<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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 November 5,
1998 was 10,019,152 shares.
<PAGE>
FOURTH SHIFT CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- -----------------------------------------------------------------------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets at 2
September 30, 1998 and December 31, 1997
Consolidated Statements of Operations 3
for the three and nine months ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows 4
for the nine months ended
September 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 5. Other Information 12
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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . $ 8,191 $ 5,758
Accounts receivable, net. . . . . . . . . . . 12,536 14,001
Inventories . . . . . . . . . . . . . . . . . 105 482
Prepaid expenses. . . . . . . . . . . . . . . 1,236 1,031
Royalty receivable. . . . . . . . . . . . . . 55 650
---------- ----------
Total current assets . . . . . . . . . . 22,123 21,922
FURNITURE, FIXTURES AND EQUIPMENT, net . . . . . . 4,038 5,503
RESTRICTED CASH. . . . . . . . . . . . . . . . . . 465 715
SOFTWARE DEVELOPMENT COSTS, net. . . . . . . . . . 3,245 3,289
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . $ 29,871 $ 31,429
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations. . . $919 $1,803
Revolving credit facility . . . . . . . . . . - 2,000
Accounts payable. . . . . . . . . . . . . . . 1,322 3,964
Accrued expenses. . . . . . . . . . . . . . . 7,936 8,001
Deferred revenue. . . . . . . . . . . . . . . 13,620 10,315
---------- ----------
Total current liabilities. . . . . . . . 23,797 26,083
LONG-TERM OBLIGATIONS. . . . . . . . . . . . . . . 686 1,299
SHAREHOLDERS' EQUITY:
Common stock. . . . . . . . . . . . . . . . . 100 98
Additional paid-in capital. . . . . . . . . . 31,142 30,640
Other comprehensive losses. . . . . . . . . . (274) (236)
Accumulated deficit . . . . . . . . . . . . . (25,580) (26,455)
---------- ----------
Total shareholders' equity . . . . . . . 5,388 4,047
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . $ 29,871 $ 31,429
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
1998 1997 1998 1997
------ ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Software license. . . . . . . . . . . . . . . . . . . . $6,757 $5,900 $19,151 $15,282
Service . . . . . . . . . . . . . . . . . . . . . . . . 9,677 6,753 27,007 19,803
Third-party software and other. . . . . . . . . . . . . 844 780 2,878 2,029
------ ------- ------- -------
Total revenue. . . . . . . . . . . . . . . . . . . 17,278 13,433 49,036 37,114
------ ------- ------- -------
OPERATING EXPENSES:
Cost of licenses. . . . . . . . . . . . . . . . . . . . 1,078 708 3,518 1,926
Cost of services. . . . . . . . . . . . . . . . . . . . 4,554 3,300 13,083 9,627
Cost of third-party software and other. . . . . . . . . 703 587 2,192 1,476
Selling, general and administrative . . . . . . . . . . 7,958 6,635 22,988 19,335
Product development . . . . . . . . . . . . . . . . . . 1,967 2,422 5,662 6,480
------ ------- ------- -------
Total operating expenses . . . . . . . . . . . . . 16,260 13,652 47,443 38,844
------ ------- ------- -------
Operating income (loss). . . . . . . . . . . . . . . . . . . 1,018 (219) 1,593 (1,730)
Interest expense, net. . . . . . . . . . . . . . . . . . . . (190) (112) (473) (245)
Other income (expense), net. . . . . . . . . . . . . . . . . 9 (43) (20) (50)
------ ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES. . . . . . . . . . . . . 837 (374) 1,100 (2,025)
Provision for income taxes. . . . . . . . . . . . . . . 180 20 409 10
------ ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS . . . . . . . . . . 657 (394) 691 (2,035)
NET GAIN ON SALE OF DISCONTINUED OPERATIONS. . . . . . . . . 50 1,255 184 1,661
------ ------- ------- -------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . $707 $861 $875 $(374)
------ ------- ------- -------
------ ------- ------- -------
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations income (loss) per share. . . . . . . $0.06 $(0.04) $0.07 $(0.21)
Discontinued operations income per share . . . . . . . . . 0.01 0.13 0.02 0.17
------ ------- ------- -------
Net income (loss) per share. . . . . . . . . . . . . . . . $0.07 $0.09 $0.09 $(0.04)
------ ------- ------- -------
------ ------- ------- -------
SHARES USED IN BASIC AND DILUTED PER COMMON SHARE COMPUTATION:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . 9,998 9,781 9,934 9,719
------ ------- ------- -------
------ ------- ------- -------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . 10,211 9,781 10,030 9,719
------ ------- ------- -------
------ ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 875 $ (374)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,198 2,389
Capitalized development written-off 458 -
Gain on sale of discontinued operations (184) (1,661)
Other 11 (33)
Change in current operating items:
Accounts receivable, net 1,465 1,087
Inventories 377 8
Prepaid expenses (205) (445)
Accounts payable (2,643) (1,903)
Accrued expenses 400 425
Deferred revenue 3,294 (454)
------- -------
Net cash provided by (used in) operating activities 6,046 (961)
------- -------
INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (446) (832)
Cash released from restrictions 250 -
Proceeds from sale of discontinued operations 780 1,857
Capitalized software development costs (701) (3,090)
------- -------
Net cash used in investing activities (117) (2,065)
------- -------
FINANCING ACTIVITIES:
Payments of long-term obligations (1,632) (732)
Borrowings on equipment facility - 195
Borrowings on line of credit 500 2,000
Payments on line of credit (2,500) -
Proceeds on issuance of common stock 136 129
------- -------
Net cash provided by (used in) financing activities (3,496) 1,592
------- -------
Net change in cash and cash equivalents 2,433 (1,434)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,758 6,435
------- -------
End of period $8,191 $5,001
------- -------
------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during each period for-
Income taxes $ 35 $ 57
Interest 450 159
------- -------
------- -------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases $ 135 $ 518
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FOURTH SHIFT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 1998
and 1997 and for the three month and nine month periods then ended include, in
the opinion of management, all adjustments, consisting solely of normal
recurring adjustments, necessary for a fair presentation of the financial
results for the respective interim periods. The results of operations for the
three month and nine month periods ended September 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 September 30, 1998, the Company recognized a gain of
$50,000 in conjunction with the royalty agreement of the sale of its former
subsidiary, Just In Time Enterprise Systems, Inc. For the nine month period
ended September 30, 1998, the Company recognized a gain of $184,000 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 third quarter of 1998, the Company capitalized $367,000 of development costs
relating to upcoming product releases. For the nine month period ended
September 30, 1998, $701,000 of development costs were capitalized. In the three
month and nine month periods ended September 30, 1997, the Company capitalized
$755,000 and $3,090,000, 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.
5
<PAGE>
As of September 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 third
quarter of 1998 the Company amortized $186,000 of previously capitalized
technology with the release of MSS for OBJECTS 6.10.101. In addition, for
the third quarter of 1998 the Company wrote-off $206,000 of previously
capitalized technology that was no longer aligned with the Company's current
product strategy. For the nine month period ended September 30, 1998 the
Company amortized $287,000 of previously capitalized technology with the release
of MSS for OBJECTS 6.10.101 and wrote-off $458,000 of previously capitalized
technology that was no longer aligned with the Company's current product
strategy.
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 historical margin levels.
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 213,000 shares for third quarter 1998 and 96,000 shares for the
nine month period ended September 30, 1998. There was no dilutive effect
from the stock options for the three month and nine month periods ended
September 30, 1997 as the options were anti-dilutive.
Effective January 1, 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income". 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 $38,000 and $63,000 for the nine months
ended September 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.
The Financial Accounting Standards Board has released SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 requires
disclosure of business and geographic segments in the consolidated financial
statements of the Company. The Company is currently analyzing the impact SFAS
No. 131 will have on the disclosures in its financial statements.
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 $707,000 or $.07 per share
for the quarter ended September 30, 1998, compared to net income of $861,000 or
$.09 per share for the quarter ended September 30, 1997. For the nine month
period ended September 30, 1998, the Company recorded net income of $875,000 or
$.09 per share compared to a net loss of $374,000 or $.04 per share for the same
period ended September 30, 1997.
7
<PAGE>
INCOME FROM CONTINUING OPERATIONS. The Company recorded income from
continuing operations of $657,000 or $.06 per share for the quarter ended
September 30, 1998, compared to a loss from continuing operations of $394,000
or $.04 per share for the quarter ended September 30, 1997. For the nine
month period ended September 30, 1998, the Company recorded income from
continuing operations of $691,000 or $.07 per share compared to a loss from
continuing operations of $2,035,000 or $.21 per share for the same period
ended September 30, 1997.
GAIN FROM DISCONTINUED OPERATIONS. The Company recorded gains from
discontinued operations of $50,000 or $.01 per share for the quarter ended
September 30, 1998, compared to $1,255,000 or $.13 per share for the quarter
ended September 30, 1997. For the nine month period ended September 30, 1998,
the Company recorded gains from discontinued operations of $184,000 or $.02 per
share compared to $1,661,000 or $.17 per share for the same period ended
September 30, 1997.
TOTAL REVENUE increased 29% to $17,278,000 during the quarter ended
September 30, 1998 from $13,433,000 during the comparable period in 1997. For
the nine month period ended September 30, 1998, total revenue increased 32% to
$49,036,000 from $37,114,000 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
September 30, 1998 increased 15% to $6,757,000 from $5,900,000 during the same
quarter in 1997. Software license revenue for the nine month period ended
September 30, 1998 increased 25% to $19,151,000 from $15,282,000 during the same
period in 1997. At the regional level, the Americas and Europe posted third
quarter increases of 12% and 63%, respectively over the comparable period in
1997. These third quarter increases were partially offset by a decline in Asia
software revenue of 13% 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
September 30, 1998 increased 43% to $9,677,000 from $6,753,000 during the same
quarter in 1997. For the nine month period ended September 30, 1998, service
revenue increased 36% to $27,007,000 from $19,803,000 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
nine 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.
8
<PAGE>
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 8% to $844,000 in the third quarter of 1998 from $780,000
during the same quarter in 1997. For the nine month period ended September
30, 1998, third-party software and other revenue increased 42% to $2,878,000
from $2,029,000 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 $1,078,000 in the third quarter of 1998 from
$708,000 in the same period of 1997. For the nine month period ended September
30, 1998, cost of licenses increased to $3,518,000 from $1,926,000 the same
period in 1997. As a percentage of license revenue, cost of licenses was 18% in
the nine month period ended September 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.
COST OF SERVICES increased to $4,554,000 or 47% of services revenue for the
three months ended September 30, 1998 from $3,300,000 or 49% of services revenue
for the same period of 1997. For the nine month period ended September 30,
1998, cost of services as a percent of service revenue was 48%, compared to 49%
in the same period in 1997.
COST OF THIRD-PARTY SOFTWARE AND OTHER increased to $703,000 for the
third quarter of 1998 from $587,000 in the third quarter of 1997. For the
nine month period ended September 30, 1998, cost of third-party software and
other increased to $2,192,000 from $1,476,000 for the same period of 1997.
As a percentage of third-party software and other revenue, cost of
third-party software and other was 83% for the quarter ended September 30,
1998 compared to 76% during the same quarter in 1997. For the nine month
period ended September 30, the cost of third-party software and other as a
percent of the cost of third-party software and other revenue was 76% in
1998 compared to 73% for the same period of 1997. The increase in cost of
third-party software and other as a percentage of third-party software and
other revenue is due to improved integration processes for both new and
existing third-party products, as well as product mix.
SELLING, GENERAL AND ADMINISTRATIVE expense was $7,958,000 or 46% of
total revenue for the three month period ended September 30, 1998, from
$6,635,000 or 49% of total revenue for the same period of 1997. Selling,
general and administrative expense for the nine month period ended September
30, 1998 was $22,988,000 or 47% of total revenue from $19,355,000 or 52% 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 of management to control expenses as revenues
increase.
9
<PAGE>
PRODUCT DEVELOPMENT expense for the three months ended September 30, 1998
decreased to $1,967,000 from $2,422,000 for the three months ended September 30,
1997. As a percentage of total revenue, product development declined to 11%
from 18% during the same period in 1997. For the nine month period ended
September 30, 1998, product development expense decreased to $5,662,000 or 12%
of total revenue, from $6,480,000 or 17% of total revenue for the comparable
period of 1997.
Further, for the nine month period ended September 30, 1998 the Company
capitalized $701,000 of development costs relating to future releases of MSS for
OBJECTS. In the nine month period ended September 30, 1997 the Company
capitalized $3,090,000 of development costs for the Company's object-oriented,
communications-centric technology (OBJECTS).
The $3,207,000 reduction in product development spending for the nine month
period ended September 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.
In addition, for the nine month period ended September 30, 1998 the
Company amortized $287,000 of previously capitalized technology with the
release of MSS for OBJECTS 6.10.101 and wrote-off $458,000 of previously
capitalized technology that was no longer aligned with the Company's current
product strategy.
PROVISION FOR INCOME TAXES. The provision for income taxes for the nine
months ended September 30, 1998 and 1997 was comprised of U.S. federal, state,
and foreign income taxes. The Company's U.S. federal taxes are limited to
alternative minimum taxes due to utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998, the Company's cash and
cash equivalents increased $2,433,000 to $8,191,000.
The Company generated $6,046,000 of cash from operating activities during
the nine month period ended September 30, 1998 compared to a consumption of
$961,000 in the same period of 1997. The $7,007,000 improvement in operating
cash 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 $2,643,000 of cash.
Investing activities used $117,000 of cash for the nine months ended
September 30, 1998. The primary sources of cash were $780,000 of royalty
payments received in connection
10
<PAGE>
with the sale of JIT and $250,000 of cash released from restrictions. This
was offset by $701,000 of capitalized development and purchases of furniture,
fixtures and equipment of $446,000. The Company's purchases of furniture,
fixtures, and equipment for the comparable period in 1997 was $832,000. 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 $3,496,000 of cash during the nine months
ended September 30, 1998. The primary use of cash was the repayment of the
$2,000,000 line of credit. The company also used $1,632,000 of cash for
financing activities for principal payments of long-term lease obligations
and the early settlement of a certain equipment debt facility.
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 historical margin levels. In January 1999 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 $8,191,000 of cash and cash equivalents on
hand at September 30, 1998, and anticipated cash flows from operations will
be sufficient to fund operating cash needs over the next twelve months. If
the above sources of cash are not sufficient to fund operations, the Company
may also borrow against its $5,000,000 line of credit.
YEAR 2000 COMPLIANCE
The Company began addressing year 2000 issues in April of 1997. The
Company utilizes both information technology ("IT") and non-IT systems and
assets throughout its worldwide operations.
The Company has three main IT systems that are year 2000 compliant. The
main system is the Fourth Shift MSS for OBJECTS Software System. This
product is owned and developed by Fourth Shift and is the product the Company
sells and uses internally to run its business. The Company performed a
complete review of the system for year 2000 compliance in early 1998. Nine
areas of concern were discovered. These have been corrected and the software
has been certified by the Information Technology Association of America that
the Fourth Shift organization meets the information technology industry's
best software development practices for addressing the Year 2000 issue.
There has been no material financial impact for the cost of corrections as
these were addressed in the normal course of development of the product. The
Company's Payroll and Human Resource systems were updated in the third
quarter of 1998 and are currently year 2000 compliant. The cost associated
with this effort has been immaterial and did not adversely impact the
Company's operating results. In addition, the Company's Customer Support
Center's system is a third-party product that is year 2000 compliant. All
other third-party IT systems sold by the Company and used in its internal
operations are year 2000 compliant or have committed to be year 2000
compliant by January 1, 1999.
The Company has assessed the year 2000 impact on its non-IT systems. In
January of 1999, the Company will conduct testing of its non-IT systems in
conjunction with the relocation of its corporate headquarters.
The Company is in the process of assessing the impact of non-compliant
vendors. To date the Company has not identified any suppliers who will not be
year 2000 compliant.
While the Company has exercised its best efforts to identify and remedy
any potential year 2000 issues, the primary remedy of the Company's
contingency plan is to use alternative vendors. Although the Company does
not anticipate a material impact on the Company's financial condition or
results of operations, it is uncertain as to the extent the Company may be
affected by such matters.
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PART II - OTHER INFORMATION
ITEM 5. - OTHER INFORMATION
On October 20, 1998, the Board of Directors amended the Company's
Bylaws to include provisions governing the introduction of proposals and
nomination of persons for election as a director of the Company. As
amended the Bylaws provide that any shareholder desiring to introduce a
proposal or to nominate a person for director at a regular meeting of the
shareholders must (i) have been a shareholder of record at the time of
giving of notice as provided for in the bylaws, (ii) be entitled to vote at
the meeting and (iii) have given prior notice of the matter, which must
otherwise be a proper matter for shareholder action, in the manner provided
for in the Bylaws. The amended Bylaws also provide that, if a shareholder
desires to introduce a proposal or to nominate a person for director at a
regular meeting of the shareholders, written notice of such business must
be received by the Company not less than 120 days before the date that is
one year after the date of the Company's proxy statement for the prior
year's regular meeting. If the Company does not receive timely notice, the
business may be excluded from consideration at the meeting. This advance
notice provision supersedes the statutory notice period in revised Rule
14a-4(c)(1) of the federal proxy rules which addresses the discretionary
proxy voting authority of the Board of Directors in connection with such
shareholder business. The foregoing description of the amended Bylaws is
qualified in its entirety by reference to the full text of the Company's
Bylaws, as amended, filed as Exhibit 3.1 hereto and incorporated by
reference herein.
Based on the Bylaws, as amended, if a shareholder desires to make a
proposal or nominate a person for election as a director at the 1999 Annual
Meeting of Shareholders (and such business is not the subject of a
shareholder proposal timely submitted for inclusion in the proxy
statement), written notice of such business containing the information
required under the Company's Bylaws must be received by the Company at its
principal executive office on or before December 2, 1998.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
<TABLE>
<S> <C>
Exhibit 10.1* Agreement with Micro Data Base Systems, Inc.
dated July 1, 1998
Exhibit 3.2 Bylaws, as Amended October 20, 1998
Exhibit 27 Financial Data Schedule Worksheet
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the nine months ended
September 30, 1998.
* Subject to a request for confidentiality.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fourth Shift Corporation
November 13, 1998
/s/ DAVID G. LATZKE
------------------------------------------
David G. Latzke
Vice President and Chief Financial Officer
(principal financial officer)
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EXHIBIT 3.2
As amended on July 19, 1994
and October 20, 1998
BYLAWS
FOURTH SHIFT CORPORATION
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. REGISTERED OFFICE. The registered office of the
corporation in Minnesota shall be that set forth in the Articles of
Incorporation or in the most recent amendment of the Articles of Incorporation
or resolution of the directors filed with the Secretary of State of Minnesota
changing the registered office.
Section 1.02. OTHER OFFICES. The corporation may have such other
offices, within or without the State of Minnesota, as the directors shall, from
time to time, determine.
Section 1.03. CORPORATE SEAL. The corporation shall have no seal.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. PLACE AND TIME OF MEETINGS. Except as provided
otherwise by Minnesota Statutes Chapter 302A, meetings of the shareholders may
be held at any place, within or without the State of Minnesota, as may from time
to time be designated by the directors and, in the absence of such designation,
shall be held at the registered office of the corporation in the State of
Minnesota. The directors shall designate the time of day for each meeting and,
in the absence of such designation, every meeting of shareholders shall be held
at ten o'clock a.m. local time at the place where the meeting is to be held.
Section 2.02. REGULAR MEETINGS.
(a) A regular meeting of the shareholders shall be held each year on
such date as the Board of Directors shall by resolution establish.
(b) At a regular meeting the shareholders, voting as provided in the
Articles of Incorporation and these Bylaws, shall elect qualified successors for
directors who serve for an indefinite term or whose terms have expired or are
due to expire within six months after the date of the meeting and shall transact
such other business as may properly come before them.
Section 2.03. SPECIAL MEETINGS. Special meetings of the shareholders
may be held at any time and for any purpose and may be called by the Chief
Executive Officer, Treasurer, any two directors, or by a shareholder or
shareholders holding 10% or more of the shares entitled to vote on the matters
to be presented to the meeting ,except that a special meeting for the purpose of
considering any action to directly or indirectly facilitate or affect a business
combination, including any action to change or otherwise affect the composition
of the board of directors for that purpose, must be called by 25% or more of the
voting power of all shares entitled to vote. A shareholder or shareholders
holding the requisite percentage of the voting power of all shares entitled to
vote may demand a special meeting of the shareholders by written notice of
demand given to the chief executive officer or chief financial officer of
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the corporation and containing the purposes of the meeting. Within 30 days
after receipt of demand by one of those officers, the board of directors
shall cause a special meeting of shareholders to be called and held on notice
no later than 90 days after receipt of the demand, at the expense of the
corporation. Special meetings shall be held on the date and at the time and
place fixed by the chief executive officer or the board of directors, except
that a special meeting called by or at demand of a shareholder or
shareholders shall be held in the county where the principal executive office
is located. The business transacted at a special meeting shall be limited to
the purposes as stated in the notice of the meeting.
Section 2.04. QUORUM, ADJOURNED MEETINGS. The holders of a majority
of the shares entitled to vote shall constitute a quorum for the transaction of
business at any regular or special meeting. In case a quorum shall not be
present at a meeting, those present may adjourn the meeting to such day as they
shall, by majority vote, agree upon, and a notice of such adjournment and the
date and time at which such meeting shall be reconvened shall be mailed to each
shareholder entitled to vote at least five days before such adjourned meeting.
If a quorum is present, a meeting may be adjourned from time to time without
notice other than announcement at the meeting. At adjourned meetings at which a
quorum is present, any business may be transacted which might have been
transacted at the meeting as originally noticed. If a quorum is present, the
shareholders may continue to transact business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
Section 2.05. VOTING. At each meeting of the shareholders every
shareholder having the right to vote shall be entitled to vote either in person
or by proxy. Each shareholder, unless the Articles of Incorporation or statute
provide otherwise, shall have one vote for each share having voting power
registered in such shareholder's name on the books of the corporation. Jointly
owned shares may be voted by any joint owner unless the corporation receives
written notice from any one of them denying the authority of that person to vote
those shares. Upon the demand of any shareholder, the vote upon any question
before the meeting shall be by ballot. All questions shall be decided by a
majority vote of the number of shares entitled to vote and represented at the
meeting at the time of the vote except if otherwise required by statute, the
Articles of Incorporation, or these Bylaws.
Section 2.06. CLOSING OF BOOKS. The Board of Directors may fix a
time, not exceeding 60 days preceding the date of any meeting of shareholders,
as a record date for the determination of the shareholders entitled to notice
of, and to vote at, such meeting, notwithstanding any transfer of shares on the
books of the corporation after any record date so fixed. The Board of Directors
may close the books of the corporation against the transfer of shares during the
whole or any part of such period. If the Board of Directors fails to fix a
record date for determination of the shareholders entitled to notice of, and to
vote at, any meeting of shareholders, the record date shall be the 20th day
preceding the date of such meeting.
Section 2.07. NOTICE OF MEETINGS. There shall be mailed to each
shareholder, shown by the books of the corporation to be a holder of record of
voting shares, at his address as shown by the books of the corporation, a notice
setting out the time and place of each regular meeting and each special meeting,
except where the meeting is an adjourned meeting and the date, time and place of
the meeting were announced at the time of adjournment, which notice shall be
mailed at least five days prior thereto; except that notice of a meeting at
which an agreement of merger or exchange is to be considered shall be mailed to
all shareholders of record, whether entitled to vote or not, at least fourteen
days prior thereto. Every notice of any special meeting called pursuant to
Section 2.03 hereof shall state the purpose or purposes for which the meeting
has been called, and the business transacted at all special meetings shall be
confined to the purpose stated in the notice.
Section 2.08. WAIVER OF NOTICE. Notice of any regular or special
meeting may be waived by any shareholder either before, at or after such meeting
orally or in a writing signed by such shareholder or a representative entitled
to vote the shares of such shareholder. A shareholder, by his attendance at any
meeting of shareholders, shall be deemed to have waived notice of such meeting,
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except where the shareholder objects at the beginning of the meeting to the
transaction of business because the item may not lawfully be considered at
that meeting and does not participate in the consideration of the item at
that meeting.
Section 2.09. WRITTEN ACTION. Any action which might be taken at a
meeting of the shareholders may be taken without a meeting if done in writing
and signed by all of the shareholders entitled to vote on that action.
Section 2.10 CONDUCT OF SHAREHOLDER MEETINGS. The chairman of the
meeting shall have the right and authority to prescribe such rules, regulations
and procedures and to do all such acts as, in the judgment of such chairman, are
appropriate for conduct of the meeting. To the extent not prohibited by law,
such rules, regulations or procedures may include, without limitation,
establishment of (i) an agenda or order of business for the meeting and the
method by which business may be proposed, (ii) rules and procedures for
maintaining order at the meeting and the safety of those present, (iii)
limitations on attendance at or participation in the meeting to shareholders of
record of the corporation, their duly authorized proxies or such other persons
as the chairman of the meeting shall determine, (iv) restrictions on entry to
the meeting after the time fixed for the commencement thereof and (v)
limitations on the time allotted to questions or comments by participants. Any
proposed business contained in the notice of a regular meeting is deemed to be
on the agenda and no further motions or other actions shall be required to bring
such proposed business up for consideration. Unless and to the extent otherwise
determined by the chairman of the meeting, it shall not be necessary to follow
Robert's Rules of Order or any other rules of parliamentary procedure at the
meeting of the shareholders. Following completion of the business of the
meeting as determined by the chairman of the meeting, the chairman of the
meeting shall have the exclusive authority to adjourn the meeting.
Section 2.11. SHAREHOLDER PROPOSALS. To be properly brought before a
regular meeting of shareholders, business must be (i) specified in the notice of
the meeting, (ii) directed to be brought before the meeting by the Board of
Directors or (iii) proposed at the meeting by a shareholder who (A) was a
shareholder of record at the time of giving of notice provided for in these
bylaws, (B) is entitled to vote at the meeting and (C) gives prior notice of the
matter, which must otherwise be a proper matter for shareholder action, in the
manner herein provided. For business to be properly brought before a regular
meeting by a shareholder, the shareholder must give written notice to the
Secretary of the corporation so as to be received at the principal executive
offices of the corporation at least 120 days before the date that is one year
after the date of the corporation's proxy statement for the prior year's regular
meeting. Such notice shall set forth (i) the name and record address of the
shareholder and of the beneficial owner, if any, on whose behalf the proposal
will be made, (ii) the class and number of shares of the corporation owned by
the shareholder and beneficially owned by the beneficial owner, if any, on whose
behalf the proposal will be made, (iii) a brief description of the business
desired to be brought before the regular meeting and the reasons for conducting
such business and (iv) any material interest in such business of the shareholder
and the beneficial owner, if any, on whose behalf the proposal is made. The
chairman of the meeting may refuse to acknowledge any proposed business not made
in compliance with the foregoing procedure.
ARTICLE III.
DIRECTORS
Section 3.01. GENERAL POWERS. The business and affairs of the
corporation shall be managed by or under the direction of the Board of
Directors, except as otherwise permitted by statute.
Section 3.02 NUMBER, QUALIFICATION AND TERM OF OFFICE. The number of
directors shall consist of not less than four nor more than twelve directors as
shall be specified by resolution of the Board
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of Directors or shareholders. The directors shall be divided into three
classes; Class A, Class B and Class C, each such class, as nearly equal as
possible, to have the same number of directors. The term of office of the
initial Class A directors shall expire at the annual meeting of shareholders
held in 1995, the term of office of the initial Class B directors will expire
at the annual meeting of shareholders in 1996, and the term of office of the
initial Class C directors will expire at the annual meeting of shareholders
in 1997. At each annual meeting of shareholders after 1994, the directors
chosen to succeed those whose terms have then expired shall be identified as
being of the same class as those they succeed and shall be elected by the
shareholders for a term expiring at the third succeeding annual meeting of
shareholders. In all cases, directors shall hold office until their
successors are elected by the shareholders and qualified or until the earlier
death, resignation, removal, or disqualification of such director.
Vacancies and newly created directorships resulting from an increase in the
number of directors shall be filled by a majority of the directors then in
office, although not less than a quorum, or by a sole remaining director, and
such directors so chosen shall hold office until the next election of the class
for which such directors shall have been chosen, and until their successors
shall be elected and shall have qualified.
Section 3.03. BOARD MEETINGS. Meetings of the Board of Directors may
be held from time to time at such time and place within or without the State of
Minnesota as may be designated in the notice of such meeting.
Section 3.04. CALLING MEETINGS; NOTICE. Meetings of the Board of
Directors may be called by the Chairman of the Board by giving at least
twenty-four hours' notice, or by any other director by giving at least five
days' notice, of the date, time and place thereof to each director by mail,
telephone, telegram or in person.
Section 3.05. WAIVER OF NOTICE. Notice of any meeting of the Board
of Directors may be waived by any director either before, at, or after such
meeting orally or in a writing signed by such director. A director, by his
attendance at any meeting of the Board of Directors, shall be deemed to have
waived notice of such meeting, except where the director objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened and does not participate thereafter in the
meeting.
Section 3.06. QUORUM. A majority of the directors holding office
immediately prior to a meeting of the Board of Directors shall constitute a
quorum for the transaction of business at such meeting.
Section 3.07. ABSENT DIRECTORS. A director may give advance written
consent or opposition to a proposal to be acted on at a meeting of the Board of
Directors. If such director is not present at the meeting, consent or
opposition to a proposal does not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the minutes or other record of action at the meeting, if the proposal acted on
at the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.
Section 3.08. CONFERENCE COMMUNICATIONS. Any or all directors may
participate in any meeting of the Board of Directors, or of any duly constituted
committee thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this Section 3.08 shall be deemed present in person at
the meeting, and the place of the meeting shall be the place of origination of
the conference communication.
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Section 3.09. VACANCIES; NEWLY CREATED DIRECTORSHIPS. Vacancies on
the Board of Directors of this corporation occurring by reason of death,
resignation, removal or disqualification shall be filled for the unexpired term
by a majority of the remaining directors of the Board although less than a
quorum. Directorships which are newly created as a result of an increase in
Board size pursuant to Section 10.01 shall be given by the affirmative vote of a
majority of a quorum of the Board before the increase. Each director elected
pursuant to this Section 3.09 shall be a director until such director's
successor is elected by the shareholders at their next regular or special
meeting.
Section 3.10. REMOVAL. Any directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of the proportion or number of voting
power of the shares sufficient to elect them. In the event that the entire
Board or any one or more directors be so removed, new directors shall be elected
at the same meeting.
Section 3.11. COMMITTEES. A resolution approved by the affirmative
vote of a majority of the Board of Directors may establish committees having the
authority of the Board in the management of the business of the corporation to
the extent provided in the resolution. A committee shall consist of one or more
persons, who need not be directors, appointed by affirmative vote of a majority
of the directors present. Committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the Board of
Directors.
A majority of the members of the committee is a quorum for the
transaction of business. The affirmative vote of a majority of the members
present is needed for Committee action.
Section 3.12. WRITTEN ACTION. Any action which might be taken at a
meeting of the Board of Directors, or any duly constituted committee thereof,
may be taken without a meeting if done in writing and signed by all of the
directors or committee members, unless the Articles provide otherwise and the
action need not be approved by the shareholders.
Section 3.13. COMPENSATION. Directors who are not salaried officers
of this corporation shall receive such fixed sum per meeting attended or such
fixed annual sum as shall be determined, from time to time, by resolution of the
Board of Directors. The Board of Directors may, by resolution, provide that all
directors shall receive their expenses, if any, of attendance at meetings of the
Board of Directors and any committee thereof. Nothing herein contained shall be
construed to preclude any director from serving this corporation in any other
capacity and receiving proper compensation therefor.
Section 3.14. NOMINATION OF DIRECTORS. Nominations of persons for
election as directors may be made at a regular meeting of shareholders (i) by
or at the direction of the Board of Directors or (ii) by any shareholder who
(A) was a shareholder of record at the time of giving of notice provided for
in these bylaws, (B) is entitled to vote at the meeting and (C) gives prior
notice of the nomination in the manner herein provided. For a nomination to
be properly made by a shareholder, the shareholder must give written notice
to the Secretary of the corporation so as to be received at the principal
executive offices of the corporation at least 120 days before the date that
is one year after the date of the corporation's proxy statement for the prior
year's regular meeting. Such notice shall set forth (i) as to the
shareholder giving the notice: (A) the name and record address of the
shareholder and of the beneficial owner, if any, on whose behalf the
nomination will be made, and (B) the class and number of shares of the
corporation owned by the shareholder and beneficially owned by the beneficial
owner, if any, on whose behalf the nomination will be made and (ii) as to
each person the shareholder proposes to nominate: (A) the name, age, business
address and residence address of the person, (B) the principal occupation or
employment of the person and (C) the class and number of shares of the
corporation's capital stock beneficially owned by the person. The chairman
of the meeting may refuse to acknowledge the nomination of any person not
made in compliance with the foregoing procedure.
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ARTICLE IV.
OFFICERS
Section 4.01. NUMBER. The officers of the corporation shall consist
of a Chairman or Chief Executive Officer, a President or Chief Operating
Officer, a Treasurer, a Secretary (if one is elected by the Board) and such
other officers and agents as may, from time to time, be elected or appointed by
the Board of Directors. Any number of offices may be held by the same person.
Section 4.02. ELECTION TERM OF OFFICE AND QUALIFICATIONS. The Board
of Directors shall elect or appoint, by resolution approved by the affirmative
vote of a majority of the directors present, from within or without their
number, the Chairman or Chief Executive Officer, the President or Chief
Operating Officer, the Treasurer, the Secretary and such other officers as may
be deemed advisable, each of whom shall have the powers, rights, duties,
responsibilities, and terms in office provided for in these Bylaws or a
resolution of the Board of Directors not inconsistent therewith. Officers who
may be directors shall continue to hold office until the election and
qualification of their successors, notwithstanding an earlier termination of
their directorship.
Section 4.03. REMOVAL, RESIGNATION AND VACANCIES. Any officer may be
removed from his office by the Board of Directors at any time, with or without
cause. Such removal, however, shall be without prejudice to the contract rights
of the person so removed. Any officer may resign at any time by giving written
notice to the corporation. The resignation is effective without acceptance when
the notice is given to the corporation, unless a later effective date is
specified in the notice. If there be a vacancy among the officers of the
corporation by reason of death, resignation or otherwise, such vacancy shall be
filled for the unexpired term by the Board of Directors.
Section 4.04. CHIEF OPERATING OFFICER. The Chief Operating Officer
shall have such duties as may be prescribed, from time to time, by the Board of
Directors after consultation with the Chief Executive Officer.
Section 4.05. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall have general active management of the business of the corporation. He
shall preside at all meetings of the shareholders and directors. He shall see
that all orders and resolutions of the Board of Directors are carried into
effect. He shall execute and deliver, in the name of the corporation, any
deeds, mortgages, bonds, contracts or other instruments pertaining to the
business of the corporation unless the authority to execute and deliver is
required by law to be exercised by another person or is expressly delegated by
the Articles of Incorporation or Bylaws or by the Board of Directors to some
other officer or agent of the corporation. He shall maintain records of and,
whenever necessary, certify all proceedings of the Board of Directors and the
shareholders, and in general, shall perform all duties usually incident to the
office of the president of a corporation. He shall have such other duties as
may, from time to time, be prescribed by the Board of Directors.
Section 4.06. VICE PRESIDENT. Each Vice President, if one or more
are elected, shall have such powers and shall perform such duties as prescribed
by the Board of Directors or by the Chief Executive Officer. In the event of
the absence or disability of the Chief Executive Officer, Vice Presidents shall
succeed to his power and duties in the order designated by the Board of
Directors.
Section 4.07. SECRETARY. The Secretary, if one is elected, shall be
secretary of and shall attend all meetings of the shareholders and Board of
Directors and shall record all proceedings of such meetings in the minute book
of the corporation. He shall give proper notice of meetings of shareholders and
directors. He shall perform such other duties as may, from time to time, be
prescribed by the Board of Directors or by the Chief Executive Officer.
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Section 4.08. TREASURER. The Treasurer shall be the chief financial
officer and shall keep accurate financial records for the corporation. He shall
deposit all moneys, drafts and checks in the name of, and to the credit of, the
corporation in such banks and depositaries as the Board of Directors shall, from
time to time, designate. He shall have power to endorse, for deposit, all
notes, checks and drafts received by the corporation. He shall disburse the
funds of the corporation, as ordered by the Board of Directors, making proper
vouchers therefor. He shall render to the Chief Executive Officer and the
directors, whenever requested, an account of all his transactions as Treasurer
and of the financial condition of the corporation, and shall perform such other
duties as may, from time to time, be prescribed by the Board of Directors or by
the Chief Executive Officer.
Section 4.09. COMPENSATION. The officers of this corporation shall
receive such compensation for their services as may be determined, from time to
time, by resolution of the Board of Directors.
ARTICLE V.
SHARES AND THEIR TRANSFER
Section 5.01. CERTIFICATES FOR SHARES. All shares of the corporation
shall be certificated shares. Every owner of shares of the corporation shall be
entitled to a certificate, to be in such form as shall be prescribed by the
Board of Directors, certifying the number of shares of the corporation owned by
such shareholder. The certificates for such shares shall be numbered in the
order in which they shall be issued and shall be signed, in the name of the
corporation, by the Chief Executive Officer and by the Secretary or an Assistant
Secretary or by such officers as the Board of Directors may designate. If the
certificate is signed by a transfer agent or registrar, such signatures of the
corporate officers may be by facsimile if authorized by the Board of Directors.
Every certificate surrendered to the corporation for exchange or transfer shall
be cancelled, and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been so
cancelled, except in cases provided for in Section 5.04.
Section 5.02. ISSUANCE OF SHARES. The Board of Directors is
authorized to cause to be issued shares of the corporation up to the full amount
authorized by the Articles of Incorporation in such amounts as may be determined
by the Board of Directors and as may be permitted by law. No shares shall be
allotted except in consideration of cash or other property, tangible or
intangible, received or to be received by the corporation under a written
agreement, of services rendered or to be rendered to the corporation under a
written agreement, or of an amount transferred from surplus to stated capital
upon a share dividend. At the time of such allotment of shares, the Board of
Directors making such allotments shall state, by resolution, their determination
of the fair value to the corporation in monetary terms of any consideration
other than cash for which shares are allotted.
Section 5.03. TRANSFER OF SHARES. Transfer of shares on the books of
the corporation may be authorized only by the shareholder named in the
certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the absolute owner
of shares of the corporation, the person or persons in whose name shares are
registered on the books of the corporation.
Section 5.04. LOSS OF CERTIFICATES. Except as otherwise provided by
Minnesota Statutes Section 302A.419, any shareholder claiming a certificate for
shares to be lost, stolen or destroyed shall make an affidavit of that fact in
such form as the Board of Directors shall require and shall, if the Board of
Directors so requires, give the corporation a bond of indemnity in form, in an
amount, and with one or more sureties satisfactory to the Board of Directors, to
indemnify the corporation against any claim which may be made against it on
account of the reissue of such certificate, whereupon a new certificate may be
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issued in the same tenor and for the same number of shares as the one alleged
to have been lost, stolen or destroyed.
ARTICLE VI.
DIVIDENDS, RECORD DATE
Section 6.01. DIVIDENDS. Subject to the provisions of the Articles
of Incorporation, of these Bylaws, and of law, the Board of Directors may
declare dividends whenever, and in such amounts as, in its opinion, are deemed
advisable.
Section 6.02. RECORD DATE. Subject to any provisions of the Articles
of Incorporation, the Board of Directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any dividend as the record date for
the determination of the shareholders entitled to receive payment of the
dividend and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive payment of such dividend notwithstanding any
transfer of shares on the books of the corporation after the record date. The
Board of Directors may close the books of the corporation against the transfer
of shares during the whole or any part of such period.
ARTICLE VII.
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01. SHARE REGISTER. The Board of Directors of the
corporation shall cause to be kept at its principal executive office, or at
another place or places within the United States determined by the Board:
(1) a share register not more than one year old, containing the names
and addresses of the shareholders and the number and classes of
shares held by each shareholder; and
(2) a record of the dates on which certificates or transaction
statements representing shares were issued.
Section 7.02. OTHER BOOKS AND RECORDS. The Board of Directors shall
cause to be kept at its principal executive office, or, if its principal
executive office is not in Minnesota, shall make available at its registered
office within ten days after receipt by an officer of the corporation of a
written demand for them made by a shareholder or other person authorized by
Minnesota Statutes Section 302A.461, originals or copies of:
(1) records of all proceedings of shareholders for the last three
years;
(2) records of all proceedings of the board for the last three years;
(3) its articles and all amendments currently in effect;
(4) its bylaws and all amendments currently in effect;
(5) financial statements required by Minnesota Statutes Section
302A.463 and the financial statement for the most recent interim
period prepared in the course of the operation of the corporation
for distribution to the shareholders or to a governmental agency
as a matter of public record;
(6) reports made to shareholders generally within the last three
years;
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(7) a statement of the names and usual business addresses of its
directors and principal officers;
(8) any shareholder voting or control agreements of which the
corporation is aware; and
(9) such other records and books of account as shall be necessary and
appropriate to the conduct of the corporate business.
Section 7.03. FISCAL YEAR. The fiscal year of the corporation shall
be determined by the Board of Directors.
ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to, guarantee an
obligation of, become a surety for, or otherwise financially assist a person if
the transaction, or a class of transactions to which the transaction belongs, is
approved by the affirmative vote of a majority of the directors present and:
(1) is in the usual and regular course of business of the
corporation;
(2) is with, or for the benefit of, a related corporation, an
organization in which the corporation has a financial interest,
an organization with which the corporation has a business
relationship, or an organization to which the corporation has the
power to make donations;
(3) is with, or for the benefit of, an officer or other employee of
the corporation or a subsidiary, including an officer or employee
who is a director of the corporation or a subsidiary, and may
reasonably be expected, in the judgment of the board, to benefit
the corporation; or
(4) has been approved by the affirmative vote of the holders of
two-thirds of the outstanding shares.
The loan, guarantee, surety contract or other financial assistance may be with
or without interest, and may be unsecured, or may be secured in the manner as a
majority of the directors approve, including, without limitation, a pledge of or
other security interest in shares of the corporation. Nothing in this section
shall be deemed to deny, limit, or restrict the powers of guaranty or warranty
of the corporation at common law or under a statute of the State of Minnesota.
ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. The corporation shall indemnify such persons, for such
expenses and liabilities, in such manner, under such circumstances, and to such
extent as permitted by Minnesota Statutes Section 302A.521, as now enacted or
hereafter amended.
ARTICLE X.
AMENDMENTS
Section 10.01. Except as otherwise provided in the Company's
Restated Articles of Incorporation, these Bylaws may be amended or altered by
a vote of the majority of the whole Board of Directors at any meeting
provided that notice of such proposed amendment shall have been given in the
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notice given to the directors of such meeting. Except as otherwise provided
in the Company's Restated Articles of Incorporation, such authority in the
Board of Directors is subject to the power of the shareholders to change or
repeal such Bylaws by a majority vote of the shareholders present or
represented at any regular or special meeting of shareholders called for such
purpose, and the Board of Directors shall not make or alter any Bylaws fixing
a quorum for meetings of shareholders, prescribing procedures or removing
directors or filling vacancies in the Board of Directors, or fixing the
number of directors or their classifications, qualifications, or terms of
office except that the Board of Directors may adopt or amend any Bylaw to
increase their number.
ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. VOTING SECURITIES HELD BY THE CORPORATION. Unless
otherwise ordered by the Board of Directors, the Chief Executive Officer shall
have full power and authority on behalf of the corporation (a) to attend any
meeting of security holders of other corporations in which the corporation may
hold securities and to vote such securities on behalf of this corporation; (b)
to execute any proxy for such meeting on behalf of the corporation; or (c) to
execute a written action in lieu of a meeting of such other corporation on
behalf of this corporation. At such meeting, the Chief Executive Officer shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities that the corporation possesses. The Board of Directors may,
from time to time, grant such power and authority to one or more other persons
and may remove such power and authority from the Chief Executive Officer upon
any other person or persons.
Section 11.02. PURCHASE AND SALE OF SECURITIES. Unless otherwise
ordered by the Board of Directors, the Chief Executive Officer shall have full
power and authority on behalf of the corporation to purchase, sell, transfer or
encumber any and all securities of any other corporation owned by the
corporation, and may execute and deliver such documents as may be necessary to
effectuate such purchase, sale, transfer or encumbrance. The Board of Directors
may, from time to time, confer like powers upon any other person or persons.
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AGREEMENT
This Agreement, dated as of July 1, 1998, is between Fourth Shift
Corporation, a Minnesota corporation with its principal place of business in
Minneapolis, Minnesota, and Micro Data Base Systems, Inc., an Indiana
corporation with its principal place of business in West Lafayette, Indiana.
RECITALS
In recognition of Fourth Shift Corporation's stature in
manufacturing and financial applications and of the superior capabilities of
Micro Data Base Systems, Inc.'s patented database management system, Fourth
Shift and MDBS wish to join forces to strengthen their respective marketplace
positions. Fourth Shift will, accordingly, use MDBS software technologies in
support of those Fourth Shift activities which Fourth Shift believes can
benefit from the inclusion of these advanced capabilities. It is the
intention of the parties that their relationship, as evidenced by this
Agreement, will grow and develop over time, if and as appropriate.
In recognition of the existence of subsidiaries of Fourth Shift
Corporation, the ongoing change and growth in the number and configuration of
those subsidiaries, and the desire of Fourth Shift and MDBS to facilitate the
licensing of MDBS technologies throughout the Fourth Shift corporate family,
MDBS and Fourth Shift wish to enter into a single licensing agreement that
benefits and is binding upon Fourth Shift Corporation and all of its
subsidiaries.
For due consideration, the receipt and sufficiency of which are hereby
acknowledged, Micro Data Base Systems, Inc. and Fourth Shift Corporation, on its
own behalf and on behalf of all of its operating subsidiaries, agree as follows:
<PAGE>
1 DEFINITIONS
1.1 "Fourth Shift" refers collectively to Fourth Shift Corporation
and its operating subsidiaries whether directly or indirectly held, now
existing or hereafter acquired during the term of this Agreement. An
individual operating subsidiary of Fourth Shift Corporation is sometimes
referred to generically herein as a "Fourth Shift Entity." A list of the
currently existing direct and indirect subsidiaries of Fourth Shift
Corporation is attached as Exhibit A hereto.
1.2 "MDBS" refers to Micro Data Base Systems, Inc.
1.3 "MDBS Development Code" refers to computer object code that has
been or is hereafter created by MDBS as part of its MDBS III, MDBS IV or
TITANIUM product lines (including enhancements, improvements and support for
new operating systems made to those products using the architecture and code
base of MDBS IV or TITANIUM) and is (or previous to this Agreement has been)
delivered by MDBS to Fourth Shift or sold or licensed by MDBS as one or more
identified development system modules.
1.4 "MDBS Runtime Code" is a subset of MDBS Development Code that is
listed as distributable on an MDBS standard runtime distribution license, price
list or product catalog, or their equivalent.
1.5 "MDBS-content Fourth Shift Application" refers to a software
program into which MDBS Runtime Code is (or previous to this Agreement has
been) integrated by or for a Fourth Shift Entity as an embedded database
management system pursuant to this Agreement or a prior agreement between
MDBS and Fourth Shift Corporation, which: a) is (or previous to this
Agreement has been) distributed by a Fourth Shift Entity for the purpose of
using Fourth Shift
<PAGE>
Products, and b) contains a significant amount of computer code created by a
Fourth Shift Entity. This definition is not and shall not be deemed to be
dependent on the form or configuration of media used to embody or deliver an
"MDBS-content Fourth Shift Application."
1.6 "Acquisition Transaction" refers to any merger of Fourth Shift
Corporation with or into, combination of Fourth Shift Corporation with, or sale
of all or substantially all of the assets of Fourth Shift Corporation to any
other person or entity, or sale of a majority of the outstanding voting stock of
Fourth Shift Corporation to any single person or entity. An Acquisition
Transaction shall not include any good-faith merger, transfer of assets or other
combination of a Fourth Shift Entity with any other Fourth Shift Entity that
does not cause a material change in the ownership, control or capitalization of
Fourth Shift and its operating subsidiaries considered as a corporate family.
2 PRIOR AGREEMENTS SUPERSEDED
2.1 This Agreement supersedes all distribution agreements previously
entered into by Fourth Shift Corporation and Micro Data Base Systems, Inc. To
the extent that this Agreement conflicts with any previous agreement between
Micro Data Base Systems, Inc. and Fourth Shift Corporation or any of its
subsidiaries, this Agreement controls.
2.2 Any and all agreement documents entitled "Business Partner
Agreement," "Tailored Technical Services Agreement," or "Cooperative Sales
Support Agreement" entered into by Fourth Shift Corporation and Micro Data Base
Systems, Inc. (including those dated July 1, 1997) are deemed terminated as of
June 30, 1998. Notwithstanding the execution of this Agreement, Fourth Shift
Corporation shall remain obligated to MDBS pursuant to the terms of the Business
Partner Agreement dated as of July 1, 1997 to pay MDBS royalties specified
therein *
3
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______________
* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
4
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3 BASE TERM
3.1 The Base Term of this Agreement shall be from July 1, 1998 to
June 30, 2002, except that the Base Term may be terminated by MDBS prior to
June 30, 2002, as follows:
3.1.1 The Base Term may be terminated for cause pursuant to
section 17.1 of this Agreement.
3.1.2 In the event of an Acquisition Transaction that is
reasonably expected to cause a material change in the unit-volume of Fourth
Shift's distribution of MDBS-content Fourth Shift Applications during the
Base Term, then MDBS may, at its sole option, elect to terminate the Base
Term prior to June 30, 2002, as follows:
3.1.2.1 Not later than January 1, 2001, MDBS shall give
Fourth Shift written notice of its election to terminate the Base Term;
3.1.2.2 Upon issuance by MDBS of written notice of its
election to terminate the Base Term, the Base Term shall terminate as of the
first June 30 that occurs more than 150 days after issuance by MDBS of its
notice of election to terminate the Base Term.
4 RENEWAL TERM
4.1 Provided that this Agreement has not previously terminated
pursuant to section 17.1 Fourth Shift Corporation may extend the term of this
Agreement beyond the Base Term as follows:
4.1.1 Fourth Shift may extend the term of this Agreement for up to
three successive three-year periods, each of which is referred to herein as a
"Renewal Term," subject to the following exceptions:
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4.1.1.1 If MDBS elects to terminate the Base Term
pursuant to paragraph 3.1.2 of this Agreement, then Fourth Shift may extend
the term of this Agreement for one three-year Renewal Term only.
4.1.1.2 In the event of an Acquisition Transaction during
a Renewal Term that is reasonably expected to cause a material change in the
unit-volume of Fourth Shift's distribution of MDBS-content Fourth Shift
Applications during that Renewal Term, MDBS may, at its sole option, elect to
terminate that Renewal Term prior to its normal expiry, as follows:
4.1.1.3 Not later than January 1 of the second contract
year of the Renewal Term, MDBS shall give Fourth Shift written notice of its
election to terminate that Renewal Term;
4.1.1.4 Upon issuance by MDBS of written notice of its
election to terminate that Renewal Term, the Renewal Term shall terminate as
of the first June 30 that occurs more than 150 days after issuance by MDBS of
its notice of election to terminate the Renewal Term.
4.1.1.5 Upon termination of the Renewal Term by MDBS
pursuant to this paragraph 4.1.1, Fourth Shift may elect to enter into a
single, final Renewal Term by notifying MDBS in writing of Fourth Shift's
intent to exercise its option to do so.
4.2 To exercise its option to enter into a Renewal Term, Fourth Shift
shall, not less than one hundred twenty (120) days prior to the expiration of
the Base Term, or the then-current Renewal Term, as may be applicable, give MDBS
written notice of Fourth Shift's intent to do so. The date upon which Fourth
Shift exercises its option to enter into a Renewal Term shall be known as the
"Renewal Term Exercise Date."
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5 END TERM
5.1 At the expiry of the Base Term or the final Renewal Term,
whichever comes later, the term of this Agreement shall be extended for a
two-year period designated as the "End Term." The sole purpose and intent of
MDBS and Fourth Shift Corporation with respect to the End Term is to permit
Fourth Shift Corporation, in the event that the parties choose to end their
business relationship pursuant to the terms of this Agreement, to have a
wind-down period to distribute maintenance updates to MDBS-content Fourth
Shift Applications to its then-existing base of customers who have installed
MDBS-content Fourth Shift Applications, subject to the terms and conditions
set forth in this Agreement, while fairly compensating MDBS in proportion to
the extent of Fourth Shift Corporation's duplication and distribution of
those maintenance updates.
5.2 If Fourth Shift Corporation does not exercise its option to
enter into a first Renewal Term, then the term of this Agreement shall extend
to June 30, 2004, inclusive of the End Term. If Fourth Shift Corporation
exercises its option to enter into the first Renewal Term, then the term of
this Agreement shall extend to June 30, 2007, inclusive of the End Term. If
Fourth Shift Corporation exercises its option to enter into a second Renewal
Term, then the term of this Agreement shall extend to June 30, 2010,
inclusive of the End Term. If Fourth Shift Corporation exercises its option
to enter into a third Renewal Term, then the term of this Agreement shall
extend to June 30, 2013, inclusive of the End Term.
5.3 The provision of this Agreement for the End Term is not
intended to and shall in no manner be construed to prejudice the right of
either party to seek to enter into future agreements with each other for the
use, duplication and distribution of MDBS computer code,
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or the engagement of MDBS's consulting and support services.
8
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6 BASE TERM FEE AND RELATED INITIAL OBLIGATIONS
6.1 For the Base Term, Fourth Shift Corporation shall pay MDBS *,
which amount is referred to hereinafter as the "Base Term Fee" for the Base
Term; provided that, in the event of termination of the Base Term prior to
June 30, 2002, the Base Term Fee shall be reduced *. Fourth Shift
Corporation shall pay the Base Term Fee * as follows:
6.1.1 * due and owing on July 1, 1998;
6.1.2 * due and owing on the fifteenth day of each calendar month
commencing August 15, 1998 through June 15, 2002.
6.2 In addition to the Base Term Fee, Fourth Shift shall pay MDBS the
following upon the inception of this Agreement:
6.2.1 If this Agreement is executed on or before July 1, 1998,
Fourth Shift shall concurrently with execution of this Agreement pay MDBS *
in satisfaction of outstanding obligations associated with its purchase of a
TITANIUM version 7 Single User Development System with MDBS IV database
compatibility; in such case, and only such case, certain other related
obligations in the amount of * are deemed discharged upon payment of the July
1, 1998 installment of the Base Term Fee.
6.2.2 If this Agreement is executed after July 1, 1998, Fourth
Shift shall pay MDBS * concurrently with execution of this Agreement in
satisfaction of certain outstanding invoices from MDBS to Fourth Shift.
______________
9
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* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
10
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7 RENEWAL TERM FEE
7.1 Upon exercise of its right to extend the term of this Agreement
into a Renewal Term, Fourth Shift shall become obligated to pay MDBS a
"Renewal Term Fee" for each Renewal Term option exercised. At the inception
of each Renewal Term, the Renewal Term Fee for that Renewal Term shall be
determined as follows:
7.1.1 If neither MDBS nor Fourth Shift invokes the fee
determination procedures set forth in paragraph 7.1.2 below on or before the
Renewal Term Exercise Date, then the Renewal Term Fee shall automatically be
determined by reference to 1) * times the annual increment of the Base Term
Fee, and 2) the * of Fourth Shift between that reported for * and that
reported for *, as follows:
First Renewal Term Fee:
* Second Renewal Term Fee:
* Third Renewal Term Fee:
* By way of illustration only, if Fourth Shift's * (as reported by
Fourth Shift *) increases or decreases from that reported at * to that
reported at *, then the Renewal Term Fee for the first Renewal Term would
increase or decrease *.
7.1.2 On any Renewal Term Exercise Date Fourth Shift may
request, and not later than the fifth day after any Renewal Term Exercise
Date that occurs after early termination of the Base Term or any Renewal Term
pursuant to Sections 3.1.2 or 4.1.1.2, respectively, MDBS may request by
written notice pursuant to paragraph 21.9 below that the parties commence the
"Renewal Term Fee Determination Procedure" (as it shall be known) as set
forth below. Once
______________
11
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* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
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either Fourth Shift or MDBS demands commencement of the Renewal Term Fee
Determination Procedure, the parties shall be bound to complete that
Procedure and to abide by the resulting determination of the Renewal Term
Fee. Upon commencement of the Renewal Term Fee Determination Procedure, the
parties shall negotiate in good-faith for a Renewal Term Fee to be determined
by reference to any or all of the following criteria, as appropriate: *. If
the parties reach agreement according to these criteria on a Renewal Term Fee
for the Renewal Term at issue, then that agreement shall be memorialized as
an addendum to this document, and shall be binding upon the parties. If, by
the 30th day after the Renewal Term Exercise Date, the parties' good-faith
negotiation fails to result in an agreed-upon Renewal Term Fee, then the
parties shall submit the determination of the Renewal Term Fee to binding
arbitration, as follows:
7.1.2.1 Not later than the 45th day after the Renewal
Term Exercise Date, the party commencing the Renewal Term Fee Determination
Procedure (the "Commencing Party") shall set forth in detail a statement of
contentions and supporting facts and evidence with respect to determination
of the Renewal Term Fee, and shall serve that document on the other party
(the "Responding Party");
7.1.2.2 Not later than the 60th day after the Renewal
Term Exercise Date, the Responding Party shall set forth in detail a
statement of contentions and supporting facts and evidence with respect to
determination of the Renewal Term Fee, and shall serve that document on the
Commencing Party;
7.1.2.3 A single arbitrator shall be chosen by the
parties from a panel supplied by the CPR Institute for Dispute Resolution
("CPR"), New York City, or based upon the
13
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______________
* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
14
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CPR's suggestion of a person outside its panel, according to a procedure set
down by CPR;
7.1.2.4 The arbitration and all documents and proceedings
associated therewith, shall be kept confidential;
7.1.2.5 CPR's rules for commercial arbitrations shall be
applied to all matters of procedure, including discovery, subject to the
final decision and authority of the arbitrator;
7.1.2.6 The arbitrator shall be charged to determine the
Renewal Term Fee by taking into account each of the criteria enumerated in
paragraph 7.1.2; provided, however, that in the event of a Renewal Term Fee
Determination that occurs after early termination of the Base Term or a
Renewal Term pursuant to sections 3.1.2 or 4.1.1.2, the arbitrator shall be
further instructed that the Renewal Term Fee shall not be less than * per
annum;
7.1.2.7 The arbitrator's decision shall be final, and
shall become an addendum to this Agreement;
7.1.2.8 Each party shall pay one-half of the fees and
costs assessed by CPR with respect to the arbitration, and each side shall
bear its own attorney's fees and costs associated with the arbitration,
regardless of outcome.
7.2 Fourth Shift Corporation must pay one thirty-sixth of the
Renewal Term 'Fee on the fifteenth day of each month of the Renewal Term.
8 END TERM FEE
8.1 Prior to the inception of the End Term, Fourth Shift
Corporation and MDBS shall negotiate in good-faith for the determination of:
______________
15
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* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b.
16
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8.1.1 a mutually agreeable fee as fair market compensation to
MDBS for Fourth Shift's receipt of version upgrades and maintenance releases
of MDBS computer code during the End Term;
8.1.2 appropriate obligations of Fourth Shift for
record-keeping and disclosure to MDBS with respect to Fourth Shift's
duplication and distribution of MDBS computer code during the End Term
pursuant to this Agreement.
8.2 The parties' agreement with respect to the matters set forth in
paragraph 8.1 shall be memorialized as a written addendum to this Agreement,
and shall become part of this Agreement.
8.3 If Fourth Shift Corporation and MDBS fail to agree upon and
execute the addendum described in the preceding paragraph within the last
thirty days of the Base Term or, if applicable, the last Renewal Term, then
the parties shall submit their dispute to binding arbitration as follows:
8.3.1 A single arbitrator shall be chosen by the parties from a
panel supplied by the CPR Institute for Dispute Resolution ("CPR"), New York
City, or based upon the CPR's suggestion of a person outside its panel,
according to a procedure set down by CPR;
8.3.2 The CPR's rules for commercial arbitration shall be
applied to all matters of procedure, including discovery, subject to the
final decision and authority of the arbitrator;
8.3.3 The arbitrator shall be charged to take into account MDBS
standard commercial rates for the rights described in paragraphs 8.1 and 9.3
and determine a fair market fee therefor;
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8.3.4 The arbitrator's decision shall be final, and shall
become an addendum to this Agreement.
8.3.5 The arbitration and all documents and proceedings associated
therewith, shall be kept confidential;
8.3.6 Each party shall pay one-half of the fees and costs
assessed by CPR with respect to the arbitration, and each side shall bear its
own attorney's fees and costs associated with the arbitration, regardless of
outcome.
8.4 Fourth Shift Corporation shall pay the End Term Fee in monthly
installments in the same manner as the Base Term Fee.
9 GRANT OF LICENSE
9.1 During the Base Term, and during the Renewal Term(s) (if any),
Fourth Shift may, subject to payment of its above-referenced fee obligations:
*
9.3 The license rights created by this Agreement are intended to be *.
9.4 At the conclusion of the End Term, all of MDBS's obligations to
Fourth Shift Corporation pursuant to this Agreement (other than those
obligations set forth in section 19 hereinbelow) shall cease completely.
9.5 Under no circumstance may any Fourth Shift Entity permit any
third-party to use or have access to MDBS Runtime Code other than in the form
of an MDBS-content Fourth Shift Application without (i) specific prior
notification to and written permission from MDBS (which permission shall be
given, conditioned or withheld according to MDBS's reasonable business
judgment) and (ii) compliance with the licensing requirements herein.
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______________
* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
9.6 Fourth Shift Entity may not permit any third-party (other than an
individual Fourth Shift agent working on the development of an MDBS-content
Fourth Shift Application at or by remote access to a Fourth Shift facility on a
licensed installation of MDBS Development Code) to use or have access to any
MDBS Development Code without (i) prior notification to and written permission
from MDBS (which permission shall be given, conditioned or withheld according to
MDBS's reasonable business judgment) and (ii) compliance with the licensing
requirements set forth in section 15.4 below.
10 REPORTING; DISCLOSURE
10.1 Commencing on June 30, 1999, on each successive June 30 of the
Base Term, the Renewal Term(s), (if any), and the End Term, Fourth Shift
Corporation shall disclose to MDBS the following:
10.1.1 A summary of the aggregate number of end-users
(delineated by MDBS-content Fourth Shift Application) who have subscribed to
Fourth Shift's customer support program with respect to an MDBS-content
Fourth Shift Application during the preceding twelve months;
10.1.2 The corporate identity of each Fourth Shift Entity that has
used * any MDBS Runtime Code or MDBS Development Code during the previous twelve
months;
10.1.3 The corporate identity of each Fourth Shift Entity that
is in possession of any MDBS Runtime Code or MDBS Development Code;
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_____________
* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
20
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10.1.4 The names and version numbers of all MDBS-content Fourth
Shift Applications for which Fourth Shift has rendered any customer support,
service or maintenance during the previous twelve months;
10.1.5 A copy of the text and an exemplar of the format of the
standard license agreement (shrinkwrap or clickwrap) used by Fourth Shift as a
license agreement for each MDBS-content Fourth Shift Application distributed by
any Fourth Shift Entity during the previous year;
10.1.6 Complete directory file listings for all MDBS-content
Fourth Shift Applications that are available for distribution to any
customers of any Fourth Shift Entity;
10.1.7 A listing, by MDBS Development Code system serial
number, of the physical office address for each computer, workstation or
database server on which any MDBS Development Code is installed;
10.1.8 The name and version number of any database management
system product, other than an MDBS database management system product, which
Fourth Shift has distributed (other than an alpha or beta version thereof)
during the preceding twelve months.
10.2 *
11 MAINTENANCE RELEASES
11.1 MDBS Development Code delivered to Fourth Shift pursuant to this
Agreement shall generally conform to MDBS's user documentation.
11.2 During the Base Term and any Renewal Terms, *
______________
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* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
22
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12. SERVICE
12.1 During the Base Term, Fourth Shift Corporation shall pay MDBS
a Term Service Fee of *, which shall be payable in four equal installments of
* each on the date this Agreement is executed, July 1, 1999, July 1, 2000,
and July 1, 2001.
12.2 During the Renewal Term, if any, Fourth Shift Corporation
shall pay MDBS a Term Service Fee equivalent to prepayment for * hours of
telephone support at MDBS's published rate for standard telephone support in
effect as of the inception of that Renewal Term. The Term Service Fee for
the Renewal Term shall be payable in three equal installments on July I of
each year of the Renewal Term.
12.3 Payment of the Term Service Fee during the Base Term and any
Renewal Term shall entitle Fourth Shift to * hours per contract year (July
I-June 30) of standard telephone support, consulting, and custom development
services from MDBS support personnel, as follows:
12.3.1 MDBS will annually provide training to Fourth Shift
personnel for the purpose of introduction to new advanced functionalities of
MDBS's products, which hours shall be charged against Fourth Shift's annual
*-hour allocation.
12.3.2 Standard telephone support shall be available Monday
through Friday, excluding national holidays, 9:00 a.m. to 5:00 p.m. E.S.T.
12.3.3 MDBS shall not be obligated to make its consulting
personnel available to Fourth Shift anywhere other than West Lafayette,
Indiana and Minneapolis, Minnesota. Fourth Shift shall reimburse MDBS for
all reasonable travel costs and expenses for MDBS personnel who travel to
Minneapolis, Minnesota.
______________
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* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
24
<PAGE>
12.3.4 During the Base Term and any Renewal Term, Fourth Shift
may, at its option, purchase additional standard telephone support hours from
MDBS in blocks of * hours at * of MDBS's standard commercial rate in effect
for standard telephone support at the time of each such purchase.
12.3.5 Any hours of telephone support, consulting and custom
development services that are not used during a given contract year will
expire, and will not carry over into any subsequent contract year.
12.4 MDBS shall have no obligation to provide any telephone support
or other technical service to Fourth Shift during the End Term or thereafter;
provided, however, that during the End Term Fourth Shift may purchase
telephone support from MDBS by paying MDBS the then-standard commercial rate
for such support, and MDBS may, in its sole discretion, make other services
available to Fourth Shift.
12.5 During the Base Term and any Renewal Term, Fourth Shift may
request to purchase, and MDBS shall (as it has in the past) endeavor to make
available, priority support services from time to time according to mutually
agreeable terms and conditions then-agreed between the parties, taking into
account any then-relevant considerations, specifically including but not
limited to any mission-critical needs identified by Fourth Shift and any
opportunity costs to MDBS.
13 SOURCE CODE ESCROW
13.1 Not later than August 1, 1998, MDBS shall enter into a source
code escrow agreement with Data Securities International, Inc. (hereafter,
the "Source Code Escrow Agent") with Fourth Shift as a beneficiary with
respect to the MDBS IV and TITANIUM products,
25
<PAGE>
substantially in accordance with the escrow agreement attached hereto as
Exhibit B, as subsequently conformed to this Agreement.
13.2 Notwithstanding any provision of this Agreement, title to the
Source Code shall remain with MDBS at all times.
13.3 *
13.4 Once the circumstances or conditions that cause an Escrow
Release Event end, Fourth Shift shall promptly return the Source Code Package
to the Source Code Escrow Agent.
13.5 In the event of release of the Source Code Package to Fourth
Shift, Fourth Shift may use the Source Code Package solely pursuant to the
terms of this Agreement for the maintenance of MDBS-content Fourth Shift
Applications, and for no other purpose. Under no circumstances may Fourth
Shift distribute, deliver, copy or convey the Source Code Package or any part
thereof to any third-party.
13.6 Fourth Shift shall respond promptly, fully and completely, to
any and all reasonable requests for information from MDBS concerning Fourth
Shift's use of the Source Code Package and the names of the individual(s)
having access to the Source Code Package.
13.7 Under no circumstances shall Fourth Shift have any right to
receive the Source Code Package or any part thereof from the Source Code
Escrow Agent following the expiry of the Base Term or the final Renewal Term
(if any).
_____________
* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
26
<PAGE>
14 DEVELOPMENT AND MARKETING
14.1 Fourth Shift will employ all MDBS Runtime Code which Fourth
Shift believes in its reasonable business judgment to be beneficial to the
development and performance of its MDBS-content Fourth Shift Applications.
14.2 Upon MDBS's request, Fourth Shift will provide testimonials by
Fourth Shift respecting the benefits derived by Fourth Shift and its
customers from use of MDBS database technology.
14.3 Upon request from MDBS, Fourth Shift will timely make available
to MDBS for interview Fourth Shift technical and marketing staff who are
knowledgeable regarding the advantages of any TITANIUM feature newly utilized
in an MDBS-content Fourth Shift Application; provided further, that MDBS will
draft TITANIUM Case Studies based upon those interviews and supporting
information to be supplied by Fourth Shift, and Fourth Shift will cooperate
with MDBS in the editing of those Case Studies to the satisfaction of MDBS
and Fourth Shift.
14.4 For Fourth Shift customers requiring consulting assistance that
Fourth Shift does not itself provide with respect to MDBS Runtime Code in its
MDBS-content Fourth Shift Applications, Fourth Shift:
14.4.1 Will identify MDBS as the preferred supplier of such
services;
14.4.2 Hereby consents to the performance by MDBS of any
services requested of MDBS by a Fourth Shift customer; provided, however,
that such services shall be performed by MDBS as an independent contractor
solely responsible therefor, and Fourth Shift's consent is not and shall
27
<PAGE>
not be deemed a guarantee, warranty or endorsement by Fourth Shift of the
services to be performed by MDBS.
14.5 Fourth Shift will continually make its marketing, sales,
development, and customer support staff knowledgeable of the overall
functionality and all significant features of the TITANIUM database
technology. Fourth Shift will also make best efforts to ensure that all
statements made by its representatives regarding MDBS technologies are
accurate. If requested by Fourth Shift, MDBS will provide support in these
undertakings.
14.6 Fourth Shift and MDBS will maintain and update, as appropriate,
the established Web links and related activities.
14.7 Fourth Shift will include the standard MDBS "BUILT WITH
TITANIUM" logo, as supplied by MDBS in object code, in the screens referenced
in paragraph 15.6 for its MDBS content Fourth Shift Applications which
utilize TITANIUM code.
15 COPYRIGHT AND PATENT PROTECTION
15.1 Fourth Shift acknowledges that MDBS holds a copyright to all MDBS
Runtime Code and MDBS Development Code.
15.2 This Agreement does not, and shall not be construed to,
transfer or authorize the transfer to anyone of (i) MDBS's title in or
copyright in any MDBS computer code, or (ii) Fourth Shift's title in or
copyright in any Fourth Shift computer code.
15.3 Under no circumstance may any Fourth Shift Entity distribute or
permit the distribution after the date of the execution of this Agreement of
any MDBS-content Fourth Shift Application to any person or entity who does
not enter into a license agreement with a Fourth Shift Entity for the use of
the subject MDBS-content Fourth Shift Application. Such license
28
<PAGE>
agreement may be in writing, or may take the form of a shrinkwrap or
click-wrap license and shall contain a notice that the MDBS-content Fourth
Shift Application includes certain software owned and copyrighted by MDBS;
that the recipient is not receiving title to the MDBS software, but rather a
license to use it; and that only working and backup copies for
non-production, archive purposes may be made. At least one such license
agreement entered into on or after December 31, 1998 for each Fourth Shift
customer or client shall contain the following statement:
This product includes certain software owned and copyrighted by Micro Data
Base Systems, Inc., PO Box 2438, West Lafayette, Indiana 47906, USA. Micro
Data Base Systems, Inc. holds United States Patents with respect to any and
all TITANIUM database management system technology used in this software.
You are not receiving title to the software owned by MDBS, but rather a
license to use it. Only working and backup copies for non-production,
archive purposes may be made. No identifying marks or copyrights in or on
the software may be deleted. The portions of the product owned by MDBS may
not be used independently of a product or service of Fourth Shift
Corporation or its subsidiaries. Micro Data Base Systems, Inc. makes no
express or implied warranties of quality, performance, merchantability or
fitness for any particular purpose. The MDBS portions of the product are
licensed "as is", with all faults and defects. MDBS will not be liable for
incidental, consequential, or exemplary damages.
15.4 No third-party (other than an individual Fourth Shift agent
working on the development of an MDBS-content Fourth Shift Application at or
by remote access to a Fourth Shift facility on a licensed installation of
MDBS Development Code) may assist in the development of an MDBS-content
Fourth Shift Application without first entering into a license agreement with
MDBS.
15.5 No third-party may provide duplication or distribution services
to Fourth Shift for an MDBS-content Fourth Shift Application *.
29
<PAGE>
15.6 All MDBS-content Fourth Shift Application copies manufactured
on or after November 1, 1998 or the date of the first manufacture of the next
release of an MDBS-content
_____________
* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
30
<PAGE>
Fourth Shift Application (whichever date is earlier) shall (with programming
assistance from MDBS upon Fourth Shift's request) employ a sign-on screen,
boot-up screen or comparable splash screen that presents to the
Application-user, each time the Application-user begins using the
Application, a display that includes:
15.6.1 The standard MDBS logo, and
15.6.2 The following statement: "This product includes certain
software owned and copyrighted by Micro Data Base Systems, Inc., West Lafayette,
Indiana USA. Use of this software is governed by the license agreement that
accompanied its delivery and/or installation."
16 ASSIGNMENT
16.1 Neither party may assign this Agreement without the prior
written consent of the other party, which consent shall not be unreasonably
withheld but may contain reasonable conditions imposed by the non-assigning
party. With respect to the rights and obligations set forth in this clause,
Fourth Shift and MDBS will both act in good-faith.
17 TERMINATION
17.1 Subject to the procedures set forth below, either party shall
have the right to terminate this Agreement prior to its expiry upon the
occurrence of a material violation by the other party of its material
obligations under this Agreement (hereafter, an "Event of Default").
17.2 A termination on account of an uncured Event of Default will
become effective only upon occurrence of the following:
17.2.1 Delivery by the terminating party to the party alleged
to be in default, by certified mail to the Notice address set forth below, of
a written notice of the Event of Default; and,
31
<PAGE>
17.2.2 Failure by the non-terminating party to cure the duly
noticed Event of Default within thirty-three calendar days of the mailing of
the written notice of the Event of Default.
17.3 Upon termination of this Agreement by either party for cause
prior to the expiry of the term of this Agreement, Fourth Shift's rights to
duplicate or distribute MDBS Runtime Code pursuant to this Agreement shall
thenceforth cease completely.
17.4 Upon termination of this Agreement, whether by expiry or for
cause, Fourth Shift shall promptly:
17.4.1 With respect to Fourth Shift's obligations pursuant to
this Agreement, submit to a reasonable review by MDBS of documents that
directly reflect Fourth Shift's use of MDBS Development Code and use;
duplication and distribution of MDBS Runtime Code;
17.4.2 Either destroy or deliver to MDBS all runtime version
copies of all MDBS-content Fourth Shift Applications that remain in Fourth
Shift's inventory.
17.5 Notwithstanding termination of this Agreement (whether by
expiry or for cause), Fourth Shift customers or clients who received a copy
of an MDBS-content Fourth Shift Application from a Fourth Shift Entity
pursuant to this Agreement or a prior Agreement between MDBS and Fourth Shift
Corporation shall retain their rights with respect to their copy (or copies)
of that MDBS-content Fourth Shift Application.
17.6 Neither party's remedies with respect to termination of this
Agreement shall be deemed to be exclusive of any of its available legal
rights and remedies. Upon termination of this Agreement for cause, the
non-defaulting party will be entitled to all available damages and remedies
as otherwise provided by law, including but not limited to contract, tort,
patent,
33
<PAGE>
and copyright remedies and reimbursement for reasonable attorney's fees and
enforcement costs, subject to the limitation set forth in paragraph 19.3
below.
18 WARRANTIES
18.1 Fourth Shift Corporation warrants and agrees that:
18.1.1 It is authorized to enter into this Agreement;
18.1.2 It intends and is authorized to bind all of its
subsidiaries, both direct and indirect, to comply with the requirements of
this Agreement, as agents of Fourth Shift Corporation with respect to those
requirements.
18.2 MDBS warrants and agrees that:
18.2.1 MDBS Development Code (including MDBS Runtime Code) does
not infringe any patent, copyright, trade secret or any other proprietary
right of any third party;
18.2.2 MDBS owns all right, title and interest in and to MDBS
Development Code (including MDBS Runtime Code);
18.2.3 MDBS Development Code (including MDBS Runtime Code) is
free and clear of all liens, security interests, charges or encumbrances by
third parties;
18.2.4 MDBS has full right, power and authority to enter into
this Agreement and to carry out its obligations hereunder;
18.2.5 MDBS's TITANIUM version 7 product, when properly
programmed by Fourth Shift and used in conformity with its user documentation
and intended functionality, will properly record, store, retrieve, process
and present calendar dates, data and information before or after January 1,
2000 and will accurately calculate, store, and display date dependent fields
representing the year 2000 and subsequent years up to the documented design
limit of those
33
<PAGE>
products without compromising the integrity of any data. This
warranty is strictly limited to version 7 (and subsequent versions) of MDBS's
TITANIUM product and does not apply to any other MDBS products or to any
software developed by Fourth Shift.
18.2.6 MDBS's MDBS IV product, when properly programmed by
Fourth Shift and used in conformity with its user documentation and intended
functionality, will properly record, store, retrieve, process and present
calendar dates, data and information up to the year 2027, and will accurately
calculate, store, and display date-dependent fields representing the year
2000 and subsequent years up to up to the year 2027 without compromising the
integrity of any data. This warranty is strictly limited to MDBS's MDBS IV
product and does not apply to any other MDBS products or to any software
developed by Fourth Shift.
18.3 Subject to the foregoing express warranties, MDBS disclaims any
and all warranties with respect to MDBS Development Code, MDBS Runtime Code
or any part thereof, including any and all implied warranties of
merchantability, or fitness or suitability for any purpose (whether or not
MDBS knows, has reason to know, has been advised, or is otherwise in fact
aware of any such purpose), whether alleged to arise by law, by reason of
custom or usable in the trade, or by course of dealing.
19 LIMITATION OF LIABILITY; INDEMNIFICATION
19.1 Fourth Shift Corporation will indemnify MDBS from and against
any judgment won by a third-party against MDBS, which judgment relates to the
interruption or loss of use of, or the furnishing, functioning or use of any
MDBS-content Fourth Shift Application, or part thereof, except that Fourth
Shift shall not be obligated to indemnify MDBS to the extent that Fourth
Shift establishes that the judgment resulted from (i) the gross negligence or
willful
34
<PAGE>
misconduct of MDBS, its employees or agents or (ii) solely from harm directly
caused by an defect in MDBS Runtime Code, which defect was not known to
Fourth Shift, and not from any error or omission of Fourth Shift or (iii)
breach by MDBS of a representation or warranty given or other obligation
undertaken by MDBS to Fourth Shift in this Agreement. To qualify for
indemnity under this paragraph, MDBS must (i) give Fourth Shift prompt notice
of any such claim, and (ii) cooperate with Fourth Shift and allow Fourth
Shift, if it elects to do so, to control the defense of any such claim and
all related settlement negotiations. In the event that Fourth Shift has
elected to control the defense of any such claim and MDBS wishes to
participate in the defense thereof, Fourth Shift shall allow MDBS, if it
elects to do so, to participate at its own expense. Fourth Shift Corporation
will also reimburse MDBS for attorney's fees reasonably incurred by MDBS in
the defense of any proceeding that results in a judgment that is
indemnifiable under this paragraph.
19.2 Notwithstanding the foregoing, MDBS agrees to indemnify a
Fourth Shift Entity against any judgment won by a third-party against that
Fourth Shift Entity to the extent that the judgment is based upon a claim
that the Fourth Shift Entity's use, duplication or distribution of MDBS
Development Code or MDBS Runtime Code (as part of an MDBS-content Fourth
Shift Application distributed pursuant to this Agreement) infringed any
copyright, patent, trade secret or other proprietary right of a third-party.
To qualify for indemnity under this paragraph, Fourth Shift must (i) give
MDBS prompt notice of any such claim, and (ii) cooperate with MDBS and allow
MDBS, if it elects to do so, to control the defense of any such claim and all
related settlement negotiations. In the event that MDBS has elected to
control the defense of any such claim and any Fourth Shift Entity wishes to
participate in the defense thereof, MDBS shall allow
35
<PAGE>
that Fourth Shift Entity, if it elects to do so, to participate at its own
expense. This paragraph has no application to the extent that MDBS
establishes that any claim or suit for infringement of any copyright, patent,
trade secret or other proprietary right of a third-party results from a
Fourth Shift Entity's modification of any MDBS Development Code or MDBS
Runtime Code, or a Fourth Shift Entity's use, duplication or distribution of
MDBS Development Code or MDBS Runtime Code in a form or manner that is not
expressly intended and authorized by MDBS. MDBS will also reimburse a Fourth
Shift Entity for attorney's fees reasonably incurred by that Fourth Shift
Entity in the defense of any proceeding that results in a judgment that is
indemnifiable under this paragraph.
19.3 Notwithstanding any language to the contrary contained herein,
neither MDBS nor any Fourth Shift Entity shall be liable to the other for any
exemplary or punitive damages under any circumstances.
20 ASSUMED LIABILITIES
20.1 Fourth Shift Corporation hereby assumes and will satisfy all
liabilities to MDBS for the actions of each and any Fourth Shift Entity from
the date of execution of this Agreement forward with respect to any use,
duplication or distribution of any MDBS Runtime Code or MDBS Development
Code. Fourth Shift's obligations under this paragraph survive the
termination of this Agreement.
21 MISCELLANEOUS
21.1 This Agreement shall not be changed, modified or amended except
by a writing signed by MDBS and Fourth Shift Corporation
21.2 Both MDBS and Fourth Shift have participated in the drafting of
this Agreement.
36
<PAGE>
21.3 MDBS shall be entitled to reimbursement from Fourth Shift for
MDBS's costs of shipping and physical duplication for all physical media,
documentation and other materials shipped by MDBS to Fourth Shift pursuant to
this Agreement.
21.4 All past due payment obligations of Fourth Shift to MDBS pursuant
to this Agreement shall accrue interest at the rate of * per month.
21.5 Fourth Shift agrees to comply with all government export
regulations in distributing any MDBS-content Fourth Shift Application.
21.6 The parties shall attempt in good faith to resolve any dispute
arising out of or relating to this Agreement promptly by negotiation between
executives who have authority to settle the controversy.
21.6.1 Any party may give the other party written notice of any
dispute not resolved in the normal course of business. Within 15 days after
delivery of the notice, the receiving party shall submit to the other a written
response. The notice and the response shall include (a) a statement of each
party's position and a summary of arguments supporting that position, and (b)
the name and title of the executive who will represent that party and of any
other person who will accompany the executive. Within 15 days after delivery of
the disputing party's notice, the executives of both parties shall meet at a
mutually acceptable time and place, and thereafter as often as they reasonably
deem necessary, to attempt to resolve the dispute.
21.6.2 If the matter has not been resolved within 30 days of the
disputing party's notice, or if the parties fail to meet within 15 days, either
party may initiate mediation of the controversy or claim as provided
hereinafter.
37
<PAGE>
21.6.3 If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the dispute by
mediation under the then current CPR Model
______________
* Confidential information has been omitted and filed separately with the
Commission pursuant to Rule 24b-2.
38
<PAGE>
Procedure for Mediation of Business Disputes. The neutral third party will
be selected from the CPR Panel of Neutrals as an individual with industry
knowledge in the software industry, unless the parties otherwise agree. If
the dispute has not been resolved within 60 days after the commencement of
mediation, either party may take such other actions as are available under
applicable law. Notwithstanding any other provision of this paragraph 21.6,
each party shall be entitled at any time to seek any and all legal and
equitable remedies necessary to preserve the status quo pending the mediation.
21.6.4 This paragraph 21.6 shall have no application to disputes
relating to the Renewal Term and End Term fees and fee determination procedures
set forth in this Agreement.
21.7 If litigation or other action is commenced between MDBS and any
Fourth Shift Entity concerning any dispute arising out of or relating to this
Agreement, the prevailing party will be entitled, in addition to any other award
that may be made, to recover all court costs or other official costs and all
reasonable expenses, including without limitation reasonable attorney's fees and
expenses.
21.8 Each party acknowledges that in the course of dealings between
the parties, each may acquire information about the other's business activities
and operations, technical information and trade secrets, including but not
limited to computer programs and the terms of this Agreement (the "Confidential
Information"). Confidential Information shall not include information generally
available to or known by the public, information independently developed outside
the scope of this Agreement, information not subject to any obligation of
confidentiality which is already known by the receiving party, or, in general,
the existence of this Agreement. Each party shall hold all such Confidential
Information in strict confidence and shall not reveal
39
<PAGE>
the same except pursuant to a court order. The Confidential Information
shall be safeguarded with at least as great a degree of care as each party
holds its own most confidential materials or data relating to its own
business, but in no event less than a reasonable degree of care.
21.9 Notices required by this Agreement are effective only if
written and delivered by certified mail to the contact person and address
shown below, or to such other persons and addresses as the parties may
subsequently agree upon in writing:
21.9.1 For MDBS: Micro Data Base Systems, Inc.
Attn: General Counsel
P.O. Box 2438
West Lafayette, IN 47906
21.9.2 For Fourth Shift: Fourth Shift Corporation
Attn: General Counsel
7900 International Drive
Minneapolis, MN 55425
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by a duly authorized officer of each party hereto.
Date: June 30, 1998 Fourth Shift Corporation
-------------------
/s/ David G. Latzke
-------------------
By: David G. Latzke
Its: VP & CFO
Date: June 30, 1998 Micro Data Base Systems, Inc.
-------------------
/s/ J. David Cicardo
--------------------
By: J. David Cicardo
Its: Executive Vice President
40
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