SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year 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 0-20109
Kronos Incorporated
(Exact name of registrant as specified in its charter)
Massachusetts 04-2640942
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Fifth Avenue, Waltham MA 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 890-3232
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
<PAGE>
State the aggregate market value of the voting stock held by
non-affiliates of the registrant.
Non-Affiliate Voting Aggregate
Date Shares Outstanding Market Value
November 30, 1998 7,725,826 $334,141,975
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Date Class Outstanding Shares
Common Stock, $0.01 par
November 30, 1998 value per share 8,352,889
DOCUMENTS INCORPORATED BY REFERENCE.
The Company's definitive proxy statement dated December 11, 1998 for the Annual
Meeting of Stockholders to be held on January 29, 1999 (Part III - Items
10,11,12 and 13).
<PAGE>
PART I
Item 1. Business
Kronos Incorporated (the "Company" or "Kronos") was organized in 1977
as a Massachusetts corporation. The Company designs, develops, manufactures and
markets frontline labor management systems that enhance productivity in the
workplace. Frontline labor management systems capture, process and deliver
information about employees' time and activities. The Company has expanded its
business from the collection and processing of employee time and labor data to
the development of frontline labor management systems. Kronos' software
processes data for a wide range of activities including time and attendance,
employee scheduling, plant operations management, and decision support.
Kronos(R) systems capture time and work-related information from employees in
the workplace utilizing a variety of data collection technologies including
intelligent data collection terminals that the Company manufactures. In
addition, the systems can interface with related applications and technologies
at many points throughout the enterprise to enable management to optimize their
labor resources. The Company collaborates with industry leading application
vendors that market products that are synergistic to Kronos solutions. These
collaborations include SAP, Oracle, PeopleSoft, Baan, Honeywell, Infinium, J.D.
Edwards, Lawson Software and SMS.
Products and Services
Kronos provides frontline labor management systems that capture,
process and deliver information about employees' time and activities. Kronos'
products include fully integrated software and intelligent data collection
terminals that capture time and work-related data, as well as complementary
integrated software designed to expand the functions of its core products. The
Company's frontline labor management systems are designed for a wide range of
businesses from single-user to large multi-site enterprises. In addition, the
Company maintains an extensive professional service and technical support
organization that is responsible for maintaining systems and providing
professional and educational services. To date, the majority of the Company's
revenues and profits have been derived from its time and attendance applications
and related products and services.
Frontline Labor Management Systems
Kronos' frontline labor management systems are designed to operate
independently or to interface with third party systems. The software
incorporated in Kronos' systems is parameter-driven, which allows it to be
configured upon installation to meet the needs of an individual customer and
reconfigured as customer needs evolve. Currently, the Company offers various
releases of its time and attendance software that run in desktop or
client/server environments. The Company's client/server time and attendance
system runs on Windows 95 and Windows NT, and supports a variety of standard
databases including Oracle, Informix and Microsoft SQL Server. The Company also
offers frontline labor management systems that run on the IBM AS/400 platform.
<PAGE>
Kronos provides a wide range of data collection options to accommodate
various work environments and markets, and to satisfy the price/performance
requirements of its customers. The Company manufactures a family of intelligent
data collection terminals that collect time and attendance and factory-floor
data via keypad, bar code readers, lasers and charged coupled device ("CCD")
scanners. Terminal choices include wall-mounted, desk-mounted and hand-held
devices that are available in various sizes and models, some of which are
designed to operate in harsh environments. The Company also offers desktop
computer and telephone based data collection options.
The Company believes that the functions and features of its time and
attendance products, its ability to offer frontline labor management systems
that accommodate specific vertical markets, and the flexibility of its data
collection options provide it with an important advantage over its competition.
Major Systems
The major systems currently offered by the Company include:
Time and Attendance Systems. The Company's desktop, workgroup and enterprise
Timekeeper(R) systems are designed to reduce payroll preparation time,
consistently apply payroll rules, improve labor scheduling and control labor
costs. These systems automatically calculate employee hours data according to
the payroll policies of the individual customer and are user-configurable.
Information is consolidated within a number of standard labor management reports
such as absenteeism, tardiness, projected overtime, on-premises and budget
versus actual costs. The Company's client/server system offers open database
connectivity and powerful query and reporting tools. The Company's time and
attendance systems work in conjunction with a variety of data collection methods
described above.
Shop Floor Data Collection Systems. The ShopTrac(R) Data Collection System and
Timekeeper/AS Labor Data Collection System consists of a suite of software
applications and intelligent data collection terminals used for plant operations
management. They are designed for discrete manufacturers that build product in a
series of operations and repetitive manufacturing. The systems capture labor and
material data to provide real-time information on labor allocation for the
measurement of costs, quality control and the status of work-in-process for
communication to Enterprise Resource Planning (ERP) systems and Manufacturing
Execution Systems (MES), thereby extending the value of those systems.
Labor Decision Support Systems. The Visionware(R) product consists of a suite of
labor productivity tools that synthesizes information from disparate information
systems such as billing, payroll and time and attendance and accurately
captures, analyzes and reports the information. The information, which can be
reported in either graphical or tabular format, can enable management to monitor
and analyze labor productivity.
<PAGE>
Employee Scheduling System. The Kronos Smart Scheduler(TM) can forecast the
level of activity a location can expect by analyzing key business volume
indicators and then apply the appropriate work standards to generate the optimum
staffing level required for the expected level of business. The product combines
this data along with detailed employee information about skill level,
availability, seniority and work preferences to produce a complete and detailed
work schedule. This information can be automatically integrated with the Kronos
time and attendance system enabling management to evaluate key performance
indicators.
Complementary Products
The Company offers optional application software and other products
designed to expand and enhance the range of functions performed by its systems.
Such products include the following:
Time Bank Module. Software that provides an interface to most major payroll
service bureau software and also supports interfaces to major human resources
and automated scheduling systems. The Company purchases this product from a
third party.
Accruals Module. Software that provides the ability to efficiently administer a
flexible program of earned time. The product automatically records hours earned
for personal, vacation, sick and other company-defined benefit time.
Attendance Tracker Module. Software that systematically records and documents
all types of employee absences and provides for attendance and performance data
to be reported in detail or summary reports. The Company licenses
this product from a third party.
TeleTime(R) System. System that allows customer telephones to serve as data
input devices. This product incorporates technology that is licensed from a
third party.
Imagekeeper(R) System. System that utilizes high-resolution video imaging to
create and store digital photographs and signatures of employees.
Finally, the Company markets a number of other accessories to its products
including badges, traditional badge making equipment, time cards, bar code
labels and modems.
Services and Support
Kronos maintains an extensive professional service and technical
support organization which provides a suite of maintenance, professional and
educational services. These services are designed to support the Company's
customers throughout the product life cycle. Maintenance service options are
delivered through the Company's centralized Global Support operation or through
local service personnel. The Company's professional services include
implementation support, technical and business consulting as well as system
integration and optimization. The Company's educational services offer a full
range of curriculums which are delivered through local training centers or via
computer based training courses. When necessary, the Company may also provide
software customization services to meet any unique customer requirements.
<PAGE>
Marketing and Sales
Kronos markets and sells its products to the mid-market and enterprise
markets in the United States and other countries through its direct sales and
support organization and through independent dealers. In addition, to serve
smaller businesses, the Company has a joint marketing agreement with ADP, Inc.
("ADP"). Under the terms of the agreement, ADP markets a proprietary version of
the Company's PC-based time and attendance software, together with data
collection terminals manufactured by the Company. Reduction in the sales efforts
of the Company's major dealers and/or original equipment manufacturers (OEMs),
or termination or changes in their relationships with the Company, could have a
material adverse effect on the results of the Company's operations.
The Company recognizes that the information needs of businesses in
various industries continue to be increasingly specialized and sophisticated. As
a result, the Company's marketing and field sales personnel are organized into
industry specific divisions. These divisions focus on the needs of the
manufacturing, healthcare, retail/hospitality and government/education markets.
These divisions operate with the following objectives:
o To gain expertise in their respective industry environments
and pursue opportunities for growth and product leadership.
o To focus engineering and marketing resources on industry
specific product development efforts required to deliver
products and services that meet those industry needs.
o To develop long-term business relationships with select industry partners.
o To educate and train sales staff as industry specialists.
Focusing on industry specific divisions permits Kronos to better
understand the needs of its customers and to respond quickly to the
opportunities presented by these markets.
Direct Sales Organization
The Company has 38 direct sales and support offices located in the
United States. In addition, the Company has two sales and support offices
located in Canada, two in the United Kingdom, one in Mexico, two in South
Africa, three in Australia and one in Brazil. Each direct sales office covers a
defined territory, and has sales and support functions.
<PAGE>
For the fiscal years ended September 30, 1998, 1997 and 1996, the
Company's international subsidiaries generated net revenues of $14.9 million,
$13.6 million and $8.0 million, respectively. Total assets at these locations
for these periods were $12.1 million, $10.7 million and $7.3 million,
respectively.
Dealers
Kronos also markets and sells its products through independent dealers
within designated geographic territories generally not covered by Kronos' direct
sales offices. These dealers provide sales, support and installation services
for Kronos' products. There are presently approximately 27 dealers in the United
States actively selling and supporting Kronos' products. Sales to independent
U.S. dealers for the years ended September 30, 1998, 1997 and 1996 were $26.9
million, $22.7 million, and $21.8 million, respectively. Kronos also has dealers
in Argentina, Brazil, Canada, Chile, Columbia, Guam, Guyana, Guatemala, Hong
Kong, Jamaica, Lebanon, Malaysia, Mexico, Netherland Antilles, New Zealand,
Norway, Panama, Philippines, Puerto Rico, Singapore, Venezuela and the West
Indies. Sales to independent international dealers were not material in any of
the fiscal years. Kronos supports its dealers with training, technical
assistance, and major account marketing assistance.
Customers
End-users of the Company's products include companies of all sizes from
the manufacturing, service, public and private sectors. The Company believes
that the dollar amount of backlog is not material to an understanding of its
business. Although the Company has contracts to supply systems to certain
customers over an extended period of time, substantially all of the Company's
product revenue in each quarter results from orders received in that quarter.
Product Development
The Company's product development efforts are focused on enhancing and
increasing the performance of its existing products and developing new products
and interfaces to third party products on a timely basis for the increasingly
sophisticated needs of its customers. During fiscal 1998, 1997 and 1996, Kronos'
engineering, research and development expenses were $19.7 million, $16.5 million
and $13.6 million, respectively. The Company intends to continue to commit
substantial resources to enhance and extend its product lines and develop
interfaces to third party products. Although the Company is continually seeking
to further enhance its product offerings and to develop new products and
interfaces, there can be no assurance that these efforts will succeed, or that,
if successful, such product enhancements or new products will achieve widespread
market acceptance, or that the Company's competitors will not develop and market
products which are superior to the Company's products or achieve greater market
acceptance. The Company also depends upon the reliability and viability of a
variety of software development tools owned by third parties to develop its
products. If these tools are inadequate or not properly supported, the Company's
ability to release competitive products in a timely manner could be adversely
impacted.
<PAGE>
Competition
The Company, which operates within the frontline labor management
industry, provides time and attendance, data collection and labor management
solutions that can enable businesses to optimize their labor resources. The
industry is highly competitive. Competition is increasing as competitors in
related industries, such as human resources management, payroll processing and
ERP enter the market. Advances in software development tools have accelerated
the software development process and, therefore, can allow competitors to
penetrate certain of the Company's markets. Although the Company believes it has
certain technological and other advantages over its current competitors,
maintaining those advantages will require continued investment by the Company in
research and development and marketing and sales programs. There can be no
assurance that the Company will have sufficient resources to make such
investments or be able to achieve the technological advances necessary to
maintain its competitive advantages. Increased competition could adversely
affect the Company's operating results through price reductions and/or loss of
market share.
The Company competes primarily on the basis of price/performance,
quality, reliability and customer service. In the time and attendance market,
the Company competes against firms that sell automated time and attendance
products to many industries, against firms that focus on specific industries,
and against firms selling related products, such as payroll processing, human
resources management, or ERP systems.
Proprietary Rights
The Company relies on a combination of patents, copyrights, trade
secret law and contracts to protect its proprietary technology.
The Company generally provides software products to end-users under
non-exclusive shrink-wrap licenses or under signed licenses, both of which may
be terminated by Kronos if the end-user breaches the terms of the license. These
licenses generally require that the software be used only internally subject to
certain limitations, such as the number of employees, simultaneous users,
computer model and serial number, features and/or terminals for which the
end-user has paid the required license fee. The Company authorizes its dealers
to sublicense software products to end-users under similar terms. In certain
circumstances, the Company also makes master software licenses available to
end-users which permit either a specified limited number of copies or an
unlimited number of copies of the software to be made for internal use. Some
customers license software products under individually negotiated terms.
Despite these precautions, it may be possible to copy or otherwise
obtain and use the Company's products or technology without authorization. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries.
<PAGE>
The Company has registered trademarks for Kronos, Timekeeper,
Timekeeper Central, Jobkeeper, Jobkeeper Central, Datakeeper, Datakeeper
Central, Gatekeeper, Gatekeeper Central, Imagekeeper, TeleTime, TimeMaker,
CardSaver, ShopTrac, the ShopTrac logo, Start.Time, Keep.Trac, Solution In A
Box, Visionware and the Company's logo in the United States. In addition,
certain trademarks have been obtained or are in process in various foreign
countries.
The Company purchases the Time Bank payroll interface and other
software from a single vendor for resale in certain of its frontline labor
management systems. Although the Company believes its relationship with this
vendor is good, any interruption or termination of the Company's right to resell
such software could delay shipment of certain of the Company's products and
require the Company to write its own software to perform this function. Although
the Company believes it would be able to produce its own interface software, any
delay or problems encountered in doing so could temporarily and adversely affect
the Company's results of operations.
Manufacturing and Sources of Supply
The duplication of the Company's software and the printing of
documentation are outsourced to suppliers. The Company currently has two
suppliers who have been certified to the Company's manufacturing specifications
to perform the software duplication process. The Company's data collection
terminals are assembled from the printed circuit board level in its facility in
Chelmsford, Massachusetts. Although most of the parts and components included
within the Company's products are available from multiple suppliers, certain
parts and components are purchased from single suppliers. The Company has chosen
to source these items from single suppliers because it believes that the
supplier chosen is able to consistently provide the Company with the highest
quality product at a competitive price on a timely basis. While the Company has
to date been able to obtain adequate supplies of these parts and components, the
Company's inability to transition to alternate sources on a timely basis if and
as required in the future could result in delays or reductions in product
shipments which could have a material adverse effect on the Company's operating
results.
Employees
As of November 30, 1998, the Company had 1,538 employees. None of the
Company's employees is represented by a union or other collective bargaining
agreement, and the Company considers its relations with its employees to be
good. The Company has encountered intense competition for experienced technical
personnel for product development, technical support and sales and expects such
competition to continue in the future. Any inability to attract and retain a
sufficient number of qualified technical personnel could adversely affect the
Company's ability to produce, support and sell products in a timely manner.
<PAGE>
Item 2. Properties
The Company leases approximately 75,000 square feet at its headquarters
in Waltham, Massachusetts and leases 49 sales and support offices located
throughout North America, Europe, Africa, Australia and South America. The
Company also leases a total of approximately 165,000 square feet in two
facilities located in Chelmsford, Massachusetts. The Company's manufacturing
operations, Global Support Center and various engineering and administrative
operations are located in these facilities. The Company's aggregate rental
expense for all of its facilities in fiscal 1998 was approximately $6.5 million.
The Company considers its facilities to be adequate for its current requirements
and that additional space will be available as needed in the future.
Item 3. Legal Proceedings
From time to time, the Company is involved in legal proceedings arising
in the normal course of business. None of the legal proceedings in which the
Company is currently involved is considered material by the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
Executive Officers of the Registrant
Name Age Position
Mark S. Ain 55 Chief Executive Officer and Chairman of the Board
W. Patrick Decker 51 President, Chief Operating Officer
Aron J. Ain 41 Vice President, Worldwide Sales and Service
Paul A. Lacy 51 Vice President, Finance and Administration,
Treasurer and Clerk
Laura L. Woodburn 51 Vice President, Engineering
Lloyd B. Bussell 53 Vice President, Manufacturing
Laurel Giarrusso 49 Vice President, Business Planning and Development
James Kizielewicz 39 Vice President, Marketing
Sally J. Wallace 48 Vice President, General Counsel
Mark S. Ain, a founder of the Company, has served as Chief Executive
Officer and Chairman since its organization in 1977. He also served as
President from 1977 until October, 1996. Mr. Ain is the brother of Aron
J. Ain, Vice President, Worldwide Sales and Service of the Company.
W. Patrick Decker served as Vice President, Marketing and Field
Operations from 1982 until October, 1996, when he was appointed President and
Chief Operating Officer. Mr. Decker was elected to the Board of Directors in
January, 1997.
Aron J. Ain served as Vice President, Sales and Service from 1988
until October, 1996, when he was appointed Vice President, Marketing and
Worldwide Field Operations. In November, 1998, his title changed to Vice
President, Worldwide Sales and Service. Mr. Ain is the brother of Mark S.
Ain, Chief Executive Officer and Chairman.
Paul A. Lacy has been Vice President, Finance and Administration,
Treasurer and Clerk since 1988.
Laura L. Woodburn has served as Vice President, Engineering since
November, 1996. She held various positions at Digital Equipment Corporation from
1979 to 1996, most recently serving as Vice President of the Storage Big
Business segment.
<PAGE>
Lloyd B. Bussell has served as Vice President, Manufacturing since
1987.
Laurel Giarrusso has served in a variety of positions at the Company
from 1979 until her appointment as Vice President, Business Planning and
Development in January, 1997.
James Kizielewicz has served in a variety of capacities at the Company
from 1981 until his appointment as Vice President, Marketing in January, 1997.
Sally J. Wallace has served as General Counsel since 1988 and was
appointed Vice President in October, 1994.
Officers of the Company hold office until the first meeting of
directors following the next annual meeting of stockholders and, in the case of
the President, Treasurer and Clerk, until their successors are chosen and
qualified.
PART II
Item 5. Market for Registrant's Common Equity and Stockholder Matters
STOCK MARKET INFORMATION
The Company's common stock is traded on the Nasdaq National Market under the
symbol KRON. The following table sets forth the high and low sales prices for
fiscal 1998 and 1997. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
1998
----------------------------------------------------
Fiscal High Low
- --------------------------- ------------------------- --------------------------
First quarter $34 1/8 $19 1/4
Second quarter 37 5/8 28 5/8
Third quarter 37 1/2 30 3/4
Fourth quarter 40 34
1997
----------------------------------------------------
Fiscal High Low
- --------------------------- ------------------------- --------------------------
First quarter $32 1/2 $24 1/8
Second quarter 35 3/4 22 1/2
Third quarter 28 3/4 16 1/4
Fourth quarter 28 1/2 20 5/8
<PAGE>
HOLDERS
On November 30, 1998 there were approximately 3,000 shareholders of record of
the Company's common stock.
DIVIDENDS
The Company has not paid cash dividends on its common stock, and the present
policy of the Company is to retain earnings for use in its business.
<PAGE>
Item 6. Selected Financial Data
The following table data should be read in conjunction with the consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
Financial Highlights In thousands, except share data
Year Ended September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues ............... $202,469 $170,538 $142,957 $120,373 $92,919
Net income ................. $ 14,720 $ 11,272 $ 11,425 $ 8,398 $ 4,892
Net income per common share:
Basic .................. $ 1.78 $ 1.38 $ 1.42 $ 1.07 $ 0.64
Diluted ................ $ 1.73 $ 1.34 $ 1.37 $ 1.03 $ 0.62
Balance Sheet Data:
Total assets ............... $160,775 $128,114 $104,866 $ 78,518 $60,284
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This discussion includes certain forward-looking statements about the Company's
business and its expectations. Any such statements are subject to risk that
could cause the actual results to vary materially from expectations. For a
further discussion of the various risks that may affect the Company's business
and expectations, see "Certain Factors That May Affect Future Operating Results"
at the end of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<PAGE>
Results of Operations
Revenues. Revenues amounted to $202.5 million, $170.5 million and $143.0 million
in fiscal 1998, 1997 and 1996, respectively. Annual revenue growth amounted to
19% in each of the respective fiscal years. Revenue growth in fiscal 1998 was
principally the result of customer demand driving an increase in sales volume
through the Company's domestic direct and dealer distribution channels. In
fiscal 1998, the Company substantially completed its product transition from DOS
and UNIX platforms to the Windows and client/server environment. The Company
experienced strong growth of its sales of its Windows and client/server systems
as well as services accompanying those sales. This growth more than offset lower
than anticipated revenues from the Company's international subsidiaries and
dealers.
Product revenues amounted to $135.2 million, $116.2 million and $101.0 million
in fiscal 1998, 1997 and 1996, respectively. Product revenues grew by 16% in
fiscal 1998 and 15% in fiscal 1997 and 1996. Product revenue growth in all
fiscal years was principally the result of customer demand. More specifically,
growth in fiscal 1998 was principally the result of customer demand driving an
increase in sales of the Company's Windows and client/server products. As a
result of the strength of sales of Windows and client/server systems, the
software component of product sales increased to 45% of total product sales in
fiscal 1998 as compared to 38% in fiscal 1997 and 1996. In fiscal 1997 product
revenue growth was driven by an increase in sales of the Company's Windows and
client/server products as well as hardware and ancillary products that accompany
the sale of software systems.
Service revenues amounted to $67.3 million, $54.4 million and $42.0 million in
fiscal 1998, 1997 and 1996, respectively. Service revenues grew by 24% in fiscal
1998 and 29% in fiscal 1997 and 1996. Service revenues amounted to 33%, 32% and
29% of total revenues in fiscal 1998, 1997 and 1996, respectively. The growth in
service revenues in all periods reflects an increase in maintenance revenue from
expansion of the installed base and the level of services sold to that installed
base, as well as an increase in the level of maintenance contracts and
professional services accompanying new sales. As the customer-installed base
continues to grow, management anticipates that service revenue growth rates will
gradually become more consistent with product revenue growth rates.
International revenues, which include revenues from the Company's international
subsidiaries and sales to independent international dealers, grew 4% in fiscal
1998 to $16.0 million from $15.4 million in fiscal 1997. International revenues
in fiscal 1996 were $10.4 million. International revenues amounted to 8% of
total revenues in fiscal 1998 as compared to 9% and 7% of total revenues in
fiscal 1997 and 1996, respectively. The growth in international revenues in
fiscal 1998 was lower than management's expectations. The shortfall in
international revenues was primarily attributable to the Company's initiatives
to strengthen subsidiary management and to position the subsidiaries' sales
organizations to better penetrate their respective markets. In addition, the
international revenue growth rate in fiscal 1998 was also unfavorably impacted
by the Asian/Pacific economic recession and related fluctuations in foreign
currencies. The growth in international revenues experienced in fiscal 1997
principally reflected the results of the Company's fiscal 1996 acquisition of
distribution rights to certain international sales territories previously held
by certain independent dealers of the Company.
<PAGE>
Gross Profit. Gross profit as a percentage of revenues was 62% in fiscal 1998
and 61% in fiscal 1997 and 1996. The improvement in gross profit as a percentage
of revenues in fiscal 1998 was attributable to increases in both product and
service gross profit. Product gross profit as a percentage of product revenues
was 76% in fiscal 1998 and 74% in fiscal 1997 and 1996. The improvement in
product gross profit in fiscal 1998 as compared to fiscal 1997 and 1996 was
primarily attributable to a change in the mix of product sold. As described
above, the Company's product revenue in fiscal 1998 was derived from sales of
systems in which software, which typically generates higher gross profit, was a
significantly higher proportion of product revenues. Management anticipates that
fiscal 1999 product gross margin will continue to be positively impacted by the
increased proportion of software sales to total product sold.
Service gross profit as a percentage of service revenues was 34%, 33% and 31%
for fiscal 1998, 1997 and 1996, respectively. The increase in service gross
profit in all periods is primarily attributable to the growth in service
revenues without a proportionate increase in service expenses. In fiscal 1998
this was accomplished by more fully leveraging service resources and improving
service efficiencies by re-engineering the system implementation process. The
increase in service gross profit in fiscal 1997 and 1996 was accomplished by the
implementation of programs which focus on revenue enhancement for services
provided, as well as improved efficiency in the delivery of such services.
Expenses. Expenses as a percentage of revenues were 50% in fiscal 1998 and 1997,
and 48% in fiscal 1996. Sales and marketing expenses were $68.0 million, $57.9
and $45.6 million in fiscal 1998, 1997 and 1996, respectively. The increase in
sales and marketing expenses in all periods relates to increased business
volume. Sales and marketing expenses as a percentage of sales were 34% in fiscal
1998 and 1997, and 32% in fiscal 1996. The increase in sales and marketing
expenses as a percentage of revenues in fiscal 1998 and 1997 as compared to
fiscal 1996 is principally attributable to management's decision to invest in
new products and programs, none of which were individually material, in order to
position the Company to better penetrate and/or pursue new market opportunities.
Engineering, research and development expenses were $19.7 million, $16.5 million
and $13.6 million in fiscal 1998, 1997 and 1996, respectively. These expenses
are net of capitalized software development costs of $6.6 million, $5.2 million
and $4.0 million, respectively. Engineering, research and development expenses
as a percentage of revenues were 10% in fiscal 1998 and 1997, and 9% in fiscal
1996. The growth in engineering, research and development expenses in all
periods resulted principally from the development of new products in the
client/server and Windows environment. Also contributing to the growth in
expenses in fiscal 1998 was the Company's efforts to standardize products for
the purpose of increasing the efficiency of product development. Increased
spending on software development costs reflects the Company's commitment to
further enhance existing products, making them easier to use, and on new product
development. Management anticipates that engineering, research and development
expenses as a percentage of revenues will increase in fiscal 1999 as the Company
continues new product development efforts.
<PAGE>
General and administrative expenses were $13.8 million, $11.6 million and $9.9
million in fiscal 1998, 1997 and 1996, respectively. As a percentage of
revenues, general and administrative expenses were 7% in each of the respective
fiscal years.
Other expense, net amounted to less than 1% of revenues in fiscal 1998, 1997 and
1996. Other expense, net is composed primarily of amortization of intangible
assets related to acquisitions made by the Company that is offset by interest
income earned on its investments.
Income Taxes. The provision for income taxes as a percentage of pretax income
was 40% in fiscal 1998, 38% in fiscal 1997 and 39% in fiscal 1996. The increase
in the effective income tax rate in fiscal 1998 is primarily attributable to an
increase in net operating losses of foreign subsidiaries for which no benefit
has been recognized.
Liquidity and Capital Resources
Working capital as of September 30, 1998 amounted to $45.1 million as compared
with $41.2 million at September 30, 1997. Cash and equivalents, marketable
securities and investments at those dates amounted to $51.8 million and $36.2
million, respectively.
Cash provided by operations increased to $36.2 million in fiscal 1998 from $18.9
million in fiscal 1997. Cash provided by operations amounted to $23.9 million in
fiscal 1996. The increase in operating cash flows in fiscal 1998 is primarily
attributable to an increase in earnings, unearned service revenues and
compensation accruals, as well as better management of accounts receivable from
trade customers. Also contributing to the increase in operating cash flows were
non-cash charges related to depreciation and amortization. The decrease in
operating cash flows in fiscal 1997 was primarily due to an increase in accounts
receivable related to year-end sales volume.
Cash provided by operations was more than sufficient to fund investments in
equipment and capitalized software development costs in fiscal 1998, 1997 and
1996. In addition, cash provided by operations in fiscal 1998 funded the
Company's acquisition of labor productivity technology as well as payments
related to acquisitions of dealer territories. Investments in equipment in
fiscal 1998, 1997 and 1996 totaled $6.3 million, $8.7 million and $9.6 million,
respectively. Management anticipates that investment in capitalized software
development costs and equipment in fiscal 1999 will increase as compared to
fiscal 1998. The increase will be the result of the Company's investment in
product enhancements and equipment to support development efforts, as well as
investments in information systems to improve and support operations. The
Company expects to finance these investments from available cash and operating
cash flow generated in fiscal 1999.
<PAGE>
Under the Company's stock repurchase program initiated during fiscal 1997, the
Company has repurchased 77,500 and 90,000 common shares in fiscal 1998 and 1997,
respectively, at a cost of $2.7 million and $2.3 million, respectively. The
common shares repurchased under the program are used for the Company's employee
stock option plans and employee stock purchase plan.
Adjustments resulting from the translation of the Company's net investments in
its foreign subsidiaries are made directly to a separate component of
stockholders' equity. As a result of significant fluctuations in foreign
currency exchange rates and increases in its net investments, the Company
recorded a $.9 million adjustment to stockholders' equity in fiscal 1998.
Adjustments in fiscal 1997 and 1996 were not material.
Certain Factors That May Affect Future Operating Results
Except for historical matters, the matters discussed in the Annual Report and/or
Form 10-K are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). The Company desires to
take advantage of the safe harbor provisions of the Act and is including this
statement for the express purpose of availing itself of the protection of the
safe harbor with respect to all forward looking statements that involve risks
and uncertainties.
The following important factors, among others, could cause actual operating
results to differ materially from those indicated by forward-looking statements
made in this Annual Report and/or Form 10-K and presented elsewhere by
management from time to time.
Potential Fluctuations in Results. The Company's operating results may fluctuate
as a result of a variety of factors, including the timing of the introduction of
new products and product enhancements by the Company and its competitors, market
acceptance of new products, mix of products sold, the purchasing patterns of its
customers, competitive pricing pressure and general economic conditions. The
Company historically has realized a relatively larger percentage of its annual
revenues and profits in the fourth quarter and a relatively smaller percentage
in the first quarter of each fiscal year, although there can be no assurance
that this pattern will continue. In addition, while the Company has contracts to
supply systems to certain customers over an extended period of time,
substantially all of the Company's product revenue and profits in each quarter
result from orders received in that quarter. If near-term demand for the
Company's products weakens or if significant anticipated sales in any quarter do
not close when expected, the Company's revenues for that quarter will be
adversely affected. The Company believes that its operating results for any one
period are not necessarily indicative of results for any future period.
Product Development and Technological Change. Continual change and improvement
in computer software and hardware technology characterize the markets for
frontline labor management systems. The Company's future success will depend
largely on its ability to enhance its existing product lines and to develop new
products and interfaces to third party products on a timely basis for the
increasingly sophisticated needs of its customers. Although the Company is
continually seeking to further enhance its product offerings and to develop new
products and interfaces, there can be no assurance that these efforts will
succeed, or that, if successful, such product enhancements or new products will
achieve widespread market acceptance, or that the Company's competitors will not
develop and market products which are superior to the Company's products or
achieve greater market acceptance.
<PAGE>
Competition. The frontline labor management industry is highly competitive.
Competition is increasing as competitors in related industries, such as human
resources management, payroll processing and ERP, enter the market. Advances in
software development tools have accelerated the software development process
and, therefore, can allow competitors to penetrate certain of the Company's
markets. Maintaining the Company's technological and other advantages over
competitors will require continued investment by the Company in research and
development and marketing and sales programs. There can be no assurance that the
Company will have sufficient resources to make such investments or be able to
achieve the technological advances necessary to maintain its competitive
advantages. Increased competition could adversely affect the Company's operating
results through price reductions and/or loss of market share.
Dependence on Alternate Distribution Channels. The Company markets and sells its
products through its direct sales organization, independent dealers and OEMs.
For the fiscal year ended September 30, 1998, approximately 20% of the Company's
revenue was generated through sales to dealers and OEMs. Reduction in the sales
efforts of the Company's major dealers and/or OEMs, or termination or changes in
their relationships with the Company, could have a material adverse effect on
the results of the Company's operations.
Year 2000. The Company has an executive level steering committee to identify and
resolve Year 2000 issues associated with the Company's internal systems (both
information technology ("IT") and non-IT), the Company's own products and
services, the status of third party products distributed by the Company to its
customers as well as the Year 2000 readiness of the Company's suppliers. The
Company has completed an assessment of all of its principal IT systems, which
include manufacturing, distribution, customer service and financial systems. The
Company has, with the assistance of an outside consultant, tested its principal
internal enterprise resource planning (ERP) system and believes it to be year
2000 compliant. This ERP system includes order entry, material resource
planning, master production scheduling, purchasing, shipping and financial
systems. The Company has identified Year 2000 issues in other less significant
IT systems, and expects to resolve those issues, by replacements and/or
upgrades, by mid-1999. The Company is currently performing an assessment of
certain non-IT systems and expects that assessment to be completed by mid-1999.
Examples of these non-IT systems include telephone systems and stand alone
shop-floor test equipment. The Company does not plan to assess specifically its
facility management systems, or the external forces such as utility or
transportation Year 2000 compliance failures that might generally affect
industry and commerce. Although the Company is not currently aware of any
material operational issues or costs associated with preparing its internal IT
and non-IT systems for the Year 2000, the Company may experience material
unanticipated problems and costs caused by undetected errors or defects in these
internal systems.
<PAGE>
The Company's Year 2000 compliance plan includes designing its current products
to meet the Company's definition of "Year 2000 Compliant" and testing the most
recent versions of its products to determine whether they meet that definition.
Testing of products currently manufactured by the Company is approximately 75%
completed and is expected to be finished by January 1999. The Company has
warranted, and may in the future warrant to certain customers that its products
will work in the Year 2000 and beyond. Generally, for products that have been
identified to date as needing upgrades/new versions to address Year 2000 issues,
the Company has those upgrades/new versions available to customers for purchase
or under maintenance agreements. Some of the Company's customers are using
products and/or product versions that the Company has not tested, and does not
support, for Year 2000 compliance. The Company is encouraging these customers to
migrate to current products/versions that meet the Company's Year 2000
compliance definition. It is possible that the Company may experience increased
expenses in addressing migration issues for these customers. In addition, the
Company does not intend to test any of its custom software products for Year
2000 compliance.
For third party products that the Company distributes with its products, the
Company has sought information and assurances from the manufacturers concerning
those products' Year 2000 compliance status. The Company expects to complete its
assessment of those third party products early in 1999.
Despite the testing of its own products and efforts to obtain assurances on
third party products, errors or defects in such products could result in delay
or loss of revenue, diversion of development resources, damage to the Company's
reputation, or increased service and warranty costs, any of which could
materially affect the Company's business, results of operations, or financial
condition. In addition, the unprecedented nature of potential litigation
regarding Year 2000 compliance issues makes it uncertain whether the Company
will be affected by such litigation.
The Company has completed its systematic inquiry of key suppliers to assess
their Year 2000 readiness. The Company is not aware of any problems that would
materially affect its business, results of operations or financial condition,
but the Company has no means of ensuring that assurances received from such
suppliers are accurate. The inability of such suppliers to meet Year 2000
requirements could materially impact the ability of the Company to procure
material from these suppliers and to meet its obligations to supply products to
its customers.
The Company does not currently have any information concerning the Year 2000
compliance status of its customers. As with other similarly situated companies,
if the Company's current or future customers fail to achieve Year 2000
compliance or if they divert expenditures to address Year 2000 compliance
problems, the Company's business, results of operations, or financial condition
could be materially affected.
<PAGE>
The Company has not yet developed a contingency plan on Year 2000 readiness. The
Company is currently assessing the need for such a plan and anticipates
completing that assessment by mid-1999.
The costs associated with the Company's Year 2000 plan have been funded from
operating cash flows and have been charged to operations. To date, the Company
has incurred approximately $.3 million of incremental costs and expects, on a
cumulative basis, total costs to be approximately $.5 million to address its
internal IT and non-IT systems. Those costs, and the costs to accomplish the
other elements of the Company's Year 2000 plan, have not been and are not
expected to be material to the Company's financial position, results of
operations or cash flows. The cost of completing the Year 2000 plan and the date
on which the Company believes the plan will be complete are based upon
management's best estimates derived by using numerous assumptions of future
events, including the continued availability of certain resources. There can be
no guarantee that these estimates will be achieved and the actual results may
differ materially from those anticipated. Specific factors that might cause
these differences include without limitation, the availability and cost of
personnel trained in this area, the ability to make timely and appropriate
adjustments to all relevant computer codes and similar uncertainties.
Attracting and Retaining Sufficient Technical Personnel for Product Development,
Support and Sales. The Company has encountered intense competition for
experienced technical personnel for product development, technical support and
sales and expects such competition to continue in the future. Any inability to
attract and retain a sufficient number of qualified technical personnel could
adversely affect the Company's ability to produce, support and sell products in
a timely manner.
Dependence on Time and Attendance Product Line. To date, more than 90% of the
Company's revenues have been attributable to sales of time and attendance
systems and services and the Company expects that to continue in the next fiscal
year. Competitive pressures or other factors could cause the Company's time and
attendance products to lose market acceptance or experience significant price
erosion, adversely affecting the results of the Company's operations.
Reliance on Key Vendors. The Company depends upon the reliability and viability
of a variety of software development tools owned by third parties to develop its
products. If these tools are inadequate or not properly supported, the Company's
ability to release competitive products in a timely manner could be adversely
impacted. Also, certain parts and components used in the Company's hardware
products are purchased from single vendors. The Company has chosen to source
these items from single vendors because it believes that the vendor chosen is
able to consistently provide the Company with the highest quality product at a
competitive price on a timely basis. While the Company has to date been able to
obtain adequate supplies of these parts and components, the Company's inability
to transition to alternate sources on a timely basis if and as required in the
future could result in delays or reductions in product shipments which could
have a material adverse effect on the Company's operating results. In addition,
the Company purchases payroll interface and other software from a single vendor
for resale in certain of its frontline labor management systems. Although the
Company believes its relationship with this vendor is good, any interruption or
termination of the Company's rights to resell such software could delay shipment
of certain of the Company's products and require the Company to write its own
software to perform this function. Although the Company believes it would be
able to produce its own payroll interface software, any delay or problems
encountered in doing so could temporarily and adversely affect the Company's
results of operations.
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of market risks, including changes in
interest rates affecting the return on its investments and foreign currency
fluctuations. The Company's exposure to market risk for a change in interest
rates relates primarily to the Company's investment portfolio. The fair value of
the Company's investment portfolio and related interest income would not be
materially impacted by either a 100 basis point increase or decrease in interest
rates due mainly to the short-term nature of the major portion of the Company's
investment portfolio and the relative insignificance of interest income to
consolidated pre-tax income, respectively. In addition, the Company has
classified all of its marketable securities and investments as "held to
maturity" which does not expose the consolidated statement of operations or
balance sheets to fluctuations in interest rates. The Company's exposure to
market risk for fluctuations in foreign currency relate primarily to the amounts
due from subsidiaries. Exchange gains and losses related to amounts due from
subsidiaries have not been material. For foreign currency exposures existing at
September 30, 1998, a 10% unfavorable movement in the foreign exchange rates for
each subsidiary location would not expose the Company to material losses in
earnings or cash flows. The calculation assumes that each exchange rate would
change in the same direction relative to the U.S. dollar.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are listed in the Index
to Consolidated Financial Statements at Item 14 of this Form 10-K.
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the executive officers of the registrant
appears under the caption "Executive Officers of the Registrant" in Part I,
following Item 4 of this Form 10-K. Information relating to the directors is
incorporated by reference from pages 4 through 6 of the Company's definitive
proxy statement for the 1999 Annual Meeting of Stockholders to be held on
January 29, 1999 under the caption "Election of Directors."
<PAGE>
Item 11. Executive Compensation
Incorporated by reference from pages 6 through 11 of the Company's
definitive proxy statement for the 1999 Annual Meeting of Stockholders to
be held on January 29, 1999 under the following captions: "Director
Compensation," "Executive Compensation," "Option Grants and Exercises," and
"Report of Compensation Committee."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from pages 2 through 3 of the Company's
definitive proxy statement for the 1999 Annual Meeting of Stockholders to be
held on January 29, 1999 under the caption "Security Ownership of Certain
Beneficial Owners and Management."
Item 13. Certain Relationships and Related Transactions
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Related Transactions
(a) The following are filed as a part of this report:
1. Financial Statements Page
Consolidated Statements of Income for the Years Ended F-1
September 30, 1998, 1997 and 1996
Consolidated Balance Sheets as of September 30, 1998 and 1997 F-2
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended September 30, 1998, 1997 and 1996 F-3
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996 F-4
Notes to Consolidated Financial Statements F-5
Report of Ernst & Young LLP, Independent Auditors F-20
2. Financial Statement Schedule
II - Valuation and Qualifying Accounts F-21
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. Exhibits
Exhibit
No. Description
3.1(10) Restated Articles of Organization of the Registrant, as amended.
3.2* Amended and Restated By-laws of the Registrant.
4* Specimen Stock Certificate.
10.1*(11) 1986A Stock Option Plan.
10.2(10)(11) 1992 Equity Incentive Plan, as amended and restated.
<PAGE>
3. Exhibits (continued)
Exhibit
No. Description
10.3(9)(11) 1992 Employee Stock Purchase Plan, as amended and restated.
10.4(3) Lease dated November 16, 1993, between Teachers Realty Corporation
and the Registrant, relating to premises leased in Chelmsford, MA.
10.5(5) Lease dated August 8, 1995, between Principal Mutual Life
Insurance Company and the Registrant, relating to premises
leased in Chelmsford, MA.
10.6(8) Fleet Bank Letter Agreement and Promissory Note dated January 1,
1997,relating to amendment of $3,000,000 credit facility.
10.7(2)(12) Software License and Support and Hardware Purchase Agreement dated
April 2,1993, between ADP, Inc. and the Registrant.
10.7.1(7)(12) Amendments dated July 22, 1996 to Software License and Support
and Hardware Purchase Agreement dated April 2, 1993, between ADP,
Inc. and the Registrant.
10.8* Sales Agreement dated December 6, 1990, between Integrated Design,
Inc. and the Registrant.
10.8.1(6) Amendment dated November 2, 1995 to Sales Agreement dated December
6, 1990, between Integrated Design, Inc. and the Registrant.
10.9(3)(12) Acquisition Agreement dated November 2, 1993 between Interboro
Systems Corporation and the Registrant.
10.10* Form of Indemnity Agreement entered into among the Registrant
and Directors of the Registrant. 10.11(1) Lease dated November 9,
1992, as amended, between John Hancock Mutual Life Insurance
Company and the Registrant, relating to premises leased in
Waltham, MA.
10.11.1(6) Amendment dated January 1, 1996 to Lease dated November 9, 1992,
as amended, between John Hancock Mutual Life Insurance Company
and the Registrant, relating to premises leased in Waltham, MA.
10.11.2(8) Amendment dated October 11, 1996 to Lease dated November 9,
1992, as amended, between John Hancock Mutual Life Insurance
Company and the Registrant, relating to premises leased in
Waltham, MA.
10.12(4) Agreement of Reorganization among Kronos Incorporated;
Kronos S/T Corporation, ShopTrac Data Collection Systems,
Inc., Thomas J. O'Malia and Mark J. MacWhirter, dated March
31, 1994.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
* Incorporated by reference to the same Exhibit Number in the
Company's Registration Statement on Form S-1 (File No. 33-47383).
<PAGE>
3. Exhibits (continued)
(1) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30, 1992.
(2) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended April 3, 1993.
(3) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30, 1993.
(4) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended July 2, 1994.
(5) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30,1995.
(6) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended March 30, 1996.
(7) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30, 1996.
(8) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended December 28, 1996.
(9) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended March 29, 1997.
(10) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended April 4, 1998.
(11) Management contract or compensatory plan or arrangement filed
as an exhibit to this Form 10-K pursuant to Items 14(a) and
14(c) of Form 10-K.
<PAGE>
3. Exhibits (continued)
(12) Confidential treatment was granted for certain portions of this
agreement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last fiscal quarter of the
fiscal year covered by this report.
Kronos, Timekeeper, Timekeeper Central, Jobkeeper, Jobkeeper Central,
Datakeeper, Datakeeper Central, Gatekeeper, Gatekeeper Central, Imagekeeper,
TeleTime, TimeMaker, CardSaver, ShopTrac, the ShopTrac logo, Start. Time,
Keep.Trac, Solution in a Box, Visionware and the Company's logo are registered
trademarks of the Company. DKC/Datalink, Timekeeper Web, HyperFind, Kronos 2100,
Smart Scheduler, Starter Series, Start.Labor, Start.WIP, Start.Quality, Labor
Plus, WIP Plus, Comm.Mgr, CommLink, Community Computer, Tempo and the Tempo logo
are trademarks of the Company. IBM is a registered trademark of, and AS and
AS/400 are trademarks of, International Business Machines Corporation Total Time
is a service mark of ADP, Inc. and ADP is a registered trademark of Automatic
Data Processing, Inc. Time Bank is a registered trademark of Integrated Design
Inc. UNIX is a registered trademark in the U.S. and other countries, licensed
exclusively by X/Open Company Ltd. VMS is a registered trademark of Digital
Equipment Corporation. Microsoft, Windows, and Windows 95 are registered
trademarks of, and Windows NT is a trademark of, Microsoft Corporation. Oracle
is a registered trademark of Oracle Corporation. Informix is a registered
trademark of Informix Software, Inc. PeopleSoft is a registered trademark of
PeopleSoft, Inc. Baan is a trademark of Baan Development B.V. Honeywell is a
registered trademark of Honeywell, Inc. J.D. Edwards is a registered trademark
of J.D. Edwards and Company. Lawson is a registered trademark of Lawson
Associates, Inc. SAP is a trademark of SAP AG.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on December 11, 1998.
KRONOS INCORPORATED
By /s/ MARK S. AIN
Mark S. Ain
Chief Executive
Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on December 11, 1998.
Signature Capacity
/s/ MARK S. AIN Chief Executive
Mark S. Ain Officer and Chairman of
the Board
(Principal Executive Officer)
/s/ PAUL A. LACY Vice President, Finance and
Paul A. Lacy Administration
(Principal Financial and
Accounting Officer)
/s/ W. PATRICK DECKER Director, President and Chief
W. Patrick Decker Operating Officer
/s/ RICHARD J. DUMLER Director
Richard J. Dumler
/s/ D. BRADLEY McWILLIAMS Director
D. Bradley McWilliams
/s/ LAWRENCE PORTNER Director
Lawrence Portner
/s/ SAMUEL RUBINOVITZ Director
Samuel Rubinovitz
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income In thousands, except share data
Year Ended September 30, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
Product ............................................ $ 135,186 $ 116,155 $ 100,951
Service ............................................ 67,283 54,383 42,006
---------- ---------- ----------
202,469 170,538 142,957
Cost of sales:
Product ............................................ 32,305 29,816 26,281
Service ............................................ 44,085 36,449 28,850
---------- ---------- ----------
76,390 66,265 55,131
---------- ---------- ----------
Gross profit ............................... 126,079 104,273 87,826
Expenses:
Sales and marketing ................................ 68,049 57,886 45,599
Engineering, research and development .............. 19,700 16,538 13,559
General and administrative ......................... 13,841 11,554 9,942
Other expense, net ................................. 158 7 27
---------- ---------- ----------
101,748 85,985 69,127
---------- ---------- ----------
Income before income taxes ..................... 24,331 18,288 18,699
Provision for income taxes ............................. 9,611 7,016 7,274
---------- ---------- ----------
Net income ..................................... $ 14,720 $ 11,272 $ 11,425
========== ========== ==========
Net income per common share:
Basic .......................................... $ 1.78 $ 1.38 $ 1.42
========== ========== ==========
Diluted ........................................ $ 1.73 $ 1.34 $ 1.37
========== ========== ==========
Average common and common equivalent shares outstanding:
Basic .......................................... 8,261,777 8,187,977 8,041,428
========== ========== ==========
Diluted ........................................ 8,523,304 8,413,553 8,343,274
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets In thousands, except share data
September 30, 1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents .............................................................. $ 29,888 $ 20,698
Marketable securities ............................................................. 17,501 15,530
Accounts receivable, less allowances for doubtful accounts of $1,268 in 1998
and $1,091 in 1997 ............................................................ 42,752 38,817
Inventories ....................................................................... 3,065 4,322
Deferred income taxes ............................................................. 5,188 4,277
Other current assets .............................................................. 10,172 6,539
--------- ---------
Total current assets ...................................................... 108,566 90,183
Equipment, net ......................................................................... 15,816 17,038
Investments ............................................................................ 4,445 --
Net investment in sales-type leases .................................................... 8,248 5,312
Excess of cost over net assets of businesses acquired, net ............................. 13,731 7,855
Deferred software development costs, net ............................................... 9,541 7,312
Other assets ........................................................................... 428 414
--------- ---------
Total assets .............................................................. $ 160,775 $ 128,114
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................................. $ 15,721 $ 13,217
Accrued compensation .............................................................. 14,503 10,105
Federal and state income taxes payable ............................................ 6,190 3,497
Unearned service revenue .......................................................... 27,065 22,209
--------- ---------
Total current liabilities ................................................. 63,479 49,028
Deferred income taxes .................................................................. 911 2,587
Unearned service revenue ............................................................... 8,830 3,523
Other liabilities ...................................................................... 352 503
Shareholders' equity:
Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares, no shares
issued and outstanding
Common Stock, par value $.01 per share: authorized 20,000,000 shares,
8,310,479 shares and 8,246,453 shares issued at September 30, 1998 and
1997, respectively ............................................................ 83 82
Additional paid-in capital ........................................................ 29,617 29,770
Retained earnings ................................................................. 59,765 45,045
Equity adjustment from translation ................................................ (1,162) (262)
Cost of Treasury Stock (30,574 shares and 86,493 shares at September 30, 1998
and 1997, respectively) ....................................................... (1,100) (2,162)
--------- ---------
Total shareholders' equity ................................................ 87,203 72,473
--------- ---------
Total liabilities and shareholders' equity ................................ $ 160,775 $ 128,114
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
In thousands
Equity
Common Stock Additional Adjustment Treasury Stock
---------------- Paid-in Retained from -----------------
Shares Amount Capital Earnings Translation Shares Amount Total
---------------- -------- -------- ----------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 ............. 7,940 $ 79 $ 24,353 $ 22,348 $ (206) $ (5) $ 46,569
Net income ................................ 11,425 11,425
Proceeds from exercise of stock options ... 144 2 538 (16) 525 1,065
Proceeds from employee stock purchase plan 40 945 945
Impact of compensation relating to
nonqualified stock option plans ...... 68 68
Equity adjustment from translation ........ (45) (45)
Purchase of treasury stock ................ 17 (537) (537)
Tax benefit associated with the exercise
of stock options ..................... 1,608 1,608
------------------ -------- --------- ----------- ----------------- --------
Balance at September 30, 1996 ............. 8,124 81 27,512 33,773 (251) 1 (17) 61,098
Net income ................................ 11,272 11,272
Proceeds from exercise of stock options ... 78 1 439 (16) 454 894
Proceeds from employee stock purchase plan 44 1,105 1,105
Impact of compensation relating to
nonqualified stock option plans ...... (60) (60)
Equity adjustment from translation ........ (11) (11)
Purchase of treasury stock ................ 101 (2,599) (2,599)
Tax benefit associated with the exercise
of stock options ..................... 774 774
------------------ -------- --------- ----------- ----------------- --------
Balance at September 30, 1997 ............ 8,246 82 29,770 45,045 (262) 86 (2,162) 72,473
Net income ................................ 14,720 14,720
Proceeds from exercise of stock options .. 56 1 (1,453) (135) 3,912 2,460
Proceeds from employee stock purchase plan 8 (156) (43) 1,407 1,251
Equity adjustment from translation ....... (900) (900)
Purchase of treasury stock ............... 123 (4,257) (4,257)
Tax benefit associated with the exercise
of stock options .................... 1,456 1,456
------------------ -------- --------- ----------- ----------------- --------
Balance at September 30, 1998 ............. 8,310 $ 83 $ 29,617 $ 59,765 $(1,162) 31 $ (1,100) $87,203
================== ========= ========== =========== ================== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows In thousands
Year Ended September 30, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income ........................................................... $ 14,720 $ 11,272 $ 11,425
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation .................................................. 7,368 6,435 4,751
Amortization of deferred software development
costs and other assets ..................................... 6,897 4,720 3,402
Provision for deferred income taxes ........................... (2,587) (901) 726
Changes in certain operating assets and liabilities:
Accounts receivable, net ................................... (4,912) (8,362) (2,744)
Inventories ................................................ 1,218 (183) 310
Unearned service revenue ................................... 10,321 6,555 5,385
Accounts payable, accrued compensation
and other liabilities ................................... 9,780 4,570 5,440
Net investment in sales-type leases ........................ (4,750) (4,787) (3,766)
Other ......................................................... (1,834) (439) (1,045)
-------- -------- --------
Net cash and equivalents provided by operating activities 36,221 18,880 23,884
Investing activities:
Purchase of equipment ................................................ (6,309) (8,698) (9,646)
Capitalization of software development costs ......................... (6,589) (5,215) (4,014)
(Increase) decrease in marketable securities and investments ......... (6,416) 6,465 (15,279)
Acquisitions of businesses ........................................... (8,490) (1,671) (1,808)
Other ................................................................ -- -- (125)
-------- -------- --------
Net cash and equivalents used in investing activities ... (27,804) (9,119) (30,872)
Financing activities:
Net proceeds and tax benefits from exercise of stock options and
employee purchase plans ........................................... 5,167 2,769 3,618
Purchase of treasury stock ........................................... (4,257) (2,599) (537)
-------- -------- --------
Net cash and equivalents provided by financing activities 910 170 3,081
Effect of exchange rate changes on cash and equivalents ................... (137) (28) (25)
-------- -------- --------
Increase (decrease) in cash and equivalents ............................... 9,190 9,903 (3,932)
Cash and equivalents at the beginning of the period ....................... 20,698 10,795 14,727
-------- -------- --------
Cash and equivalents at the end of the period ............................. $ 29,888 $ 20,698 $ 10,795
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KRONOS INCORPORATED
NOTE A--Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts of Kronos Incorporated and its wholly-owned subsidiaries (the
"Company"). All intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made in the accompanying
consolidated financial statements in order to conform with the fiscal year 1998
presentation.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Translation of Foreign Currencies: The assets and liabilities of the Company's
foreign subsidiaries are denominated in each country's local currency and
translated at the year-end rate of exchange. The related income statement items
are translated at the average rate of exchange for the year. The resulting
translation adjustments are excluded from income and reflected as a separate
component of shareholders' equity. Realized and unrealized exchange gains or
losses arising from transaction adjustments are reflected in operations and are
not material. The Company has certain intercompany foreign currency transactions
that are deemed to be of a long-term investment nature. Exchange adjustments
related to these transactions are made directly to a separate component of
stockholders' equity.
Cash Equivalents: Cash equivalents consist of highly liquid investments with
maturities of three months or less at date of acquisition.
Marketable Securities and Investments: The Company's marketable securities and
investments consist of state revenue bonds and government agency bonds. Bonds
with a maturity of twelve months or longer at the balance sheet date are
classified as investments. The bonds are classified as held to maturity and are
carried at amortized cost. Unrealized gains and losses on investments classified
as held to maturity are not recognized until realized or until a decline in fair
value below cost is deemed to be other-than-temporary. Interest income earned on
the Company's cash, cash equivalents, marketable securities and investments is
included in other expense, net and amounted to $1,790,000, $1,401,000 and
$1,200,000 in fiscal 1998, 1997 and 1996, respectively.
Inventories: Inventories are stated at the lower of cost
(first-in, first-out method) or market.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE A--Summary of Significant Accounting Policies--(continued)
Equipment: Equipment is stated on the basis of cost less accumulated
depreciation, provisions for which have been computed using the straight-line
method over the estimated useful lives of the assets, which are principally as
follows:
Estimated
Assets Useful Life
- ----------------------------------------- --------------------------------------
Machinery and equipment 3-5 years
Furniture and fixtures 8-10 years
Leasehold improvements Shorter of economic life or
lease-term
Accounting for the Impairment of Long-Lived Assets: Long-lived assets used in
operations, such as the excess of cost over net assets of businesses acquired,
capitalized software development costs and equipment, are included in impairment
evaluations when events or circumstances exist that indicate the carrying amount
of those assets may not be recoverable. If the impairment evaluation indicates
the affected asset is not recoverable, the asset's carrying value would be
reduced to fair value. No event has occurred that would impair the value of
long-lived assets recorded in the accompanying consolidated financial
statements.
Revenue Recognition: The Company derives its revenues from the sale of frontline
labor management systems as well as sales of application software, parts and
components. The Company's systems consist of fully integrated software and
intelligent data collection terminals. The Company also derives revenues by
providing maintenance, professional and educational services to its direct
customers. The Company recognizes revenues from sales of its systems,
application software, parts and components at the time of shipment, unless the
Company has significant obligations remaining. When significant obligations
remain, revenue is not recognized until such obligations have been completed or
are no longer significant. The Company recognizes revenues from its sales-type
leases of systems at time of shipment. Service revenues are recognized ratably
over the contractual period or as the services are performed.
The Company provides installation services and certain warranties to its
customers. It also provides, without additional charge, certain software product
enhancements for customers covered under software maintenance contracts. The
provision for these expenses is made at the time revenues are recognized.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE A--Summary of Significant Accounting Policies--(continued)
Stock-Based Compensation: The Company accounts for its stock-based compensation
plans in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. Under APB 25, no compensation expense is recognized as the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation" (see Note J).
Income Taxes: The Company accounts for income taxes under the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Net Income Per Share: Net income per share is based on the weighted-average
number of common shares and, when dilutive, common stock equivalents outstanding
during the year. Common stock equivalents are attributable to stock options (See
Note L).
Newly Issued Accounting Standards: In June 1997 the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." The effect of the Company's adoption of SFAS
No. 130 in fiscal 1999 will be limited to the presentation of the Company's
disclosures. In June 1997 the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" effective for the Company in
fiscal 1999. The Company believes it operates in one segment and consequently,
adoption of SFAS No. 131 will result in no significant change in the
presentation of the Company's disclosures. In November 1997, the Accounting
Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 97-2,
"Software Revenue Recognition" which is also effective for the Company in fiscal
1999. The Company does not believe the adoption of SOP 97-2 will have a material
effect on the Company's financial statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE B--Concentration of Credit Risk
The Company markets and sells its products through its direct sales
organization, independent dealers and an OEM agreement with ADP, Inc. The
Company's dealers have significantly smaller resources than the Company. The
Company's direct sales organization sells to customers who are dispersed across
many different industries and geographic areas. The Company reviews a customer's
(including dealer's) credit history before extending credit and generally does
not require collateral. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
NOTE C--Equipment
Equipment consists of the following (in thousands):
September 30,
----------------------------------
1998 1997
- --------------------------------------------- ---------------- -----------------
Machinery and equipment $34,736 $30,077
Furniture and fixtures 7,750 6,774
Leasehold improvements 4,724 4,313
-------- --------
47,210 41,164
-------- --------
Less accumulated depreciation 31,394 24,126
-------- --------
$15,816 $17,038
======== ========
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE D--Leases
The Company leases systems to customers under sales-type leases as defined in
SFAS No. 13, "Accounting for Leases." The current portion of the net investment
in sales-type leases amounted to $5,066,000 and $3,241,000 at September 30, 1998
and 1997, respectively, and is included in other current assets. The components
of the net investment in sales-type leases are as follows (in thousands):
September 30,
---------------------------------
1998 1997
- ---------------------------------------------- ------------------- -------------
Minimum rentals receivable $15,281 $10,129
Estimated residual values of leased equipment
(unguaranteed) 396 329
Less unearned interest income 2,363 1,905
-------- --------
Net investment in sales-type leases $13,314 $ 8,553
======== ========
Minimum rentals receivable under existing leases as of September 30, 1998 are as
follows (in thousands):
Fiscal Year
- -------------------------------------------------------------- -----------------
1999 .................................... $ 6,241
2000 .................................... 4,523
2001 .................................... 2,751
2002 .................................... 1,253
2003 .................................... 489
Thereafter ........................... 24
--------
$15,281
========
NOTE E--Acquisitions
In fiscal 1998, 1997 and 1996, the Company completed various acquisitions of
dealer territories in the United States and Australia as well as the acquisition
of labor productivity technology. These acquisitions were accounted for under
the purchase method of accounting and, accordingly, the operating results are
included in the consolidated statements of income from the date of each
respective acquisition.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE E--Acquisitions--(continued)
The combined cost of the acquisitions which amounted to $5,718,000, $526,000,
and $750,000 in fiscal 1998, 1997 and 1996, respectively, largely relates to
intangible assets which are being amortized using the straight-line method over
a period not to exceed eight years. Related amortization expense amounted to
$2,503,000, $1,505,000 and $1,232,000 in fiscal 1998, 1997 and 1996,
respectively.
Certain agreements contain provisions that require the Company to make
additional payments based upon profitability of the business unit or if
specified minimum revenue requirements are met. These provisions expire during
fiscal years 1999 and 2003. Amounts earned under the terms of the agreements are
recorded as an increase in the excess of the total acquisition cost over the
fair value of the net assets acquired. During fiscal 1998, 1997 and 1996
payments of $2,884,000, $1,130,000 and $903,000, respectively, were made.
NOTE F--Deferred Software Development Costs
Costs incurred in the research, design and development of software for sale to
others are charged to expense until technological feasibility is established.
Thereafter, software development costs are capitalized and amortized to product
cost of sales on a straight-line basis over the lesser of three years or the
estimated economic lives of the respective products, beginning when the products
are offered for sale.
Amortization of capitalized software development costs amounted to $4,360,000,
$3,162,000 and $2,115,000 in fiscal 1998, 1997 and 1996, respectively. Total
research and development expenses charged to operations amounted to $14,263,000,
$11,455,000 and $9,299,000 in fiscal 1998, 1997 and 1996, respectively.
NOTE G--Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands):
September 30,
-----------------------------
1998 1997
- ------------------------------------------- ---------- ----------
Trade accounts payable $6,427 $5,419
Accrued warranty and professional services 5,587 4,720
Accrued other 3,707 3,078
---------- -----------
$15,721 $13,217
========== ===========
F-10
<PAGE>
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE H--Lease Commitments
The Company leases certain office space, manufacturing facilities and equipment
under long-term operating lease agreements. Future minimum rental commitments
under operating leases with noncancellable terms of one year or more are as
follows (in thousands):
Fiscal Year
- -------------------------------------------------------------- -----------------
1999 ................................. $ 6,141
2000 ................................. 5,299
2001 ................................. 3,238
2002 ................................. 1,945
2003 ................................. 1,253
Thereafter ........................... 1,387
--------
$19,263
========
Rent expense was $7,649,000, $7,360,000 and $5,756,000 in fiscal 1998, 1997 and
1996, respectively.
NOTE I--Capital Stock, Stock Repurchase Program and Stock Rights Agreement
Capital Stock: At the Company's January 1998 annual meeting, stockholders
approved an amendment to the Company's Restated Articles of Organization to
increase the number of authorized shares of common stock from 12,000,000 to
20,000,000. The Board of Directors is authorized, subject to any limitations
prescribed by law, from time to time to issue up to an aggregate of 1,000,000
shares of Preferred Stock, $1.00 par value per share, in one or more series,
each of such series to have such preferences, voting powers (up to 10 votes per
share), qualifications, and special or relative rights and privileges as shall
be determined by the Board of Directors in a resolution or resolutions providing
for the issue of such Preferred Stock.
Stock Repurchase Program: The Company's Board of Directors has authorized the
repurchase of up to 500,000 of the Company's outstanding common shares to be
used for the Company's employee stock option plans and employee stock purchase
plan. Under the stock repurchase program, the Company repurchased 77,500 and
90,000 common shares in fiscal 1998 and 1997, respectively, at a cost of
$2,708,000 and $2,250,000, respectively. In addition, the Company repurchases
common stock from employees in connection with the exercise of stock options.
F-11
<PAGE>
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE I--Capital Stock, Stock Repurchase Program
and Stock Rights Agreement--(continued)
Stock Rights Agreement: On November 17, 1995, the Company's Board of Directors
adopted a Rights Agreement. Under the Agreement, the Company distributed to
stockholders a dividend of one Right for each outstanding share of Common Stock.
Each Right initially represents the right to purchase one one-thousandth of a
share of a new series of preferred stock at an exercise price of $236, subject
to adjustment. The Company reserved 12,500 shares of its Preferred Stock for
issuance under the agreement. The Rights may be exercised, in whole or in part,
only if a person or group acquires beneficial ownership of 20% or more of the
Company's outstanding Common Stock or announces a tender or exchange offer upon
consummation of which, such person or group would beneficially own 25% or more
of the Company's Common Stock. When exercisable, each Right will entitle its
holder (other than such person or members of such group) to purchase for an
amount equal to the then current exercise price, in lieu of preferred stock, a
number of shares of the Company's Common Stock having a market value of twice
the Right's exercise price. In addition, when exercisable, the Company may
exchange the Rights, in whole or in part, at an exchange ratio of one share of
Common Stock or one one-thousandth of a share of Preferred Stock per Right. In
the event that the Company is acquired in a merger or other business
combination, the Rights would entitle the stockholders (other than the acquirer)
to purchase securities of the surviving company at a similar discount. Until
they become exercisable, the Rights will be evidenced by the Common Stock
certificates and will be transferred only with such certificates. Under the
Agreement, the Company can redeem all outstanding Rights at $.01 per Right at
any time until the tenth day following the public announcement that a 20%
beneficial ownership position has been acquired or the Company has been acquired
in a merger or other business combination. The Rights will expire on November
17, 2005.
NOTE J--Employee Benefit Plans
Stock Option Plans: The 1992 Equity Incentive Plan enables the Compensation
Committee of the Board of Directors of the Company to grant awards in the form
of options, stock appreciation rights, restricted or unrestricted stock awards,
deferred stock awards and performance awards, as defined in the Plan. During
fiscal 1998, 1997 and 1996, the Company granted under the Plan stock options to
purchase 346,500, 341,450 and 190,400 shares, respectively, of Common Stock at a
purchase price equal to the fair value of the Common Stock at the date of grant.
No other awards were made under the Plan through September 30, 1998. Options
granted in fiscal 1998 under the 1992 Equity Incentive Plan are exercisable in
equal installments over a four year period beginning one year from the date of
grant. Options granted in prior fiscal years under the same Plan are exercisable
in equal installments over a five year period. During fiscal 1998, the Plan was
amended to increase the number of shares available for issuance from 1,237,500
to 2,237,500. Options available for grant are 1,030,070 and 329,580 at September
30, 1998 and 1997, respectively.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE J--Employee Benefit Plans--(continued)
The Company also has several nonqualified and incentive stock option plans
adopted from 1979 through 1987. No additional options were granted under these
plans since fiscal 1992. Options granted under these plans are exercisable five
years after the date of grant and generally have a ten year contractual life.
The following schedule summarizes the changes in stock options issued under
various plans for the three fiscal years in the period ended September 30, 1998.
Options exercisable under the plans were 307,163, 325,959 and 312,896 in fiscal
1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Weighted - Ave
Exercise Price Exercise
Number of Shares Per Share Price Per Share
- --------------------- --------------- --------------- --------------------
<S> <C> <C> <C>
Outstanding at
September 30, 1995 769,395 $ 9.64 $ 0.22 - 23.33
Granted .......... 190,400 27.67 27.00 - 34.50
Exercised ........ (160,727) 6.65 0.22 - 20.33
Canceled ......... (41,214) 14.79 0.22 - 32.50
---------
Outstanding at
September 30, 1996 757,854 14.52 0.22 - 34.50
Granted .......... 341,450 23.78 17.50 - 26.00
Exercised ........ (94,182) 9.49 4.89 - 27.00
Canceled ......... (89,168) 19.99 0.22 - 32.50
---------
Outstanding at
September 30, 1997 915,954 17.96 4.89 - 34.50
Granted .......... 346,500 27.51 26.50 - 36.00
Exercised ........ (177,651) 12.88 4.89 - 32.50
Canceled ......... (46,990) 23.59 11.00 - 32.50
---------
Outstanding at
September 30, 1998 1,037,813 $ 21.76 $ 4.89 - 36.00
========== ========== ==============
</TABLE>
As discussed in Note A, the Company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," and continues to
account for stock-based compensation under APB 25. Generally no compensation
expense is recorded with respect to the Company's stock option and employee
stock purchase plans.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE J--Employee Benefit Plans--(continued)
The following summarizes information about options outstanding and exercisable
at September 30, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------ ---------------------------------
Weighted - Weighted - Weighted -
Average Remaining Average Exercise Average Exercise
Exercise Price Per Number of Contractual Life Price Per Share Number of Price Per Share
Share Shares Shares
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.89 - $ 5.00 95,558 2.2 years $ 4.94 95,558 $ 4.94
10.83 - 18.13 226,170 1.4 years 13.38 118,100 12.45
20.33 - 36.00 716,085 3.2 years 26.66 93,505 26.19
- --------------- --------- ---------- --------- --------- -----------
$ 4.89 - $36.00 1,037,813 2.7 years $ 21.76 307,163 $ 14.30
=============== ========= ========== ========= ========= ===========
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
September 30,
1998 1997
- ------------------------------- ---------------- ----------------
Expected volatility 31.9% 36.8%
Risk-free interest rate 5.9% 6.0%
Expected lives (in years) 4.4 4.5
The Company has not paid and does not anticipate paying cash dividends;
therefore, the expected dividend yield is assumed to be zero.
The weighted-average fair value of options granted under the 1992 Equity
Incentive Plan during fiscal 1998 and 1997 was $8.34 and $7.63, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE J--Employee Benefit Plans--(continued)
For purposes of the pro forma disclosure below, the estimated fair value of the
Company's stock-based compensation plan and the estimated benefit derived from
the Company's Stock Purchase Plan is amortized to expense over the options'
vesting period. The Company's pro forma net income and net income per share for
the years ended September 30, 1998 and 1997 are as follows:
Net income (in thousands): 1998 1997
As reported $14,720 $11,272
Pro forma 13,909 10,671
Earnings per share:
As reported $1.73 $1.34
Pro forma 1.63 1.27
These pro forma disclosures may not be representative of the effects for future
years since options vest over several years and options granted prior to fiscal
1996 are not considered in these disclosures.
Stock Purchase Plan: In accordance with the 1992 Employee Stock Purchase Plan,
eligible employees may authorize payroll deductions of up to 10% of their
compensation (not to exceed $12,500 in a six month period) to purchase shares at
the lower of 85% of the fair market value of the Company's Common Stock at the
beginning or end of the six month option period. During fiscal 1998, 51,443
shares were issued to employees at prices ranging from $22.84 to $26.19 per
share.
At September 30, 1998, a total of 2,231,633 shares of Common Stock were reserved
for issuance. Included in this amount are 1,972,325 shares for the 1992 Equity
Incentive Plan, 140,644 shares for the Employee Stock Purchase Plan and 118,664
shares for the various stock option plans adopted in the period 1979 through
1987.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE J--Employee Benefit Plans--(continued)
Defined Contribution Plan: The Company sponsors a defined contribution savings
plan for the benefit of substantially all employees. Total expense under the
plan was $1,182,000, $958,000 and $777,000 in fiscal 1998, 1997 and 1996,
respectively.
NOTE K--Income Taxes
The provision for income taxes consists of the following (in thousands):
Year Ended September 30,
----------------------------------------------------
1998 1997 1996
- ------------------------ ----------------- ---------------- -----------------
Current:
Federal $10,315 $6,682 $5,566
State 1,706 1,010 951
Foreign 177 225 31
------- ------- ------
12,198 7,917 6,548
------- ------- ------
Deferred:
Federal (2,264) (797) 654
State (323) (104) 72
------- ------- -------
(2,587) (901) 726
------- ------- -------
$9,611 $7,016 $7,274
======= ======= =======
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE K--Income Taxes--(continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, the Company has determined that recognition of the deferred tax asset
resulting from net operating loss carryforwards of foreign subsidiaries does not
meet the "more likely than not" criteria of the Standard and, therefore, has
provided a valuation allowance for related future tax benefits. Significant
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):
September 30,
--------------------------------
1998 1997
- ----------------------------------------------- --------------- ----------------
Deferred tax assets:
Inventory reserves $ 604 $ 501
Accounts receivable reserves 1,188 696
Accrued expenses 3,464 2,872
Unearned service revenue 2,022 591
Other 747 -
Net operating loss carryforwards of
foreign subsidiaries 2,400 1,041
------ ------
Total deferred tax assets 10,425 5,701
valuation allowance (2,400) (1,041)
------ ------
8,025 4,660
Deferred tax liabilities:
Capitalized software development costs (3,748) (2,925)
Other - (45)
------ ------
Net deferred tax assets $ 4,277 $ 1,690
====== ======
The effective tax rate differed from the United States statutory rate as
follows:
Year ended September 30,
1998 1997 1996
- ---------------------------------- ------------ ------------ ------------
Statutory rate 35% 35% 35%
State income taxes, net of federal
Income tax benefit 4 3 4
Foreign losses not benefited 5 3 1
Use of foreign net operating
loss carryforwards - (1) (1)
Income tax credits (2) (1) -
Other (2) (1) -
---- ---- ----
40% 38% 39%
==== ==== ====
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE K--Income Taxes--(continued)
There were $393,000 of net operating loss carryforwards utilized in fiscal 1997.
At September 30, 1998, the Company had $5,999,000 of available net operating
loss carryforwards from foreign operations that may be used to reduce future
income taxes payable in their respective countries. Of these carryforwards,
$2,029,000 expire from 2000 through 2005. The remaining carryforwards, totaling
$3,970,000, may be carried forward indefinitely.
The Company made income tax payments of $7,659,000, $4,847,000 and $4,424,000
in fiscal 1998, 1997 and 1996, respectively.
NOTE L -- Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings per Share," which the Company adopted in the first quarter of
fiscal 1998. All earnings per share amounts presented have been restated to
conform to SFAS No. 128 requirements. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options is excluded. The
impact of SFAS No.128, "Earnings per Share" resulted in an increase in basic
earnings per share of $.04 per share and $.05 per share in fiscal 1997 and 1996,
respectively. The impact of SFAS No. 128, "Earnings per Share" on the
calculation of diluted earnings per share for these periods was not material.
Options to purchase 40,400 shares of common stock at prices ranging from $34.44
to $36.00 per share were outstanding during fiscal 1998 but were not included in
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
F-18
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
For The Year Ended September 30,
---------------------------------------------
1998 1997 1996
------------- ------------- ------------
Net income (in thousands) $14,720 $11,272 $11,425
============= ============= ============
Weighted-average shares 8,261,777 8,187,977 8,041,428
Effect of dilutive securities:
Employee stock options 261,527 225,576 301,846
------------- ------------- ------------
Adjusted weighted-average shares
and assumed conversions 8,523,304 8,413,533 8,343,274
============= ============= ============
Basic earnings per share $1.78 $1.38 $1.42
============= ============= ============
Diluted earnings per share $1.73 $1.34 $1.37
============= ============= ============
F-19
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Kronos Incorporated
We have audited the accompanying consolidated balance sheets of Kronos
Incorporated as of September 30, 1998 and 1997 and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended September 30, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kronos
Incorporated at September 30, 1998 and 1997, and the consolidated results of
operations and cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
October 26, 1998
F-20
<PAGE>
<TABLE>
<CAPTION>
KRONOS INCORPORATED
SCHEDULE II - Valuation and Qualifying Accounts
(In thousands)
=============================================================================================================
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------------------------------------------------------------------------
Additions
-------------------------
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End
Description of Period Expenses Describe Describe of Period
<S> <C> <C> <C> <C> <C> <C>
Year ended September 30, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $1,001 $ 322 $336 (1) $ 987
====== ====== ======= ==== ======
Year ended September 30, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 987 $ 494 $390 (1) $1,091
====== ====== ======= ==== ======
Year ended September 30, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $1,091 $1,016 $839 (1) $1,268
====== ====== ======= ==== ======
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
F-21
<PAGE>
Exhibit Index
Exhibit
No. Description
3.1(10) Restated Articles of Organization of the Registrant as amended.
3.2* Amended and Restated By-laws of the Registrant.
4* Specimen Stock Certificate.
10.1*(11) 1986A Stock Option Plan.
10.2(10)(11) 1992 Equity Incentive Plan, as amended and restated.
10.3(9)(11) 1992 Employee Stock Purchase Plan, as amended and restated.
10.4(3) Lease dated November 16, 1993, between Teachers Realty Corporation
and the Registrant, relating to premises leased in Chelmsford, MA.
10.5(5) Lease dated August 8, 1995, between Principal Mutual Life
Insurance Company and the Registrant, relating to leased premises
in Chelmsford, MA.
10.6(8) Fleet Bank Letter Agreement and Promissory Note dated January 1,
1997, relating to amendment of $3,000,000 credit facility.
10.7(2)(12) Software License and Support and Hardware Purchase Agreement
dated April 2, 1993, between ADP, Inc. and the Registrant.
10.7.1(7)(12)Amendments dated July 22, 1996 to Software License and Support and
Hardware Purchase Agreement dated April 2, 1993 between ADP, Inc.
and the Registrant.
10.8* Sales Agreement dated December 6, 1990, between Integrated Design,
Inc. and the Registrant.
10.8.1(6) Amendment dated November 2, 1995 to Sales Agreement dated December
6, 1990 between Integrated Design and the Registrant.
10.9(3)(12) Acquisition Agreement dated November 2, 1993 between
Interboro Systems Corporation and the Registrant.
10.10* Form of Indemnity Agreement entered into among the Registrant
and Directors of the Registrant.
10.11(1) Lease dated November 9, 1992, as amended, between John Hancock
Mutual Life Insurance Company and the Registrant, relating to
premises leased in Waltham, MA.
10.11.1(6) Amendment dated January 1, 1996 to Lease dated November 9,
1992, as amended, between John Hancock Mutual Life Insurance
Company and the Registrant, relating to premises leased in
Waltham, MA.
10.11.2(8) Amendment dated October 11, 1996 to Lease dated November 9,
1992, as amended, between John Hancock Mutual Life Insurance
Company and the Registrant relating to premises leased in
Waltham, MA.
10.12(4) Agreement of Reorganization among Kronos Incorporated, Kronos
S/T Corporation, ShopTrac Data Collection Systems, Inc.,
Thomas J. O'Malia and Mark J. MacWhirter, dated March 31,
1994.
21 Subsidiaries of the Registrant.
<PAGE>
Exhibit Index (continued)
Exhibit
No. Description
23 Consent of Independent Auditors.
27 Financial Data Schedule.
* Incorporated by reference to the same Exhibit Number in the
Company's Registration Statement on Form S-1 (File No. 33-47383).
(1) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30, 1992.
(2) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended April 3, 1993.
(3) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30, 1993.
(4) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended July 2, 1994.
(5) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30, 1995.
(6) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended March 30, 1996.
<PAGE>
Exhibit Index (continued)
Exhibit
No. Description
(7) Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30, 1996.
(8) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended December 28, 1996.
(9) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended March 29, 1997.
(10) Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended April 4, 1998.
(11) Management contract or compensatory plan or arrangement filed
as an exhibit to this Form 10-K pursuant to Items 14(a) and
14(c) of Form 10-K.
(12) Confidential treatment was granted for certain portions of this
agreement.
EXHIBIT 21 - Subsidiaries of the Registrant
Jurisdiction
Corporation of Incorporation
Kronos Computerized Time Systems, Inc. Canada
Kronos Systems Limited United Kingdom
Kronos International Sales Corp. U.S. Virgin Islands
Kronos Securities Corporation Massachusetts
Kronos de Mexico, S.A. de C.V. Mexico
Kronos Australia Pty. Ltd. Australia
Kronos Solutions Pty. Ltd. South Africa
Kronos Brasil Ltda Brazil
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-08987) pertaining to the 1992 Equity Incentive Plan of our report
dated October 26, 1998 with respect to the consolidated financial statements and
schedule of Kronos Incorporated included in this Annual Report (Form 10-K) for
the year ended September 30, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
December 8, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of the Corporation for the
year ended September 30, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000886903
<NAME> Kronos Incorporated
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-mos 12-mos
<FISCAL-YEAR-END> Sep-30-1998 Sep-30-1997
<PERIOD-START> Oct-01-1997 Oct-01-1996
<PERIOD-END> Sep-30-1998 Sep-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 29,888 20,698
<SECURITIES> 17,501 15,530
<RECEIVABLES> 44,020 39,908
<ALLOWANCES> 1,268 1,091
<INVENTORY> 3,065 4,322
<CURRENT-ASSETS> 108,566 90,183
<PP&E> 47,210 41,164
<DEPRECIATION> 31,394 24,126
<TOTAL-ASSETS> 160,775 128,114
<CURRENT-LIABILITIES> 63,479 49,028
<BONDS> 0 0
0 0
0 0
<COMMON> 83 82
<OTHER-SE> 87,120 72,391
<TOTAL-LIABILITY-AND-EQUITY> 160,775 128,114
<SALES> 135,186 116,115
<TOTAL-REVENUES> 202,469 170,538
<CGS> 32,305 29,816
<TOTAL-COSTS> 76,390 66,265
<OTHER-EXPENSES> 101,748 85,985
<LOSS-PROVISION> 1,016 494
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 24,331 18,288
<INCOME-TAX> 9,611 7,016
<INCOME-CONTINUING> 14,720 11,272
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,720 11,272
<EPS-PRIMARY> 1.78 1.38
<EPS-DILUTED> 1.73 1.34
</TABLE>
