FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
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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: 1-5513
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TRIDEX CORPORATION
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(Exact name of registrant as specified in its charter)
Connecticut 06-0682273
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
61 Wilton Road, Westport CT 06880
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(Address of principal executive offices)
(Zip Code)
(203) 226-1144
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(Registrant's telephone number, including area code)
Former address:
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(Former name, former address and former fiscal year, if changed since last
report.)
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 |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES |_| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding August 12, 1999
- ----- ---------------------------
Common stock, no par value 6,368,289
TRIDEX CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I. Financial Information:
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the Quarters
and Six Months Ended June 30, 1999 and June 30, 1998 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and June 30, 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition 9
PART II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
EXHIBIT INDEX
Exhibit 11 Computation of Per Share Earnings 16
2
TRIDEX CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Dollars in Thousands)
(Unaudited)
June 30, 1999 December 31, 1998
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,146 $ 18
Receivables 10,880 7,806
Inventories 6,622 7,941
Deferred tax assets 1,092 1,092
Other current assets 326 278
-------- --------
Total current assets 20,066 17,135
-------- --------
Plant and equipment 4,530 4,251
Less accumulated depreciation (2,064) (1,806)
-------- --------
2,466 2,445
-------- --------
Goodwill and intangible assets, net 13,236 13,803
Purchased and internally developed software costs, net 10,979 11,319
Deferred tax assets 8,000 8,000
Other assets 264 251
-------- --------
$ 55,011 $ 52,953
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Bank line of credit $ 5,400 $ 4,756
Current portion of long term debt (Note 5) 2,850 1,650
Accounts payable 7,085 5,875
Accrued liabilities 3,434 2,021
Deferred revenue 640 933
-------- --------
Total current liabilities 19,409 15,235
-------- --------
Long term debt, less current portion (Note 5) 17,675 19,341
Shareholders' equity:
Common stock, no par value 1,634 1,634
Additional paid-in capital 33,928 33,328
Retained deficit (15,869) (14,819)
Receivable from sale of stock (801) (801)
Common shares held in treasury, at cost (965) (965)
-------- --------
17,927 18,377
-------- --------
$ 55,011 $ 52,953
======== ========
See notes to consolidated condensed financial statements.
3
TRIDEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Quarters Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
Net sales $ 19,108 $ 11,813 $ 32,926 $ 18,025
------------------------- -------------------------
Operating costs and expenses:
Cost of sales 14,083 8,621 24,098 13,367
Engineering, design and product development costs 1,158 1,300 1,896 1,580
Selling, administrative and general expenses 2,398 2,262 4,803 3,353
Depreciation and amortization 1,073 899 2,154 1,128
Purchased in-process software technology 17,600 17,600
------------------------- -------------------------
18,712 30,682 32,951 37,028
------------------------- -------------------------
Operating income (loss) 396 (18,869) (25) (19,003)
Other charges (credits):
Interest expense, net 850 562 1,565 336
Other, net (67) 9 (60) 8
------------------------- -------------------------
783 571 1,505 344
------------------------- -------------------------
Loss before income taxes (387) (19,440) (1,530) (19,347)
Benefit for income taxes (63) (6,610) (480) (6,564)
------------------------- -------------------------
Net loss $ (324) $ (12,830) $ (1,050) $ (12,783)
========================= =========================
Loss per share - basic and diluted:
Net loss $ (0.05) $ (2.07) $ (0.16) $ (2.22)
========================= =========================
Weighted average shares outstanding
Basic and diluted 6,368,000 6,187,000 6,368,000 5,771,000
========================= =========================
See notes to consolidated condensed financial statements.
4
TRIDEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Six Months Ended
-------------------
June 30, June 30,
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $ (1,050) $(12,783)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 357 253
Amortization of goodwill and intangible assets 853 522
Amortization of purchased and internally developed software costs 1,065 353
Amortization of debt discount 134 17
Charge for purchased in-process software technology 17,600
Deferred income taxes (6,414)
Gain on sale of assets (180)
Changes in operating assets and liabilities, net of amounts acquired:
Receivables (3,155) (1,559)
Inventory 852 93
Other assets (61) (31)
Accounts payable, accrued liabilities and income taxes payable 2,343 1,930
-------- --------
Net cash provided by (used in) operating activities 1,158 (19)
-------- --------
Cash flows from investing activities:
Purchases of plant and equipment (244) (185)
Capitalized software development costs (725) (109)
Net cash paid for acquisition (44,831)
Proceeds from sale of assets 295 855
-------- --------
Net cash used in investing activities (674) (44,270)
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Cash flows from financing activities:
Proceeds from issuance of long term debt 23,000
Net proceeds from line of credit 644 3,450
Proceeds from issuance of stock 2,000
Principal payments on long term debt (300)
Net decrease in short term investments 4,403
Proceeds from exercise of stock options and warrants 87
-------- --------
Net cash provided by financing activities 644 32,640
-------- --------
Increase (decrease) in cash and cash equivalents 1,128 (11,649)
Cash and cash equivalents at beginning of period 18 11,839
-------- --------
Cash and cash equivalents at end of period $ 1,146 $ 190
======== ========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 1,062 $ 236
Income taxes 50 99
Supplemental disclosures of non-cash investing and financing activities:
Stock issued for acquisition $ 4,998
See notes to consolidated condensed financial statements.
5
TRIDEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. General:
Tridex Corporation ("Tridex" or the "Company"), through its wholly-owned
subsidiaries, Ultimate Technology Corporation ("Ultimate") and Progressive
Software, Inc. ("Progressive"), is a leading provider of Point-of-Sale
("POS") and Back Office enterprise resource management software, systems
integration and related services to the food service and specialty retail
markets.
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly its financial
position as of June 30, 1999, the results of its operations for the
quarters and six months ended June 30, 1999 and June 30, 1998 and changes
in its cash flows for the six months ended June 30, 1999 and June 30,
1998. The December 31, 1998 consolidated condensed balance sheet has been
derived from the Company's audited financial statements at that date.
These interim financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
Revenue includes hardware sales, design, implementation and support of
software systems, and related consultation services. Revenue on hardware
sales is recognized upon shipment to the customer. Revenue on software
sales is recognized in accordance with Statement of Position (SOP) 97-2,
"Software Revenue Recognition". Software license revenues are recognized
when a software contract has been signed, delivery has occurred, fees are
fixed and determinable and collectibility is probable. Maintenance
revenues are deferred and recognized ratably over the maintenance period,
generally one year.
Although the Company has experienced significant growth in revenues during
the past six months, the Company does not believe such growth is
necessarily indicative of future operating results and there can be no
assurance that the Company will be profitable on a quarterly or annual
basis. In addition, the Company expects increased competition and intends
to continue to invest in software development. Future operating results
will depend on many factors, including demand for the Company's products,
the level of product competition, competitor pricing, the size and timing
of significant orders, the ability of the Company to develop, introduce
and market new products on a timely basis and changes in levels of
operating expenses.
2. Acquisition of Progressive Software, Inc.:
The Company purchased Progressive on April 17, 1998 and accounted for the
acquisition by the purchase method. Accordingly, the results of operations
of Progressive have been included in the accompanying consolidated
financial statements from the date of acquisition.
The purchase price of Progressive was $47,594,000 including acquisition
costs. The consideration paid for Progressive was comprised of 714,000
shares of Tridex common stock valued at $4,998,000 and the balance in
cash. The cash portion of the purchase price was financed by: (a)
$12,000,000 borrowed under a senior term loan from Fleet National Bank
("Fleet"), (b) $11,000,000 proceeds from the sale of senior subordinated
notes to Massachusetts Mutual Life Insurance Company and certain
affiliates (the "MassMutual Investors"), (c) $2,000,000 proceeds from the
sale of 285,714 shares of Tridex common stock to the MassMutual Investors,
(d) $1,736,000 borrowed under a working capital facility with Fleet, and
(e) the balance from the Company's cash and short term investments. The
Company also issued to the MassMutual Investors stock purchase warrants
for 350,931 shares of common stock at an exercise price of $7.00 per
share. The value of the warrants of $1,228,000 was recorded as a discount
to the principal amount of the outstanding notes and is being amortized to
interest expense over the term of the notes using the interest rate
method. See note 5 for further discussion of the Company's obligations to
Fleet and the MassMutual Investors and the warrant issued to the
MassMutual Investors.
The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values. The tangible net assets
consisted primarily of accounts receivable, inventory, equipment and
leasehold improvements, other assets and liabilities. Intangible assets
consisted of goodwill, existing
6
technology and core technology being amortized over five to ten years.
Based upon a valuation prepared by an independent technology consulting
firm, $17,600,000 of the purchase price was allocated to in-process
technology that had not reached technological feasibility, had no
alternative future use, and for which successful development was
uncertain. Accordingly, in the second quarter of 1998 the Company recorded
a one-time charge in the amount of $17,600,000.
The following unaudited pro forma data reflect the acquisition of
Progressive as if the acquisition had occurred at the beginning of 1998,
but exclude the one-time charge for in-process software technology,
discussed above. The pro forma financial information is not necessarily
indicative of the combined results that would have occurred had the
acquisition taken place at the beginning of the period, nor is it
necessarily indicative of the results that may occur in the future.
Quarter Ended Six Months Ended
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June 30, 1998 June 30, 1998
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(Dollars in thousands, except per share amounts)
Sales $ 13,362 $ 24,491
Operating loss (1,417) (2,684)
Net loss (1,402) (2,674)
Loss per share - basic: $ (0.23) $ (0.42)
3. Earnings (loss) per common share:
Basic earnings (loss) per common share is based on the weighted average
number of common shares outstanding during the period. Diluted earnings
per common share assumes the exercise of options and warrants and the
conversion of dilutive securities, when the result is dilutive.
4. Inventories:
Components of inventory are:
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in Thousands)
Raw materials and component parts $ 2,663 $ 3,011
Work-in-process 29 37
Finished goods 3,930 4,893
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$ 6,622 $ 7,941
============= =================
5. Bank credit agreement and long term debt:
The components of long term debt are:
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in thousands)
Term loan payable $ 11,100 $ 11,100
Senior subordinated notes, net of
discount 9,425 9,891
------------- -----------------
20,525 20,991
Less: current portion 2,850 1,650
------------- -----------------
$ 17,675 $ 19,341
============= =================
On April 17, 1998, the Company entered into a Credit Agreement (the
"Credit Agreement") with Fleet. The Credit Agreement is secured by a first
priority security interest in substantially all of the Company's assets
and restricts the amount available for payment of cash dividends and
capital stock distributions. The original terms of the Credit Agreement
provided for an $8 million working capital facility (the "Working Capital
Facility") and a $12 million term loan facility (the "Term Loan"). The
Credit Agreement allowed the Company to borrow at interest rates based
upon Fleet's prime rate, plus a margin of up to one percentage point,
depending upon certain performance criteria. At the Company's option, it
could borrow at interest rates based upon LIBOR, plus a margin ranging
from 1.25 to 2.75 percentage points, depending upon certain performance
criteria. Interest on prime rate-based loans is payable monthly. Interest
on LIBOR-based loans is payable at the end of the LIBOR measuring period.
At June 30, 1999 the interest rate on outstanding Credit Agreement debt
was approximately 8.865%. The Working Capital Facility bears a
non-utilization fee
7
on the unused facility ranging from .25% to .625% depending upon certain
performance criteria. The Term Loan requires the Company to make quarterly
principal payments commencing June 30, 1998 in the amount of $300,000 per
quarter during the first year, $450,000 per quarter during the second year
and $750,000 per quarter through termination on March 31, 2003. The Credit
Agreement, as originally executed, imposed certain financial covenants,
including minimum tangible capital base, maximum ratio of senior funded
debt to EBITDA, maximum ratio of total consolidated funded debt to EBITDA,
minimum interest coverage ratio and minimum fixed charge coverage ratio.
As of December 31, 1998, the Company was not in compliance with the
covenants related to the ratio of senior funded debt to EBITDA, the ratio
of total consolidated funded debt to EBITDA, the interest coverage ratio
and the fixed charge coverage ratio. On March 30, 1999, Fleet agreed to
waive the non-compliance as of December 31, 1998 and to amend the
covenants. The amended covenants require the Company to maintain a minimum
interest coverage ratio and a minimum net worth. In addition, the
amendment imposes a temporary reduction of $2,000,000 in the availability
under the Working Capital Facility and increases the interest rate by one
percentage point. The amendment allows the Company to defer its March 31,
1999 term loan payment of $300,000 to June 30, 1999. The Company incurred
a fee of $50,000 payable to Fleet for this amendment. Fees to amend the
Credit Agreement are being amortized over the remaining term of the
agreement. As of June 30, 1999, the Company was in compliance with the
covenants and expects to be in compliance through the end of the year. On
June 30, 1999, the working capital facility with Fleet was extended to
September 30, 1999 and the term loan payments scheduled for March 31, 1999
and June 30, 1999 were deferred to September 30, 1999. Fees of up to
$80,000 will be paid to Fleet during the term of this amendment. The
Company is in discussions with Fleet to continue the facility and with
other financial institutions to replace the facility.
On April 17, 1998, in conjunction with the acquisition of Progressive, the
Company sold to the MassMutual Investors $11 million of the Company's
senior subordinated notes due April 17, 2005 (the "Notes"). The Notes bear
interest at 12% payable quarterly on the 17th day of January, April, July
and October. The Notes require prepayments of $3,666,667 on each of April
17, 2003 and April 17, 2004. The Notes, as originally issued, imposed
certain financial covenants, including minimum consolidated net worth,
minimum fixed charge coverage ratio and maximum leverage ratio. The
Company issued to the MassMutual Investors on May 27, 1998 warrants to
purchase 350,931 shares of the Company's common stock at $7.00 per share.
The estimated fair market value of the warrants of $1,228,000 was recorded
as a discount to the principal amount of the outstanding Notes and is
being amortized to interest expense over the term of the Notes using the
interest rate method.
As of December 31, 1998, the Company was not in compliance with the
covenants related to the fixed charge coverage ratio and the leverage
ratio. On March 26, 1999, the MassMutual Investors agreed to waive the
non-compliance as of December 31, 1998 and to amend the financial
covenants. The amended covenants require the Company to maintain a minimum
interest coverage ratio and a minimum net worth. The amendment allows the
Company to defer its April 17, 1999 interest payment of $330,000 to July
17, 1999. In consideration for the amendment to the Notes and in exchange
for the warrant issued in 1998, on March 29, 1999 the Company issued new
stock purchase warrants to the MassMutual Investors to purchase 800,000
shares of common stock at $2.03125 per share. The incremental estimated
fair value of the new warrants over the estimated fair value of the old
warrants, $600,000, was recorded as additional debt discount and is being
amortized to interest expense over the remaining term of the Notes using
the interest rate method. On June 30, 1999, the MassMutual Investors
agreed to defer the interest payments due on April 17, 1999 and July 17,
1999, each in the amount of $330,000, to October 17, 1999. As of June 30,
1999, the Company was in compliance with the covenants of the Notes and
expects to be in compliance through the end of the year.
6. Commitments and contingencies:
The Company is involved in an environmental matter and legal proceedings
discussed in Note 9 to the consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998. During the quarter ended June 30, 1999, the Company increased its
accruals for these matters by $130,000.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Certain statements included in this report, including, but not limited to,
statements in this Management's Discussion and Analysis of the Results of
Operations and Financial Condition, which are not historical facts may be deemed
to contain forward looking statements with respect to events the occurrence of
which involves risks and uncertainties, including, but not limited to, the
Company's expectations regarding net sales, gross profit, operating income and
financial condition.
Results of Operations
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Consolidated net sales for the quarter ended June 30, 1999 increased $7,295,000
(61.8%) to $19,108,000 from $11,813,000 in the comparable quarter of the prior
year. The increase reflects increased sales at Progressive and greater volume of
shipments of Ultimate's point-of-sale ("POS") component products, particularly
custom manufactured keyboards and pole displays, as well as distributed
products. Progressive's sales also included an enterprise license fee of
approximately $500,000 to a distributor.
Consolidated gross profit increased $1,833,000 (57.4%) to $5,025,000 from
$3,192,000 in the prior year's quarter, as a result of the contribution of
Progressive and greater volume of shipments of Ultimate's POS products.
Consolidated gross profit margin decreased to 26.3% of sales from 27.0% of sales
in the prior year's quarter as a result of the mix of hardware component of
Progressive's sales offset in part by a more favorable product mix and lower
manufacturing costs from Ultimate.
Consolidated engineering, design and product development costs for the current
quarter, at $1,408,000, were at essentially the same level as the prior year's
quarter. Net of amounts capitalized, $250,000 during the quarter and $109,000
during the prior year's quarter, such expenses decreased $142,000 to $1,158,000
from $1,300,000 in the prior year's quarter. Product development projects at
Ultimate include the recently introduced UltimaTouch 5000 POS workstation.
Consolidated selling, administrative and general expenses increased $136,000
(6.0%) to $2,398,000 from $2,262,000 in the prior year's quarter. The increase
in selling expenses reflects the establishment of the indirect channel for
Progressive's products as well as increased expenditures in the marketing of POS
terminal systems at Ultimate. The increase in administrative and general
expenses is primarily the result of increased professional services. General
expenses in the prior year's quarter reflect the inclusion of a non-recurring
charge of approximately $160,000 associated with the due diligence review for a
transaction that was not completed.
Operating expense in the prior year's quarter includes the $17,600,000 write off
of in-process software technology acquired with the purchase of Progressive. The
valuation of in-process software technology is based on estimates of the after
tax net cash flows and gives explicit consideration to the SEC's views on
purchased in-process technology as set forth in a September 9, 1998 letter from
the SEC to the American Institute of Certified Public Accountants. Specifically,
the valuation gives consideration to the following: (I) a fair market value
premise was employed; (II) the value of the core technology was explicitly
addressed, with a view toward ensuring the relative allocations to core
technology and in-process technology were consistent with the relative
contributions of each to the final product; and (III) the allocation to
in-process technology was based on a calculation that considered only the
efforts completed as of the transaction date, and only the cash flow associated
with said completed efforts for one generation of the products currently
in-process.
The one time charge of $17,600,000 recorded in the second quarter of 1998 was
for purchased in-process technology that had not reached technological
feasibility, had no alternative future use, and for which successful development
was uncertain. The conclusion that the in-process development effort, or any
material sub-component, had no alternative future use was reached in
consultation with development personnel at Progressive and an independent
technology consulting firm, acting on behalf of the Company.
9
The in-process development related to a project to develop a Windows(R) NT(R)
compliant POS software product. The primary tasks under development at the time
of acquisition included writing code to work in a Windows environment and
completing various POS and back office functions.
Significant assumptions used to determine the value of in-process technology
included several factors. Among the factors are, first, a forecast of net cash
flows that were expected to result from the development effort. Second, a
percentage of completion estimated by considering a number of factors, including
the costs invested to date relative to the expected total cost of the
development effort and the amount of progress completed as of the transaction
date, on a technological basis, relative to the overall technological
achievements required to achieve the intended functionality of the eventual
product. The technological issues were addressed by engineering representatives
from both Progressive and an independent technology consulting firm engaged by
the Company. Third, a discount rate of approximately 23%, which represents the
Company's risk adjusted weighted average cost of capital, was applied to the
cash flows resulting from the revenues expected to be generated from the IRIS
project.
Consolidated depreciation and amortization for the quarter was $1,073,000
compared to $899,000 in the prior year's quarter. The increase in amortization
is primarily the result of amortizing goodwill, intangibles and existing and
core technology acquired with Progressive.
Consolidated operating income for the current quarter was $396,000 compared to a
loss of $1,269,000 (exclusive of the write-off of in-development software
technology) in the prior year's quarter. The increase in the current period was
primarily the result of increased volume at both Ultimate and Progressive.
Consolidated operating income as a percentage of sales was 2.1% compared to a
loss of 10.7% in the prior year's quarter.
Net interest expense for the quarter was $850,000 compared to $562,000 in the
prior year's quarter. The increase in interest expense is primarily the result
of increased borrowings under the working capital facility and related banking
fees. Interest expense is net of interest income of $26,000 in the current
quarter and $80,000 in the prior year's quarter.
Other income of $67,000 reflects a gain of $180,000 on the sale of the assets of
the ribbon division offset by provisions for costs associated with the
remediation of environmental matters and non-operating properties held for sale.
Benefit for income taxes in the current quarter reflects an estimated effective
tax rate for the quarter. The benefit recorded in the prior year's quarter
reflects the recognition of deferred taxes of $5,814,000 related to the
write-off of in-process software technology.
Net loss for the current quarter was $324,000 (or $0.05 per share), as compared
to a net loss of $12,830,000 (or $2.07 per share) in the prior year's quarter.
The average number of common shares outstanding increased to 6,368,000 shares
from 6,187,000 shares in the prior year's quarter.
10
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Consolidated net sales for the six months ended June 30, 1999 increased
$14,901,000 (82.7%) to $32,926,000 from $18,025,000 in the comparable period of
the prior year. Prior year's sales include the sales of Progressive only from
the date of acquisition, April 17, 1998. The increase in sales reflects record
levels of shipments of Ultimate's products. Progressive's sales were 43% greater
than the full six-month period of the prior year. Progressive's sales also
included an enterprise license fee of approximately $500,000 to a distributor.
Consolidated gross profit increased $4,170,000 (89.5%) to $8,828,000 from
$4,658,000 in the prior year's period, primarily as a result of the contribution
of Progressive and greater volume of shipments of POS products. Consolidated
gross profit margin increased to 26.8% of sales from 25.8% of sales in the prior
year's period as a result of the contribution of software sales from
Progressive.
Consolidated engineering, design and product development costs increased
$932,000 to $2,621,000 from $1,689,000 in the prior year's period. Net of
amounts capitalized, $725,000 during the current period and $109,000 during the
prior year's period, such expenses increased $316,000 to $1,896,000 from
$1,580,000 in the prior year's period. Product development projects at Ultimate
include the recently introduced UltimaTouch 5000 POS workstation.
Consolidated selling, administrative and general expenses increased $1,450,000
(43.2%) to $4,803,000 from $3,353,000 in the prior year's period. The increase
in selling, administrative and general expenses is primarily the result of the
inclusion of such costs for Progressive. General expenses in the prior year's
period include a non-recurring charge of approximately $160,000 associated with
the due diligence review for a transaction that was not completed. Operating
expenses in the prior year include the $17,600,000 write-off of in-process
software technology acquired with the purchase of Progressive.
Consolidated depreciation and amortization for the current period was $2,154,000
compared to $1,128,000 in the prior year's period. The increase in amortization
is primarily the result of amortizing goodwill, intangibles and existing and
core technology acquired with Progressive.
Consolidated operating income (loss) for the current period was a loss of
$25,000 compared to a loss of $1,403,000 (exclusive of the write-off of in
process software technology) in the prior year's period. The loss in the current
period was primarily the result of the increase in selling, administrative and
general expenses. Consolidated operating loss as a percentage of sales was nil
compared to a 7.8% loss in the prior year's period.
Net interest expense for the current period was $1,565,000 compared to $336,000
in the prior year's period. Interest expense of the period consists of interest
on debt incurred to acquire Progressive. The increase in interest expense
reflects such debt being outstanding for the entire period and, to a lesser
extent, to increased borrowings under the working capital facility and related
banking fees. Interest expense is net of interest income of $46,000 in the
current period and $307,000 in the prior year's period.
Other income of $60,000 reflects a gain of $180,000 on the sale of the assets of
the ribbon division offset by provisions for costs associated with the
remediation of environmental matters and non-operating properties held for sale.
Benefit for income taxes in the first six months reflects an estimated effective
tax rate for the year of 31.4%. The benefit recorded in the prior year's period
reflects the recognition of deferred taxes of approximately $5,814,000 related
to the write-off of in-process software technology.
Net loss for the current period was $1,050,000 (or $0.16 per share) as compared
to a net loss of $12,783,000 (or $2.22 per share) in the prior year's period.
The average number of common shares outstanding increased to 6,368,000 shares
from 5,771,000 shares in the prior year's period.
11
Liquidity and Capital Resources
The Company's working capital at June 30, 1999 was $657,000 compared with
$1,900,000 at December 31, 1998. The current ratio was 1.03 : 1.00 at June 30,
1999 and 1.12 : 1.00 at December 31, 1998.
The Company has a credit agreement with Fleet under which Fleet has provided the
Company with a $12.0 million term loan facility and an $8.0 million working
capital revolving credit facility. As of December 31, 1998, the Company was not
in compliance with the covenants related to the ratio of senior funded debt to
EBITDA, the ratio of total consolidated funded debt to EBITDA, the interest
coverage ratio and the fixed charge coverage ratio. On March 30, 1999, Fleet
agreed to waive the non-compliance as of December 31, 1998 and to amend the
covenants. The amended covenants require the Company to maintain a minimum
interest coverage ratio and a minimum net worth. In addition, the amendment
imposes a temporary reduction of $2,000,000 in the availability under the
Working Capital Facility and increases the interest rate by one percentage
point. The amendment allows the Company to defer its March 31, 1999 term loan
payment of $300,000 to June 30, 1999. The Company incurred a fee of $50,000
payable to Fleet for this amendment. Fees to amend the Credit Agreement are
being amortized over the remaining term of the agreement. As of June 30, 1999,
the Company was in compliance with the covenants and expects to be in compliance
through the end of the year. On June 30, 1999, the working capital facility with
Fleet was extended to September 30, 1999 and the term loan payments scheduled
for March 31, 1999 and June 30, 1999 were deferred to September 30, 1999. The
Company is in discussions with Fleet to continue the Working Capital Facility
and with other financial institutions to replace the facility. Based on these
discussions the Company believes it can renew or obtain similar working capital
financing. However, there is no certainty such financing can be obtained, or can
be obtained at similar terms or costs. If similar working capital financing is
not obtained, it would have a material adverse effect on the Company's financial
position and cash flows.
The Notes payable to the MassMutual Investors, as originally issued, imposed
certain financial covenants, including minimum consolidated net worth, minimum
fixed charge coverage ratio and maximum leverage ratio. As of December 31, 1998,
the Company was not in compliance with the covenants related to the fixed charge
coverage ratio and the leverage ratio. On March 26, 1999, the MassMutual
Investors agreed to waive the non-compliance as of December 31, 1998 and to
amend the financial covenants. The amended covenants require the Company to
maintain a minimum interest coverage ratio and a minimum net worth. The
amendment allows the Company to defer its April 17, 1999 interest payment of
$330,000 to July 17, 1999. In consideration for the amendment to the Notes and
in exchange for the warrant issued in 1998, on March 29, 1999 the Company issued
new stock purchase warrants to the MassMutual Investors to purchase 800,000
shares of common stock at $2.03125 per share. The incremental estimated fair
value of the new warrants over the estimated fair value of the old warrants,
$600,000, was recorded as additional debt discount and is being amortized to
interest expense over the remaining term of the Notes using the interest rate
method. On June 30, 1999, the MassMutual Investors agreed to defer the interest
payments due on April 17, 1999 and July 17, 1999, each in the amount of
$330,000, to October 17, 1999. As of June 30, 1999, the Company was in
compliance with the covenants of the Notes and expects to be in compliance
through the end of the year.
At June 30, 1999, the Company had availability of $600,000 under the Working
Capital Facility and no material commitment for capital expenditures. The
Company will continue to invest in software development in the future. The
Company believes that funds generated from operations and borrowings under the
working capital revolving credit facility of the Credit Agreement, if necessary,
will continue to satisfy its working capital needs and allow the Company to meet
its obligations but there can be no assurance that the Company will be able to
generate sufficient cash from those sources to meet its requirements. In the
event that the Company was unable to meet its needs for cash from the sources
described above, the Company will need to obtain equity or debt financing or
reduce its operating expenses and capital expenditures. There can be no
assurance that equity or debt financing would be available to the Company on
favorable terms or at all.
The Year 2000
The Company has identified four areas which could be affected by the Year 2000
issue: Company products, internally used systems and software, products and/or
services provided by key third parties and internal systems used by key
customers.
12
The Company has been performing extensive testing on software products and third
party components used in products sold or licensed by the Company to its
customers. As of this date no significant non-compliance issues have been
identified.
The Company has sent questionnaires to and has received assurances from key
vendors and suppliers that any Year 2000 issues that they suffer will not have a
material adverse effect on the Company. The Company believes that its current
and future communication and actions with key vendors and suppliers will
minimize these risks.
The Company's internal information systems have been updated with new releases
from its vendors to bring these systems into Year 2000 compliance. The Company's
other internal systems used in the development of products and services have
been tested for Year 2000 compliance and the Company has received compliance
certificates from the providers of these systems. The Company will continue to
test these systems throughout 1999 and 2000.
The Company has sent questionnaires to all of its current customers asking for
verification that their systems are Year 2000 compliant and, if not, to identify
those open issues that may have a material adverse effect on the Company.
However, there can be no absolute assurance that customers will convert their
internal systems in a timely manner to avoid a material adverse effect on the
Company. If customers do not resolve their internal Year 2000 process issues,
they may postpone buying decisions in the fourth quarter of 1999 and the first
quarter of 2000. This could have a material adverse effect on the operations,
liquidity, and capital resources of the Company.
The Company has expensed costs as incurred related to the Year 2000 analysis and
remediation process. All costs to finish the Year 2000 effort will be expensed
as incurred and are not expected to have an adverse material effect on the
Company. The Company believes its efforts have identified and corrected the
crucial Year 2000 compliance issues. The Company expects to complete the Year
2000 project by the end of the third quarter and the Company will continue to
test through the remainder of 1999 and the Year 2000. If the Company, its large
customers, its key vendors, and significant suppliers are unable to resolve Year
2000 processing issues in a timely manner, it could have a material adverse
effect on the operations, liquidity, and capital resources of the Company.
13
PART II. OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 19, 1999.
Matters voted upon at the meeting and the number of votes cast for,
against or withheld, are as follows:
(1) To consider and act upon a proposal to elect the following nominees
to be Directors:
Nominee Votes For Votes Against or Withheld
------- --------- -------------------------
Seth M. Lukash 4,864,013 33,174
Paul J. Dunphy 4,864,005 33,182
Graham Y. Tanaka 4,864,219 32,968
Thomas R. Schwarz 4,864,218 32,969
Dennis J. Lewis 4,864,219 32,968
(2) To appoint PricewaterhouseCoopers LLP as the Company's independent
certified public accountants for the year ended December 31, 1999.
Votes cast were: 4,877,024 for, 8,898 against and 11,265 withheld.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 11. Computation of Per Share Earnings
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 16, 1999 to
report that it had amended the Credit Agreement with Fleet and the
Securities Purchase Agreements with the MassMutual Investors.
14
SIGNATURES
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.
TRIDEX CORPORATION
------------------
(Registrant)
August 12, 1999 /s/ Seth M. Lukash
------------------------------------------
Seth M. Lukash
Chairman of the Board, President, Chief
Executive Officer, and Chief Operating
Officer
August 12, 1999 /s/ Daniel A. Bergeron
------------------------------------------
Daniel A. Bergeron
Vice President and Chief Financial Officer
August 12, 1999 /s/ George T. Crandall
------------------------------------------
George T. Crandall
Vice President and Treasurer
15