SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- --------------------------
Commission file number 0-20109
---------------------------------------------------------
Kronos Incorporated
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2640942
- -------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
297 Billerica Road, Chelmsford, MA 01824
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(978) 250-9800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
As of July 27, 2002, 19,680,453 shares of the registrant's common stock,
$.01 par value, were outstanding.
KRONOS INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the Three
and Nine Months Ended June 29, 2002 and June 30, 2001 1
Condensed Consolidated Balance Sheets at June 29, 2002
and September 30, 2001 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 29, 2002 and June 30, 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
UNAUDITED
Three Months Ended Nine Months Ended
---------------------------------- -----------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------------- --------------- ------------ -------------
Net revenues:
Product .......................................... $ 40,458 $ 39,790 $ 109,651 $ 106,371
Service .......................................... 46,612 35,960 133,482 102,193
------------ ------------ ------------ ------------
87,070 75,750 243,133 208,564
------------ ------------ ------------ ------------
Cost of sales:
Product .......................................... 10,106 8,298 26,956 24,009
Service .......................................... 24,770 19,776 68,514 58,239
------------ ------------ ------------ ------------
34,876 28,074 95,470 82,248
------------ ------------ ------------ ------------
Gross profit ................................. 52,194 47,676 147,663 126,316
Operating expenses and other income:
Sales and marketing .............................. 28,337 26,035 79,586 73,002
Engineering, research and development ............ 9,023 9,107 26,210 25,443
General and administrative ....................... 5,507 4,954 15,114 13,570
Amortization of intangible assets ................ 746 1,860 2,113 5,447
Other income, net ................................ (1,378) (1,621) (3,667) (4,333)
Special charge ................................... -- 698 -- 3,689
------------ ------------ ------------ ------------
42,235 41,033 119,356 116,818
Income before income taxes ................... 9,959 6,643 28,307 9,498
Income tax provision ................................... 3,462 2,325 9,840 3,324
------------ ------------ ------------ ------------
Net income ................................... $ 6,497 $ 4,318 $ 18,467 $ 6,174
============ ============ ============ ============
Net income per common share:
Basic ........................................ $ 0.33 $ 0.23 $ 0.94 $ 0.33
============ ============ ============ ============
Diluted ...................................... $ 0.32 $ 0.23 $ 0.90 $ 0.32
============ ============ ============ ============
Average common and common equivalent shares outstanding:
Basic ........................................ 19,658,011 18,750,018 19,607,647 18,683,586
============ ============ ============ ============
Diluted ...................................... 20,349,674 19,164,780 20,501,109 19,224,752
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
UNAUDITED
June 29, September 30,
2002 2001
------------ -------------
ASSETS
Current assets:
Cash and equivalents ................................................................ $ 21,084 $ 36,561
Marketable securities ............................................................... 16,492 13,812
Accounts receivable, less allowances of $9,354
at June 29, 2002 and $7,151 at September 30, 2001 ................................ 70,287 75,295
Deferred income taxes ............................................................... 8,176 6,655
Other current assets ................................................................ 21,201 15,819
--------- ---------
Total current assets ......................................................... 137,240 148,142
Property, plant and equipment, net ..................................................... 37,202 36,016
Marketable securities .................................................................. 19,196 18,400
Intangible assets ...................................................................... 19,654 17,027
Goodwill ............................................................................... 55,982 34,142
Deferred software development costs, net ............................................... 18,223 17,144
Other assets ........................................................................... 17,830 13,943
--------- ---------
Total assets .................................................................. $ 305,327 $ 284,814
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 8,091 $ 7,272
Accrued compensation ................................................................ 24,224 26,932
Accrued expenses and other current liabilities ...................................... 11,609 16,073
Deferred professional service revenues .............................................. 30,331 29,740
Deferred maintenance revenues ....................................................... 63,973 57,053
--------- ---------
Total current liabilities ..................................................... 138,228 137,070
Deferred maintenance revenues .......................................................... 8,357 12,054
Other liabilities ...................................................................... 6,415 4,674
Shareholders' equity:
Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares,
no shares issued and outstanding ................................................. -- --
Common Stock, par value $.01 per share: authorized 50,000,000 shares, 19,911,952 and
19,154,138 shares issued at June 29, 2002 and September 30, 2001, respectively ... 199 192
Additional paid-in capital .......................................................... 34,285 20,548
Retained earnings ................................................................... 132,815 114,348
Cost of Treasury Stock (315,378 shares and 95,787 shares
at June 29, 2002 and September 30, 2001) .......................................... (13,909) (2,588)
Accumulated other comprehensive income (loss):
Foreign currency translation ...................................................... (1,170) (1,796)
Net unrealized gain on available-for-sale investments ............................. 107 312
--------- ---------
(1,063) (1,484)
Total shareholders' equity .................................................... 152,327 131,016
--------- ---------
Total liabilities and shareholders' equity .................................... $ 305,327 $ 284,814
========= =========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Nine Months Ended
----------------------------
June 29, June 30,
2002 2001
------------- -----------
Operating activities:
Net income ..................................................................... $ 18,467 $ 6,174
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation ........................................................... 6,785 5,986
Amortization of intangible assets ...................................... 2,111 5,447
Amortization of deferred software development costs .................... 7,227 6,257
Provision for deferred income taxes .................................... 874 1,171
Changes in certain operating assets and liabilities:
Accounts receivable, net ........................................... 13,652 11,979
Deferred maintenance revenue ....................................... (3,875) (1,978)
Deferred professional service revenue .............................. (1,338) 1,236
Accounts payable, accrued compensation
and other liabilities .......................................... (6,215) (991)
Taxes payable ...................................................... (5,964) (3,697)
Non cash portion of special charge ................................. -- 1,300
Other .............................................................. 704 (1,090)
Tax benefit from exercise of stock options ............................. 10,291 2,528
-------- --------
Net cash and equivalents provided by operating activities ...... 42,719 34,322
Investing activities:
Purchase of property, plant and equipment ...................................... (7,696) (4,606)
Capitalization of software development costs ................................... (9,100) (9,003)
Increase in marketable securities .............................................. (3,476) (19,470)
Acquisitions of businesses and technology, net of cash acquired ................ (30,407) (4,311)
-------- --------
Net cash and equivalents used in investing activities .......... (50,679) (37,390)
Financing activities:
Net proceeds from exercise of stock option and employee stock
purchase plans ............................................................. 15,856 8,357
Purchase of treasury stock ..................................................... (20,881) (7,833)
Net investment in call option .................................................. (2,810) --
-------- --------
Net cash and equivalents (used) provided in financing activities (7,835) 524
Effect of exchange rate changes on cash and equivalents ............................. 318 (187)
-------- --------
Decrease in cash and equivalents .................................................... (15,477) (2,731)
Cash and equivalents at the beginning of the period ................................. 36,561 23,201
-------- --------
Cash and equivalents at the end of the period ....................................... $ 21,084 $ 20,470
======== ========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - General
The accompanying unaudited condensed consolidated financial statements include
all adjustments, consisting of normal recurring accruals that management of
Kronos Incorporated (the "Company" or "Kronos") considers necessary for a fair
presentation of the Company's financial position and results of operations as of
and for the interim periods presented pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures in these financial
statements are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements for the fiscal year ended September
30, 2001. The results of operations for the three and nine months ended June 29,
2002 are not necessarily indicative of the results for a full fiscal year.
Certain reclassifications have been made in the accompanying consolidated
financial statements in order to conform to the fiscal 2002 presentation.
NOTE B - Fiscal Quarters
The Company utilizes a system of fiscal quarters. Under this system, the first
three quarters of each fiscal year end on a Saturday. However, the fourth
quarter of each fiscal year will always end on September 30. Because of this,
the number of days in the first quarter (90 days in fiscal 2002 and 91 days in
fiscal 2001) and fourth quarter (93 days in fiscal 2002 and 92 days in fiscal
2001) of each fiscal year varies from year to year. The second and third
quarters of each fiscal year will be exactly thirteen weeks long. This policy
does not have a material effect on the comparability of results of operations
between quarters.
NOTE C - Other Current Assets
Other current assets consists of the following (in thousands):
June 29, September 30,
2002 2001
-------- -------------
Inventory $6,340 $5,076
Prepaid income and other taxes 4,367 903
Prepaid commissions 4,138 4,633
Prepaid royalties 1,715 2,251
Prepaid expenses - other 4,641 2,956
------- -------
Total $21,201 $15,819
======= =======
NOTE D - Goodwill and Other Intangible Assets - Adoption of Statements 141 and
142
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" (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 has applied the
new rules on accounting for business combinations and 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.
During the three-month period ended March 30, 2002, the Company completed the
initial testing of the impairment of goodwill, as of October 1, 2001. As a
result of the test, the Company has concluded that no impairment of goodwill
exists as of October 1, 2001.
The following table presents the impact of the new standards related to goodwill
amortization (and related tax effects) on net income and earnings per share, as
if they had been in effect for the three and nine months ended June 30, 2001 (in
thousands, except per share data).
Three Months Ended Nine Months Ended
--------------------- ----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- --------- ---------- ---------
Reported net income ................................... $ 6,497 $ 4,318 $ 18,467 $ 6,174
Add back: Goodwill amortization .................. -- 855 -- 2,555
--------- --------- ---------- ---------
Adjusted net income ............................... $ 6,497 $ 5,173 $ 18,467 $ 8,729
========= ========= ========== =========
Basic earnings-per-share:
Reported net income ............................... $ 0.33 $ 0.23 $ 0.94 $ 0.33
Goodwill amortization ............................. -- 0.05 -- 0.14
--------- --------- ---------- ---------
Adjusted net income ............................... $ 0.33 $ 0.28 $ 0.94 $ 0.47
========= ========= ========== =========
Diluted earnings-per-share:
Reported net income ............................... $ 0.32 $ 0.23 $ 0.90 $ 0.32
Goodwill amortization ............................. -- 0.04 -- 0.13
--------- --------- ---------- ---------
Adjusted net income ............................... $ 0.32 $ 0.27 $ 0.90 $ 0.45
========= ========= ========== =========
Acquired intangible assets subject to amortization are presented in the
following table.
(in thousands)
As of June 29, 2002
---------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Customer related $18,998 $6,333
Maintenance relationships 6,004 410
Non-compete agreements and other 2,748 1,353
------- ------
$27,750 $8,096
======= ======
For the three and nine months ended June 29, 2002, amortization expense for
intangible assets was $0.7 million and $2.1 million, respectively. The estimated
annual amortization expense for intangible assets for the current and next five
fiscal years is as follows (in thousands):
Fiscal Year Ending Estimated annual
September 30, amortization expense
------------------ --------------------
2002 $2,884
2003 2,897
2004 2,517
2005 2,054
2006 2,012
2007 1,995
NOTE E - Acquisitions
On November 29, 2001, the Company completed the acquisition of certain assets
and the ongoing business operations of NW Micro-Technics, Inc. ("NWM"), the
former Oregon-based Kronos dealer. The aggregate purchase price was not material
to the Company's financial position. The results of NWM's operations, which are
not material to the Company's results of operations, have been included in the
consolidated financial statements since that date. NWM was engaged in the sale
and service of employee time and attendance, employee scheduling, data
collection and labor management hardware and software systems, including the
resale of the Company's products through a dealer relationship. As a result of
the acquisition, the Company gains access to existing and prospective customers
in the northwestern United States region through its direct sales and service
organizations, as well as access to the existing maintenance revenue stream from
NWM customers.
On December 28, 2001, the Company completed the acquisition of certain assets
and the ongoing business operations of the Integrated Software Business of
SimplexGrinnell's Workforce Solutions Division ("SimplexGrinnell"). The
aggregate purchase price was $22.1 million in cash. The results of
SimplexGrinnell's operations have been included in the consolidated financial
statements since that date. SimplexGrinnell was engaged in the development,
sales and support of integrated workforce management software solutions. As a
result of the acquisition, the Company expects to increase its presence in the
mid-market sector, which includes companies with between 100 and 1,000
employees.
The transaction was accounted for under the purchase method of accounting and
accordingly, the assets and liabilities acquired were recorded at their
estimated fair values at the effective date of the acquisition. The goodwill
recognized is deductible for income tax purposes. The following table summarizes
the estimated fair values of the assets acquired and liabilities assumed at the
date of the acquisition (in thousands).
At December 28, 2001
--------------------
Accounts receivable $7,091
Customer related intangible asset (amortized over 1,100
12 years)
Maintenance relationships intangible asset 2,500
(amortized over 12 years)
Goodwill 18,067
Other assets 768
-------
Total assets acquired 29,526
Deferred professional services revenue (1,564)
Deferred maintenance revenue (5,611)
Other liabilities (301)
-------
Total liabilities assumed (7,476)
-------
Net assets acquired $22,050
=======
Due to the significant volume of customer contracts assumed in conjunction with
the SimplexGrinnell acquisition, the Company has not finalized the allocation of
the purchase price. The Company anticipates that the allocation of purchase
price will be completed by September 30, 2002.
The following table presents the consolidated results of operations on an
unaudited pro forma basis as if the acquisition of SimplexGrinnell had taken
place at the beginning of the periods presented. The following table has been
prepared on the basis of estimates and assumptions available at the time of this
filing that the Company and SimplexGrinnell believe are reasonable under the
circumstances (in thousands, except per share data).
Three Months Ended Nine Months Ended
----------------------- -------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ---------- ----------- -----------
Total revenues ............. $ 87,070 $ 81,896 $ 249,702 $ 226,282
Net income ................. 6,497 3,520 17,304 2,245
Earnings per share - basic . $ 0.33 $ 0.19 $ 0.88 $ 0.12
Earnings per share - diluted $ 0.32 $ 0.18 $ 0.84 $ 0.12
The unaudited pro forma results of operations are for comparative purposes only
and do not necessarily reflect the results that would have occurred had the
acquisitions occurred at the beginning of the periods presented or the results
which may occur in the future.
On February 20, 2002, the Company completed the acquisition of certain assets
and the ongoing business operations of Packard Business Systems, Inc.
("Packard"), the former West Virginia-based Kronos dealer. The aggregate
purchase price was not material to the Company's financial position. The results
of Packard's operations, which are not material to the Company's results of
operations, have been included in the consolidated financial statements since
that date. Packard was engaged in the sale and service of employee time and
attendance, employee scheduling, data collection and labor management hardware
and software systems, including the resale of the Company's products through a
dealer relationship. As a result of the acquisition, the Company gains access to
existing and prospective customers in the West Virginia area through its direct
sales and service organizations, as well as access to the existing maintenance
revenue stream from Packard customers.
On March 18, 2002, the Company completed the acquisition of the outstanding
stock of Data Collection Systems Ltd. ("DCS"), a provider of time and attendance
applications headquartered in the U.K. The aggregate purchase price was not
material to the Company's financial position. The results of DCS's operations,
which are not material to the Company's results of operations, have been
included in the consolidated financial statements since that date. As a result
of the acquisition, the Company gains access to existing and prospective
customers in the U.K. through its subsidiary in the U.K., Kronos Systems Ltd.,
as well as access to the existing maintenance revenue stream from DCS customers.
NOTE F - Source Code License Agreement
On March 15, 2002, the Company entered into an agreement with Best Software Inc.
("Best") to acquire a limited license to the source code and object code for
Best's human resources and payroll software (Abra Enterprise (TM)). Under the
terms of the agreement, Best will provide the Abra Enterprise source code to the
Company and give the Company the right to reproduce, market and sublicense the
software. The Company will integrate Abra Enterprise into its Workforce
Central(R) suite and intends to market and sublicense the integrated product
suite. Per the terms of the agreement, the Company paid Best a one-time
technology delivery fee that is being amortized over a five (5) year period and
prepaid certain service fees. These amounts are included in other assets and
other current assets on the balance sheet. The agreement also requires the
Company to pay minimum royalties for the first five (5) years of the agreement
with royalty payments based on the number of licensed employees continuing for
an aggregate period of ten (10) years.
NOTE G - Comprehensive Income
For the three and nine months ended June 29, 2002 and June 30, 2001,
comprehensive income consisted of the following (in thousands):
Three Months Ended Nine Months Ended
-------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Comprehensive income:
Net income ...................... $ 6,497 $ 4,318 $ 18,467 $ 6,174
Cumulative translation adjustment 298 216 626 (325)
Unrealized gain (loss) on
available-for-sale securities ... 220 (100) (205) 306
-------- -------- -------- --------
Total comprehensive income ...... $ 7,015 $ 4,434 $ 18,888 $ 6,155
======== ======== ======== ========
NOTE H - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except share and per share data):
Three Months Ended Nine Months Ended
-------------------------- --------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income ................... $ 6,497 $ 4,318 $ 18,467 $ 6,174
=========== =========== =========== ===========
Weighted-average shares ...... 19,658,011 18,750,018 19,607,647 18,683,586
Effect of dilutive securities:
Employee stock options ... 691,663 414,762 893,462 541,166
----------- ----------- ----------- -----------
Adjusted weighted-average
shares and assumed conversions 20,349,674 19,164,780 20,501,109 19,224,752
=========== =========== =========== ===========
Basic earnings per share ..... $ 0.33 $ .23 $ 0.94 $ 0.33
=========== =========== =========== ===========
Diluted earnings per share ... $ 0.32 $ .23 $ 0.90 $ 0.32
=========== =========== =========== ===========
NOTE I - Stock Split
On October 25, 2001, the Company's Board of Directors approved a three-for-two
stock split effected 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.
NOTE J - New Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. This statement supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for
the Company October 1, 2002, and early adoption is allowed. The Company does not
expect SFAS No. 144 to have a material effect on its earnings or financial
position.
In January 2002, the Emerging Issues Task Force (EITF) issued EITF No. 01-14,
"Income Statement Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred" (formerly EITF Abstracts, Topic No. D-103).
This EITF requires that reimbursements received for out-of-pocket expenses
incurred should be characterized as revenue in the income statement as opposed
to a reduction of expenses incurred. Out-of-pocket expenses include travel
expenses such as airfare, hotel, mileage and meals that the customer will
reimburse the service vendor. The EITF is effective for financial reporting
periods beginning after December 15, 2001. As a result of the adoption of the
EITF, service revenues and the corresponding cost of sales increased by $0.3
million and $0.4 million for the three month periods ended June 29, 2002 and
June 30, 2001, respectively, and by $0.8 million and $0.9 million for the nine
month periods ended June 29, 2002 and June 30, 2001, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This discussion includes certain forward-looking statements about Kronos'
business and its expectations, including statements relating to revenues derived
from prior acquisitions, revenue growth rates and gross profit, operating
expenses, future acquisitions and available cash, investments and operating cash
flow and the future effects of accounting pronouncements. Any such statements
are subject to risk that could cause Kronos' actual results to vary materially
from expectations. For a further discussion of the various risks that may affect
Kronos' business and expectations, see "Certain Factors That May Affect Future
Operating Results" at the end of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based upon Kronos' consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
Kronos to make estimates and assumptions that affect the reported amounts of
assets and liabilities, revenue and expenses, and related disclosures of
contingent assets and liabilities. Kronos bases its estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from these estimates under
different assumptions or conditions.
Kronos has identified the following critical accounting policies that
affect the more significant judgments and estimates used in the preparation of
consolidated financial statements. This listing is not a comprehensive list of
all of Kronos' accounting policies. Please refer to Note A in the Notes to
Consolidated Financial Statements in Item 14 of Kronos' Annual Report on Form
10-K for the year ended September 30, 2001 for further information.
Revenue Recognition - Kronos recognizes revenues in accordance with the
provisions of the American Institute of Certified Public Accountants Statement
of Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-9,
"Modification of SOP 97-2, With Respect to Certain Transactions." Product
revenue from sales and sales-type leases is recognized upon shipment when a
noncancelable agreement has been signed, there are no uncertainties surrounding
product acceptance, the fees are fixed and determinable and collection is
probable. 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. Typically software fees are due within one year from date
of contract signing. However, since the mid 1990's Kronos has also offered
customers the option to make payments over periods exceeding one year. Kronos
has established a history of sucessfully collecting under the original payment
terms without making concessions on payments, products or services. Kronos
ordinarily records revenue for these transactions upon shipment, assuming all
other conditions for revenue recognition have been satisfied. If the fee due
from the customer is not fixed or determinable, revenue is recognized as
payments become due and all other conditions for revenue recognition have been
satisfied. Revenues from maintenance agreements are recognized ratably over the
contractual period and all other service revenues are recognized as the services
are performed.
Allowance for Doubtful Accounts and Sales Returns Allowance - Kronos
maintains an allowance for doubtful accounts to reflect estimated losses
resulting from the inability of customers to make required payments. This
allowance is based on estimates made by Kronos after consideration of factors
such as the composition of the accounts receivable aging, bad debt history, and
customer creditworthiness. If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances and bad debt expense may be required. In addition, Kronos
maintains a sales returns allowance to reflect estimated losses for sales
returns and adjustments. This allowance is established by Kronos using estimates
based on historical experience. If Kronos experiences an increase in sales
returns and adjustments, additional allowances and charges against revenue may
be required.
Valuation of Intangible Assets and Goodwill - In assessing the
recoverability of goodwill and other intangible assets, Kronos must make
assumptions regarding the estimated future cash flows and other factors to
determine the fair value of these assets. If these estimates or their related
assumptions change in the future, Kronos may be required to record impairment
charges against these assets in the reporting period in which the impairment is
determined. For intangible assets, this evaluation includes an analysis of
estimated future undiscounted net cash flows expected to be generated by the
assets over their estimated useful lives. If the estimated future undiscounted
net cash flows are insufficient to recover the carrying value of the assets over
their estimated useful lives, Kronos will record an impairment charge in the
amount by which the carrying value of the assets exceeds their fair value. For
goodwill, the impairment evaluation includes a comparison of the carrying value
of the reporting unit which houses goodwill to that reporting unit's fair value.
Kronos has only one reporting unit. The fair value of the reporting unit is
based upon the net present value of future cash flows, including a terminal
value calculation. If the reporting unit's estimated fair value exceeds the
reporting unit's carrying value, no impairment of goodwill exists. If the fair
value of the reporting unit does not exceed its carrying value, then further
analysis would be required to determine the amount of the impairment, if any.
For the first nine months of fiscal 2002, no impairment was recorded.
Capitalization of Software Development Costs - Costs incurred in the
research, design and development of software for sale to others are charged to
expense until technological feasibility is established. Thereafter, software
development costs are capitalized and amortized to product cost of sales on a
straight-line basis over the lesser of three years or the estimated economic
lives of the respective products, beginning when the products are offered for
sale. Costs incurred in the development of software for internal use are charged
to expense until it becomes probable that future economic benefits will be
realized. Thereafter, certain costs are capitalized and amortized to operating
expense on a straight-line basis over the lesser of three years or the estimated
economic life of the software.
Results of Operations
Revenues. Revenues for the three and nine month periods ended June 29, 2002
were $87.1 million and $243.1 million respectively, as compared to $75.8 million
and $208.6 million for the comparable periods in the prior year. Revenue growth
was 15% for the three month period ended June 29, 2002 and 17% for the nine
month period ended June 29, 2002, as compared to 11% and 7% in the comparable
periods in the prior year. The revenue growth rates experienced in the three and
nine month periods ended June 29, 2002 were primarily attributable to the effect
of incremental revenues derived from customers obtained from acquisitions of
businesses over the preceding four quarters. Excluding the effect of these
incremental revenues, revenue growth was nominal in the three month period ended
June 29, 2002 and grew 5% in the nine month period ended June 29, 2002. In
addition, revenues were favorably impacted by the continued increase in demand
for Kronos' services. Management presently anticipates that revenue growth,
including revenues from customers obtained in the acquisition of businesses,
will range between 7% - 12% in the fourth quarter of fiscal 2002 and range
between 14% - 15% for all of fiscal 2002.
Product revenues for the quarter increased 2% to $40.5 million as compared
to $39.8 million and an increase of 3% in the third quarter of fiscal 2001.
Product revenue for the first nine months of fiscal 2002 increased 3% to $109.7
million as compared to $106.4 million and a product revenue decline of 1% in the
first nine months of fiscal 2001. The product revenue growth experienced in the
three and nine month periods ended June 29, 2002 was attributable to revenues
related to the conversion to Kronos products by, and add-on sales to, customers
acquired from other providers of labor management solutions. Product revenue
derived from acquired customers was $4.6 million and $8.0 million in the three
and nine month periods ended June 29, 2002, respectively. Management believes
that the decline in product revenues, excluding incremental product revenue from
acquired customers, is attributable to the continued economic downturn resulting
in many customers deferring or reducing their technology purchases. While
management believes the impact on technology purchasing is temporary, the effect
may continue to cause delays or reductions in customer purchases of Kronos
products and services in the future.
Service revenues for the third quarter of fiscal 2002 increased 30% to
$46.6 million as compared to $36.0 million and an increase of 21% in the third
quarter of fiscal 2001. Service revenues for the first nine months of fiscal
2002 increased 31% to $133.5 million as compared to $102.2 million and an
increase of 16% for the first nine months of the prior year. Service revenue
derived from acquired customers was $6.6 million and $16.0 million in the three
and nine month periods ended June 29, 2002, respectively. In addition to the
acquisition of businesses, the growth in service revenues in the three and nine
month periods ended June 29, 2002 reflects an increase in maintenance revenue
from the expansion of the installed base and the level of services sold to the
installed base and, to a lesser extent, an increase in the level of professional
services accompanying new and upgrade sales.
Gross Profit. Gross profit as a percentage of revenues was 60% and 61% for
the three and nine month periods ended June 29, 2002, respectively, as compared
to 63% and 61% for the same periods of the prior year. The decrease in gross
profit as a percentage of revenues in the three month period ended June 29, 2002
was primarily attributable to a higher proportion of service revenues, which
generate lower margins than product revenues, as well as a decline in product
gross profit that was partially offset by an increase in service gross profit.
Product gross profit as a percentage of product revenues was 75% in both
the three and nine month periods ended June 29, 2002, compared to 79% and 77% in
the three and nine month periods ended June 30, 2001, respectively. The decrease
in product gross profit in both periods is primarily related to higher royalty
and software amortization costs as well as higher production costs attributable
to a newly released terminal and related modules. This decrease is partially
offset by a higher proportion of software sales that typically carry a higher
gross profit than hardware sales. Management anticipates that product gross
profit as a percentage of product revenues in the fourth quarter will exceed
that experienced in the current quarter.
Service gross profit as a percentage of service revenues was 47% and 49%
for the three and nine month periods ended June 29, 2002, respectively, compared
to 45% and 43% in the same periods of the prior year. The improvement in service
gross profit is attributable to increased productivity in the service
organization. The improvement in productivity is the result of leveraging
investments in service systems to more effectively manage the resources required
to deliver professional services and customer support. Management anticipates
that service gross profit as a percentage of service revenues in the fourth
quarter will exceed that experienced in the current quarter despite the fact
that Kronos is continuing to invest in infrastructure to support the
introduction of its new Human Resources Management System (HRMS) products.
Net Operating Expenses. Net operating expenses as a percentage of revenues
were 49% for both the three and nine month periods ended June 29, 2002, as
compared to 54% and 56% for the same periods in the prior year. The decrease in
operating expenses as a percentage of revenues was primarily due to the special
charge recorded in the second and third quarters of fiscal 2001 and the
elimination of goodwill amortization due to Kronos' adoption of Statements of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets" effective October 1,
2001 (see Note D in the Notes to Condensed Consolidated Financial Statements).
On a pro forma basis, excluding the special charge and amortization expense, net
operating expenses as a percentage of revenues for the three and nine month
periods ended June 30, 2001 were 52% for both periods. Management anticipates
that operating expenses as a percentage of revenues in the fourth quarter will
be less than that experienced in the first nine months of fiscal 2002 despite
the fact that Kronos is continuing to invest in infrastructure to support the
introduction of its new HRMS products.
Sales and marketing expenses as a percentage of revenues were 33% for the
three and nine month periods ended June 29, 2002, as compared to 34% and 35% for
the comparable periods in the prior year. The increase in sales and marketing
expenses in both periods is attributable to Kronos' investments in sales
personnel and related support costs to maximize the penetration of existing
accounts and to add new customers as well as initiatives to expand market
awareness of Kronos products and services. The decrease in sales and marketing
expense as a percent of revenue in both periods was attributable to leveraging
our investment in infrastructure to generate higher sales volumes.
Engineering, research and development expenses as a percentage of revenues
were 10% and 11% for the three and nine month periods ended June 29, 2002 as
compared to 12% for the comparable periods in the prior year. The decrease as a
percentage of revenues for the three and nine month periods ended June 29, 2002
as compared to the same period in the prior fiscal year was due to cost
containment efforts coupled with higher sales volume in fiscal 2002. Engineering
expenses of $9.0 million and $9.1 million in the third quarter of fiscal 2002
and 2001, respectively, are net of capitalized software development costs of
$3.0 million in each period. The nominal decrease in expenses in the three month
period ended June 29, 2002 as compared to the same period of the prior year is
principally attributable to a reduction in spending related to contract
consultants partially offset by an increase in salary and related expenses for
additional engineering personnel. Engineering expenses of $26.2 million and
$25.4 million in the first nine months of fiscal 2002 and 2001, respectively,
are net of capitalized software development costs of $8.7 million and $8.4
million, respectively. The increase in engineering expenses in the nine month
period ended June 29, 2002 as compared to the same period of the prior year is
principally attributable to an increase in salary related expenses for
additional engineering personnel partially offset by a reduction in spending
related to contract consultants. The significant project development efforts in
the three and nine month periods ended June 29, 2002 primarily related to
further development and enhancement of the Workforce Central(R) suite,
Timekeeper Central(R) system, Kronos iSeries Central suite, Kronos 4500(TM)
terminal and, to a lesser extent, the eForce(R) software acquired from
SimplexGrinnell. In addition, in the three month period ended June 29, 2002,
Kronos initiated its development of its newest product suite, Workforce
HRMS(TM).
General and administrative expenses as a percentage of revenues were 6% in
the three and nine month periods ended June 29, 2002 as compared to 7% in three
and nine month periods ended June 30, 2001. The increase in general and
administrative expenses in both periods is principally attributable to Kronos'
investment in personnel and other infrastructure to support the growth of
operations. The decrease as a percentage of revenues for the three and nine
month periods ended June 29, 2002 as compared to the same period in the prior
fiscal year was attributable to leveraging our investment in infrastructure to
support higher sales volumes.
Amortization of intangible assets as a percentage of revenues was 1% in the
three and nine month periods ended June 29, 2002 as compared to 2% and 3% in the
comparable periods of the prior year. The decrease in amortization is the result
of the elimination of goodwill amortization described above. Other income, net
is principally attributable to interest income earned from Kronos' cash as well
as investments in its marketable securities and lease portfolio.
Prior Year Special Charges. 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 charge was the
result of management's effort to streamline operations to better align costs
with expected revenues. In addition, in the second quarter of fiscal 2001 Kronos
recorded a special charge in the amount of $3.0 million related to the
termination of Kronos' Crosswinds Technology operations. 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.
The $3.0 million charge consisted of $1.6 million in termination costs, $1.3
million for the write off of intangible assets and $0.1 million in other costs.
Income Taxes. The provision for income taxes as a percentage of pretax
income was 34.8% in the three and nine month periods ended June 29, 2002 as
compared to 35.0% in the comparable periods of the prior year. Kronos' effective
income tax rate may fluctuate between periods as a result of various factors,
none of which is material, either individually or in the aggregate, to the
consolidated results of operations.
Newly Issued Accounting Standards. In June 2001, the Financial Accounting
Standards Board (the "FASB") issued SFAS 141 and SFAS 142. 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 FASB statements. Other intangible assets will continue to be amortized over
their useful lives.
For acquisitions completed prior to June 30, 2001, the Company applied the
new rules on accounting for business combinations and goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002. For
acquisitions completed after June 30, 2001, Kronos applied the new rules
beginning in the fourth quarter of fiscal 2001. On a pro forma basis, Kronos
would have realized an increase in net income of $0.9 million, or $0.04 per
diluted share for the three months ended June 30, 2001 and $2.6 million, or
$0.13 per diluted share for the nine months ended June 30, 2001, if these new
standards had been applied to the first nine months of fiscal 2001.
In October 2001, the FASB issued Statements of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." This FASB statement addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This statement supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 is effective for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years, with early application encouraged. Kronos does not expect SFAS No.
144 to have a material effect on its earnings or financial position.
In January 2002, the Emerging Issues Task Force (EITF) issued EITF No.
01-14, "Income Statement Characterization of Reimbursements Received for
'Out-of-Pocket' Expenses Incurred" (formerly EITF Abstracts, Topic No. D-103).
This EITF requires that reimbursements received for out-of-pocket expenses
incurred should be characterized as revenue in the income statement as opposed
to a reduction of expenses incurred. Out-of-pocket expenses include travel
expenses such as airfare, hotel, mileage and meals that the customer will
reimburse the service vendor. The EITF is effective for financial reporting
periods beginning after December 15, 2001. As a result of the adoption of the
EITF, service revenues and the corresponding cost of sales increased by $0.3
million and $0.4 million for the three month periods ended June 29, 2002 and
June 30, 2001, respectively, and by $0.8 million and $0.9 million for the nine
month periods ended June 29, 2002 and June 30, 2001, respectively.
Liquidity and Capital Resources
Kronos funds its business through cash generated by operations. If
near-term demand for Kronos' products weakens or if significant anticipated
sales in any quarter do not close when expected, the availability of such funds
may be adversely impacted. If the need arose, Kronos believes that based on its
current debt-free balance sheet and its financial position, it would be
successful in securing financing from the capital markets. As of June 29, 2002,
Kronos had negative working capital of $1.0 million as compared to working
capital of $11.1 million at September 30, 2001. Kronos believes that this
decrease in working capital is principally due to cash spent on the acquisition
of businesses and technology and the purchase of treasury stock during the first
nine months of fiscal 2002. During the first nine months of fiscal 2002, working
capital was reduced as Kronos used available cash of $30.4 million to complete
acquisitions of businesses with a net working capital of $0.2 million and to
purchase the Abra Enterprise human resources and payroll software (HRMS
technology). In addition, Kronos completed repurchases of its common shares of
approximately $20.9 million during the first nine months of fiscal 2002 for
share repurchases pursuant to Kronos' stock repurchase program as well as the
purchase of mature stock (stock held for at least six months) from employees
related to the exercise of stock options. Cash, cash equivalents and marketable
securities amounted to $56.8 million as of June 29, 2002, and $68.8 million as
of September 30, 2001. The decline in cash, cash equivalents and marketable
securities in the first nine months of fiscal 2002 is primarily attributable to
cash used in the Company's acquisitions and stock repurchases.
Cash generated from operations amounted to $42.7 million in the first nine
months of fiscal 2002 as compared to $34.3 million in the first nine months of
fiscal 2001. The increase in cash generated from operations is primarily
attributable to an increase in net income and the tax benefit from the exercise
of stock options, partially offset by a decrease in long term deferred
maintenance revenues and deferred professional services as well as compensation
related payments. Cash used for property, plant and equipment was $7.7 million
in the first nine months of fiscal 2002 compared to $4.6 million in the same
period of fiscal 2001. Kronos' use of cash for the acquisition of businesses and
technology in the first nine months of fiscal 2002 was principally related to
the acquisitions of specified assets and/or businesses of Kronos' dealers and/or
other providers of labor management solutions as well as the acquisition of the
source code license for the HRMS technology. Kronos is assessing several
acquisition opportunities that may be completed over the next twelve months,
although there can be no assurance that these acquisitions will be completed.
Excess cash reserves not required for operations, investments in property, plant
and equipment or acquisitions are invested in marketable securities. Net
investments in marketable securities increased by $3.5 million in the first nine
months of fiscal 2002 compared to an increase of $19.5 million in the first nine
months of fiscal 2001.
Under Kronos' stock repurchase program, Kronos repurchased 396,950 common
shares in the first nine months of fiscal 2002 at a cost of $17.0 million
compared to 171,000 common shares at a cost of $6.0 million for the same period
in the prior year. The common shares repurchased under the program are used for
Kronos' employee stock option plans and employee stock purchase plan. Cash
provided by operations was sufficient to fund investments in capitalized
software development costs, property, plant and equipment and stock repurchases.
Kronos believes that with cash generated from ongoing operations it has adequate
cash and investments and operating cash flow to fund its investments in
property, plant and equipment, software development costs, cash requirements
under operating leases, cash payments related to acquisitions, if any, and any
additional stock repurchases for the foreseeable future.
During the quarter ended June 29, 2002, Kronos did not engage in:
o material off-balance sheet activities, including the use of structured
finance or special purpose entities,
o material trading activities in non-exchange traded commodity contracts, or
o transactions with persons or entities that benefit from their
non-independent relationship with Kronos.
Certain Factors That May Affect Future Operating Results
Except for historical matters, the matters discussed in this Quarterly
Report on Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act"). Kronos desires to
take advantage of the safe harbor provisions of the Act and is including this
statement for the express purpose of availing itself of the protection of the
safe harbor with respect to all forward looking statements that involve risks
and uncertainties.
Kronos' actual operating results may differ from those indicated by forward
looking statements made in this Quarterly Report on Form 10-Q and presented
elsewhere by management from time to time because of a number of factors
including the potential fluctuations in quarterly results, timing and acceptance
of new product introductions by Kronos and its competitors, the dependence on
Kronos' time and attendance product line, the ability to attract and retain
sufficient technical personnel, competitive pricing pressure, and the dependence
on alternate distribution channels and on key vendors, as further described
below and in Kronos' Annual Report on Form 10-K for the fiscal year ended
September 30, 2001, which are specifically incorporated by reference herein.
Potential Fluctuations in Quarterly Results. Kronos' quarterly operating
results may fluctuate as a result of a variety of factors, including the
purchasing patterns of its customers, mix of products and services sold, the
ability of Kronos to effectively integrate acquired businesses into Kronos'
operations, the timing of the introduction of new products and product
enhancements by Kronos and its competitors, the strategy employed by Kronos to
enter the Human Resources Management System (HRMS) market, market acceptance of
new products, competitive pricing pressure and general economic conditions.
Kronos historically has realized a relatively larger percentage of its annual
revenues and profits in the 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.
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 HRMS 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
Kronos' revenues have been attributable to sales of time and attendance systems
and related services. Although Kronos has introduced its products for the
licensed HRMS market this fiscal quarter, Kronos expects that its dependence on
the time and attendance product line for revenues will continue for the
foreseeable future. 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 its OEM
partner, ADP, Inc ("ADP"). In the first nine months of fiscal 2002,
approximately 12% of Kronos' revenue was generated through sales to dealers and
ADP. Management does not anticipate that its intention to enter the HRMS market
will have a negative impact on its relationship with ADP. However, a reduction
in the sales efforts of Kronos' major dealers and/or ADP, or termination or
changes in their relationships with Kronos, could have a material adverse affect
on the results of Kronos' operations.
Competition. The frontline labor management industry is highly competitive.
Technological changes such as those allowing for increased use of the Internet
have resulted in new entrants into the 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 and marketing and
sales programs. There can be no assurance that Kronos will have sufficient
resources to make such investments or be able to achieve the technological
advances necessary to maintain its competitive advantages. Increased competition
could adversely affect Kronos' operating results through price reductions and/or
loss of market share. With Kronos' efforts to expand its frontline labor
management offering with the recent introduction of its HRMS product suite,
Kronos will continue to meet strong competition. Many of these competitors may
be able to adapt more quickly to new or emerging technologies or to devote
greater resources to the promotion and sale of their HRMS products than Kronos.
Many of Kronos' HRMS competitors have significantly greater financial, technical
and sales and marketing resources than Kronos, as well as more experience in
delivering HRMS solutions. There can be no assurance that Kronos will be able to
compete successfully against the current and future HRMS competitors, and its
failure to do so could have a material adverse impact upon its business,
prospects, financial condition and operating results.
Attracting and Retaining Sufficient Technical Personnel for Product
Development, Support and Sales. Kronos has encountered intense competition for
experienced technical personnel for product development, technical support and
sales and expects such competition to continue in the future. Any inability to
attract and retain a sufficient number of qualified technical personnel could
adversely affect Kronos' ability to produce, support and sell products in a
timely manner.
Protection of Intellectual Property. Kronos has developed, and through its
acquisitions of businesses, acquired proprietary technology and intellectual
property rights. Kronos' success is dependent upon its ability to further
develop and protect its proprietary technology and intellectual property rights.
Kronos seeks to protect products, software, documentation and other written
materials primarily through a combination of trade secret, patent, trademark and
copyright laws, confidentiality procedures and contractual provisions. While
Kronos has attempted to safeguard and maintain its proprietary rights, it is
unknown whether Kronos has been or will be successful in doing so.
Despite Kronos' efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of its products or obtain and use
information that is regarded as proprietary. Policing unauthorized use of
Kronos' products is difficult. While Kronos is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected to
be a persistent problem, particularly in foreign countries where the laws may
not protect proprietary rights as fully as in the United States. Kronos can
offer no assurance that it can adequately protect its proprietary rights or that
its competitors will not reverse engineer or independently develop similar
technology.
Infringement of Intellectual Property Rights. Kronos cannot provide
assurance that others will not claim that Kronos developed or acquired
intellectual property rights are infringing on their intellectual property
rights or that Kronos does not in fact infringe on those intellectual property
rights.
Any litigation regarding intellectual property rights could be costly and
time-consuming and divert the attention of Kronos' management and key personnel
from business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require Kronos to enter into
costly royalty or license agreements, and in this event, Kronos may not be able
to obtain royalty or license agreements on acceptable terms, if at all. Kronos
may also be subject to significant damages or an injunction against the use of
its products. A successful claim of patent or other intellectual property
infringement against Kronos could cause immediate and substantial damage to its
business and financial condition.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fiscal quarter
ended June 29, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS INCORPORATED
By /s/ Paul A. Lacy
------------------------------
Paul A. Lacy
Executive Vice President, Chief
Financial and Administrative Officer
(Duly Authorized Officer and
Principal Financial Officer)
August 12, 2002
KRONOS INCORPORATED
EXHIBIT INDEX
Exhibit
Number Description
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Kronos Incorporated
(the "Company") for the period ended June 29, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned, Mark
S. Ain, Chief Executive Officer of the Company, and Paul A. Lacy, Executive Vice
President, Chief Financial and Administrative Officer of the Company, each
hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By /s/ Mark S. Ain
-------------------------------------
Dated: August 12, 2002 Mark S. Ain
Chief Executive Officer
By /s/ Paul A. Lacy
------------------------------------
Dated: August 12, 2002 Paul A. Lacy
Executive Vice President, Chief Financial
and Administrative Officer