SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
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.)
-------------------------
TWO MERIDIAN CROSSINGS
MINNEAPOLIS, MN 55423
(612) 851-1500
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
The number of shares outstanding of the Registrant's Common Stock on August 12,
1999 was 10,511,652 shares.
FOURTH SHIFT CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------------------------------------------------
Item 1. Financial Statements:
Consolidated Balance Sheets at 2
June 30, 1999 and December 31, 1998
Consolidated Statements of Operations 3
for the three months and six months ended
June 30, 1999 and 1998
Consolidated Statements of Cash Flows 4
for the six months ended June 30, 1999
and 1998
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 16
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 10,564 $ 10,073
Short-term investments............................................. 1,239 -
Accounts receivable, net........................................... 13,626 13,863
Inventories........................................................ 104 91
Prepaid expenses................................................... 1,210 1,096
--------- ---------
Total current assets..................................... 26,743 25,123
FURNITURE, FIXTURES AND EQUIPMENT, net........................................ 4,409 4,584
RESTRICTED CASH............................................................... 215 465
ACQUIRED SOFTWARE AND GOODWILL, net........................................... 1,915 -
SOFTWARE DEVELOPMENT COSTS, net............................................... 3,195 3,229
--------- ---------
TOTAL ASSETS $ 36,477 $ 33,401
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations................................. $ 904 $ 1,099
Revolving credit facility................................................ 1,200 -
Accounts payable......................................................... 2,836 2,501
Accrued expenses......................................................... 6,775 8,377
Deferred revenue......................................................... 13,714 13,510
--------- ---------
Total current liabilities......................................... 25,429 25,487
LONG-TERM OBLIGATIONS......................................................... 1,738 835
SHAREHOLDERS' EQUITY:
Common stock............................................................. 104 102
Additional paid-in capital............................................... 32,385 31,591
Deferred compensation.................................................... (373) (417)
Accumulated other comprehensive income (losses).......................... 5 (266)
Accumulated deficit...................................................... (22,811) (23,931)
--------- ---------
Total shareholders' equity........................................ 9,310 7,079
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,477 $ 33,401
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated
financial statements.
2
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
REVENUE:
Software license ................................. $ 5,386 $ 7,061 $ 10,817 $ 12,394
Service .......................................... 11,276 9,133 22,315 17,330
Third-party software and other ................... 1,091 1,134 1,598 2,034
--------- --------- --------- ---------
Total revenue .......................... 17,753 17,328 34,730 31,758
--------- --------- --------- ---------
OPERATING EXPENSES:
Cost of licenses ................................. 902 1,486 1,692 2,440
Cost of services ................................. 5,525 4,566 10,734 8,529
Cost of third-party software and other ........... 784 817 1,089 1,489
Selling, general and administrative .............. 7,694 7,901 15,492 15,030
Product development .............................. 2,166 1,887 4,285 3,695
--------- --------- --------- ---------
Total operating expenses ............... 17,071 16,657 33,292 31,183
Operating income ............................................. 682 671 1,438 575
Interest expense, net ........................................ (28) (152) (74) (283)
Other income (expense), net .................................. (15) 20 (42) (29)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES ....................... 639 539 1,322 263
Provision for income taxes ....................... 102 194 282 229
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ............................ 537 345 1,040 34
NET GAIN ON SALE OF DISCONTINUED OPERATIONS .................. 50 66 80 134
--------- --------- --------- ---------
NET INCOME ................................................... $ 587 $ 411 $ 1,120 $ 168
--------- --------- --------- ---------
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Continuing operations income per share .................. $ 0.06 $ 0.03 $ 0.10 $ 0.01
Discontinued operations income per share ................ 0.00 0.01 0.01 0.01
--------- --------- --------- ---------
Net income per share .................................... $ 0.06 $ 0.04 $ 0.11 $ 0.02
--------- --------- --------- ---------
--------- --------- --------- ---------
SHARES USED IN BASIC AND DILUTED PER COMMON SHARE COMPUTATION:
Basic ............................................ 10,126 9,904 10,118 9,903
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted .......................................... 10,635 9,980 10,735 9,950
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated
financial statements.
3
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
-------------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income .......................................................... $ 1,120 $ 168
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................. 2,247 1,655
Gain on sale of discontinued operations ........................ (80) (134)
Deferred compensation .......................................... 44 --
Other .......................................................... -- 11
Change in current operating items:
Accounts receivable, net .................................. 973 (196)
Inventories ............................................... 22 382
Prepaid expenses .......................................... (114) (254)
Accounts payable .......................................... 181 (1,862)
Accrued expenses .......................................... (1,432) (871)
Deferred revenue .......................................... (12) 2,276
--------- ---------
Net cash provided by operating activities ...................... 2,949 1,175
--------- ---------
INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment ....................... (252) (189)
Proceeds from sale of furniture, fixtures and equipment ............. 44 --
Purchases of short-term investments.................................. (1,239) --
Cash released from restrictions ..................................... 250 250
Proceeds from sale of discontinued operations ....................... 86 718
Capitalized software development costs .............................. (972) (334)
Payments for acquisitions ........................................... (1,200) --
--------- ---------
Net cash provided by (used in) investing activities ............ (3,283) 445
--------- ---------
FINANCING ACTIVITIES:
Payments of long-term obligations ................................... (692) (1,194)
Proceeds from refinancing of equipment facility ..................... 538 --
Payments of equipment facility ...................................... (538) --
Borrowings on line of credit ........................................ 1,200 500
Payments on line of credit .......................................... -- (272)
Proceeds on issuance of common stock ................................ 317 27
--------- ---------
Net cash provided by (used in) financing activities ............ 825 (939)
--------- ---------
Net change in cash and cash equivalents ........................ 491 681
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................. 10,073 5,758
--------- ---------
End of period ................................................... $ 10,564 $ 6,439
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during each period for-
Income taxes .............................................. $ 10 $ --
Interest .................................................. 152 307
--------- ---------
--------- ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases .................................................. $ 630 $ 92
Common stock and long term obligations issued as part of acquisition 1,249 --
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated
financial statements.
4
FOURTH SHIFT CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. The accompanying interim consolidated financial statements have been
prepared by Fourth Shift Corporation (the "Company"), without audit, in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission.
The unaudited consolidated financial statements as of June 30, 1999 and
1998 and for the three month and six month periods then ended include, in the
opinion of management, all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial results for the
respective interim periods. The results of operations for the three month and
six month periods ended June 30, 1999 are not necessarily indicative of results
of operations to be expected for the entire fiscal year ending December 31,
1999. 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, 1998. Accordingly, certain
footnote disclosures that would substantially duplicate the disclosures
contained in the December 31, 1998 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, 1998 and the notes thereto.
2. Other comprehensive income was $271,000 for the six months ended June
30, 1999. For the six months ended June 30, 1998, other comprehensive losses
were $17,000. These amounts result from translation of the Company's foreign
operations.
3. Effective June 30, 1999, the Company acquired all of the outstanding
capital stock of Computer Aided Business Solutions, Inc. ("CABS"), a developer
of software solutions for manufacturing companies, for approximately $1,200,000
in cash; 130,000 shares of common stock which had a market value of
approximately $479,000 at the time of acquisition; and $1,000,000 payable in
equal installments of $250,000 due on December 31, 2000, 2001, 2002 and 2003.
The installment payments are non-interest bearing and the Company has recorded
the payments at present value, in the amount of $769,000.
In addition, the Company may be required to make additional payments
of up to $1,500,000 to the shareholder based on the attainment of certain
operating results for the year ended December 31, 1999. If the operating
results are attained, these additional payments will be recorded as an
adjustment to the purchase price at the time the amount becomes known.
This acquisition has been accounted for under the purchase method.
Accordingly, the purchase price has been allocated to identifiable tangible and
intangible assets acquired and liabilities assumed based on their estimated fair
values. Goodwill is the excess of cost over net assets acquired and will be
amortized on a straight-line basis over seven years. The consolidated statement
of operations will reflect the results of operations of the purchased company
beginning July 1, 1999.
5
The following unaudited pro forma summary presents the Company's
results of operations as if the acquisition was consummated on
January 1, 1999. This summary is provided for informational purposes only. It
does not necessarily reflect the actual results that would have occurred had
the acquisitions been made as of those dates or of results that may occur in the
future.
Six months ended June 30,
1999 1998
---- ----
(unaudited)
(in thousands, except per share data)
Revenues $36,393 $33,005
Operating Income 1,739 832
Net income 1,357 295
Basic and Dilluted Earnings per share $0.13 $0.03
4. On June 30, 1999, the Company entered into a OEM licensing agreement
with a leading customer relationship management software vendor. As part of
the agreement, the Company will pay a minimum license royalty of $500,000 for
the contract year ending June 30, 2000 and $1,000,000 for each of the
following four contract years.
5. In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," certain software
development costs are capitalized upon the establishment of technological
feasibility. Costs incurred prior to the establishment of technological
feasibility and development costs incurred to improve and enhance existing
software are charged to expense as incurred.
In the second quarter of 1999, the Company capitalized $585,000 of
development costs relating to future releases of MSS for OBJECTS and amortized
$398,000 of previously capitalized technology. In the six month period ended
June 30, 1999, the Company capitalized $972,000 of development costs and
amortized $796,000 of previously capitalized technology. In conjunction with
development planning, the Company evaluates previously capitalized development
and in the three month period ended June 30, 1999, the Company expensed $210,000
of previously capitalized technology that was no longer aligned with the
Company's current product strategy.
In the second quarter of 1998, the Company capitalized $334,000 of
software development costs, amortized $5,000 of previously capitalized
technology and expensed $348,000 of capitalized software development costs
that were no longer aligned with the Company's product strategy. In the first
quarter of 1998, the Company capitalized no software development costs and
recorded no amortization expense.
6. 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 509,000 shares for three month
period ended June 30, 1999 and 617,000 shares for the six month period ended
June 30, 1999. The dilutive effect of the stock options for the three month
period ended June 30, 1998 was 76,000 shares, compared to 47,000 shares for
the six month period ended June 30, 1998.
6
7. The Company has three operating segments: Americas, Europe and Asia.
Financial information by operating segment as of June 30 for the three month
and six month periods then ended is as follows (in thousands):
Americas Europe Asia Eliminations Consolidated
-------- -------- ------- ------------ ------------
Three month period ended
June 30, 1999:
Revenue $12,999 $3,214 $1,540 - $17,753
Net income (loss) 853 14 (280) - 587
Six month period ended
June 30, 1999:
Revenue 25,052 6,405 3,273 - 34,730
Net income (loss) 1,343 (4) (219) - 1,120
Segment assets at
June 30, 1999 34,538 4,127 3,092 (5,280) 36,477
Three month period ended
June 30, 1998:
Revenue $12,588 $2,941 $1,799 - $17,328
Net income (loss) 475 6 (70) - 411
Six month period ended
June 30, 1998:
Revenue 23,319 5,357 3,082 - 31,758
Net income (loss) 493 19 (344) - 168
Segment assets at
June 30, 1998 25,538 4,340 3,087 (2,781) 30,184
7
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, 1998.
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, availability of new products 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;
- - The ability of the Company to effectively integrate newly acquired or
licensed products with MSS and to train and incent its sales and marketing
staff to sell such products;
- - Fluctuations in quarterly operating results caused by changes in the
computer industry, buying patterns and general economic conditions;
- - The effect of year 2000 buying patterns on revenue from licensing of its
MSS product;
- - The ability of the Company to successfully develop its MSS product to
continue 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 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.
8
RESULTS OF OPERATIONS
NET INCOME. The Company recorded net income of $587,000 or $.06 per
share for the quarter ended June 30, 1999, compared to net income of $411,000 or
$.04 per share for the quarter ended June 30, 1998. For the six month period
ended June 30, 1999, the Company recorded net income of $1,120,000 or $.11 per
share compared to net income of $168,000 or $.02 per share for the same period
ended June 30, 1998. The improved net income primarily resulted from growth in
service revenue and control over selling, general and administrative expenses.
TOTAL REVENUE increased 2% to $17,753,000 during the three months ended
June 30, 1999 from $17,328,000 during the comparable period in 1998. For the six
month period ended June 30, 1999, total revenue increased 9% to $34,730,000 from
$31,758,000 during the comparable period in 1998, as outlined below.
SOFTWARE LICENSE REVENUE are fees paid by customers for the right to
use the Company's software systems. Software license revenue decreased 24%
to $5,386,000 from $7,061,000 during the same quarter in 1998. Software
license revenue for the six month period ended June 30, 1999 decreased 13% to
$10,817,000 from $12,394,000 during the same period in 1998. At the regional
level, license revenue declined 16% in the Americas, 1% in Europe and 10% in
Asia for the six month period ended June 30, 1999 compared to the same period in
1998. We believe the year 2000 planning cycle has softened current demand for
enterprise software solutions, resulting in a decline in software license
revenue and increased competition.
On June 30, 1999, the Company acquired Computer Aided Business
Solutions, Inc. ("CABS"), a Colorado corporation that sells a series of software
products that are complementary to the Company's products, and that assist in
e-commerce applications. The Company expects the acquisition to result in
increased software license revenue during future periods.
On June 30, 1999, the Company also entered into an OEM licensing
agreement with a leading customer relationship management software vendor
that provides the Company the right to license the customer relationship
management product with the Company's products.
SERVICE REVENUE includes customer support fees, training, consulting,
installation and project management. Service revenue increased 23% to
$11,276,000 from $9,133,000 during the same quarter in 1998. For the six month
period ended June 30, 1999, service revenue increased 29% to $22,315,000 from
$17,330,000 during the same period in 1998. Service revenues showed strong
growth due to sustained license revenue growth in 1998. A major portion of
professional services are purchased in the three to six months following the
licensing of the software. In addition, service revenue continues to benefit
from the Company's ongoing efforts to expand, standardize and promote its
professional services offerings.
THIRD-PARTY SOFTWARE 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 decreased 4% to
$1,091,000 in the second quarter of 1999 from $1,134,000 during the same quarter
in 1998. For the six month period ended June 30, 1999, third-party software and
other revenue decreased 21% to $1,598,000 from $2,034,000 during the same period
in 1998. This decrease is primarily related to the decrease in software license
revenue in the Americas, since third-party software is often licensed in
conjunction with the licensing of the MSS product in the Americas.
9
COST OF LICENSES decreased to $902,000 in the second quarter of 1999
from $1,486,000 in the same period of 1998. For the six month period ended June
30, 1998, costs of licenses decreased to $1,692,000 from $2,440,000 in the same
period in 1998. As a percentage of total license revenue, cost of licenses was
16% in the six month period ended June 30, 1999 compared to 20% for the prior
year comparable period. The decrease in the cost of licenses as a percentage of
license revenue is primarily due to realization of cost savings related to a
long-term contract entered into in the second quarter of 1998 with the supplier
of a product embedded in and distributed with the MSS product. In future periods
these decreased costs as a percent of revenue may be offset by costs relating to
an OEM licensing agreement with a leading customer relationship management
software vendor. In addition, the Company expensed $350,000 of database software
inventory in the second quarter of 1998 in conjunction with the execution of
this long-term contract.
COST OF SERVICES increased to $5,525,000, for the three months ended
June 30, 1999 from $4,566,000, for the same period of 1998. For the six month
period ended June 30, 1999, cost of services as a percent of service revenue was
48%, compared to 49% in the same period in 1998. The decrease in the cost of
services as a percent of revenue is due to improved customer support margins
resulting from productivity improvements and high levels of customer support
renewals. This was partially offset by lower margins in consulting and training
services due to pricing pressures.
COST OF THIRD-PARTY SOFTWARE AND OTHER decreased to $784,000 in the
second quarter of 1999 from $817,000 in the same period of 1998. For the six
month period ended June 30, 1999, cost of third-party software and other
decreased to $1,089,000 from $1,489,000 for the same period in 1998. For the six
month period ended June 30, 1999, cost of third-party software and other as a
percent of third-party software and other revenue was 68%, down from 73% for the
same period in 1998. The decrease in cost of third-party software as a
percentage of third-party software revenue is due to changes in the mix of
software products sold in the quarter.
SELLING, GENERAL AND ADMINISTRATIVE was $7,694,000, or 43% of total
revenue, for the three month period ended June 30, 1999, down from $7,901,000,
or 46% of total revenue, for the three month period ended June 30, 1998.
Selling, general and administrative expense for the six month period ended June
30, 1999 was $15,492,000 or 45% of total revenue, from $15,030,000 or 47% of
total revenue for the same period in 1998. The increase in terms of absolute
dollars reflects the addition of sales and marketing personnel and related
commissions earned in connection with the Company's expanded market penetration.
The decrease of selling, general and administrative expenses as a percent of
revenue in the six month period ended June 30, 1999 reflects the Company's
focused efforts to control expenses as total revenues grow.
PRODUCT DEVELOPMENT expense for the three months ended June 30, 1999
increased to $2,166,000 from $1,887,000 for the three months ended June 30,
1998. For the six month period ended June 30, 1999, product development expense
increased to $4,285,000 from $3,695,000 from the comparable period in 1998. As a
percentage of total revenue, product development increased to 12% in the second
quarter of 1999 from 11% during the same period in 1998 and remained constant at
12% for the six month periods ended June 30, 1999 and 1998.
In the second quarter of 1999, the Company capitalized $585,000 of
development costs relating to future releases of MSS for OBJECTS and
amortized $398,000 of previously capitalized technology. In the six month
period ended June 30, 1999, the Company capitalized $972,000 of development
costs and amortized $796,000 of previously capitalized technology. In
conjunction with development planning, the Company evaluates previously
capitalized development and in the three month period ended June 30, 1999,
the Company expensed $210,000 of previously capitalized technology that was
no longer aligned with the Company's current product strategy.
10
During the second quarter in 1998, the Company capitalized $334,000 of
development costs, amortized $5,000 of previously capitalized technology and
expensed $348,000 of capitalized software development costs that were no
longer aligned with the Company's product strategy.
For the six month period ended June 30, 1999, the Company capitalized
$972,000 of development costs and amortized $796,000 of previously capitalized
technology. In the first quarter of 1998, the Company capitalized no software
development costs and recorded no amortization expense.
PROVISION FOR INCOME TAXES. The provision for income taxes for the
three and six months ended June 30, 1999 and 1998 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 six months ended June 30, 1999, the Company's cash, cash
equivalents and short-term investments increased $1,730,000 to $11,803,000.
The Company's operating activities provided cash flows of $2,949,000
during the six month period ended June 30, 1999. Net income adjusted for noncash
items and discontinued operations resulted in a cash source of $3,331,000. The
collection of receivables generated $973,000 of cash. In addition, the Company's
accounts payable increased, generating $181,000 of cash. These sources were
offset by a reduction in accrued expenses, resulting in a use of $1,432,000 of
cash. The decrease in accrued expenses resulted from lower accrued commissions
and bonuses due to decreases in license revenues.
Investing activities used $3,283,000 of cash for the six months
ended June 30, 1999. This includes $1,200,000 for acquisition payments,
$252,000 for the purchase of furniture, fixtures and equipment, $1,239,000 for
purchases of short-term investments and $972,000 of capitalized development
costs. This was offset by a decrease in the restricted cash balance of
$250,000.
Financing activities provided $825,000 of cash during the six months
ended June 30, 1999. The primary source of cash was $1,200,000 borrowings on the
line of credit to finance the CABS acquisition payment and proceeds on issuance
of common stock of $317,000. This was offset by payments of $692,000 for
principal payments on the Company's capital lease obligations. In addition, the
Company refinanced $538,000 of its equipment facility in a cash flow neutral
transaction.
The Company has capital commitments with respect to software that it
embeds and sells with its software, and third party software that it has agreed
to distribute. Under the remaining three years of an agreement with a database
supplier, the Company has a $9,000,000 commitment that it pays in equal monthly
installments. The company has also entered into a commitment to pay minimum
licensing royalties of $500,000 for the contract year ending June 30, 2000, and
$1,000,000 for each of the following four contract years.
As part of the CABS acquisition, the Company issued 130,000 shares of
its common stock and entered into an agreement to pay four equal installments of
$250,000 due on December 31, 2000, 2001, 2002 and 2003.
The Company does not have any other material scheduled commitments for
capital expenditures. The Company believes that the $11,803,000 of cash, cash
equivalents and short-term investments on hand
11
at June 30, 1999, together with the Company's available line of credit and
anticipated cash flows from operations will be sufficient to fund operating cash
needs over the next twelve months. At June 30, 1999, the Company was in
compliance with all related financial performance covenants under the bank line
of credit. If the above sources of cash are not sufficient to fund operations,
the Company may need to seek additional funds through equity or debt financing.
OTHER
The Company 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 ready. 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 readiness in early 1998. Areas of concern have been
corrected and the process used to test for year 2000 readiness has been
certified by the Information Technology Association of America to meet the
information technology industry's best software development practices for
addressing the year 2000 issue. All concerns for the Company's internal use of
the software were addressed through the normal course of development of the
product. There has been no material financial impact for the cost of these
corrections. The Company's Payroll and Human Resource systems were updated in
the third quarter of 1998 and are currently year 2000 ready. 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 ready. All other third-party IT
systems sold by the Company and used in its internal operations are year 2000
ready.
The Company has assessed the year 2000 impact on its non-IT systems and
has purchased a software package to use in testing the Company's hardware and
equipment. The Company had tested substantially all of the hardware by the end
of the second quarter of 1999. No material concerns were discovered during the
testing.
The Company is in the process of assessing the impact of non-compliant
vendors. To date the Company has not identified any significant suppliers who
will not be year 2000 ready.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. Certain sales made through certain foreign subsidiaries are
denominated in the subsidiaries' functional currencies. The effect of foreign
currency exchange rate fluctuations versus the U.S. Dollar on these revenues
is largely offset to the extent expenses of the foreign subsidiary are
incurred and paid for in that same currency. None of these foreign operations
have significant receivables, obligations or commitments denominated in
currencies other than these operations' functional currencies.
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The Company does not have any foreign currency swaps or derivatives and is
not subject to material foreign currency exchange risk. There have been no
significant changes in qualitative and quantitative risks since December 31,
1999. The Company had $1,359,000 of foreign currency on June 30, 1999 in its
China operations. The currency in China is controlled by the Chinese
government and although no major fluctuations have significantly impacted the
Company, the risk does exist that the Chinese government may devalue the
currency which would impact the financial position of the Company's
subsidiary in China.
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PART II - OTHER INFORMATION
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) The Company issued 130,000 shares of its common stock, $.01 par
value, on June 30, 1999 to the sole shareholder of Computer Aided
Business Solutions, Inc. as part of the purchase price for the
outstanding capital stock of CABS. Such shares were valued at the
closing price of the Company's common stock on June 30 ($3 11/16) for
such purposes. The Company relied on the exemption contained in section
4(2) of the Securities Act of 1933 for such issuance.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Fourth Shift Corporation was held
at 3:30 p.m. on Tuesday, May 4, 1999. Shareholders holding 9,087,614 shares, or
approximately 88% of the outstanding shares, were represented at the meeting by
proxy or in person. Matters submitted at the meeting for vote by the
shareholders were as follows:
a. Election of Directors
The following nominees were elected to serve as members of the Board of
Directors until the annual meeting of shareholders in 2002 or until such time as
a successor may be elected:
TABULATION OF VOTES
-------------------
FOR WITHHELD
------------------------
Jimmie H. Caldwell 8,759,459 328,155
Mark W. Sheffert 8,737,467 350,147
b. Approval of amendment to 1993 Stock Incentive Plan
Shareholders approved an amendment to the Company's 1993 Stock
Incentive Plan increasing the number of shares of common stock reserved for
issuance thereunder by 750,000 shares by a vote of 5,806,454 shares, or 56%, of
outstanding shares in favor, 821,883 shares against, 35,371 shares abstained,
and 2,423,906 shares not voted.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Stock Purchase Agreement between Fourth Shift Corporation and
shareholder of Computer Aided Business Solutions, Inc.
(incorporated by
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reference to Exhibit 2.1 to the current report on Form 8-K
dated July 8, 1999 (file no. 0-21992)
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on June 30,
1999 reporting the acquisition of all of the outstanding
shares of common stock of Computer Aided Business Solutions,
Inc.
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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
August 13, 1999
/s/ DAVID G. LATZKE
--------------------------------
David G. Latzke
Vice President and Chief Financial Officer
(principal financial officer)
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