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, 2003
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)
Registrant's telephone number, including area code (978) 250-9800
____________________________
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
Series A Junior Preferred Participating Stock, $1.00 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes X No
----- -----
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
March 29, 2003 19,584,610 $473,294,768
Shares of voting stock held by each officer and director and by each person
who owns 5% or more of the outstanding common stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes. The
registrant has no shares of non-voting stock authorized or outstanding.
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 29, 2003 value per share 30,751,302
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days of the registrant's fiscal year end, are incorporated
by reference into Items 10-14 of Part III hereof. With the exceptions of the
portions of the Proxy Statement expressly incorporated by reference, such
document shall not be deemed filed with this Form 10-K.
PART I
Item 1. Business
Kronos Incorporated (the "Company" or "Kronos") was organized in 1977 as a
Massachusetts corporation. As part of its employee relationship management
("ERM") solution, the Company develops, manufactures, and markets human
resources, payroll, scheduling, and time and labor systems. These solutions
enable organizations to reduce costs and increase productivity, improve employee
satisfaction, align employee performance with organizational objectives, and put
real-time information in the hands of decision makers.
Kronos solutions collect data from, and deliver information to, all employees,
including hourly workers, hourly professionals, and salaried professionals.
Specifically, they collect time and labor data and other information using a
variety of technologies such as desktop applications, Web-based applications,
remote transmission applications for use with personal digital assistants
(PDAs), intelligent data collection terminals that the Company manufactures and
interactive voice response and biometrics for employee identification.
The Company's systems are designed for a wide range of businesses, which can
include everything from single-site companies to large, multi-site enterprises.
These solutions can be purchased or financed from Kronos, or they can be
obtained on a subscription basis via Kronos' application service provider
delivery model.
The company's ERM solution can operate independently in a desktop environment,
or it can be interfaced with related applications and technologies at many
points throughout the enterprise to optimize the use of labor resources. In
addition, the Company maintains an extensive services and technical support
organization that maintains systems and provides professional and educational
services. These services can be delivered on-site or via the Web.
The Company also collaborates with many industry-leading vendors who market
products and services that are synergistic with Kronos solutions. These include
major enterprise resource planning system (ERP) providers; manufacturing
execution system (MES) providers; human resources, finance, scheduling, and
payroll application providers; and consulting and systems integration firms. To
date, substantially all of the Company's revenues and profits have been derived
from its time and labor applications and related products and services. The
Company introduced its human resources and payroll products during the course of
fiscal 2002 and 2003.
Stock Split in the Form of 50% Common Stock Dividend
- ----------------------------------------------------
On September 26, 2003, the Board of Directors declared a three-for-two split of
the Company's common stock, payable on October 31, 2003 to all stockholders of
record as of the close of business on October 20, 2003. The stock split was
effected in the form of a 50% common stock dividend. All share and per share
amounts in this Annual Report on Form 10-K have been restated to reflect the
retroactive effect of the stock split.
Kronos Products
The Kronos Employee Relationship Management Solution
The Kronos ERM solution enables organizations to reduce costs and increase
productivity, improve employee satisfaction, align employee performance with
organizational objectives and put real-time information in the hands of decision
makers.
Kronos' ERM solution consists of the following components: human resources,
payroll, scheduling, time and labor, data collection and self-service, as well
as analytics. These components can be deployed together or independently to meet
the unique needs of various organizations.
The Workforce Central(R) Suite
------------------------------
Using Web-based technology, the Workforce Central suite is a closely integrated
system of human resources, payroll, scheduling and time and labor applications.
It can be deployed individually or as a comprehensive solution for employee
relationship management. The Workforce Central suite incorporates powerful
applications for analytics and employee self-service, and employs a broad range
of Kronos' own industry-leading data collection devices. Each component of the
Workforce Central suite provides unmatched functionality, streamlined workflow
technology, and an intuitive user interface.
The Workforce Central solutions include:
Human resources
Workforce HR(TM) manages and automates human resources processes, from
recruiting to benefits administration, so that organizations have more time
to focus on strategic initiatives. Because it empowers employees to manage
their own personal information, Workforce HR reduces operational expenses
while it fosters employee satisfaction compared to a manual system. It
provides superior control over critical processes and enables real-time
sharing of employee information, all of which contributes to better
decision-making and improved organizational performance.
Workforce Recruiter(TM) is a Web-based recruiting application designed to
help identify qualified candidates faster, more efficiently, and more
cost-effectively. It enables organizations to automate the sourcing,
management, and hiring of job candidates, and reduces time and costs to
hire, while it helps them focus on the organization's strategic goals.
Payroll
Workforce Payroll(TM) manages all of the complex information required to
administer and complete payment of wages, bonuses, and other forms of
compensation. With streamlined payroll processing in house, organizations
will enjoy more flexibility and control, with quick and easy access to the
critical data an organization needs.
Workforce Tax Filing(TM) is a cost-effective solution to managing payroll
tax filing activities without the resource demands that weigh heavily on
productivity. Workforce Tax Filing is backed by Federal Liaison Services,
Inc., or FLS, a compliance leader with more than 15 years of experience in
managing payroll tax filing for more than 5,000 customers.
Scheduling
Workforce Smart Scheduler(TM) is an expanded employee scheduling solution
for retailers. Based on a history of key business drivers derived from a
point-of-sale system, Workforce Smart Scheduler forecasts expected
business, then translates that forecast into required staffing levels
according to pre-determined labor standards. Workforce Smart Scheduler is
designed to match the best employees to an organization's required staffing
based on availability, skills, and preferences, freeing managers from the
burden of processing schedules and enhancing productivity at minimum cost.
Workforce Scheduler(TM) is a powerful, all-in-one solution to an
organization's scheduling challenges. It provides the tools managers need
to plan staff coverage -- by shift, by employee, or by job description --
and react with speed and effectiveness when unforeseen circumstances put
productivity at risk. This product is planned for release during the second
fiscal quarter of fiscal 2004.
Time and labor
Workforce Timekeeper(TM) automates and streamlines the management,
collection, and distribution of employee hours, eliminating the need for
manual timesheets. Workforce Timekeeper has a robust, flexible pay rules
engine that applies complex work and pay rules accurately and consistently
throughout an organization.
Workforce Accruals(R) provides a tightly integrated module for controlling
leave liability and complying with corporate policies or contracts. It is
designed to ensure accuracy across an organization with minimal
supervision, enabling employees and managers to manage leave time easily
and efficiently. Workforce Accruals has the flexibility to facilitate an
organization's most complex leave and benefit policies.
Workforce Record Manager(TM) makes maintaining Workforce Timekeeper
database faster, easier, and more effective. It enables IT managers to
easily move data from one Workforce Timekeeper database to another, and
provides the functionality needed to create archiving processes.
Workforce Activities(TM) enables real-time tracking of activity data for
individual employees and teams. It reconciles direct and indirect labor to
time paid, and enables an organization to compare productivity against
standards. Workforce Activities also eliminates the process of manually
entering job-costing data into ERP systems. Going beyond weekly or daily
reporting, Workforce Activities provides up-to-the-minute information so
that managers can adjust to the shifting demands of a production
environment. This product is planned for release during the second fiscal
quarter of fiscal 2004.
Data collection
Kronos 4500(TM) badge terminals are high speed, network-centric data
collection devices that capture and manage labor data easily and
effectively. The Kronos 4500 terminals provide access to key self-service
functionality, and their centralized configuration makes them easy to
deploy and maintain. The Kronos 4500 terminals are designed with "swipe and
go" badge functionality and keypads for fast interaction.
Kronos 4500(TM) Touch ID terminal, like the Kronos 4500 badge terminal, is
a high speed, network-centric data collection device that captures and
manages labor data easily and effectively. The Kronos 4500 Touch ID
terminal incorporates leading fingerprint verification technology, ideal
for eliminating "buddy punching."
Workforce TeleTime(R) leverages the convenience and accessibility of the
telephone to collect time and labor information from employees on the move.
Workforce TeleTime provides a solution for these employees and managers,
whether they telecommute, work in multiple facilities, travel frequently,
or otherwise don't have access to a data collection terminal or the Web.
These employees can use this interactive touchtone application for a range
of time and labor transactions, all completed through the telephone.
Workforce MobileTime(TM) allows users to record and transmit labor
information via personal digital assistants (PDAs), ideal for the mobile
employees who routinely work away from the office or move from job site to
job site during a workday. It supports reliable data collection when
working offline, and is designed for overall ease of use -- no PC
experience is required.
Self-service
Workforce Employee(TM) is an intuitive, browser-based interface that
employees can use to enter time and labor data and access human resources
and payroll information and processes. It allows them to view hours worked,
approve timecards, or even sign up for available shifts. Workforce Employee
also provides convenient Web access to a breadth of human resources
information, including available training, job openings, and benefits
enrollment.
Workforce Manager(TM) is designed to be a significant time saver in that it
alerts managers to the issues that require immediate attention, such as an
employee approaching an overtime threshold. Workforce Manager provides
managers with broad visibility into their staff, including skills,
experience, and completed training, all of which is essential to helping
them optimize the workforce.
Analytics
Workforce Decisions(R) is a complete analytics application that extends the
value of labor data captured by our Kronos time and labor systems,
providing managers with a method for tracking workforce performance against
business targets.
Visionware(R) is a labor analytics system for organizations in industries
such as healthcare, where controlling labor costs is a significant
challenge. Visionware enables organizations to manage productivity, reduce
labor costs, and most importantly, align labor decisions with strategic
objectives.
The Kronos iSeries Central suite
--------------------------------
The Kronos iSeries Central suite is comprised of time and labor applications
designed specifically for the IBM eServer iSeries. The Kronos iSeries Central
suite automates time and labor management processes on the frontline and
provides access to real-time data for better decision-making. It employs a broad
range of Kronos' own industry-leading data collection devices.
Kronos iSeries Central product solutions include:
Kronos iSeries Timekeeper is designed to automate and streamline the
management, collection, and distribution of employee hours, eliminating the
need for manual timesheets.
Kronos iSeries Accruals is a tightly integrated module designed to manage
leave liability and complying with corporate policies or contracts.
Kronos iSeries Attendance is designed to allow an organization to automate
a no-fault attendance program by capturing lost time exceptions and
absences.
Kronos iSeries Shopfloor is designed to put an organization in control of
manufacturing operations by capturing time, labor, and throughput at every
stage of the production process and reconciling it with time and attendance
in Kronos iSeries Timekeeper.
Kronos iSeries Decisions is designed to provide sophisticated reporting
capabilities that extend the value of employee data to decision makers
throughout an organization.
Kronos iSeries Access and Gatekeeper(R) terminals are an integrated
solution designed to manage employee admittance into controlled areas in
any facility.
Kronos iSeries interface is a host of interfaces tailored specifically for
a system, designed to interact with payroll, human resources, and
manufacturing systems.
The Timekeeper Central(R) system
--------------------------------
The Timekeeper Central(R) system is an advanced time and attendance system for
small and medium sized companies deploying on a site by site basis. It is
designed to automate the capture, management, and distribution of critical
employee labor data. The Timekeeper Central system runs on Windows and Citrix
platforms. It eliminates the need for manual timesheets and helps ensure an
organization's ability to produce an accurate payroll, measure variations in
labor productivity, and administer time-related benefits.
Timekeeper Central software modules include a:
Scheduling module designed to speed the process of creating and assigning
employee schedules.
Accruals module designed to ensure consistent benefit time administration.
CardSaver(R) module designed to store individual punch history data for
easy retrieval.
Archive module designed to store historical work totals for easy retrieval.
Database Poster designed to export time and attendance data to other
software applications.
Messaging module designed to download messages to employee terminals.
Complementary products
----------------------
In addition to our core products, Kronos offers a variety of solutions designed
to help maximize ERM capabilities.
Data collection devices from Kronos provide powerful and convenient methods
for capturing employees' time and labor information, and offer a wide range
of interaction methods: badge terminals, biometrics, telephony, handheld
devices, and more.
Workforce Connect(TM) is an integration solution that reduces delays and
modification costs. Data can be imported and exported quickly and easily
from a variety of sources. It supports over 250 payroll systems and other
essential integration needs.
Gatekeeper(R) provides a method to control and track access to areas of an
organization that require monitoring.
NexTrak Attendance Management(TM) software automates almost any attendance
program. It allows organizations to efficiently manage employee attendance
and reduce absenteeism.
NexTrak Leave Management(TM) software automates the process of managing and
tracking earned employee leave time.
ShopTrac Pro(R) helps to control manufacturing operations by capturing
time, labor, and throughput at every stage of the production process.
Kronos e-Central(TM) is a time and labor solution in a completely hosted
ASP service model.
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 curriculae that are delivered through local training centers or
via computer based training courses.
Marketing and Sales
Kronos markets and sells its products to the major market (organizations up
to 1,000 employees), the enterprise market (organizations with 1,000-10,000
employees) and the national market (organizations with 10,000 or more
employees). The Company sells and markets in the United States and other
countries through its direct sales and support organization and through
independent resellers. In addition, the Company has a joint marketing agreement
with Automatic Data Processing, Inc. ("ADP"), under which ADP markets
proprietary versions of the Company's Timekeeper Central system, Workforce
Central Suite and data collection terminals manufactured by the Company. The
Company's direct sales force is organized to focus on the distinct market
segments (major market, enterprise, national) and in some cases on distinct
vertical industries or product lines. The direct sales force is organized by
geographic region and the marketing department is organized into functional
groups.
Marketing Organization:
The responsibilities of the marketing organization include:
o developing product strategy, positioning and marketing;
o vertical market strategy and programs;
o interaction with press, industry analysts and the investment community;
o management of the customer database and customer relationship programs;
o lead generation programs, events and advertising;
o marketing communications; and
o management of strategic alliances.
Direct Sales Organization
- -------------------------
The Company has 46 direct sales and support offices located in the United
States. In addition, the Company has four sales and support offices located in
Canada, three in the United Kingdom, two in Mexico, five in Australia, and one
in New Zealand. Each direct sales office covers a defined territory, and has
sales and support functions. To capitalize on the specialization of the
Company's Visionware product and the focus on major market, enterprise market
and national market prospects, the Company has dedicated Visionware, major
market, enterprise market, and national market sales teams within its direct
sales organization.
For the fiscal years ended September 30, 2003, 2002, and 2001, the
Company's direct sales and support offices in the U.S. generated net revenues of
$320.6 million, $279.1 million, and $230.2 million, respectively. For the fiscal
years ended September 30, 2003, 2002, and 2001, the Company's international
subsidiaries generated net revenues of $37.5 million, $25.8 million, and $23.4
million, respectively. Total assets at the Company's international subsidiaries
for these periods were $29.8 million, $24.8 million, and $19.9 million,
respectively. The increase in total assets in fiscal 2003 is attributable to
increases in cash and accounts receivable balances in certain of the
international subsidiaries.
Resellers
- ---------
Kronos also markets and sells its products through independent resellers
within designated geographic territories generally not covered by Kronos' direct
sales offices. These resellers provide sales, support and installation services
for Kronos' products. There are presently approximately 10 resellers in the
United States actively selling and supporting Kronos' products. Sales to
independent U.S. resellers for the years ended September 30, 2003, 2002, and
2001 were $10.8 million, $14.5 million, and $17.3 million, respectively. The
decrease in revenues in fiscal 2003 and 2002 was principally due to the
acquisitions by Kronos of various resellers during fiscal 2003, 2002 and 2001.
Kronos also has resellers in Argentina, Bahamas, Bahrain, Barbados, Bermuda,
Brazil, Chile, Columbia, Ghana, Guam, Guyana, Jamaica, Lebanon, Netherlands
Antilles, Netherlands, Nigeria, Norway, Panama, The Philippines, Puerto Rico,
Romania, Singapore, South Africa, Trinidad, and United Arab Emerites. Sales to
independent international resellers were not material in any of the fiscal years
2001- 2003. Kronos supports its resellers 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 Suite and data collection terminals manufactured by the
Company.
During fiscal 2003, the Company and ADP signed an agreement extending their
business relationship for an additional term of five years. A reduction in the
sales efforts of the Company's major resellers 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/Backlog
End-users of the Company's products include companies of virtually all
sizes from many varied sectors such as manufacturing, healthcare, service,
retail and government 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.
During fiscal 2003, 2002, and 2001, Kronos' engineering, research and
development expenses were $38.5 million, $37.0 million, and $33.3 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 continually seeks to further enhance its product
offerings and to develop new products and interfaces, including products for the
ERM 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 products owned by third parties to develop its products. If
these products are inadequate or not properly supported, the Company's ability
to release competitive products in a timely manner could be adversely impacted.
Competition
The ERM market, which includes time and labor, scheduling, human resources
and payroll, is highly competitive. Technological changes such as those allowing
for increased use of the Internet have resulted in new entrants into the market.
Increased competition could adversely affect Kronos' operating results through
price reductions and/or loss of market share. With Kronos' efforts to expand its
labor management offering with the recent introduction of its human resources
and payroll 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
human resources and payroll products. Many of Kronos' human resources and
payroll competitors have significantly greater financial, technical and sales
and marketing resources than Kronos, as well as more experience in delivering
human resources and payroll solutions. Although Kronos believes it has core
competencies that position it strongly in the marketplace, maintaining Kronos'
technological and other advantages over competitors will require continued
investment by Kronos in research and development and marketing and sales
programs. There can be no assurance that Kronos will have sufficient resources
to make such investments or be able to achieve the technological advances
necessary to maintain its competitive advantages. There can be no assurance that
Kronos will be able to compete successfully in the human resources and payroll
marketplace, and its failure to do so could have a material adverse impact upon
its business, prospects, financial condition and operating results.
Proprietary Rights
The Company has developed, and through its acquisitions of businesses and
technology, acquired, proprietary technology and intellectual property rights.
The Company's success is dependent upon its ability to further develop and
protect its proprietary technology and intellectual property rights. The Company
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 the Company
has attempted to safeguard and maintain its proprietary rights, it is unknown
whether the Company has been or will be successful in doing so.
Despite the Company's 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
the Company's products is difficult. While the Company 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.
The Company 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.
The Company has registered trademarks for Kronos, Kronos TouchID, My
Genies, Timekeeper, Timekeeper Central, TimeWeb, Jobkeeper Central, Datakeeper,
Datakeeper Central, Gatekeeper, Gatekeeper Central, Imagekeeper, TeleTime,
CardSaver, ShopTrac, ShopTrac Pro, the ShopTrac logo, Keep.Trac, Solution In A
Box, Visionware, the Visionware logo, Workforce Central, Workforce Genie,
Workforce Accruals, Workforce TeleTime, Workforce Express, Workforce Decisions,
eForce, PeoplePlanner, PeoplePlanner design, StarComm, StarPort, StarSaver,
StarTimer, and the Company's logo in the United States and other countries. In
addition, Kronos eCentral, Timekeeper Web, Workforce Connect, FasTrack,
Workforce Activities, Workforce Scheduler, Workforce Smart Scheduler, Workforce
Manager, Workforce MobileTime, Workforce Timekeeper, FasTrack, Hyperfind, Kronos
4500, Kronos 4500 Touch ID, Labor Plus, Schedule Assistant, Winstar, Winstar
Elite, WIP Plus, Workforce HR, Workforce View, Workforce Employee, Workforce
Mobiletime, Smart Scheduler, StartLabor, StartQuality, StartWIP, Starter Series,
Timekeeper Decisions, VisionPlus, Workforce Payroll, Workforce Record Manager,
Workforce Recruiter, Workforce Tax Filing, and Workforce Web are trademarks of
the Company. Certain trademarks have been obtained or are in process in various
foreign countries.
IBM is a registered trademark of, and iSeries and eServer are trademarks
of, International Business Machines Corporation. ADP is a registered trademark
of Automatic Data Processing, Inc. Microsoft is a registered trademark of
Microsoft Corporation. PeopleSoft is a registered trademark of PeopleSoft, 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.
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 majority of the assembly of the printed
circuit boards used in the Company's data collection terminals is completed at
the Company's facility in Chelmsford, Massachusetts. A portion of this assembly
is completed by approved suppliers. All final assembly and testing of the
Company's data collection terminals is completed at the Company's Chelmsford
facility. 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. 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.
Acquisitions
The Company completed several acquisitions during fiscal 2003, none of
which are material to the Company's business. Please refer to Note H of the
Notes to Consolidated Financial Statements for further information.
Employees
As of September 30, 2003, the Company had approximately 2,400 employees.
None of the Company's employees is represented by a union or other collective
bargaining agreement, and the Company considers its relations with its employees
to be good. The Company has historically 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.
Available Information
Kronos maintains an internet website at www.kronos.com. Kronos makes
available, free of charge through its website, the Company's annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and each
amendment to these reports. Each such report is posted on Kronos' website as
soon as reasonably practicable after such report is filed with the SEC via the
EDGAR system.
The information on our website is not incorporated by reference into this
Annual Report on Form 10-K and should not be considered a part of this Annual
Report. The Company's website address is included in this Annual Report as an
inactive textual reference only.
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 60 sales and
support offices located throughout North America, Europe, Australia and New
Zealand. The Company's aggregate rental expense for all of its facilities in
fiscal 2003 was approximately $10.8 million. The Company considers its
facilities to be adequate for its current requirements and believes 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.
Item 4A. Executive Officers
Executive Officers of the Registrant
Name Age Position
- ---- --- --------
Mark S. Ain 60 Chief Executive Officer and Chairman
Paul A. Lacy 56 Executive Vice President, Chief Financial and
Administrative Officer
Aron J. Ain 46 Executive Vice President, Chief Operating
Officer
Lloyd B. Bussell 58 Vice President, Manufacturing
James Kizielewicz 44 Vice President, Marketing and Corporate
Strategy
Peter C. George 43 Vice President, Engineering and Chief
Technology Officer
Joseph DeMartino 54 Vice President, Customer Service
Laura Vaughan 55 Vice President, Sales
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 sits on the Board of Directors for
the following public companies: KVH Industries, Inc., LTX Corporation and Park
Electrochemical Corp. Mr. Ain is the brother of Aron J. Ain, Executive Vice
President, Chief Operating Officer of the Company.
Paul A. Lacy has served as Executive Vice President, Chief Financial and
Administrative Officer since April 2002. Previously, Mr. Lacy served as Vice
President, Finance and Administration, Treasurer and Clerk from 1988 until April
2002.
Aron J. Ain has served as Executive Vice President, Chief Operating Officer
since April 2002. Previously, Mr. Ain served as Vice President, Worldwide Sales
and Service from November 1998 until April 2002, as Vice President, Marketing
and Worldwide Field Operations from September 1996 until November 1998, and as
Vice President, Sales and Service from 1988 through September, 1996. Mr. Ain is
the brother of Mark S. Ain, Chief Executive Officer and Chairman.
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 and Corporate Strategy
in January, 1997.
Peter George has served as Vice President, Engineering, Chief Technology
Officer since February 2002. Previously, Mr. George served as Vice President,
Software Development since 1997 where he was responsible for the management of
the development of the Company's software products.
Joseph DeMartino has served as Vice President, Customer Service since June
2002. Previously, Mr. DeMartino served as Vice President, North America Field
Service since 1998 where he was responsible for the management of the customer
service delivery functions, including consulting, education and technical
support, for the Company's North America operations.
Laura Vaughan has served in a variety of capacities at the Company from
1992 until her appointment as Vice President, Sales in 2000. In this role, Ms.
Vaughan is responsible for the Company's field sales operations for the U.S.,
Canada, Caribbean and Latin America territories. Ms. Vaughan was appointed to
her current position as an executive officer in June 2002.
Officers of the Company hold office until the first meeting of directors
following the next annual meeting of stockholders at which time officers are
appointed for the following fiscal year.
PART II
Item 5. Market for Registrant's Common Equity and Stockholder Matters
Stock Market Information
- ------------------------
The prices 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 October 31, 2003 to stockholders of record as of October 20,
2003.
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 2003 and 2002. Such over-the-counter market quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
2003
----------------------------------------------------
Fiscal High Low
- --------------------------------------------------------------------------------
First quarter $31.287 $15.853
Second quarter 29.960 22.000
Third quarter 33.287 23.367
Fourth quarter 40.900 32.720
2002
----------------------------------------------------
Fiscal High Low
- --------------------------------------------------------------------------------
First quarter $35.367 $16.955
Second quarter 40.267 28.000
Third quarter 31.727 17.340
Fourth quarter 22.700 15.640
Holders
- -------
On November 29, 2003 there were approximately 4,500 stockholders 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 selected consolidated financial data should be read in conjunction
with the audited consolidated financial statements and notes thereto and
management's discussion and analysis of financial condition and results of
operations included elsewhere in this Annual Report on Form 10-K. The balance
sheet data as of September 30, 2003 and 2002 and the statements of operations
data for the years ended September 30, 2003, 2002, and 2001 have been derived
from the audited consolidated financial statements for such years, included
elsewhere in this Annual Report on Form 10-K. The balance sheet data as of
September 30, 2001, 2000, and 1999 and the statements of operations data for the
years ended September 30, 2000 and 1999 have been derived from the audited
consolidated financial statements for such years, not included in this Annual
Report on Form 10-K.
Financial Highlights In thousands, except share data
Year Ended September 30,
----------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Operating Data:
Net revenues ................... $397,355 $342,377 $295,290 $271,195 $256,191
Net income ..................... $ 34,666 $ 28,827 $ 16,504 $ 15,701 $ 22,378
Net income per common share (1):
Basic ...................... $ 1.16 $ 0.98 $ 0.59 $ 0.56 $ 0.79
Diluted .................... $ 1.12 $ 0.94 $ 0.57 $ 0.54 $ 0.76
Balance Sheet Data:
Total assets ................... $412,806 $333,024 $289,098 $240,641 $229,711
(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 October 31, 2003 to stockholders of record as of
October 20, 2003.
Selected Quarterly Financial Data In thousands, except share data
Three Months Ended (1)
--------------------------------------------------
Sept. 30, June 28, March 29, Dec. 28,
2003 2003 2003 2002
--------- -------- --------- --------
Net revenues ................. $112,949 $ 98,216 $ 96,481 $ 89,709
Gross profit ................. $ 69,654 $ 59,963 $ 57,925 $ 54,409
Net income ................... $ 11,971 $ 8,384 $ 7,262 $ 7,049
Net income per share (2):
Basic ....... $ 0.40 $ 0.28 $ 0.24 $ 0.24
Diluted ..... $ 0.38 $ 0.27 $ 0.24 $ 0.23
Three Months Ended (1)
-----------------------------------------------
Sept. 30, June 29, March 30, Dec. 29,
2002 2002 2002 2001
--------- -------- --------- --------
Net revenues ............ $99,244 $87,070 $79,934 $76,129
Gross profit ............ $63,076 $52,194 $48,608 $46,861
Net income .............. $10,360 $ 6,497 $ 5,773 $ 6,197
Net income per share (2):
Basic ...... $ 0.35 $ 0.22 $ 0.19 $ 0.21
Diluted .... $ 0.35 $ 0.21 $ 0.19 $ 0.20
(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) 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 October 31, 2003 to
stockholders of record as of October 20, 2003.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This discussion and the discussion under "Business" includes certain
forward-looking statements about Kronos' business and its expectations,
including statements relating to the timing of new product launches, product and
service revenues, revenue growth rates, operating expenses, gross profit, future
acquisitions, capital expenditures, customer purchase patterns, income tax
rates, available cash, investments and operating cash flow, and the future
effects of accounting pronouncements. Any such statements are subject to risk
that could cause the actual results to vary materially from expectations. For a
further discussion of the various risks that may affect Kronos' business and
expectations, see "Certain Factors That May Affect Future Operating Results" at
the end of Management's Discussion and Analysis of Financial Condition and
Results of Operations. The risks and uncertainties discussed herein do not
reflect the potential future impact of any mergers, acquisitions or
dispositions. In addition, any forward-looking statements represent our
estimates only as of the day this Annual Report was filed with the Securities
and Exchange Commission and should not be relied upon as representing our
estimates as of any subsequent date. While we may elect to update
forward-looking statements at some point in the future, we specifically disclaim
any obligation to do so, even if our estimates change.
Overview
Kronos is a single-source provider of human resources, payroll, scheduling,
and time and labor solutions. Kronos' solutions are designed for a wide range of
businesses from single-site to large multi-site enterprises. Kronos derives
revenues from the licensing of its software solutions, sales of its hardware
solutions and providing professional services as well as ongoing customer
support and maintenance.
Although Kronos has been successful in continuing to increase annual
revenues in all periods presented, management believes that the continued
economic environment may result in many customers deferring or reducing their
technology purchases in the future. While management believes the impact on
technology purchasing may be temporary, the effect may continue to cause delays
or reductions in customer purchases of Kronos products and services in the
future.
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 for further information.
Revenue Recognition - The Company licenses software and sells data
collection hardware and related ancillary products to end-user customers through
its direct sales force as well as indirect channel customers, which include ADP
and other independent resellers. Substantially all of the Company's software
license revenue is earned from perpetual licenses of off-the-shelf software
requiring no modification or customization. The software license, data
collection hardware and related ancillary product revenues from the Company's
end-user customers and indirect channel customers are generally recognized using
the residual method when:
o Persuasive evidence of an arrangement exists, which is typically when
a non-cancelable sales and software license agreement has been signed;
o Delivery, which is typically FOB shipping point, is complete for the
software (either physically or electronically), data collection
hardware and related ancillary products;
o The customer's fee is deemed to be fixed or determinable and free of
contingencies or significant uncertainties;
o Collectibility is probable; and
o Vendor-specific objective evidence of fair value exists for all
undelivered elements, typically maintenance and professional services.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements and is recognized as revenue, assuming all other conditions
for revenue recognition have been satisfied. Substantially all of the Company's
product revenue is recognized in this manner. If the Company cannot determine
the fair value of any undelivered element included in an arrangement, the
Company will defer revenue until all elements are delivered, services are
performed or until fair value can be objectively determined.
As part of an arrangement, end-user customers typically purchase
maintenance contracts as well as professional services from the Company.
Maintenance services include telephone and Web-based support as well as rights
to unspecified upgrades and enhancements, when and if the Company makes them
generally available. Professional services are deemed to be non-essential and
typically are for implementation planning, loading of software, installation of
the data collection hardware, training, building simple interfaces, running test
data, and assisting in the development and documentation of pay rules and best
practices consulting.
Revenues from maintenance services are recognized ratably over the term of
the maintenance contract period based on vendor-specific objective evidence of
fair value. Vendor-specific objective evidence of fair value is based upon the
amount charged when purchased separately, which is typically the contract's
renewal rate. Maintenance services are typically stated separately in an
arrangement. The Company has classified the allocated fair value of revenues
pertaining to the contractual maintenance obligations that exist for the
12-month period subsequent to the balance sheet date as a current liability, and
the contractual obligations with a term beyond 12 months as a non-current
liability. Revenues from time and material maintenance services are recognized
as the services are delivered.
Revenues from professional services are generally recognized based on
vendor-specific objective evidence of fair value when:
o A non-cancelable agreement for the services has been signed or a
customer's purchase order has been received; and
o The professional services have been delivered.
Vendor-specific objective evidence of fair value is based upon the price charged
when these services are sold separately and are typically an hourly rate for
professional services and a per-class rate for training. Based upon the
Company's experience in completing product implementations, it has determined
that these services are typically delivered within a 12-month period subsequent
to the contract signing and therefore classifies deferred professional services
as a current liability.
The Company's arrangements with its end-user customers and indirect channel
customers do not include any rights of return or price protection, nor do
arrangements with indirect channel customers include any acceptance provisions.
Generally, the Company's arrangements with end-user customers also do not
include any acceptance provisions. However, if an arrangement does include
acceptance provisions, they typically are based on the Company's standard
acceptance provision. The Company's standard acceptance provision provides the
end-user customer with a right to a refund if the arrangement is terminated
because the product did not meet Kronos' published specifications. Generally,
the Company determines that these acceptance provisions are not substantive and
therefore should be accounted for as a warranty in accordance with SFAS No. 5.
At the time the Company enters into an arrangement, the Company assesses
the probability of collection of the fee and the terms granted to the customer.
For end-user customers, the Company's typical payment terms include a deposit
and subsequent payments, based on specific due dates, such that all payments for
the software license, data collection hardware and related ancillary products,
as well as services included in the original arrangement are ordinarily due
within one year of contract signing. The Company's payment terms for its
indirect channel customers are less than 90 days and typically due within 30
days of invoice date.
If the payment terms for the arrangement are considered extended or if the
arrangement includes a substantive acceptance provision, the Company defers
revenue not meeting the criterion for recognition under SOP 97-2 and classifies
this revenue as deferred revenue, including deferred product revenue. This
revenue is recognized, assuming all other conditions for revenue recognition
have been satisfied, when the payment of the arrangement fee becomes due and/or
when the uncertainty regarding acceptance is resolved as generally evidenced by
written acceptance or payment of the arrangement fee. The Company reports the
allocated fair value of revenues related to the product element of arrangements
as a current liability because of the expectation that these revenues will be
recognized within 12 months of the balance sheet date.
Since fiscal 1996, the Company has had a standard practice of providing
creditworthy end-user customers the option of financing arrangements beyond one
year. These arrangements, which encompass separate fees for software license,
data collection hardware and ancillary products, maintenance and support
contracts and professional services, are evidenced by distinct standard sales,
license and maintenance agreements and typically require equal monthly payments.
The term of these arrangements typically range between 18 and 48 months. At the
time the Company enters into an arrangement, the Company assesses the
probability of collection and whether the arrangement fee is fixed or
determinable. The Company considers its history of collection without
concessions as well as whether each new transaction involves similar customers,
products and arrangement economics to ensure that the history developed under
previous arrangements remains relevant to current arrangements. If the fee is
not determined to be collectible, fixed or determinable, the Company will
initially defer the revenue and recognize when collection becomes probable,
which typically is when payment is due assuming all other conditions for revenue
recognition have been satisfied.
Allowance for Doubtful Accounts and Sales Returns Allowance - Kronos
maintains an allowance for doubtful accounts to reflect estimated losses
resulting from the inability of customers to make required payments. This
allowance is based on estimates made by Kronos after consideration of factors
such as the composition of the accounts receivable aging and bad debt history.
If the financial condition of customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances and bad debt
expense may be required. In addition, Kronos maintains a sales returns allowance
to reflect estimated losses for sales returns and adjustments. Sales returns and
adjustments are generally due to incorrect ordering of product, general customer
satisfaction issues or incorrect billing. This allowance is established by
Kronos using estimates based on historical experience. If Kronos experiences an
increase in sales returns and adjustments, additional allowances and charges
against revenue may be required.
Valuation of Intangible Assets and Goodwill - In assessing the
recoverability of goodwill and other intangible assets, Kronos must make
assumptions regarding the estimated future cash flows and other factors to
determine the fair value of these assets. If these estimates or their related
assumptions change in the future, Kronos may be required to record impairment
charges against these assets in the reporting period in which the impairment is
determined. For intangible assets, this evaluation includes an analysis of
estimated future undiscounted net cash flows expected to be generated by the
assets over their estimated useful lives. If the estimated future undiscounted
net cash flows are insufficient to recover the carrying value of the assets over
their estimated useful lives, Kronos will record an impairment charge in the
amount by which the carrying value of the assets exceeds their fair value. For
goodwill, the impairment evaluation includes a comparison of the carrying value
of the reporting unit which houses goodwill to that reporting unit's fair value.
Kronos has only one reporting unit. The fair value of the reporting unit is
based upon the net present value of future cash flows, including a terminal
value calculation. If the reporting unit's estimated fair value exceeds the
reporting unit's carrying value, no impairment of goodwill exists. If the fair
value of the reporting unit does not exceed its carrying value, then further
analysis would be required to determine the amount of the impairment, if any. If
Kronos determines that there is an impairment in either an intangible asset, or
goodwill, Kronos may be required to record an impairment charge in the reporting
period in which the impairment is determined, which may have a negative impact
on earnings. During the three-month period ended September 30, 2003, the Company
completed its annual testing of the impairment of goodwill, as of June 29, 2003.
As a result of the test, the Company has concluded that no impairment of
goodwill existed as of June 29, 2003. Therefore, as a result of this impairment
test, no impairment was recorded in fiscal 2003.
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. 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.
Income Taxes - Kronos 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. Kronos records a valuation
allowance in accordance with generally accepted accounting principles to reduce
our deferred tax assets to the amount of future tax benefit that is more likely
than not to be realized. While Kronos has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, there is no assurance that the valuation allowance will
not need to be increased to cover additional deferred tax assets that may not be
realizable. Any increase in the valuation allowance could have a material
adverse impact on Kronos' income tax provision and net income in the period in
which such determination is made.
Results of Operations
Revenues. Revenues amounted to $397.4 million, $342.4 million and $295.3
million in fiscal 2003, 2002 and 2001, respectively. Annual revenue growth
amounted to 16% in fiscal 2003 and 2002, and 9% in fiscal 2001. Revenues from
core business (business generated from customers that have not been part of an
acquired business transaction over the preceding four fiscal quarters) accounted
for 13% of Kronos' revenue growth in fiscal 2003, 5% in fiscal 2002 and 7% in
fiscal 2001. The principal factors driving revenue growth were increased demand
for Kronos products from new customers, including increased customer demand for
the newest data collection hardware, as well as software capacity upgrades and
platform conversions, continued demand for Kronos' professional and maintenance
services from new and existing customers, and revenues attributable to
acquisitions of businesses over the last four fiscal quarters. Revenues
attributable to acquisitions of businesses over the last four fiscal quarters
accounted for 3% of Kronos' revenue growth in fiscal 2003, 11% in fiscal 2002
and 2% in fiscal 2001. The revenue growth experienced in fiscal 2002 was
attributable to the effect of incremental revenues derived from customers
obtained from acquisitions of businesses over the preceding four quarters and
core business growth resulting from increased demand for Kronos' services.
Management presently anticipates that revenue growth will range between 12% -
16% for fiscal 2004.
Product revenues amounted to $178.6 million, $158.5 million and $154.1
million in fiscal 2003, 2002 and 2001, respectively. Product revenues increased
13% in fiscal 2003, 3% in fiscal 2002 and 1% in fiscal 2001. The principal
factors driving product revenue growth in fiscal 2003 were increased demand for
Kronos products from new and existing customers, including demand for the newest
data collection hardware, as well as software capacity upgrades and platform
conversions. Although product revenues increased during fiscal 2003 as compared
to the prior year, management believes that the continued economic environment
may result in customers deferring or reducing their technology purchases. While
management believes the impact on technology purchasing may be temporary, the
effect may cause delays or reductions in customer purchases of Kronos products
and services in the future. The product revenue growth during fiscal 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 $2.5 million
during fiscal 2003 as compared to $10.7 million in fiscal 2002 and $0.4 million
in fiscal 2001, respectively.
Maintenance revenues amounted to $124.9 million, $105.5 million and $80.4
million in fiscal 2003, 2002 and 2001, respectively. Maintenance revenues
increased 18% in fiscal 2003 as compared to 31% and 20% in fiscal 2002 and 2001,
respectively. Maintenance revenue from core business accounted for 13% of
Kronos' maintenance revenue growth in fiscal 2003 as compared to 14% and 15% of
Kronos' maintenance revenue growth in fiscal 2002 and 2001, respectively.
Maintenance revenue growth attributable to acquisitions of businesses over the
preceeding four quarters was 5% in fiscal 2003, as compared to 17% and 5% in
fiscal 2002 and 2001, respectively. The principal increase in maintenance
revenues in all periods was the result of expansion of the installed base, an
increase in the value of maintenance contracts, and incremental maintenance
revenues attributable to customers obtained from the acquisition of businesses.
The increase in the value of the maintenance contracts was principally
attributable to the platform upgrade of existing customers to Kronos' new
products. Platform and capacity upgrade sales typically result in an increased
value of maintenance contracts. In fiscal 2003, maintenance revenue growth also
benefited from an improvement in the billing process which appropriately
captures the effective date of contract reinstatements.
Professional services revenues amounted to $93.8 million, $78.4 million and
$60.8 million in fiscal 2003, 2002 and 2001, respectively. Professional services
revenues increased 20% in fiscal 2003, as compared to 29% and 19% in fiscal 2002
and 2001, respectively. Professional services revenue from core business
accounted for 16% of Kronos' professional services revenue growth in fiscal 2003
as compared to 17% and 15% of Kronos' professional services revenue growth in
fiscal 2002 and 2001, respectively. Professional services revenue growth
attributable to acquisitions of businesses over the preceeding four quarters was
4% in fiscal 2003 and 12% and 4% in fiscal 2002 and 2001, respectively. The
growth in professional services revenues in fiscal 2003 was primarily due to an
increase in demand for professional services accompanying sales to new
customers, and an increase in the level of professional services accompanying
new and platform conversion sales. The growth in core business professional
service revenues in fiscal 2002 and 2001 was attributable to an increase in the
level of professional services accompanying new and platform conversion sales,
an increase in the level of follow-on services sold to the installed base, and
an increase in delivery of professional services resulting from improving the
efficiency of Kronos' services organization.
Deferred maintenance revenues increased 10% from September 30, 2002.
Current deferred maintenance revenues increased 13% and long-term deferred
maintenance revenues decreased 15% from September 30, 2002. Maintenance revenues
have grown at a faster rate than deferred maintenance primarily due to the
positive impact on the improvement in the billing process which appropriately
captures the effective date of contract reinstatements, as well as the effect of
the expiration of multi-year maintenance contracts sold in previous fiscal
years. As the multi-year maintenance contracts approach the end of their term,
the revenue will remain constant, however, the deferred maintenance revenue
balance continues to decrease. The decrease in the long-term portion was due to
Kronos' decision to curtail the practice of selling multi-year maintenance
contracts. Professional services revenues increased 20% in fiscal 2003, which
approximates the 18% growth in deferred professional services revenues from
September 30, 2002.
International revenues, which include revenues from Kronos' international
subsidiaries and sales to independent international resellers, amounted to $39.2
million, $27.1 million and $25.6 million in fiscal 2003, 2002 and 2001,
respectively. International revenues grew by 45% in fiscal 2003 and 6% in fiscal
2002 and 2001. International revenues amounted to 10%, 8% and 9% of total
revenues in fiscal 2003, 2002 and 2001, respectively. The growth in
international revenues in fiscal 2003 was primarily attributable to the timing
of several large customer orders which were executed during fiscal 2003. Kronos
does not believe that the revenue growth experienced in fiscal 2003 is
indicative of future results and expects the future year's revenue growth to be
more consistent with that experienced in fiscal 2002 and 2001.
Gross Profit. Gross profit as a percentage of revenues was 61% in fiscal
2003 and 62% in fiscal 2002 and 2001, respectively. The decline in gross profit
in fiscal 2003 is primarily attributable to a higher proportion of service
revenues, which typically carries a lower gross profit and a decline in service
gross profit as compared to fiscal 2002.
Product gross profit as a percentage of product revenues was 76% in fiscal
2003 and 2002, as compared to 78% in fiscal 2001. Although hardware revenues,
which typically carry a lower gross profit than software revenues, were a
greater proportion of total product revenues in fiscal 2003 than fiscal 2002,
the negative impact on product margin was offset by a decrease in sales of
third-party product for resale, which typically carry the lowest product gross
profit. The decrease in product gross profit in fiscal 2002, as compared to
fiscal 2001, is primarily related to higher production costs attributable to the
Kronos 4500(TM) terminal and related modules. This decrease was partially offset
by a higher proportion of software sales, which typically carry a higher gross
profit than hardware sales.
Service gross profit as a percentage of professional service and
maintenance revenues was 48% in fiscal 2003 as compared to 49% and 44% in fiscal
2002 and 2001, respectively. The decrease in service gross profit in fiscal 2003
was primarily attributable to increased spending in support of Kronos' human
resources and payroll product rollout, partially offset by growth in maintenance
revenues and further leveraging of the existing support organization to support
the increasing customer base. The improvement in gross profit in fiscal 2002, as
compared to fiscal 2001, was primarily attributable to increased productivity in
the service organization, which was the result of leveraging investments in
service systems to more effectively manage the resources required to deliver
professional services and customer support.
Net Operating Expenses. Net operating expenses for fiscal 2003 increased
$21.1 million, or 13%, to $187.4 million as compared to an increase of $9.2
million, or 6%, to $166.2 million in fiscal 2002. The increase in actual
spending in fiscal 2003 was primarily attributable to investments in personnel
and related compensation and support costs in response to increased customer
demand and to support the development of new products, as well as increased
spending for outside consultants and professional fees. Net operating expenses
as a percentage of revenues were 47% in fiscal 2003, as compared to 49% and 53%
in fiscal 2002 and 2001, respectively. The decrease in net operating expenses as
a percentage of revenues in fiscal 2003 was primarily attributable to the
leveraging of investments in infrastructure to generate higher sales volumes,
and continued corporate-wide efforts to contain costs. The decrease in net
operating expenses as a percentage of revenues in fiscal 2002 was primarily due
to the special charges 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, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets", effective October 1, 2001.
On a proforma basis, excluding the special charge and amortization expense, net
operating expenses as a percentage of revenues were 50% in fiscal 2001. Although
management intends to decrease operating expenses as a percentage of revenues
during fiscal 2004, principally through continued productivity improvements,
uncertainty related to the current economic climate and its impact on the timing
of customers' purchases, as well as increased investments in productivity
programs and infrastructure to support the anticipated increase in sales volume,
may prevent decreases in operating expenses as a percentage of revenues from
being realized.
Sales and marketing expenses were $123.9 million, $109.8 million and $99.8
million in fiscal 2003, 2002 and 2001, respectively. Sales and marketing
expenses for fiscal 2003 increased $14.2 million, or 13%, as compared to an
increase of $10.0 million, or 10% in fiscal 2002. The increase in actual
spending in fiscal 2003 was primarily attributable to Kronos' investment in
sales personnel and related compensation and support costs to add new customers
and to maximize the penetration of existing accounts, additional spending on
programs related to the expansion of market awareness of Kronos products and
services, as well as additional spending for personnel training. The increase in
sales and marketing expenses in fiscal 2002 and 2001 was attributable to Kronos'
investments in sales personnel and related support costs, as well as, to a
lesser extent, the impact of converting Kronos' reseller operations to direct
sales operations. As a percentage of revenues, sales and marketing expenses were
31%, 32% and 34% in fiscal 2003, 2002 and 2001, respectively. The decrease in
sales and marketing spending as a percentage of total revenues in fiscal 2003
and 2002 was primarily attributable to leveraging the investments in
infrastructure to generate higher sales volumes. These infrastructure
investments include investments in information systems as well as investments in
training programs.
Engineering, research and development expenses were $38.5 million, $37.0
million and $33.3 million in fiscal 2003, 2002 and 2001, respectively.
Engineering, research and development expenses increased $1.5 million, or 4%, as
compared to an increase of $3.6 million, or 11%, in fiscal 2002. The increase in
actual spending in fiscal 2003 was principally attributable to an increase in
compensation-related expenses, expenses associated with the introduction of the
new human resources and payroll products, as well as an increase in training
expenses, partially offset by the reallocation of certain engineering resources
focused upon information systems support to general and administrative expenses.
The increase in spending in fiscal 2002 was primarily due to an increase in
salary-related expenses, partially offset by a reduction in spending related to
contract consultants. As a percentage of revenues, engineering, research and
development expenses were 10% in fiscal 2003 as compared to 11% in both fiscal
2002 and 2001. The decrease as a percentage of revenues in fiscal 2003, as
compared to fiscal 2002, was primarily due to higher sales volume in fiscal
2003. These expenses are net of capitalized software development costs of $12.1
million, $11.2 million and $11.1 million, in fiscal 2003, 2002 and 2001,
respectively. The significant project development efforts in fiscal 2003
principally related to further development and enhancement of the Workforce
Central(R) suite, Workforce HR(TM), Workforce Payroll(TM), and the Kronos 4500
terminal.
General and administrative expenses were $25.9 million, $21.2 million and
$18.5 million in fiscal 2003, 2002 and 2001, respectively. General and
administrative expenses increased $4.7 million, or 22%, in fiscal 2003, as
compared to an increase of $2.7 million, or 14% in fiscal 2002. General and
administrative expenses primarily consist of personnel and overhead-related
expenses for administrative, information technology, finance, legal, and human
resources support functions. The increase in general and administrative expenses
in fiscal 2003 was primarily due to Kronos' investment in personnel and related
compensation and support costs (including those costs associated with the
previously discussed reallocation of engineering resources to general and
administrative expenses), an increase in fees related to tax planning and other
professional services, and continued investment in infrastructure to support the
growth of operations. The increase in general and administrative expenses in
fiscal 2002 is primarily due to Kronos' investment in personnel and other
infrastructure to support the growth of operations. As a percentage of revenues,
general and administrative expenses were 7% in fiscal 2003 as compared to 6% in
fiscal 2002 and 2001.
Amortization of intangible assets as a percentage of revenues were 1% in
fiscal 2003 and 2002, as compared to 3% in fiscal 2001. The decrease in
amortization in fiscal 2002 as compared to fiscal 2001 was the result of the
elimination of goodwill amortization described in this Annual Report and/or Form
10-K. Other income, net as a percentage of revenues was 1% in fiscal 2003 and
2002, as compared to 2% in fiscal 2001. Other income, net is principally
interest income earned from Kronos' cash as well as investments in its
marketable securities and financing arrangements.
Special Charge - Fiscal 2001. A special charge in the amount of $3.7
million was recorded in fiscal 2001. Approximately $3.0 million of the special
charge was recorded in the second quarter of fiscal 2001 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 standalone 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.
Approximately $0.7 million of the special charge was recorded in the third
quarter of fiscal 2001 related to termination costs from a reduction in
workforce of approximately 90 employees. This charge was the result of
management's effort to streamline operations to better align costs with expected
revenues. As of September 30, 2002, Kronos did not have any remaining liability
related to the special charge.
Income Taxes. The provision for income taxes as a percentage of pre-tax
income was 36.5% in fiscal 2003, 35.2% in fiscal 2002 and 35.0% in fiscal 2001.
Kronos' effective income tax rate may fluctuate between periods as a result of
various factors, including income tax credits, foreign tax rate differentials
and state income taxes. Management currently anticipates that the income tax
rate will decline in fiscal 2004 as Kronos implements certain tax management
strategies.
Newly Issued Accounting Standards. In December 2002, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." This statement provides alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
compensation. The statement amends the disclosure requirements of FASB Statement
No. 123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. Kronos accounts for stock-based
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
complies with the disclosure provisions of FASB Statement No. 123. The
transition provisions are effective for fiscal years ending after December 15,
2002. The disclosure provisions are effective for interim periods beginning
after December 15, 2002. Kronos implemented the required disclosure provisions
in the three-month period ended March 29, 2003. The adoption of this statement
did not have any impact on Kronos' consolidated financial position, results of
operations or cash flows and Kronos does not anticipate making the voluntary
change to the fair value method of accounting for stock-based compensation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin No. 51."
FIN No. 46 requires certain variable interest entities, or VIEs, to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN No. 46 is effective for all VIEs created or acquired after January 31, 2003.
In October 2003, the FASB issued FIN No. 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities." This FASB
Staff Position deferred the effective date for applying the provisions of FIN
No. 46 for interests held by public entities in variable interest entities or
potential variable interest entities created before February 1, 2003. A public
entity need not apply the provisions of FIN No. 46 to an interest held in a
variable interest entity or potential variable interest entity until the end of
the first interim or annual period ending after December 15, 2003 if both of the
following apply:
o The variable interest entity was created before February 1, 2003.
o The public entity has not issued financial statements reporting
interests in variable interest entities in accordance with FIN No. 46,
other than certain required disclosures.
Kronos currently has no contractual relationship or other business relationship
with a variable interest entity and therefore the adoption of FIN No. 46-6 will
not have a material effect on Kronos' consolidated financial position, results
of operations or cash flows.
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. Kronos believes that it has more than adequate
financing to sustain its operations through the next fiscal year.
Cash, cash equivalents and marketable securities (which includes both
short- and long-term securities) amounted to $131.0 million as of September 30,
2003 and $74.7 million as of September 30, 2002. This increase in cash, cash
equivalents and marketable securities is due to cash generated from operations.
Working capital as of September 30, 2003 amounted to $21.2 million as compared
with $2.4 million at September 30, 2002. This increase in working capital is
primarily due to an increase in cash resulting from cash provided by operations.
Cash provided by operations amounted to $82.6 million in fiscal 2003 as
compared to $70.2 million and $54.4 million in fiscal 2002 and 2001,
respectively. The increase in cash provided by operations in fiscal 2003 is
principally attributable to higher net income, an increase in accruals related
to taxes and compensation expenses due to the timing of payments, as well as
increased non-cash charges that are added back in the calculation of cash flow
from operations. These are partially offset by an increase in accounts
receivable due to higher sales volume. The increase in cash provided by
operations in fiscal 2002 is principally attributable to an increase in net
income, collection of accounts receivable from trade customers and the tax
benefit from the exercise of stock options. These are partially offset by a
reduced rate of increase in Kronos' deferred revenues as well as an increase in
cash used due to timing of compensation-related payments.
Cash used for property, plant and equipment was $11.6 million in fiscal
2003 compared to $11.6 million in fiscal 2002 and $7.6 million in fiscal 2001.
Kronos' use of cash for property, plant and equipment in all periods presented
includes investments in information system and infrastructure to improve and
support expanding operations. Kronos' use of cash for the acquisition of
businesses and software in all periods presented was principally related to the
acquisitions of specified assets and/or businesses of Kronos' resellers and/or
other providers of labor management solutions. In addition, during fiscal 2002,
Kronos' use of cash for the acquisition of businesses and software included cash
used for the acquisition of the source code license for the Abra Enterprise
human resources and payroll software. 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. Management
anticipates making significant capital investments during fiscal 2004 in
conjunction with the replacement of information technology systems. These
investments could approximate up to 1% of total revenues in fiscal 2004. 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 $20.5 million in fiscal 2003 compared to
an increase of $8.4 million in fiscal 2002 and an increase of $4.0 million in
fiscal 2001.
Under Kronos' stock repurchase program, Kronos repurchased 535,050 shares
of common stock in fiscal 2003 at a cost of $13.2 million, compared to 814,425
shares of common stock at a cost of $21.3 million in fiscal 2002 and 532,012
shares of common stock at a cost of $8.7 million in fiscal 2001. The common
stock repurchased under the program is used for Kronos' employee stock option
plans and employee stock purchase plan. During the first quarter of fiscal 2003,
Kronos received $2.6 million upon the maturity of a call option arrangement. As
of September 30, 2003, Kronos did not have any outstanding call option
arrangements. Please refer to Note A in the Notes to Condensed Consolidated
Financial Statements for further details regarding call option arrangements.
Cash provided by operations was sufficient to fund investments in capitalized
software development costs, property, plant and equipment and stock repurchases.
Kronos leases certain office space, manufacturing facilities and equipment
under long-term operating lease agreements. In addition, certain acquisition
agreements contain provisions that require Kronos to make a guaranteed payment
and/or contingent payments based upon profitability of the business unit or if
specified minimum revenue requirements are met. Future minimum rental
commitments under operating leases with non-cancelable terms of one year or
more, and future payment obligations related to guaranteed payments are as
follows (in thousands):
Payments Due by Period
---------------------------------------------------------------------
More Than More Than
1 Year, 3 Year,
Less Than Less Than Less Than More Than
Contractual Obligations Total 1 Year 3 Years 5 Years 5 Years
- ----------------------- ------- --------- --------- --------- ---------
Operating lease obligations .. $34,665 $ 9,441 $14,541 $ 6,364 $ 4,319
Guaranteed payment obligations 3,652 1,713 1,939 -- --
------- ------- ------- ------- -------
Total ........................ $38,317 $11,154 $16,480 $ 6,364 $ 4,319
======= ======= ======= ======= =======
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.
Certain Factors That May Affect Future Operating Results
Except for historical matters, the matters discussed in this 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.
Kronos' actual operating results may differ 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 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 labor product line, the ability to attract and
retain sufficient technical personnel, the protection of Kronos' intellectual
property and the potential infringement on Kronos' intellectual property rights,
competitive pricing pressure, and the dependence on alternate distribution
channels and on key vendors, as further described below.
Potential Fluctuations in Results. Kronos' operating results, including
revenue growth, sources of revenue, effective tax rate and liquidity, may
fluctuate as a result of a variety of factors, including the purchasing patterns
of its customers, mix of products and services sold, the ability of Kronos to
effectively integrate acquired businesses into Kronos' operations, the timing of
the introduction of new products and product enhancements by Kronos and its
competitors, the strategy employed by Kronos to enter the human resources and
payroll market, market acceptance of new products, competitive pricing pressure
and general economic conditions. Kronos historically has realized a relatively
larger percentage of its annual revenues and profits in the third and fourth
quarters and a relatively smaller percentage in the first and second quarters of
each fiscal year, although there can be no assurance that this pattern will
continue. In addition, substantially all of Kronos' product revenue and profits
in each quarter result from orders received in that quarter. If near-term demand
for Kronos' products weakens or if significant anticipated sales in any quarter
do not close when expected, Kronos' revenues for that quarter will be adversely
affected. Kronos believes that its operating results for any one period are not
necessarily indicative of results for any future period.
Competition. The employee relationship management ("ERM") market, which
includes time and labor, scheduling, human resources and payroll, is highly
competitive. Technological changes such as those allowing for increased use of
the Internet have resulted in new entrants into the market. Increased
competition could adversely affect Kronos' operating results through price
reductions and/or loss of market share. With Kronos' efforts to expand its labor
management offering with the recent introduction of its human resources and
payroll 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
human resources and payroll products. Many of Kronos' human resources and
payroll competitors have significantly greater financial, technical and sales
and marketing resources than Kronos, as well as more experience in delivering
human resources and payroll solutions. Although Kronos believes it has core
competencies that position it strongly in the marketplace, maintaining Kronos'
technological and other advantages over competitors will require continued
investment by Kronos in research and development and marketing and sales
programs. There can be no assurance that Kronos will have sufficient resources
to make such investments or be able to achieve the technological advances
necessary to maintain its competitive advantages. There can be no assurance that
Kronos will be able to compete successfully in the human resources and payroll
marketplace, and its failure to do so could have a material adverse impact upon
its business, prospects, financial condition and operating results.
Dependence on Time and Labor Product Line. To date, more than 90% of
Kronos' revenues have been attributable to sales of labor management systems and
related services. Although Kronos has introduced products for the licensed human
resources and payroll market during fiscal 2002, Kronos expects that its
dependence on the time and labor product line for revenues will continue for the
foreseeable future. Competitive pressures or other factors could cause Kronos'
time and labor products to lose market acceptance or experience significant
price erosion, adversely affecting the results of Kronos' operations.
Product Development and Technological Change. Continual change and
improvement in computer software and hardware technology characterize the
markets for ERM 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 ERM offerings and
to develop new products and interfaces, there can be no assurance that these
efforts will succeed, or that, if successful, such product enhancements or new
products will achieve widespread market acceptance, or that Kronos' competitors
will not develop and market products which are superior to Kronos' products or
achieve greater market acceptance.
Dependence on Alternate Distribution Channels. Kronos markets and sells its
products through its direct sales organization, independent resellers and ADP
under an OEM agreement. In fiscal 2003, approximately 10% of Kronos' revenue was
generated through sales to resellers and ADP. Management does not anticipate
that its entrance into the human resources and payroll market will have a
negative impact on its relationship with ADP. During fiscal 2003, Kronos and ADP
signed an agreement extending their business relationship for an additional term
of five years. However, a reduction in the sales efforts of either Kronos' major
resellers or ADP, or termination or changes in their relationships with Kronos,
could have a material adverse effect on the results of Kronos' operations.
Attracting and Retaining Sufficient Technical Personnel for Product
Development, Support and Sales. Kronos has encountered intense competition for
experienced technical personnel for product development, technical support and
sales and expects such competition to continue in the future. Any inability to
attract and retain a sufficient number of qualified technical personnel could
adversely affect Kronos' ability to produce, support and sell products in a
timely manner.
Protection of Intellectual Property. Kronos has developed, and through its
acquisitions of businesses and software, acquired proprietary technology and
intellectual property rights. Kronos' success is dependent upon its ability to
further develop and protect its proprietary technology and intellectual property
rights. Kronos seeks to protect products, software, documentation and other
written materials primarily through a combination of trade secret, patent,
trademark and copyright laws, confidentiality procedures and contractual
provisions. While Kronos has attempted to safeguard and maintain its proprietary
rights, it is unknown whether Kronos has been or will be successful in doing so.
Despite Kronos' efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of its products or obtain and use
information that is regarded as proprietary. Policing unauthorized use of
Kronos' products is difficult. While Kronos is unable to determine the extent to
which piracy of its software products exists, software piracy can be expected to
be a persistent problem, particularly in foreign countries where the laws may
not protect proprietary rights as fully as in the United States. Kronos can
offer no assurance that it can adequately protect its proprietary rights or that
its competitors will not reverse engineer or independently develop similar
technology.
Infringement of Intellectual Property Rights. Kronos cannot provide
assurance that others will not claim that Kronos developed or acquired
intellectual property rights infringe 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.
Additional Stock Option Program Information
Option Program Description. The Company intends that its stock option
program be its primary vehicle for offering long-term incentives and rewarding
its executives and key employees. Stock options are granted to key employees
based upon prior performance, the importance of retaining their services for the
Company and the potential for their performance to help the Company attain its
long-term goals. However, there is no set formula for the award of options to
individual executives or employees.
Stock options are generally granted annually in conjunction with the
Compensation Committee's formal review of the individual performance of its key
executives, including its Chief Executive Officer, and their contributions to
the Company. In fiscal 2003, 76% of the options granted went to employees other
than the top five officers ("Named Executive Officers"). All the options awarded
are granted from the same plan. Options, which are granted at the fair market
value on the date of grant, typically vest in four equal annual installments
beginning one year from the date of grant and have a contractual life of four
years and six months.
The presentation of share and per share amounts 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 October 31, 2003 to stockholders of record as of
October 20, 2003.
Distribution and Dilutive Effect of Options.
Employee and Executive Option Grants as of September 30,
2003 2002 2001
----- ----- -----
Net grants during period as % of 4.1% 4.7% 4.2%
outstanding shares
Grants to Named Executive Officers* 24.1% 25.3% 17.0%
during period as % of options granted
Grants to Named Executive Officers* 1.0% 1.2% 0.7%
during period as % of shares outstanding
*The following individuals are Kronos' Named Executive Officers for fiscal 2003:
Mark S. Ain Chief Executive Officer and Chairman
Paul A. Lacy Executive Vice President, Chief Financial and
Administrative Officer
Aron J. Ain Executive Vice President, Chief Operating Officer
Peter C. George Vice President, Engineering and Chief Technology Officer
James Kizielewicz Vice President, Marketing and Corporate Strategy
The figures for fiscal 2002 and 2001 reflect the Named Executive Officers as
reported in the Company's definitive proxy statement for those years.
General Option Information.
Summary of Option Activity
(in thousands, except per share data)
Weighted-Average
Shares Available Number of Exercise Price
for Options Shares per Share
---------------- --------- ----------------
Outstanding at September 30, 2002 2,436 3,962 $15.45
Grants (1,243) 1,243 16.91
Exercises -- (1,415) 12.95
Cancellations (1) 36 (150) 16.22
----- ----- ------
Outstanding at September 30, 2003 1,229 3,640 $16.89
===== ===== ======
(1) Includes 114,000 shares cancelled under the 1992 Equity Incentive
Plan, which expired under its terms on March 27, 2002.
In-the-Money and Out-of-the-Money Option Information as of September 30, 2003
(in thousands, except per share data)
Exercisable Unexercisable Total
--------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Price per Price per Price per
Shares Share Shares Share Shares Share
------ ----- ------ ----- ------ -----
In-the-Money ............ 645 $16.61 2,995 $16.95 3,640 $16.89
Out-of-the-Money (1) .... -- -- -- -- -- --
---- ------ ----- ------ ----- ------
Total Options Outstanding 645 $16.61 2,995 $16.95 3,640 $16.89
==== ====== ===== ====== ===== ======
(1) Out-of-the-Money options are those options with an exercise price
equal to or above the closing price of $35.27 at the end of the fiscal
year.
Executive Options. The following tables summarize option grants and
exercises during the fiscal year ended September 30, 2003 to the Company's Named
Executive Officers and the value of the options held by such persons at the end
of fiscal 2003.
Options Granted to Named Executive Officers
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(4)
----------------------------------------------------- ------------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in or Base
Granted Friscal Price per Expiration
Name (1) Year (2) Share (3) Date 5% 10%
- ---- ---------- ------------- --------- ---------- -- ---
Mark S. Ain ............ 90,000 7.2% $16.57 04/07/07 $366,775 $801,444
CEO and Chairman
Paul A. Lacy ........... 60,000 4.8% 16.57 04/07/07 244,517 534,296
Exec. V.P. and Chief
Financial and
Administrative Officer
Aron J. Ain ............ 60,000 4.8% 16.57 04/07.07 244,517 534,296
Exec. V.P. and Chief
Operating Officer
Peter C. George ........ 45,000 3.6% 16.57 04/07/07 183,388 400,722
V.P., Engineering and
Chief Technology Officer
James Kizielewicz ...... 45,000 3.6% 16.57 04/07/07 183,388 400,722
V.P., Marketing and
Corporate Strategy
(1) Each option vests in four equal annual installments commencing one year
from the date of grant.
(2) Based on an aggregate of 1,242,600 shares subject to options granted to
employees of the Company in fiscal 2003.
(3) The exercise price of each option was equal to the fair market value of the
Company's common stock on the date of grant as reported by The NASDAQ
National Market(R).
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date (and are shown net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the exercise
of the options or the sale of the underlying shares.) Actual gains, if any,
on stock option exercises will depend on the future performance of the
common stock, the optionholder's continued employment with the Company
through the option vesting period and the date on which the options are
exercised.
Option Exercises and Remaining Holdings of Named Executive Officers
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
at Fiscal Year-End Fiscal Year-End (2)
Shares
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (1) Unexercisable Unexercisable
- ---- ----------- -------------- -------------------- -----------------------
Mark S. Ain .......... 101,250 $1,890,675 144,000/229,500 $2,688,360/4,154,130
Paul A. Lacy ......... 102,375 1,920,668 16,875/147,750 262,894/2,658,874
Aron J. Ain .......... 116,438 2,147,980 2,813/147,750 16,706/2,658,874
Peter C. George ...... 25,875 459,189 54,000/110,250 1,056,660/1,997,310
James Kizielewicz .... 58,500 1,118,055 2,250/112,500 13,365/2,013,930
(1) Represents the difference between the exercise price and the fair market
value of the common stock on the date of exercise.
(2) Based on the fair market value of the common stock on September 30, 2003
($35.27), the last day of the Company's 2003 fiscal year, less the option
exercise price.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Kronos is exposed to a variety of market risks, including changes in
interest rates affecting the return on its investments, foreign currency
fluctuations and decreases in its common stock price affecting capped call
options. Refer to Note A, "Summary of Significant Accounting Policies", in the
Notes to Consolidated Financial Statements for further discussion regarding
marketable securities, foreign currency forward exchange contracts and capped
call option arrangements. Kronos' marketable securities that expose it to market
rate risks are comprised of debt securities. A decrease in interest rates would
not adversely impact interest income or related cash flows pertaining to
securities held at September 30, 2003, as all of these securities have fixed
rates of interest. A 100 basis point increase in interest rates would not
adversely impact the fair value of these securities by a material amount due to
the size and average duration of the portfolio. Kronos' exposure to market risk
for fluctuations in foreign currency relate primarily to the amounts due from
subsidiaries. Exchange gains and losses related to amounts due from subsidiaries
have not been material. For foreign currency exposures existing at September 30,
2003, a 10% unfavorable movement in the foreign exchange rates for each
subsidiary location would not expose the Company to material losses in earnings
or cash flows. The calculation assumes that each exchange rate would change in
the same direction relative to the U.S. dollar.
Kronos has periodically entered into short-term capped call options in
conjunction with its stock repurchase initiatives. During the first quarter of
fiscal 2003, Kronos received $2.6 million upon the maturity of a call option
arrangement. For more information on this call option, please refer to Note A in
the Notes to Condensed Consolidated Financial Statements. As of September 30,
2003, there were no capped call option arrangements outstanding.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included herein under
Item 6 and in the Consolidated Financial Statements and related notes thereto.
See Item 15 of this Form 10-K.
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
None.
PART III
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's management,
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
September 30, 2003. Based on this evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that, as of September 30,
2003, the Company's disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the Company's Chief Executive
Officer and Chief Financial Officer by others within those entities,
particularly during the period in which this report was being prepared and
(2) effective, in that they provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls. No change in the Company's internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) occurred during the fiscal year ended September 30, 2003
that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
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 the Company's definitive proxy statement for the 2004 Annual
Meeting of Stockholders to be held on February 12, 2004 under the captions
"Election of Directors" and "Board of Directors and Committees."
Item 11. Executive Compensation
Incorporated by reference from the Company's definitive proxy statement for
the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under
the following captions: "Director Compensation," "Executive Compensation,"
"Option Grants and Exercises," "Equity Compensation Plan Information," and
"Report of Compensation Committee."
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Incorporated by reference from the Company's definitive proxy statement for
the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under
the caption "Security Ownership of Certain Beneficial Owners and Management."
The disclosure required by Item 201(d) of Regulation S-K is incorporated by
reference from the Company's definitive proxy statement for the 2004 Annual
Meeting of Stockholders to be held on February 12, 2004 under the caption
"Equity Compensation Plan Information".
Item 13. Certain Relationships and Related Transactions
Information related to executive officers' retention agreements is
incorporated by reference from the Company's definitive proxy statement for the
2004 Annual Meeting of Stockholders to be held on February 12, 2004 under the
caption "Employment Contracts and Retention Agreements."
Item 14. Principal Accountant Fees and Services
Incorporated by reference from the Company's definitive proxy statement for
the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under
the caption "Relationship with Independent Auditors."
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements
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, 2003, 2002 and 2001
Consolidated Balance Sheets as of September 30, 2003 and 2002 F-2
Consolidated Statements of Shareholders' Equity for
the Years Ended September 30, 2003, 2002 and 2001 F-3
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2003, 2002 and 2001 F-4
Notes to Consolidated Financial Statements F-5
Report of Ernst & Young LLP, Independent Auditors F-25
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.
(b) Reports on Form 8-K
On July 24, 2003, the Company furnished a Current Report on Form 8-K under
Item 12, containing a copy of its earnings release, dated July 24, 2003, for the
period ended June 28, 2003.
On October 28, 2003, the Company furnished a Current Report on Form 8-K
under Item 12, containing a copy of its earnings release, dated October 28,
2003, for the period ending September 30, 2003.
On October 7, 2003, the Company furnished a Current Report on Form 8-K
under Item 5, containing a copy of its press release announcing the declaration
of a three-for-two stock split of the Company's common stock, in the form of a
50% common stock dividend.
(c) Exhibits
The Exhibits filed as part of this Form 10-K are listed on the Exhibit
Index following the audit report to this Form 10-K and are incorporated herein
by reference.
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 23, 2003.
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 23, 2003.
Signature Capacity
- --------- --------
/s/ Mark S. Ain Chief Executive Officer
- ------------------------- and Chairman of the Board
Mark S. Ain (Principal Executive Officer)
/s/ Paul A. Lacy Executive Vice President, Chief Financial
- ------------------------- and Administrative Officer
Paul A. Lacy (Principal Financial and Accounting Officer)
/s/ Aron J. Ain Executive Vice President, Chief Operating
- ------------------------- Officer
Aron J. Ain
/s/ W. Patrick Decker Director
- -------------------------
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
/s/ David B. Kiser Director
- -------------------------
David B. Kiser
Consolidated Statements of Income In thousands, except share and per share data
Year Ended September 30,
2003 2002 2001
------------ ------------ ------------
Net revenues:
Product ...................................... $ 178,607 $ 158,466 $ 154,064
Maintenance .................................. 124,911 105,519 80,393
Professional services ........................ 93,837 78,392 60,833
------------ ------------ ------------
397,355 342,377 295,290
Cost of sales:
Costs of product ............................. 42,507 37,577 33,993
Costs of maintenance and professional services 112,897 94,061 78,808
------------ ------------ ------------
155,404 131,638 112,801
------------ ------------ ------------
Gross profit ............................. 241,951 210,739 182,489
Operating expenses and other income:
Sales and marketing .......................... 123,937 109,780 99,767
Engineering, research and development ........ 38,463 36,970 33,333
General and administrative ................... 25,884 21,196 18,520
Amortization of intangible assets ............ 3,481 2,970 7,557
Other income, net ............................ (4,375) (4,668) (5,768)
Special charge ............................... -- -- 3,689
------------ ------------ ------------
187,390 166,248 157,098
------------ ------------ ------------
Income before income taxes ............... 54,561 44,491 25,391
Provision for income taxes ....................... 19,895 15,664 8,887
------------ ------------ ------------
Net income ............................... $ 34,666 $ 28,827 $ 16,504
============ ============ ============
Net income per common share:
Basic .................................... $ 1.16 $ 0.98 $ 0.59
============ ============ ============
Diluted .................................. $ 1.12 $ 0.94 $ 0.57
============ ============ ============
Weighted-average common shares outstanding:
Basic .................................... 29,834,942 29,413,316 28,134,765
============ ============ ============
Diluted .................................. 31,003,019 30,543,812 29,019,492
============ ============ ============
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets In thousands, except share and per share data
September 30, 2003 2002
---------- ----------
ASSETS
Current assets:
Cash and equivalents .................................................................. $ 69,884 $ 34,117
Marketable securities ................................................................. 17,056 16,096
Accounts receivable, less allowances of $7,833 ........................................ 84,275 84,128
at September 30, 2003 and $9,697 at September 30, 2002
Deferred income taxes ................................................................. 8,427 6,893
Other current assets .................................................................. 18,649 17,835
--------- ---------
Total current assets .......................................................... 198,291 159,069
Property, plant and equipment, net ......................................................... 39,263 38,635
Marketable securities ...................................................................... 44,065 24,534
Intangible assets .......................................................................... 22,938 20,545
Goodwill ................................................................................... 70,446 56,167
Capitalized software, net .................................................................. 23,012 22,237
Other assets ............................................................................... 14,791 11,837
--------- ---------
Total assets .................................................................. $ 412,806 $ 333,024
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................................... $ 6,584 $ 6,212
Accrued compensation .................................................................. 35,655 32,674
Accrued expenses and other current liabilities ........................................ 16,169 10,831
Deferred product revenues ............................................................. 3,387 6,853
Deferred professional service revenues ................................................ 39,745 33,551
Deferred maintenance revenues ......................................................... 75,505 66,550
--------- ---------
Total current liabilities ..................................................... 177,045 156,671
Deferred maintenance revenues .............................................................. 7,319 8,588
Deferred income taxes ...................................................................... 8,190 4,565
Other liabilities .......................................................................... 3,655 3,531
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, 30,439,778 and
29,867,928 shares issued at September 30, 2003 and September 30, 2002, respectively 304 299
Additional paid-in capital ............................................................ 38,110 31,394
Retained earnings ..................................................................... 177,841 143,175
Cost of Treasury Stock (260 shares and 549,093 shares at
September 30, 2003 and September 30, 2002, respectively) .......................... (6) (14,020)
Accumulated other comprehensive income/(loss):
Foreign currency translation ...................................................... (8) (1,372)
Net unrealized gain on available-for-sale investments ............................. 356 193
--------- ---------
348 (1,179)
Total shareholders' equity .................................................... 216,597 159,669
--------- ---------
Total liabilities and shareholders' equity .................................... $ 412,806 $ 333,024
========= =========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
In thousands
Accumulated
Common Stock Additional Other Treasury Stock
---------------- Paid-in Retained Comprehensive ----------------
Shares Amount Capital Earnings Income (Loss) Shares Amount Total
---------------- ---------- -------- ------------- ---------------- --------
Balance at September 30, 2000 .. 28,428 $285 $23,683 $ 97,844 $(1,366) 698 $(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 ............... 303 3 (6,660) -- -- (891) 15,560 8,903
Proceeds from employee stock
purchase plan ............... -- -- (2,053) -- -- (327) 5,534 3,481
Purchase of treasury stock .... -- -- -- -- -- 665 (11,026) (11,026)
Tax benefit from the exercise
of stock options and other -- -- 5,482 -- -- -- -- 5,482
------ ---- ------- -------- ------- ------- -------- --------
Balance at September 30, 2001 .. 28,731 288 20,452 114,348 (1,484) 145 (2,588) 131,016
Net income .................... -- -- -- 28,827 -- -- -- 28,827
Foreign currency translation .. -- -- -- -- 424 -- -- 424
Net unrealized loss on
available-for-sale securities -- -- -- -- (119) -- -- (119)
--------
Comprehensive income ........ -- -- -- -- -- -- -- 29,132
Proceeds from exercise of
stock options ............... 1,012 10 4,115 -- -- (411) 10,041 14,166
Proceeds from employee stock
purchase plan ............... 125 1 402 -- -- (125) 3,666 4,069
Purchase of treasury stock .... -- -- (13) -- -- 940 (25,139) (25,152)
Tax benefit from the exercise
of stock options and other -- -- 9,248 -- -- -- -- 9,248
Net investment in call options -- -- (2,810) -- -- -- -- (2,810)
------ ------ --------- -------- ------- ------- -------- --------
Balance at September 30, 2002 .. 29,868 299 31,394 143,175 (1,179) 549 (14,020) 159,669
Net income .................... -- -- -- 34,666 -- -- -- 34,666
Foreign currency translation .. -- -- -- -- 1,364 -- -- 1,364
Net unrealized gain on
available-for-sale securities -- -- -- -- 163 -- -- 163
--------
Comprehensive income ........ -- -- -- -- -- -- -- 36,193
Proceeds from exercise of
stock options ............... 441 4 (6,158) -- -- (975) 24,489 18,335
Proceeds from employee stock
purchase plan ............... 131 1 1,238 -- -- (165) 4,214 5,453
Purchase of treasury stock .... -- -- (15) -- -- 591 (14,689) (14,704)
Tax benefit from the exercise
of stock options and other -- -- 9,054 -- -- -- -- 9,054
Proceeds from call options .... -- -- 2,597 -- -- -- -- 2,597
------ ---- ------- -------- ------- ------- -------- --------
Balance at September 30, 2003 .. 30,440 $304 $38,110 $177,841 $ 348 -- $ (6) $216,597
====== ==== ======= ======== ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows In thousands
Year Ended September 30, 2003 2002 2001
-------- -------- --------
Operating activities:
Net income ...................................................... $ 34,666 $ 28,827 $ 16,504
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation ............................................... 11,210 9,513 8,362
Amortization of intangible assets .......................... 3,481 2,970 7,557
Amortization of capitalized software ....................... 11,470 9,511 8,249
Provision for deferred income taxes ........................ 2,223 4,759 1,976
Changes in certain operating assets and liabilities:
Accounts receivable, net ................................ (3,005) 4,724 (5,659)
Deferred product revenues ............................... (3,545) 2,716 3,049
Deferred professional service revenues .................. 4,853 2,216 5,524
Deferred maintenance revenues ........................... 3,092 (1,282) 771
Accounts payable, accrued compensation
and other liabilities ................................... 6,347 226 3,887
Taxes payable ........................................... 2,431 (2,118) (1,039)
Non-cash portion of special charge ...................... -- -- 1,753
Other ................................................... 315 (1,096) (2,043)
Tax benefit from exercise of stock options and other ....... 9,054 9,248 5,482
-------- -------- --------
Net cash and equivalents provided by operating activities 82,592 70,214 54,373
Investing activities:
Purchase of property, plant and equipment ....................... (11,559) (11,557) (7,585)
Capitalized internal software development costs ................. (12,128) (11,216) (11,059)
Increase in marketable securities ............................... (20,491) (8,417) (3,974)
Acquisitions of businesses and software, net of cash acquired ... (15,605) (31,859) (19,506)
-------- -------- --------
Net cash and equivalents used in investing activities ... (59,783) (63,049) (42,124)
Financing activities:
Net proceeds from exercise of stock options and
employee purchase plans ....................................... 23,788 18,235 12,384
Purchase of treasury stock ...................................... (14,704) (25,152) (11,026)
Proceeds from (net investment in) call options .................. 2,597 (2,810) --
-------- -------- --------
Net cash and equivalents provided by/(used in)
financing activities ................................. 11,681 (9,727) 1,358
Effect of exchange rate changes on cash and equivalents ........... 1,277 118 (247)
-------- -------- --------
Increase (decrease) in cash and equivalents ....................... 35,767 (2,444) 13,360
Cash and equivalents at the beginning of the period ............... 34,117 36,561 23,201
-------- -------- --------
Cash and equivalents at the end of the period ..................... $ 69,884 $ 34,117 $ 36,561
======== ======== ========
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, which are not material, have been made
in the accompanying consolidated financial statements in order to conform to the
fiscal 2003 presentation. The Company operates in one business segment, the
development, manufacturing and marketing of employee relationship 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
shareholders' equity.
Stock Split: On September 26, 2003, the Company's Board of Directors approved a
three-for-two stock split, effective on October 7, 2003, in the form of a 50%
stock dividend. This stock dividend was paid on October 31, 2003 to stockholders
of record as of October 20, 2003. Accordingly, the presentation of shares
outstanding and amounts per share have been restated for all periods presented
to reflect the split.
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 12 months or longer at the balance sheet date are classified
as non-current marketable securities. At September 30, 2003, no bonds had
effective maturities that extend beyond October 2008. Marketable securities are
carried at fair value as determined from quoted market prices. Interest income
earned on the Company's cash, cash equivalents and marketable securities are
included in other income, net and amounted to $1,779,000, $1,740,000, and
$2,490,000, in fiscal 2003, 2002 and 2001, respectively.
Financial Instruments: The carrying value of the Company's financial
instruments, which include cash and cash equivalents, marketable securities,
current and non-current accounts receivable and accounts payable, approximated
their fair value at September 30, 2003 and September 30, 2002, respectively, due
to the short-term nature of these instruments.
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, equipment and software 3-5 years
Furniture and fixtures 8-10 years
Leasehold improvements Shorter of economic
life or lease-term
Valuation of Intangible Assets and Goodwill: In assessing the recoverability of
goodwill and other intangible assets, the Company 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, the Company 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, the Company 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. The Company 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. No impairment was recorded during fiscal 2003. See Note G for a discussion
of the Company's impairment tests and related results.
Revenue Recognition: The Company licenses software and sells data collection
hardware and related ancillary products to end-user customers through its direct
sales force as well as indirect channel customers, which include ADP and other
independent resellers. Substantially all of the Company's software license
revenue is earned from perpetual licenses of off-the-shelf software requiring no
modification or customization. The software license, data collection hardware
and related ancillary product revenues from the Company's end-user customers and
indirect channel customers are generally recognized using the residual method
when:
o Persuasive evidence of an arrangement exists, which is typically when a
non-cancelable sales and software license agreement has been signed;
o Delivery, which is typically FOB shipping point, is complete for the
software (either physically or electronically), data collection hardware
and related ancillary products;
o The customer's fee is deemed to be fixed or determinable and free of
contingencies or significant uncertainties;
o Collectibility is probable; and
o Vendor-specific objective evidence of fair value exists for all undelivered
elements, typically maintenance and professional services.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements and is recognized as revenue, assuming all other conditions
for revenue recognition have been satisfied. Substantially all of the Company's
product revenue is recognized in this manner. If the Company cannot determine
the fair value of any undelivered element included in an arrangement, the
Company will defer revenue until all elements are delivered, services are
performed or until fair value can be objectively determined.
As part of an arrangement, end-user customers typically purchase
maintenance contracts as well as professional services from the Company.
Maintenance services include telephone and Web-based support as well as rights
to unspecified upgrades and enhancements, when and if the Company makes them
generally available. Professional services are deemed to be non-essential and
typically are for implementation planning, loading of software, installation of
the data collection hardware, training, building simple interfaces, running test
data, and assisting in the development and documentation of pay rules and best
practices consulting.
Revenues from maintenance services are recognized ratably over the term of
the maintenance contract period based on vendor-specific objective evidence of
fair value. Vendor-specific objective evidence of fair value is based upon the
amount charged when purchased separately, which is typically the contract's
renewal rate. Maintenance services are typically stated separately in an
arrangement. The Company has classified the allocated fair value of revenues
pertaining to the contractual maintenance obligations that exist for the
12-month period subsequent to the balance sheet date as a current liability, and
the contractual obligations with a term beyond 12 months as a non-current
liability. Revenues from time and material maintenance services are recognized
as the services are delivered.
Revenues from professional services are generally recognized based on
vendor-specific objective evidence of fair value when:
o A non-cancelable agreement for the services has been signed or a customer's
purchase order has been received; and
o The professional services have been delivered.
Vendor-specific objective evidence of fair value is based upon the price charged
when these services are sold separately and are typically an hourly rate for
professional services and a per-class rate for training. Based upon the
Company's experience in completing product implementations, it has determined
that these services are typically delivered within a 12-month period subsequent
to the contract signing and therefore classifies deferred professional services
as a current liability.
The Company's arrangements with its end-user customers and indirect channel
customers do not include any rights of return or price protection, nor do
arrangements with indirect channel customers include any acceptance provisions.
Generally, the Company's arrangements with end-user customers also do not
include any acceptance provisions. However, if an arrangement does include
acceptance provisions, they typically are based on the Company's standard
acceptance provision. The Company's standard acceptance provision provides the
end-user customer with a right to a refund if the arrangement is terminated
because the product did not meet Kronos' published specifications. Generally,
the Company determines that these acceptance provisions are not substantive and
therefore should be accounted for as a warranty in accordance with SFAS No. 5.
At the time the Company enters into an arrangement, the Company assesses
the probability of collection of the fee and the terms granted to the customer.
For end-user customers, the Company's typical payment terms include a deposit
and subsequent payments, based on specific due dates, such that all payments for
the software license, data collection hardware and related ancillary products,
as well as services included in the original arrangement are ordinarily due
within one year of contract signing. The Company's payment terms for its
indirect channel customers are less than 90 days and typically due within 30
days of invoice date.
If the payment terms for the arrangement are considered extended or if the
arrangement includes a substantive acceptance provision, the Company defers
revenue not meeting the criterion for recognition under SOP 97-2 and classifies
this revenue as deferred revenue, including deferred product revenue. This
revenue is recognized, assuming all other conditions for revenue recognition
have been satisfied, when the payment of the arrangement fee becomes due and/or
when the uncertainty regarding acceptance is resolved as generally evidenced by
written acceptance or payment of the arrangement fee. The Company reports the
allocated fair value of revenues related to the product element of arrangements
as a current liability because of the expectation that these revenues will be
recognized within 12 months of the balance sheet date.
Since fiscal 1996, the Company has had a standard practice of providing
creditworthy end-user customers the option of financing arrangements beyond one
year. These arrangements, which encompass separate fees for software license,
data collection hardware and ancillary products, maintenance and support
contracts and professional services, are evidenced by distinct standard sales,
license and maintenance agreements and typically require equal monthly payments.
The term of these arrangements typically range between 18 and 48 months. At the
time the Company enters into an arrangement, the Company assesses the
probability of collection and whether the arrangement fee is fixed or
determinable. The Company considers its history of collection without
concessions as well as whether each new transaction involves similar customers,
products and arrangement economics to ensure that the history developed under
previous arrangements remains relevant to current arrangements. If the fee is
not determined to be collectible, fixed or determinable, the Company will
initially defer the revenue and recognize when collection becomes probable,
which typically is when payment is due assuming all other conditions for revenue
recognition have been satisfied.
Allowance for Doubtful Accounts and Sales Returns Allowance: The Company
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 the Company after consideration of
factors such as the composition of the accounts receivable aging and bad debt
history. In addition, the Company maintains a sales returns allowance to reflect
estimated losses for sales returns and adjustments. Sales returns and
adjustments are generally due to incorrect ordering of product, general customer
satisfaction issues or incorrect billing. This allowance is established by the
Company using estimates based on historical experience.
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. 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.
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." 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,
--------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Expected volatility 60.0% 55.8% 50.9%
Risk-free interest rate 2.5% 3.9% 5.6%
Expected lives (in years) 4.0 4.0 4.0
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 2002 and 2001 was $8.17 and $6.36, respectively.
The weighted-average fair value of options granted under the 2002 Equity
Incentive Plan during fiscal 2003 and 2002 was $8.07 and $12.63, respectively.
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 1992 Employee 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, 2003, 2002 and 2001 are as follows (in
thousands, except per share data):
2003 2002 2001
---- ---- ----
Net income, as reported .................. $ 34,666 $ 28,827 $ 16,504
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects ...................... 7,533 6,821 4,764
-------- -------- ----------
Pro forma net income ..................... $ 27,133 $ 22,006 $ 11,740
======== ======== ==========
Earnings per share:
Basic - as reported ................ $ 1.16 $ 0.98 $ 0.59
======== ======== ==========
Basic - pro forma .................. $ 0.91 $ 0.75 $ 0.42
======== ======== ==========
Diluted - as reported .............. $ 1.12 $ 0.94 $ 0.57
======== ======== ==========
Diluted - pro forma ................ $ 0.88 $ 0.72 $ 0.40
======== ======== ==========
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 Notes M and N).
Derivatives: The Company from time to time holds foreign currency forward
exchange contracts having durations of no more 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 2003, 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 not material. As of September 30, 2003, the fair
value of these forward contracts was not material. In addition, the Company has
periodically entered into a limited number of call option arrangements. A call
option arrangement provides the Company an opportunity to lock in a repurchase
price for shares under the Company's stock repurchase program. There are no
dividend and liquidation preferences, participation rights, sinking-fund
requirements, unusual voting rights or any other significant terms pertaining to
these call option arrangements. The Company has classified the call option
arrangements as an equity instrument in accordance with the provisions of
Emerging Issues Task Force ("EITF") 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." A
call option matured during fiscal 2003. At maturity, the Company's stock price
exceeded the strike price of $16.67 per share and the Company received a return
of its cash investment and a premium totaling approximately $2.6 million, which
was credited to additional paid-in capital. If at maturity, the Company's stock
price was less than the strike price, the Company would use its cash investment
to purchase Company shares at a predetermined price. As of September 30, 2003,
there were no call option arrangements outstanding.
Newly Issued Accounting Standards:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." This statement provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based compensation. The
statement amends the disclosure requirements of FASB Statement No. 123 to
require prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. Kronos accounts for stock-based
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
complies with the disclosure provisions of FASB Statement No. 123. The
transition provisions are effective for fiscal years ending after December 15,
2002. The disclosure provisions are effective for interim periods beginning
after December 15, 2002. Kronos implemented the required disclosure provisions
in the three-month period ended March 29, 2003. The adoption of this statement
did not have any impact on Kronos' consolidated financial position, results of
operations or cash flows and Kronos does not anticipate making the voluntary
change to the fair value method of accounting for stock-based compensation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51." FIN No. 46
requires certain variable interest entities, or VIEs, to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 is
effective for all VIEs created or acquired after January 31, 2003.
In October 2003, the FASB issued FIN No. 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities." This FASB
Staff Position deferred the effective date for applying the provisions of FIN
No. 46 for interests held by public entities in variable interest entities or
potential variable interest entities created before February 1, 2003. A public
entity need not apply the provisions of FIN No. 46 to an interest held in a
variable interest entity or potential variable interest entity until the end of
the first interim or annual period ending after December 15, 2003 if both of the
following apply:
o The variable interest entity was created before February 1, 2003.
o The public entity has not issued financial statements reporting interests
in variable interest entities in accordance with FIN No. 46, other than
certain required disclosures.
Kronos currently has no contractual relationship or other business relationship
with a variable interest entity and therefore the adoption of FIN No. 46-6 will
not have a material effect on Kronos' consolidated financial position, results
of operations or cash flows.
NOTE B--Concentration of Credit Risk
The Company markets and sells its products through its direct sales
organization, independent resellers and an OEM agreement with ADP. The Company's
resellers 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 reseller'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.
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, 2003
Available-for-sale securities:
United States government
and agency debt securities $13,019 $ 57 $ 10 $13,066
Municipal debt securities 36,229 243 19 36,453
U.S. corporate securities 11,517 120 35 11,602
------- ------- ------- -------
$60,765 $ 420 $ 64 $61,121
======= ======= ======= =======
September 30, 2002
Available-for-sale securities:
United States government
and agency debt securities $ 5,605 $ 40 $ -- $ 5,645
Municipal debt securities 15,982 17 120 15,879
U.S. corporate securities 18,850 281 25 19,106
------- ------- ------- -------
$40,437 $ 338 $ 145 $40,630
======= ======= ======= =======
The Company recorded gross proceeds from the sale of available-for-sale
securities of $43.1 million, $22.5 million and $23.7 million in fiscal 2003,
2002 and 2001, respectively, and recorded a gross realized gain of $434,000 and
$298,000 in fiscal 2003 and 2002, respectively, and a gross realized loss of
$296,000 in fiscal 2001. In fiscal 2003, 2002 and 2001, the net unrealized gain
of $163,000, the net unrealized loss of $119,000, and the net unrealized gain of
$400,000, respectively, is included as a separate component of shareholders'
equity.
The amortized costs and estimated fair value of debt securities at September 30,
2003 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 $16,972 $17,056
Due after one year through two years 24,115 24,211
Due after two years through four years 18,490 18,671
Due after four years 1,188 1,183
--------- ---------
$60,765 $61,121
========= =========
NOTE D -Accounts Receivable
Accounts receivable consists of the following (in thousands):
September 30,
----------------------------------------
2003 2002 2001
-------- -------- --------
Trade accounts receivable ................. $ 92,108 $ 93,825 $ 88,202
Non-current trade accounts receivable ..... 14,435 11,386 12,679
-------- -------- --------
106,543 105,211 100,881
Less:
Allowance for doubtful accounts ........... 4,455 6,546 5,099
Allowance for sales returns and adjustments 3,378 3,151 3,524
-------- -------- --------
7,833 9,697 8,623
-------- -------- --------
$ 98,710 $ 95,514 $ 92,258
======== ======== ========
Non-current trade accounts receivable relate to balances not due within the next
12 months and are included in other assets.
Allowance activity consists of the following (in thousands):
September 30,
---------------------------------------
2003 2002 2001
------- ------- -------
Beginning balance .................. $ 9,697 $ 8,623 $ 7,462
Plus:
Provisions ......................... 1,183 924 2,357
Acquired accounts receivable reserve -- 1,628 --
Recoveries ......................... (1,077) (365) --
------- ------- -------
106 2,187 2,357
Less:
Write-offs ......................... (1,970) (1,113) (1,196)
------- ------- -------
$ 7,833 $ 9,697 $ 8,623
======= ======= =======
In fiscal 2001 provisions of $2,357,000 included reserves for specific accounts,
which were substantially recovered during fiscal 2003 and 2002. In fiscal 2002,
$1,628,000 was reserved for accounts receivable acquired via acquisitions and
recorded through purchase accounting. Charges against the allowances of
$1,970,000, $1,113,000, and $1,196,000 in fiscal 2003, 2002 and 2001,
respectively, principally relate to uncollectible accounts written off. Included
in the fiscal 2003 charges were $1,284,000 of write-offs of acquired accounts
receivable. 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 - Other Current Assets
Other current assets consists of the following (in thousands):
September 30,
--------------------------------
2003 2002
------- -------
Inventory $ 5,197 $ 6,492
Prepaid expenses 13,452 11,343
------- -------
Total $18,649 $17,835
======= =======
NOTE F--Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
September 30,
-------------------------
2003 2002
-------- -------
Land $ 2,810 $ 2,810
Building 13,522 13,522
Machinery, equipment and software 69,366 62,038
Furniture and fixtures 15,503 13,768
Leasehold improvements 6,925 5,870
-------- -------
108,126 98,008
Less accumulated depreciation 68,863 59,373
-------- -------
$ 39,263 $38,635
======== =======
NOTE G--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 September 30, 2003, the Company completed
its annual testing of the impairment of goodwill, as of June 29, 2003. As a
result of the test, the Company has concluded that no impairment of goodwill
existed as of June 29, 2003. Therefore, as a result of this impairment test, no
impairment was recorded in fiscal 2003.
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 fiscal year ended September 30, 2001 (in
thousands, except per share data).
Twelve Months Ended
September 30,
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
Reported net income ....... $ 34,666 $ 28,827 $ 16,504
Add back: Goodwill
amortization .............. -- -- 3,544
---------- ---------- ----------
Adjusted net income ... $ 34,666 $ 28,827 $ 20,048
========== ========== ==========
Basic earnings per share:
Reported net income ... $ 1.16 $ 0.98 $ 0.59
Goodwill amortization . -- -- 0.13
---------- ---------- ----------
Adjusted net income ... $ 1.16 $ 0.98 $ 0.71
========== ========== ==========
Diluted earnings per share:
Reported net income ... $ 1.12 $ 0.94 $ 0.57
Goodwill amortization . -- -- 0.12
---------- ---------- ----------
Adjusted net income ... $ 1.12 $ 0.94 $ 0.69
========== ========== ==========
Certain earnings per share amounts may not sum to the total due to rounding.
Acquired intangible assets subject to amortization are presented in the
following table (in thousands).
Weighted
Average Gross
Life in Carrying Accumulated Net Book
Years Value Amortization Value
-------- -------- ------------ --------
As of September 30, 2003:
Intangible assets:
Customer related ........ 9.7 $21,327 $ 9,261 $12,066
Maintenance relationships 11.9 8,092 1,101 6,991
Tax benefits ............ 10.7 2,144 527 1,617
Non-compete agreements .. 4.0 4,060 1,796 2,264
------- ------- -------
Total intangible assets ..... $35,623 $12,685 $22,938
======= ======= =======
As of September 30, 2002:
Intangible assets:
Customer related ........ 9.5 $19,166 $ 6,851 $12,315
Maintenance relationships 11.9 6,267 535 5,732
Tax benefits ............ 10.7 2,127 309 1,818
Non-compete agreements .. 5.1 1,908 1,228 680
------- ------- -------
Total intangible assets ..... $29,468 $ 8,923 $20,545
======= ======= =======
The amount of goodwill acquired during fiscal 2003 and 2002 is $14.3 million and
$22.0 million, respectively.
During fiscal 2003, the Company recorded amortization expense for intangible
assets of $3.5 million. The estimated annual amortization expense for intangible
assets for the next five fiscal years is as follows (in thousands):
Fiscal Year Ending Estimated Annual
September 30, Amortization Expense
------------------ --------------------
2004 $3,791
2005 3,293
2006 2,865
2007 2,476
2008 2,370
NOTE H--Acquisitions
On May 16, 2003, the Company completed the acquisition of the Abra Enterprise
customer base from Best Software. The aggregate purchase price was not material
to the Company's financial position. The results of operations related to the
purchase of these customers, which is 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 gained access to the
existing Abra Enterprise customers through its direct sales and service
organizations, which broadens the Company's presence in the human resources and
payroll market. In addition, the Company gained access to the existing
maintenance revenue stream from these customers. The deferred revenue related to
the maintenance revenue stream, which was recorded at fair value, was recognized
as the Company had assumed a legal performance obligation as described in EITF
01-03.
On May 6, 2003, the Company completed the acquisition of certain assets of
Simplex International Pty Ltd. ("Simplex International"). Based in Australia,
Simplex International was engaged in the marketing, selling, supporting and
maintaining integrated workforce management software solutions. The aggregate
purchase price was not material to the Company's financial position. The results
of Simplex International'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 expects
to increase its presence in the mid-market sector in Australia, through its
subsidiary in Australia, Kronos Australia Pty. Ltd. The mid market sector
includes companies with between 250 and 1,000 employees. In connection with the
acquisition, the Company assumed obligations to provide services associated with
maintenance contracts and obligations to provide professional services,
primarily installation services. The deferred revenue related to the maintenance
and professional services revenue streams, which was recorded at fair value, was
recognized as the Company had assumed a legal performance obligation as
described in EITF 01-03.
On March 11, 2003, the Company completed the acquisition of certain assets of
Ban-koe Systems, Inc. ("BKS"), the former Minnesota-based Kronos reseller. The
aggregate purchase price was not material to the Company's financial position.
The results of BKS's operations, which are not material to the Company's results
of operations, have been included in the consolidated financial statements since
that date. BKS 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
reseller relationship. As a result of the acquisition, the Company gained access
to existing and prospective customers in several states (including Michigan,
Illinois, Iowa, Wisconsin, and Minnesota) through its direct sales and service
organizations, as well as access to the existing maintenance revenue stream from
BKS customers. In connection with the acquisition, the Company assumed
obligations to provide services associated with maintenance contracts and
obligations to provide professional services, primarily installation services.
The deferred revenue related to the maintenance and professional services
revenue streams, which was recorded at fair value, was recognized as the Company
had assumed a legal performance obligation as described in EITF 01-03.
On January 20, 2003, the Company completed the acquisition of the maintenance
agreements of DataPro Solutions, Inc. ("DP"), the former Washington State-based
Kronos reseller. The aggregate purchase price was not material to the Company's
financial position. The results of DP operations, which are not material to the
Company's results of operations, have been included in the consolidated
financial statements since that date. DP 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 reseller relationship. As a result of the acquisition, the
Company gained access to the existing maintenance revenue stream from DP
customers. The deferred revenue related to the maintenance revenue stream, which
was recorded at fair value, was recognized as the Company had assumed a legal
performance obligation as described in EITF 01-03.
On November 20, 2002, the Company completed the acquisition of certain assets
and the ongoing business operations of Hi-Tek Special Systems, Inc. ("HT"), the
former Texas-based Kronos reseller. The aggregate purchase price was not
material to the Company's financial position. The results of HT's operations,
which are not material to the Company's results of operations, have been
included in the consolidated financial statements since that date. HT was
engaged in the sale and service of employee time and attendance, employee
scheduling, data collection and labor management hardware and software systems,
including the resale of the Company's products through a reseller relationship.
As a result of the acquisition, the Company gained access to existing and
prospective customers in the Texas, New Mexico and Mexico area through its
direct sales and service organizations, as well as access to the existing
maintenance revenue stream from HT customers. In connection with the
acquisition, the Company assumed obligations to provide services associated with
maintenance contracts and obligations to provide professional services,
primarily installation services. The deferred revenue related to the maintenance
and professional services revenue streams, which was recorded at fair value, was
recognized as the Company had assumed a legal performance obligation as
described in EITF 01-03.
On December 28, 2001, the Company completed the acquisition of certain assets
and the ongoing business operations of the Integrated Software Business of
SimplexGrinnell's Workforce Solutions Division ("SimplexGrinnell"). The
aggregate purchase price was $22.1 million in cash. The results of
SimplexGrinnell's operations have been included in the consolidated financial
statements since that date. SimplexGrinnell was engaged in the development,
sales and support of integrated workforce management software solutions. As a
result of the acquisition, the Company has increased its presence in the
mid-market sector, which includes companies with between 250 and 1,000
employees.
The SimplexGrinnell transaction was accounted for under the purchase method of
accounting and accordingly, the assets and liabilities acquired were recorded at
their estimated fair values at the effective date of the acquisition. The
goodwill recognized is deductible for income tax purposes. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of the acquisition (in thousands).
At December 28, 2001
--------------------
Accounts receivable $ 6,678
Customer related intangible asset (amortized over 1,100
12 years)
Maintenance relationships intangible asset 2,500
(amortized over 12 years)
Goodwill 17,655
Other assets 768
-------
Total assets acquired 28,701
Deferred professional services revenue (1,564)
Deferred maintenance revenue (4,747)
Other liabilities (340)
-------
Total liabilities assumed (6,651)
-------
Net assets acquired $22,050
=======
In connection with the acquisition of the assets and liabilities of
SimplexGrinnell in December 2001, the Company acquired obligations to provide
services associated with maintenance contracts and obligations to provide
professional services, primarily installation services. The amounts of deferred
revenue ascribed to acquired maintenance obligations and professional services
amounts to $4.8 million and $1.6 million, respectively. The deferred revenue,
which was recorded at fair value, was recognized as the Company had assumed a
legal performance obligation as described in EITF 01-03. The acquired
maintenance arrangements required the Company to provide phone support, bug
fixes and unspecified upgrades for the remaining contract terms. The acquired
professional services obligations required the Company to provide installation
services.
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).
Twelve Months Ended
September 30,
(unaudited)
---------------------------
2002 2001
-------- --------
Total revenues $348,946 $321,699
Net income 27,664 12,732
Earnings per share - basic $0.94 $0.45
Earnings per share - diluted $0.91 $0.44
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.
Certain agreements related to the Company's acquisitions contain provisions that
require the Company to make a guaranteed payment and/or contingent payments
based upon profitability of the business unit or if specified minimum revenue
requirements are met. These provisions expire at various dates through 2006.
Guaranteed payments are accrued at the time of the acquisition and are included
in the purchase price allocation. Contingent payments due under the terms of the
agreements are recognized when earned and are principally recorded as goodwill.
However, under certain circumstances, a portion of the contingent payment may be
recorded as compensation expense. During fiscal 2003, 2002, and 2001, $2.6
million, $1.0 million and $1.1 million, respectively, of contingent payments
were earned, all of which were recorded as goodwill, except for approximately
$0.2 million and $0.3 million in fiscal 2003 and 2001, respectively, which were
recorded as compensation expense. There are several contingent payment
arrangements currently outstanding, on which the Company may have future payment
obligations, contingent upon the achievement of various financial performance
goals. As of September 30, 2003, the Company has the obligation to pay $3.7
million in guaranteed payments, which is included in the September 30, 2003
balance sheet as accrued expenses and other liabilities. These payments will be
made at various dates through fiscal 2006.
NOTE I--Capitalized Software
Capitalized software and accumulated amortization consists of the following (in
thousands):
September 30,
-----------------------
2003 2002
-------- --------
Internal development costs $ 71,182 $ 59,054
Acquired from third parties 4,051 3,934
-------- --------
75,233 62,988
Less accumulated amortization 52,221 40,751
-------- --------
$23,012 $22,237
======== ========
Total internal development costs capitalized were $12,128,000, $11,216,000 and
$11,059,000 in fiscal 2003, 2002 and 2001, respectively. Amortization of
capitalized software amounted to $11,470,000, $9,511,000 and $8,249,000 in
fiscal 2003, 2002 and 2001, respectively. Total research and development
expenses charged to operations amounted to $20,200,000, $19,700,000 and
$17,300,000 in fiscal 2003, 2002 and 2001, respectively. Total expenses for
engineering activities related to the maintenance of existing products charged
to operations amounted to $18,300,000, $17,300,000 and $16,000,000 in fiscal
2003, 2002 and 2001, respectively.
NOTE J -Special Charge
A special charge in the amount of $3.7 million was recorded during fiscal 2001.
In the second quarter of fiscal 2001, the Company recorded a special charge in
the amount of $3.0 million related to the termination of the Company's
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. In addition, $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. As of September 30, 2002, the Company did not have any
remaining liability related to the special charge.
NOTE K--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 non-cancelable terms of one year or more are as
follows (in thousands):
Operating Lease
Fiscal Year Commitments
-------------------------------------------------
2004 $ 9,441
2005 8,320
2006 6,221
2007 4,336
2008 2,028
Thereafter 4,319
-------
$34,665
=======
Rent expense was $12,066,000, $11,704,000 and $9,715,000 in fiscal 2003, 2002
and 2001, respectively.
NOTE L--Income Taxes
The provision for income taxes consists of the following (in thousands):
Year Ended September 30,
---------------------------------
2003 2002 2001
------- ------- -------
Current:
Federal ................................................................ $14,877 $ 8,313 $ 5,280
State .................................................................. 1,841 1,694 1,140
Foreign ................................................................ 954 898 491
------- ------- -------
17,672 10,905 6,911
------- ------- -------
Deferred:
Federal ................................................................ 1,941 4,164 1,729
State .................................................................. 282 595 247
------- ------- -------
2,223 4,759 1,976
------- ------- -------
$19,895 $15,664 $ 8,887
======= ======= =======
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,
-----------------------
2003 2002
-------- --------
Deferred tax assets:
Accounts receivable reserves ........................... $ 2,545 $ 2,115
Inventory reserves ..................................... 557 706
Accrued expenses ....................................... 2,813 1,688
Deferred maintenance revenues .......................... 2,414 4,695
Intangible and goodwill-related amortization ........... 253 1,581
Net operating loss carryforwards of foreign subsidiaries 120 125
-------- --------
Total deferred tax assets .............................. 8,702 10,910
Less valuation allowance ............................. 120 125
-------- --------
8,582 10,785
Deferred tax liabilities:
Capitalized internal development costs ................. (8,185) (7,893)
Other .................................................. (160) (564)
-------- --------
Net deferred tax assets .............................. 237 2,328
Less non-current portion in other liabilities ........ 8,190 4,565
-------- --------
Net current deferred tax asset ....................... $ 8,427 $ 6,893
======== ========
The effective tax rate differed from the United States statutory rate as
follows:
Year Ended September 30,
----------------------------
2003 2002 2001
---- ---- ----
Statutory rate 35% 35% 35%
State income taxes, net of federal
income tax benefit 3 3 3
Goodwill --- --- 2
Tax exempt interest (1) (1) (1)
Foreign tax rate differentials --- 1 ---
Income tax credits (2) (3) (6)
Other 1 --- 2
--- --- ---
36% 35% 35%
=== === ===
As of September 30, 2003, $314,000 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 has fully reserved for the net operating loss carryforwards due to the
uncertainty of their realizability.
The Company made income tax payments of $6,796,000, $6,054,000, and $3,641,000
in fiscal 2003, 2002, and 2001, respectively.
NOTE M--Net Income Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year Ended September 30,
-------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income (in thousands) ... $ 34,666 $ 28,827 $ 16,504
=========== =========== ===========
Weighted-average shares ..... 29,834,942 29,413,316 28,134,765
Effect of dilutive securities:
Employee stock options ...... 1,168,077 1,130,496 884,727
----------- ----------- -----------
Adjusted weighted-average shares
and assumed conversions ..... 31,003,019 30,543,812 29,019,492
=========== =========== ===========
Basic earnings per share ....... $ 1.16 $ 0.98 $ 0.59
=========== =========== ===========
Diluted earnings per share ..... $ 1.12 $ 0.94 $ 0.57
=========== =========== ===========
NOTE N--Capital Stock, 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.
The Company has periodically entered into a limited number of call option
arrangements. A call option arrangement provides the Company an opportunity to
lock in a repurchase price for shares under the Company's stock repurchase
program. There are no dividend and liquidation preferences, participation
rights, sinking-fund requirements, unusual voting rights or any other
significant terms pertaining to these call option arrangements. The Company has
classified the call option arrangements as an equity instrument in accordance
with the provisions of EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." A
call option matured during fiscal 2003. At maturity, the Company's stock price
exceeded the strike price of $16.67 per share and the Company received a return
of its cash investment and a premium totaling approximately $2.6 million, which
was credited to additional paid-in capital.
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, 2003, the
Company's Board of Directors had authorized the repurchase of 5,437,500 common
shares, of which 964,912 remain to be repurchased. Under the stock repurchase
program, the Company repurchased 535,050, 814,425 and 532,012 common shares in
fiscal 2003, 2002 and 2001, respectively, at a cost of $13,212,000, $21,301,000
and $8,671,000, respectively. In addition, the Company is also authorized to and
does repurchase stock held for at least six months from employees related to the
exercise of stock options.
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 O--Employee Benefit Plans
Stock Option Plans: In February 2002, the stockholders approved the adoption of
the 2002 Stock Incentive Plan. Under this plan, the Compensation Committee of
the Board of Directors may grant awards in the form of stock options as defined
by the plan. During fiscal 2003 and 2002, under the 2002 Stock Incentive Plan,
the Company granted stock options to purchase 1,242,600 and 114,225 shares,
respectively, at a purchase price equal to the fair value of the common stock at
the date of grant. Options granted in fiscal 2003 and 2002 under the 2002 Stock
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. As of September 30, 2003, there are 1,229,025 options
available for grant.
The 1992 Equity Incentive Plan, which expired under its terms on March 27, 2002,
also enabled the Compensation Committee of the Board of Directors of the Company
to grant awards in the form of options as defined in the plan. During fiscal
2002 and 2001, the Company granted under the plan stock options to purchase
1,258,013 and 1,193,850 shares, respectively, of common stock at a purchase
price equal to the fair value of the common stock at the date of grant. Options
granted in fiscal 2002 and 2001 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.
No further grants may be made under this plan.
The Company also had several nonqualified and incentive stock option plans
adopted from 1979 through 1987. No additional options were granted under these
plans since fiscal 1992, all outstanding options have been exercised and all the
plans have expired.
The following schedule summarizes the changes in stock options issued under
various plans for the three fiscal years in the period ended September 30, 2003.
Options exercisable under the plans were 644,598, 880,110 and 1,042,855 in
fiscal 2003, 2002 and 2001, respectively.
Weighted - Average
Exercise Price Exercise Price
Number of Shares Per Share Per Share
---------------- ------------------ --------------
Outstanding at
September 30, 2000 4,400,006 $10.56 $1.45 - 28.89
Granted .......... 1,193,850 14.25 12.42 - 17.86
Exercised ........ (1,193,559) 7.46 1.45 - 16.95
Canceled ......... (239,796) 12.34 5.19 - 16.95
---------- ------ --------------
Outstanding at
September 30, 2001 4,160,501 12.41 1.48 - 28.89
Granted .......... 1,372,238 18.89 17.77 - 29.33
Exercised ........ (1,424,016) 9.95 1.48 - 18.45
Canceled ......... (146,942) 14.67 5.19 - 26.61
---------- ------ --------------
Outstanding at
September 30, 2002 3,961,781 15.45 8.19 - 29.33
Granted .......... 1,242,600 16.91 16.57 - 27.98
Exercised ........ (1,415,399) 12.95 8.19 - 27.55
Cancelled ........ (149,433) 16.22 8.19 - 27.07
---------- ------ --------------
Outstanding at
September 30, 2003 3,639,549 $16.89 $10.22 - 29.33
========== ====== ==============
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, 2003:
Outstanding Exercisable
------------------------------------ --------------------
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Exercise Price Number Contractual Price Per Number Price Per
Per Share of Shares Life Share of Shares Share
- -------------- --------- ----------- --------- --------- ---------
$10.22 - 13.55 273,906 1.3 years $12.42 118,761 $12.41
13.75 - 15.09 576,336 1.6 years 14.34 134,670 14.34
15.33 - 17.07 1,596,287 2.7 years 16.59 195,957 16.65
17.77 - 23.47 972,670 2.5 years 17.77 142,092 17.77
24.21 - 29.33 220,350 2.9 years 27.42 53,118 28.49
- -------------- --------- ---------- --------- --------- ---------
$10.22 - 29.33 3,639,549 2.4 years $16.89 644,598 $16.61
============== ========= ========== ========= ========= =========
Stock Purchase Plan: In February 2003, the stockholders approved the adoption of
the 2003 Employee Stock Purchase Plan. Under this 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. No shares were issued under this plan during fiscal
2003.
In accordance with the 1992 Employee Stock Purchase Plan, which expired by its
terms on June 30, 2003, eligible employees could 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 period. During fiscal
2003, 295,752 shares were issued to employees at prices ranging from $16.43 to
$20.97 per share.
At September 30, 2003, a total of 5,918,574 shares of common stock were reserved
for issuance. Included in this amount are 2,546,625 shares for the 2002 Stock
Incentive Plan, 2,321,949 shares for the 1992 Equity Incentive Plan, and
1,050,000 shares for the 2003 Employee Stock Purchase Plan.
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 $2,602,000, $2,477,000 and $2,210,000 in fiscal
2003, 2002 and 2001, respectively.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Kronos Incorporated
We have audited the accompanying consolidated balance sheets of Kronos
Incorporated as of September 30, 2003 and 2002, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended September 30, 2003. 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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2003, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note G to the financial statements, the Company changed its
method of accounting for acquisitions consummated subsequent to June 30, 2001
and effective October 1, 2001 the Company changed its method of accounting for
goodwill.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
October 24, 2003
Exhibit Index
Exhibit
No. Description
- ------- -----------
3.1(5) Restated Articles of Organization of the Registrant, as amended.
3.2* Amended and Restated By-laws of the Registrant.
4.1* Specimen Stock Certificate.
10.1(5)(6) 1992 Equity Incentive Plan, as amended and restated.
10.2(6)(10) 2002 Employee Stock Incentive Plan
10.3(6)(11) Kronos Incorporated 2003 Employee Stock Purchase Plan as amended.
10.4(1) Lease dated November 16, 1993, between Teachers Realty Corporation
and the Registrant, relating to premises leased in Chelmsford, MA.
10.5(2) Lease dated August 8, 1995, between Principal Mutual Life Insurance
Company and the Registrant, relating to premises leased in
Chelmsford, MA.
10.6(4) Fleet Bank Letter Agreement and Promissory Note dated January 1,
1997, relating to amendment of $3,000,000 credit facility.
10.7(8) Software License, Hardware Purchase and Support Agreement dated
July 24, 2003 between ADP, Inc. and the Registrant, superceding the
Restated Software License & Support & Hardware Purchase Agreement
dated September 25, 2000.
10.8* Form of Indemnity Agreement entered into among the Registrant and
Directors of the Registrant.
10.9(9) Lease Agreement Between W/9TIB Real Estate Limited Partnership, as
Landlord, and Kronos Incorporated, as Tenant Dated 2/26/99
10.10(7) Construction Agreement Between Cranshaw Construction of New England
Limited Partnership and Kronos Incorporated Dated March 10, 1999.
10.11(7) Agreement of Purchase and Sale Beyond Between W/9TIB Real Estate
Limited Partnership and Kronos Incorporated Dated March 29, 1999.
10.12(6) Form of Senior Executive Retention Agreement with
accompanying schedule.
10.13(8)(9) Asset Purchase Agreement, dated as of December 28, 2001 by and
among the Registrant and SimplexGrinnell L.P., Tyco International
Canada, Ltd., Simplex International Pty. Ltd., and ADT Services
A.G.
10.14(8)(10) Best Software Inc./Kronos Incorporated Agreement, dated as of
March 15, 2002 by and between Kronos Incorporated and Best
Software, Inc.
14.1 Code of Ethics of Registrant
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-4(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended.
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-4(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* 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, 1993.
(2) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30,1995.
(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended September 30, 1996.
(4) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended December 28, 1996.
(5) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 4, 1998.
(6) Management contract or compensatory plan or arrangement filed as an exhibit
to this Form 10-K.
(7) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 3, 1999.
(8) Confidential treatment was requested for certain portions of this
agreement.
(9) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended December 29, 2001.
(10) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 30, 2002.
(11) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended June 28, 2003.