SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 3, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20109
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Kronos Incorporated
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2640942
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Fifth Avenue, Waltham, MA 02154
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(Address of principal executive offices) (Zip Code)
(781) 890-3232
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
As of January 30, 1998, 8,264,902 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
KRONOS INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the Three
Months Ended January 3, 1998 and December 28, 1996 1
Condensed Consolidated Balance Sheets at January 3, 1998
and September 30, 1997 2
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended January 3, 1998 and December 28, 1996 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
<TABLE>
<CAPTION>
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
UNAUDITED
Three Months Ended
--------------------------
January 3, December 28,
1998 1996
----------- -----------
<S> <C> <C>
Net revenues:
Product .......................................... $ 29,761 $ 25,718
Service .......................................... 14,812 11,392
----------- -----------
44,573 37,110
----------- -----------
Cost of sales:
Product .......................................... 7,040 6,415
Service .......................................... 10,129 7,972
----------- -----------
17,169 14,387
----------- -----------
Gross profit ............................... 27,404 22,723
Expenses:
Sales and marketing .............................. 16,051 12,744
Engineering, research and development ............ 4,324 3,972
General and administrative ....................... 3,095 2,508
Other (income) expense, net ...................... (2) (37)
----------- -----------
23,468 19,187
----------- -----------
Income before income taxes ................. 3,936 3,536
Provision for income taxes ............................. 1,504 1,350
----------- -----------
Net income ................................. $ 2,432 $ 2,186
=========== ===========
Net income per common share:
Basic ...................................... $ 0.30 $ 0.27
=========== ===========
Diluted .................................... $ 0.29 $ 0.26
=========== ===========
Average common and common equivalent shares outstanding:
Basic ...................................... 8,190,075 8,131,153
=========== ===========
Diluted .................................... 8,441,075 8,397,349
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
UNAUDITED
January 3, September 30,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents .............................................................................. $ 16,601 $ 20,698
Marketable securities ............................................................................. 20,545 15,530
Accounts receivable, less allowances for doubtful accounts of $996
at January 3, 1998 and $1,091 at September 30, 1997 ............................................ 38,021 38,817
Inventories ....................................................................................... 4,624 4,322
Deferred income taxes ............................................................................. 4,277 4,277
Other current assets .............................................................................. 7,222 6,539
--------- ---------
Total current assets ....................................................................... 91,290 90,183
Equipment, net ....................................................................................... 16,132 17,038
Net investment in sales-type leases .................................................................. 5,396 5,312
Excess of cost over net assets of businesses acquired ................................................ 7,572 7,855
Other assets ......................................................................................... 8,235 7,726
--------- ---------
Total assets ............................................................................... $ 128,625 $ 128,114
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................................................. $ 12,559 $ 13,217
Accrued compensation .............................................................................. 8,070 10,105
Federal and state income taxes payable ............................................................ 1,977 3,497
Unearned service revenue .......................................................................... 23,419 22,209
--------- ---------
Total current liabilities .................................................................. 46,025 49,028
Deferred income taxes ................................................................................ 2,587 2,587
Unearned service revenue ............................................................................. 3,974 3,523
Other liabilities .................................................................................... 460 503
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 12,000,000 shares,
8,254,154 shares and 8,246,453 shares issued at January 3, 1998 and
September 30, 1997, respectively ............................................................... 83 82
Additional paid-in capital ........................................................................ 28,642 29,770
Retained earnings ................................................................................. 47,478 45,045
Equity adjustment from translation ................................................................ (624) (262)
Cost of Treasury Stock (0 shares and 86,493
shares at January 3, 1998 and September 30, 1997, respectively) ................................ -- (2,162)
--------- ---------
Total shareholders' equity ................................................................. 75,579 72,473
--------- ---------
Total liabilities and shareholders' equity ................................................. $ 128,625 $ 128,114
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Three Months Ended
---------------------
January 3, December 28,
1998 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income ..................................................................................... $ 2,432 $ 2,186
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation ........................................................................... 1,788 1,462
Amortization of deferred software development costs and
excess of cost over net assets of businesses acquired ............................... 1,443 1,024
Changes in certain operating assets and liabilities:
Accounts receivable, net ............................................................ 634 1,584
Inventories ......................................................................... (322) (387)
Unearned service revenue ............................................................ 1,707 972
Accounts payable, accrued compensation
and other liabilities ........................................................... (3,850) (57)
Net investment in sales-type leases ................................................. (291) (1,810)
Other .................................................................................. (517) (445)
-------- --------
Net cash and equivalents provided by operating activities ....................... 3,024 4,529
Investing activities:
Purchase of equipment .......................................................................... (920) (2,218)
Capitalization of software development costs ................................................... (1,444) (1,163)
(Increase) decrease in marketable securities ................................................... (5,015) 1,795
Acquisitions of businsesses .................................................................... (726) (178)
-------- --------
Net cash and equivalents used in investing activities ........................... (8,105) (1,764)
Financing activities:
Net proceeds from exercise of stock option and employee stock
purchase plans .............................................................................. 1,062 53
Purchase of treasury stock ..................................................................... (27) (27)
-------- --------
Net cash and equivalents provided by financing activities ....................... 1,035 26
Effect of exchange rate changes on cash and equivalents ............................................. (51) 1
-------- --------
Increase (decrease) in cash and equivalents ......................................................... (4,097) 2,792
Cash and equivalents at the beginning of the period ................................................. 20,698 10,795
-------- --------
Cash and equivalents at the end of the period ....................................................... $ 16,601 $ 13,587
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
KRONOS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - General
The accompanying unaudited condensed consolidated financial statements include
all adjustments, consisting of normal recurring accruals, that management
considers necessary for a fair presentation of the Company's financial position
and results of operations as of and for the interim periods presented pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
the disclosures in these financial statements are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the Company's audited financial
statements for the fiscal year ended September 30, 1997. The results of
operations for the three month period ended January 3, 1998 is not necessarily
indicative of the results for a full fiscal year. Certain amounts have been
reclassified in fiscal 1997 to permit comparison with fiscal 1998.
NOTE B - Fiscal Quarters
The Company utilizes a system of fiscal quarters. Under this system, the first
three quarters of each fiscal year end on a Saturday. However, the fourth
quarter of each fiscal year will always end on September 30. Because of this,
the number of days in the first quarter (95 days in fiscal 1998 and 89 days in
fiscal 1997) and fourth quarter (88 days in fiscal 1998 and 94 days in fiscal
1997) of each fiscal year varies from year to year. The second and third
quarters of each fiscal year will be exactly thirteen weeks long. This policy
does not have a material effect on the comparability of results of operations
between quarters.
NOTE C - Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts presented have been restated
to conform to SFAS No. 128 requirements.
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
January 3, 1998 December 28, 1996
------------------ --------------------
Net income (in thousands) $2,432 $2,186
================== ====================
Weighted average shares 8,190,075 8,131,153
Effect of dilutive securities:
Employee stock options 251,000 266,196
------------------ --------------------
Adjusted weighted average shares
and assumed conversions 8,441,075 8,397,349
================== ====================
Basic earnings per share $0.30 $0.27
================== ====================
Diluted earnings per share $0.29 $0.26
================== ====================
NOTE D - Subsequent Events
On January 30, 1998, the stockholders of the Company approved an increase in the
number of authorized shares of common stock from 12,000,000 to 20,000,000 at the
1998 Annual Meeting of Stockholders.
<PAGE>
Item 2. 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.
Results of Operations
Revenues. Revenues for the first quarter of fiscal 1998 amounted to $44.6
million as compared with $37.1 million for the first quarter of the prior year.
Revenue growth amounted to 20% and 18% in the first quarters of fiscal 1998 and
1997, respectively. Product revenues for the quarter increased 16% to $29.8
million from $25.7 million in the same period of fiscal 1997. In the first
quarter of fiscal 1997, product revenues increased 14% over the same period in
fiscal 1996. Product revenue growth was principally driven by customer demand.
Demand for the Company's Windows and client/server based products increased
substantially in the first quarter of fiscal 1998 as compared to the first
quarter of fiscal 1997. Revenues generated by client/server based products
included several major account sales. Service revenues for the quarter increased
30% to $14.8 million from $11.4 million in the same period of fiscal 1997. In
the first quarter of fiscal 1997, service revenues increased 28% over the same
period in fiscal 1996. The growth in service revenues reflects an increase in
the level of professional services accompanying new sales as well as an increase
in maintenance revenue from expansion of the installed base.
Gross Profit. Gross profit as a percentage of revenues was 62% in the first
quarter of fiscal 1998 as compared with 61% in the first quarter of the prior
year. The improvement in gross profit was evidenced in both product and service
gross profit. Product gross profit increased to 76% in the quarter from 75% in
the first quarter of the prior year. The improvement in product gross profit in
the first quarter of fiscal 1998 is primarily attributable to an increased
proportion of product revenues generated by software, which typically generates
higher gross profit. The unusually high level of software revenue realized in
the first quarter of fiscal 1998 was impacted by several major account sales.
Service gross profit increased to 32% in the first quarter of fiscal 1998 from
30% in the first quarter of the prior year. The increase in service gross profit
is primarily attributable to the growth in service revenues without a
proportionate increase in service expenses. This has been 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 53% in the first
quarter of fiscal 1998 as compared with 52% in the first quarter of the prior
year. Sales and marketing expenses as a percentage of revenues increased to 36%
in the first quarter of fiscal 1998 from 34% in the first quarter of the prior
year. The increase in sales and marketing expenses as a percentage of revenues
is primarily driven by less than anticipated revenues from the Company's
international and OEM distribution channels. Sales costs supporting the OEM
channel are relatively fixed. Sales costs supporting the international
operations are growing as the Company focuses on expanding these markets.
Engineering, research and development expenses as a percentage of revenues
were 10% in the first quarter of fiscal 1998 as compared with 11% in the first
quarter of the prior year. Expenses of $4.3 million and $4.0 million in the
first quarter of fiscal 1998 and 1997, respectively, are net of capitalized
software development costs of $1.4 million and $1.2 million, respectively. The
growth in engineering, research and development expenses results primarily from
efforts to standardize products and the development of new products in the
Windows and client/server environments.
General and administrative expenses as a percentage of revenues amounted to
7% for all periods presented. Other (income) expense, net amounted to less than
1% of revenues for all periods presented. Other (income) expense, net is
composed primarily of amortization of intangible assets related to acquisitions
made by the Company which is partially offset by interest income earned on its
investments.
Income Taxes. The provision for income taxes as a percentage of pretax
income was 38% in the first quarters of both fiscal 1998 and 1997. The Company's
effective income tax rate may fluctuate between periods as a result of various
factors, none of which is material, either individually or in aggregate, to the
consolidated results of operations.
<PAGE>
Liquidity and Capital Resources
Working capital as of January 3, 1998, amounted to $45.3 million as
compared with $41.2 million at September 30, 1997. As of those dates, cash and
equivalents and marketable securities amounted to $37.1 million and $36.2
million, respectively. Cash generated from operations decreased to $3.0 million
in the first quarter of fiscal 1998 from $4.5 million in the first quarter of
the prior year, principally due to a reduction in accruals for compensation and
income tax related obligations offset by an increase in unearned service revenue
and a decrease in the net investment in sales-type leases in the current period.
The Company's investment in equipment in the first quarter of the fiscal year
decreased from its investment in the first quarter of the prior year due to the
timing of capital projects. The Company anticipates that investment in equipment
in fiscal 1998 will be comparable to fiscal 1997.
Cash generated from operations was more than sufficient to fund investments
in equipment and capitalized software development costs. The Company expects to
fund its investments in equipment and software development costs over the
remainder of its fiscal year with available cash and operating cash flow
generated in fiscal 1998.
Certain Factors That May Affect Future Operating Results
Except for historical matters, the matters discussed in this Quarterly
Report on Form 10-Q 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 Company's actual operating results may differ from those indicated by
forward looking statements made in this Quarterly Report on Form 10-Q and
presented elsewhere by management from time to time because of a number of
factors including the potential fluctuations in quarterly results, timing of new
product announcements or introductions by the Company and its competitors,
competitive pricing pressures, the dependence on alternate distribution
channels, potential effects associated with the century change, the ability to
attract and retain sufficient technical personnel, and the dependence on the
Company's time and attendance product line and on key vendors, as further
described below and in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997, which factors are specifically incorporated by
reference herein.
Potential Fluctuations in Quarterly Results. The Company's quarterly
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. The markets for time and
attendance, labor management, and data collection systems are characterized by
continual change and improvement in computer software and hardware technology.
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.
Although management believes the Company has substantially completed the product
transition from DOS and UNIX platforms to the Windows and client/server
environments, the Company's revenue growth and results of operations in fiscal
1998 will depend in part on the continuing growth of sales of its Windows and
client/server products.
Competition. The time and attendance, labor management, and data collection
industries are highly competitive. Competition is increasing as competitors in
related industries, such as human resources and payroll, 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, 1997, approximately 22% 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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during
the fiscal quarter ended January 3, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS INCORPORATED
By /s/ Paul A. Lacy
Paul A. Lacy
Vice President of Finance
and Administration
(Duly Authorized Officer and
Principal Financial Officer)
February 12, 1998
<PAGE>
KRONOS INCORPORATED
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE CORPORATION FOR THE THREE
MONTHS ENDED JANUARY 3, 1998 AND DECEMBER 28, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS </LEGEND>
<CIK> 0000886903
<NAME> KRONOS INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> JAN-03-1998 DEC-28-1996
<EXCHANGE-RATE> 1 1
<CASH> 16,601 13,587
<SECURITIES> 20,545 20,200
<RECEIVABLES> 39,017 29,956
<ALLOWANCES> 996 977
<INVENTORY> 4,624 4,534
<CURRENT-ASSETS> 91,290 74,358
<PP&E> 42,024 34,809
<DEPRECIATION> 25,892 19,166
<TOTAL-ASSETS> 128,625 107,774
<CURRENT-LIABILITIES> 46,025 38,999
<BONDS> 0 0
0 0
0 0
<COMMON> 83 81
<OTHER-SE> 75,496 63,153
<TOTAL-LIABILITY-AND-EQUITY> 128,625 107,774
<SALES> 29,761 25,718
<TOTAL-REVENUES> 44,573 37,110
<CGS> 7,040 6,415
<TOTAL-COSTS> 17,169 14,387
<OTHER-EXPENSES> 23,468 19,187
<LOSS-PROVISION> 108 83
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,936 3,536
<INCOME-TAX> 1,504 1,350
<INCOME-CONTINUING> 2,432 2,186
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,432 2,186
<EPS-PRIMARY> 0.30 0.27
<EPS-DILUTED> 0.29 0.26
</TABLE>
