SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20109
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Kronos Incorporated
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2640942
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
297 Billerica Road, Chelmsford, MA 01824
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(Address of principal executive offices) (Zip Code)
(978) 250-9800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of July 28, 2001, 12,579,925 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
KRONOS INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION Page
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Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the Three
and Nine Months Ended June 30, 2001 and July 1, 2000 1
Condensed Consolidated Balance Sheets at June 30, 2001
and September 30, 2000 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 2001 and July 1, 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
UNAUDITED
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------------- --------------- ------------- ------------
Net revenues:
Product ........................................... $ 39,524 $ 38,602 $ 105,614 $ 106,845
Service ........................................... 35,596 29,531 101,332 87,722
------------ ------------ ------------ ------------
75,120 68,133 206,946 194,567
Cost of sales:
Product ........................................... 8,311 8,729 24,132 24,586
Service ........................................... 19,194 17,813 56,663 51,068
------------ ------------ ------------ ------------
27,505 26,542 80,795 75,654
------------ ------------ ------------ ------------
Gross profit .................................. 47,615 41,591 126,151 118,913
Operating expenses and other income:
Sales and marketing ............................... 25,974 24,147 72,837 68,492
Engineering, research and development ............. 9,107 7,245 25,443 21,834
General and administrative ........................ 4,954 4,409 13,570 12,853
Amortization of intangible assets ................. 1,860 1,704 5,447 4,842
Other income, net ................................. (1,621) (1,171) (4,333) (4,214)
Special charge .................................... 698 -- 3,689 --
------------ ------------ ------------ ------------
40,972 36,334 116,653 103,807
Income before income taxes .................... 6,643 5,257 9,498 15,106
Income tax provision ................................... 2,325 1,945 3,324 5,589
------------ ------------ ------------ ------------
Net income .................................... $ 4,318 $ 3,312 $ 6,174 $ 9,517
============ ============ ============ ============
Net income per common share:
Basic ......................................... $ 0.35 $ 0.27 $ 0.50 $ 0.76
============ ============ ============ ============
============ ============
Diluted ....................................... $ 0.34 $ 0.26 $ 0.48 $ 0.73
============ ============ ============ ============
Average common and common equivalent shares outstanding:
Basic ......................................... 12,500,012 12,404,310 12,455,724 12,460,641
============ ============ ============ ============
Diluted ....................................... 12,776,520 12,734,592 12,816,501 13,016,507
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORP0RATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
UNAUDITED
June 30, September 30,
2001 2000
------------ --------------
ASSETS
Current assets:
Cash and equivalents .................................................... $ 20,470 $ 23,201
Marketable securities ................................................... 31,310 10,788
Accounts receivable, less allowances of $7,305
at June 30, 2001 and $6,986 at September 30, 2000 .................... 59,336 71,493
Deferred income taxes ................................................... 5,991 5,916
Other current assets .................................................... 17,373 13,750
--------- ---------
Total current assets ............................................. 134,480 125,148
Property, plant and equipment, net ......................................... 35,805 37,082
Marketable securities ...................................................... 16,400 17,450
Excess of cost over net assets of businesses acquired, net ................. 29,589 29,421
Deferred software development costs, net ................................... 16,023 13,788
Other assets ............................................................... 13,732 16,600
--------- ---------
Total assets ...................................................... $ 246,029 $ 239,489
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 6,786 $ 8,278
Accrued compensation .................................................... 20,321 19,879
Accrued expenses and other current liabilities .......................... 10,914 14,339
Deferred professional service revenues .................................. 24,979 23,451
Deferred maintenance revenues ........................................... 51,906 48,483
--------- ---------
Total current liabilities ......................................... 114,906 114,430
Deferred maintenance revenues .............................................. 12,145 15,814
Other liabilities .......................................................... 1,747 1,455
Shareholders' equity:
Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares,
no shares issued and outstanding ..................................... -- --
Common Stock, par value $.01 per share: authorized 20,000,000 shares,
12,634,728 shares issued at June 30, 2001 and September 30, 2000 ...... 126 126
Additional paid-in capital .............................................. 17,290 23,842
Retained earnings ....................................................... 104,018 97,844
Accumulated other comprehensive loss .................................... (1,385) (1,366)
Cost of Treasury Stock (78,129 shares and 310,038
shares at June 30, 2001 and September 30, 2000, respectively) ........ (2,818) (12,656)
--------- ---------
Total shareholders' equity ........................................ 117,231 107,790
--------- ---------
Total liabilities and shareholders' equity ........................ $ 246,029 $ 239,489
========= =========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Nine Months Ended
---------------------------
June 30, July 1,
2001 2000
------------ ----------
Operating activities:
Net income .................................................................. $ 6,174 $ 9,517
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation ........................................................ 5,986 5,826
Amortization of excess of cost over net assets of businesses acquired 5,447 4,842
Amortization of deferred software development costs ................. 6,257 5,356
Provision for deferred income taxes ................................. 1,171 (3,808)
Changes in certain operating assets and liabilities:
Accounts receivable, net ......................................... 11,979 2,685
Deferred maintenance revenue ..................................... (1,978) 2,115
Accounts payable, accrued compensation
and other liabilities ........................................ (3,452) (5,543)
Long term investment in leases ................................... 2,072 2,888
Non cash portion of special charge ............................... 1,300 --
Other ............................................................ (3,162) (1,863)
Tax benefit from exercise of stock options .......................... 2,528 4,645
-------- --------
Net cash and equivalents provided by operating activities .... 34,322 26,660
Investing activities:
Purchase of property, plant and equipment ................................... (4,606) (16,959)
Capitalization of software development costs ................................ (9,003) (7,246)
(Increase) decrease in marketable securities ............................... (19,470) 12,610
Acquisitions of businesses, net of cash acquired ............................ (4,311) (9,009)
-------- --------
Net cash and equivalents used in investing activities ........ (37,390) (20,604)
Financing activities:
Net proceeds from exercise of stock option and employee stock
purchase plans .......................................................... 8,357 7,069
Purchase of treasury stock .................................................. (7,833) (22,503)
Proceeds from sale of put options ........................................... -- 169
-------- --------
Net cash and equivalents used in financing activities ....... 524 (15,265)
Effect of exchange rate changes on cash and equivalents .......................... (187) (285)
-------- --------
Decrease in cash and equivalents ................................................. (2,731) (9,494)
Cash and equivalents at the beginning of the period .............................. 23,201 20,148
-------- --------
Cash and equivalents at the end of the period .................................... $ 20,470 $ 10,654
======== ========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - General
The accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting of normal recurring accruals that management
of Kronos Incorporated (the "Company") considers necessary for a fair
presentation of the Company's financial position and results of operations as of
and for the interim periods presented pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures in these financial
statements are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements for the fiscal year ended September
30, 2000. The results of operations for the three and nine months ended June 30,
2001 are not necessarily indicative of the results for a full fiscal year.
Certain reclassifications have been made in the accompanying consolidated
financial statements in order to conform to the fiscal 2001 presentation.
Note B - Newly Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. 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 will apply
the new rules on accounting for business combinations and goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002. For
acquisitions completed after June 30, 2001, the Company will apply the new rules
beginning in the fourth quarter of fiscal year 2001. The Company has not yet
determined the effect that the application of the non-amortization provisions of
the Statements will have on net income. During fiscal year 2002, the Company
will perform the first of the required impairment tests of goodwill as of
October 1, 2001 and has not yet determined what the effect of these tests will
be on earnings and financial position of the Company.
NOTE C - Fiscal Quarters
The Company utilizes a system of fiscal quarters. Under this system, the
first three quarters of each fiscal year end on a Saturday. However, the fourth
quarter of each fiscal year will always end on September 30. Because of this,
the number of days in the first quarter (91 days in fiscal 2001 and 93 days in
fiscal 2000) and fourth quarter (92 days in fiscal 2001 and 91 days in fiscal
2000) of each fiscal year varies from year to year. The second and third
quarters of each fiscal year will be exactly thirteen weeks long. This policy
does not have a material effect on the comparability of results of operations
between quarters.
Note D - Special Charge
A special charge in the amount of $700,000 was recorded in this quarter
related to termination costs from a reduction in workforce of approximately 90
employees. At June 30, 2001, the outstanding liability related to this charge
was approximately $100,000, which is anticipated to be paid within the next
three months.
During the second quarter of 2001, the Company commenced the shut down of
its Crosswinds Technology Group operations located in Santa Cruz, California,
which resulted in a $3.0 million charge to operating income in that quarter. The
charge included $1.6 million in termination costs, $1.3 million for the write
off of intangible assets, and $100,000 in other costs. Approximately 19
employees were affected by this action. Of the $1.7 million liability recorded
in March 2001, $1.2 million remains outstanding as of June 30, 2001. The Company
expects to settle these liabilities within the next nine months.
The components of the liabilities related to the second and third quarter
special charges are listed below.
Accrual for special charges (in thousands):
Balance at Additional Cash Balance at
Description March 31, Charges Outlays June 30,
----------- 2001 2001
---------- ---------- --------- ----------
Termination costs $ 1,600 $ 700 $(1,100) $ 1,200
Other costs ..... 100 -- -- 100
------- ------- ------- -------
Total accrual ... $ 1,700 $ 700 $(1,100) $ 1,300
======= ======= ======= =======
NOTE E - Comprehensive Income
For the three and nine months ended June 30, 2001 and July 1, 2000 comprehensive
income consisted of the following (in thousands):
Three Months Ended Nine Months Ended
----------------------- -----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
--------- ---------- --------- --------
Comprehensive income:
Net income ...................... $ 4,318 $ 3,312 $ 6,174 $ 9,517
Cumulative translation adjustment 216 (236) (325) (545)
Unrealized (loss)gain
on .............................. (100) (206) 306 (206)
available-for-sale securities
------- ------- ------- -------
Total comprehensive income .......... $ 4,434 $ 2,870 $ 6,155 $ 8,766
======= ======= ======= =======
NOTE F - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income (in thousands) ...... $ 4,318 $ 3,312 $ 6,174 $ 9,517
=========== =========== =========== ===========
Weighted-average shares ........ 12,500,012 12,404,310 12,455,724 12,460,641
Effect of dilutive securities:
Put options ................. -- -- -- 10,266
Employee stock options ...... 276,508 330,282 360,777 545,600
----------- ----------- ----------- -----------
Adjusted weighted-average shares
and assumed conversions ..... 12,776,520 12,734,592 12,816,501 13,016,507
=========== =========== =========== ===========
Basic earnings per share ....... $ 0.35 $ 0.27 $ 0.50 $ 0.76
=========== =========== =========== ===========
Diluted earnings per share ..... $ 0.34 $ 0.26 $ 0.48 $ 0.73
=========== =========== =========== ===========
G. Subsequent Event
On July 1, 2001, the Company acquired substantially all of the assets of a
competing provider of labor management solutions to the U.S. healthcare
industry. Cash held in escrow at June 30, 2001, pending the completion of this
acquisition, amounted to $10.5 million and included $1.5 million for the
prepayment of certain account receivable balances. This acquisition will be
accounted using the purchase method of accounting and will not materially impact
the Company's results of operations or financial condition. As a result, no pro
forma information has been presented.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This discussion includes certain forward-looking statements about Kronos'
business and its expectations, including statements relating to demand for
products and services, revenue growth rates and gross margin, management of
dealer channels, future acquisitions and available cash, investments and
operating cash flow. Any such statements are subject to risk that could cause
the actual results to vary materially from expectations. For a further
discussion of the various risks that may affect Kronos' business and
expectations, see "Certain Factors That May Affect Future Operating Results" at
the end of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Revenues. Revenues for the three and nine months ended June 30, 2001 were
$75.1 million and $206.9 million, respectively, as compared to $68.1 million and
$194.6 million for the comparable periods in the prior year. Revenue growth in
the three and nine months ended June 30, 2001 were 10% and 6%, respectively, as
compared to 1% and 7% growth in the comparable periods of the prior year. The
revenue growth rate experienced in the third quarter of fiscal 2001 compares
favorably to the comparable quarter of the prior year principally due to the
unusually low growth rate experienced in the third quarter of fiscal 2000.
Although the revenue growth rate experienced in the first nine months of fiscal
2001 is comparable to the growth rate experienced in the same period of the
prior year, the revenue growth rate experienced from the second quarter of
fiscal 2000 through the first quarter of fiscal 2001 was nominal due principally
to the transitory impact on demand for Kronos' products and services as a result
of Year 2000 compliance efforts and the broad economic downturn. The revenue
growth rates experienced in the second and third quarters of fiscal 2001 have
improved in comparison to the preceding four quarters, principally due to demand
for Kronos' services. Management believes that demand for Kronos' products and
services continues to exist. Although, the revenue growth rate in the fourth
quarter is anticipated to be positive, uncertainty exists given the broad
economic downturn and the possibility of companies postponing technology
spending.
Product revenues for the quarter increased 2% to $39.5 million as compared
to $38.6 million and a product revenue decline of 12% in the third quarter of
fiscal 2000. Product revenues for the first nine months of fiscal 2001 declined
1% to $105.6 million compared to $106.8 million and a product revenue decline of
9% in the first nine months of fiscal 2000. The product revenue growth
experienced in the third quarter was principally the result of customer demand
in Kronos' direct sales channel. Product revenues from Kronos' independent
dealer channel in the third quarter of fiscal 2001 were comparable to revenues
in the same quarter of the prior year. Management continues to believe that
given the increased sophistication of Kronos' products and the related
heightened need for pre-sales technological support and other sales support, the
dealer channel's sales cycle requires greater management and participation by
Kronos. To address this trend, management anticipates expending greater
resources to assist the dealer channel in the short term and increasing Kronos'
emphasis on direct sales in the longer term.
Service revenues for the third quarter of fiscal 2001 increased to $35.6
million as compared to $29.5 million in the third quarter of fiscal 2000.
Service revenues for the first nine months of fiscal 2001 were $101.3 million as
compared to $87.7 million for the first nine months of the prior year. Service
revenues grew at a rate of 21% and 15% during the three and nine month periods
ended June 30, 2001, respectively. The growth in service revenues in these
periods reflects an increase in the level of professional services delivered due
to more effective management of resources as compared to the same period in the
prior year. The growth in service revenues in the third quarter of fiscal 2001
also reflects an increase in maintenance revenue from expansion of the installed
base, increased level of services sold to the installed base and, to a lesser
extent, incremental service revenues resulting from Kronos' acquisitions over
the past four quarters. Service revenues grew at a rate of 27% and 37% in the
three and nine month periods ended July 1, 2000, respectively. The unusually
high service revenue growth rate experienced in these periods is attributable to
an increase in maintenance revenue from expansion of the installed base due to
the accelerated product revenue growth experienced in fiscal 1999 because of
demand for new products and upgrades resulting from customers' Year 2000
compliance efforts. Also contributing to the growth in service revenues in these
periods were an increase in the level of maintenance contracts and professional
services accompanying new and upgrade sales as well as maintenance and
professional service revenues resulting from Kronos' acquisitions, including the
acquisition of its largest dealer territory in June 1999.
Gross Profit. Gross profit as a percentage of revenues was 63% and 61% in
the three and nine month periods ended June 30, 2001, respectively, compared to
61% in each of the comparable periods in the prior year. The improvement in
gross profit in the third quarter was attributable to increases in both product
and service gross profit. Product gross profit as a percentage of product
revenues was 79% and 77% in the three and nine month periods ended June 30,
2001, respectively, compared to 77% in each of the comparable periods in the
prior year. The improvement in product gross profit is principally attributable
to product mix. Software, which typically generates higher gross profit,
comprised a greater proportion of product revenues in the three and nine month
periods ended June 30, 2001 as compared to the same periods in the prior year.
However, higher software development amortization and production costs due to
lower hardware sales volume partially offset the effect of this favorable mix.
Service gross profit as a percentage of service revenues was 46% and 44% in the
three and nine month periods ended June 30, 2001, compared to 40% and 42% in the
comparable periods of the prior year. The improvement in service gross profit is
attributable to increased productivity in the service organization and a
reduction in discretionary spending. The improvement in productivity is the
result of leveraging investments in service systems and processes coupled with a
reduction in headcount to better align costs with revenues.
Net Operating Expenses. Net operating expenses as a percentage of revenues
were 55% and 56% for the three and nine month periods ended June 30, 2001,
respectively, as compared to 53% for the comparable periods in the prior year.
The increase in operating expenses in fiscal 2001 as compared to fiscal 2000 is
principally attributable to increased program and infrastructure costs incurred
to support increases in business volume and product development efforts. Also
contributing to the increase in operating expenses was an increase in the
amortization of intangible assets related to acquisitions and the recognition of
various special charges related to termination of operations and a reduction in
workforce. Sales and marketing expenses as a percentage of revenues were 35% in
the three and nine month periods ended June 30, 2001 and July 1, 2000.
Engineering, research and development expenses as a percentage of revenues were
12% in the three and nine month periods ended June 30, 2001 as compared to 11%
in the comparable periods of the prior year. Engineering expenses of $9.1
million and $7.2 million in the third quarter of fiscal 2001 and 2000,
respectively, are net of capitalized software development costs of $3.0 million
and $2.4 million, respectively. Engineering expenses of $25.4 million and $21.8
million in the first nine months of fiscal 2001 and 2000, respectively, are net
of capitalized software development costs of $8.4 million and $7.2 million,
respectively. The growth in engineering, research and development expenses this
year resulted from the continuing research, design and development of software
and hardware technology, principally related to the Company's Workforce 4.0
product and the 4500 Terminal. General and administrative expenses as a
percentage of revenues were 7% in the three and nine month periods ended June
30, 2001 and 6% and 7% for the comparable periods of the prior year.
Amortization of intangible assets as a percentage of revenues was 2% and 3% in
the three and nine month periods ended June 30, 2001 and July 1, 2000. The
increase in amortization expense is principally related to various acquisitions
completed in the past four quarters. Kronos amortizes these costs over the
assets estimated remaining economic lives. Other income, net is principally
attributable to interest income earned from Kronos' cash as well as investments
in its marketable securities and lease portfolio.
Special Charge. A special charge in the amount of $700,000 was recorded in
the third quarter of fiscal 2001 related to termination costs from a reduction
in workforce of approximately 90 employees. The charge is the result of
management's effort to streamline operations to better align costs with expected
revenues. Kronos anticipates making cash outlays of less than $100,000 relating
to this action over the next three months. In the second quarter of fiscal 2001
Kronos recorded a special charge in the amount of $3.0 million related to the
termination of Kronos' Crosswinds Technology operations. The Crosswinds
Technology Group, which was purchased in May 1999, was responsible for the
product development, marketing and sales support of time and attendance
applications that operated as a Microsoft Outlook plug in product. Lower than
anticipated sales of these applications, redundant infrastructure and ongoing
operating losses resulted in the termination of the Crosswinds Technology Group
as a stand-alone operating unit. The $3.0 million charge consists of $1.6
million in termination costs, $1.3 million for the write off of intangible
assets and $100,000 in other costs. Cash outlays of approximately $1.2 million
relating to this action are anticipated to be paid over the next nine months.
The anticipated pre-tax savings resulting from these actions is a cost
reduction, principally salaries, of approximately $1.9 million for the remainder
of fiscal 2001 and $7.5 million annually thereafter, excluding amortization of
$1.3 million over the next three years.
Income Taxes. The provision for income taxes as a percentage of pretax
income was income tax was 35% in the three and nine month periods ended June 30,
2001, respectively, as compared to 37% in the comparable periods of the prior
year. The lower effective income tax rate experienced in fiscal 2001 was
principally attributable to tax benefits resulting from Kronos' investment tax
credits. Management anticipates the effective income tax rate for the remainder
of the fiscal year will be 35%.
Newly Issued Accounting Standards. In June 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. 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 will apply
the new rules on accounting for business combinations and goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002. For
acquisitions completed after June 30, 2001, the Company will apply the new rules
beginning in the fourth quarter of fiscal year 2001. The Company has not yet
determined the effect that the application of the non-amortization provisions of
the Statements will have on net income. During fiscal year 2002, the Company
will perform the first of the required impairment tests of goodwill as of
October 1, 2001 and has not yet determined what the effect of these tests will
be on earnings and financial position of the Company.
Liquidity and Capital Resources
Working capital as of June 30, 2001, amounted to $19.6 million as compared
to $10.7 million at September 30, 2000. During fiscal 2000, working capital was
reduced as Kronos funded its investment in its corporate headquarters facility
and other property, plant and equipment, as well as the repurchase of common
shares under Kronos' stock repurchase program and, to a lesser extent, payments
related to acquisitions. Cash, cash equivalents and marketable securities
amounted to $68.2 million as of June 30, 2001 and $51.4 million as of September
30, 2000. Included in the cash balance as of June 30, 2001 was $10.5 million
that was held in escrow pending the completion of an acquisition in July 2001.
Cash generated from operations amounted to $34.3 million in the first nine
months of fiscal 2001 as compared to $26.7 million in the first nine months of
fiscal 2000. The increase in cash generated from operations is principally
attributable to increased collection of accounts receivable as well as increased
accrued compensation, partially offset by lower earnings and a smaller increase
in deferred service revenues as compared to the prior year. Cash used for
property, plant and equipment was $4.6 million in the first nine months of
fiscal 2001 compared to $17.0 million in the same period of fiscal 2000. Fiscal
2000 investments in property, plant and equipment were principally related to
the construction of Kronos' corporate headquarters campus as well as investments
in information systems and infrastructure to improve and support expanded
operations. Excess cash reserves not required for operations, investments in
property, plant and equipment or acquisitions are invested in marketable
securities. Marketable securities increased by $19.5 million in fiscal 2001
compared to a decrease of $12.6 million in the first nine months of fiscal 2000.
Kronos' use of cash for the acquisition of businesses in the first nine months
of fiscal year 2001 was principally related to the acquisition of a dealer
territory in November 2000 and the April 2001 acquisition of a competing
provider of labor management solutions located in Australia. These acquisitions
did not have a material impact on revenues or results of operations in the three
and nine months ended June 30, 2001. Subsequent to June 30, 2001 Kronos acquired
substantially all of the assets of a competing provider of labor management
solutions to the U.S. healthcare industry. Management does not anticipate that
this acquisition will have a material impact on revenues or results of
operations in the fourth quarter. 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.
Under Kronos' stock repurchase program, Kronos repurchased 171,000 common
shares in the first nine months of fiscal 2001 at a cost of $6 million compared
to 494,000 common shares at a cost of $21.4 million for the same period in the
prior year. The common shares repurchased under the program are used for Kronos'
employee stock option plans and employee stock purchase plan. Cash provided by
operations was more than sufficient to fund investments in capitalized software
development costs, property, plant and equipment and stock repurchases. Kronos
believes it has adequate cash and investments and operating cash flow to fund
its investments in property, plant and equipment, software development costs,
cash payments related to acquisitions, 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 Quarterly
Report on Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act"). Kronos desires to
take advantage of the safe harbor provisions of the Act and is including this
statement for the express purpose of availing itself of the protection of the
safe harbor with respect to all forward looking statements that involve risks
and uncertainties.
Kronos' actual operating results may differ from those indicated by forward
looking statements made in this Quarterly Report on Form 10-Q and presented
elsewhere by management from time to time because of a number of factors
including the potential fluctuations in quarterly results, timing and acceptance
of new product introductions by Kronos and its competitors, the ability to
attract and retain sufficient technical personnel, competitive pricing pressure,
the dependence on Kronos' time and attendance product line, and the dependence
on alternate distribution channels and on key vendors, as further described
below and in Kronos' Annual Report on Form 10-K for the fiscal year ended
September 30, 2000, which are specifically incorporated by reference herein.
Potential Fluctuations in Quarterly Results. Kronos' quarterly operating
results may fluctuate as a result of a variety of factors, including the
purchasing patterns of its customers, mix of products and services sold, the
timing of the introduction of new products and product enhancements by Kronos
and its competitors, market acceptance of new products, competitive pricing
pressure and general economic conditions. Kronos historically has realized a
relatively larger percentage of its annual revenues and profits in the fourth
quarter and a relatively smaller percentage in the first quarter of each fiscal
year, although there can be no assurance that this pattern will continue. In
addition, while Kronos has contracts to supply systems to certain customers over
an extended period of time, substantially all of Kronos' product revenue and
profits in each quarter result from orders received in that quarter. If
near-term demand for Kronos' products weakens or if significant anticipated
sales in any quarter do not close when expected, Kronos' revenues for that
quarter will be adversely affected. Kronos believes that its operating results
for any one period are not necessarily indicative of results for any future
period.
Product Development and Technological Change. Continual change and
improvement in computer software and hardware technology characterize the
markets for frontline labor management systems. Kronos' future success will
depend largely on its ability to enhance the capabilities and increase the
performance of its existing products and to develop new products and interfaces
to third party products on a timely basis to meet the increasingly sophisticated
needs of its customers. Although Kronos is continually seeking to further
enhance its product offerings and to develop new products and interfaces, there
can be no assurance that these efforts will succeed, or that, if successful,
such product enhancements or new products will achieve widespread market
acceptance, or that Kronos' competitors will not develop and market products
which are superior to Kronos' products or achieve greater market acceptance.
Dependence on Time and Attendance Product Line. To date, more than 90% of
the Kronos' revenues have been attributable to sales of time and attendance
systems and related services and Kronos expects that to continue in the next
fiscal year. Competitive pressures or other factors could cause Kronos' time and
attendance products to lose market acceptance or experience significant price
erosion, adversely affecting the results of Kronos' operations.
Dependence on Alternate Distribution Channels. Kronos markets and sells its
products through its direct sales organization, independent dealers and OEMs. In
the first nine months of fiscal 2001, approximately 13% of Kronos' revenue was
generated through sales to dealers and OEMs. A reduction in the sales efforts of
Kronos' major dealers and/or OEMs, the termination or changes in their
relationships with Kronos, or the failure of Kronos to monitor and incent its
independent dealers and OEMs, could have a material adverse affect 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.
Competition. The frontline labor management industry is highly competitive.
Technological changes such as those allowing for increased use of the Internet
may also create the potential for new entrants. Although Kronos believes it has
core competencies that are not easily obtainable by competitors, maintaining
Kronos' technological and other advantages over competitors will require
continued investment by Kronos in research and development and marketing and
sales programs. There can be no assurance that Kronos will have sufficient
resources to make such investments or be able to achieve the technological
advances necessary to maintain its competitive advantages. Increased competition
could adversely affect Kronos' operating results through price reductions and/or
loss of market share.
PART II. OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fiscal quarter
ended June 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRONOS INCORPORATED
By /s/ Paul A. Lacy
Paul A. Lacy
Vice President of Finance
and Administration
(Duly Authorized Officer and
Principal Financial Officer)
August 10, 2001