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 December 28, 1996
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 04-264094
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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)
(617) 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
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As of December 31, 1996, 8,159,181 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
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 December 28, 1996 and December 30, 1995 1
Condensed Consolidated Balance Sheets at December 28, 1996
and September 30, 1996 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 28, 1996 and December 30, 1995 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
UNAUDITED
Three Months Ended
--------------------------
December 28, December 30,
1996 1995
----------- -----------
Net revenues:
Product .......................................... $ 25,718 $ 22,538
Service .......................................... 11,392 8,929
----------- -----------
37,110 31,467
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Cost of sales:
Product .......................................... 6,415 5,981
Service .......................................... 7,830 6,540
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14,245 12,521
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Gross profit ................................ 22,865 18,946
Expenses:
Sales and marketing .............................. 13,101 10,409
Engineering, research and development ............ 3,757 2,646
General and administrative ....................... 2,508 2,352
Other (income) expense, net ...................... (37) 52
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19,329 15,459
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Income before income taxes .................. 3,536 3,487
Provision for income taxes ............................. 1,350 1,336
----------- -----------
Net income .................................. $ 2,186 $ 2,151
=========== ===========
Net income per common share:
Primary and fully diluted ........................ $ 0.26 $ 0.26
Average common and common equivalent shares outstanding:
Primary ..................................... 8,371,366 8,281,659
=========== ===========
Fully diluted ............................... 8,397,349 8,296,248
=========== ===========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
UNAUDITED
December 28, September 30,
1996 1996
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ASSETS
Current assets:
Cash and equivalents .............................................$ 13,587 $ 10,795
Marketable securities ............................................ 20,200 21,995
Accounts receivable, less allowances for doubtful accounts of $977
at December 28, 1996 and $987 at September 30, 1996 ........... 28,979 30,622
Inventories ...................................................... 4,534 4,149
Deferred income taxes ............................................ 3,025 3,025
Other current assets ............................................. 4,033 3,765
----------- -----------
Total current assets ...................................... 74,358 74,351
Equipment, net ...................................................... 15,643 14,738
Excess of cost over net assets of businesses acquired ............... 6,955 7,221
Other assets ........................................................ 10,818 8,556
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Total assets ..............................................$ 107,774 $ 104,866
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................$ 10,997 $ 11,894
Accrued compensation ............................................. 9,045 8,445
Federal and state income taxes payable ........................... 1,465 1,367
Unearned service revenue ......................................... 17,492 16,388
----------- -----------
Total current liabilities ................................. 38,999 38,094
Deferred income taxes ............................................... 2,236 2,236
Unearned service revenue ............................................ 2,690 2,721
Other liabilities ................................................... 615 717
Shareholders' equity:
Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares,
no shares issued and outstanding
Common Stock, par value $.01 per share: authorized 12,000,000 shares,
8,138,645 shares and 8,124,133 shares issued at December 28, 1996 and
September 30, 1996, respectively ................................ 81 81
Additional paid-in capital ....................................... 27,500 27,512
Retained earnings ................................................ 35,959 33,773
Equity adjustment from translation ............................... (271) (251)
Cost of Treasury Stock (1,196 shares and 583 shares at
December 28, 1996 and September 30, 1996, respectively) ....... (35) (17)
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Total shareholders' equity ................................ 63,234 61,098
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Total liabilities and shareholders' equity ................$ 107,774 $ 104,866
=========== ===========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Three Months Ended
------------------------
December 28, December 30,
1996 1995
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Operating activities:
Net income ................................................................ $ 2,186 $ 2,151
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation .................................................... 1,460 1,001
Amortization of deferred software development costs and
excess of cost over net assets of businesses acquired ....... 1,022 753
Changes in certain operating assets and liabilities:
Accounts receivable, net .................................... 1,651 1,766
Inventories ................................................. (382) (29)
Unearned service revenue .................................... 1,015 988
Accounts payable, accrued compensation
and other liabilities ................................... (95) 985
Net investment in sales-type leases ......................... (1,810)
Other ........................................................... (498) (458)
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Net cash and equivalents provided by operating activities 4,549 7,157
Investing activities:
Purchase of equipment ..................................................... (2,229) (2,312)
Capitalization of software development costs .............................. (1,163) (705)
(Increase) decrease in marketable securities .............................. 1,795 (1,975)
Acquisitions of businesses ................................................ (178)
Other ..................................................................... (9) 146
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Net cash and equivalents used in investing activities ... (1,784) (4,846)
Financing activities:
Principal payments under capital leases ................................... (18)
Net proceeds from exercise of stock option and employee stock
purchase plans ........................................................ 26 169
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Net cash and equivalents provided by financing activities 26 151
Effect of exchange rate changes on cash and equivalents ........................ 1 (19)
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Increase in cash and equivalents ............................................... 2,792 2,443
Cash and equivalents at the beginning of the period ............................ 10,795 14,727
-------- --------
Cash and equivalents at the end of the period .................................. $ 13,587 $ 17,170
======== ========
See accompanying notes to condensed consolidated financial statements.
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, 1996. The results of
operations for the three month period ended December 28, 1996 and December 30,
1995 are not necessarily indicative of the results for a full fiscal year.
Certain amounts have been reclassified in fiscal 1996 to permit comparison with
fiscal 1997.
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 and fourth quarters of each fiscal year may vary
slightly 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 - Inventories
Inventories consist of the following (in thousands):
December 28, September 30,
1996 1996
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Finished goods $2,340 $2,148
Work - in - process 432 283
Raw materials 1,762 1,718
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$4,534 $4,149
=================== ===================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Revenues. Revenues for the first quarter of fiscal 1997 amounted to $37.1
million as compared with $31.5 million for the first quarter of the prior year.
Revenue growth amounted to 18% and 20% in the first quarters of fiscal 1997 and
1996, respectively. During the quarter, the Company continued the transition of
its core products from DOS and Unix platforms to the Windows and client/server
environments. In December, an enhanced version of the Company's time and
attendance Windows product was released for distribution. Due to the timing of
that product release, there was no significant impact on revenues in the
quarter. The Company anticipates releasing an enhanced version of its time and
attendance product in the client/server environment in the second quarter as
well as enhanced versions of its time and attendance product in both the
client/server and Windows environment throughout fiscal 1997. Revenue growth in
fiscal 1997 will depend in part on the commercial success of its Windows and
client/server versions of its time and attendance product. Product revenues for
the quarter increased 14% to $25.7 million principally driven by customer
demand. Service revenues for the quarter increased 28% to $11.4 million. The
growth in service revenues reflects increases in maintenance revenue from
expansion of the installed base as well as an increase in the level of services
accompanying the sale of new products.
Gross Profit. Gross profit as a percentage of revenues was 62% in the
first quarter of fiscal 1997 as compared with 60% 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 75% in the quarter from
73% in the first quarter of the prior year. The improvement in product gross
profit in the first quarter of fiscal 1997 is principally attributable to the
Company's ability to decrease the per unit product cost of the hardware
component of its systems. Service gross profit increased to 31% in the first
quarter of fiscal 1997 from 27% in the first quarter of the prior year. The
increase in service gross profit is primarily attributable to the growth in
service revenues. The Company has been able to absorb the increase in service
volume without a proportionate increase in service expenses, favorably impacting
gross margins. 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 52% in the first
quarter of fiscal 1997 as compared with 49% in the first quarter of the prior
year. Sales and marketing expenses as a percentage of revenues increased to 35%
in the first quarter of fiscal 1997 from 33% in the first quarter of the prior
year. The increase in sales and marketing expenses as a percentage of revenues
is a result of the Company's investment in its international direct sales
organization and corporate marketing organization.
Engineering, research and development expenses increased as a percentage
of revenues to 10% in the first quarter of fiscal 1997 as compared with 8% in
the first quarter of the prior year. The growth in engineering, research and
development expenses as a percentage of revenues results primarily from the
Company's continuing development of new products. Expenses of $3.8 million and
$2.6 million in the first quarter of fiscal 1997 and 1996 are net of capitalized
software development costs of $1.2 million and $.7 million, respectively.
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 1997 and 1996. 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.
Liquidity and Capital Resources
Working capital as of December 28, 1996, amounted to $35.4 million as
compared with $36.3 million at September 30, 1996. As of those dates, cash and
equivalents and marketable securities amounted to $33.8 million and $32.8
million, respectively. Cash generated from operations decreased to $4.6 million
in the first quarter of fiscal 1997 from $7.2 million in the first quarter of
the prior year, principally due to the Company's investment in its internal
customer lease program. The Company's investment in equipment in the quarter was
comparable to its investment in the first quarter of the prior year.
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 existing cash and equivalents together
with internally generated cash. The Company recently decided to cancel its
committed bank line of credit of $3.0 million, in light of the Company's
available cash and equivalents. The Company has replaced the line of credit with
an informal $3.0 million credit facility in which the bank may offer credit to
the Company at the bank's discretion.
Certain Factors That May Affect Future Operating Results
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 ability to attract and retain sufficient
technical personnel, the dependence on alternate distribution channels, 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, 1996, 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 quarter are not necessarily indicative of
results for any future period.
Product Development and Technological Change. The markets for time and
attendance 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. The Company is
transitioning its product offerings from DOS and Unix platforms to the Windows
and client/server environments. The Company's revenue growth and results of
operations in fiscal 1997 will depend in part on the success of this product
transition.
Competition. The time and attendance 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment dated October 11, 1996 to Lease dated November 6,
1992, as amended, between John Hancock Mutual Life Insurance
Company and the Registrant, relating to premises leased in
Waltham, MA.
10.2 Fleet Bank Letter Agreement and Promissory Note dated
January 1, 1997 relating to amendment of $3,000,000 credit
facility.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during
the fiscal quarter ended December 28, 1996.
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 7, 1997
KRONOS INCORPORATED
EXHIBIT INDEX
Exhibit
Number Description
10.1 Amendment dated October 11, 1996 to Lease dated November 6,
1992, as amended, between John Hancock Mutual Life Insurance
Company and the Registrant, relating to premises leased in
Waltham, MA.
10.2 Fleet Bank Letter Agreement and Promissory Note dated
January 1, 1997 relating to amendment of $3,000,000 credit
facility.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule