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 March 29, 1997 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 02154 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (617) 890-3232 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (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 March 31, 1997, 8,204,572 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 and Six Months Ended March 29, 1997 and March 30, 1996 1 Condensed Consolidated Balance Sheets at March 29, 1997 and September 30, 1996 2 Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 29, 1997 and March 30, 1996 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 4. Submission of Matters to a Vote of Security Holders 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 and per share amounts) UNAUDITED Three Months Ended Six Months Ended --------------------------- ------------------------------ March 29, March 30, March 29, March 30, 1997 1996 1997 1996 -------------- ------------ -------------- -------------- Net revenues: Product .............................. $ 26,121 $ 23,236 $ 51,839 $ 45,774 Service .............................. 13,282 9,866 24,674 18,795 ----------- ----------- ----------- ----------- 39,403 33,102 76,513 64,569 Cost of sales: Product .............................. 7,041 6,321 13,456 12,302 Service .............................. 8,622 6,797 16,452 13,337 ----------- ----------- ----------- ----------- 15,663 13,118 29,908 25,639 ----------- ----------- ----------- ----------- Gross profit .................... 23,740 19,984 46,605 38,930 Expenses: Sales and marketing .................. 14,158 10,828 27,259 21,237 Engineering, research and development 4,034 2,856 7,791 5,502 General and administrative ........... 2,745 2,406 5,253 4,758 Other (income) expense, net .......... (75) 61 (112) 113 ----------- ----------- ----------- ----------- 20,862 16,151 40,191 31,610 ----------- ----------- ----------- ----------- Income before income taxes ...... 2,878 3,833 6,414 7,320 Provision for income taxes ................ 1,099 1,468 2,449 2,804 ----------- ----------- ----------- ----------- Net income ...................... $ 1,779 $ 2,365 $ 3,965 $ 4,516 =========== =========== =========== =========== Net income per common share: Primary and fully diluted ............ $ 0.21 $ 0.28 $ 0.47 $ 0.54 Average common and common equivalent shares outstanding: Primary ......................... 8,439,616 8,319,500 8,405,492 8,300,580 =========== =========== =========== =========== Fully diluted ................... 8,439,627 8,319,500 8,418,489 8,300,580 =========== =========== =========== =========== See accompanying notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) UNAUDITED March 29, September 30, 1997 1996 ----------- ------------- ASSETS Current assets: Cash and equivalents .................................................... $ 14,306 $ 10,795 Marketable securities ................................................... 18,200 21,995 Accounts receivable, less allowances for doubtful accounts of $907 at March 29, 1997 and $987 at September 30, 1996 ..................... 29,674 30,622 Inventories ............................................................. 4,832 4,149 Deferred income taxes ................................................... 3,025 3,025 Other current assets .................................................... 4,304 3,765 --------- --------- Total current assets ............................................. 74,341 74,351 Equipment, net ............................................................. 16,980 14,738 Excess of cost over net assets of businesses acquired ...................... 6,786 7,221 Other assets ............................................................... 12,284 8,556 --------- --------- Total assets ..................................................... $ 110,391 $ 104,866 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ................................... $ 12,328 $ 11,894 Accrued compensation .................................................... 6,831 8,445 Federal and state income taxes payable .................................. 654 1,367 Unearned service revenue ................................................ 19,067 16,388 --------- --------- Total current liabilities ........................................ 38,880 38,094 Deferred income taxes ...................................................... 2,236 2,236 Unearned service revenue ................................................... 2,806 2,721 Other liabilities .......................................................... 592 717 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, 8,205,350 shares and 8,124,133 shares issued at March 29, 1997 and September 30, 1996, respectively ..................................... 82 81 Additional paid-in capital .............................................. 28,375 27,512 Retained earnings ....................................................... 37,737 33,773 Equity adjustment from translation ...................................... (293) (251) Cost of Treasury Stock (778 shares and 583 shares at March 29, 1997 and September 30, 1996, respectively) ....... (24) (17) --------- --------- Total shareholders' equity ....................................... 65,877 61,098 --------- --------- Total liabilities and shareholders' equity ....................... $ 110,391 $ 104,866 ========= ========= See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) UNAUDITED Six Months Ended ---------------------- March 29, March 30, 1997 1996 --------- --------- Operating activities: Net income ............................................................ $ 3,965 $ 4,516 Adjustments to reconcile net income to net cash and equivalents provided by operating activities: Depreciation .................................................. 3,020 2,155 Amortization of deferred software development costs and excess of cost over net assets of businesses acquired ...... 2,179 1,562 Changes in certain operating assets and liabilities: Accounts receivable, net ................................... 932 1,885 Inventories ................................................ (687) (13) Unearned service revenue ................................... 2,689 2,968 Accounts payable, accrued compensation and other liabilities ................................... (1,690) 685 Net investment in sales-type leases ........................ (2,676) (756) Other ......................................................... (844) (403) -------- -------- Net cash and equivalents provided by operating activities 6,888 12,599 Investing activities: Purchase of equipment ................................................. (5,177) (4,905) Capitalization of software development costs .......................... (2,552) (1,537) (Increase) decrease in marketable securities .......................... 3,795 (3,675) Acquisitions of businsesses ........................................... (422) (339) Other ................................................................. (5) 164 -------- -------- Net cash and equivalents used in investing activities ... (4,361) (10,292) Financing activities: Net proceeds from exercise of stock option and employee stock ......... 889 purchase plans Other ................................................................. -- (20) -------- -------- Net cash and equivalents provided by financing activities 968 869 Effect of exchange rate changes on cash and equivalents .................... 16 (24) -------- -------- Increase in cash and equivalents ........................................... 3,511 3,152 Cash and equivalents at the beginning of the period ........................ 10,795 17,727 -------- -------- Cash and equivalents at the end of the period .............................. $ 14,306 $ 20,879 ======== ======== 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 and six month periods ended March 29, 1997 and March 30, 1996 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 fiscalyear 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): March 29, September 30, 1997 1996 ------------------- ------------------- Finished goods $2,584 $2,148 Work - in - process 289 283 Raw materials 1,959 1,718 ------------------- ------------------- $4,832 $4,149 =================== =================== NOTE D - Financial Accounting Standards Board Statement No. 128, Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted in the first quarter of fiscal 1998. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in basic earnings per share of approximately $.01 per share for the three month periods ended March 29, 1997 and March 30, 1996, respectively, and approximately $.03 per share and $.02 per share for the six month periods ended March 29, 1997 and March 30, 1996, respectively. The impact of Statement 128 on the calculation of diluted earnings per share for these quarters is not expected to be material. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Revenues. Revenues for the second quarter of fiscal 1997 amounted to $39.4 million as compared with $33.1 million for the second quarter of the prior year. Revenues for the first six months of fiscal 1996 were $76.5 million as compared with $64.6 million for the first six months of the prior year. Revenue growth of 19% and 18% in the three and six month periods ended March 29, 1997, respectively, increased from 13% and 17% for comparable periods of the prior year. Product revenues for the second quarter of fiscal 1997 amounted to $26.1 million as compared with $23.2 million for the second quarter of the prior year. Product revenues for the first six months of fiscal 1997 were $51.8 million as compared with $45.8 million for the first six months of the prior year. Product revenue growth of 12% for the second quarter of fiscal 1997 increased from 9% for the comparable period of the prior year. Product revenue growth was 13% in each of the six month periods ended March 29, 1997 and March 30, 1996. The growth in product revenues in the three and six month periods ended March 29, 1997 was principally driven by customer demand. While revenues increased over comparable periods of the prior year, the growth rate was below management's expectations. The shortfall in revenue growth from management's expectations is attributable to a variety of factors, the most significant of which includes the impact of recent product transitions and less than anticipated sales volume in the international and government and education markets. During the quarter the Company continued its transition of its core products from DOS and UNIX platforms to the Windows and client/server environments. Sales of the Company's client/server product to the manufacturing sector were below expectations due to a longer than anticipated sales cycle as a result of the complexity and size of these transactions. Sales in both the government and education and international markets also fell short of expectations. Sales to these markets may vary from quarter to quarter as the Company invests in these markets by building the infrastructure necessary to support future growth. Revenue growth over the remainder of fiscal 1997 will depend in part on the commercial success of the Company's Windows and client/server versions of its time and attendance products as well as its penetration into the international and government and education markets. Service revenues for the second quarter of fiscal 1997 amounted to $13.3 million as compared with $9.9 million for the second quarter of the prior year. Service revenues for the first six months of fiscal 1997 were $24.7 million as compared with $18.8 million for the first six months of the prior year. Service revenue growth of 35% and 31% in the three and six month periods ended March 29, 1997, respectively, increased from 26% in each of the comparable periods of the prior year. The growth in service revenues in the three and six month periods ended March 29, 1997 reflects an increase in maintenance revenue from expansion of the installed base. The Company also continued its efforts to increase revenue arising from maintenance and professional services. This effort has led to an increase in the level of maintenance contracts and professional services accompanying new sales as well as services sold to existing customers. Gross Profit. Gross profit as a percentage of revenues was 62% in the second quarter of fiscal 1997 as compared with 60% in the second quarter of the prior year. Gross profit as a percentage of revenues for the first six months of fiscal 1997 was 61% as compared with 60% for the first six months of fiscal 1996. Product gross profit as a percentage of revenues was 73% in the quarter, consistent with the prior year. Product gross profit increased slightly to 74% in the first six months of fiscal 1997 from 73% in the first six months of the prior year. Service gross profit as a percentage of revenues increased to 35% in the second quarter of fiscal 1997 from 31% in the second quarter of the prior year. Service gross profit increased to 33% for the first six months of fiscal 1997 from 29% in the first six months of the prior year. The increase in service gross profit in the three and six month periods ended March 29, 1997 is primarily attributable to growth in service revenues without a proportionate increase in service expenses. The Company has continued to realize the benefits of its service revenue enhancement programs, as well as improved efficiency in the delivery of services. Expenses. Total operating expenses as a percentage of revenues were 53% for the second quarter and six month period ended March 29, 1997 as compared to 49% for comparable periods in the prior year. The increase in expenses as a percentage of revenues results from lower than expected revenues, as well as investments made in the Company's international operations, government and education division and in engineering. Sales and marketing expenses as a percentage of revenues increased to 36% in the three and six month periods ended March 29, 1997 from 33% in the comparable periods 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 sales organization, including providing corporate support resources and investing in its direct subsidiary operations, as well as the Company's investment in the government and education division. The Company believes such investments are necessary to penetrate these markets successfully. Engineering, research and development expenses as a percentage of revenues increased to 10% in the second quarter and six month period ended March 29, 1997 as compared with 9% in the second quarter and six month period of the prior year. The growth in engineering, research and development expenses as a percentage of revenues results from the development of new products primarily in the Windows and client/server environments. Expenses of $4.0 million and $2.9 million in the second quarter of fiscal 1997 and 1996 are net of capitalized software development costs of $1.4 million and $.8 million, respectively. Expenses of $7.8 million and $5.5 million in the first six months of fiscal 1997 and 1996 are net of capitalized software development costs of $2.6 million and $1.5 million, respectively. The growth in spending on capitalized software development costs principally reflects enhancements of products released in the past three quarters. General and administrative expenses as a percentage of revenues amounted to 7% for all periods presented. Other (income) expense amounted to less than 1% for all periods presented. Other (income) expense is composed primarily of amortization of intangible assets related to acquisitions made by the Company which is offset by interest income earned on its investments. Income Taxes. The provision for income taxes as a percentage of pretax income was 38% for all periods presented 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 March 29, 1997, amounted to $35.5 million as compared with $36.3 million at September 30, 1996. As of those dates, cash and equivalents and marketable securities amounted to $32.5 million and $32.8 million, respectively. Cash generated from operations decreased to $6.9 million in the first six months of fiscal 1997 from $12.6 million in the first six months of the prior year. The decrease in cash generated from operations is principally due to changes in working capital items, primarily the Company's investment in its internal lease program and a reduction in compensation and income tax related obligations. The Company's investment in equipment in the first six months of fiscal 1997 was comparable to its investment in the first six months of the prior year. Cash generated from operations, together with the Company's other financial resources, was 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 also has an informal $3.0 million credit facility in which the bank may offer credit to the Company at the bank's discretion. No amounts were outstanding under the credit facility as of March 29, 1997. On April 16, 1997, the Company announced that its Board of Directors had approved a stock repurchase program covering up to 500,000 shares of the Company's common stock. The Company intends to use the shares for issuance under its employee stock purchase and stock option plans. 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 4. Submission of Matters to a Vote of Security Holders (a) The 1997 Annual Meeting of Stockholders of Kronos Incorporated was held on January 31, 1997. (b) At the Annual Meeting, W. Patrick Decker was elected as a Class II Director for a three-year term expiring in 2000. In addition, the Directors whose terms of office continue after the meeting are two Class I Directors: Messrs. D. Bradley McWilliams and Lawrence Portner and three Class III Directors: Messrs. Mark S. Ain, Richard Dumler and Samuel Rubinovitz. The tabulation of votes for the Director nominee was as follows: FOR WITHHELD W. Patrick Decker 7,521,335 6,575 (c) The other item voted upon at the meeting was as follows: BROKER FOR AGAINST ABSTAIN NON-VOTES (i) Ratification of the 7,517,765 3,251 6,894 ---- selection of Ernst & Young LLP Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 1992 Employee Stock Purchase Plan, as amended and restated 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 March 29, 1997. 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) May 13, 1997 KRONOS INCORPORATED EXHIBIT INDEX Exhibit Number Description 10 1992 Employee Stock Purchase Plan, as amended and restated 11 Statement re: Computation of Per Share Earnings 27 Financial Data Schedule