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, 2002
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.)
297 Billerica Road, Chelmsford, MA 01824
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(Address of principal executive offices) (Zip Code)
(978) 250-9800
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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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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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As of January 25, 2003, 19,911,395 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, 2002 and December 29, 2001 1
Condensed Consolidated Balance Sheets at December 28, 2002
and September 30, 2002 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 28, 2002 and December 29, 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 27
Item 4. Evaluation of Disclosure Controls and Procedures 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
Signatures
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
-------------------------------
December 28, December 29,
2002 2001
------------ ------------
Net revenues:
Product ...................................... $ 38,887 $ 35,214
Maintenance .................................. 28,985 23,421
Professional services ........................ 21,837 17,494
------------ ------------
89,709 76,129
Cost of sales:
Costs of product ............................. 9,427 8,454
Costs of maintenance and professional services 25,873 20,814
------------ ------------
35,300 29,268
------------ ------------
Gross profit ........................... 54,409 46,861
Operating expenses and other income:
Sales and marketing .......................... 29,053 25,191
Engineering, research and development ........ 8,483 7,936
General and administrative ................... 6,045 4,532
Amortization of intangible assets ............ 719 643
Other income, net ............................ (905) (975)
------------ ------------
43,395 37,327
Income before income taxes ............. 11,014 9,534
Provision for income taxes ....................... 3,965 3,337
------------ ------------
Net income ............................. $ 7,049 $ 6,197
============ ============
Net income per common share:
Basic .................................. $ 0.36 $ 0.32
============ ============
Diluted ................................ $ 0.35 $ 0.30
============ ============
Weighted-average common shares outstanding:
Basic .................................. 19,639,827 19,404,923
============ ============
Diluted ................................ 20,409,753 20,388,203
============ ============
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
UNAUDITED
December 28, September 30,
2002 2002
------------ -------------
ASSETS
Current assets:
Cash and equivalents .................................................... $ 49,745 $ 34,117
Marketable securities ................................................... 13,262 16,096
Accounts receivable, less allowances of $10,062 ......................... 78,076 84,128
at December 28, 2002 and $9,697 at September 30, 2002
Deferred income taxes ................................................... 7,394 6,893
Other current assets .................................................... 18,665 17,835
--------- ---------
Total current assets ............................................ 167,142 159,069
Property, plant and equipment, net ........................................... 38,294 38,635
Marketable securities ........................................................ 24,175 24,534
Intangible assets ............................................................ 20,111 20,545
Goodwill ..................................................................... 57,480 56,167
Capitalized software, net .................................................... 22,296 22,237
Other assets ................................................................. 11,136 11,837
--------- ---------
Total assets .................................................... $ 340,634 $ 333,024
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 5,992 $ 6,212
Accrued compensation .................................................... 24,936 32,674
Accrued expenses and other current liabilities .......................... 10,153 10,831
Deferred product revenues ............................................... 6,333 6,853
Deferred professional service revenues .................................. 33,010 33,551
Deferred maintenance revenues ........................................... 68,809 66,550
--------- ---------
Total current liabilities ....................................... 149,233 156,671
Deferred maintenance revenues ................................................ 8,109 8,588
Other liabilities ............................................................ 8,866 8,096
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 50,000,000 shares,
19,911,952 shares issued at December 28, 2002 and September 30, 2002 199 199
Additional paid-in capital .............................................. 30,460 31,494
Retained earnings ....................................................... 150,224 143,175
Cost of Treasury Stock (139,610 shares and 366,062 shares at
December 28, 2002 and September 30, 2002, respectively) ............. (5,361) (14,020)
Accumulated other comprehensive loss:
Foreign currency translation ........................................ (1,174) (1,372)
Net unrealized gain on available-for-sale investments ............... 78 193
--------- ---------
(1,096) (1,179)
Total shareholders' equity ...................................... 174,426 159,669
--------- ---------
Total liabilities and shareholders' equity ...................... $ 340,634 $ 333,024
========= =========
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 29,
2002 2001
------------ ------------
Operating activities:
Net income ....................................................... $ 7,049 $ 6,197
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation ............................................... 2,610 2,217
Amortization of intangible assets .......................... 719 643
Amortization of capitalized software ....................... 2,764 2,044
Provision for deferred income taxes ........................ 263 (206)
Changes in certain operating assets and liabilities:
Accounts receivable, net ................................ 6,829 12,053
Deferred product revenues ............................... (549) (1,284)
Deferred professional service revenues .................. (559) (596)
Deferred maintenance revenues ........................... 1,469 (626)
Accounts payable, accrued compensation
and other liabilities ................................... (8,342) (8,777)
Taxes payable ........................................... (337) (6,634)
Other ................................................... (547) (29)
Tax benefit from exercise of stock options ................. 2,413 7,144
-------- --------
Net cash and equivalents provided by operating activities 13,782 12,146
Investing activities:
Purchase of property, plant and equipment ........................ (2,238) (2,237)
Capitalized internal software development costs .................. (2,824) (2,641)
Decrease (increase) in marketable securities ..................... 3,193 (12,449)
Acquisitions of businesses, net of cash acquired ................. (1,646) (23,993)
-------- --------
Net cash and equivalents used in investing activities ... (3,515) (41,320)
Financing activities:
Net proceeds from exercise of stock options and
employee purchase plans ....................................... 5,126 10,955
Purchase of treasury stock ....................................... (2,518) (2,623)
Proceeds from (net investment in) call options ................... 2,596 (2,000)
-------- --------
Net cash and equivalents provided by financing activities 5,204 6,332
Effect of exchange rate changes on cash and equivalents ............... 157 (4)
-------- --------
Increase (decrease) in cash and equivalents ........................... 15,628 (22,846)
Cash and equivalents at the beginning of the period ................... 34,117 36,561
-------- --------
Cash and equivalents at the end of the period ......................... $ 49,745 $ 13,715
======== ========
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 of
Kronos Incorporated (the "Company" or "Kronos") 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, 2002. The results of operations for the three months ended December 28, 2002
are not necessarily indicative of the results for a full fiscal year. Certain
reclassifications have been made in the accompanying consolidated financial
statements in order to conform to the fiscal 2003 presentation.
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 (89 days in fiscal 2003 and 90 days in
fiscal 2002) and fourth quarter (94 days in fiscal 2003 and 93 days in fiscal
2002) 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 - Other Current Assets
Other current assets consists of the following (in thousands):
December 28, September 30,
2002 2002
------------ -------------
Inventory $7,087 $6,492
Prepaid expenses 11,578 11,343
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Total $18,665 $17,835
======= =======
NOTE D - Intangible Assets
Acquired intangible assets subject to amortization are presented in the
following table (in thousands).
As of December 28, 2002:
Weighted
Average Gross
Life in Carrying Accumulated Net Book
Years Value Amortization Value
------- -------- ------------ --------
Intangible assets:
Customer related ........ 9.7 $19,328 $ 7,425 $11,903
Maintenance relationships 11.9 6,381 592 5,789
Tax benefits ............ 10.7 2,131 363 1,768
Non-compete agreements .. 5.0 1,943 1,292 651
------- ------- -------
Total intangible assets ..... $29,783 $ 9,672 $20,111
======= ======= =======
As of September 30, 2002:
Intangible assets:
Customer related ........ 9.5 $19,166 $ 6,851 $12,315
Maintenance relationships 11.9 6,267 535 5,732
Tax benefits ............ 10.7 2,127 309 1,818
Non-compete agreements .. 5.1 1,908 1,228 680
------- ------- -------
Total intangible assets ..... $29,468 $ 8,923 $20,545
======= ======= =======
The amount of goodwill acquired during the three months ended December 28, 2002
and December 29, 2001 is $1.2 million and $15.0 million, respectively.
For the three months ended December 28, 2002, the Company recorded amortization
expense for intangible assets of $0.7 million. The estimated annual amortization
expense for intangible assets for the current and next five fiscal years is as
follows (in thousands):
Fiscal Year Ending Estimated Annual
September 30, Amortization Expense
------------------ --------------------
2003 $3,024
2004 2,723
2005 2,255
2006 2,190
2007 2,172
2008 2,072
NOTE E - Acquisitions
On November 20, 2002, the Company completed the acquisition of certain assets
and the ongoing business operations of Hi-Tek Special Systems, Inc. ("HT"), the
former Texas-based Kronos dealer. The aggregate purchase price was not material
to the Company's financial position. The results of HT's operations, which are
not material to the Company's results of operations, have been included in the
consolidated financial statements since that date. HT was engaged in the sale
and service of employee time and attendance, employee scheduling, data
collection and labor management hardware and software systems, including the
resale of the Company's products through a dealer relationship. As a result of
the acquisition, the Company gained access to existing and prospective customers
in the Texas, New Mexico and Mexico area through its direct sales and service
organizations, as well as access to the existing maintenance revenue stream from
HT customers. The deferred revenue related to the maintenance revenue stream,
which was recorded at an amount approximating cost, plus a normal profit margin,
was recognized as the Company had assumed a legal performance obligation as
described in EITF 01-03.
On December 28, 2001, the Company completed the acquisition of certain assets
and the ongoing business operations of the Integrated Software Business of
SimplexGrinnell's Workforce Solutions Division ("SimplexGrinnell"). The
aggregate purchase price was $22.1 million in cash. The results of
SimplexGrinnell's operations have been included in the consolidated financial
statements since that date. SimplexGrinnell was engaged in the development,
sales and support of integrated workforce management software solutions. As a
result of the acquisition, the Company has increased its presence in the
mid-market sector, which includes companies with between 100 and 1,000
employees.
The SimplexGrinnell transaction was accounted for under the purchase method of
accounting and accordingly, the assets and liabilities acquired were recorded at
their estimated fair values at the effective date of the acquisition. The
goodwill recognized is deductible for income tax purposes. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of the acquisition (in thousands).
At December 28, 2001
--------------------
Accounts receivable $6,678
Customer related intangible asset (amortized over 1,100
12 years)
Maintenance relationships intangible asset 2,500
(amortized over 12 years)
Goodwill 18,065
Other assets 768
-------
Total assets acquired 29,111
Deferred professional services revenue (1,564)
Deferred maintenance revenue (5,157)
Other liabilities (340)
-------
Total liabilities assumed (7,061)
-------
Net assets acquired $22,050
=======
In connection with the acquisition of the assets and liabilities of
SimplexGrinnell in December 2001, the Company acquired obligations to provide
services associated with maintenance contracts and obligations to provide
professional services, primarily installation services. The amounts of deferred
revenue ascribed to acquired maintenance obligations and professional services
amounts to $5.2 million and $1.6 million, respectively. The deferred revenue,
which was recorded at an amount approximating cost, plus a normal profit margin,
was recognized as the Company had assumed a legal performance obligation as
described in EITF 01-03. The acquired maintenance arrangements required the
Company to provide phone support, bug fixes and unspecified upgrades for the
remaining contract terms. The acquired professional services obligations
required the Company to provide installation services.
Certain agreements contain provisions that require the Company to make a
guaranteed payment and/or contingent payments based upon profitability of the
business unit or if specified minimum revenue requirements are met. These
provisions expire during fiscal 2003 through 2006. Guaranteed payments are
accrued at the time of the acquisition and are included in the purchase price
allocation. Contingent payments due under the terms of the agreements are
recognized when earned and are principally recorded as goodwill. However, under
certain circumstances, a portion of the contingent payment may be recorded as
compensation expense. During the first quarter of fiscal 2003 and 2002, $0.6
million and $0.2 million, respectively, of contingent payments were earned, all
of which was recorded as goodwill. There are several contingent payment
arrangements currently outstanding, on which the Company may have future payment
obligations, contingent upon the achievement of various financial performance
goals. As of December 28, 2002, the Company has the obligation to pay $4.2
million in guaranteed payments. These payments will be made at various dates
through fiscal 2006.
NOTE F - Comprehensive Income
For the three months ended December 28, 2002 and December 29, 2001,
comprehensive income consisted of the following (in thousands):
Three Months Ended
--------------------------------
December 28, December 29,
2002 2001
------------ ------------
Comprehensive income:
Net income $7,049 $6,197
Cumulative translation adjustment 198 203
Unrealized gain (loss)on
available-for-sale securities (115) (151)
------- -------
Total comprehensive income $7,132 $6,249
======= =======
NOTE G - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except share and per share data):
Three Months Ended
-----------------------------------------
December 28, 2002 December 29, 2001
----------------- -----------------
Net income $7,049 $6,197
========== ==========
Weighted-average shares 19,639,827 19,404,923
Effect of dilutive securities:
Employee stock options 769,926 983,280
---------- ----------
Adjusted weighted-average shares
and assumed conversions 20,409,753 20,388,203
========== ==========
Basic earnings per share $0.36 $0.32
===== =====
Diluted earnings per share $0.35 $0.30
===== =====
NOTE H - New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." This statement provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based compensation. The
statement amends the disclosure requirements of FASB Statement No. 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. The Company accounts for stock-based
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
complies with the disclosure provisions of FASB Statement No. 123. The
transition provisions are effective for fiscal years ending after December 15,
2002. The disclosure provisions are effective for interim periods beginning
after December 15, 2002. The Company will implement the required disclosure
provisions in the three month period ending March 29, 2003. The adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows as the
Company does not anticipate making the voluntary change to the fair value method
of accounting for stock-based compensation.
NOTE I - Call Option Arrangements
The Company periodically enters into call option arrangements, which are
classified as an equity instrument in accordance with the provisions of EITF
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." During the quarter, a call
option arrangement matured in December 2002. At maturity, the Company's stock
price exceeded the strike price of $25.00 per share and the Company received a
return of its cash investment and a premium totaling approximately $2.6 million,
which is credited to additional paid-in-capital. If at maturity the Company's
stock price was less than the strike price, the Company would use its cash
investment to purchase Company shares at a predetermined price. A call option
arrangement provides the Company an opportunity to lock in a repurchase price
for shares under the Company's stock repurchase program. There are no dividend
and liquidation preferences, participation rights, sinking-fund requirements,
unusual voting rights or any other significant terms pertaining to these call
option arrangements. As of the balance sheet date, the Company did not have any
call option arrangements outstanding.
NOTE J - Additional Stock Option Program Information
Option Program Description: The Company intends that its stock option program be
its primary vehicle for offering long-term incentives and rewarding its
executives and key employees. Stock options are granted to key employees based
upon, among other things, prior performance of the executive or key employee,
the importance of retaining their services for the Company and the potential for
their performance to help the Company attain its long-term goals. There is no
set formula for the award of options to individual executives or employees.
Stock options are generally granted annually in conjunction with the
Compensation Committee's formal review of the individual performance of its key
executives, including its Chief Executive Officer, and their contributions to
the Company. In the three month period ended December 28, 2002, 75% of the
options granted went to employees other than the top five officers ("Named
Executive Officers"). The Named Executive Officers for the first quarter of
fiscal 2003, for purposes of this footnote, are the same Named Executive
Officers for fiscal 2002, which are identified in the Company's definitive proxy
statement for the 2003 Annual Meeting of Stockholders. The Named Executive
Officers for fiscal 2001 are the officers which are identified in the Company's
definitive proxy statement for the 2002 Annual Meeting of Stockholders. All the
options awarded are granted from the same plan. Options, which are granted at
the fair market value on the date of grant, typically vest annually over a
four-year period beginning one year from the date of grant and have a
contractual life of four years and six months.
Distribution and Dilutive Effect of Options:
Employee and Executive Option Grants:
For the Three
Month Period For the Fiscal For the Fiscal
Ended Year Ended Year Ended
December 28, 2002 September 30, 2002 September 30, 2001
----------------- ------------------ ------------------
Net grants during period as % of outstanding ... 4.0% 4.7% 4.2%
shares
Grants to Named Executive Officers during period 25.2% 25.3% 17.0%
as % of options granted
Grants to Named Executive Officers ............. 1.0% 1.2% 0.7%
during period as % of shares outstanding
General Option Information:
Summary of Option Activity
(in thousands, except per share data)
Number of Weighted-Average
Shares Available Option Shares Exercise Price
for Options Outstanding per Share
---------------- ------------- ----------------
Outstanding at September 30, 2002 ........... 1,624 2,641 $ 23.18
Grants ................... (794) 794 24.86
Exercises ................ -- (291) 17.61
Cancellations ............ -- (16) 22.02
Additional shares reserved -- -- --
------ ------ ---------
Outstanding at December 28, 2002 ............ 830 3,128 $ 24.13
====== ====== =========
In-the-Money and Out-of-the-Money Option Information as of December 28, 2002
(in thousands, except per share data)
Exercisable Unexercisable Total
----------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Price Price Price
Shares per Share Shares per Share Shares per Share
------ --------- ------ --------- ------ ---------
In-the-Money ............ 936 $ 21.59 2,090 $ 24.35 3,026 $ 23.50
Out-of-the-Money (1) .... 9 $ 43.33 93 $ 43.02 102 $ 43.05
----- --------- ----- --------- ----- ---------
Total Options Outstanding 945 $ 21.80 2,183 $ 25.14 3,128 $ 24.13
===== ========= ===== ========= ===== =========
(1) Out-of-the-Money options are those options with an exercise price equal to
or above the closing price of $38.179 at the end of the current quarter.
Executive Options: The following tables summarize option grants and exercises
during the three month period ended December 28, 2002 to the Company's Named
Executive Officers and the value of the options held by such persons at December
28, 2002.
Options Granted to Named Executive Officers
- -------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(4)
--------------------------------------------------------- ------------------------
Percent of Total
Options Granted
Number of to Employees in
Securities Three Month Exercise or
Underlying Period Ended Base Price
Options Granted December 28, per Share Expiration
Name (1) 2002 (2) (3) Date 5% 10%
- ---- --------------- --------------- ---------- ----------- -------- --------
Mark S. Ain ............. 60,000 7.6% $24.86 04/07/07 $366,775 $801,444
CEO and Chairman
Paul A. Lacy ............ 40,000 5.0% 24.86 04/07/07 244,517 534,296
Exec. V.P. and Chief
Financial &
Administrative Officer
Aron J. Ain ............. 40,000 5.0% 24.86 04/07/07 244,517 534,296
Exec. V.P. and Chief
Operating Officer
Peter C. George ......... 30,000 3.8% 24.86 04/07/07 183,388 400,722
V.P., Engineering & Chief
Technology Officer
James Kizielewicz ....... 30,000 3.8% 24.86 04/07/07 183,388 400,722
V.P., Marketing and
Corporate Strategy
(1) Each option vests in four equal annual installments commencing one year
from the date of grant.
(2) Based on an aggregate of 793,900 shares subject to options granted to
employees of the Company in the three month period ended December 28, 2002.
(3) The exercise price of each option was equal to the fair market value of the
Company's common stock on the date of grant as reported by The NASDAQ
National Market(R).
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date (and are shown net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the exercise
of the options or the sale of the underlying shares.) Actual gains, if any,
on stock option exercises will depend on the future performance of the
common stock, the optionholder's continued employment with the Company
through the option vesting period and the date on which the options are
exercised.
Option Exercises and Remaining Holdings of Named Executive Officers (for the
three month period ended December 28, 2002)
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
at December 28, 2002 December 28, 2002 (2)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (1) Unexercisable Unexercisable
---- --------------- -------------- -------------------- ----------------------
Mark S. Ain ..... -- $ -- 161,250/155,250 $3,035,464/1,939,579
Paul A. Lacy .... 20,000 563,400 57,625/100,375 889,771/1,240,613
Aron J. Ain ..... 27,000 783,720 50,625/100,375 708,478/1,240,613
Peter C. George -- -- 46,125/80,625 841,105/1,053,184
James Kizielewicz 13,500 398,620 25,500/76,500 362,795/935,300
(1) Represents the difference between the exercise price and the fair market
value of the common stock on the date of exercise.
(2) Based on the fair market value of the common stock on December 28, 2002
($38.179), the last day of the first quarter of the Company's 2003 fiscal
year, less the option exercise price.
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 Kronos'
business and its expectations, including statements relating to revenues,
product and service revenues and revenue growth rates, deferred maintenance
revenue, gross profit, future acquisitions and available cash, investments and
operating cash flow, Kronos' ability to obtain third-party financing, and the
future effects of accounting pronouncements. 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 Kronos' 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.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based upon Kronos' consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
Kronos to make estimates and assumptions that affect the reported amounts of
assets and liabilities, revenue and expenses, and related disclosures of
contingent assets and liabilities. Kronos bases its estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from these estimates under
different assumptions or conditions.
Kronos has identified the following critical accounting policies that
affect the more significant judgments and estimates used in the preparation of
consolidated financial statements. This listing is not a comprehensive list of
all of Kronos' accounting policies. Please refer to Note A in the Notes to
Consolidated Financial Statements in Item 15 of Kronos' Annual Report on Form
10-K for the fiscal year ended September 30, 2002 for further information.
Revenue Recognition - The Company licenses software and sells data
collection hardware and related ancillary products to end-user customers through
its direct sales force as well as indirect channel customers, Automatic Data
Processing, Inc. ("ADP") and its independent resellers. Substantially all of the
Company's software license revenue is earned from perpetual licenses of
off-the-shelf software requiring no modification or customization. The software
license, data collection hardware and related ancillary product revenues from
the Company's end-user customers and indirect channel customers are generally
recognized using the residual method when:
o persuasive evidence of an arrangement exists, which is typically when a
non-cancelable sales and software license agreement has been signed;
o delivery, which is typically FOB shipping point, is complete for the
software (either physically or electronically), data collection hardware
and related ancillary products;
o the customer's fee is deemed to be fixed or determinable and free of
contingencies or significant uncertainties;
o collectibility is probable; and
o vendor specific objective evidence of fair value exists for all undelivered
elements, typically maintenance and professional services.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements and is recognized as revenue, assuming all other conditions
for revenue recognition have been satisfied. Substantially all of the Company's
product revenue is recognized in this manner. If the Company cannot determine
the fair value of any undelivered element included in an arrangement, the
Company will defer revenue until all elements are delivered, services are
performed or until fair value can be objectively determined.
As part of an arrangement, end-user customers typically purchase
maintenance contracts as well as professional services from the Company.
Maintenance services include telephone and Web-based support as well as rights
to unspecified upgrades and enhancements, when and if the Company makes them
generally available. Professional services are deemed to be non-essential and
typically are for implementation planning, loading of software, installation of
the data collection hardware, training, building simple interfaces, running test
data, and assisting in the development and documentation of pay rules and best
practices consulting.
Revenues from maintenance services are recognized ratably over the term of
the maintenance contract period based on vendor specific objective evidence of
fair value. Vendor specific objective evidence of fair value is based upon the
amount charged when purchased separately, which is typically the contract's
renewal rate. Maintenance services are typically stated separately in an
arrangement. The Company has classified the allocated fair value of revenues
pertaining to the contractual maintenance obligations that exist for the
12-month period subsequent to the balance sheet date as a current liability, and
the contractual obligations with a term beyond 12 months as a non-current
liability. Revenues from time and material maintenance services are recognized
as the services are delivered.
Revenues from professional services are generally recognized based on
vendor specific objective evidence of fair value when: (1) a non-cancelable
agreement for the services has been signed or a customer's purchase order has
been received; and (2) the professional services have been delivered. Vendor
specific objective evidence of fair value is based upon the price charged when
these services are sold separately and are typically an hourly rate for
professional services and a per class rate for training. Based upon the
Company's experience in completing product implementations, it has determined
that these services are typically delivered within a 12-month period subsequent
to the contract signing and therefore classifies deferred professional services
as a current liability.
The Company's arrangements with its end-user customers and indirect channel
customers do not include any rights of return or price protection, nor do
arrangements with indirect channel customers include any acceptance provisions.
Generally, the Company's arrangements with end-user customers also do not
include any acceptance provisions. However, if an arrangement does include
acceptance provisions, they typically are based on the Company's standard
acceptance provision. The Company's standard acceptance provision provides the
end-user customer with a right to a refund if the arrangement is terminated
because the product did not meet Kronos' published specifications. Generally,
the Company determines that these acceptance provisions are not substantive and
therefore should be accounted for as a warranty in accordance with SFAS No. 5.
At the time the Company enters into an arrangement, the Company assesses
the probability of collection of the fee and the terms granted to the customer.
For end-user customers, the Company's typical payment terms include a deposit
and subsequent payments, based on specific due dates, such that all payments for
the software license, data collection hardware and related ancillary products,
as well as services included in the original arrangement are ordinarily due
within one year of contract signing. The Company's payment terms for its
indirect channel customers are less than 90 days and typically due within 30
days of invoice date.
If the payment terms for the arrangement are considered extended or if the
arrangement includes a substantive acceptance provision, the Company defers
revenue not meeting the criterion for recognition under SOP 97-2 and classifies
this revenue as deferred revenue, including deferred product revenue. This
revenue is recognized, assuming all other conditions for revenue recognition
have been satisfied, when the payment of the arrangement fee becomes due and/or
when the uncertainty regarding acceptance is resolved as generally evidenced by
written acceptance or payment of the arrangement fee. The Company reports the
allocated fair value of revenues related to the product element of arrangements
as a current liability because of the expectation that these revenues will be
recognized within 12 months of the balance sheet date.
Since fiscal 1996, the Company has had a standard practice of providing
creditworthy end-user customers the option of financing arrangements beyond one
year. These arrangements, which encompass separate fees for software license,
data collection hardware and ancillary products, maintenance and support
contracts and professional services, are evidenced by distinct standard sales,
license and maintenance agreements and typically require equal monthly payments.
The term of these arrangements typically range between 18 and 36 months. At the
time the Company enters into an arrangement, the Company assesses the
probability of collection and whether the arrangement fee is fixed or
determinable. The Company considers its history of collection without
concessions as well as whether each new transaction involves similar customers,
products and arrangement economics to ensure that the history developed under
previous arrangements remains relevant to current arrangements. If the fee is
not determined to be collectible, fixed or determinable, the Company will
initially defer the revenue and recognize when collection becomes probable,
which typically is when payment is due assuming all other conditions for revenue
recognition have been satisfied.
Allowance for Doubtful Accounts and Sales Returns Allowance - Kronos
maintains an allowance for doubtful accounts to reflect estimated losses
resulting from the inability of customers to make required payments. This
allowance is based on estimates made by Kronos after consideration of factors
such as the composition of the accounts receivable aging and bad debt history.
If the financial condition of customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances and bad debt
expense may be required. In addition, Kronos maintains a sales returns allowance
to reflect estimated losses for sales returns and adjustments. Sales returns and
adjustments are generally due to incorrect ordering of product, general customer
satisfaction issues or incorrect billing. This allowance is established by
Kronos using estimates based on historical experience. If Kronos experiences an
increase in sales returns and adjustments, additional allowances and charges
against revenue may be required.
Valuation of Intangible Assets and Goodwill - In assessing the
recoverability of goodwill and other intangible assets, Kronos must make
assumptions regarding the estimated future cash flows and other factors to
determine the fair value of these assets. If these estimates or their related
assumptions change in the future, Kronos may be required to record impairment
charges against these assets in the reporting period in which the impairment is
determined. For intangible assets, this evaluation includes an analysis of
estimated future undiscounted net cash flows expected to be generated by the
assets over their estimated useful lives. If the estimated future undiscounted
net cash flows are insufficient to recover the carrying value of the assets over
their estimated useful lives, Kronos will record an impairment charge in the
amount by which the carrying value of the assets exceeds their fair value. For
goodwill, the impairment evaluation includes a comparison of the carrying value
of the reporting unit which houses goodwill to that reporting unit's fair value.
Kronos has only one reporting unit. The fair value of the reporting unit is
based upon the net present value of future cash flows, including a terminal
value calculation. If the reporting unit's estimated fair value exceeds the
reporting unit's carrying value, no impairment of goodwill exists. If the fair
value of the reporting unit does not exceed its carrying value, then further
analysis would be required to determine the amount of the impairment, if any.
Capitalization of 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. Costs incurred in the development of software for internal use are charged
to expense until it becomes probable that future economic benefits will be
realized. Thereafter, certain costs are capitalized and amortized to operating
expense on a straight-line basis over the lesser of three years or the estimated
economic life of the software.
Results of Operations
Revenues. Revenues for the first quarter of fiscal 2003 were $89.7 million
as compared to $76.1 million for the first quarter of the prior year. Revenue
growth, as compared to the same period in the prior year, was 18% in the first
quarter of fiscal 2003, as compared to 17% in the first quarter of fiscal 2002.
Revenues from core business (business generated from customers that have not
been part of an acquired business transaction over the last four quarters) grew
11% in the first quarter of fiscal 2003 and 2002, and revenues attributable to
acquisitions of businesses over the last four quarters contributed 7% and 6% of
revenue growth in the first quarter of fiscal 2003 and 2002, respectively.
Management presently anticipates that revenue growth for the second quarter and
for the entire fiscal 2003, including revenues from customers obtained in the
acquisition of businesses, will range between 16% - 20% and 11% - 13%,
respectively.
Product revenues for the first quarter of fiscal 2003 were $38.9 million as
compared to $35.2 million for the first quarter of fiscal 2002. Product revenue
growth, as compared to the same period in the prior year, was 10% in the first
quarter of fiscal 2003, as compared to 4% in first quarter of fiscal 2002. One
factor driving the product revenue growth experienced in the first quarter of
fiscal 2003 was revenues related to the conversion to Kronos products by, and
add-on sales to, customers acquired from other providers of labor management
solutions. Product revenue derived from acquired customers accounted for 6% of
the growth in the first quarter of fiscal 2003, or $2.1 million in revenue.
Other less significant factors include increased customer demand for Kronos
products, as well as platform and capacity upgrades and upgrades to the newest
badge terminals from existing customers. Although product revenues increased
during the quarter, management believes that the continued economic downturn may
result in many customers deferring or reducing their technology purchases in the
future. While management believes the impact on technology purchasing may be
temporary, the effect may continue to cause delays or reductions in customer
purchases of Kronos products and services in the future. The product growth in
the first quarter of fiscal 2002 was attributable to customer demand for
platform and capacity upgrades from existing customers and demand for Kronos'
new products, as well as, revenues from customers obtained from acquisitions of
businesses.
Maintenance revenues for the first quarter of fiscal 2003 were $29.0
million as compared to $23.4 million in the first quarter of fiscal 2002.
Maintenance revenues, as compared to the same period in the prior year,
increased 24% in the first quarter of fiscal 2003, as compared to 25% in the
first quarter of fiscal 2002. The increase in maintenance revenues in both
periods is a result of expansion of the installed base, an increase in the value
of maintenance contracts and incremental maintenance revenues attributable to
customers obtained from the acquisition of businesses. The increase in the value
of the maintenance contracts was principally attributable to the platform
upgrade of existing customers to Kronos' new products. Platform and capacity
upgrade sales generally result in an increased value of maintenance contracts.
Excluding the effect of incremental maintenance revenues from acquisitions of
businesses in the preceding four quarters, maintenance revenues would have
increased 14% in the first quarter of fiscal 2003 and 2002.
Professional services revenues for the first quarter of fiscal 2003 were
$21.8 million as compared to $17.5 million in the first quarter of fiscal 2002.
Professional service revenues, as compared to the same period in the prior year,
increased 25% in the first quarter of fiscal 2003 as compared to 40% in the
first quarter of fiscal 2002. The growth in professional services is primarily
due to an increase in the level of professional services accompanying new and
platform upgrade sales, an increase in demand for Kronos' services, and to a
lesser extent, incremental revenues from acquisition of businesses. Excluding
the effect of incremental professional service revenues from acquisitions of
businesses in the preceding four quarters, professional service revenues would
have increased 19% and 31% in the first quarter of fiscal 2003 and 2002,
respectively. The growth in professional service revenues for the first quarter
of fiscal 2002 reflects an increase in the level of professional services
accompanying new and upgrade sales, an increase in the level of services sold to
the installed base, an increase in delivery of professional services resulting
from improving the efficiency of Kronos services organization, as well as
incremental revenues from acquisitions of businesses.
Deferred maintenance revenues increased 2% from September 30, 2002. Current
deferred maintenance revenues increased 3% and long-term deferred maintenance
revenues decreased 6% from September 30, 2002. Although maintenance revenue
increased 24% in the first quarter of fiscal 2003, as compared to the same
period of last year, the deferred maintenance revenue increased 2% from
September 30, 2002 primarily due to the positive impact on the maintenance
revenues of the acquisitions completed during the past fiscal year, primarily
the December 28, 2001 acquisition of the Integrated Software Business of
SimplexGrinnell's Workforce Solutions Division, as well as the effect of the
timing of the expiration of multi-year maintenance contracts sold in previous
years. The decrease in the long-term portion was due to Kronos' decision in
fiscal 2000 to curtail the practice of selling multi-year maintenance contracts.
Kronos management does not anticipate significant reductions in the growth rate
of deferred maintenance in the foreseeable future. Deferred professional
services revenues decreased 2% from September 30, 2002. The decrease in deferred
professional services revenue is the result of an increase in volume of the
delivery of professional services which accompanied product sales during the
fourth quarter of fiscal 2002. As the volume of sales in the fourth quarter
typically result in a larger deferred professional services revenue balance, the
combination of the delivery of these services during the first quarter, as well
as typically lower sales in the first quarter as compared to the fourth quarter,
will typically result in a similar or lower deferred professional service
revenue balance at the end of the first quarter of the fiscal year.
Gross Profit. Gross profit as a percentage of revenues was 61% in first
quarter of fiscal 2003, compared to 62% in the same period in the prior year.
The reduction in gross profit is primarily attributable to a higher proportion
of service revenue, which generally carries a lower gross profit than product
revenue. Product gross profit as a percentage of product revenues was 76% in the
first quarter of fiscal 2003 and 2002. Service gross profit as a percentage of
service revenues was 49% in the first quarter of fiscal 2003 and 2002.
Management anticipates overall gross profit to decline in fiscal 2003 as more
revenue derives from newer products including its Kronos 4500 terminal and Human
Resources Management System (HRMS) products, which carry higher royalty and
production costs, and as Kronos increases its investment in infrastructure to
support the introduction of its HRMS products. In addition, if service revenues
continue to grow proportionately faster than product revenues, gross margins may
decrease as service revenues have a lower gross profit.
Net Operating Expenses. Net operating expenses as a percentage of revenues
were 48% and 49% in the first quarter of fiscal 2003 and 2002, respectively. The
reduction in net operating expenses as a percentage of revenues is attributable
to a corporate-wide effort to contain costs, as well as leveraging existing
investments in infrastructure to generate higher sales volumes. Although
management intends to decrease operating expenses as a percentage of revenues
during the remainder of fiscal 2003, principally through continued productivity
improvements, uncertainty related to the current economic climate and its impact
on the timing of customers' purchases, as well as increased investment in
infrastructure to support the introduction of the new HRMS products may prevent
decreases in operating expenses as a percentage of revenues from being realized.
Sales and marketing expenses as a percentage of revenues were 32% and 33%
in the first quarter of fiscal 2003 and 2002, respectively. The increase in
sales and marketing expenses is attributable to Kronos' investments in sales
personnel and related support costs to maximize the penetration of existing
accounts and to add new customers as well as initiatives to expand market
awareness of Kronos products and services. The decrease in sales and marketing
expense as a percentage of revenue in the first quarter of fiscal 2003 was
primarily due to leveraging our investment in infrastructure to generate higher
sales volumes.
Engineering, research and development expenses as a percentage of revenues
were 9% and 10% in the first quarter of 2003 and 2002, respectively. The
decrease as a percentage of revenues for the first quarter of fiscal 2003 as
compared to the same quarter in fiscal 2002 is primarily due to a reduction in
costs associated with engineering consultants, coupled with higher sales volume
in fiscal 2003. Engineering, research and development expenses of $8.5 million
and $7.9 million in the first quarter of fiscal 2003 and 2002, respectively, are
net of capitalized software development costs of $2.8 million and $2.6 million,
respectively. The increase in expenses in the first quarter of fiscal 2003 as
compared to the same period of the prior year is principally attributable to an
increase in salary-related expenses for additional engineering personnel. The
significant project development efforts in the first quarter of fiscal 2003
principally related to further development and enhancement of the Workforce
Central(R) suite, Workforce HR(TM), Workforce Payroll(TM), Kronos 4500(TM)
terminal and, to a lesser extent, the eForce(R) software acquired from
SimplexGrinnell on December 28, 2001.
General and administrative expenses as a percentage of revenues were 7% and
6% in the first quarter of fiscal 2003 and 2002, respectively. General and
administrative expenses primarily consist of personnel and overhead related
expenses for administrative, information technology, finance, legal and human
resources support functions. The increase in general and administrative expenses
in fiscal 2003 is primarily due to Kronos' investment in personnel and other
infrastructure to support the growth of operations.
Amortization of intangible assets as a percentage of revenues were 1% in
the first quarter of fiscal 2003 and 2002. Other income, net as a percentage of
revenues were 1% in the first quarter of fiscal 2003 and 2002. Other income, net
is principally interest income earned from Kronos' cash as well as investments
in its marketable securities and financing arrangements.
Income Taxes. The provision for income taxes as a percentage of pretax
income was 36% and 35% in the first quarter of fiscal year 2003 and 2002,
respectively. Kronos' effective income tax rate may fluctuate between periods as
a result of various factors, including income tax credits, amortization of
goodwill for tax purposes, foreign tax rate differentials and state income
taxes.
Newly Issued Accounting Standards. In December 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123." This statement provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based compensation. The statement amends the disclosure
requirements of FASB Statement No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and complies with the disclosure provisions of
FASB Statement No. 123. The transition provisions are effective for fiscal years
ending after December 15, 2002. The disclosure provisions are effective for
interim periods beginning after December 15, 2002. The adoption of this
statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows as the
Company does not anticipate making the voluntary change to the fair value method
of accounting for stock-based compensation. The Company expects to implement the
required disclosure provisions in the three month period ending March 29, 2003.
Liquidity and Capital Resources
Kronos funds its business through cash generated by operations. If
near-term demand for Kronos' products weakens or if significant anticipated
sales in any quarter do not close when expected, the availability of such funds
may be adversely impacted. If the need arose, Kronos believes that based on its
current debt-free balance sheet and its financial position, it would be
successful in securing financing from the capital markets.
Cash, cash equivalents and marketable securities (which includes both short
and long term securities) at December 28, 2002 increased to $87.2 million from
$74.7 million at September 30, 2002. This increase in cash, cash equivalents and
marketable securities is due to cash generated from operations. Working capital
as of December 28, 2002 amounted to $17.9 million as compared with $2.4 million
at September 30, 2002. This increase in working capital is primarily due to an
increase in cash resulting from cash provided by operations.
Cash provided by operations amounted to $13.8 million in the first quarter
of fiscal 2003 as compared to $12.1 million for the same period in the prior
year. The increase in operating cash flows in fiscal 2003 is principally
attributable to an increase in deferred revenues, particularly maintenance
revenues to be recognized over the next twelve months, and increased net income
as well as increased non-cash charges related to deprecation and amortization
that are added back in the calculation of cash flow from operations. These
increases were offset by a lower rate of accounts receivable collections from
customer financing arrangements. In addition, although the tax benefit from
exercise of stock options contributed less to cash flow from operations in the
first quarter of fiscal 2003, as compared to the same period last year, the
resulting increase in taxes payable offsets this effect.
Cash used for property, plant and equipment was $2.2 million in the first
quarter of fiscal 2003 compared to $2.2 million for the same period in the prior
year. Kronos' use of cash for property, plant and equipment in both periods
presented includes investments in information system and infrastructure to
improve and support expanding operations. Kronos' use of cash for the
acquisition of businesses in the first quarter of fiscal 2003 and 2002 was
principally related to the acquisitions of specified assets and/or businesses of
Kronos' dealers and/or other providers of labor management solutions. Kronos is
assessing several acquisition opportunities that may be completed over the next
twelve months, although there can be no assurance that these acquisitions will
be completed. Excess cash reserves not required for operations, investments in
property, plant and equipment or acquisitions are invested in marketable
securities. Net investments in marketable securities decreased by $3.2 million
in the first quarter of fiscal 2003 compared to an increase of $12.5 million in
the first quarter of fiscal 2002.
Under Kronos' stock repurchase program, Kronos repurchased 65,000 shares of
common stock during the first quarter of fiscal 2003 at an aggregate cost of
$2.5 million compared to 22,500 common shares at a cost of $0.6 million in the
first quarter of fiscal 2002. The common shares repurchased under the program
are used for Kronos' employee stock option plans and employee stock purchase
plan. During the first quarter of fiscal 2003, Kronos received $2.6 million upon
the maturity of a call option arrangement. As of December 28, 2002, Kronos did
not have any outstanding call option arrangements. Please refer to Note I in the
Notes to Condensed Consolidated Financial Statements for further details
regarding call option arrangements. Cash provided by operations was sufficient
to fund investments in capitalized software development costs, property, plant
and equipment and stock repurchases.
Kronos 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):
Operating Lease
Fiscal Year Commitments
--------------------------------------------------
2003 (remaining 9 months) $ 7,043
2004 8,926
2005 8,075
2006 6,086
2007 4,230
Thereafter 4,238
-------
$38,598
Certain acquisition agreements contain provisions that require Kronos to
make a guaranteed payment and/or contingent payments based upon profitability of
the business unit or if specified minimum revenue requirements are met. Please
refer to Note E in the Notes to Condensed Consolidated Financial Statements for
further details regarding guaranteed and/or contingent payments.
Kronos believes that with cash generated from ongoing operations it has
adequate cash and investments and operating cash flow to fund its investments in
property, plant and equipment, software development costs, cash requirements
under operating leases, cash payments related to acquisitions, if any, and any
additional stock repurchases for the foreseeable future.
During the first quarter of fiscal 2003, Kronos did not engage in:
o material off-balance sheet activities, including the use of structured
finance or special purpose entities,
o material trading activities in non-exchange traded commodity contracts, or
o transactions with persons or entities that benefit from their
non-independent relationship with Kronos.
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"). Kronos 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.
Kronos' 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 and
acceptance of new product introductions by Kronos and its competitors, the
dependence on Kronos' time and attendance product line, the ability to attract
and retain sufficient technical personnel, the protection of Kronos'
intellectual property and the potential infringement on Kronos' intellectual
property rights, competitive pricing pressure, and the dependence on alternate
distribution channels and on key vendors, as further described below and in
Kronos' Annual Report on Form 10-K for the fiscal year ended September 30, 2002,
which are specifically incorporated by reference herein.
Potential Fluctuations in Results. Kronos' operating results, including
revenue growth, sources of revenue, effective tax rate and liquidity, may
fluctuate as a result of a variety of factors, including the purchasing patterns
of its customers, mix of products and services sold, the ability of Kronos to
effectively integrate acquired businesses into Kronos' operations, the timing of
the introduction of new products and product enhancements by Kronos and its
competitors, the strategy employed by Kronos to enter the Human Resources
Management System ("HRMS") market, market acceptance of new products,
competitive pricing pressure and general economic conditions. Kronos
historically has realized a relatively larger percentage of its annual revenues
and profits in the third and fourth quarters and a relatively smaller percentage
in the first and second quarters of each fiscal year, although there can be no
assurance that this pattern will continue. In addition, substantially all of
Kronos' product revenue and profits in each quarter result from orders received
in that quarter. If near-term demand for Kronos' products weakens or if
significant anticipated sales in any quarter do not close when expected, Kronos'
revenues for that quarter will be adversely affected. Kronos believes that its
operating results for any one period are not necessarily indicative of results
for any future period.
Dependence on Labor Management Product Line. To date, more than 90% of
Kronos' revenues have been attributable to sales of labor management systems and
related services. Although Kronos has introduced its products for the licensed
HRMS market during fiscal 2002, Kronos expects that its dependence on the labor
management product line for revenues will continue for the foreseeable future.
Competitive pressures or other factors could cause Kronos' labor management
products to lose market acceptance or experience significant price erosion,
adversely affecting the results of Kronos' operations.
Product Development and Technological Change. Continual change and
improvement in computer software and hardware technology characterize the
markets for labor management systems. Kronos' future success will depend largely
on its ability to enhance the capabilities and increase the performance of its
existing products and to develop new products and interfaces to third-party
products on a timely basis to meet the increasingly sophisticated needs of its
customers. Although Kronos is continually seeking to further enhance its labor
management, HR and payroll product offerings (including products for the HRMS
market) 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
Kronos' competitors will not develop and market products which are superior to
Kronos' products or achieve greater market acceptance.
Dependence on Alternate Distribution Channels. Kronos markets and sells its
products through its direct sales organization, independent resellers and ADP
under an OEM agreement. In the first quarter of fiscal 2003, approximately 10%
of Kronos' revenue was generated through sales to resellers and ADP. Management
does not anticipate that its entrance into the HRMS market will have a negative
impact on its relationship with ADP. However, a reduction in the sales efforts
of either Kronos' major resellers or ADP, or termination or changes in their
relationships with Kronos, could have a material adverse effect on the results
of Kronos' operations.
Competition. The labor management industry is highly competitive.
Technological changes such as those allowing for increased use of the Internet
have resulted in new entrants into the market. Although Kronos believes it has
core competencies that position it strongly in the marketplace, maintaining
Kronos' technological and other advantages over competitors will require
continued investment by Kronos in research and development and marketing and
sales programs. There can be no assurance that Kronos 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 Kronos' operating results through price reductions and/or
loss of market share. With Kronos' efforts to expand its labor management
offering with the recent introduction of its HRMS product suite, Kronos will
continue to meet strong competition. Many of these competitors may be able to
adapt more quickly to new or emerging technologies or to devote greater
resources to the promotion and sale of their HRMS products. Many of Kronos' HRMS
competitors have significantly greater financial, technical and sales and
marketing resources than Kronos, as well as more experience in delivering HRMS
solutions. There can be no assurance that Kronos will be able to compete
successfully in the HRMS marketplace, and its failure to do so could have a
material adverse impact upon its business, prospects, financial condition and
operating results.
Attracting and Retaining Sufficient Technical Personnel for Product
Development, Support and Sales. Kronos 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 Kronos' ability to produce, support and sell products in a
timely manner.
Protection of Intellectual Property. Kronos has developed, and through its
acquisitions of businesses and software, acquired proprietary technology and
intellectual property rights. Kronos' success is dependent upon its ability to
further develop and protect its proprietary technology and intellectual property
rights. Kronos seeks to protect products, software, documentation and other
written materials primarily through a combination of trade secret, patent,
trademark and copyright laws, confidentiality procedures and contractual
provisions. While Kronos has attempted to safeguard and maintain its proprietary
rights, it is unknown whether Kronos has been or will be successful in doing so.
Despite Kronos' efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of its products or obtain and use
information that is regarded as proprietary. Policing unauthorized use of
Kronos' products is difficult. While Kronos is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected to
be a persistent problem, particularly in foreign countries where the laws may
not protect proprietary rights as fully as in the United States. Kronos can
offer no assurance that it can adequately protect its proprietary rights or that
its competitors will not reverse engineer or independently develop similar
technology.
Infringement of Intellectual Property Rights. Kronos cannot provide
assurance that others will not claim that Kronos developed or acquired
intellectual property rights are infringing on their intellectual property
rights or that Kronos does not in fact infringe on those intellectual property
rights.
Any litigation regarding intellectual property rights could be costly and
time-consuming and divert the attention of Kronos' management and key personnel
from business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require Kronos to enter into
costly royalty or license agreements, and in this event, Kronos may not be able
to obtain royalty or license agreements on acceptable terms, if at all. Kronos
may also be subject to significant damages or an injunction against the use of
its products. A successful claim of patent or other intellectual property
infringement against Kronos could cause immediate and substantial damage to its
business and financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Kronos is exposed to a variety of market risks, including changes in
interest rates affecting the return on its investments, foreign currency
fluctuations and decreases in its common stock price affecting capped call
options. Refer to Note A "Summary of Significant Accounting Policies" in the
Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for
the year ended September 30, 2002 for further discussion regarding marketable
securities, foreign currency forward exchange contracts and capped call option
arrangements. Kronos' marketable securities that expose it to market rate risks
are comprised of debt securities. A decrease in interest rates would not
adversely impact interest income or related cash flows pertaining to securities
held at December 28, 2002, as all of these securities have fixed rates of
interest. A 100 basis point increase in interest rates would not adversely
impact the fair value of these securities by a material amount due to the size
and average duration of the portfolio. Kronos' 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 December 28,
2002, 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.
Kronos has periodically entered into short term capped call options in
conjunction with its stock repurchase initiatives. As of December 28, 2002,
there were no capped call option arrangements outstanding.
Item 4. Evaluation of Disclosure Controls and Procedures
1. Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14( c) and 15d-14( c) under the Securities Exchange Act of 1934) as of
a date within 90 days of the filing of this quarterly report on Form 10-Q,
the Company's chief executive officer and chief financial officer have
concluded that the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and are operating in an effective manner.
2. Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their most recent
evaluation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fiscal quarter
ended December 28, 2002.
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
Executive Vice President,
Chief Financial and Administrative Officer
(Duly Authorized Officer and
Principal Financial Officer)
February 10, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Mark S. Ain, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kronos Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 10, 2003 /s/ Mark S. Ain
-----------------------
Mark S. Ain
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Paul A. Lacy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kronos Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 10, 2003 /s/ Paul A. Lacy
-----------------------
Paul A. Lacy
Chief Financial Officer
KRONOS INCORPORATED
EXHIBIT INDEX
Exhibit
Number Description
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Kronos Incorporated
(the "Company") for the period ended December 28, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Mark S. Ain, Chief Executive Officer of the Company, and Paul A.
Lacy, Executive Vice President, Chief Financial and Administrative Officer of
the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Mark S. Ain
-----------------------
Dated: February 10, 2003 Mark S. Ain
Chief Executive Officer
/s/ Paul A. Lacy
-----------------------
Dated: February 10, 2003 Paul A. Lacy
Executive Vice President, Chief
Financial and Administrative Officer