SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended September 30, 2001
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
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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)
Registrant's telephone number, including area code (978) 250-9800
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant.
Non-Affiliate Voting Aggregate
Date Shares Outstanding Market Value
November 30, 2001 18,772,709 $809,103,758
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Date Class Outstanding Shares
Common Stock, $0.01 par
November 30, 2001 value per share 19,623,032
DOCUMENTS INCORPORATED BY REFERENCE.
The Company's definitive proxy statement dated December 19, 2001 for the Annual
Meeting of Stockholders to be held on February 7, 2002 (Part III - Items
10,11,12 and 13).
PART I
Item 1. Business
Kronos Incorporated (the "Company" or "Kronos") was organized in 1977 as a
Massachusetts corporation. The Company develops, manufactures and markets
frontline labor management systems that improve workforce productivity and the
utilization of labor resources by planning, tracking and analyzing time and
activities information about employees, including hourly workers, hourly
professionals and salaried professionals. By eliminating the need for manual
data collection and data entry, the systems reduce the time needed to collect
employee work related information, improve payroll accuracy, and provide
time-sensitive labor information to frontline managers. The Company's frontline
labor management systems are designed for a wide range of businesses from
single-site to large multi-site enterprises. These systems can be purchased or
leased from Kronos, or obtained on a subscription basis via the Company's
application service provider (ASP) delivery model. Kronos' applications perform
time and attendance, employee scheduling, shop floor labor allocation,
activity-tracking and labor analytics. Kronos' systems capture information from
all employees in the workplace utilizing a variety of user interaction
technologies. These technologies include the Internet, desktop applications and
intelligent data collection terminals that the Company manufactures, as well as
interactive voice response and biometrics. Kronos' application suite can either
operate independently in a desktop environment or interface with related
applications and technologies at many points throughout the enterprise to enable
management to optimize the utilization of labor resources. In addition, the
Company maintains an extensive professional service and technical support
organization that is responsible for maintaining systems and providing
professional and educational services. These services can be provided on site or
over the Internet. The Company also collaborates with industry leading vendors
that market products and services that are synergistic to Kronos solutions.
These collaborations include major enterprise resource planning system (ERPs)
providers, manufacturing execution system (MES) providers, and human resources,
finance, scheduling and payroll application providers, as well as consulting and
systems integration firms. In October 2001, the Company announced its intent to
expand beyond the frontline labor management market and enter the licensed Human
Resources (HR)/Payroll market. The Company is evaluating various strategies to
enter the HR/Payroll market, including purchase of technology and/or
establishing an OEM relationship with an HR/Payroll solutions provider. To date,
nearly all of the Company's revenues and profits have been derived from its time
and attendance applications and related products and services.
Products
The software incorporated in Kronos' frontline labor management systems is
parameter-driven, which allows it to be configured upon installation to meet the
needs of an individual customer and reconfigured as customer needs evolve
without the need for expensive custom software coding. The Company offers
various products that operate in enterprise or desktop environments and can be
accessed through a variety of user interaction technologies. The Company's
current products include:
Workforce CentralTM Suite:
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A suite of web-based products, for both single-site and enterprise-wide
deployment, designed for organizations that need to provide all levels of
management with access to real-time information on the labor components of their
business. Solutions integrated with the suite include:
o Workforce TimekeeperTM - A Time & Attendance solution that streamlines the
management, collection, calculations and distribution of employee hours,
and simplifies the control of the labor expense throughout an enterprise.
Workforce Timekeeper uses a robust pay rules engine to apply complex work
and pay rules accurately and consistently throughout an organization thus
eliminating the need for manual timecards and timesheets.
o Workforce AccrualsTM - Using a configurable accruals engine, the product
helps organizations control leave liability, comply with corporate policies
or contracts, and manage benefit time by automatically calculating the
balances of each employee's available benefit time, as well as providing
self service for both employees and managers to interactively monitor,
request, modify and approve employee leave.
o Workforce ActivitiesTM - Provides a sophisticated activity rules engine for
monitoring and reporting on employee productivity and efficiency, as well
as calculating additional pay associated with the quality and results of
the work performed by the employee. This product also captures data as a
front end to other systems such as billing or project tracking.
o Workforce Smart SchedulerTM - Provides a scheduling engine that offers
organizations with complex staffing and scheduling requirements the ability
to forecast staffing needs to business volumes, optimize staffing by
applying work standards, and provides all levels of management with
reporting tools to act on real-time labor information to improve their
staffing allocation and optimize costs.
o Workforce DecisionsTM - A labor analytics application that synthesizes
information from disparate information systems such as billing, payroll,
and time and attendance and accurately captures, analyzes and reports the
information. The information, which can be reported in either graphical or
tabular format, enables senior and department level management to monitor
labor productivity at the department and employee level.
Timekeeper Central(R)System:
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Targeted at small to mid-size businesses or large enterprises that deploy
systems site-by-site, the system streamlines the management, collection and
distribution of employee hours for payroll, human resources, and other Kronos
applications for frontline labor management. The System's rules engine has been
developed to accommodate a wide variety of pay policies and work rules correctly
and uniformly across the organization. It accepts a wide range of user
interaction technologies including data collection devices, native windows
applications and the Internet.
The Company's Timekeeper Central and Workforce Timekeeper systems run on
Windows 95, 98, 2000, NT and Citrix. The Workforce Central suite supports a
variety of industry-standard databases including Oracle and Microsoft SQL
Server.
Kronos iSeries Central Suite:
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A suite of web-enabled products for both single-site and enterprise-wide
deployment in IBM iSeries environments. Kronos iSeries Central provides
centralized data with decentralized access, allowing all levels of management
access to real-time information on the labor component of the business and
extending the functionality of ERP systems. Solutions integrated with the suite
include:
o Kronos iSeries Timekeeper - A native iSeries server Time & Attendance
solution that streamlines the management, collection, calculations and
distribution of employee hours, and simplifies the control of labor
expenses. Kronos iSeries Timekeeper provides users with a flexible and
comprehensive pay rules engine to apply complex work and pay rules
accurately and consistently throughout the entire organization eliminating
the need for manual timecards and timesheets.
o Kronos iSeries Accruals - provides for control of leave liability,
compliance with corporate policies or contracts, and enables employees and
supervisors to manage benefit time by automatically calculating and
tracking employee leave balances.
o Kronos iSeries Attendance Tracker - allows organizations to automate its
no-fault attendance program by capturing lost time exceptions and absences
from the Kronos iSeries Timekeeper system and providing real time
information to managers for disciplinary management.
o Kronos iSeries Labor Data Collection - captures time, labor, and material
usage at every stage of the production process thereby providing managers
the tools to improve customer responsiveness, enhance operating efficiency,
increase labor productivity, and ensure quality control.
o Kronos iSeries Gate Access - provides a method to control and track access
to areas within an organization that require monitoring.
In addition, the Company offers the following solutions to address
customers' specific needs:
ShopTrac Pro(R) - captures real-time information on time, labor, and material
usage at every stage of the production process thereby providing managers the
tools to improve customer responsiveness, reduce operating costs, increase labor
productivity, and ensure quality control. Modules that are integrated with the
solution include Time and Attendance, Labor Allocation, Work-in-Process, Quality
and Productivity Analysis. Optional modules include Team Tracking and Electronic
Scorecard.
Visionware(R) - labor cost management application specifically designed for the
healthcare industry that synthesizes information from disparate information
systems such as billing, payroll and time and attendance and accurately
captures, analyzes and reports the information. The information, which can be
reported in either graphical or tabular format, enables senior and department
level management to monitor labor productivity at the department and employee
level, as well as provides recommendations for both short and longer term
staffing decisions by department and employee type.
Timekeeper DecisionsTM - labor analytics application that synthesizes
information from disparate information systems such as billing, payroll, and
time and attendance and accurately captures, analyzes and reports the
information. The information, which can be reported in either graphical or
tabular format, enables senior and department level management to monitor labor
productivity at the department and employee level.
Kronos IVIS 2000 - easy to use, fully featured employee badging solution that
captures employee images and signatures, and stores them with other personnel
data. The Kronos IVIS 2000 provides instant on-line identification and
verification of employees and produces economical badges that can be utilized by
multiple applications using barcodes, magnetic stripes and other technologies.
Personnel data can easily be shared with other in-house applications that
require the same information.
Kronos provides a wide range of user interaction technologies to
accommodate various work environments and markets, and to satisfy the
price/performance requirements of its customers. These user interaction
technologies include:
o Workforce ProfessionalTM and Kronos iSeries Professional Time: Using a
standard web browser (e.g. Netscape or Internet Explorer), employers can
automate time and labor management for their professional workforce,
offering employee self service for routine labor reporting such as entering
time worked in a variety of formats, capturing hours worked on various
projects or tasks, allocating their time amongst various departments,
request time off, and review leave balances and total hours worked.
o Timekeeper ExpressTM: Using Microsoft Outlook or Windows, employers can
automate time and labor management for their professional workforce,
offering employee self service for routine labor reporting such as entering
time worked in a variety of formats, capturing hours worked on various
projects or tasks, allocating their time amongst various departments,
request time off, and review leave balances and total hours worked.
o Workforce ManagerTM: Using a standard web browser or Windows, allows
supervisors to schedule their employees, manage time and leave on an
exception basis and measure and improve productivity.
o Time and Labor Data Entry Terminals: Fixed and portable intelligent data
collection devices that record time, labor, and activity data via serial,
Ethernet, Token Ring, or modem host communications. Data can be entered
using the terminal's stationary badge reader in Barcode or Magnetic Stripe
format, or entered manually via the terminal keyboard. Lasers, charged
coupled device ("CCD") scanners and Wedge readers can be attached to the
terminal to aid in the collection of factory-floor or labor activity data.
o Kronos Handpunch: By measuring the unique hand geometry of an employee the
product provides for positive identification of employees working in high
security or limited access work environments and provides for positive
verification of employees for punching in or out of work thereby
eliminating buddy punching.
o Kronos iSeries Terminal Entry: Using iSeries, AS/400 or PC based host
systems, time and labor data can be collected from local or remote data
entry terminals via serial, Ethernet, Token Ring or modem communications in
a heterogeneous computing environment.
o Workforce TeleTimeTM and Kronos iSeries TeleTime: Using telephone-based,
interactive voice response solutions, enterprise-wide time and labor
information can be collected and communicated.
o Kronos iSeries MobileTime: Provides a method for data collection and
supervisory review for remote and mobile employees. Kronos iSeries
MobileTime improves the speed and efficiency of the remote workforce by
allowing the use of Personal Data Assistants (PDAs) to record and transmit
labor information to the Kronos iSeries Central system.
The Company believes that the extensive set of functions and features within its
time and attendance products, the suite of applications available through its
frontline labor management systems and its various user interaction technologies
provide it with an important advantage over its competition. The Company
believes additional competitive advantages are provided by: 1) its ability to
offer frontline labor management systems that accommodate the professional
workforce as well as specific vertical markets; 2) its ability to offer
frontline labor management systems in an ASP environment; and 3) the Company's
collaborations with various industry-leading vendors.
Services and Support
Kronos maintains an extensive professional service and technical support
organization that provides a suite of maintenance, professional and educational
services. These services are designed to support the Company's customers
throughout the product life cycle. Maintenance service options are delivered
through the Company's centralized Global Support operation or through local
service personnel. The Company also provides a wide range of customer
self-service options through the Internet. The Company's professional services
include implementation support, technical and business consulting as well as
system integration and optimization. The Company's educational services offer a
full range of curriculums that are delivered through local training centers or
via computer based training courses. When necessary, the Company may also
provide software customization services to meet any unique customer
requirements.
Marketing and Sales
Kronos markets and sells its products to the mid-market and enterprise
markets in the United States and other countries through its direct sales and
support organization and through independent dealers. In addition, to serve
smaller businesses, the Company has a joint marketing agreement with ADP, Inc.
("ADP"). The Company recognizes that the information needs of businesses in
various industries continue to be increasingly specialized and sophisticated. As
a result, the Company's marketing and certain of its field sales personnel are
organized into industry specific divisions. These divisions focus on the needs
of the manufacturing, healthcare, retail/hospitality and government/education
markets. These divisions operate with the following objectives:
o To gain expertise in their respective industry environments and pursue
opportunities for growth and product leadership.
o To focus engineering and marketing resources on industry specific product
development efforts required to deliver products and services that meet
those industry needs.
o To develop long-term business relationships with select industry partners.
o To educate and train sales staff as industry specialists.
Focusing on industry specific divisions permits Kronos to better understand
the needs of its customers and to respond quickly to the opportunities presented
by these markets.
Direct Sales Organization
The Company has 46 direct sales and support offices located in the United
States. In addition, the Company has three sales and support offices located in
Canada, two in the United Kingdom, one in Mexico, five in Australia, one in New
Zealand, and one in Brazil. Each direct sales office covers a defined territory,
and has sales and support functions. To capitalize on the specialization of the
Company's Visionware and ShopTrac Pro products and the focus on mid-market and
enterprise prospects, the Company has dedicated Visionware, Discrete
Manufacturing, mid-market and enterprise sales teams within its direct sales
organization.
For the fiscal years ended September 30, 2001, 2000, and 1999, the
Company's direct sales and support offices in the U.S. generated net revenues of
$229.0 million, $210.0 million, and $184.3 million, respectively. For the fiscal
years ended September 30, 2001, 2000, and 1999, the Company's international
subsidiaries generated net revenues of $23.2 million, $21.2 million, and $20.4
million, respectively. Total assets at the Company's international subsidiaries
for these periods were $16.4 million, $15.8 million, and $15.3 million,
respectively.
Dealers
Kronos also markets and sells its products through independent dealers
within designated geographic territories generally not covered by Kronos' direct
sales offices. These dealers provide sales, support and installation services
for Kronos' products. There are presently approximately 17 dealers in the United
States actively selling and supporting Kronos' products. Sales to independent
U.S. dealers for the years ended September 30, 2001, 2000, and 1999 were $17.3
million, $20.1 million, and $30.6 million, respectively. The decrease in
revenues in fiscal 2001 and 2000 is principally due to the acquisitions of
various dealers during fiscal 2001, 2000 and 1999. Kronos also has dealers in
Australia, Bahamas, Bahrain, Barbados, Brazil, Chile, Columbia, Ghana, Guam,
Guatemala, Guyana, Jamaica, Lebanon, Mexico, Netherlands Antilles, Netherlands,
Norway, Panama, Puerto Rico, South Africa, Singapore, Trinidad, United Kingdom,
and Venezuela. Sales to independent international dealers were not material in
any of the fiscal years. Kronos supports its dealers with training, technical
assistance, and major account marketing assistance.
Original Equipment Manufacturers (OEM)
The Company has a joint marketing agreement with ADP under which ADP
markets proprietary versions of the Company's Timekeeper Central system,
Workforce Central(TM) Suite and data collection terminals manufactured by the
Company.
In October 2001, the Company announced its intention to enter the licensed
Human Resource (HR)/Payroll market in fiscal 2002. Management does not
anticipate that this will have a negative impact on its relationship with ADP.
However, a reduction in the sales efforts of the Company's major dealers and/or
ADP, or termination or changes in their relationships with the Company, could
have a material adverse effect on the results of the Company's operations.
Customers
End-users of the Company's products include companies of all sizes from the
manufacturing, service, public and private sectors. The Company believes that
the dollar amount of backlog is not material to an understanding of its
business. Although the Company has contracts to supply systems to certain
customers over an extended period of time, substantially all of the Company's
product revenues in each quarter result from orders received in that quarter.
Product Development
The Company's product development efforts are focused on enhancing the
capabilities and increasing the performance of its existing products as well as
developing new products and standard interfaces to third party products on a
timely basis to meet the increasingly sophisticated needs of its customers,
including reaching the professional workforce through the Internet. During
fiscal 2001, 2000, and 1999, Kronos' engineering, research and development
expenses were $33.3 million, $29.9 million, and $26.8 million, respectively. The
Company intends to continue to commit substantial resources to enhance and
extend its product lines and develop interfaces to third party products.
Although the Company is continually seeking to further enhance its product
offerings and to develop new products and interfaces, including products for the
HR/Payroll market, there can be no assurance that these efforts will succeed, or
that, if successful, such product enhancements or new products will achieve
widespread market acceptance, or that the Company's competitors will not develop
and market products which are superior to the Company's products or achieve
greater market acceptance. The Company also depends upon the reliability and
viability of a variety of software development tools owned by third parties to
develop its products. If these tools are inadequate or not properly supported,
the Company's ability to release competitive products in a timely manner could
be adversely impacted.
Competition
The frontline labor management industry is highly competitive. The number
of competitors is also increasing as applications and systems providers in
related industries, such as human resources management, payroll processing and
ERP enter the market. Technological changes such as those allowing for increased
use of the Internet have also resulted in new entrants in the market. Although
the Company believes it has core competencies that are not easily obtainable by
competitors, maintaining the Company's competitive 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.
The Company competes primarily on the basis of price/performance, quality,
reliability and customer service. In the time and attendance market, the Company
competes against firms that sell automated time and attendance products to many
industries, against firms that focus on specific industries, and against firms
selling related products, such as payroll processing, human resources
management, or ERP systems.
Proprietary Rights
The Company relies on a combination of patents, copyrights, trademarks,
trade secret law and contracts to protect its proprietary technology.
The Company generally provides software products to end-users under
non-exclusive shrink-wrap licenses or under signed licenses, both of which may
be terminated by Kronos if the end-user breaches the terms of the license. These
licenses generally require that the software be used only internally subject to
certain limitations, such as the number of employees, simultaneous or active
users, computer model and serial number, features and/or terminals for which the
end-user has paid the required license fee. The Company authorizes its dealers
to sublicense software products to end-users under similar terms. In certain
circumstances, the Company also makes master software licenses available to
end-users that permit either a specified limited number of copies or an
unlimited number of copies of the software to be made for internal use. Some
customers license software products under individually negotiated terms.
Despite these precautions, it may be possible to copy or otherwise obtain
and use the Company's products or technology without authorization. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries.
The Company has registered trademarks for Kronos, Timekeeper, Timekeeper
Central, Jobkeeper, Jobkeeper Central, Datakeeper, Datakeeper Central,
Gatekeeper, Gatekeeper Central, Imagekeeper, TeleTime, TimeMaker, CardSaver,
ShopTrac, ShopTrac Pro, the ShopTrac logo, Start.Time, Keep.Trac, Solution In A
Box, Visionware and the Company's logo in the United States. In addition, Kronos
eCentral, Timekeeper Web, Kronos Connect, My Genies, FasTrack, Workforce
Accruals, Workforce Activities, Workforce Central, Workforce Decisions,
Workforce Express, Workforce Genie, Workforce Scheduler, Workforce Smart
Scheduler, Workforce Manager, Workforce MobileTime, Workforce TeleTime,
Workforce Timekeeper and Workforce Web are trademarks of the Company. Certain
trademarks have been obtained or are in process in various foreign countries.
Manufacturing and Sources of Supply
The duplication of the Company's software and the printing of documentation
are outsourced to suppliers. The Company currently has two suppliers who have
been certified to the Company's manufacturing specifications to perform the
software duplication process. The Company's data collection terminals are
assembled from the printed circuit board level in its facility in Chelmsford,
Massachusetts. Although most of the parts and components included within the
Company's products are available from multiple suppliers, certain parts and
components are purchased from single suppliers. The Company has chosen to source
these items from single suppliers because it believes that the supplier chosen
is able to consistently provide the Company with the highest quality product at
a competitive price on a timely basis. Kronos intends to complete development
and release an alternative hardware product during fiscal 2002 that is
anticipated to have the same reliance on single suppliers. While the Company has
to date been able to obtain adequate supplies of these parts and components, the
Company's inability to transition to alternate sources on a timely basis if and
as required in the future could result in delays or reductions in product
shipments which could have a material adverse effect on the Company's operating
results.
Employees
As of November 30, 2001, the Company had 2,009 employees. None of the
Company's employees are represented by a union or other collective bargaining
agreement, and the Company considers its relations with its employees to be
good. The Company has encountered intense competition for experienced technical
personnel for product development, technical support and sales and expects such
competition to continue in the future. Any inability to attract and retain a
sufficient number of qualified technical personnel could adversely affect the
Company's ability to produce, support and sell products in a timely manner.
Item 2. Properties
The Company owns its 129,000 square foot corporate headquarters facility
and leases approximately 195,000 square feet in two additional facilities, all
located in Chelmsford, Massachusetts. The Company's manufacturing operations,
Global Support Center and various engineering and administrative operations are
located in these leased facilities. The Company additionally leases 59 sales and
support offices located throughout North America, Europe, Australia and South
America. The Company's aggregate rental expense for all of its facilities in
fiscal 2001 was approximately $8.7 million. The Company considers its facilities
to be adequate for its current requirements and that additional space will be
available as needed in the future.
Item 3. Legal Proceedings
From time to time, the Company is involved in legal proceedings arising in
the normal course of business. None of the legal proceedings in which the
Company is currently involved is considered material by the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Name Age Position
Mark S. Ain 58 Chief Executive Officer and Chairman
W. Patrick Decker 54 President and Chief Operating Officer
Aron J. Ain 44 Vice President, Worldwide Sales and Service
Paul A. Lacy 54 Vice President, Finance and Administration,
Treasurer and Clerk
Laura L. Woodburn 54 Vice President, Engineering
Lloyd B. Bussell 56 Vice President, Manufacturing
James Kizielewicz 42 Vice President, Marketing
Mark S. Ain, a founder of the Company, has served as Chief Executive
Officer and Chairman since its organization in 1977. He also served as President
from 1977 through September, 1996. Mr. Ain is the brother of Aron J. Ain, Vice
President, Worldwide Sales and Service of the Company.
W. Patrick Decker served as Vice President, Marketing and Field Operations
from 1982 through September, 1996, when he was appointed President and Chief
Operating Officer. Mr. Decker was elected to the Board of Directors in January,
1997.
Aron J. Ain served as Vice President, Sales and Service from 1988 through
September, 1996, when he was appointed Vice President, Marketing and Worldwide
Field Operations. In November, 1998, his title changed to Vice President,
Worldwide Sales and Service. Mr. Ain is the brother of Mark S. Ain, Chief
Executive Officer and Chairman.
Paul A. Lacy has been Vice President, Finance and Administration, Treasurer
and Clerk since 1988.
Laura L. Woodburn has served as Vice President, Engineering since November,
1996. She held various positions at Digital Equipment Corporation from 1979 to
1996, most recently serving as Vice President of the Storage Big Business
segment.
Lloyd B. Bussell has served as Vice President, Manufacturing since 1987.
James Kizielewicz has served in a variety of capacities at the Company from
1981 until his appointment as Vice President, Marketing in January, 1997.
Officers of the Company hold office until the first meeting of directors
following the next annual meeting of stockholders and, in the case of the
President, Treasurer and Clerk, until their successors are chosen and qualified.
PART II
Item 5. Market for Registrant's Common Equity and Stockholder Matters
STOCK MARKET INFORMATION
The sales prices have been restated to reflect the Company's three-for-two
stock split effected in the form of a 50% common stock dividend that was paid
November 15, 2001 to stockholders of record as of November 5, 2001.
The Company's common stock is traded on the Nasdaq National Market under
the symbol KRON. The following table sets forth the high and low sales prices
for fiscal 2001 and 2000. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
2001
-----------------------------------
Fiscal High Low
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First quarter ........................ $ 28.167 $ 19.083
Second quarter ....................... 26.750 18.167
Third quarter ........................ 30.667 16.709
Fourth quarter ....................... 35.667 22.833
2000
-----------------------------------
Fiscal High Low
------------------------------------------------------------------------------------
First quarter ........................ $ 42.667 $ 23.833
Second quarter ....................... 53.333 15.500
Third quarter ........................ 23.333 14.000
Fourth quarter ....................... 27.333 16.833
HOLDERS
On November 30, 2001 there were approximately 4,500 shareholders of record
of the Company's common stock.
DIVIDENDS
The Company has not paid cash dividends on its common stock, and the
present policy of the Company is to retain earnings for use in its business.
Item 6. Selected Financial Data
The following table data should be read in conjunction with the
consolidated financial statements and notes thereto.
Financial Highlights In thousands, except share data
Year Ended September 30,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Operating Data:
Net revenues ................... $292,947 $269,607 $254,298 $202,469 $170,538
Net income ..................... $ 16,504 $ 15,701 $ 22,378 $ 14,720 $ 11,272
Net income per common share (1):
Basic ...................... $ 0.88 $ 0.84 $ 1.19 $ 0.79 $ 0.61
Diluted .................... $ 0.85 $ 0.81 $ 1.14 $ 0.77 $ 0.60
Balance Sheet Data:
Total assets ................... $284,814 $239,489 $228,243 $163,861 $129,132
(1) The presentation of amounts per share have been restated to reflect the
Company's three-for-two stock split effected in the form of a 50% common
stock dividend that was paid on November 15, 2001 to stockholders of
record as of November 5, 2001.
Selected Quarterly Financial Data In thousands, except share data
Three Months Ended (1)
-------------------------------------------
Sept. 30, June 30, March 31, Dec. 30,
2001 2001 (2) 2001 (2) 2000
--------- -------- --------- --------
Net revenues ................... $ 86,001 $ 75,120 $ 67,073 $ 64,753
Gross profit ................... $ 56,117 $ 47,615 $ 39,303 $ 39,233
Net income (loss) .............. $ 10,330 $ 4,317 $ (932) $ 2,789
Net income (loss) per share (3):
Basic ... $ 0.54 $ 0.23 $ (0.05) $ 0.15
Diluted . $ 0.52 $ 0.23 $ (0.05) $ 0.15
Three Months Ended (1)
-------------------------------------
Sept. 30, July 1, April 1, Jan. 1,
2000 2000 2000 2000
--------- ------- -------- -------
Net revenues ................. $75,040 $68,133 $61,826 $64,608
Gross profit ................. $47,045 $41,591 $37,260 $40,062
Net income ................... $ 6,184 $ 3,312 $ 1,955 $ 4,250
Net income per share (3):
Basic $ 0.33 $ 0.18 $ 0.10 $ 0.23
Diluted $ 0.32 $ 0.17 $ 0.10 $ 0.21
(1) The Company follows a system of fiscal months as opposed to calendar
months. Under this system, the first eleven months of each fiscal year end
on a Saturday. The last month of the fiscal year always ends on September
30.
(2) In the periods ended March 31 and June 30, 2001, the Company recorded
special charges in the amount of $3.0 million and $.7 million,
respectively.
(3) The presentation of amounts per share have been restated to reflect the
Company's three-for-two stock split effected in the form of a 50% common
stock dividend that was paid on November 15, 2001 to stockholders of record
as of November 5, 2001.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This discussion includes certain forward-looking statements about Kronos'
business and its expectations. Any such statements are subject to risk that
could cause the actual results to vary materially from expectations. For a
further discussion of the various risks that may affect 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.
Results of Operations
Revenues. Revenues amounted to $292.9 million, $269.6 million and $254.3
million in fiscal 2001, 2000 and 1999, respectively. Annual revenue growth
amounted to 9% in fiscal 2001, 6% in fiscal 2000 and 26% in fiscal 1999. The
revenue growth rate experienced in fiscal 1999 was accelerated due to demand for
new products, product upgrades and related services resulting from customers'
Year 2000 compliance efforts.
Product revenues amounted to $153.1 million, $152.1 million and $164.3
million in fiscal 2001, 2000 and 1999, respectively. Product revenues increased
1% in fiscal 2001 as compared to a decrease of 7% in fiscal 2000, and growth of
22% in fiscal 1999. During fiscal 2001, and principally during the last three
quarters of the fiscal year, Kronos experienced increased product sales volume
and product revenue growth as a result of customer demand for platform and
capacity upgrades from existing customers and demand for Kronos' new products.
Contributing to the demand were product upgrades from existing customers using
DOS and Unix products for which maintenance support was discontinued effective
October 31, 2001. Whereas Kronos benefited from an accelerated sales cycle
during fiscal 1999 due to customers' Year 2000 compliance efforts, it
experienced a more lengthened sales cycle during fiscal 2000 that resulted in a
product revenue decrease. The extension of the sales cycle during fiscal 2000
was attributable to the combination of customers delaying investment in new
applications after the significant investments made in preparation for the Year
2000 and increased complexity in the sales process for Kronos products and
services. The increased complexity in the sales process can be attributed to
factors including more complex product technology and an increase in average
transaction size.
Service revenues amounted to $139.9 million, $117.5 million and $90.0
million in fiscal 2001, 2000 and 1999, respectively. Service revenues grew by
19% in fiscal 2001 as compared to 31% and 34% in fiscal 2000 and 1999,
respectively. Service revenues amounted to 48%, 44% and 35% of total revenues in
fiscal 2001, 2000 and 1999, respectively. The growth in service revenues in all
periods reflects an increase in maintenance revenue from expansion of the
installed base and the level of services sold to the installed base, as well as
an increase in the level of professional services accompanying new and upgrade
sales. The expansion of the installed base results from the cumulative effect of
adding new sales to the base, and the acquisition of dealers and other
companies. The increase in the level of services sold to the installed base is
principally attributable to the upgrade of existing customers to Kronos' new
products. Upgrade sales generally result in an increased level of maintenance
and professional service revenues. Acquisitions provided approximately $5.0
million, $8.5 million and $5.0 million of incremental service revenues in fiscal
2001, 2000 and 1999, respectively. The growth in fiscal 2001 service revenues
also reflects the increase in delivery of professional services resulting from
improving the efficiency of Kronos' service organization. As the installed base
continues to grow, management anticipates that the proportion of service
revenues to total revenues will continue to grow in fiscal 2002.
International revenues, which include revenues from Kronos' international
subsidiaries and sales to independent international dealers, amounted to $25.6
million, $24.1 million and $22.3 million in fiscal 2001, 2000 and 1999,
respectively. International revenues amounted to 9% of total revenues in all
fiscal years presented. International revenues grew by 6% and 8% in fiscal 2001
and 2000, respectively, as compared to 39% in fiscal 1999. The higher growth
rate experienced in fiscal 1999 was partially due to demand for new products,
product upgrades and related services resulting from customers' Year 2000
compliance efforts as well as the result of lower than anticipated revenue from
international operations in fiscal 1998 due to Kronos' initiatives to strengthen
subsidiary management and to position the subsidiaries sales organizations to
better penetrate their respective markets.
Gross Profit. Gross profit as a percentage of revenues was 62% in fiscal
2001 and 2000 as compared to 64% in fiscal 1999. Gross profit as a percentage of
revenues in fiscal 2001 was favorably impacted by improvements in both product
and service gross margin, offsetting the effect of a higher proportion of
service revenues. The decrease in gross profit as a percentage of revenues in
fiscal 2000 as compared to fiscal 1999 was directly attributable to the decrease
in product revenues in that year. Service revenue, which generates lower gross
margin, has grown faster than product revenue and represents a greater
proportion of total revenue in fiscal 2001 and 2000 as compared to fiscal 1999.
Product gross profit as a percentage of product revenues was 78% in fiscal
2001 as compared to 77% in fiscal 2000 and 1999. The improvement in product
gross margin in fiscal 2001 is principally attributable to favorable product
mix. Software, which typically generates higher gross profit, was a greater
proportion of product revenues during fiscal 2001 as compared to prior years.
The software component of product revenue increased to 60% of total product
revenues in fiscal 2001 as compared to 54% and 49% in fiscal 2000 and 1999,
respectively. Higher software development amortization and higher production
costs due to lower hardware sales volume partially offset the favorable product
mix effect.
Service gross profit as a percentage of service revenues was 45% in fiscal
2001 as compared to 42% and 41% in fiscal 2000 and 1999, respectively. The
improvement in service gross profit in each of the periods is primarily
attributable to improving the efficiency in the delivery of services by
leveraging investments in service systems and web-based self-service offerings,
centralizing the software support function as well as reducing the number of
product versions requiring support. In addition, Kronos has also focused on
reducing discretionary spending and strengthening its billing practices for
professional services, which has also improved service gross profit.
Net Operating Expenses. Net operating expenses as a percentage of revenues
were 54% in fiscal 2001 as compared to 52% and 51% in fiscal 2000 and 1999. The
increase in net operating expenses as a percentage of revenues in fiscal 2001 is
attributable to special charges described below. Sales and marketing expenses as
a percentage of revenues were 34% in all fiscal years presented. Sales and
marketing expenses were $99.5 million, $92.3 and $85.3 million in fiscal 2001,
2000 and 1999, respectively. The increase in sales and marketing expenses in all
periods principally relates to increased business volume, and to a lesser
extent, the impact of converting Kronos' dealer operations to direct sales
operations. Engineering, research and development expenses as a percentage of
revenues were 11% in all fiscal years presented. Engineering, research and
development expenses were $33.3 million, $29.9 million and $26.8 million in
fiscal 2001, 2000 and 1999, respectively. These expenses are net of capitalized
software development costs of $11.7 million, $9.8 million and $8.8 million,
respectively. The growth in engineering, research and development expenses in
fiscal 2001 resulted principally from the development of new web-based software
applications and hardware products. The growth in engineering, research and
development expenses in fiscal 2000 resulted principally from the development
and integration of new products and acquired technologies. Increased spending in
engineering, research and development reflects Kronos' commitment to new product
development and further enhancement of existing products.
General and administrative expenses were $18.5 million, $17.8 million and
$15.5 million in fiscal 2001, 2000 and 1999, respectively. As a percentage of
revenues, general and administrative expenses were 6% in fiscal 2001 as compared
to 7% and 6% in fiscal 2000 and 1999, respectively. Amortization of intangible
assets as a percentage of revenues was 3% in fiscal 2001 as compared to 2% in
fiscal 2000 and 1999. The increase in amortization expense is related to
acquisitions completed during fiscal 2001 and 2000. Kronos amortizes these costs
over the estimated remaining economic lives of the assets. However, as discussed
below, for acquisitions completed subsequent to June 30, 2001, Kronos has
applied new rules on accounting for business combinations, goodwill and other
intangible assets. Other income, net as a percentage of revenues were 2% in
fiscal 2001 and 2000 as compared to 1% in fiscal 1999. Other income, net is
principally interest income earned from Kronos' cash as well as investments in
its marketable securities and lease portfolio.
Special Charge. A special charge in the amount of $3.0 million related to
the termination of Kronos' Crosswinds Technology operations was recorded in the
second quarter of fiscal 2001. The Crosswinds Technology Group, which was
purchased in May 1999, was responsible for the product development, marketing
and sales support of time and attendance applications that operated as a
Microsoft Outlook plug-in product. Lower than anticipated sales of these
applications, redundant infrastructure and ongoing operating losses resulted in
the termination of the stand-alone operating unit. Revenues in the first six
months of fiscal 2001 generated by the Crosswinds Technology Group were not
material. The $3.0 million charge consists of $1.6 million in termination costs,
$1.3 million for the write off of all related intangible assets and $0.1 million
in other costs. Cash outlays of approximately $0.5 million relating to this
action are anticipated to be paid over the next six months. In addition, in
order to streamline operations to better align costs with expected revenues, a
special charge in the amount of $0.7 million was recorded in the third quarter
of fiscal 2001 related to termination costs from a reduction in workforce of
approximately 90 employees. The workforce reductions resulted in a pre-tax
savings of $3.1 million in fiscal 2001 and is expected to result in annual
savings of $7.5 million going forward.
Newly Issued Accounting Standards. In June 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001 (the "Statements").
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
For acquisitions completed prior to June 30, 2001, Kronos anticipates that
it will apply the new rules on accounting for business combinations, goodwill
and other intangible assets beginning in the first quarter of fiscal 2002. For
acquisitions completed after June 30, 2001, Kronos has applied the rules, as
they relate to no longer amortizing goodwill and indefinite lived intangible
assets, beginning in the fourth quarter of fiscal 2001 as required by the
Statements. Kronos expects that the effect of the application of the
non-amortization provisions of the Statements will result in an increase in net
income of $3.7 million, or $.19 per diluted share, in fiscal 2002. During fiscal
2002, Kronos will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of October 1, 2001. Kronos has not
currently determined what effect, if any, these impairment tests may have on its
earnings and financial position.
Income Taxes. The provision for income taxes as a percentage of pretax
income was 35%, 36% and 35% in fiscal 2001, 2000 and 1999, 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
and state income taxes.
Liquidity and Capital Resources
Working capital as of September 30, 2001 amounted to $11.1 million as
compared with $10.7 million at September 30, 2000. Cash, cash equivalents and
marketable securities at September 30, 2001 increased to $68.8 million from
$51.4 million at September 30, 2000. Cash provided by operations amounted to
$54.4 million in fiscal 2001 as compared to $44.0 million and $55.4 million in
fiscal 2000 and 1999, respectively. The increase in operating cash flows in
fiscal 2001 is principally attributable to increased accrued compensation and
collection of accounts receivable from trade customers as well as the net effect
of changes to Kronos' deferred tax asset related to multi-year maintenance
contracts. These factors are partially offset by a reduced rate of increase in
Kronos' deferred maintenance and professional service revenues. The decrease in
operating cash flows in fiscal 2000 was principally attributable to a reduced
rate of increase in Kronos' deferred maintenance and professional service
revenues, lower earnings and related compensation accruals, as well as the use
of cash for guaranteed acquisition related payments due during fiscal 2000.
Partially offsetting these items were cash flows from increased collection of
accounts receivable from trade customers and a reduced rate of investment in
Kronos' lease portfolio. Also contributing to the increase in operating cash
flows in all periods presented were non-cash charges related to depreciation and
amortization. It is Kronos' policy to bill accompanying professional services
and maintenance contracts when the product is invoiced. Kronos has experienced
growth in deferred maintenance and professional service revenues in all periods
presented as the result of the expansion of the installed base and an increase
in the level of professional services accompanying new sales and sales to
Kronos' existing customer base.
Kronos' investment in property, plant and equipment in all periods
presented includes investments in information systems and infrastructure to
improve and support expanding operations. In fiscal 2000 and 1999 Kronos'
investment included the development and construction of its corporate
headquarters campus. Kronos' use of cash for the acquisition of businesses in
all fiscal years is principally related to acquisitions of specified assets
and/or businesses of Kronos' dealers and/or other providers of labor management
solutions. These acquisitions did not have a material impact on results of
operations in any of the periods presented. 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. Marketable
securities increased by $4.0 million in fiscal 2001 compared to a decrease of
$14.1 million in fiscal 2000 and an increase of $20.3 million in fiscal 1999.
Under Kronos' stock repurchase program, Kronos has repurchased 354,675,
783,000 and 567,525 common shares in fiscal 2001, 2000 and 1999, respectively,
at a cost of $8.7 million, $22.4 million and $14.2 million, respectively. The
common shares repurchased under the program are used for Kronos' employee stock
option plans and employee stock purchase plan. In addition, Kronos repurchases
common stock from employees in connection with the exercise of stock options.
Cash provided by operations was more than sufficient to fund investments in
property, plant and equipment, capitalized software development costs,
acquisitions of businesses and stock repurchases in fiscal 2001, 2000 and 1999.
Kronos believes it has adequate cash and investments and operating cash flow to
fund its investments in property, plant and equipment, software development
costs, cash payments related to acquisitions and stock repurchases, if any, for
the foreseeable future.
Certain Factors That May Affect Future Operating Results
Except for historical matters, the matters discussed in the Annual Report
and/or Form 10-K are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act"). 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.
The following important factors, among others, could cause actual operating
results to differ materially from those indicated by forward-looking statements
made in this Annual Report and/or Form 10-K and presented elsewhere by
management from time to time.
Potential Fluctuations in Results. Kronos' operating results, including
revenue growth, sources of revenue, effective tax rate and liquidity, may be
affected as a result of a variety of factors, including the timing of the
introduction of new products and product enhancements by Kronos and its
competitors, market acceptance of new products, general economic conditions, the
purchasing patterns of Kronos' customers, the strategy employed by Kronos to
enter the Human Resource(HR)/Payroll market, the mix of products and services
sold, and competitive pricing pressure. Kronos 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 Kronos has contracts to supply systems to certain customers over
an extended period of time, 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.
Events of September 11, 2001. No Kronos employees were lost or injured, and
no Kronos properties or records were damaged, as a result of the terrorist
attacks that occurred in the United States on September 11, 2001. Although
operations during that week were hampered by the temporary disruption of the
transportation and communications infrastructure as well as the general impact
on business activity, management does not believe the impact has been material
to date. However, at this time, it is not possible to predict the long-term
impact of these events, or the domestic and foreign response, on either our
industry as a whole or on our operations and financial condition in particular.
Product Development and Technological Change. Continual change and
improvement in computer software and hardware technology characterize the
markets for frontline 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 product offerings and to develop new products and interfaces,
including products for the HR/Payroll market, 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 Time and Attendance Product Line. To date, more than 90% of
the Kronos' revenues have been attributable to sales of time and attendance
systems and related services. Although Kronos has announced its intention to
enter the licensed HR/Payroll market in fiscal 2002, Kronos expects that its
dependence on the time and attendance product line for revenues will continue in
the next fiscal year. Competitive pressures or other factors could cause Kronos'
time and attendance products to lose market acceptance or experience significant
price erosion, adversely affecting the results of Kronos' operations.
Dependence on Alternate Distribution Channels. Kronos markets and sells its
products through its direct sales organization, independent dealers and an OEM.
In fiscal 2001, approximately 14% of Kronos' revenue was generated through sales
to dealers and the OEM. Management does not anticipate that its intention to
enter the HR/Payroll market will have a negative impact on its relationship with
its OEM. However, a reduction in the sales efforts of Kronos' major dealers
and/or its OEM, or termination or changes in their relationships with the
Kronos, could have a material adverse affect on the results of Kronos'
operations.
Competition. The frontline labor management industry and the HR/Payroll
market are highly competitive. The number of competitors is also increasing as
applications and systems providers such as human resources management, payroll
processing and enterprise resource planning (ERP), enter these markets.
Technological changes such as those allowing for increased use of the Internet
have also resulted in new entrants into the markets. Although Kronos believes it
has core competencies that are not easily obtainable by competitors, maintaining
Kronos' technological and other advantages over competitors will require
continued investment by Kronos in research and development, 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.
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.
Reliance on Key Vendors. Kronos depends upon the reliability and viability
of a variety of software development tools owned by third parties to develop its
products. If these tools are inadequate or not properly supported, Kronos'
ability to release competitive products in a timely manner could be adversely
impacted. Also, certain parts and components used in Kronos' hardware products
are purchased from single suppliers. Kronos has chosen to source these items
from single suppliers because it believes that the supplier chosen is able to
consistently provide Kronos with the highest quality product at a competitive
price on a timely basis. Kronos intends to complete development and release an
alternative hardware product during fiscal 2002 that is anticipated to have the
same reliance on single suppliers. While Kronos has to date been able to obtain
adequate supplies of these parts and components, Kronos' inability to transition
to alternate sources on a timely basis if and as required in the future could
result in delays or reductions in product shipments that could have a material
adverse affect on Kronos' results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of market risks, including changes in
interest rates affecting the return on its investments and foreign currency
fluctuations. The Company's 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 September 30, 2001, 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. The Company's exposure to market risk for
fluctuations in foreign currency relate primarily to the amounts due from
subsidiaries. Exchange gains and losses related to amounts due from subsidiaries
have not been material. For foreign currency exposures existing at September 30,
2001, a 10% unfavorable movement in the foreign exchange rates for each
subsidiary location would not expose the Company to material losses in earnings
or cash flows. The calculation assumes that each exchange rate would change in
the same direction relative to the U.S. dollar.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are listed in the Index to
Consolidated Financial Statements at Item 14 of this Form 10-K.
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the executive officers of the registrant appears
under the caption "Executive Officers of the Registrant" in Part I, following
Item 4 of this Form 10-K. Information relating to the directors is incorporated
by reference from pages 5 through 7 of the Company's definitive proxy statement
for the 2002 Annual Meeting of Stockholders to be held on February 7, 2002 under
the caption "Election of Directors."
Item 11. Executive Compensation
Incorporated by reference from pages 7 through 14 of the Company's
definitive proxy statement for the 2002 Annual Meeting of Stockholders to be
held on February 7, 2002 under the following captions: "Director Compensation,"
"Executive Compensation," "Option Grants and Exercises," and "Report of
Compensation Committee."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from pages 3 through 4 of the Company's
definitive proxy statement for the 2002 Annual Meeting of Stockholders to be
held on February 7, 2002 under the caption "Security Ownership of Certain
Beneficial Owners and Management."
Item 13. Certain Relationships and Related Transactions
Information related to executive officers' retention agreements is
incorporated by reference from pages 9 through 12 of the Company's definitive
proxy statement for the 2002 Annual Meeting of Stockholders to be held on
February 7, 2002 under the caption "Report of Compensation Committee."
Information related to related-party transactions is incorporated by reference
from page 13 of the Company's definitive proxy statement for the 2002 Annual
Meeting of Stockholders to be held on February 7, 2002 under the caption
"Certain Transaction."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Related Transactions
(a) The following are filed as a part of this report:
1. Financial Statements Page
----
Consolidated Statements of Income for the Years Ended F-1
September 30, 2001, 2000 and 1999
Consolidated Balance Sheets as of September 30, 2001 and 2000 F-2
Consolidated Statements of Shareholders' Equity for
the Years Ended September 30, 2001, 2000 and 1999 F-3
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2001, 2000 and 1999 F-4
Notes to Consolidated Financial Statements F-5
Report of Ernst & Young LLP, Independent Auditors F-22
2. Financial Statement Schedules
Information required by schedule II is shown in the Notes to Consolidated
Financial Statements. All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
3. Exhibits
Exhibit
No. Description
------- -----------
3.1(10) Restated Articles of Organization of the Registrant, as
amended.
3.2* Amended and Restated By-laws of the Registrant.
4* Specimen Stock Certificate.
10.1*(11) 1986A Stock Option Plan.
10.2(10)(11) 1992 Equity Incentive Plan, as amended and restated.
10.3(9)(12) 1992 Employee Stock Purchase Plan, as amended and restated.
10.4(3) Lease dated November 16, 1993, between Teachers Realty
Corporation and the Registrant, relating to premises leased
in Chelmsford, MA.
10.5(5) Lease dated August 8, 1995, between Principal Mutual Life
Insurance Company and the Registrant, relating to premises
leased in Chelmsford, MA.
10.6(8) Fleet Bank Letter Agreement and Promissory Note dated January
1, 1997, relating to amendment of $3,000,000 credit facility.
10.7(14) Restated Software License & Support & Hardware Purchase
Agreement dated September 25, 2000 between ADP, Inc. and the
Registrant.
10.8* Sales Agreement dated December 6, 1990, between Integrated
Design, Inc. and the Registrant.
10.8.1(6) Amendment dated November 2, 1995 to Sales Agreement dated
December 6, 1990, between Integrated Design, Inc. and the
Registrant.
10.8.2 Amendment dated October 8, 1999 to Sales Agreement dated
December 6, 1990 between Integrated Design, Inc. and the
Registrant.
10.9* Form of Indemnity Agreement entered into among the Registrant
and Directors of the Registrant.
10.10(12) Lease Agreement Between W/9TIB Real Estate Limited
Partnership, as Landlord, and Kronos Incorporated, as Tenant
Dated 2/26/99
10.11(12) Construction Agreement Between Cranshaw Construction of New
England Limited Partnership and Kronos Incorporated Dated
March 10, 1999.
3. Exhibits (continued)
Exhibit
No. Description
------- -----------
10.12(12) Agreement of Purchase and Sale Beyond Between W/9TIB Real
Estate Limited Partnership and Kronos Incorporated Dated
March 29, 1999.
10.13(11) Form of Senior Executive Retention Agreement.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
* Incorporated by reference to the same Exhibit Number in the Company's
Registration Statement on Form S-1 (File No. 33-47383).
(1) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30, 1992.
(2) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 3, 1993.
(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30, 1993.
(4) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended July 2, 1994.
(5) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30,1995.
(6) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 30, 1996.
(7) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30, 1996.
(8) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended December 28, 1996.
(9) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 29, 1997.
(10) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 4, 1998.
(11) Management contract or compensatory plan or arrangement filed as an exhibit
to this Form 10-K pursuant to Items 14(a) and 14(c) of Form 10-K.
(12) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 3, 1999.
(13) Confidential treatment was granted for certain portions of this agreement.
(14) Confidential treatment was requested for certain portions of this
agreement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last fiscal quarter of the
fiscal year covered by this report.
Kronos, Timekeeper, Timekeeper Central, Jobkeeper, Jobkeeper Central,
Datakeeper, Datakeeper Central, Gatekeeper, Gatekeeper Central, Imagekeeper,
TeleTime, TimeMaker, CardSaver, ShopTrac, ShopTrac Pro the ShopTrac logo, Start.
Time, Keep.Trac, Solution in a Box, Visionware and the Company's logo are
registered trademarks of the Company. DKC/Datalink, Timekeeper Web, HyperFind,
Kronos 2100, Smart Scheduler, Starter Series, Start.Labor, Start.WIP,
Start.Quality, Labor Plus, WIP Plus, Comm.Mgr, CommLink, Community Computer,
Tempo and the Tempo logo, Kronos Connect, FasTrack, Workforce Central and the
Workforce Central logo, Workforce Timekeeper, Workforce Activities, Workforce
Smart Scheduler, Workforce Manager, Workforce Accruals, Workforce Web, Workforce
TeleTime, Workforce Express, Workforce Scheduler, Workforce Decisions and Prism
are trademarks of the Company. IBM is a registered trademark of, and iSeries AS
and AS/400 are trademarks of, International Business Machines Corporation Total
Time is a service mark of ADP, Inc. and ADP is a registered trademark of
Automatic Data Processing, Inc. Microsoft, Windows, and Windows 95 are
registered trademarks of, and Windows NT is a trademark of, Microsoft
Corporation. Oracle is a registered trademark of Oracle Corporation. Informix is
a registered trademark of Informix Software, Inc. PeopleSoft is a registered
trademark of PeopleSoft, Inc. Baan is a trademark of Baan Development B.V.
Honeywell is a registered trademark of Honeywell, Inc. J.D. Edwards is a
registered trademark of J.D. Edwards and Company. Lawson is a registered
trademark of Lawson Associates, Inc. SAP is a trademark of SAP AG. Citrix is a
registered trademark of Citrix Systems Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on December 19, 2001.
KRONOS INCORPORATED
By /s/ Mark S. Ain
----------------------------
Mark S. Ain
Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on December 19, 2001.
Signature Capacity
--------- --------
/s/ Mark S. Ain Chief Executive Officer
----------------------------- and Chairman of the Board
Mark S. Ain (Principal Executive Officer)
/s/ Paul A. Lacy Vice President, Finance and Administration
----------------------------- (Principal Financial and Accounting
Paul A. Lacy Officer)
/s/ W. Patrick Decker Director, President and Chief Operating
----------------------------- Officer
W. Patrick Decker
/s/ Richard J. Dumler
----------------------------- Director
Richard J. Dumler
/s/ D. Bradley McWilliams Director
-----------------------------
D. Bradley McWilliams
/s/ Lawrence Portner Director
-----------------------------
Lawrence Portner
/s/ Samuel Rubinovitz Director
-----------------------------
Samuel Rubinovitz
Consolidated Statements of Income In thousands, except share data
Year Ended September 30, 2001 2000 1999
------------- ------------ ------------
Net revenues:
Product .............................................................. $ 153,054 $ 152,122 $ 164,340
Service .............................................................. 139,893 117,485 89,958
------------ ------------ ------------
292,947 269,607 254,298
Cost of sales:
Product .............................................................. 34,245 35,119 37,507
Service .............................................................. 76,434 68,530 53,292
------------ ------------ ------------
110,679 103,649 90,799
------------ ------------ ------------
Gross profit ..................................................... 182,268 165,958 163,499
Operating expenses and other income:
Sales and marketing .................................................. 99,546 92,254 85,283
Engineering, research and development ................................ 33,333 29,889 26,802
General and administrative ........................................... 18,520 17,771 15,502
Amortization of excess of costs over net assets of businesses acquired 7,557 6,491 4,384
Other income, net .................................................... (5,768) (4,980) (2,952)
Special charge ....................................................... 3,689 -- --
------------ ------------ ------------
------------ ------------ ------------
156,877 141,425 129,019
------------ ------------ ------------
Income before income taxes ....................................... 25,391 24,533 34,480
Provision for income taxes ............................................... 8,887 8,832 12,102
------------ ------------ ------------
------------ ------------ ------------
Net income ....................................................... $ 16,504 $ 15,701 $ 22,378
============ ============ ============
Net income per common share:
Basic ............................................................ $ 0.88 $ 0.84 $ 1.19
============ ============ ============
Diluted .......................................................... $ 0.85 $ 0.81 $ 1.14
============ ============ ============
Weighted average common shares outstanding:
Basic ............................................................ 18,756,510 18,644,007 18,822,092
============ ============ ============
Diluted .......................................................... 19,346,328 19,422,512 19,663,847
============ ============ ============
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets In thousands, except share data
September 30, 2001 2000
--------- ---------
ASSETS
Current assets:
Cash and equivalents .............................................................. $ 36,561 $ 23,201
Marketable securities ............................................................. 13,812 10,788
Accounts receivable, less allowances of $7,151 in 2001 and $6,986 in 2000 ......... 75,295 71,493
Deferred income taxes ............................................................. 6,655 5,916
Other current assets .............................................................. 15,819 13,750
--------- ---------
Total current assets ....................................................... 148,142 125,148
Property, plant and equipment, net ..................................................... 36,016 37,082
Marketable securities .................................................................. 18,400 17,450
Excess of cost over net assets of businesses acquired, net ............................. 51,169 29,421
Deferred software development costs, net ............................................... 17,144 13,788
Other assets ........................................................................... 13,943 16,600
--------- ---------
Total assets ............................................................... $ 284,814 $ 239,489
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 7,272 $ 8,278
Accrued compensation .............................................................. 26,932 19,879
Accrued expenses and other current liabilities .................................... 16,073 14,339
Deferred professional service revenues ............................................ 29,740 23,451
Deferred maintenance revenues ..................................................... 57,053 48,483
--------- ---------
Total current liabilities .................................................. 137,070 114,430
Deferred maintenance revenues .......................................................... 12,054 15,814
Other liabilities ...................................................................... 4,674 1,455
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, 19,154,138
and 18,952,092 shares issued at September 30, 2001 and 2000, respectively ...... 192 190
Additional paid-in capital ........................................................ 20,548 23,778
Retained earnings ................................................................. 114,348 97,844
Cost of Treasury Stock (95,787 shares and 465,057 shares at September 30, 2001
and 2000, respectively) ........................................................ (2,588) (12,656)
Accumulated other comprehensive income (loss):
Foreign currency translation ................................................... (1,796) (1,278)
Net unrealized gain (loss) on available-for-sale investments ................... 312 (88)
--------- ---------
(1,484) (1,366)
Total shareholders' equity ................................................. 131,016 107,790
--------- ---------
Total liabilities and shareholders' equity ................................. $ 284,814 $ 239,489
========= =========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
In thousands
Accumulated
Other
Comprehen-
Common Stock Additional sive Treasury Stock
-------------- Paid-in Retained Income ----------------
Shares Amount Capital Earnings (Loss) Shares Amount Total
-------------- ---------- -------- -------- ---------------- ---------
Balance at September 30, 1998 ....................... 18,699 $187 $ 29,513 $ 59,765 $(1,162) 69 $ (1,100) $ 87,203
Net income ......................................... -- -- -- 22,378 -- -- -- 22,378
Foreign currency translation ....................... -- -- -- -- 825 -- -- 825
---------
Comprehensive income ............................. -- -- -- -- -- -- -- 23,203
Proceeds from exercise of stock options ............ 179 2 (3,098) -- -- (357) 6,916 3,820
Proceeds from employee stock purchase plan ......... 74 1 955 -- -- (63) 1,133 2,089
Purchase of treasury stock ......................... -- -- -- -- -- 639 (15,710) (15,710)
Tax benefit from the exercise
of stock options .............................. -- -- 3,462 -- -- -- -- 3,462
Proceeds from sale of put options .................. -- -- 191 -- -- -- -- 191
------ ---- ------ ------ ------ ----- ------- ---------
Balance at September 30, 1999 ...................... 18,952 190 31,023 82,143 (337) 288 (8,761) 104,258
Net income ......................................... -- -- -- 15,701 -- -- -- 15,701
Foreign currency translation ....................... -- -- -- -- (941) -- -- (941)
Net unrealized loss on available-for-sale securities -- -- -- -- (88) -- -- (88)
---------
Comprehensive income ............................. -- -- -- -- -- -- -- 14,672
Proceeds from exercise of stock options ............ -- -- (10,829) -- -- (500) 15,466 4,637
Proceeds from employee stock purchase plan ......... -- -- (1,384) -- -- (141) 4,144 2,760
Purchase of treasury stock ......................... -- -- -- -- -- 818 (23,505) (23,505)
Tax benefit from the exercise
of stock options .............................. -- -- 4,799 -- -- -- -- 4,799
Proceeds from sale of put options .................. -- -- 169 -- -- -- -- 169
------ ---- ------- ------ ------- ---- ------- ---------
Balance at September 30, 2000 ....................... 18,952 190 23,778 97,844 (1,366) 465 (12,656) 107,790
Net income ......................................... -- -- -- 16,504 -- -- -- 16,504
Foreign currency translation ....................... -- -- -- -- (518) -- -- (518)
Net unrealized gain on available-for-sale securities -- -- -- -- 400 -- -- 400
---------
Comprehensive income ............................. 16,386
Proceeds from exercise of stock options ............ 202 2 (6,659) -- -- (594) 15,560 8,903
Proceeds from employee stock purchase plan ......... -- -- (2,053) -- -- (218) 5,534 3,481
Purchase of treasury stock ......................... -- -- -- -- -- 443 (11,026) (11,026)
Tax benefit from the exercise
of stock options and other .................... -- -- 5,482 -- -- -- -- 5,482
------ ---- -------- -------- ------- ---- -------- ---------
Balance at September 30, 2001 ....................... 19,154 $192 $ 20,548 $114,348 $(1,484) 96 $ (2,588) $ 131,016
====== ==== ======== ======== ======= ==== ======== =========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows In thousands
Year Ended September 30, 2001 2000 1999
-------- -------- --------
Operating activities:
Net income ................................................................ $ 16,504 $ 15,701 $ 22,378
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation ......................................................... 8,299 7,756 7,856
Amortization of excess of costs over net assets of businesses acquired 7,557 6,491 4,384
Amortization of deferred software development costs .................. 8,312 8,191 6,159
Deferred income taxes ................................................ 1,976 (3,860) (3,031)
Changes in certain operating assets and liabilities:
Accounts receivable, net .......................................... (1,835) (3,936) (15,765)
Deferred maintenance revenues ..................................... 771 4,149 20,899
Accounts payable, accrued compensation
and other liabilities ............................................. 8,289 5,199 17,507
Long term investment in leases .................................... (692) 1,283 (4,974)
Non-cash portion of special charge ................................ 1,753 -- --
Other ............................................................. (2,043) (1,822) (3,466)
Tax benefit from exercise of stock options ........................... 5,482 4,799 3,462
-------- -------- --------
Net cash and equivalents provided by operating activities ......... 54,373 43,951 55,409
Investing activities:
Purchase of property, plant and equipment ................................. (6,976) (19,718) (16,222)
Capitalization of software development costs .............................. (11,668) (9,761) (8,836)
(Increase) decrease in marketable securities .............................. (3,974) 14,055 (20,253)
Acquisitions of businesses, net of cash acquired .......................... (19,506) (9,009) (10,260)
-------- -------- --------
Net cash and equivalents used in investing activities ............. (42,124) (24,433) (55,571)
Financing activities:
Net proceeds from exercise of stock options and
employee purchase plans ................................................. 12,384 7,397 5,909
Purchase of treasury stock ................................................ (11,026) (23,505) (15,710)
Proceeds from sale of put options ......................................... -- 169 191
-------- -------- --------
Net cash and equivalents provided by (used in) financing activities 1,358 (15,939) (9,610)
Effect of exchange rate changes on cash and equivalents ........................ (247) (526) 32
-------- -------- --------
Increase (decrease) in cash and equivalents .................................... 13,360 3,053 (9,740)
Cash and equivalents at the beginning of the period ............................ 23,201 20,148 29,888
-------- -------- --------
Cash and equivalents at the end of the period .................................. $ 36,561 $ 23,201 $ 20,148
======== ======== ========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KRONOS INCORPORATED
NOTE A--Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts of Kronos Incorporated and its wholly-owned subsidiaries (the
"Company"). All intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made in the accompanying
consolidated financial statements in order to conform to the fiscal 2001
presentation. The Company operates in one business segment, the development,
manufacturing and marketing of frontline labor management systems that improve
workforce productivity and the utilization of labor resources.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Translation of Foreign Currencies: The assets and liabilities of the Company's
foreign subsidiaries are denominated in each country's local currency and
translated at the year-end rate of exchange. The related income statement items
are translated at the average rate of exchange for the year. The resulting
translation adjustments are excluded from income and reflected as a separate
component of shareholders' equity. Realized and unrealized exchange gains or
losses arising from transaction adjustments are reflected in operations. The
Company may periodically have certain intercompany foreign currency transactions
that are deemed to be of a long-term investment nature. Exchange adjustments
related to those transactions are made directly to a separate component of
stockholders' equity.
Cash Equivalents: Cash equivalents consist of highly liquid investments with
maturities of three months or less at date of acquisition.
Marketable Securities: The Company's marketable securities consist of United
States government agency bonds, corporate bonds and state revenue bonds. Bonds
with a maturity of twelve months or longer at the balance sheet date are
classified as non-current marketable securities. At September 30, 2001, no bonds
had effective maturities that extend beyond February 2006. Marketable securities
are carried at fair value as obtained from outside pricing sources. Interest
income earned on the Company's cash, cash equivalents and marketable securities
is included in other income, net and amounted to $2,490,132, $2,579,000, and
$2,601,000 in fiscal 2001, 2000, and 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE A--Summary of Significant Accounting Policies--(continued)
Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost less accumulated depreciation, provisions for which have been
computed using the straight-line method over the estimated useful lives of the
assets, which are principally as follows:
Estimated
Assets Useful Life
------ -----------
Building 30 years
Machinery and equipment 3-5 years
Furniture and fixtures 8-10 years
Leasehold improvements Shorter of economic
life or lease-term
Accounting for the Impairment of Long-Lived Assets: Long-lived assets used in
operations, such as the excess of cost over net assets of businesses acquired,
capitalized software development costs and property, plant and equipment, are
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable. If the
impairment evaluation indicates the affected asset is not recoverable, the
asset's carrying value would be reduced to fair value or net realizable value in
the case of deferred software development costs. In fiscal 2001 the Company
recorded a charge for the impairment of an investment in a previously acquired
business (See Note I). Other than the event discussed in Note I, no events have
occurred that would impair the value of long-lived assets recorded in the
accompanying consolidated financial statements.
Revenue Recognition: The Company derives its revenues from the sale of frontline
labor management systems as well as sales of application software, parts and
components. The Company also derives revenues by providing services including
maintenance, installation, consulting and training. Revenue earned on software
arrangements involving multiple elements which qualify for separate element
treatment is allocated to each element based on the relative fair values of
those elements based on vendor specific objective evidence. In instances where
vendor specific objective evidence does not exist for delivered elements,
typically software products, the residual method is used to recognize revenue.
The Company recognizes revenues from sales and sales-type leases when a
noncancelable agreement has been signed, the product shipped, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable and collection is considered probable. From time to time, customers
request delayed shipment, usually because of scheduling for systems integration
and /or lack of storage space at the customers' facilities during the
implementation. In such bill and hold transactions, the Company recognizes
revenue when the criteria of Staff Accounting Bulletin No. 101 are satisfied.
Revenues from maintenance agreements are recognized ratably over the contractual
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE A--Summary of Significant Accounting Policies--(continued)
period and all other service revenues are recognized as the services are
performed. As of October 1, 1998, the Company adopted Statement of Position
(SOP) 97-2, "Software Revenue Recognition," which was effective for transactions
the Company entered into in fiscal 1999. The Company subsequently adopted SOP
98-9, "Modification of SOP 97-2, With Respect to Certain Transactions." The
adoption of SOP 97-2 and SOP 98-9 did not have a material effect on the
Company's financial statements. The Company provides certain warranties to its
customers and, without additional charge, certain software product enhancements
for customers covered under software maintenance agreements. Any provision
required for these expenses is made at the time revenues are recognized.
Stock-Based Compensation: The Company accounts for its stock-based compensation
plans in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations. Under APB 25, no compensation expense is recognized as the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation" (see Note L).
Income Taxes: The Company accounts for income taxes under the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Net Income Per Share: Net income per share is based on the weighted-average
number of common shares and, when dilutive, includes stock options and put
options (see Note K and N).
Derivatives: The Company from time to time holds foreign currency forward
exchange contracts having durations of less than 12 months. These forward
exchange contracts offset the impact of exchange rate fluctuations on
intercompany payables due from the Company's foreign subsidiaries. Forward
exchange contracts are accounted for as cash flow hedges and are recorded on the
balance sheet at fair value. Changes in the fair value are recognized in other
comprehensive income until the gain or loss of the hedged item is recognized in
earnings, at which time the change in the fair value is reclassified to
earnings. For fiscal 2001, the difference between the cumulative change in the
fair value of the hedge instruments and the cumulative change in the value of
the hedged transactions was immaterial. As of September 30, 2001, these forward
contracts had an immaterial fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE A--Summary of Significant Accounting Policies--(continued)
Newly Issued Accounting Standards: In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
the Company adopted in fiscal 2001. The adoption of SFAS No. 133 did not have a
material effect on the Company's financial statements.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001 (the "Statements"). Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
For acquisitions completed prior to June 30, 2001, the Company anticipates that
it will apply the new rules on accounting for business combinations, goodwill
and other intangible assets beginning in the first quarter of fiscal 2002. For
acquisitions completed after June 30, 2001, the Company has applied the new
rules beginning in the fourth quarter of fiscal 2001 as required by the
Statements. The effect of the application of the non-amortization provisions of
the Statements in fiscal 2001 was to increase income before taxes by $214,000
and net income by $139,000 or $0.01 per diluted share. The effect in fiscal 2002
is expected to increase net income by $3.7 million, or $0.19 per diluted share.
During fiscal 2002, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of
October 1, 2001. The Company has not currently determined what effect, if any,
these impairment tests may have on its earnings and financial position.
NOTE B--Concentration of Credit Risk
The Company markets and sells its products through its direct sales
organization, independent dealers and an OEM agreement with ADP, Inc. The
Company's dealers have significantly smaller resources than the Company. The
Company's direct sales organization sells to customers who are dispersed across
many different industries and geographic areas. The Company does not have a
concentration of credit or operating risk in any one industry or any one
geographic region within or outside of the United States. The Company reviews a
customer's (including dealer's) credit history before extending credit and
generally does not require collateral. The Company establishes its allowances
based upon factors including the credit risk of specific customers, historical
trends and other information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE C- -Marketable Securities
The following is a summary of marketable securities (in thousands):
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- -------- --------
September 30, 2001 Available-for-sale securities:
United States government
and agency debt securities ........... $ 403 $ 13 $ --- $ 416
Municipal debt securities .............. 17,716 162 11 17,867
U.S. corporate securities .............. 13,781 182 34 13,929
------- ------- ------- -------
$31,900 $ 357 $ 45 $32,212
======= ======= ======= =======
September 30, 2000 Available-for-sale securities:
United States government
and agency debt securities ........... $11,838 $ --- $ 125 $11,713
Municipal debt securities .............. 11,875 25 29 11,871
U.S. corporate securities .............. 4,613 41 --- 4,654
------- ------- ------- -------
$28,326 $ 66 $ 154 $28,238
======= ======= ======= =======
The Company recorded gross realized losses of $296,000 and $56,000 in fiscal
2001 and 2000, respectively. In fiscal 2001 and 2000, the net adjustment of
$400,000 for unrealized gains and $88,000 for unrealized losses is included as a
separate component of shareholders' equity.
The amortized costs and estimated fair value of debt securities at September 30,
2001 are shown below by effective maturity. Effective maturities will differ
from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.
(In thousands) Estimated
Fair
Cost Value
------- ---------
Available-for-sale securities:
Due in one year or less $13,846 $13,812
Due after one year through two years 9,269 9,380
Due after two years through four years 8,422 8,621
Due after four years 363 399
------- ---------
$31,900 $32,212
======= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE D -Accounts Receivable
Accounts receivable consists of the following (in thousands):
September 30,
---------------------------
2001 2000 1999
------- ------- -------
Trade accounts receivable ................. $68,540 $65,712 $63,347
Current investment in sales-type leases ... 13,906 12,767 10,261
Non-current trade accounts receivable ..... 3,567 3,452 3,580
------- ------- -------
86,013 81,931 77,188
Less:
Allowance for doubtful accounts ........... 3,657 4,010 3,535
Allowance for sales returns and adjustments 3,494 2,976 3,256
------- ------- -------
7,151 6,986 6,791
------- ------- -------
$78,862 $74,945 $70,397
======= ======= =======
Non-current trade receivables relate to balances not due within the next twelve
months. The non-current trade receivables are included in other assets.
In fiscal 2001, 2000, and 1999 the Company recorded provisions for its
allowances in the amount of $1,391,000, $1,128,000, and $2,982,000,
respectively. Charges against the allowances of $1,226,000, $933,000, and
$636,000 in fiscal 2001, 2000, and 1999, respectively, principally relate to
uncollectible accounts written off, net of recoveries. It is the Company's
practice to record an estimated allowance for sales returns and adjustments
based on historical experience and to record individual charges for sales
returns and adjustments directly to revenue as incurred.
NOTE E--Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
September 30,
2001 2000
------- -------
Land $ 2,810 $ 2,810
Building 13,522 13,508
Machinery and equipment 52,962 47,322
Furniture and fixtures 11,957 11,374
Leasehold improvements 5,530 4,863
------- -------
86,781 79,877
Less accumulated depreciation 50,765 42,795
------- -------
$36,016 $37,082
======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE F--Leases
The Company leases hardware and other components as well as provides financing
for services to customers under sales-type leases as defined in SFAS No. 13,
"Accounting for Leases." The long-term portion of the net investment in
sales-type leases amounted to $9,311,000 and $8,619,000 at September 30, 2001
and 2000, respectively, and is included in other assets. The components of the
net investment in sales-type leases are as follows (in thousands):
September 30,
-------------------------
2001 2000
------------------------------------------------------------------------------
Minimum rentals receivable $25,090 $23,381
Estimated residual values of leased equipment
(unguaranteed) 252 242
Unearned interest income (2,125) (2,237)
-------- --------
Net investment in sales-type leases $23,217 $21,386
======== ========
Minimum rentals receivable under existing leases as of September 30, 2001 are as
follows (in thousands):
Fiscal Year
----------------------------------------------------
2002 .................................... $15,557
2003 .................................... 7,405
2004 .................................... 1,750
2005 .................................... 140
2006..................................... 238
-------
$25,090
=======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE G--Acquisitions
In fiscal 2001, 2000 and 1999, the Company completed various acquisitions of
dealer territories and other companies. All acquisitions have been accounted for
under the purchase method of accounting and, accordingly, the operating results
are included in the consolidated statements of income from the date of each
respective acquisition.
The combined cost of the acquisitions, which amounted to $24,234,000,
$3,775,000, and $15,500,000 in fiscal 2001, 2000 and 1999, respectively,
principally relates to intangible assets that are being amortized using the
straight-line method over a period ranging from two to twelve years (See Note
A). Related amortization expense amounted to $7,557,000, $6,491,000, and
$4,384,000 in fiscal 2001, 2000 and 1999, respectively. Related accumulated
amortization amounted to $22,928,000 and $17,383,000 in fiscal 2001 and 2000,
respectively.
Certain agreements contain provisions that require the Company to make a
guaranteed payment within one year and/or contingent payments based upon
profitability of the business unit or if specified minimum revenue requirements
are met. These provisions expire during fiscal 2002 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 an
increase in the excess of the total acquisition cost over the fair value of the
net assets acquired. However, under certain circumstances, a portion of the
contingent payment may be recorded as compensation expense. During fiscal 2001,
2000 and 1999, $905,000, $318,000 and $811,000, respectively, of contingent
payments were earned of which $295,000, $62,000 and $225,000, respectively, were
expensed.
NOTE H--Deferred Software Development Costs
Costs incurred in the research, design and development of software for sale to
others are charged to expense until technological feasibility is established.
Thereafter, software development costs are capitalized and amortized to product
cost of sales on a straight-line basis over the lesser of three years or the
estimated economic lives of the respective products, beginning when the products
are offered for sale. 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 bases over the lesser of three
years or the estimated economic life of the software. Total amounts capitalized
were $11,668,000, $9,761,000 and $8,836,000 in fiscal 2001, 2000 and 1999,
respectively.
Amortization of capitalized software development costs amounted to $8,312,000,
$8,191,000, and $6,159,000 in fiscal 2001, 2000 and 1999, respectively. Total
research and development expenses charged to operations amounted to $26,006,000,
$23,188,000 and $19,505,000 in fiscal 2001, 2000 and 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE I -Special Charges
A special charge in the amount of $3.0 million related to the termination of the
Company's Crosswinds Technology operations was recorded in the second quarter of
fiscal 2001. The Crosswinds Technology Group, which was purchased in May 1999,
was responsible for the product development, marketing and sales support of time
and attendance applications that operated as a Microsoft Outlook plug in
product. Lower than anticipated sales of these applications, redundant
infrastructure and ongoing operating losses had resulted in the termination of
the stand-alone operating unit. Revenues in the first six months of fiscal 2001
generated by the Crosswinds Technology Group were not material. The $3.0 million
charge consisted of $1.6 million in termination costs, $1.3 million for the
write off of all related intangible assets and $0.1 million in other costs. In
addition, in order to streamline operations to better align costs with expected
revenues, a special charge in the amount of $.7 million was recorded in the
third quarter of fiscal 2001 related to termination costs from a reduction in
workforce of approximately 90 employees.
The components of the liabilities of these special charges are listed below (in
thousands):
Balance at Additional Cash Balance at
Description March 31, 2001 Charges Outlays September 30, 2001
----------- -------------- ---------- -------- ------------------
Termination costs $1,600 $700 $(1,900) $ 400
Other costs 100 -- -- 100
-------------- ---------- -------- ------------------
Total accrual $1,700 $700 $(1,900) $ 500
============== ========== ======== ==================
NOTE J--Lease Commitments
The Company leases certain office space, manufacturing facilities and equipment
under long-term operating lease agreements. Future minimum rental commitments
under operating leases with noncancellable terms of one year or more are as
follows (in thousands):
Fiscal Year
------------------------------------------------------
2002 .................................... $ 8,599
2003 .................................... 7,487
2004 .................................... 6,710
2005 .................................... 5,891
2006 .................................... 4,121
Thereafter ............................ 5,311
-------
$38,119
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE J--Lease Commitments --(continued)
Rent expense was $9,715,000, $9,227,000, and $8,197,000 in fiscal 2001, 2000,
and 1999, respectively.
NOTE K--Capital Stock, Stock Split, Stock Repurchase Program and Stock Rights
Agreement
Capital Stock: The Board of Directors is authorized, subject to any limitations
prescribed by law, from time to time to issue up to an aggregate of 1,000,000
shares of Preferred Stock, $1.00 par value per share, in one or more series,
each of such series to have such preferences, voting powers (up to 10 votes per
share), qualifications and special or relative rights and privileges as shall be
determined by the Board of Directors in a resolution or resolutions providing
for the issue of such Preferred Stock.
During fiscal 2000, the Company sold put options that entitled the holder of
each option to sell to the Company one share of Common Stock at an exercise
price of $33.33. The 75,000 options expired on June 9, 2000 and the Company
chose to settle the obligation with cash. During fiscal 1999 the Company also
sold put options that expired without being exercised on December 10, 1999. The
premiums of $169,000 and $191,000 respectively, which were received in
conjunctions with these private placements, were recorded as additional paid-in
capital.
Stock Split: On October 25, 2001, the Company's Board of Directors approved a
three-for-two stock split effective in the form of a 50% stock dividend. This
stock dividend was paid on November 15, 2001 to stockholders of record as of
November 5, 2001. Accordingly, the presentation of shares outstanding and
amounts per share have been restated for all periods presented to reflect the
split. The par value of the additional shares was transferred from additional
paid-in-capital to Common Stock.
Stock Repurchase Program: In fiscal 1997 the Company's Board of Directors
implemented a stock repurchase program under which it periodically authorizes,
subject to certain business and market conditions, the repurchase of the
Company's outstanding common shares to be used for the Company's employee stock
option plans and employee stock purchase plan. As of September 30, 2001 the
Company's Board of Directors had authorized the repurchase of 2,625,000 common
shares, of which 542,925 remain to be repurchased. Under the stock repurchase
program, the Company repurchased 354,675, 783,000 and 576,525 common shares in
fiscal 2001, 2000 and 1999 respectively, at a cost of $8,671,000, $22,364,000
and $14,155,000, respectively. In addition, the Company is also authorized to
and does repurchase mature stock (i.e. stock held by an employee for more than
six months) from employees related to the exercise of stock options.
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE K--Capital Stock, Stock Split, Stock Repurchase Program and Stock Rights
Agreement--(continued)
Stock Rights Agreement: The Company has a Stock Rights Agreement, under which
each holder of a share of Common Stock also has one Right that initially
represents the right to purchase one one-thousandth of a share of a new series
of preferred stock at an exercise price of $236, subject to adjustment. The
Company reserved 12,500 shares of its Preferred Stock for issuance under the
agreement. The Rights may be exercised, in whole or in part, only if a person or
group acquires beneficial ownership of 20% or more of the Company's outstanding
Common Stock or announces a tender or exchange offer upon consummation of which,
such person or group would beneficially own 25% or more of the Company's Common
Stock. When exercisable, each Right will entitle its holder (other than such
person or members of such group) to purchase for an amount equal to the then
current exercise price, in lieu of preferred stock, a number of shares of the
Company's Common Stock having a market value of twice the Right's exercise
price. In addition, when exercisable, the Company may exchange the Rights, in
whole or in part, at an exchange ratio of one share of Common Stock or one
one-thousandth of a share of Preferred Stock per Right. In the event that the
Company is acquired in a merger or other business combination, the Rights would
entitle the stockholders (other than the acquirer) to purchase securities of the
surviving company at a similar discount. Until they become exercisable, the
Rights will be evidenced by the Common Stock certificates and will be
transferred only with such certificates. Under the Agreement, the Company can
redeem all outstanding Rights at $.01 per Right at any time until the tenth day
following the public announcement that a 20% beneficial ownership position has
been acquired or the Company has been acquired in a merger or other business
combination. The Rights will expire on November 17, 2005.
NOTE L--Employee Benefit Plans
Stock Option Plans: The 1992 Equity Incentive Plan enables the Compensation
Committee of the Board of Directors of the Company to grant awards in the form
of options, stock appreciation rights, restricted or unrestricted stock awards,
deferred stock awards and performance awards, as defined in the Plan. During
fiscal 2001, 2000 and 1999, the Company granted under the Plan stock options to
purchase 795,900, 1,192,050 and 843,075 shares, respectively, of Common Stock at
a purchase price equal to the fair value of the Common Stock at the date of
grant. No other awards were made under the Plan through September 30, 2001.
Options granted in fiscal 2001, 2000 and 1999 under the 1992 Equity Incentive
Plan are exercisable in equal installments over a four year period beginning one
year from the date of grant and have a contractual life of four years and six
months. Options granted in prior fiscal years under the same Plan are
exercisable in equal installments over a five year period and have a contractual
life of five years and sixty days. Options available for grant are 1,548,675,
684,711 and 1,585,419 at September 30, 2001, 2000 and 1999, respectively. On
February 8, 2001, the stockholders approved an increase of an additional
l,500,000 shares for issuance under this plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE L--Employee Benefit Plans--(continued)
The Company also has several nonqualified and incentive stock option plans
adopted from 1979 through 1987. No additional options were granted under these
plans since fiscal 1992. Options granted under these plans are exercisable five
years after the date of grant and generally have a ten year contractual life.
The following schedule summarizes the changes in stock options issued under
various plans for the three fiscal years in the period ended September 30, 2001.
Options exercisable under the plans were 695,237, 747,366 and 642,432 in fiscal
2001, 2000 and 1999, respectively.
Weighted - Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
---------------------------------------------------------------------------
Outstanding at
September 30, 1998 2,337,087 $ 9.67 $2.17 - 16.00
Granted .......... 843,075 12.70 12.28 - 27.67
Exercised ........ (535,236) 7.16 2.17 - 15.42
Canceled ......... (112,822) 12.47 4.89 - 25.42
---------- ------ -------------
Outstanding at
September 30, 1999 2,532,104 11.09 2.17 - 27.67
Granted .......... 1,192,050 23.31 15.33 - 43.33
Exercised ........ (449,475) 9.28 2.17 - 15.42
Canceled ......... (291,342) 16.34 7.78 - 25.42
---------- ------ -------------
Outstanding at
September 30, 2000 2,933,337 15.84 2.17 - 43.33
Granted .......... 795,900 21.38 18.63 - 26.79
Exercised ........ (795,706) 11.19 2.17 - 25.42
Canceled ......... (159,864) 18.51 7.78 - 25.42
---------- ------ -------------
Outstanding at
September 30, 2001 2,773,667 $18.61 $2.22 - 43.33
========= ====== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE L--Employee Benefit Plans--(continued)
As discussed in Note A, the Company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," and continues to
account for stock-based compensation under APB 25. Generally no compensation
expense is recorded with respect to the Company's stock option and employee
stock purchase plans.
The following summarizes information about options outstanding and exercisable
at September 30, 2001:
Outstanding Exercisable
------------------------------------ ------------------------
Weighted - Weighted - Weighted -
Average Average Average
Remaining Exercise Exercise
Exercise Price Number Contractual Price Number Price
Per Share of Shares Life Per Share of Share Per Share
------------------------------------------------------------------------------
$2.22 - 8.05 41,321 0.7 Years $ 7.75 26,741 $7.71
11.17 - 13.83 943,196 1.0 Years 11.92 425,715 11.86
15.33 - 19.92 406,824 3.0 Years 18.33 85,006 17.87
20.33 - 25.60 1,357,726 3.7 Years 23.27 151,025 25.03
26.67 - 43.33 24,600 2.8 Years 40.36 6,750 38.95
------------- --------- --------- ------ ------- ------
$2.22 - 43.33 2,773,667 2.3 Years $18.61 695,237 $15.56
============= ========= ========= ====== ======= ======
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
September 30,
---------------------------------------
2001 2000 1999
---------------------------------------------------------------------------
Expected volatility 50.9% 49.4% 56.4%
Risk-free interest rate 5.6% 6.1% 4.6%
Expected lives (in years) 3.8 3.9 4.4
The Company has not paid and does not anticipate paying cash dividends;
therefore, the expected dividend yield is assumed to be zero.
The weighted-average fair value of options granted under the 1992 Equity
Incentive Plan during fiscal 2001, 2000 and 1999 was $10.31, $11.38 and $6.43,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE L--Employee Benefit Plans--(continued)
For purposes of the pro forma disclosure below, the estimated fair value of the
Company's stock-based compensation plan and the estimated benefit derived from
the Company's Stock Purchase Plan is amortized to expense over the options'
vesting period. The Company's pro forma net income and net income per share for
the years ended September 30, 2001, 2000 and 1999 are as follows:
2001 2000 1999
------- ------- -------
Net income (in thousands):
As reported $16,504 $15,701 $22,378
Pro forma 11,596 12,126 19,907
Earnings per share:
As reported $0.85 $0.81 $1.14
Pro forma 0.60 0.63 1.01
Stock Purchase Plan: In accordance with the 1992 Employee Stock Purchase Plan,
eligible employees may authorize payroll deductions of up to 10% of their
compensation (not to exceed $12,500 in a six month period) to purchase shares at
the lower of 85% of the fair market value of the Company's Common Stock at the
beginning or end of the six month option period. During fiscal 2001, 217,467
shares were issued to employees at prices ranging from $14.73 to $17.53 per
share.
At September 30, 2001, a total of 4,650,698 shares of Common Stock were reserved
for issuance. Included in this amount are 4,321,809 shares for the 1992 Equity
Incentive Plan, 269,639 shares for the Employee Stock Purchase Plan and 59,250
shares for the various stock option plans adopted in the period 1979 through
1987.
Defined Contribution Plan: The Company sponsors a defined contribution savings
plan for the benefit of substantially all employees. Company contributions to
the plan are based upon a matching formula applied to employee contributions.
Total expense under the plan was $2,210,000, $1,835,000, and $1,475,000 in
fiscal 2001, 2000 and 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE M--Income Taxes
The provision for income taxes consists of the following (in thousands):
Year Ended September 30,
--------------------------------
2001 2000 1999
--------------------------------------------------
Current:
Federal $ 5,280 $ 10,449 $ 12,953
State 1,140 1,669 1,924
Foreign 491 574 256
-------- -------- --------
6,911 12,692 15,133
-------- -------- --------
Deferred:
Federal 1,729 (3,378) (2,652)
State 247 (482) (379)
-------- -------- --------
1,976 (3,860) (3,031)
-------- -------- --------
$ 8,887 $ 8,832 $ 12,102
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
September 30,
---------------------
2001 2000
----------------------------------------------------------------------------------
Deferred tax assets:
Inventory reserves ..................................... $ 408 $ 676
Accounts receivable reserves ........................... 2,040 2,460
Accrued expenses ....................................... 2,720 2,601
Deferred maintenance revenues .......................... 6,839 7,968
Intangible and goodwill related amortization ........... 2,054 2,211
Other .................................................. -- 194
Net operating loss carryforwards of foreign subsidiaries 188 122
-------- --------
Total deferred tax assets .............................. 14,249 16,232
Valuation allowance .................................... (188) (122)
-------- --------
14,061 16,110
Deferred tax liabilities:
Capitalized software development costs ................. (6,639) (5,806)
Other .................................................. (518) --
-------- --------
Net deferred tax assets ............................. 6,904 10,304
Less: Non-current portion in other assets .............. (249) (4,388)
-------- --------
Net current deferred tax asset ...................... $ 6,655 $ 5,916
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE M--Income Taxes -(continued)
The effective tax rate differed from the United States statutory rate as
follows:
Year Ended September 30,
-----------------------------------
2001 2000 1999
---------------------------------------------------------------------------
Statutory rate 35% 35% 35%
State income taxes, net of federal
income tax benefit 3 4 4
Goodwill 2 - -
Tax exempt interest (1) - -
Use of foreign net operating loss
carryforwards - - (4)
Income tax credits (6) (4) (2)
Other 1 1 2
------ ------ ------
35% 36% 35%
====== ====== ======
As of September 30, 2001, $188,000 of net operating loss carryforwards from
foreign operations remain available to reduce future income taxes payable. These
net operating loss carryforwards may be carried forward indefinitely.
The Company made income tax payments of $3,641,000, $7,128,000, and $15,409,000
in fiscal 2001, 2000 and 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KRONOS INCORPORATED
NOTE N--Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share. The presentation has been restated to reflect the Company's three-for-two
stock split (See Note K) that will be paid on November 15, 2001 to stockholders
of record as of November 5, 2001:
Year Ended September 30,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income (in thousands) ...... $ 16,504 $ 15,701 $ 22,378
=========== =========== ===========
Weighted-average shares ........ 18,756,510 18,644,007 18,822,092
Effect of dilutive securities:
Employee stock options ......... 589,818 778,505 841,755
----------- ----------- -----------
Adjusted weighted-average shares
and assumed conversions ...... 19,346,328 19,422,512 19,663,847
=========== =========== ===========
Basic earnings per share .......... $ .88 $ .84 $ 1.19
=========== =========== ===========
Diluted earnings per share ........ $ .85 $ .81 $ 1.14
=========== =========== ===========
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Kronos Incorporated
We have audited the accompanying consolidated balance sheets of Kronos
Incorporated as of September 30, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended September 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kronos
Incorporated at September 30, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note A to the financial statements, the Company changed its
method of accounting for business combinations for acquisitions consummated
subsequent to June 30, 2001.
ERNST & YOUNG LLP
Boston, Massachusetts
October 25, 2001
Exhibits Index
Exhibit
No. Description
------- -----------
3.1(10) Restated Articles of Organization of the Registrant, as amended.
3.2* Amended and Restated By-laws of the Registrant.
4* Specimen Stock Certificate.
10.1*(11) 1986A Stock Option Plan.
10.2(10)(11) 1992 Equity Incentive Plan, as amended and restated.
10.4(3) Lease dated November 16, 1993, between Teachers Realty
Corporation and the Registrant, relating to premises leased in
Chelmsford, MA.
10.5(5) Lease dated August 8, 1995, between Principal Mutual Life
Insurance Company and the Registrant, relating to premises
leased in Chelmsford, MA.
10.6(8) Fleet Bank Letter Agreement and Promissory Note dated January
1, 1997, relating to amendment of $3,000,000 credit facility.
10.7(14) Restated Software License & Support & Hardware Purchase
Agreement dated September 25, 2000 between ADP, Inc. and the
Registrant.
10.8* Sales Agreement dated December 6, 1990, between Integrated
Design, Inc. and the Registrant.
10.8.1(6) Amendment dated November 2, 1995 to Sales Agreement dated
December 6, 1990, between Integrated Design, Inc. and the
Registrant.
10.8.2 Amendment dated October 8, 1999 to Sales Agreement dated
December 6, 1990 between Integrated Design, Inc. and the
Registrant.
10.9* Form of Indemnity Agreement entered into among the Registrant
and Directors of the Registrant.
10.10(12) Lease Agreement Between W/9TIB Real Estate Limited Partnership,
as Landlord, and Kronos Incorporated, as Tenant Dated 2/26/99.
10.11(12) Construction Agreement Between Cranshaw Construction of New
England Limited Partnership and Kronos Incorporated Dated
March 10, 1999.
10.12(12) Agreement of Purchase and Sale Beyond Between W/9TIB Real
Estate Limited Partnership and Kronos Incorporated Dated
March 29, 1999.
10.13(11) Form of Senior Executive Retention Agreement.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
* Incorporated by reference to the same Exhibit Number in the Company's
Registration Statement on Form S-1 (File No. 33-47383).
(1) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30, 1992.
(2) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 3, 1993.
(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30, 1993.
(4) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended July 2, 1994.
(5) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30,1995.
(6) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 30, 1996.
(7) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30, 1996.
(8) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended December 28, 1996.
(9) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 29, 1997.
(10) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 4, 1998.
Exhibits (continued)
(11) Management contract or compensatory plan or arrangement filed as an exhibit
to this Form 10-K pursuant to Items 14(a) and 14(c) of Form 10-K.
(12) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 3, 1999.
(13) Confidential treatment was granted for certain portions of this agreement.
(14) Confidential treatment was requested for certain portions of this
agreement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last fiscal quarter of the
fiscal year covered by this report.
Kronos, Timekeeper, Timekeeper Central, Jobkeeper, Jobkeeper Central,
Datakeeper, Datakeeper Central, Gatekeeper, Gatekeeper Central, Imagekeeper,
TeleTime, TimeMaker, CardSaver, ShopTrac, ShopTrac Pro the ShopTrac logo, Start.
Time, Keep.Trac, Solution in a Box, Visionware and the Company's logo are
registered trademarks of the Company. DKC/Datalink, Timekeeper Web, HyperFind,
Kronos 2100, Smart Scheduler, Starter Series, Start.Labor, Start.WIP,
Start.Quality, Labor Plus, WIP Plus, Comm.Mgr, CommLink, Community Computer,
Tempo and the Tempo logo, Kronos Connect, FasTrack, Workforce Central and the
Workforce Central logo, Workforce Timekeeper, Workforce Activities, Workforce
Smart Scheduler, Workforce Manager, Workforce Accruals, Workforce Web, Workforce
TeleTime, Workforce Express, Workforce Scheduler, Workforce Decisions and Prism
are trademarks of the Company. IBM is a registered trademark of, and iSeries AS
and AS/400 are trademarks of, International Business Machines Corporation Total
Time is a service mark of ADP, Inc. and ADP is a registered trademark of
Automatic Data Processing, Inc. Microsoft, Windows, and Windows 95 are
registered trademarks of, and Windows NT is a trademark of, Microsoft
Corporation. Oracle is a registered trademark of Oracle Corporation. Informix is
a registered trademark of Informix Software, Inc. PeopleSoft is a registered
trademark of PeopleSoft, Inc. Baan is a trademark of Baan Development B.V.
Honeywell is a registered trademark of Honeywell, Inc. J.D. Edwards is a
registered trademark of J.D. Edwards and Company. Lawson is a registered
trademark of Lawson Associates, Inc. SAP is a trademark of SAP AG. Citrix is a
registered trademark and Metaframe is a trademark of Citrix Systems Inc.
EXHIBIT 21 - Subsidiaries of the Registrant
Jurisdiction
Corporation of Incorporation
----------- ----------------
Kronos Computerized Time Systems, Inc. Canada
Kronos Systems Limited United Kingdom
Kronos International Sales Corp. U.S. Virgin Islands
Kronos Securities Corporation Massachusetts
Kronos de Mexico, S.A. de C.V. Mexico
Kronos Australia Pty. Ltd. Australia
Kronos Brasil Ltda Brazil
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of our report dated October 25, 2001, with respect to the
consolidated financial statements of Kronos Incorporated included in this Annual
Report (Form 10-K) for the year ended September 30, 2001.
- Form S-8 Nos. 333-08987 and 333-52209 pertaining to the 1992 Equity
Incentive Plan;
- Form S-8 No. 33-49430, pertaining to the 1986A Stock Option Plan, 1992
Equity Incentive Plan and 1992 Employee stock Purchase Plan and
- Form S-8 No. 333-36402 pertaining to the 1992 Employee Stock Purchase
Plan
/s/ Ernst & Young LLP
Boston, Massachusetts
December 14, 2001