<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________ to __________
Commission file number: 0-21992
--------------------------
FOURTH SHIFT CORPORATION
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1437794
(state or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
--------------------------
7900 INTERNATIONAL DRIVE
SUITE 450
MINNEAPOLIS, MN 55425
(612) 851-1500
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
The number of shares outstanding of the Registrant's Common Stock on August 7,
1998 was 9,999,152 shares.
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FOURTH SHIFT CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets at 2
June 30, 1998 and December 31, 1997
Consolidated Statements of Operations 3
for the three and six months ended
June 30, 1998 and 1997
Consolidated Statements of Cash Flows 4
for the six months ended June 30, 1998
and 1997
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . $ 6,439 $ 5,758
Accounts receivable, net . . . . . . . . . . . . . 14,197 14,001
Inventories. . . . . . . . . . . . . . . . . . . . 100 482
Prepaid expenses . . . . . . . . . . . . . . . . . 1,285 1,031
Royalty receivable . . . . . . . . . . . . . . . . 66 650
--------- ---------
Total current assets . . . . . . . . . . . . . . 22,087 21,922
FURNITURE, FIXTURES AND EQUIPMENT, net . . . . . . . . 4,362 5,503
RESTRICTED CASH. . . . . . . . . . . . . . . . . . . . 465 715
SOFTWARE DEVELOPMENT COSTS, net. . . . . . . . . . . . 3,270 3,289
--------- ---------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . $ 30,184 $ 31,429
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations . . . . . $ 1,040 $ 1,803
Revolving credit facility. . . . . . . . . . . . . 2,228 2,000
Accounts payable . . . . . . . . . . . . . . . . . 2,102 3,964
Accrued expenses . . . . . . . . . . . . . . . . . 6,940 8,001
Deferred revenue . . . . . . . . . . . . . . . . . 12,591 10,315
--------- ---------
Total current liabilities. . . . . . . . . . . . 24,901 26,083
LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . . . 868 1,299
SHAREHOLDERS' EQUITY:
Common stock . . . . . . . . . . . . . . . . . . . 99 98
Additional paid-in capital . . . . . . . . . . . . 30,856 30,640
Other comprehensive losses . . . . . . . . . . . . (253) (236)
Accumulated deficit. . . . . . . . . . . . . . . . (26,287) (26,455)
--------- ---------
Total shareholders' equity . . . . . . . . . . . 4,415 4,047
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . $ 30,184 $ 31,429
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
2
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FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Software license . . . . . . . . . . . . . . . . . . . $ 7,061 $ 5,581 $ 12,394 $ 9,382
Service. . . . . . . . . . . . . . . . . . . . . . . . 9,133 6,634 17,330 13,050
Third-party software and other . . . . . . . . . . . . 1,134 661 2,034 1,249
-------- -------- --------- --------
Total revenue. . . . . . . . . . . . . . . . . . . . . 17,328 12,876 31,758 23,681
-------- -------- --------- --------
OPERATING EXPENSES:
Cost of licenses . . . . . . . . . . . . . . . . . . . 1,486 693 2,440 1,218
Cost of services . . . . . . . . . . . . . . . . . . . 4,566 3,205 8,529 6,327
Cost of third-party software and other . . . . . . . . 817 477 1,489 889
Selling, general and administrative. . . . . . . . . . 7,901 6,577 15,030 12,700
Product development. . . . . . . . . . . . . . . . . . 1,887 1,985 3,695 4,058
-------- -------- --------- --------
Total operating expenses . . . . . . . . . . . . . . . 16,657 12,937 31,183 25,192
-------- -------- --------- --------
Operating income (loss). . . . . . . . . . . . . . . . . . 671 (61) 575 (1,511)
Interest expense, net. . . . . . . . . . . . . . . . . . . (152) (65) (283) (133)
Other income (expense), net. . . . . . . . . . . . . . . . 20 2 (29) (7)
-------- -------- --------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES . . . . . . . . . . . 539 (124) 263 (1,651)
Provision for (benefit from) income taxes. . . . . . . 194 21 229 (10)
-------- -------- --------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS . . . . . . . . . 345 (145) 34 (1,641)
NET GAIN ON SALE OF DISCONTINUED OPERATIONS. . . . . . . . 66 205 134 406
-------- -------- --------- --------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . $ 411 $ 60 $ 168 $ (1,235)
-------- -------- --------- --------
-------- -------- --------- --------
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations income (loss) per share . . . . $ 003 $ (001) $ 001 $ (017)
Discontinued operations income per share. . . . . . . 001 002 001 004
-------- -------- --------- --------
Net income (loss) per share . . . . . . . . . . . . . $ 004 $ 001 $ 002 $ (013)
-------- -------- --------- --------
-------- -------- --------- --------
SHARES USED IN BASIC AND DILUTED PER COMMON SHARE COMPUTATION:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . 9,904 9,749 9,903 9,712
-------- -------- --------- --------
-------- -------- --------- --------
Diluted. . . . . . . . . . . . . . . . . . . . . . . . 9,980 9,749 9,950 9,712
-------- -------- --------- --------
-------- -------- --------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
3
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FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------
1998 1997
--------- -----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 168 $ (1,235)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,302 1,410
Gain on sale of discontinued operations (134) (406)
Other 11 (32)
Change in current operating items:
Accounts receivable, net (196) 984
Inventories 382 6
Prepaid expenses (254) (136)
Accounts payable (1,862) (1,425)
Accrued expenses (871) (207)
Deferred revenue 2,276 (90)
--------- -----------
Net cash provided by (used in) operating activities 822 (1,131)
--------- -----------
INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (189) (738)
Cash released from restrictions 250 -
Proceeds from sale of discontinued operations 718 397
Capitalized software development costs 19 (2,335)
--------- -----------
Net cash provided by (used in) investing activities 798 (2,676)
--------- -----------
FINANCING ACTIVITIES:
Payments of long-term obligations (1,194) (395)
Borrowings on equipment facility - 195
Borrowings on line of credit 500 2,000
Payments on line of credit (272) -
Proceeds on issuance of common stock 27 103
--------- -----------
Net cash provided by (used in) financing activities (939) 1,903
--------- -----------
Net change in cash and cash equivalents 681 (1,904)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,758 6,435
--------- -----------
End of period $ 6,439 $ 4,531
--------- -----------
--------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during each period for-
Income taxes $ - $ 25
Interest 307 236
--------- -----------
--------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases $ 92 $ 496
--------- -----------
--------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
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FOURTH SHIFT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. The accompanying interim consolidated financial statements have been
prepared by Fourth Shift Corporation (the "Company"), without audit, in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission.
The unaudited consolidated financial statements as of June 30, 1998 and
1997 and for the three month and six month periods then ended include, in the
opinion of management, all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial results for the
respective interim periods. The results of operations for the three month and
six month period ended June 30, 1998 are not necessarily indicative of results
of operations to be expected for the entire fiscal year ending December 31,
1998. The accompanying interim consolidated financial statements have been
prepared under the presumption that users of the interim consolidated financial
information have either read or have access to the audited consolidated
financial statements for the year ended December 31, 1997. Accordingly, certain
footnote disclosures which would substantially duplicate the disclosures
contained in the December 31, 1997 audited consolidated financial statements
have been omitted from these interim consolidated financial statements. It is
suggested that these interim consolidated financial statements be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1997 and the notes thereto.
2. In the quarter ended June 30, 1998, the Company recognized a gain of
$66,000 in conjunction with the royalty agreement of the sale of its former
subsidiary, Just In Time Enterprise Systems, Inc. For the six month period
ended June 30, 1998, the Company recognized a gain of $134,000 in connection
with this sale.
3. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," certain software development costs are capitalized upon
the establishment of technological feasibility. Costs incurred prior to the
establishment of technological feasibility and development costs incurred to
improve and enhance existing software are charged to expense as incurred. In
the second quarter of 1998, the Company capitalized $334,000 of development
costs relating to upcoming product releases. No development costs were
capitalized in the first quarter of 1998. In the three month and six month
periods ending June 30, 1997, the Company capitalized $1,055,000 and
$2,275,000, respectively, of development costs related to the development of
its next generation product, Fourth Shift OBJECTS Enterprise Software -TM- .
In conjunction with a December 1997 restructuring of the Company's product
development operations, the Company reevaluated its OBJECTS development
activities and product strategy. As a result of this evaluation, the Company
identified ways to combine some of the OBJECTS technology with the functionality
of the current MSS product, and redirected its development activities
accordingly. Because of this redirection, components of the previously
developed OBJECTS product will not be incorporated into planned future product
releases. As such, $1,630,000 of previously capitalized costs related to these
components, net of accumulated amortization, were charged to restructuring
expense in December 1997.
As of June 30, 1998, Fourth Shift is not marketing the Fourth Shift
OBJECTS Enterprise Software-TM-. As such, the remaining capitalized asset
will be amortized as the underlying technology is incorporated into a product
that is available for general release. Upon releasing such a product, the
remaining capitalized costs will be amortized straight-line over the lesser
of three years or the product's estimated economic life. In the second
quarter of 1998 the Company amortized $101,000 of previously capitalized
technology with the release of MSS for OBJECTS 6.10.101. In addition, for
the second quarter of 1998 the Company expensed $348,000 of previously
capitalized technology that was no longer aligned with the Company's current
product strategy. No previously capitalized development costs were expensed
in the first quarter of 1998.
4. On July 1, 1998 the Company entered into a four year $12,000,000
commitment with a third-party database supplier whose product is embedded in
and distributed with the MSS product. The agreement also includes three
three-year renewal options. Payments will be made evenly throughout the 48
months of the contract. The Company does not anticipate this commitment to
materially impact margins.
5
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5. NEW ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of 1997 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings per Share" and, retroactively,
restated the earnings (loss) per share (EPS) for all prior periods. SFAS No.
128 requires presentation of basic and diluted EPS. Basic EPS is computed by
dividing net income by the number of weighted average common shares
outstanding. Diluted EPS reflects potential dilution from outstanding stock
options, using the treasury stock method. The dilutive effect of the stock
options was 76,000 shares for second quarter 1998 and 47,000 shares for the
six month period ended June 30, 1998. There was no dilutive effect from the
stock options for the three month and six month periods ended June 30, 1997
as the options were anti-dilutive.
The Financial Accounting Standards Board has released SFAS 130,
"Reporting Comprehensive Income," effective for years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting in the
financial statements the non-income components of all nonowner changes in
equity. Other comprehensive losses were $17,000 and $35,000 for the six
months ending June 30, 1998 and 1997, respectively. These amounts result
from translation losses from the Company's foreign operations. Other
comprehensive losses are reclassified on a cumulative basis from accumulated
deficit in the attached Consolidated Balance Sheets.
The Company has adopted Statement of Position (SOP) 97-2, "Software
Revenue Recognition," effective January 1998. This statement provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. The implementation of SOP 97-2 did not have
a material impact on the Company's financial condition or results of
operations. A provision of SOP 97-2 has been deferred until January 1, 1999
as a result of the issuance of SOP 98-4, "Software Revenue Recognition". The
Company is currently analyzing the deferred provision of SOP 97-2 and does
not believe that if and when such provision becomes effective it will have a
material impact on the Company's financial condition or results of operations.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations has been prepared under the presumption that users of the interim
consolidated financial statements have either read or have access to the
Company's annual report for the year ended December 31, 1997.
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 continually enhance the Manufacturing
Software System for OBJECTS (MSS) product to meet ever changing market
demands for both functionality and new technology;
- - Fluctuations in quarterly operating results caused by changes in the
computer industry, buying patterns and general economic conditions;
- - The ability of the Company to successfully develop its MSS product to meet
European Monetary Union requirements;
- - The dependence of the Company on revenue from licensing of its 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 ability of the Company to retain key employees;
- - The ability of the Company to continue to integrate complementary
applications with its MSS product to meet functionality demands;
- - The increasing size of the Company's international operations, particularly
in Asia;
- - The ability of the Company to manage expansion of international
distribution channels;
- - The dependence of the MSS product line on a third-party database management
system; and
- - Evolving standards regarding intellectual property protection for software
products in general.
RESULTS OF OPERATIONS
NET INCOME. The Company recorded net income of $411,000 or $.04 per share for
the quarter ended June 30, 1998, compared to net income of $60,000 or $.01 per
share for the quarter ended June 30, 1997. For the six month period ended June
30, 1998, the Company recorded net income of $168,000 or $.02 per share compared
to a net loss of $1,235,000 or $.13 per share for the same period ended June 30,
1997.
7
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TOTAL REVENUE increased 35% to $17,328,000 during the quarter ended June
30, 1998 from $12,876,000 during the comparable period in 1997. For the six
month period ended June 30, 1998, total revenue increased 34% to $31,758,000
from $23,681,000 during the comparable period in 1997, as outlined below.
SOFTWARE LICENSE REVENUE are fees paid by customers for the right to use
the Company's software systems. Software license revenue for the quarter ended
June 30, 1998 increased 27% to $7,061,000 from $5,581,000 during the same
quarter in 1997. Software license revenue for the six month period ended June
30, 1998 increased 32% to $12,394,000 from $9,382,000 during the same period in
1997. At the regional level, the Americas and Europe posted second quarter
increases of 58% and 20%, respectively over the comparable period in 1997.
These second quarter increases were partially offset by a decline in Asia
software revenue of 43% from the same quarter in 1997.
The growth in the Americas and Europe was due to improved sales
strategies and management changes initiated in the second and third quarters
of 1997. In addition, the Americas has benefited from an increased number of
sales personnel. The decline in Asia is primarily attributable to economic
problems in Asia that have softened the demand for enterprise software
solutions. Additionally, the Company has experienced increased competition in
Asia.
SERVICE REVENUE includes customer support fees, training, consulting,
installation and project management. Service revenue for the quarter ended June
30, 1998 increased 38% to $9,133,000 from $6,634,000 during the same quarter in
1997. For the six month period ended June 30, 1998, service revenue increased
33% to $17,330,000 from $13,050,000 during the same period in 1997. Service
revenue showed strong growth due to license revenue growth beginning in the
third quarter of 1997 that has continued through the first half of 1998. A
major portion of professional services are purchased in the three to six months
following the licensing of the software. In addition, service revenue continues
to benefit from the Company's ongoing efforts to expand, standardize and promote
its professional services offerings.
THIRD-PARTY SOFTWARE AND OTHER REVENUE is derived from the resale of
third-party software licenses (complementary applications). These
complementary applications have been integrated to function with the MSS
software and extend the functionality of MSS. Third-party software and other
revenue increased 72% to $1,134,000 in the second quarter of 1998 from
$661,000 during the same quarter in 1997. For the six month period ended
June 30, 1998, third-party software and other revenue increased 63% to
$2,034,000 from $1,249,000 during the same period in 1997. This increase is
primarily attributable to the increase in MSS software license revenue, as a
significant portion of third-party software is licensed in conjunction with
the MSS product. Additional revenues were also generated though the
introduction of certain complementary applications that were added to the
product line.
COST OF LICENSES increased to $1,486,000 in the second quarter of 1998
from $693,000 in the same period of 1997. For the six month period ended
June 30, 1998, cost of licenses increased to $2,440,000 from $1,218,000 the
same period in 1997. As a percentage of license revenue, cost of licenses
was 20% in the six month period ended June 30, 1998 compared to 13% for the
prior year comparable period. The increase in the cost of licenses as a
percentage of license revenue is primarily due to one-time royalty costs paid
to third-party software suppliers whose products are embedded in and
distributed with the MSS product. A portion of the increased cost of
licenses relates to $350,000 of database software inventory expensed in the
second quarter of 1998 in conjunction with the execution of a long-term
contract with the supplier.
8
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COST OF SERVICES increased to $4,566,000 or 50% of services revenue for
the three months ended June 30, 1998 from $3,205,000 or 48% of services
revenue for the same period of 1997. For the six month period ended June 30,
1998, cost of services as a percent of service revenue was 49%, compared to
48% in the same period in 1997. The increase in the cost of services as a
percent of service revenue is due to consulting revenue, which has greater
costs as a percent of revenue, increased more than maintenance revenue from
1997.
COST OF THIRD-PARTY SOFTWARE AND OTHER increased to $817,000 for the
second quarter of 1998 from $477,000 in the second quarter of 1997. For the
six month period ended June 30, 1998, cost of third-party revenue and other
increased to $1,489,000 from $889,000 for the same period of 1997. As a
percentage of third-party software and other revenue, cost of third-party
software and other was 72% for both second quarter 1998 and 1997 and 73% for
the six month period ended June 30, 1998 compared to 71% for the same period
of 1997
SELLING, GENERAL AND ADMINISTRATIVE expense increased to $7,901,000 or
46% of total revenue for the three month period ended June 30, 1998, from
$6,577,000 or 51% of total revenue for the same period of 1997. Selling,
general and administrative expense for the six month period ended June 30,
1998 increased to $15,030,000 or 47% of total revenue from $12,700,000 or 54%
of total revenue for the same period of 1997. The increase in terms of
absolute dollars reflects the increased size of the Company resulting from
second half 1997 growth and market penetration. The decrease as a percent of
revenue reflects the focused efforts to control expenses as revenues increase.
PRODUCT DEVELOPMENT expense for the three months ended June 30, 1998
decreased to $1,887,000 from $1,985,000 for the three months ended June 30,
1997. As a percentage of total revenue, product development declined to 11%
from 15% during the same period in 1997. For the six month period ended June
30, 1998, product development expense decreased to $3,695,000 or 12% of total
revenue, from $4,058,000 or 17% of total revenue for the comparable period of
1997.
Further, for the three and six month periods ended June 30, 1998 the
Company capitalized $334,000 of development costs relating to future releases of
MSS for OBJECTS. In 1997, the Company capitalized $1,115,000 of development
costs in the second quarter and $2,335,000 in the six month period ended June
30, 1997 for the Company's object-oriented, communications-centric technology
(OBJECTS).
The $2,364,000 reduction in product development spending for the six month
period ended June 30 resulted from the execution of a product development
restructuring plan that was implemented in the fourth quarter of 1997. The
restructuring plan merged two development operations into one and resulted in
staff and contractor reductions and allowed the Company to close the development
office in San Jose. The implementation of this plan has reduced the product
development costs in absolute dollars and as a percentage of revenue.
9
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PROVISION FOR INCOME TAXES. The provision for income taxes for the six
months ended June 30, 1998 and 1997 was comprised of state and foreign income
taxes. The Company does not provide for U.S. federal taxes as a result of a
significant net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company's cash and cash
equivalents increased $681,000 to $6,439,000.
The Company generated $822,000 of cash from operating activities during
the six month period ended June 30, 1998 compared to a consumption of
$1,131,000 in the same period of 1997. The $1,953,000 increase from 1997 was
primarily attributable to increases in net income and deferred revenue.
Deferred revenue increased due to increased service revenues. The Company
defers revenue for consulting services to be recognized as the services are
delivered and for customer support payments which are recognized as income
over the period of the support services. Customer support payments were also
augmented in the first quarter by offering a discount for customers who
prepaid two years of support services. This cash provided by operating
activities was partially offset by paying down seasonally high accounts
payable resulting in the use of $1,862,000 of cash, and paying severance and
other costs associated with the restructuring discussed above, resulting in a
reduction in accrued expenses and the use of $871,000 of cash.
Investing activities provided $798,000 of cash for the six months ended
June 30, 1998. The primary sources of cash were $718,000 of royalty payments
received in connection with the sale of JIT and $250,000 of cash released from
restrictions. This was partially offset by purchases of furniture, fixtures and
equipment totaling $189,000. The Company's purchases of furniture, fixtures,
and equipment for the comparable period in 1997 was $738,000. The sharp decline
is a direct result of the restructuring plan initiated in December 1997 that
reduced headcount in the development area.
Financing activities used $939,000 of cash during the six months ended June
30, 1998. The primary use of cash was $1,194,000 of payments for the early
settlement of a certain equipment debt facility and principal payments on the
Company's capital lease obligations. This was partially offset by net
borrowings of $228,000 under the Company's line of credit agreement.
On July 1, 1998 the Company entered into a four year $12,000,000 commitment
with a third-party database supplier whose product is embedded in and
distributed with the MSS product. The agreement also includes three three-year
renewal options. Payments will be made evenly throughout the 48 months of the
contract. The Company does not anticipate this commitment to materially impact
margins. In or near January 1998 the Company will be moving its corporate
headquarters to a new leased facility. The Company anticipates leasing the
majority of the capital assets associated with the move and does not
anticipate a material impact on the Company's financial condition or results of
operations. The Company does not have any other material scheduled
commitments for capital expenditures.
The Company believes that the $6,439,000 of cash and cash equivalents on
hand at June 30, 1998, together with the Company's available line of credit
and anticipated cash flows from operations will be sufficient to fund
operating cash needs over the next twelve months. At June 30, 1998, and the
Company was in compliance with all related financial
10
<PAGE>
performance covenants under the bank line of credit. If the above sources of
cash are not sufficient to fund operations, the Company may need to seek
additional funds through equity or debt financing.
OTHER
The Company has analyzed the potential affect of the year 2000 issue on its
application which is also the application software it uses in its internal
operations. The Information Technology Association of America (ITAA) has
certified that Fourth Shift enterprise software solutions are year 2000
compliant. Additionally, the Company has requested and received documentation
from vendors currently supplying third party products addressing year 2000
compliance. In most cases, vendor's responses indicated that their applications
were either currently year 2000 compliant or that they would be compliant by the
end of 1998. In certain instances, vendors have not made a commitment to become
year 2000 compliant by the end of 1998. The Company is evaluating alternative
courses of action relating to these certain vendors and anticipates resolution
by the end of 1998. Based on this review, the Company does not anticipate any
material effect on its future operating results or financial position.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The annual meeting of shareholders of Fourth Shift Corporation was held
at 3:30 PM on Wednesday May 6, 1998. Shareholders holding 7,772,797 shares,
or approximately 78.47% of the outstanding shares, were represented at the
meeting by proxy or in person. Matters submitted at the meeting for vote by
the shareholders were as follows:
a. Election of Directors
The following nominees were elected to serve as members of the Board of
Directors until the annual meeting of shareholders in 2001 or until such time
as a successor may be elected:
<TABLE>
<CAPTION>
TABULATION OF VOTES
-------------------
FOR WITHHELD
--- --------
<S> <C> <C>
Marion Melvin Stuckey 7,567,929 204,868
Michael J. Adams 7,586,311 186,486
</TABLE>
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule Worksheet
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
June 30, 1998.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fourth Shift Corporation
August ___, 1998
/s/ DAVID G. LATZKE
-------------------------------------------
David G. Latzke
Vice President and Chief Financial Officer
(principal financial officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,439
<SECURITIES> 0
<RECEIVABLES> 14,263
<ALLOWANCES> 0
<INVENTORY> 100
<CURRENT-ASSETS> 22,087
<PP&E> 14,254
<DEPRECIATION> 9,892
<TOTAL-ASSETS> 30,184
<CURRENT-LIABILITIES> 24,901
<BONDS> 868
0
0
<COMMON> 99
<OTHER-SE> 4,316
<TOTAL-LIABILITY-AND-EQUITY> 30,184
<SALES> 14,428
<TOTAL-REVENUES> 31,758
<CGS> 3,929
<TOTAL-COSTS> 12,458
<OTHER-EXPENSES> (20)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152
<INCOME-PRETAX> 539
<INCOME-TAX> 194
<INCOME-CONTINUING> 345
<DISCONTINUED> 66
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 411
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
