding the possibility, threat or occurrence of
a bid to take over control of the Company, and to induce Executive to remain in
the employ of the Company or the subsidiary of the Company with which Executive
is employed (the "Subsidiary"), and for other good and valuable consideration,
the Company and Executive agree as follows:
1. TERM OF AGREEMENT.
This Agreement shall be for a two-year term commencing on the date
hereof and shall be automatically renewed for an additional two-year term
thereafter unless canceled in writing by either party hereto at least 60 days
prior to expiration of the initial or any renewal term; provided that this
Agreement shall continue for at least two years after a Change of Control that
occurs during the term of this Agreement.
2. TERMINATION OF EMPLOYMENT.
(i) If a Change in Control (as defined in Section 3(i) hereof) occurs
during the term of this Agreement and any of the following events occur within
two years after such Change of Control, (x) all stock options in the Company (or
its successor as a result of the Change of Control) held by the terminated
Executive shall be accelerated so that they are fully exercisable by the
terminated Executive for the period after termination specified in such stock
options and (y) the terminated Executive shall be entitled to receive the cash
payment provided in Section 4 hereof:
(a) the Company or the Subsidiary, as the case may be, shall
have exercised its right to terminate the Executive without cause; or
(b) the Executive shall have voluntarily exercised his option to
terminate his employment for Good Reason (as defined in Section 3(ii)
hereof). Notice of election of this option must identify the
Executive who desires to terminate his employment and set forth in
reasonable detail the facts and circumstances claimed to constitute
Good Reason.
(ii) From and after the date of a Change in Control, the Company and
the Subsidiary shall have the right to terminate Executive from employment at
any time during the term of this Agreement for Cause (as defined in Section
3(iii) hereof), by written notice to the Executive, specifying the particulars
of the conduct of Executive forming the basis for such termination, and
Executive shall not be entitled to any payment pursuant to Section 4 for
termination for Cause.
(iii) From and after the date of a Change in Control during the
term of this Agreement, Executive shall not be removed from employment with the
Company or the Subsidiary, as the case may be, except
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as provided in Section 2(i) or (ii) hereof or as a result of Executive's
Disability (as defined in Section 3(iv) hereof) or his death. Executive's
rights upon termination of employment prior to a Change in Control or after
the expiration of the term of this Agreement shall be governed by the
standard employment termination policy applicable to Executive in effect at
the time of termination.
Any notice given by Executive pursuant to this Section 2 shall be
effective five (5) business days after the date it is given by Executive.
3. DEFINITIONS
(i) A "Change in Control" shall mean the occurrence of any of the
following events:
(a) a change in control of the Company of a nature required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), whether or not the Company is then subject to such
reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding
securities;
(c) individuals who at the date hereof constitute the Board of
Directors of the Company cease to constitute a majority thereof,
PROVIDED THAT such change is the direct or indirect result of a proxy
fight and contested election for positions on the Board; or
(d) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in control
of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events:
(a) the assignment to Executive of employment responsibilities
which are not of comparable responsibility and status as the
employment responsibilities held by Executive immediately prior to a
Change in Control;
(b) a reduction by the Company or by the Subsidiary, as the case
may be, in Executive's compensation (including targeted bonus
compensation) as in effect immediately prior to a Change in Control;
(c) the Company's or the Subsidiary's requiring Executive to be
based anywhere other than within fifty (50) miles of Executive's
office location immediately prior to a Change in Control, except for
requirements of temporary travel on the Company's business to an
extent substantially consistent with Executive's business travel
obligations immediately prior to a Change in Control;
(d) except to the extent otherwise required by applicable law,
the failure by the Company or the Subsidiary to continue in effect any
benefit or compensation plan, stock ownership plan, stock purchase
plan, bonus plan, life insurance plan, health-and-accident plan or
disability plan in which Executive is participating immediately prior
to a Change in Control (or plans providing Executive with
substantially similar benefits), the taking of any action by the
Company or the Subsidiary which would adversely affect Executive's
participation in, or materially reduce Executive's benefits under, any
of such plans or deprive Executive of any material fringe benefit
enjoyed by Executive immediately prior to such Change in Control, or
the failure by the Company or the Subsidiary to provide Executive with
the number of paid vacation days to which Executive is entitled
immediately prior to such Change in Control in accordance with the
Company's or such Subsidiary's vacation policy as then in effect; or
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<PAGE>
(e) the failure by the Company to obtain, as specified in
Section 6(i) hereof an assumption of the obligations of the Company to
perform this Agreement by any successor to the Company.
Notwithstanding the foregoing, none of the forgoing events shall be considered
"Good Reason" if it occurs in connection with the Executive's death or
disability.
(iii) "Cause" shall mean termination by the Company or the
Subsidiary, as the case may be, of Executive's employment based upon (a) the
willful and continued failure by Executive substantially to perform his duties
and obligations (other than any such failure resulting from his incapacity due
to physical or mental illness) or (b) the willful engaging by Executive in
misconduct which is materially injurious to the Company or any of its
subsidiaries, monetarily or otherwise. For purposes of this paragraph, no act,
or failure to act, on Executive's part shall be considered "willful" unless
done, or omitted to be done, by Executive in bad faith and without reasonable
belief that his action or omission was in the best interests of the Company and
its subsidiaries.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Executive for a disability benefit under the long-term disability
plan of the Company or the Subsidiary.
4. BENEFITS UPON TERMINATION UNDER SECTION 2(i)
Upon the termination of the employment of Executive pursuant to
Section 2(i) hereof, Executive shall be entitled to receive the benefits
specified in this Section 4. The amounts due to Executive under subparagraphs
(a) and (b) of this Section 4 shall be paid to Executive not later than one
business day prior to the date that the termination of Executive's employment
becomes effective.
(a) The Company shall pay to Executive (i) the full base salary
earned by him and unpaid through the date that the termination of Executive's
employment becomes effective, at the rate in effect at the time written notice
of termination (voluntary or involuntary) was given, (ii) any amount earned by
Executive as a bonus with respect to the fiscal year of the Company preceding
the termination of his employment if such bonus has not theretofore been paid to
Executive, (iii) an amount equal to a pro rata portion, based on number of days
elapsed, of the bonus Executive would have earned for the year in which
termination is effective, assuming for such purposes that the Company achieves
targeted performance, and (iii) an amount representing credit for any vacation
earned or accrued by him but not taken;
(b) In lieu of any further base salary payments to Executive for
periods subsequent to the date that the termination of Executive's employment
becomes effective, the Company shall pay as severance pay to Executive a lump-
sum cash amount equal to one (1) times Executive's average annualized cash
compensation for the period consisting of the Executive's most recent five
taxable years ending before the date on which a Change in Control occurs (or
such portion of such period during which Executive performed services for the
Company); subject, however, to the restriction that the Executive shall not be
entitled to receive any amount pursuant to this Agreement which constitutes an
"excess parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, or any successor provision or regulations
promulgated thereunder. In case of uncertainty as to whether some portion of a
payment might constitute an excess parachute payment, the Company shall
initially make the payment to the Executive and Executive agrees to refund to
the Company any amounts ultimately determined to be excess parachute payments;
and
(c) The Company shall also pay to Executive all legal fees and
expenses incurred by Executive in seeking to obtain or enforce any right or
benefit provided to Executive by this Agreement, including any and all expenses
of arbitration in accordance with Section 12 below.
Executive shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise. The
amount of any payment or benefit provided in this Section 4 shall not be reduced
by any compensation earned by Executive as a result of any employment by another
employer.
5. SUCCESSORS; BINDING AGREEMENT; ASSIGNMENT.
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<PAGE>
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive terminated his
employment after a Change in Control for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Executive and Executive may not
assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. MODIFICATION; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. NOTICE. All notices, requests, demands and all other
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular, certified or registered mail, return
receipt requested, at the address of the other party, as follows:
If to the Company, to:
Fourth Shift Corporation
7900 International Drive
International Plaza
Suite 450
Bloomington, MN 55425
Attn: Controller
If to Executive, to:
David G. Latzke
311 Sinnen Circle
Chanhassen, Minnesota 55317
Either party hereto may change its address for purposes of this Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.
9. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstances shall to any extent be invalid
or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10. HEADINGS. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
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<PAGE>
11. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12. GOVERNING LAW/ARBITRATION. This Agreement has been executed and
delivered in the State of Minnesota and shall in all respects be governed by,
and construed and enforced in accordance with, the laws of the State of
Minnesota, including all matters of construction, validity and performance.
Notwithstanding the foregoing, any dispute as to the occurrence of a "Change of
Control," or as to "Good Reason," shall be settled by final and binding
arbitration in accordance with the Center for Public Resources Rules for Non-
Administered Arbitration of Business Disputes in effect as of the date of this
Agreement by a sole arbitrator. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. Section 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The place of arbitration shall be Minneapolis, Minnesota. The
arbitrator is empowered to award damages in excess of compensatory damages.
13. ENTIRE AGREEMENT. This Agreement supersedes any and all other
oral or written agreements or policies made relating to the subject matter
hereof; PROVIDED THAT, this Agreement shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in accordance
with their terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in its name by a duly authorized officer, and Executive has hereunto
set his hand, all as of the date first written above.
Fourth Shift Corporation
By /s/ JIMMIE H. CALDWELL
------------------------------
Its President
-----------------------
/s/ DAVID G. LATZKE
-------------------------------
David G. Latzke
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EXHIBIT 10.12
AMENDMENT NO. 1
TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 1 to Loan and Security Agreement is entered into as of
the 29th day of March, 1996, by and between Silicon Valley Bank ("Bank") and
Fourth Shift Corporation ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of October 23, 1995 (the "Agreement"). The parties desire to amend the
Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. New Sections 2.1.1 and 2.1.2 shall be added to the Amendment, as
follows:
2.1.1 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued letters of credit for the account of
Borrower in an aggregate face amount not to exceed (i) the lesser of the
Committed Line or the Borrowing Base minus (ii) the then outstanding principal
balance of the Advances provided that the face amount of outstanding letters of
credit (including drawn but unreimbursed letters of credit) shall not in any
case exceed One Million Five Hundred Thousand Dollars ($1,500,000). Each such
letter of credit shall have an expiry date no later than ninety (90) days after
the Maturity Date, provided that Borrower's letter of credit reimbursement
obligation shall be secured by cash on terms acceptable to Bank at any time
after the Maturity Date if the term of this Agreement is not extended by Bank.
All such letters of credit shall be, in form and substance, acceptable to Bank
in its sole discretion and shall be subject to the terms and conditions of
Bank's form of application and letter of credit agreement. Each request for a
letter of credit shall be deemed a request for an Advance under the Agreement.
Each letter of credit shall be deemed an "Advance" for the purpose of
calculating availability under the Committed Line.
(b) Borrower shall indemnify, defend and hold Bank harmless from
any loss, cost, expense or liability, including, without limitation, reasonable
attorneys' fees, arising out of or in connection with any letters of credit.
2.1.2 LETTER OF CREDIT REIMBURSEMENT RESERVE.
(a) Borrower may request that Bank issue a letter of credit
payable in a currency other than United States Dollars. If a demand for payment
is made under any such letter of credit, Bank shall treat such demand as an
advance to Borrower of the equivalent of the amount thereof (plus cable charges)
in United States currency at the then prevailing rate of exchange in San
Francisco, California, for sales of that other currency for cable transfer to
the country of which it is the currency.
(b) Upon the issuance of any letter of credit payable in a
currency other than United States Dollars, Bank shall create a reserve under the
Committed Line for letters of credit against fluctuations in currency exchange
rates in an amount equal to twenty percent (20%) of the face amount of
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<PAGE>
such letter of credit. The amount of such reserve may be amended by Bank
from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Line shall be reduced by the amount
of such reserve for so long as such letter of credit remains outstanding.
2. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
3. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
4. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
FOURTH SHIFT CORPORATION
By: /s/ D.G. Latzke
------------------
Title: V.P. and CFO
------------------
SILICON VALLEY BANK
By: /s/ Kirk Westbrook
------------------
Title: Vice President
------------------
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EXHIBIT 10.13
AMENDMENT NO. 2
TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 2 to Loan and Security Agreement is entered into as of
the 26th day of April, 1996, by and between Silicon Valley Bank ("Bank") and
Fourth Shift Corporation ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of October 23, 1995, as amended (the "Agreement"). The parties desire
to amend the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The term "Maturity Date" in Section 1.1 shall be amended to read
"April 25, 2000," provided that the Revolving Facility shall terminate, and all
Advances outstanding thereunder shall be due and payable, on November 6, 1996.
2. New Section 2.1.3 shall be added to the Agreement, as follows:
2.1.3 EQUIPMENT ADVANCES.
(a) At any time from the date hereof through April 25,
1997 (the "Equipment Availability Date"), Borrower may from time to time
request advances (each an "Equipment Advance" and, collectively, the
"Equipment Advances") from Bank in an aggregate principal amount of
up to One Million Five Hundred Thousand Dollars ($1,500,00). The
Equipment Advances shall be used to purchase Equipment approved from time
to time by Bank, which Equipment (i) shall in any case have been purchased
by Borrower not earlier than ninety (90) days before the date of the
requested Equipment Advance and (ii) shall not be placed at any location
outside of the United States and shall not exceed one hundred percent
(100%) of the invoiced cost of such Equipment, excluding installation
expense, freight discounts, warranty charges and taxes.
(b) Interest shall accrue from the date of each Equipment
Advance at a fixed rate of Nine and One Quarter Percent (9.25%) per annum,
and shall be payable monthly for each month through the month in which the
Equipment Availability Date falls. The Equipment Advance or Equipment
Advances that are outstanding on the Equipment Availability Date will be
payable in thirty-six (36) equal monthly installments of principal, plus
accrued interest, beginning on the twenty-fifth day of the month following
the Equipment Availability Date. The entire principal balance and all
accrued but unpaid interest shall be due and payable on April 25, 2000.
(c) When Borrower desires to obtain an Equipment Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission received no later than 3:00 p.m. California time one (1)
Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be in substantially the form of EXHIBIT B. The notice
shall be signed by a Responsible Officer and include a copy of the invoice
for the Equipment to
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be financed.
3. Section 6.9 is amended to read as follows:
6.9 TANGIBLE NET WORTH. Borrower shall maintain as of the last
day of each fiscal quarter a Tangible Net Worth of not less than Four
Million Dollars ($4,000,000).
4. Section 6.10 is amended to read as follows:
6.10 PROFITABILITY. Borrower shall have a minimum profit of One
Dollar ($1.00) for each fiscal quarter.
5. New Section 6.13 is added to the Agreement, as follows:
6.13 DEBT SERVICE RATIO. Borrower shall maintain a Debt Service
Ratio of not less than 2.0 to 1.0. "Debt Service Ratio" shall mean, as
reflected in Borrower's quarterly financial statements delivered pursuant to
Section 6.3, the sum of Borrower's net income and depreciation and amortization
annualized for the preceding three month period, divided by the interest and
principal payments due on Borrower's current portion of long-term debt for such
three month period.
6. Section 8.2 of the Agreement is amended to include Section 6.13 in the
first clause, to read, "If Borrower fails to perform any obligations under
Sections 6.7, 6.8, 6.9, 6.10, 6.11 or 6.13 . . ."
7. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
8. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
9 This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
10. As a condition to the effectiveness of this Amendment, Borrower shall
pay a Facility Fee shall be an amount equal to Four Thousand Dollars ($4,000),
payable upon the date hereof, plus all Bank Expenses incurred in connection with
the preparation of this Amendment.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
FOURTH SHIFT CORPORATION
By: /s/ D.G. Latzke
------------------
Title: V.P. and CFO
------------------
SILICON VALLEY BANK
By: /s/ Kirk Westbrook
-------------------
Title: Vice President
-------------------
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EXHIBIT 10.14
<PAGE>
AMENDMENT NO. 3
TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 3 to Loan and Security Agreement is entered into as of
the 24th day of September, 1996, by and between Silicon Valley Bank ("Bank") and
Fourth Shift Corporation ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of October 23, 1995, as amended (the "Agreement"). The parties desire
to amend the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The term "Maturity Date" in Section 1.1 shall be amended to read
"September 23, 2000," provided that the Revolving Facility shall terminate, and
all Advances outstanding thereunder shall be due and payable, on November 6,
1996.
2. New Section 2.1.4 shall be added to the Agreement, as follows:
2.1.4 EQUIPMENT ADVANCES.
(a) At any time from the date hereof through September 23, 1997,
Borrower may from time to time request advances (each an "Equipment
Advance" and, collectively, the "Equipment Advances") from Bank in an
aggregate principal amount of up to Six Hundred Thousand Dollars
($600,000). The Equipment Advances shall be used to purchase Equipment
approved from time to time by Bank, which Equipment (i) shall in any case
have been purchased by Borrower not earlier than ninety (90) days before
the date of the requested Equipment Advance and (ii) shall not exceed one
hundred percent (100%) of the invoiced cost of such Equipment, including
installation expense, freight discounts, warranty charges and taxes.
Notwithstanding any other provisions of the Agreement, if the forced
liquidation value of Borrower's fixed assets, less any Equipment Advances
outstanding under Section 2.1.3, is less than the aggregate outstanding
Equipment Advances under Sections 2.1.3 and 2.1.4, Borrower may not request
further Equipment Advances under this Section 2.1.4.
(b) Interest shall accrue from the date of each Equipment
Advance made under this Section 2.1.4 at a fixed rate of Nine and One Half
Percent (9.50%) per annum, and shall be payable monthly on the 23rd day of
each month through September 23, 1997. The Equipment Advance or Equipment
Advances that are outstanding under this Section 2.1.4 on September 23,
1997 will be payable in thirty-six (36) equal monthly installments of
principal, plus accrued interest, beginning on October 23, 1997. The
entire principal balance and all accrued but unpaid interest shall be due
and payable on September 23, 2000.
(c) When Borrower desires to obtain an Equipment Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission received no later than 3:00 p.m. California time one (1)
Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be in substantially the form of EXHIBIT B. The notice
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<PAGE>
shall be signed by a Responsible Officer and include a copy of the invoice
for the Equipment to be financed.
3. New Section 6.14 is added to the Agreement, as follows:
6.14 DEBT SERVICE RATIO-SECOND TERM LOAN. Borrower shall maintain a
Debt Service Ratio-Second Term Loan of not less than 1.75 to 1.0. "Debt Service
Ratio-Second Term Loan" shall mean, as reflected in Borrower's quarterly
financial statements delivered pursuant to Section 6.3, the sum of Borrower's
U.S. cash flow on a six-month rolling basis, divided by the interest and
principal payments due on Borrower's current portion of long-term debt for such
period.
4. Section 8.2 of the Agreement is amended to include Section 6.14 in the
first clause, to read, "If Borrower fails to perform any obligations under
Sections 6.7, 6.8, 6.9, 6.10, 6.11, 6.13 or 6.14 . . ."
5. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
6. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
7. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
8. As a condition to the effectiveness of this Amendment, Borrower shall
pay a Facility Fee shall be an amount equal to Three Thousand Dollars ($3,000),
payable upon the date hereof, plus all Bank Expenses incurred in connection with
the preparation of this Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
FOURTH SHIFT CORPORATION
By: /s/ D.G. Latzke
--------------------
Title: V.P. and CFO
--------------------
SILICON VALLEY BANK
By: /s/ Kirk Westbrook
------------------
Title: Vice President
------------------
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EXHIBIT 10.15
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<PAGE>
AMENDMENT NO. 4
TO
LOAN AND SECURITY AGREEMENT
This Amendment No. 4 to Loan and Security Agreement is entered into as of
the 6th day of November, 1996, by and between Silicon Valley Bank ("Bank") and
Fourth Shift Corporation ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of October 23, 1995, as amended (the "Agreement"). The parties desire
to amend the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The term "Committed Line" in Section 1.1 shall be amended to read
"Five Million Dollars ($5,000,000)".
2. The Revolving Facility shall terminate, and all Advances outstanding
thereunder shall be due and payable on November 5, 1997.
3. Subject to Section 3.2(b), the Advances under the Revolving Facility
shall bear interest, from November 6, 1996, at a floating rate equal to the
Prime Rate plus 1.25%.
4. Section 6.3 is amended to provide that, at any time more than
$1,000,000 is outstanding under the Revolving Facility for 90 consecutive days,
Bank shall have a right, at Borrower's expense, to audit Borrower's Accounts
semi-annually.
5. Section 6.10 of the Agreement is amended to provide that, in the
calculation of Borrower's profitability, capitalized software will be treated as
though it had been expensed on Borrower's income statement. Section 6.10 is
further amended to provide that Borrower shall not suffer a loss in excess of
$300,000 in the fiscal quarter ending September 30, 1996, a loss in excess of
$300,000 in the fiscal quarter ending December 31, 1996, or a loss in excess of
$150,000 in the fiscal quarter ending March 31, 1997. Borrower shall have a
profit of not less than $1.00 for each fiscal quarter thereafter.
6. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
7. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
8. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
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9. As a condition to the effectiveness of this Amendment, Borrower shall
pay a Facility Fee shall be an amount equal to Thirty Seven Thousand Five
Hundred Dollars ($37,500), payable upon the date hereof, plus all Bank Expenses
incurred in connection with the preparation of this Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
FOURTH SHIFT CORPORATION
By: /s/ D.G. Latzke
------------------------
Title: V.P. and CFO
------------------------
SILICON VALLEY BANK
By: /s/ Kirk Westbrook
------------------------
Title: Vice President
------------------------
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Exhibit #10.16
LICENSE AGREEMENT
This Agreement, dated as of March 3, 1996 (the "Effective Date") is made by and
between Fourth Shift Corporation, a Minnesota corporation, with its principal
offices at 7900 International Drive, Minneapolis, Minnesota 55425-1551
(hereinafter "FSC") and Teknekron Software Systems, Inc. a Delaware corporation,
with offices at 530 Lytton Avenue, Palo Alto, California, 94301 (hereinafter
"TSS").
WHEREAS, TSS is a software developer and supplier of computer
networking software technology, and related software development services,
including the Teknekron Information BUS-TM-, the Rendezvous-Registered
Trademark- Information Bus, Transaction Express, Enterprise Toolkit and other
extensions or derivatives of these products, or of other TSS technologies; and
WHEREAS, FSC desires to embed portions of certain TSS products or
technologies into one or more, current or future FSC product(s), for licensing
through FSC's distribution system;
NOW, THEREFORE, in consideration of the mutual promises contained in
this Agreement and for other good and valuable consideration, the parties agree
as follows:
1. DEFINITIONS
1.1. "AGREEMENT" shall mean this License Agreement.
1.2. "TSS SOFTWARE" shall mean those TSS software programs or program
modules included on Exhibit A, or amendments to Exhibit A, along with
any UPDATES or ENHANCEMENTS to those programs; whether the programs
are marketed by TSS under the indicated tradename, or under any other
tradename. TSS SOFTWARE consists of DEVELOPMENT SOFTWARE and RUN TIME
SOFTWARE.
1.3. "DEVELOPMENT SOFTWARE" shall mean software applications and library
files that enable FSC to create FSC PRODUCTS as set forth in Exhibit
A.
1.4. "RUN TIME SOFTWARE" shall mean application services which will be
embedded in the FSC PRODUCT as set forth in Exhibit A.
1.5. "FSC PRODUCTS" shall mean the computer software program(s) to be
distributed by FSC which includes all or portions of the RUN TIME
SOFTWARE, including any FSC derivatives of those programs; whether
using the tradename "FSC" or any other tradename, provided, however,
that an FSC PRODUCT may not be a software environment designed for
substantially the same purpose(s) as the TSS SOFTWARE.
1.6. "OBJECT CODE" shall mean computer software programs in
machine-readable format.
1.7. "SOURCE CODE" shall mean computer software programs in human-readable
format which can be converted by a compiler into OBJECT CODE.
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1.8. "DEFECT(S)" shall mean any condition wherein the TSS SOFTWARE supplied
to FSC under this Agreement fails to perform in accordance with the
DOCUMENTATION which was provided to FSC by TSS.
1.9. "DOCUMENTATION" shall mean any performance specifications or user
manuals supplied to FSC by TSS in accordance with this AGREEMENT,
which may include, but is not limited to sequence diagrams, flow
charts, schematics, processes, functional specifications, design
documents, test plans, release notes, installation information, user
documentation, Application Programming Interfaces (APIs), any software
development kit documentation, or other information relating to the
TSS SOFIWARE programs.
1.10. "END-USER" shall mean the person who or entity which licenses an FSC
PRODUCT from FSC pursuant to a valid license agreement which includes
terms protecting against unauthorized duplication or use.
1.11. "NOTICE" shall mean a written notice provided to either party from the
other party in conformance with section 11.1 of this Agreement.
1.12. "AUTHORIZED PLATFORM" shall mean the hardware/operating system
platforms specified in Exhibit A.
1.13. "AUTHORIZED DEVELOPER" shall mean those specific FSC employees and
consultants under contract to FSC (subject to section 2.7 below)
designated by FSC as authorized users of the TSS SOFTWARE as specified
in Exhibit B.
1.14. "DEVELOPER LICENSE" shall mean use of the DEVELOPMENT SOFTWARE by an
AUTHORIZED DEVELOPER on an AUTHORIZED PLATFORM under the terms of this
AGREEMENT.
1.15. "ENHANCEMENTS" shall mean a change or addition to the TSS SOFTWARE,
other than an UPDATE, that improves its function, adds new function,
or substantially enhances its performance. ENHANCEMENTS shall not
include programs that have a value and utility separate from the use
of the TSS SOFTWARE and are priced and offered separately from the TSS
SOFTWARE.
1.16. "UPDATES" shall mean a change to the TSS SOFTWARE that is in a form
that reestablishes material conformity of the TSS SOFTWARE to its
applicable DOCUMENTATION, including bug fixes, error corrections,
minor enhancements of performance, or enhancements to keep the TSS
SOFTWARE current with changes in the AUTHORIZED PLATFORMS. All
UPDATES shall be considered part of the TSS SOFTWARE for all purposes
under this AGREEMENT.
2. LICENSE OF SOFTWARE
2.1. DEVELOPMENT LICENSES
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2.1.1. TSS hereby grants Licensee a non-exclusive, non-transferable
license to use the DEVELOPMENT SOFIWARE and the
DOCUMENTATION on an internal basis for the sole purpose of
creating FSC PRODUCTS, subject to the terms and conditions
of this AGREEMENT. FSC PRODUCTS may be created pursuant to
this license (i) only on the AUTHORIZED PLATFORMS specified
in Exhibit A and (ii) only by AUTHORIZED DEVELOPERS. Each
AUTHORIZED DEVELOPER shall be granted a DEVELOPER LICENSE.
AUTHORIZED DEVELOPERS may create FSC PRODUCTS on either
stand alone computers or on computer networks provided the
number of AUTHORIZED DEVELOPERS may never exceed the number
of DEVELOPER LICENSES for which FSC has paid a license fee
as specified on Exhibit C. FSC may replace or substitute
for a designated AUTHORIZED DEVELOPER but only if the
individual is no longer an employee or consultant of FSC or
is reassigned, on a non-temporary basis, to other duties
within FSC where use of the TSS DEVELOPMENT SOFTWARE will
not be required. FSC may also use the FSC PRODUCTS created
by FSC on an internal basis in accordance with this
AGREEMENT.
2.1.2. FSC may make one copy of the DEVELOPMENT SOFTWARE for each
AUTHORIZED PLATFORM solely for backup purposes.
2.2. LICENSE OF RUN TIME SOFTWARE
2.2.1. Subject to the terms and conditions of this AGREEMENT, TSS
hereby grants FSC a worldwide, non-exclusive,
non-transferable license to (i) link and embed exactly in
the form provided to FSC, the RUN TIME SOFTWARE solely in
conjunction with and as a part of an FSC PRODUCT and (ii)
reproduce, market, sublicense and distribute the RUN TIME
SOFTWARE solely in conjunction with and for execution of FSC
PRODUCTS by END USERS. FSC is prohibited from distributing
the RUN TIME SOFTWARE in any format other than as an
embedded component of an FSC PRODUCT.
2.2.2. FSC may distribute the RUN TIME SOFTWARE as contained in the
FSC PRODUCTS on a worldwide basis on any media, and in any
manner, including but not limited to floppy disks, compact
disks, or using any other computer software storage device
or data communication device.
2.2.3. FSC is authorized to duplicate the RUN TIME SOFTWARE, in
whole or in part, for purposes of product development,
product testing, manufacturing, technical support, sales
support, or archival storage. Where applicable, TSS
copyright notices should be incorporated into the
appropriate software programs. Manufacturing of the FSC
PRODUCTS containing the RUN TIME SOFTWARE or its associated
documentation may be performed by FSC employees, or, subject
to Confidentiality and Proprietary Information restrictions,
by FSC-authorized contractors, agents, software duplication
suppliers, documentation suppliers, or packaging suppliers.
2.3. ENHANCEMENTS. TSS may from time to time offer ENHANCEMENTS as and
when developed or acquired by TSS, to FSC for inclusion in the FSC
PRODUCTS. If the parties agree on including any ENHANCEMENTS,
appropriate changes in the DOCUMENTATION and payment provisions shall
be set forth in a written amendment to this AGREEMENT and
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thereupon the ENHANCEMENTS shall become part of the TSS SOFTWARE and
DOCUMENTATION for purposes of this AGREEMENT.
2.4. This AGREEMENT is not a sale of the TSS SOFTWARE and DOCUMENTATION or
any copy of the TSS SOFTWARE and DOCUMENTATION, and FSC shall have no
title or ownership in the TSS SOFTWARE and DOCUMENTATION, or any
copies of part thereof, regardless of the form on which the original
and any copies may exist. FSC is prohibited from removing or
obliterating any copyright, trademark, or other proprietary rights
notice on the TSS SOFTWARE and DOCUMENTATION.
2.5. FSC may not use (or cause to be used) the TSS SOFTWARE (excluding the
RUN TIME SOFTWARE incorporated into an FSC PRODUCT) for rental, as a
part of a service bureau, or for any similar purpose. Except as
otherwise provided in Section 2.2.1, all sublicensing of the TSS
SOFTWARE and DOCUMENTATION or any part thereof is prohibited. FSC may
not decompile, disassemble, reverse-assemble, analyze or otherwise
examine the TSS SOFTWARE for reverse engineering of the TSS SOFTWARE.
2.6. DOCUMENTATION. Pursuant to the terms of this Agreement, TSS hereby
grants FSC a worldwide, perpetual, non-exclusive, paid up, irrevocable
license right to include, subject to any Confidential and Proprietary
Information restrictions, any or all of the DOCUMENTATION for the RUN
TIME SOFTWARE into FSC's own user documentation or technical support
documentation, as well as the right to develop and own derivatives of
any such FSC PRODUCT documentation. FSC acknowledges and agrees that
this AGREEMENT grants FSC no title or right of ownership in the
original DOCUMENTATION or TSS SOFTWARE. Notwithstanding the above,
FSC or its agents are authorized to include the DOCUMENTATION with any
local language versions of FSC PRODUCT documentation, whether prepared
in a written or an electronic form.
2.7. ALLOWABLE USE. FSC is strictly prohibited from developing any FSC
PRODUCTS where the purpose of such FSC PRODUCT is to create another
stand alone software program that is designed for substantially the
same purpose as the TSS SOFTWARE. If the FSC PRODUCT includes a
programming interface, FSC is prohibited from including functionality
which reproduces, replicates, or substantially duplicates any portion
of the structure, form or functions of the programming interface
provided with the TSS SOFTWARE.
2.8. FSC PRODUCTS shall be distributed with a license agreement which
authorizes an END USER to use the FSC PRODUCT subject to the following
provisions: (a) the limitation on the END USER'S use of the FSC
PRODUCT, including prohibitions on distribution to other parties,
including but not limited to distribution of the RUN TIME SOFTWARE, or
any part thereof; decompiling, disassembling, sublicensing or leasing
the FSC PRODUCT; copying the FSC PRODUCT (other than for making backup
copies); removing or obliterating any copyright, trademark, or
proprietary rights notices; and use on platform other than the
authorized platform; (b) a bar on the export or re-export of the FSC
PRODUCT absent necessary US governmental approvals or export licenses;
(c) an acknowledgment of the inclusion of the RUN TIME SOFTWARE in the
FSC PRODUCT and TSS' proprietary interest in them; (d) an exclusion
of liability on the part of TSS under the license agreement and an
agreement to look solely to FSC for damages relating to the FSC
PRODUCT; (e) a prohibition on the reproduction, distribution,
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use, linking, or embedding of the RUN TIME SOFTWARE or any part
thereof in any other software program; (f) a prohibition on use for
rental, as a part of a service bureau, or for any similar purpose; and
(g) a prohibition on the creation of any software program which makes
direct function calls to the TSS libraries.
2.9. FSC agrees to exercise a reasonable standard of care to (i) limit
access to the TSS SOFTWARE and DOCUMENTATION to its employees which
are AUTHORIZED DEVELOPERS and (ii) prohibit access to the TSS SOFTWARE
and DOCUMENTATION (other than the RUN TIME SOFTWARE incorporated into
an FSC PRODUCT, as authorized in this AGREEMENT) to any third party,
without the prior written consent of TSS. Notwithstanding the
foregoing, FSC shall have the right to allow consultants under
contract to FSC to access the TSS SOFTWARE and DOCUMENTATION provided
that (a) such access is governed by the terms and conditions of this
AGREEMENT including, without limitation, the provisions relating to
designated AUTHORIZED DEVELOPERS and AUTHORIZED PLATFORMS, and (b) FSC
shall be responsible for any failure of any consultant to comply with
the terms and conditions of this AGREEMENT. FSC will establish a
reliable procedure to monitor the use of the TSS SOFTWARE to ensure
that the TSS SOFTWARE and DOCUMENTATION are only being used by
AUTHORIZED DEVELOPERS on the AUTHORIZED PLATFORMS. FSC is prohibited
from disclosing the results of benchmark tests on the TSS SOFTWARE
unless TSS consents to such disclosure in writing. FSC agrees to use
the TSS SOFTWARE and DOCUMENTATION only as specifically authorized in
this AGREEMENT and for no other purpose. These obligations will
survive any termination of this AGREEMENT.
2.10. USE OF TRADENAMES, TRADEMARKS, OR COPYRIGHTS. Pursuant to the terms
of this Agreement, TSS hereby grants FSC a non-exclusive license to
use the TSS trademarks, as supplied by TSS, in connection with the
marketing, sales, and support of the FSC PRODUCTS. TSS represents and
warrants to FSC that the trademarks do not infringe any third party
intellectual property rights. TSS shall indemnify and hold FSC
harmless from any third-party claims that use of the TSS trademarks by
FSC or an END-USER infringes any third party intellectual property
rights. FSC acknowledges and agrees that the trademarks used by TSS
to identify the TSS SOFTWARE may change from time to time. FSC agrees
to change the TSS trademarks it uses in connection with the FSC
PRODUCTS accordingly, provided TSS provides reasonable notice.
2.11. MARKETING AND SALES MATERIALS. FSC may, at its sole discretion and
expense, develop and distribute advertising and product literature
containing system requirements, specifications, functional
information, or any other information related to the TSS SOFTWARE, the
FSC PRODUCTS or associated services. Wherever TSS, its products, or
its tradenames, or trademarks are mentioned or identified, TSS shall
have the right to review and approve any such usage which approval
shall not be unreasonably withheld.
3. PAYMENT SCHEDULE
3.1. LICENSING REPORTS
3.1.1. QUARTERLY REPORTS. FSC shall provide TSS with summarized
quarterly reports of license sales and maintenance/support
sales of the FSC PRODUCTS. Reports covering
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the prior calendar quarter will be provided to TSS within
thirty (30) days following the end of that quarter. All
such reports will be considered Confidential Information as
defined in Section 8.1.
3.1.2. SHIPMENT RECORDS. FSC shall maintain a shipment record of
all authorized licenses of FSC PRODUCTS containing the RUN
TIME SOFTWARE including copies in use by FSC, its
distributors, its resellers, and its licensees. These
records shall be maintained for a minimum of three (3) years
following the shipment of a product to a FSC customer.
3.2. PAYMENTS
3.2.1. LICENSE FEES. For the duration of this Agreement, FSC
agrees to pay TSS license fees for the TSS SOFTWARE
consistent with the terms of the License Fee Schedule
contained in Exhibit C, which fees may be amended from time
to time at the sole discretion of TSS. All fees may be
increased no more than once per year, in accordance with the
ECI, and any government-caused increases which are not
generally reflected in such index, which may include
mandated health insurance. The "ECI" means the US Labor
Department Bureau of Statistics Employment Cost Index for
white collar occupations. All license fees are to be
computed and paid in U.S. dollars.
3.2.2. SUPPORT FEES. FSC shall pay TSS fees annually for the
support of TSS SOFTWARE. The first year's support fee is
set forth in Exhibit C. Support fees may be amended by TSS
at each annual renewal thereof, subject to the provisions of
3.2.1.
3.2.3. PAYMENT PROCEDURES. License fees for the TSS SOFTWARE will
be paid in accordance with the prices and terms contained in
Exhibit C. Payments shall be made by company check or by
electronic funds transfer and shall be due and payable at
the time FSC provides the summarized quarterly report as
defined in section 3.1.1.
3.2.4. THIRD-PARTY SOFTWARE. TSS is responsible to pay all
required royalties or other payments for any third-party
software which may be contained in the TSS SOFTWARE, and
shall continue to maintain licensing and sublicensing terms
and conditions for such software which conform to the
licensing terms and conditions for the TSS SOFTWARE made
between the parties to this Agreement.
3.3. AUDIT RIGHTS. TSS or its authorized agent shall have the right to
periodically audit FSC's licensing revenue records related to the FSC
PRODUCTS to verify compliance with the payment terms of this
Agreement, provided that: 1) FSC is provided at least five (5)
business days advance Notice of the TSS' intention to audit; and 2)
provided that the audit is conducted during normal business hours or
at another time deemed by the parties to be reasonable, and 3)
provided that this audit right may be exercised no more frequently
than once during any twelve month period. If during an audit, FSC is
found to have inaccurately reported the applicable licensing revenue,
FSC shall be required to pay for any unreported licenses as well as an
additional penalty equal to 1 1/2 % per month for the delayed payment
of any applicable royalty fees otherwise due and payable to TSS. If
the royalty fees which were otherwise due and payable for
under-reported
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licenses exceed 5% of the royalties due and payable under this
AGREEMENT, FSC shall reimburse TSS for any reasonable costs associated
with conducting the audit.
4. DELIVERY AND ACCEPTANCE
4.1. DELIVERY. Upon the signing of this AGREEMENT and payment of the
initial licensing fee specified on Exhibit C, TSS shall deliver two
(2) complete copies of the OBJECT CODE versions of all of the RUN TIME
SOFTWARE programs, OBJECT CODE versions of the DEVELOPMENT SOFTWARE,
and all available DOCUMENTATION for the TSS SOFTWARE. Follow-on
deliveries of any new or modified OBJECT CODE or DOCUMENTATION
including the general release versions of all alpha or beta versions
of the LICENSED SOFTWARE, shall be delivered to FSC at the time of
initial beta testing. All deliveries will be F.O.B. TSS' facility in
Palo Alto, California. Reasonable transportation and insurance will
be arranged by TSS and billed to FSC.
4.2. ACCEPTANCE. FSC shall have ten (10) business days following delivery
of the media to verify that: 1) the media is in good working order;
and 2) that the applicable software have been delivered.
5. TERM OF AGREEMENT
5.1. INITIAL TERM. The initial term of this AGREEMENT shall be five (5)
years from the effective date of this AGREEMENT unless terminated
earlier.
5.2. RENEWAL. The initial term (or any extended term resulting from a
renewal) will be automatically extended on a year-to-year basis unless
terminated by written notice from either party at least sixty (60)
days before the end of the term of any renewal thereof. The initial
term (or any extended term resulting from a renewal) will be extended
automatically by one year upon each of the following circumstances:
(a) volume of business in the third year of at least $250,000, (b)
volume of business in the fourth year of at least $300,000, and (c)
volume of business in any subsequent year of at least $350,000. For
avoidance of doubt, if FSC does not meet the preceeding minimum
renewal requirement in any year, the remaining term of the AGREEMENT
after that year will not be less than two years.
5.3. TERM OF LICENSES. Notwithstanding anything contained herein to the
contrary, once FSC has made full payment of the license fee for an
item of TSS SOFTWARE, TSS cannot terminate the license granted
hereunder with respect to such item, except for an uncured breach by
FSC of the terms of Section 2 (Grant of License), Section 8
(Proprietary Information) or Section 11.2 (Assignment).
6. TECHNICAL SUPPORT AND UPDATES
6.1. TSS' SUPPORT OBLIGATIONS.
6.1.1. TECHNICAL SUPPORT SERVICES. FSC shall designate no more
than two (2) AUTHORIZED DEVELOPERS, the right to substitute
not to be unreasonably withheld, to act as technical support
liaison personnel between FSC and TSS. Each such
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designated AUTHORIZED DEVELOPER shall be entitled to access
the TSS Support Center. The Support Center operates during
business hours, 9:00 a.m. to 5:00 p.m. Pacific Time, Monday
through Friday, excluding TSS holidays. The Support Center
may be contacted to notify TSS of problems associated with
the TSS SOFTWARE and related DOCUMENTATION. TSS will log
all problems, including DEFECTS, and exercise best efforts
to provide explanations, assistance in problem resolution,
work-arounds if available and general technical assistance.
6.1.2. SERVICES PROVIDED FOR AN ADDITIONAL CHARGE. The Support
Center will provide the following services for an additional
charge: (i) assistance with questions and problems that
occur when the TSS SOFTWARE is used in a manner that is
inconsistent with its specification, and (ii) support
outside of hours specified in 6.1.1. In cases where FSC
desires these services, or when FSC requires an UPDATE or
bug fix prior to general UPGRADE availability, these
services will be made available to FSC on a time and
materials basis at TSS' standard T&M rates.
6.1.3. DURATION OF SUPPORT. TSS shall only provide technical
support for the current version of the TSS SOFTWARE and for
the version immediately preceding the last UPDATE. TSS
shall support the prior version for a period which shall not
exceed twelve (12) months from the date the UPDATE becomes
generally available. Upon expiration of this twelve months,
and upon request by FSC, TSS will provide support for prior
versions on mutually agreeable terms.
6.1.4. UPDATES. TSS shall provide, for the period during which and
the licenses for which FSC pays annual fees, UPDATES of the
TSS SOFTWARE prepared by TSS when and as such UPDATES become
available for delivery to FSC. TSS shall use reasonable
efforts to include in such UPDATES corrections of DEFECTS in
the TSS SOFTWARE provided TSS is given adequate notice of
the nature of such DEFECTS and provided further that TSS is
under no obligation to correct any DEFECT in any particular
UPDATE.
6.2. FSC'S SUPPORT OBLIGATIONS. Except as otherwise provided in this
AGREEMENT, FSC shall assume all responsibility and liability to END
USERS with respect to the FSC PRODUCTS and, in accordance with this
section, shall assume all responsibility and liability to such END
USERS for support and assistance.
6.2.1. FSC will be responsible for all technical support relating
to the FSC PRODUCT, including any RUN TIME SOFTWARE embedded
therein.
6.2.2. The purchase of technical support is not required, however,
if FSC elects to obtain such support for the DEVELOPMENT
SOFTWARE, FSC must purchase such support for the total
number of AUTHORIZED DEVELOPERS of the DEVELOPMENT SOFTWARE
for which a license is granted under this AGREEMENT, and if
an END USER elects to receive technical support, FSC shall
pay to TSS the applicable fee for support of the RUN TIME
SOFTWARE no later than the date of installation of the FSC
PRODUCT. If FSC elects to purchase support, FSC must
purchase support for both the DEVELOPMENT SOFTWARE and the
RUN TIME SOFTWARE. After the initial
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annual term, and upon receipt by FSC of an invoice
specifying the technical support fee due for the next term,
technical support will be renewable for a successive 12
month period. Payment of the invoice is due by the first
day of the subsequent term. Reinstatement after a lapse of
technical support will require payment by FSC of TSS'
then-current technical support fee for the lapsed period.
All payments are nonrefundable, except in the event this
AGREEMENT is terminated due to a breach by TSS, in which
case FSC shall receive a pro rata refund of the unused
portion.
6.2.3. Licensee is prohibited from providing UPDATES of the RUN
TIME SOFTWARE to END USERS not covered by a support
agreement for such software and for which the applicable
support fee has not been paid.
6.3. TSS will not be obligated to remedy any TSS SOFTWARE defect caused by
FSC's modification or misuse of the TSS SOFTWARE. TSS makes no
warranties with respect to the technical support service being
provided, either express or implied, including without limitation,
any warranty of merchantability or fitness for a particular purpose.
6.4. TRAINING. Training services provided by TSS to FSC personnel may be
purchased by FSC, in accordance with TSS' standard terms and
conditions.
6.5. LICENSING CONTROLS. Unless specifically approved in writing by FSC,
TSS shall make best efforts to ensure that the TSS SOFTWARE shall not
contain any lock, clock, timer, counter, copy protection feature,
defect (virus or worm), or any other disabling device which: (a) might
lock, disable, or erase the programs; (b) prevent FSC or an END USER
from fully using or sublicensing the RUN TIME SOFTWARE in accordance
with this AGREEMENT; or (c) require action or intervention by TSS or
any other person or entity to install or use the TSS SOFTWARE.
7. SOURCE CODE ESCROW
7.1. ESCROW DEPOSIT. TSS agrees to deposit with either Data Securities
International, Inc. (DSI) or another Escrow Agent mutually acceptable
to both parties, a copy of the SOURCE CODE and each subsequent UPDATE
or ENHANCEMENT of any component of the TSS SOFTWARE provided to FSC
under the terms of this AGREEMENT and all such related materials and
design documentation. Prior SOURCE CODE versions of the TSS SOFTWARE
will be maintained in escrow for six months. FSC shall have the right
to inspect and verify at the Escrow Agent's site, that the appropriate
deposits of the applicable SOURCE CODE and documentation are being
made. An additional deposit shall be made upon each new UPDATE or
ENHANCEMENT of the TSS SOFTWARE which is provided to FSC under the
terms of this AGREEMENT. Both parties agree to complete and execute
any and all additional agreements as may be necessary to facilitate
the commitments herein. FSC shall pay TSS a fee of $4,000 for these
escrow services during the first year of this AGREEMENT, and a fee of
$2,000 for each subsequent year. TSS is required to pay any and all
associated fees which are due and payable to the Escrow Agent.
7.2. ESCROW RELEASE CONDITIONS. FSC shall have the right to receive the
SOURCE CODE from escrow only upon the occurrence of one of the
following conditions: (a) TSS ceases to carry on its business; or (b)
TSS fails to provide the support services set forth in section 6.1
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above for a period of 180 days. In the event such release condition
occurs, FSC shall notify the Escrow Agent of such occurrence and the
Escrow Agent shall notify TSS of such claim, all as set forth in the
escrow agreement with terms customary for transactions of this type.
7.3. SOURCE CODE USE RESTRICTIONS. Any SOURCE CODE which may be provided
to FSC by TSS in accordance with section 7 this AGREEMENT shall be
used only for the development, testing, maintenance support, or
manufacturing of FSC PRODUCTS or derivatives of the FSC PRODUCTS. The
SOURCE CODE is only to be provided to employees of FSC and to approved
contractors (whose approval is at the sole discretion of TSS), and
only those employees who have a need-to-know.
8. PROPRIETARY INFORMATION
8.1. CONFIDENTIAL INFORMATION. Each party acknowledges that the other
party may disclose certain technical, financial, or business
information that such other party considers to be confidential and
proprietary ("Confidential Information"), and that the unauthorized
use or disclosure of any such Confidential Information by the party
receiving such Confidential Information (the "Receiving Party") would
cause irreparable financial and other damages to the disclosing party
(the "Disclosing Party"). Without limiting the generality of the
preceding sentence, the parties agree that the TSS SOFTWARE is
included in the Confidential Information of the parties. The
Receiving Party agrees not to disclose to any third party, use or
duplicate any Confidential Information of the Disclosing Party, except
as expressly permitted in this Agreement. The Receiving Party will
limit the disclosure of all such Confidential Information to those of
its employees who have a need to access such Confidential Information
for the performance of this Agreement. The Receiving Party further
agrees to take all reasonable measures to maintain the confidence of
all such Confidential Information in its possession or control, which
measures will in no event be less than the measures that the Receiving
Party takes to protect its own confidential and proprietary
information of similar importance. Each party agrees, on an annual
basis, to inform the other party of product and platform plans.
8.2. EXCEPTIONS. Confidential Information will not include information
that: (a) is in or enters the public domain without breach of this
Agreement; or (b) the Receiving Party lawfully receives from a third
party without restriction on disclosure and without breach of a
nondisclosure obligation; or (c) the Receiving Party develops
independently, which it can prove with written evidence; or (d)
information that the Receiving Party is required by U.S. law or
regulation to disclose.
9. WARRANTIES, INDEMNITIES, AND LIABILITIES
9.1. WARRANTEES
9.1.1. RIGHTS TO LICENSE THE INTELLECTUAL PROPERTY. TSS represents
and warrants that TSS now has and, during the term of this
AGREEMENT, will continue to have the complete, worldwide
right to license the TSS SOFTWARE and to sublicense any and
all third-party software which may be contained in the TSS
SOFTWARE under the licensing terms and conditions contained
in this AGREEMENT. Upon breach of this warranty, FSC may
terminate this AGREEMENT effective immediately and, if FSC
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makes such election, the parties shall be relieved of all
further liability or obligation between them. Such election
must be made within thirty (30) days of notice to FSC of
such breach. If FSC does not make such election, FSC's
sole remedies shall be those set forth in sections 9.2 and
9.3.2 of this AGREEMENT.
9.1.2. DOCUMENTATION. TSS represents and warrants to FSC, for a
period of ninety(90) days from execution of this AGREEMENT,
that the TSS SOFTWARE will function in accordance with the
DOCUMENTATION. TSS represents and warrants to FSC, for a
period of ninety (90) days from receipt by FSC, that any
UPDATES to the TSS SOFTWARE will function in accordance with
the DOCUMENTATION.
9.1.3. MEDIA. TSS warrants for a period of ninety (90) days after
delivery to FSC that the TSS SOFTWARE or any implementation,
modification, UPDATE, ENHANCEMENT, patch, source code, or
documentation has been delivered on media which is free from
any defects in material or workmanship. The sole remedy for
a media defect, at the sole option of FSC, shall be either
(a) the immediate replacement of the media containing the
software or DOCUMENTATION, or ( b) the delivery of the
software or DOCUMENTATION on a different media specified by
FSC.
9.1.4. DISCLAIMER Subject to the foregoing representations and
warranties, TSS does not warrant, guarantee, or make any
representations regarding the use, or results of the use of
the TSS SOFTWARE. THE ABOVE WARRANTIES ARE THE ONLY
WARRANTIES OF USE OF ANY KIND, EITHER EXPRESS OR INLPLIED.
TSS DISCLAIMS ALL OTHER WARRANTIES INCLUDING ANY INLPLIED
WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A
PARTICULAR PURPOSE. Such disclaimer is a fundamental part
of TSS' bargain hereunder. TSS would not have entered into
this AGREEMENT absent such disclaimer.
9.2. INDEMNITIES
9.2.1. SCOPE OF THE INDEMNIFICATION. TSS shall indemnify and agree
to hold FSC harmless from any claim that the TSS SOFTWARE as
contained in any FSC PRODUCT violates the rights of any
third parties with respect to any U.S. copyright, patent, or
trade secret or other U.S. intellectual property right.
9.2.2. CONDITIONS OF INDEMNIFICATION. TSS will have no obligation
under Section 9.2 unless: (1) FSC provides prompt
notification to TSS of any claim which comes to its
attention; and (2) TSS has full discretion and sole control
of the defense or settlement of any such claim; and (3) that
FSC provides full and complete cooperation, at no cost to
FSC, in the defense and settlement of any such claim.
9.3. LIMITATION OF LIABILITIES
9.3.1. CONSEQUENTIAL DAMAGES. FSC acknowledges and agrees that the
license fees and other charges which TSS is charging under
this AGREEMENT do not include any consideration for
assumption by TSS of the risk of FSC's consequential,
incidental, or exemplary damages which may arise in
connection with FSC's use of the TSS
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SOFTWARE. Therefore, neither party shall be liable for any
indirect, special, incidental, consequential, or exemplary
damages, including loss of profits, loss of data, or
interruption of business arising out of or relating to
performance or non-performance by the other party under this
AGREEMENT, whether based on contract, tort, product
liability or any other legal theory, regardless of whether
the party sought to be held accountable has knowledge of the
possibility of such damages.
9.3.2. TITLE DEFECTS. In the event that TSS is unable, using
reasonable commercial efforts, to obtain for FSC rights to
use TSS SOFTWARE in accordance with this AGREEMENT, TSS
shall either (i) obtain a license to use the software,
(ii) provide a functionally similar and compatible program,
(iii) modify the infringing program so that it is non
infringing while maintaining comparable functionality, or
(iv) if none of the above are reasonably feasible, as
determined in TSS' sole judgment, then TSS shall return a
proportionate share of the license fees paid to TSS for the
infringing software, such proportion to be based upon a five
(5) year straight line depreciation schedule; with such
depreciation commencing when the software is delivered.
Following the repayment, TSS shall be discharged of all
further liability for such infringement except for
continuing obligation of indemnification against third party
claims.
9.3.3. PROGRAM DEFECTS. Upon expiration of 9.1.2 above, remedies
for any failure of the TSS SOFTWARE to adequately perform
the functions described in the DOCUMENTATION shall be
limited to TSS' obligations under section 6.1 above.
9.3.4. LIMITED LIABILITY. With the exception of liability for
claims related to Section 9.2. 1, "Scope of the
Indemnification" or to Section 8.1 "Confidential
Information, TSS shall be not be liable hereunder for any
amount greater than the sum of license fees paid to TSS
pursuant to this AGREEMENT for the specified term during
which the liability occurred.
10. TERMINATION
10.1. TERMINATION FOR DEFAULT. This AGREEMENT may be terminated by the
non-defaulting party if any of the following events of default occur:
10.1.1. If either party materially fails to perform or comply with
this AGREEMENT or any provision thereof, and does not cure
such default within forty-five (45) days of the written
notification from the other party; or, if the default is not
one which by its nature cannot be fully remedied within
forty-five (45) days, the defaulting party has not
undertaken all reasonable measures toward remedying the
default within said forty-five (45) day period including a
date agreed to by both parties for final remedy of the
breach, or does not cure the breach by the agreed-upon
date;
10.1.2. If either party is declared insolvent by court or
governmental agency;
10.1.3. If either party makes a general assignment for the benefit
of creditors;
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10.2. MUTUAL AGREEMENT. This Agreement may be terminated at any time by the
mutual agreement of the parties. Continuing rights and obligations of
the parties specified in section 10.3 shall survive the termination of
this AGREEMENT.
10.3. CONTINUING RIGHTS AND OBLIGATIONS. The following rights and
obligations would survive termination of this AGREEMENT:
10.3.1. SUBLICENSES. Right-to-use sublicenses to END USERs shall
survive termination of this AGREEMENT. The termination or
expiration of one license shall not affect any other
license.
10.3.2. RETURN OF PROPRIETARY BUSINESS DATA. Upon termination of
this AGREEMENT both parties shall collect the proprietary
business or technical information and the TSS SOFIWARE which
belongs to the other party, except as may be necessary to
continue to support FSC's existing customers, and to return
it to the appropriate party or provide an officer's written
certification that all such materials have been collected
and completely destroyed.
10.3.3. PROPRIETARY INFORMATION. Obligations of the parties to
safeguard and protect the proprietary information of the
other party, in accordance with section 8 of this AGREEMENT,
shall survive termination of this AGREEMENT.
10.3.4. PAYMENTS. Obligations for license fees and any other
specified charges incurred prior to the termination date of
this AGREEMENT shall survive termination of this AGREEMENT.
10.3.5. All FSC rights to the FSC PRODUCTS and any associated
documentation, copyrights, trademarks, tradenames, and
other assets related to the FSC PRODUCTS shall survive
termination of this AGREEMENT. All TSS rights to the TSS
SOFTWARE, and the associated documentation, copyrights,
trademarks, and tradenames shall survive termination of
this AGREEMENT.
11. MISCELLANEOUS AGREEMENTS
11.1. NOTICES. All notices under this Agreement shall be in writing, and
either hand delivered, delivered by prepaid courier, or sent by
electronic means, with a copy sent concurrently by certified mail,
return receipt requested. Notices shall be sent to the parties at the
following addresses or such other addresses as the parties
subsequently may provide:
IF to LICENSEE: Fourth Shift Corporation
7900 International Drive
Minneapolis, MN 55425-1551
Attention: Chief Financial Officer
Telephone: (612) 851-1500
Fax: (612) 851-1584
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<PAGE>
With a COPY to: Dorsey & Whitney
Attorneys at Law
2200 First Bank Place East
Minneapolis, MN 55402
IF to LICENSER: Teknekron Software Systems, Inc.
530 Lytton Avenue
Palo Alto, CA 94301
Attention: Chief Financial Officer
Telephone: (415) 325 -1025
Fax: (415) 328-9608
With a COPY to: Gould & Mead
5801 Christie Avenue
Emeryville, CA 94608
Attention: Alan Gould
Telephone: (510) 428-2229
Fax: (510) 428-2232
11.2. ASSIGNMENT. Neither party may assign or transfer any of the rights or
responsibilities set forth herein without the express written consent
of the other party and any attempt to do so shall be deemed void,
except that either party may assign this Agreement and/or any of its
rights and/or obligations hereunder, upon written notice to the other
party to another entity in the event of that party's merger or
consolidation with another entity, without the consent of the other
party, provided that the assignee is capable of fulfilling and intends
to fulfill the obligations of the assigning party under this
Agreement. Notwithstanding the above, this AGREEMENT shall inure to
the benefit of the party's respective successors, permitted assigns,
or any Acquirer of the intellectual property assets related to the TSS
SOFTWARE.
11.3. CONFIDENTIALITY. The relationship between the parties to this
AGREEMENT and the specific terms and conditions of this AGREEMENT are
considered to be proprietary business information of the parties.
Without the prior, written approval of the other party, neither FSC or
TSS may disclose this information or issue a public relations
announcement concerning any relationship between the parties, and then
only to the extent authorized in the written approval.
Notwithstanding the above, TSS and FSC may each refer to the other in
their marketing, promotion and sales efforts.
11.4. TAXES. FSC is responsible for the payment of all applicable taxes,
assessments, fees, or duties related to the licensing, export, or
import of the RUN TIME SOFTWARE as embodied in the FSC PRODUCTS by FSC
with the exception of taxes based upon TSS' income.
11.5. FORCE MAJEURE. No delay, failure, or default in performance of any
obligation of either party hereunder shall constitute a breach of this
Agreement to the extent caused by Force Majeure. The term "Force
Majeure" shall be defined to include fires, earthquakes, or other
casualties or accidents, acts of God, severe weather conditions,
strikes or labor disputes, war or
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<PAGE>
other violence, failures of suppliers to deliver components or
services, or any law, order, proclamation, regulation, ordinance,
demand, or requirement of any governmental agency.
11.6. DISCLAIMER OF AGENCY. Nothing in this AGREEMENT shall be construed as
creating a partnership, joint venture, or agency relationship between
the parties, or as authorizing either party to act as agent for the
other.
11.7. GOVERNING LAW. This AGREEMENT is governed by, and construed in
accordance with the laws of the State of California without regard to
conflict of law principles.
11.8. DISPUTE RESOLUTION PROCESS. In the event of any disagreement
regarding performance under or interpretation of this AGREEMENT and
prior to the commencement of any formal proceedings, the parties shall
continue performance as set forth in this AGREEMENT and shall attempt
in good faith to reach a negotiated solution by designating
representatives of appropriate authority to resolve the dispute(s) in
a timely and expeditious manner. If the matter is not resolved within
forty-five (45) days following a formal Notice of perceived breach of
contract or dispute to the other party, then the parties agree to
resolve such dispute in accordance with the terms of section 11.14.
Nothing in this AGREE MENT shall be construed to restrain the parties
from pursuit of equitable relief through any court of competent
jurisdiction for any breach of Confidentiality or Confidential
Information.
11.9. COMPLIANCE WITH LAWS. In the performance of this contract, the
parties shall comply with the requirements of all applicable laws and
regulations of any state, country, or governmental entity. Neither
party shall export any licensed programs without, if it is required,
first obtaining a license or clearance from the Department of Commerce
or other appropriate agency of the United States Government.
11.10. ENTIRE AGREEMENT. This AGREEMENT, including the Exhibits,
Attachments, or mutually signed amendments shall constitute the entire
agreement between the parties concerning the subject matter hereof,
and will supersede all previous communications, representations,
understandings, and agreements, either oral or written, between the
parties. The parties acknowledge that they have read the AGREEMENT,
understand it, and agree to be bound by its terms and conditions,
which have been negotiated by the parties, without respect to the
author of any clause, section, or exhibit. All headings in this
AGREEMENT are included solely for convenient reference and shall not
affect the meaning or interpretation of this AGREEMENT.
11.11. NO WAIVER. Neither party's failure to exercise any of its rights
hereunder shall constitute or be deemed a waiver or forfeiture of any
such rights.
11.12. SEVERABILITY. If any provision of this AGREEMENT is held by any court
of competent jurisdiction to be invalid or unenforceable, that
provision will be severed from the AGREEMENT and any remaining
provisions will continue in full force, so long as the AGREEMENT still
expresses the intent of the parties.
11.13. COUNTERPARTS. This AGREEMENT may be executed in one or more
counterparts, each of which shall be deemed an Original, and all of
which taken together shall constitute one and the same AGREEMENT.
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11.14. ARBITRATION. Subject to Section 11.8, any controversy or claim
arising out of or related to this AGREEMENT, or the breach shall be
settled by binding arbitration. The party first filing its demand for
arbitration shall simultaneously specify the name, address and phone
number of its arbitrator. The party receiving such demand shall
respond within five (5) days of receipt of such demand by giving the
name, address and phone number of its arbitrator. The parties'
respective arbitrators need not be neutral. A third arbitrator shall
be selected by the parties' respective arbitrators or, if they are
unable to do so within five (5) days of appointment, at the election
of either party, by the American Arbitration Association under the
Rules. The arbitrators as so empaneled shall promptly meet and fix a
time and place for the hearing of the dispute which time shall not be
more than sixty (60) days after the empanelment. The majority of the
panel shall render a decision within ten (10) days of the completion
of the hearing and shall promptly transmit an executed copy of the
award to the respective parties. The decision of the arbitrators
shall be final and binding upon the parties and enforceable in any
court of competent jurisdiction. The parties agree that this section
11.14 does not apply to breaches of confidentiality or proprietary
rights provisions and that either party may petition a court of law
for injunctive relief and such other rights and remedies as it may
have at law or equity against such breaches. The parties further
agree that the arbitrator(s) shall have no authority or jurisdiction
to determine disputes involving any limitation of liability or to
modify such limitations in any manner. Arbitration shall take place
in either San Francisco, California, or Minneapolis, Minnesota, or, if
the parties cannot agree, in Chicago, Illinois.
11.15. ATTACHMENTS. Any attachments or Exhibits to this AGREEMENT shall be
initialed and dated by both parties to the AGREEMENT. All amendments
must be signed and dated by authorized representatives of each party.
Any Exhibits are hereby incorporated by reference into this AGREEMENT.
EXHIBIT A: LICENSED SOFTWARE PROGRAMS
EXHIBIT B: AUTHORIZED DEVELOPERS
EXHIBIT C: LICENSE FEE SCHEDULE
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized representatives.
AGREED:
FOURTH SHIFT CORPORATION TEKNEKRON SOFTWARE SYSTEMS, INC.
Signed: /s/ JH Caldwell Signed: /s/ David W. Rice
----------------------------- -------------------------------
Print Name: JH Caldwell Print Name: David W. Rice
------------------------- ---------------------------
Title: President Title: Exec. Vice President/CFO
------------------------------ --------------------------------
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EXHIBIT 11.1
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Calculation of Net Income (Loss) Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1996 1995 1994
------ -------- --------
<S> <C> <C> <C>
Net income (loss) $1,770 ($5,400) ($2,722)
------ -------- --------
------ -------- --------
Weighted average number of common and common equivalent
equivalent shares outstanding:
Weighted average number of common shares outstanding 9,567 9,354 9,209
Dilutive effect of stock options after application of the
treasury stock method 298 98 38
------ ------ -------
Shares used in per common share computation 9,865 9,452 9,247
------ ------ -------
------ ------ -------
Net income (loss) per common share $0.18 ($0.57) ($0.29)
------ ------- -------
------ ------- -------
</TABLE>
-49-
<PAGE>
EXHIBIT 13.0
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fourth Shift Corporation:
We have audited the accompanying consolidated balance sheets of Fourth Shift
Corporation (a Minnesota corporation) and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fourth Shift Corporation and
Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
January 21, 1997
<PAGE>
Financial Highlights
(In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue $49,310 $37,224 $30,076 $26,117 $18,426
Operating profit 1,234 661 2,201 3,958 483
Income from continuing operations 1,009 205 2,255 3,745 489
Net income (loss) 1,770 (5,400)** (2,722)** 3,517** (9,160)*
Net income (loss) per common share .18 (0.57)** (0.29)** 0.46** (1.49)*
Shares used in per common share computation 9,865 9,452 9,247 7,567 6,152
Balance Sheet Data:
Total assets $31,172 $24,494 $23,066 $20,740 $ 7,748
Long-term obligations 2,304 275 269 -- 217
Shareholders equity (deficit) 7,087 4,700 9,632 12,162 (9,536)
</TABLE>
* Includes write-offs associated with the acquisition of Just In Time
Resources International, Inc.
** Includes the effect of net losses associated with the discontinued
operations of Just In Time Enterprise Systems, Inc.
<PAGE>
Selected Consolidated Financial Data
(In thousands, Except Per Share Data)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA- 1996 1995 1994 1993 1992
-------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
REVENUE:
Software license $22,947 $17,128 $13,956 $11,615 $ 7,984
Service 23,822 18,097 13,937 11,316 8,608
Third-party software and other 2,541 1,999 2,183 3,186 1,834
-------- ------- ------- -------- --------
Total revenue 49,310 37,224 30,076 26,117 18,426
-------- ------- ------- -------- --------
OPERATING EXPENSES:
Cost of licenses 2,601 1,708 1,455 1,577 487
Cost of services 11,747 8,868 6,356 5,357 5,095
Cost of third-party software and other 2,008 1,386 1,853 2,576 1,489
Selling, general and administrative(1) 23,046 18,720 15,394 10,628 7,959
Product development 8,674 5,732 2,817 2,021 2,913
Restructuring charge -- 149 -- -- --
-------- ------- ------- -------- --------
Total operating expenses 48,076 36,563 27,875 22,159 17,943
-------- ------- ------- -------- --------
Operating profit 1,234 661 2,201 3,958 483
Other income (expense), net (36) (158) 213 (23) 14
------- ------- ------- -------- --------
Income from continuing operations
before provision for income taxes 1,198 503 2,414 3,935 497
Provision for income taxes 189 298 159 190 8
------- ------- ------- -------- --------
Income from continuing operations 1,009 205 2,255 3,745 489
------- ------- ------- -------- --------
Discontinued operations:
Loss from discontinued operations -- (7,642) (4,977) (228) (9,649)
Net gain on sale of discontinued
operations 761 2,037 -- -- --
------- ------- ------- -------- --------
Total discontinued operations 761 (5,605) (4,977) (228) (9,649)(2)
------- ------- ------- -------- --------
Net income (loss) $ 1,770 $(5,400) $(2,722) $ 3,517 $ (9,160)
------- ------- ------- -------- --------
------- ------- ------- -------- --------
Net income (loss) per common share:
Continuing operations $ .10 $ .02 $ .24 $ .49 $ .08
Discontinued operations $ .08 (.59) (.53) (.03) (1.57)
------- ------- ------- -------- ---------
Net income (loss) $ .18 $ (.57) $ (.29) $ .46 $ (1.49)
------- ------- ------- -------- ---------
------- ------- ------- -------- ---------
Shares used in per common share
computation (3) 9,865 9,452 9,247 7,567 6,152
------- ------- ------- -------- ---------
------- ------- ------- -------- ---------
BALANCE SHEET DATA -
Working capital surplus (deficit) $ 1,347 $ 1,810 $ 5,055 $ 8,995 $ (11,339)
Total assets 31,172 24,494 23,066 20,740 7,748
Long-term obligations 2,304 275 269 -- 217
Shareholders' equity (deficit) 7,087 4,700 9,632 12,162 (9,536)
</TABLE>
<PAGE>
(1) Includes provision for doubtful accounts of $457, $289, $228, $50 and
$297 for each of the five years in the period from December 31, 1996
to December 31, 1992, respectively.
(2) In connection with the acquisition of Just In Time Resources
International, Inc. (Resources) on December 29, 1992, the Company
charged to expense certain costs that the Company had capitalized in
1992 prior to the acquisition for development of a product similar
to JIT, which similar product became redundant as a result of such
acquisition. In addition, the amount includes charges for purchased
research and development incurred in connection with the acquisition
of Resources on December 29, 1992.
(3) See Note 2 of notes to the Company's consolidated financial statements
for an explanation of the determination of shares used in the per
common share computation.
<PAGE>
1996 Management's Discussion & Analysis of Financial Condition and Results of
Operations
The following discussion and analysis provides information which management
believes is relevant to an assessment and under-standing of the Company's
consolidated results of operations and financial condition and should be read in
conjunction with the consolidated financial statements and notes thereto.
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 licensing 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.
SALE OF JUST IN TIME
ENTERPRISE SYSTEMS, INC.
Effective December 31, 1995, the Company sold all of the capital stock of Just
In Time Enterprise Systems, Inc. (JIT), a wholly owned subsidiary of the
Company, along with certain net assets related to the operations of JIT in the
United Kingdom, to Interactive Group, Inc. (IGI). The Company received cash
proceeds of $1.5 million and a $2.5 million note which is collateralized by the
common stock of JIT, all receivable generated by JIT or from the JIT Enterprise
System and by the intellectual property rights in the JIT Enterprise System. The
note is collectible in quarterly installments over a period of three years and
bears interest at 8.75%. In addition, IGI will pay, commencing on December 31,
1998, an additional amount equal to 4% of the revenues generated from the JIT
Enterprise System after December 31, 1995, up to a total of $1.2 million. This
amount is also collateralized by JIT's common stock, receivables, and
intellectual property rights.
In connection with the sale of JIT, the Company recorded a 1995 gain on the sale
of $2,037,000, equal to the excess of the cash proceeds received over the
deficit book value of JIT, net of transaction costs. The Company deferred
recognition of the gain associated with the note received in connection with the
sale and is recognizing the gain associated with this note, as well as the
additional amounts receivable based on revenues generated from the JIT
Enterprise System, as such amounts are deemed collectible. In 1996 the Company
recognized a gain
<PAGE>
totaling $761,000 related to cash received in 1996 and January 1997. All income
taxes related to this transaction have been offset through the utilization of
net operating losses previously generated by JIT.
The operating results of JIT have been presented as discontinued operations in
the Company's consolidated financial statements. Accordingly, the discussion
contained herein relates to the continuing operations of the Company, unless
otherwise noted.
RESULTS OF OPERATIONS
Revenue:
TOTAL REVENUE for the year ended December 31, 1996 increased 32% to $49,310,000
from $37,224,000 in 1995 and increased 24% to $37,224,000 from $30,076,000 in
1994. The overall growth in total revenue over the three-year period was
achieved through increased market penetration in North America and geographic
expansion internationally. North American total revenue increased 25% from 1995
to 1996 and increased 14% from 1994 to 1995. International revenue increased
51% from 1995 to 1996 and increased 59% from 1994 to 1995 as the Company
continued to expand personnel and focus on markets outside of North America.
Total revenue from the Company's subsidiary in Asia grew 70% in 1996 and 175% in
1995 as a result of increased market penetration in the People's Republic of
China and further expansion into southeast Asia. Total revenue from the
Company's European subsidiary grew 32% in 1996 and 13% in 1995. The 1996 growth
was the result of strong expansion outside of the U.K. - particularly in
Continental Europe. As a percentage of total revenue, sales outside of North
America accounted for 32% in 1996, 28% in 1995 and 22% in 1994 resulting from
increased efforts at globalization.
SOFTWARE LICENSE REVENUE are fees paid by customers for the right to use the
Company's software system. Software license revenue increased 34% to $22,947,000
in 1996 from $17,128,000 in 1995 and increased 23% to $17,128,000 in 1995 from
$13,956,000 in 1994. The continued increase in license revenue is
attributable to greater visibility of the Company's MSS product, increased
penetration in foreign markets, particularly the Pacific Rim and Continental
Europe, an increase in the direct sales force, increased marketing and
lead-generating activities and increased acceptance of microcomputer
LAN-based manufacturing information systems. Also contributing to the license
revenue growth was a price increase implemented in the fourth quarter of
1994. Total software license revenue was 46% of total revenue in 1996 and
1995, which approximates the Company's overall goal of an even mix between
software license and service revenue.
SERVICE REVENUE includes customer support fees, training, consulting,
installation and project management. Service revenue increased 32% to
$23,822,000 in 1996 from $18,097,000 in 1995 and increased 30% to $18,097,000
in 1995 from $13,937,000 in 1994. The demand for services and support has
increased proportionately with the increase in the installed software license
base (2,600 at the end of 1996). In addition, the Company has strengthened its
efforts to standardize and promote its consulting and training offerings, as
well as developing additional value-added products and services for our
customers. The Company believes that services are an important component to the
overall product line offering and should grow in a manner consistent with the
growth in the installed software license base.
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 27% to $2,541,000 in 1996 from $1,999,000 in 1995 and
decreased 8% to $1,999,000 in 1995 from $2,183,000 in 1994. The increase in
1996 from 1995 is directly related to increases in MSS license revenue, since
third-party software is often licensed in conjunction with the licensing of the
MSS product. The decrease from 1994 to 1995 is a result of reduced hardware
sales, as the Company changed its sales focus from selling low margin hardware
to higher margin companion software products.
<PAGE>
OPERATING EXPENSES:
COST OF LICENSES increased to $2,601,000 in 1996 from $1,708,000 in 1995 and
increased as a percentage of total license revenue to 11% in 1996 from 10% in
both 1995 and 1994. The increase in these costs as a percent of license revenue
from 1995 to 1996 is due to increases in royalty costs paid to third-party
software suppliers whose products are embedded in and distributed with the MSS
product. This was partially offset by reduced cost of printing and distributing
software documentation as the company moved away from paper manuals towards
distribution on CD-ROM.
COST OF SERVICES increased to $11,747,000 in 1996 from $8,868,000 in 1995 and
held as a percentage of service revenue at 49% for both years. Margins were
favorably impacted in 1996 by the sale of higher margin consulting products
which were introduced in 1996, increases in the delivery of lower cost, on-site
training and increases in service productivity. This was offset by reduced
margins on customer support due to increased variety and complexity in the MSS
product. Cost of services was $6,356,000 or 46% of service revenue in 1994.
The increase in cost as a percentage of revenue from 1994 to 1995 is due to the
introduction of lower margin technical consulting services in 1995 and increased
costs associated with additional headcount that were not producing revenue
during training and orientation periods.
COST OF THIRD-PARTY PRODUCTS as a percentage of third-party products revenue was
79% in 1996, compared to 69% in 1995 and 85% in 1994. The increase from 1995
to 1996 is due to the mix of products sold combined with increases in fixed
personnel costs and increased costs associated with the writing, supporting and
maintaining the interface between certain companion products and MSS. The
decrease from 1994 to 1995 reflects a change in the mix of the Company's sales
from low margin hardware products to higher margin companion software products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased 23% to $23,046,000 in 1996
from $18,720,000 in 1995. As a percentage of total revenue, selling, general and
administrative expense was 47% of total revenue in 1996 and 50% in 1995. The
dollar increase in this amount from 1995 to 1996 relates to the addition of
selling personnel and commissions earned in connection with the Company's
expanded market penetration in North America and international markets. These
increases were somewhat offset by decreases in general and administrative costs
in North America which resulted from concerted efforts made by the Company to
control and reduce such costs. These decreases were partially offset by
increased administrative costs associated with international expansion.
Selling, general and administrative costs increased 22% to $18,720,000 in 1995
compared to $15,394,000 in 1994.
PRODUCT DEVELOPMENT EXPENSE was $8,674,000 or 18% of total revenue during
1996, compared to $5,732,000 or 15% of total revenue in 1995 and $2,817,000
or 9% of total revenue in 1994. The significant 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 (OBJECTS). The first release of
OBJECTS was shipped to beta sites for testing in the third quarter of 1996.
In addition, the Company also completed several significant user enhancements
associated with the MSS product Release 5.2, including an additional
language, additional functionality for average actual costing, development of
enhanced graphical user interface features, and a new on-line documentation
system delivered on CD-ROM. The Company's research and development
activities are conducted internally and consist primarily of software
development--(the writing of 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.
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.
The Company expects that OBJECTS will 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, and
therefore is capitalizing the costs associated with its development. The
Company is also capitalizing the development costs associated with certain
"core"
<PAGE>
OBJECTS application servers that will likely have an economic life in
excess of three years. In 1996, the Company capitalized $1,820,000 of
development costs, or 17% of total development spending.
RESTRUCTURING CHARGE is the result of a cost reduction plan implemented by the
Company during the second quarter of 1995. Substantially all of this plan was
associated with the JIT operations and is included in the loss reported from
discontinued operations; however, a restructuring charge of $149,000 was also
provided related to the Company's continuing operations. This charge was
primarily related to employee severance costs paid during 1995 and to provide
for costs to be incurred under existing contracts to exit office space that were
no longer providing an economic benefit to the Company.
OTHER INCOME (EXPENSE), NET is comprised principally of interest income offset
by interest expense on line-of-credit borrowings and capital leases.
PROVISION FOR INCOME TAXES totaled $189,000 in 1996 versus $298,000 in 1995 and
$159,000 in 1994. During 1995, the effective rate was substantially higher than
the federal statutory rate of 34%, primarily as a result of foreign income
taxes. The effective tax rate in all years was reduced as a result of the
utilization of net operating loss carryforwards. The tax provision is comprised
of state and foreign income taxes.
OPERATING PROFIT:
The Company reported operating profit of $1,234,000 for 1996 compared to
$661,000 for 1995. The increase in 1996 operating profit is a direct result of
significantly increased selling and marketing efforts (as discussed above),
thereby increasing license and service revenues. This is partially offset by
increased product development costs incurred in the continuing enhancement of
the MSS product line and the development of its next generation object-oriented
product.
The Company has historically experienced higher revenue and gross margin in its
fourth quarter compared to the other quarters. The Company attributes these
increases to customers' increased spending at the end of their calendar year
budgetary periods. The Company believes this pattern will continue.
FOREIGN CURRENCY EXCHANGE
Approximately 14% of the Company's total revenue in 1996, 16% in 1995 and 19% in
1994, was derived from sales denominated in foreign currencies. These sales were
made through certain foreign subsidiaries and were denominated in the
subsidiaries' functional currencies. The effect of foreign currency exchange
rate fluctuations versus the U.S. Dollar on these revenues is largely offset to
the extent expenses of the foreign subsidiary are incurred and paid for in that
same currency. None of these foreign operations have significant receivables,
obligations or commitments denominated in currencies other than these
operations' functional currencies.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operating activities was $3,162,000 in 1996 compared
to $4,557,000 in 1995 and $4,751,000 in 1994. The primary sources of cash from
continuing operating activities in 1996 were the net income of $1,770,000,
increases in accounts payable and accrued expenses of $2,430,000, deferred
revenue of $587,000 and depreciation and amortization of $2,065,000. These
sources were offset by increases in accounts receivable of $2,878,000 and the
net gain of $761,000 recorded on the sale of JIT. The increase in accounts
receivable is a direct result of increased sales. The increase in accounts
payable and accrued expenses results from increased incentives, commissions and
costs of third-party software associated with fourth quarter growth. The
increase in deferred revenue results from the continued growth of the business
and increases in the number of annual customer support contracts.
Cash used for investing activities was $5,415,000 in 1996 compared to $201,000
in 1995 and $2,349,000 in 1994. The increase from 1995 to 1996 reflects
increased capital spending and capitalized development costs.
<PAGE>
Specifically,purchases of furniture, fixtures and equipment of $4,161,000 were
made to accommodate the addition of personnel which required additional space,
furnishings and computer equipment. In addition, 1996 cash used in investing
activities includes $1,820,000 of capitalized development spending. Cash from
investing activities during 1996 also reflects the receipt of $566,000 related
to the sale of JIT.
Cash provided by financing activities was $1,665,000 in 1996 compared to
$212,000 in 1995 and $518,000 in 1994, and relates primarily to net proceeds
from the Company's capital lease and equipment financing arrangements. In the
fourth quarter of 1994, the Company entered into a two-year sale/leaseback
arrangement for certain furniture, fixtures and equipment purchased in 1994,
which provided approximately $556,000 of cash.
Also, as discussed in Note 5 of Notes to Consolidated Financial Statements, in
November 1995, the Company entered into a $3,000,000 line-of-credit agreement
with a bank. Borrowings under the credit agreement are limited to the lesser of
the committed line or a borrowing base equal to 75% of eligible accounts
receivable, as defined. Borrowings are collateralized by the Company's accounts
receivable and all other assets of the Company and bear interest at prime plus
1.25%. In November 1996 the agreement was extended to November 1997 and the line
was increased to $5,000,000. The agreement contains restrictive covenants which
include the maintenance of minimum tangible net worth and profitability levels
as well as certain financial ratios, as defined. There were no outstanding
borrowings on this line at December 31, 1996, and the Company was in compliance
with or had obtained waivers from the bank related to the covenants.
The Company does not have any material scheduled commitments for capital
expenditures during 1997. The Company believes that the $6,435,000 of cash and
cash equivalents on hand at December 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 for 1997. Beyond 1997, 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting
for Stock-Based Compensation", effective for fiscal years beginning after
December 15, 1995. This pronouncement encourages, but does not require, a fair
value based method of accounting for employee stock options, the sale of stock
under the Company's employee stock discount purchase plan and similar equity
instruments. It also allows an entity to elect to continue to measure
compensation cost in accordance with current accounting pronouncements. In those
instances, SFAS No. 123 requires pro forma disclosure of net income and earnings
per share as if the fair value based method of accounting had been applied. The
Company adopted SFAS No. 123 in 1996, has elected to continue to measure
compensation cost in accordance with previous accounting pronouncements, and
has complied with the pro forma disclosure requirements. As a result, this
statement has had no impact on the Company's reported results of operations or
financial position.
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In Thousands, Except Share and Per Share Data)
ASSETS 1996 1995
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 6,435 $ 7,058
Accounts receivable, net 13,007 10,129
Inventories 596 778
Prepaid expenses 1,156 864
Current portion of note receivable 813 566
--------- ---------
Total current assets 22,007 19,395
--------- ---------
FURNITURE, FIXTURES AND EQUIPMENT, at cost:
Furniture and fixtures 2,309 1,618
Computer equipment 6,734 3,287
Leasehold improvements 1,080 220
Assets held under capital lease 2,110 1,984
Less- Accumulated depreciation and amortization (6,093) (4,112)
--------- ---------
Net furniture, fixtures and equipment 6,140 2,997
NOTE RECEIVABLE 1,121 1,934
SOFTWARE DEVELOPMENT COSTS 1,820 -
GOODWILL, net 84 168
--------- ---------
Total assets $31,172 $24,494
--------- ---------
--------- ---------
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In Thousands, Except Share and Per Share Data)
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------- -------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term obligations $ 868 $ 441
Current portion of deferred gain on sale of subsidiary 617 566
Accounts payable 4,283 2,125
Accrued expenses 6,032 6,180
Deferred revenue 8,860 8,273
------- -------
Total current liabilities 20,660 17,585
LONG-TERM OBLIGATIONS 2,304 275
DEFERRED GAIN ON SALE OF SUBSIDIARY 1,121 1,934
COMMITMENTS AND CONTINGENCIES (Notes 7, 8 and 9)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized; 9,605,009 and
9,366,134 shares issued and outstanding 96 94
Additional paid-in capital 29,872 29,222
Accumulated deficit (22,881) (24,616)
------- -------
Total shareholders' equity 7,087 4,700
------- -------
Total liabilities and shareholders' equity $31,172 $24,494
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Software license $22,947 $17,128 $13,956
Service 23,822 18,097 13,937
Third-party software and other 2,541 1,999 2,183
------- ------- -------
Total revenue 49,310 37,224 30,076
------- ------- -------
OPERATING EXPENSES:
Cost of licenses 2,601 1,708 1,455
Cost of services 11,747 8,868 6,356
Cost of third-party software and other 2,008 1,386 1,853
Selling, general and administrative 23,046 18,720 15,394
Product development 8,674 5,732 2,817
Restructuring charge -- 149 --
------- ------- -------
Total operating expenses 48,076 36,563 27,875
------- ------- -------
Operating profit 1,234 661 2,201
OTHER INCOME (EXPENSE), net (36) (158) 213
------- ------- -------
Income before provision
for income taxes 1,198 503 2,414
PROVISION FOR INCOME TAXES 189 298 159
------- ------- -------
INCOME FROM CONTINUING OPERATIONS 1,009 205 2,255
------- ------- -------
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (7,642) (4,977)
Net gain on sale of discontinued
operations 761 2,037 --
------- ------- -------
Total discontinued operations 761 (5,605) (4,977)
------- ------- -------
NET INCOME (LOSS) $ 1,770 $(5,400) $(2,722)
------- ------- -------
------- ------- -------
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ .10 $ .02 $ .24
Discontinued operations $ .08 (.59) (.53)
------- ------- -------
------- ------- -------
Net income (loss) $ .18 $ (.57) $ (.29)
------- ------- -------
------- ------- -------
SHARES USED IN PER COMMON SHARE COMPUTATION 9,865 9,452 9,247
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
(In Thousands)
Common Stock
------------------ Additional
Number Par Paid-In Capital Accumulated
of Shares Value --------------- Deficit
--------- ----- ---------
BALANCE, December 31, 1993 9,180 92 28,488 (16,418)
Common stock issued 20 - 46 -
Issuance of restricted shares 17 - 139 -
Net loss - - - (2,722)
Translation adjustment - - - 7
--------- ----- ---------- ---------
BALANCE, December 31, 1994 9,217 92 28,673 (19,133)
Common stock issued 149 2 345 -
Issuance of restricted shares - - 204 -
Net loss - - - (5,400)
Translation adjustment - - - (83)
--------- ----- ---------- ---------
BALANCE, December 31, 1995 9,366 94 29,222 (24,616)
Common stock issued 234 2 591 -
Issuance of restricted shares 5 - 59 -
Net income - - - 1,770
Translation adjustment - - - (35)
--------- ----- ---------- ---------
BALANCE, December 31, 1996 9,605 96 29,872 (22,881)
--------- ----- ---------- ---------
--------- ----- ---------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $1,770 $(5,400) $(2,722)
Adjustments to reconcile net income (loss) to net
cash provided by continuing operating activities-
Noncash items:
Depreciation and amortization 2,065 1,312 1,226
Net gain on sale of discontinued operations (763) (2,037) -
Restructuring charge - 149 -
Loss from discontinued operations - 7,642 4,977
Other 62 205 139
Change in current operating items:
Accounts receivable, net (2,878) (1,526) (2,283)
Inventories 182 449 (692)
Prepaid expenses (292) (82) (278)
Accounts payable 2,158 (2,149) 3,202
Accrued expenses 272 3,232 (340)
Deferred revenue 587 2,762 1,522
-------- --------- ---------
Net cash provided by continuing operating
activities
3,163 4,557 4,751
-------- --------- ---------
INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment (4,162) (1,701) (2,349)
Capitalized software development costs (1,820) - -
Proceeds from sale of discontinued operations 566 1,500 -
-------- --------- ---------
Net cash used for investing activities (5,416) (201) (2,349)
-------- --------- ---------
</TABLE>
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In Thousands)
(Continued)
1996 1995 1994
-------- -------- --------
FINANCING ACTIVITIES:
Payments of long-term obligations $ (512) $ (427) $ (84)
Proceeds from equipment loans 2,004 579 556
Borrowings on line of credit 1,350 2,200 2,000
Payments on line-of-credit borrowings (1,350) (2,200) (2,000)
Proceeds on issuance of common stock, net 173 60 46
-------- -------- --------
Net cash provided by financing activities 1,665 212 518
CASH USED IN DISCONTINUED OPERATIONS - (4,198) (6,186)
EFFECT OF EXCHANGE RATE ON FOREIGN CASH BALANCES (35) (83) 7
-------- -------- --------
Net change in cash and cash equivalents (623) 287 (3,259)
CASH AND CASH EQUIVALENTS:
Beginning of year 7,058 6,771 10,030
-------- -------- --------
End of year $ 6,435 $ 7,058 $ 6,771
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during each period for-
Interest $ 338 $ 303 $ 108
Income taxes $ 140 $ 160 $ 146
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. NATURE OF BUSINESS AND COMPANY OPERATIONS:
Fourth Shift Corporation (a Minnesota corporation) and its subsidiaries
(collectively referred to as the Company) engage principally in the development,
marketing, licensing and support of integrated client/server application
software used for industrial planning and management processes, primarily for
use in the manufacturing industry. The Company's principal product, the Fourth
Shift Manufacturing Software System (MSS) is a family of integrated
manufacturing and financial management applications for intermediate-sized sites
of manufacturing and distribution enterprises. The MSS system operates in a
Windows NT open computing environment.
The Fourth Shift JIT Enterprise System (JIT Enterprise System), which was
offered through Just In Time Enterprise Systems, Inc. (JIT), a subsidiary of the
Company is an information management system for industrial companies involved in
aerospace and defense and contract manufacturing which operates in the
UNIX/Oracle environment. Effective December 31, 1995, the Company sold the
common stock of JIT (see Note 3.) The operating results of JIT have been
presented as discontinued operations in the accompanying consolidated financial
statements. Accordingly, the disclosures presented herein relate to the
continuing operations of the Company, unless otherwise noted.
The consolidated financial statements include the accounts of Fourth Shift
Corporation (Fourth Shift) and all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Software license revenues derived from software license fees with standard
acceptance periods are recognized upon shipment of software if there are no
significant postdelivery obligations and collectibility is reasonably assured.
Insignificant contractual obligations are accrued at the time of revenue
recognition. For fixed-fee software arrangements, the Company recognizes
revenue on payments due within one year once all significant obligations have
been met and defers the portion of the total fee which is attributable to
insignificant undelivered services or products and recognizes this revenue as
the associated services or products are delivered.
Service revenue includes customer support fees, training, consulting,
installation and project management. Revenue from customer support agreements
for maintaining, supporting and providing periodic upgrades is recognized
ratably over the maintenance period, which in most cases is one year. Revenue
is recognized for other services at the time the service is performed.
Third-party software and other revenue is derived from the resale of third-party
licenses and hardware. Revenue is recognized upon delivery of the product.
SOFTWARE DEVELOPMENT COSTS
Under Statement of Financial Accounting Standards 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 product is available for
general release to customers. Amortization is to be computed on each product
based upon the greater of the amount computed on a units sold basis (ratio of
gross product revenue to anticipated future gross revenue for that product) or
<PAGE>
-2-
straight-line basis over the remaining estimated economic life of the product.
Costs of maintenance and customer support are to be charged to expense when
related revenue is recognized or when those costs are incurred, whichever occurs
first.
Historically, the development costs incurred by the Company during the period
between the achievement of technological feasibility, defined by the Company as
the existence of a working model of the product, and the point at which the
product is available for general release to customers, have not been material.
Accordingly, prior to 1996 the Company has charged all software development
costs to expense as incurred. Beginning in the third quarter of 1996, the
Company began to capitalize development costs related to its next generation
product, Fourth Shift OBJECTS Enterprise Software (OBJECTS). The Company
capitalized $1,820,000 related the development of OBJECTS functionality and
related modules that had reached technological feasibility. 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.
CASH EQUIVALENTS
The Company considers all highly liquid and short-term investments purchased
with a maturity of three months or less to be cash equivalents. Short-term
investments consist principally of government securities and mutual funds and
are stated at cost, which approximates market.
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for losses on uncollectible
accounts. At December 31, 1996 and 1995, this allowance was $359,000 and
$452,000 respectively.
INVENTORIES
Inventories consist of third-party software held for resale, computer software
media, instruction material and packaging, and are stated at the lower of first-
in, first-out cost or market.
PREPAID EXPENSES
Prepaid expenses consist principally of prepaid rents and rental deposits,
prepaid insurance premiums and deposits on capital leases.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and are depreciated
principally under the straight-line method for financial and income tax
reporting purposes over estimated useful lives which range from three to five
years.
FOREIGN CURRENCY TRANSLATION
For the Company's foreign operations, assets and liabilities are translated at
year-end exchange rates, and items included in the consolidated statement of
operations are translated at average exchange rates prevailing during the year.
Translation adjustments, which have historically been insignificant, are
included in accumulated deficit in the accompanying consolidated balance sheets.
INCOME TAXES
The Company accounts for income taxes under the liability method of accounting.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
currently enacted tax rates.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share was computed by dividing net income (loss) by
the weighted average number of shares of common stock and dilutive common stock
equivalents outstanding determined using the treasury stock method. Fully
diluted and primary net income (loss) per share did not differ significantly
during 1996, 1995 or 1994.
<PAGE>
-3-
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. The
ultimate results could differ from those estimates.
RECLASSIFICATIONS
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation. Such reclassifications had no impact on net income (loss) or
accumulated deficit as previously reported.
3. SALE OF JUST IN TIME ENTERPRISE SYSTEMS, INC.
Effective December 31, 1995, the Company sold all of the capital stock of JIT to
Interactive Group, Inc. (IGI). The Company received sales proceeds of
$1,500,000 and a $2,500,000 note which is collateralized by the common stock of
JIT, all receivables generated by JIT or from the JIT Enterprise System and by
the intellectual property rights associated with the JIT Enterprise System. The
note is payable in quarterly installments over a period of three years and bears
interest at 8.75%. IGI also agreed to pay, commencing on December 31, 1998, an
additional amount equal to 4% of the revenues generated from the JIT Enterprise
System after December 31, 1995, up to a total of $1,200,000.
In connection with the sale of JIT in 1995, the Company recognized a gain on the
sale of $2,037,000, equal to the excess of the cash proceeds received over the
deficit book value of JIT, net of transaction costs. The Company deferred
recognition of the gain associated with the note received in connection with the
sale and is recognizing the gain associated with this note, as well as the
additional amounts receivable based on revenues generated from the JIT
Enterprise System, as cash is received. In 1996 the Company recognized a gain
totaling $761,000 related to cash received in 1996 and January 1997.
Substantially all income taxes related to this transaction have been offset by
operating losses previously generated by JIT. In addition, all previously
generated net operating loss carryforwards related to JIT will continue to be
available to offset future taxable income of the Company, subject to the
limitations discussed in Note 7.
The financial position and results of operations of JIT have been reported
separately as discontinued operations in the accompanying consolidated financial
statements. Revenues related to JIT were $15,811,000 and $16,822,000 for the
years ended December 31, 1995 and 1994, respectively.
4. RESTRUCTURING CHARGE:
In the second quarter of 1995, the Company evaluated its existing cost structure
and the future marketability of its products. As a result of this
consideration, the Company implemented a cost reduction plan which included a
restructuring of its operations. Substantially all of this plan was associated
with the JIT operations; however, a restructuring charge of $149,000 was also
provided related to the Company's continuing operations. This charge was
primarily related to employee severance costs paid during 1995, to provide for
costs to be incurred under existing contracts to exit office space that no
longer provided an economic benefit to the Company in future periods and to
recognize losses to be incurred on the disposal of leaseholds and other
equipment directly related to the abandoned office space. As of December 31,
1996, substantially all of this charge had been paid in cash.
5. LINE OF CREDIT ARRANGEMENTS:
In November 1995, the Company entered into a $3,000,000 line of credit agreement
with a bank. Borrowings under the credit agreement are limited to the lesser of
the committed line or a borrowing base equal to 75% of eligible accounts
receivable, as defined. Borrowings are collateralized by the Company's accounts
receivable and all other assets of the Company and bear interest at prime plus
1.25%. In November,1996 the agreement was extended to November 5, 1997 and the
line was increased to $5,000,000. Maximum borrowings in 1996 under this line
were $500,000 with no amounts outstanding
<PAGE>
-4-
at December 31, 1996. The agreement contains restrictive covenants which
include the maintenance of minimum tangible net worth and profitability levels
as well as certain financial ratios, as defined. As of December 31, 1996,
the Company was in compliance with or had obtained waivers from the bank
related to the covenants.
6. LONG-TERM OBLIGATIONS:
Long-term obligations consisted of the following at December 31 (in thousands):
1996 1995
------- -------
Capital lease obligations, varying
interest rates, due in various
monthly installments through 2001 $1,167 $716
Bank equipment financing 2,005 --
Less- Current portion (868) (441)
------- -------
Long-term obligations $2,304 $275
------- -------
------- -------
Future minimum payments under noncancelable capital leases, net of amounts
representing interest are $497,000 in 1997, $465,000 in 1998, $103,000 in 1999,
$92,000 in 2000 and $10,000 in 2001.
At December 31, 1996, long-term obligations included capital lease obligations
of approximately $653,000 related to prior years' sale/leaseback arrangements
associated with certain of the Company's furniture, fixtures and equipment. No
gain or loss was recognized as a result of these transactions.
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 due 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 due in thirty-six equal monthly
installments starting in October 1997 through September 2000. These facilities
are with the same bank as the Company's current line-of-credit (See Note 5) and
are governed by the same restrictive covenants. Future minimum payments under
these facilities are $365,000 in 1997, $ 710,000 in 1998, $635,000 in 1999 and
$295,000 in 2000. The carrying value of the Company's long-term obligations
approximates fair value.
7. INCOME TAXES:
At December 31, 1996, the Company had available net operating loss carryforwards
of approximately $16,500,000 and tax credit carryforwards of approximately
$1,400,000. These net operating losses and tax credit carrforwards will expire
from 1999 to 2010.
<PAGE>
-5-
The utilization of a portion of these net operating loss carryforwards may be
subject to Internal Revenue Code section 382 if certain significant investors
sell or purchase ownership interests. If an ownership change does occur, the
Company's ability to utilize its tax net operating loss carryforwards to offset
any future federal taxable income would be limited to a maximum amount in any
one year.
The provision for income taxes is comprised of the following for the years ended
December 31 (in thousands):
1996 1995 1994
---- ---- ----
Current tax provision:
State $ 43 $ 42 $ 68
Foreign 146 256 91
---- ---- ----
$189 $298 $159
---- ---- ----
---- ---- ----
The Company records deferred taxes for the difference between the financial
reporting and income tax bases of certain assets and liabilities, computed in
accordance with tax laws in effect currently. The principal differences which
give rise to deferred taxes are as follows (in thousands):
1996 1995
------ ------
Net operating loss and tax credit carryforwards $7,670 $7,000
Deferred gain on sale of JIT 735 950
Accruals and reserves not currently deductible
for tax purposes 565 668
Capitalized R&D Costs (690) --
Other (57) (16)
Less- Valuation allowance (7,753) (8,634)
------ ------
Net deferred taxes $ -- $ --
------ ------
------ ------
The Company has provided a valuation allowance for the net deferred tax benefit
resulting from net operating loss carryforwards and other differences between
the reported book and tax bases of certain assets and liabilities, as the
realizability of this net deferred tax benefit is not reasonably assured.
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate related to continuing operations is as follows for the years
ended December 31:
1996 1995 1994
----- ----- -----
Statutory federal income tax rate 34% 34% 34%
Utilization of operating losses to
reduce tax obligation (34) (34) (34)
State taxes, net of federal tax benefit 4 8 2
Foreign taxes 12 51 5
--- --- ---
Effective tax rate 16% 59% 7%
--- --- ---
--- --- ---
<PAGE>
-6-
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has operating leases for its corporate headquarters, additional
office space and for certain office equipment. The aggregate future minimum
rental payments under these leases, net of amounts to be received related to the
sublease of certain office space, are as follows (in thousands):
Year Amount
---- ------
1997 $2,294
1998 1,696
1999 625
2000 389
2001 381
Thereafter 1,714
------
$7,099
------
------
Rent expense, including amounts paid under short-term arrangements, was
approximately $2,340,000, $2,478,000, and $1,322,000 in 1996, 1995 and 1994,
respectively.
LITIGATION
The Company is subject to litigation in the normal course of business. In the
opinion of management, the resolution of these matters will not have a material
adverse effect on the Company's consolidated results of operations or financial
position.
9. OPTIONS AND COMPENSATION PLANS:
STOCK OPTIONS
Under the terms of the Company's 1989 stock option plan (the 1989 Plan), options
granted to employees expire no later than ten years after the date of grant, and
the exercise price must be at least 100% of the fair market value of the shares
at the date of grant. The 1989 Plan covers both incentive and nonqualified
stock options and is limited to 200,000 total shares. Incentive stock options
granted to employees, who immediately before such grant owned stock directly or
indirectly representing more than 10% of the voting power of all classes of the
stock of the Company, may not be exercisable more than five years after the date
of grant and the exercise price per share must be at least 110% of the fair
market value of the shares at the date of grant. Options vest over varying
periods not to exceed five years. This plan is to remain in effect until
October 17, 1999.
In June 1993, a new stock option plan (the 1993 Plan) was approved by the
Company's board of directors. The 1993 Plan covers both incentive and
nonqualified stock options and is limited to 2,250,000 shares, including 700,000
shares which were previously authorized by the Company's board of directors and
approved by the shareholders. The 1993 Plan terminates in June 2003.
Stock option plan activity is summarized as follows:
<PAGE>
-7-
<TABLE>
<CAPTION>
1989 1993 Option Price
Plan Plan Total Per Share
------- ------- -------- ------------
<S> <C> <C> <C> <C>
Option shares outstanding at
December 31, 1993 178,663 206,269 384,932 $2.00-$7.00
Options granted - 335,538 335,538 $4.125-$8.25
Options exercised (7,425) - (7,425) $2.00
Options forfeited (3,000) (55,000) (58,000) $2.00-$8.25
------- ------- -------- ------------
Option shares outstanding at
December 31, 1994 168,238 486,807 655,045 $2.00-$8.25
Options granted - 549,750 549,750 $2.625-$6.50
Options exercised (3,100) - (3,100) $2.00
Options forfeited - (120,500) (120,500) $3.25-$5.375
------- ------- -------- ------------
Option shares outstanding at
December 31, 1995 165,138 916,057 1,081,195 $2.00-$8.25
Options granted 4,000 210,000 214,000 $3.75-$7.625
Options exercised (77,375) (3,250) (80,625) $2.00-$5.00
Options forfeited (400) (77,000) (77,400) $2.00-$8.25
------- ------- -------- ------------
Option shares outstanding at
December 31, 1996 91,363 1,045,807 1,137,170 $2.00-$8.25
------- ------- -------- ------------
------- ------- -------- ------------
</TABLE>
1996 1995
--------- ---------
Options Exercisable at Year-end 379,172 247,879
Weighted Average Price of Options
Exercisable at Year-end $4.79 $4.04
Weighted Average Fair Market Value
of Options Granted $4.03 $3.63
The Company has granted options to an officer to purchase 25,000 shares of
common stock at $6.36 per share, representing the fair value at the date of
grant. The options vest over a four-year period ending in 1997.
<PAGE>
-8-
The Company accounts for these stock option plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost
for these plans been determined consistent with FASB Statement No. 123, the
Company's net income (loss) and earnings (loss) per share would have been as
follows:
1996 1995
--------- ----------
Net Income (Loss): As Reported $ 1,770 $ (5,400)
Pro Forma $ 984 $ (5,834)
Net Income (Loss)Per Common Share: As Reported $ .18 $ (.57)
Pro Forma $ .10 $ (.62)
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for all grants: risk-free interest rate of 5.0 percent and expected life
of 7.7 years for both 1996 and 1995; expected annualized volatility of .85
and .99 for 1996 and 1995, respectively.
OTHER EMPLOYEE COMPENSATION PLANS
The Company has a 401(k) plan that covers substantially all domestic
employees over 21 years of age with at least six months of continuous
service. The Company may make discretionary matching contributions to the
plan based upon employee contributions. The Company made matching
contributions to this plan of approximately $353,000 and $85,000 in 1996 and
1994, respectively. No matching contributions were made in 1995.
In April 1994, the shareholders approved an employee stock purchase plan (the
Stock Purchase Plan). Under the Stock Purchase Plan, participating full-time
employees and directors of the Company are able to purchase shares of the
Company's common stock at 85% of market value, as defined. A total of up to
400,000 shares of the Company's common stock has been reserved under the
Stock Purchase Plan. In 1995, the Company issued approximately 97,000 shares
of its common stock, which were purchased by participants of this plan during
1994. In 1996, the Company issued approximately 150,000 shares of which
100,000 were purchased in 1995 and 50,000 through June of 1996. The weighted
average fair value of shares purchased was $707,000 in 1996 and $266,000 in
1995.
BOARD OF DIRECTORS' COMPENSATION PLAN
The board of directors has approved a compensation plan whereby certain
directors may receive cash compensation for each directors' meeting attended
or, in lieu of cash payment, shares of common stock through the Company's
Stock Purchase Plan. The number of shares issued in lieu of cash fees is
adjusted to reflect the fair market value of the common stock in accordance
with the Company's Stock Purchase Plan. In addition, nonemployee directors
are entitled to receive options to purchase shares of the Company's common
stock under this plan. Total shares of 18,000, 20,000 and 1,300 were issued
under this plan in 1996, 1995 and 1994.
10. FOURTH SHIFT UK, LTD.:
In January 1993, the Company exercised its right to purchase all shares of
Fourth Shift UK Ltd. (FS-UK) held by minority shareholders through the
payment of approximately $248,000 cash and issuance of 87,500 shares of the
Company's common stock. The transaction resulted in the Company recording
approximately $421,000 of goodwill, which is being amortized over a five-year
period. Accumulated amortization as of December 31, 1996 and 1995, was
$337,000 and $253,000, respectively.
<PAGE>
-9-
11. INTERNATIONAL OPERATIONS:
Sales, services and marketing operations outside the United States are
conducted principally through foreign sales subsidiaries and through various
representatives and distributorship arrangements. Financial information by
geographical segment is as follows (in thousands):
<TABLE>
<CAPTION>
North
America Asia Europe Eliminations Consolidated
--------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1996:
Revenue $33,588 $8,786 $6,936 $ - $49,310
Operating profit (loss) (1,127) 1,253 1,108 - 1,234
Total assets 24,788 6,236 4,678 (4,530) 31,172
1995:
Revenue 26,785 5,170 5,269 - 37,224
Operating profit (loss) (737) 563 835 - 661
Total assets 20,981 3,960 3,243 (3,690) 24,494
1994:
Revenue 23,515 1,878 4,683 - 30,076
Operating profit 1,832 258 111 - 2,201
Total assets 18,753 1,597 3,348 (632) 23,066
</TABLE>
<PAGE>
-10-
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a condensed summary of actual quarterly results of operations
for 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
1996
-----------------------------------------------
First Second Third Fourth Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue $10,572 $12,423 $11,891 $14,424 $49,310
Operating profit 154 651 187 242 1,234
Income from continuing operations 126 567 162 154 1,009
Results of discontinued operations 184 188 193 196 761
------- ------- ------- ------- -------
Net income $ 310 $ 755 $ 355 $ 350 $ 1,770
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Earnings per common share:(a)
Continuing operations $ .01 $ .06 $ .02 $ .02 $ .10
Discontinued operations .02 .02 .02 .02 .08
------- ------- ------- ------- -------
Net income $ .03 $ .08 $ .04 $ .04 $ .18
------- ------- ------- ------- -------
------- ------- ------- ------- -------
1995
-----------------------------------------------
First Second Third Fourth Total
------- ------- ------- ------- -------
Revenue $ 8,186 $ 9,285 $ 8,981 $10,772 $37,224
Operating profit (loss) (416) 385 185 507 661
Income (loss) from continuing
operations (494) 287 64 348 205
Results of discontinued operations (2,931) (4,867) (9) 2,202 (5,605)
------- ------- ------- ------- -------
Net income (loss) $(3,425) $(4,580) $ 55 $ 2,550 $(5,400)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Earnings (loss) per common share:(a)
Continuing operations $(.05) $ .03 $ .01 $ .04 $ .02
Discontinued operations (.32) (.52) (.00) .23 (.59)
------- ------- ------- ------- -------
Net income (loss) $(.37) $ (.49) $ .01 $ .27 $ (.57)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
(a) The sum of quarterly per share amounts does not equal the annual amount
due to changes in the average common and common equivalent shares
outstanding.
<PAGE>
NASDAQ Symbol
The Company's common stock trades on the NASDAQ National Market tier of The
NASDAQ Stock Market under the symbol FSFT.
Price Range of Common Stock
The following table sets forth the high and low sales price of the Common
Stock as quoted by the NASDAQ National Market System for the periods
indicated. Such prices include inter-dealer prices, and may not include
retail markup, markdown or commissions.
High Low
----- -----
FISCAL 1995:
First Quarter 4 1/4 2
Second Quarter 4 3/8 2 1/2
Third Quarter 6 1/4 3 1/4
Fourth Quarter 5 3/4 3 1/8
FISCAL 1996:
First Quarter 5 3/4 3 5/8
Second Quarter 10 1/2 4 1/2
Third Quarter 8 1/2 5 1/8
Fourth Quarter 8 1/8 5 1/8
As of December 31, 1996, there were 234 shareholders of record and, based
on the best available information, approximately 2,700 beneficial holders
of the Company's Common Stock. The Company has never paid cash dividends
on its Common Stock and currently intends to retain earnings for use in
operations.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statement Files No. 33-68894, 33-80480,
33-93756, and 33-08507.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 31, 1997
<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 12/31/96 AND
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE-MONTH PERIOD ENDED 12/31/96
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,435
<SECURITIES> 0
<RECEIVABLES> 13,820<F1>
<ALLOWANCES> 0
<INVENTORY> 596
<CURRENT-ASSETS> 22,007
<PP&E> 12,233
<DEPRECIATION> (6,093)
<TOTAL-ASSETS> 31,172
<CURRENT-LIABILITIES> 20,660
<BONDS> 2,304
0
0
<COMMON> 96
<OTHER-SE> 6,991
<TOTAL-LIABILITY-AND-EQUITY> 31,172
<SALES> 25,488
<TOTAL-REVENUES> 49,310
<CGS> 4,609
<TOTAL-COSTS> 16,356
<OTHER-EXPENSES> 36
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,198
<INCOME-TAX> 189
<INCOME-CONTINUING> 1,009
<DISCONTINUED> 761
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,770
<EPS-PRIMARY> .18
<EPS-DILUTED> 0
<FN>
<F1>THESE ASSETS VALUES REPRESENT AMOUNTS NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
</FN>
</TABLE>
