-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GLSOSumR9gSB0I6HMDXkr8IrB7fUJloqehBCtrKthpeZFZAezOJCs0olMhz+FxBc LjHovMmij2iCoJB3uNTr6Q== 0000886903-00-000007.txt : 20000516 0000886903-00-000007.hdr.sgml : 20000516 ACCESSION NUMBER: 0000886903-00-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000401 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRONOS INC CENTRAL INDEX KEY: 0000886903 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042640942 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20109 FILM NUMBER: 632890 BUSINESS ADDRESS: STREET 1: 400 FIFTH AVENUE CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178903232 MAIL ADDRESS: STREET 1: 400 FIFTH AVE STREET 2: 400 FIFTH AVE CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 APRIL 1, 2000 FORM 10-Q 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 April 1, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ---------------------------- Commission file number 0-20109 --------------------- Kronos Incorporated - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2640942 - ---------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 297 Billerica Road, Chelmsford, MA 01824 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (978) 250-9800 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 400 Fifth Avenue, Waltham, MA 02154 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- As of April 30, 2000, 12,432,840 shares of the registrant's Common Stock, $.01 par value, were outstanding. KRONOS INCORPORATED INDEX PART I. FINANCIAL INFORMATION Page Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Statements of Income for the Three Months and Six Months Ended April 1, 2000 and April 3, 1999 1 Condensed Consolidated Balance Sheets at April 1, 2000 and September 30, 1999 2 Condensed Consolidated Statements of Cash Flows for the Six Months Ended April 1, 2000 and April 3, 1999 3 Notes to Condensed Consolidated Financial Statements 4 - 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 - 13 PART II. OTHER INFORMATION Item 2. Changes in Securities and of Proceeds 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 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 Six Months Ended ---------------------------- --------------------------- April 1, April 3, April 1, April 3, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net revenues: Product ........................................... $ 32,091 $ 40,643 $ 68,243 $ 73,823 Service ........................................... 29,735 21,043 58,191 40,978 ------------ ------------ ------------ ------------ 61,826 61,686 126,434 114,801 ------------ ------------ ------------ ------------ Cost of sales: Product ........................................... 7,566 9,474 15,857 17,313 Service ........................................... 17,000 12,744 33,255 24,857 ------------ ------------ ------------ ------------ 24,566 22,218 49,112 42,170 ------------ ------------ ------------ ------------ Gross profit .................................. 37,260 39,468 77,322 72,631 Expenses: Sales and marketing ............................... 22,415 21,676 44,345 40,364 Engineering, research and development ............. 7,573 6,625 14,589 12,628 General and administrative ........................ 4,290 3,842 8,444 7,216 Other (income) expense, net ....................... (121) 561 95 465 ------------ ------------ ------------ ------------ 34,157 32,704 67,473 60,673 ------------ ------------ ------------ ------------ Income before income taxes .................... 3,103 6,764 9,849 11,958 Provision for income taxes ............................. 1,148 2,213 3,644 4,197 ------------ ------------ ------------ ------------ Net income .................................... $ 1,955 $ 4,551 $ 6,205 $ 7,761 ============ ============ ============ ============ Net income per common share: Basic ......................................... $ 0.16 $ 0.36 $ 0.50 $ 0.62 ============ ============ ============ ============ Diluted ....................................... $ 0.15 $ 0.35 $ 0.47 $ 0.60 ============ ============ ============ ============ Average common and common equivalent shares outstanding: Basic ......................................... 12,515,139 12,595,809 12,488,805 12,541,659 ============ ============ ============ ============ Diluted ....................................... 13,162,020 13,069,640 13,157,464 13,019,653 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) UNAUDITED
April 1, September 30, 2000 1999 --------- --------- ASSETS Current assets: Cash and equivalents .................................................... $ 12,603 $ 20,148 Marketable securities ................................................... 27,958 20,893 Accounts receivable, less allowances of $7,002 at April 1, 2000 and $6,791 at September 30, 1999 .................... 57,718 66,817 Deferred income taxes ................................................... 5,839 5,414 Other current assets .................................................... 13,527 11,872 --------- --------- Total current assets ............................................. 117,645 125,144 Property, plant and equipment, net ......................................... 39,523 23,981 Marketable securities ...................................................... 10,900 21,400 Excess of cost over net assets of businesses acquired, net ................. 30,847 29,946 Deferred software development costs, net ................................... 13,567 12,218 Other assets ............................................................... 15,243 15,554 --------- --------- Total assets ..................................................... $ 227,725 $ 228,243 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................ $ 7,957 $ 8,503 Accrued compensation .................................................... 17,454 21,106 Accrued expenses and other current liabilities .......................... 40,539 32,753 Deferred maintenance revenues ........................................... 43,808 41,636 --------- --------- Total current liabilities ........................................ 109,758 103,998 Deferred maintenance revenues .............................................. 17,546 18,818 Other liabilities .......................................................... 1,288 1,169 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, 12,634,728 shares and 12,634,728 shares issued at April 1, 2000 and September 30, 1999, respectively ..................................... 126 126 Additional paid-in capital .............................................. 21,122 31,087 Retained earnings ....................................................... 88,348 82,143 Equity adjustment from translation ...................................... (646) (337) Cost of Treasury Stock (209,070 shares and 192,165 shares at April 1, 2000 and September 30, 1999, respectively) ........ (9,817) (8,761) --------- --------- Total shareholders' equity ....................................... 99,133 104,258 --------- --------- Total liabilities and shareholders' equity ....................... $ 227,725 $ 228,243 ========= =========
See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) UNAUDITED
Six Months Ended -------------------- April 1, April 3, 2000 1999 -------- -------- Operating activities: Net income ........................................................................ $ 6,205 $ 7,761 Adjustments to reconcile net income to net cash and equivalents provided by operating activities: Depreciation .............................................................. 3,753 4,105 Amoritzation of excess of cost over net assets of businesses acquired ..... 3,182 1,934 Amortization of deferred software development costs ....................... 3,461 2,777 Provision for deferred income taxes ....................................... (865) Changes in certain operating assets and liabilities: Accounts receivable, net .............................................. 9,640 257 Deferred maintenance revenue .......................................... 104 7,736 Accounts payable, accrued compensation and other liabilities ............................................. (2,220) 648 Other ................................................................. (795) (2,594) -------- -------- Net cash and equivalents provided by operating activities ......... 22,465 22,624 Investing activities: Purchase of property, plant and equipment ......................................... (14,192) (3,982) Capitalization of software development costs ...................................... (4,810) (4,159) Decrease (increase) in marketable securities ..................................... 3,435 (24,221) Acquisitions of businesses ........................................................ (4,009) (489) -------- -------- Net cash and equivalents used in investing activities ............. (19,576) (32,851) Financing activities: Net proceeds from exercise of stock option and employee stock purchase plans ............................................................... 5,139 2,140 Purchase of treasury stock ........................................................ (15,623) (4,347) Proceeds from sale of put options ................................................. 169 -- -------- -------- Net cash and equivalents (used in) provided by financing activities (10,315) (2,207) Effect of exchange rate changes on cash and equivalents ................................ (119) 27 -------- -------- Decrease in cash and equivalents ....................................................... (7,545) (12,407) Cash and equivalents at the beginning of the period .................................... 20,148 29,888 -------- -------- Cash and equivalents at the end of the period .......................................... $ 12,603 $ 17,481 ======== ========
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 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, 1999. The results of operations for the three and six months ended April 1, 2000 are not necessarily indicative of the results for a full fiscal year. NOTE B - Fiscal Quarters The Company utilizes a system of fiscal quarters. Under this system, the first three quarters of each fiscal year end on a Saturday. However, the fourth quarter of each fiscal year will always end on September 30. Because of this, the number of days in the first quarter (93 days in fiscal 2000 and 94 days in fiscal 1999) and fourth quarter (91 days in fiscal 2000 and 89 days in fiscal 1999) of each fiscal year varies from year to year. The second and third quarters of each fiscal year will be exactly thirteen weeks long. This policy does not have a material effect on the comparability of results of operations between quarters. < NOTE C - Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (in thousands):
April 1, September 30, 2000 1999 ------- ------- Deferred professional service revenue .. $15,710 $17,262 Accrued acquisition payments ........... 6,112 6,461 Federal and state taxes payable ........ 6,378 2,522 Accrued construction costs ............. 5,000 -- Accrued other .......................... 7,339 6,508 ------- ------- $40,539 $32,753 ======= =======
NOTE D - Capital Stock During the second quarter of fiscal 2000 the Company sold put options that entitle the holder of each option to sell to the Company one share of Common Stock at an exercise price of $50.00. The Company may, at its sole discretion, elect to settle the obligation with either cash or shares of the Company's Common Stock and accordingly, no put option liability has been recorded. The 50,000 options outstanding at April 1, 2000 expire on June 9, 2000. The premium of $169,000 received in conjunction with this private placement was recorded as additional paid in capital. There was no significant effect on diluted earnings for the three or six month periods ended April 1, 2000. NOTE E - Comprehensive Income For the three and six months ended April 1, 2000 and April 3, 1999 comprehensive income consisted of the following (in thousands):
Three Months Ended Six Months Ended -------------------- --------------------- April 1, April 3, April 1, April 3, 2000 1999 2000 1999 ------- ------- -------- -------- Comprehensive income: Net income ......................... $ 1,955 $ 4,551 $ 6,205 $ 7,761 Cumulative translation adjustment .. (309) 499 (309) 598 ------- ------- -------- -------- Total comprehensive income ............. $ 1,646 $ 5,050 $ 5,896 $ 8,359 ======= ======= ======== ========
NOTE F - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended --------------------------- -------------------------- April 1, April 3, April 1, April 3, 2000 1999 2000 1999 ---------- ----------- ----------- ----------- Net income (in thousands) ........................ $ 1,955 $ 4,551 $ 6,205 $ 7,761 ========== =========== =========== =========== Weighted-average shares .......................... 12,515,139 12,595,809 12,488,805 12,541,659 Effect of dilutive securities: Put options ................................... 30,802 - 15,401 - Employee stock options ........................ 616,079 473,831 653,258 477,994 ----------- ----------- ----------- ----------- Adjusted weighted-average shares and assumed conversions ....................... 13,162,020 13,069,640 13,157,464 13,019,653 =========== =========== =========== =========== Basic earnings per share ......................... $ 0.16 $ 0.36 $ 0.50 $ 0.62 =========== =========== =========== =========== Diluted earnings per share ....................... $ 0.15 $ 0.35 $ 0.47 $ 0.60 =========== =========== =========== ===========
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. 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 six months ended April 1, 2000 amounted to $61.8 million and $126.4 million, respectively as compared to $61.7 million and $114.8 million for the comparable periods in the prior year. Revenue growth was flat in the second quarter of fiscal 2000 and 10% in the first six months of fiscal 2000 as compared to 33% and 26% for the comparable periods in the prior year. The revenue growth rate experienced in the second, third and fourth quarters of fiscal 1999 exceeded Kronos' historical growth rate of approximately 20%. The unusually strong growth rates experienced during fiscal 1999 were in part due to demand for new products and product upgrades resulting from customers' Year 2000 compliance efforts. Management believes that as a result of customers' Year 2000 compliance efforts, Kronos benefited from an accelerated sales cycle during this period. The combination of the unusually strong product demand and accelerated sales cycle during fiscal 1999 reduced demand for Kronos' products during the first two quarters of fiscal 2000 as customers postponed product purchases in order to complete their Year 2000 compliance efforts and began the process of identifying and redirecting resources to non-Year 2000 projects. During this period the Kronos sales force focused on rebuilding its sales pipeline. Management believes that demand continues to exist for Kronos' products and services. The negative impact on revenues in the first six months of fiscal 2000 is principally attributable to a loss of unusually strong revenue momentum and accelerated sales cycles experienced in fiscal 1999 due to customers' Year 2000 compliance efforts. Product revenues for the quarter amounted to $32.1 million as compared to $40.6 million in the same period of fiscal 1999. Product revenues for the first six months of fiscal 2000 were $68.2 million as compared to $73.8 million for the first six months of the prior year. Product revenue declined 21% and 8% in the three and six months periods ended April 1, 2000, respectively, and increased 35% and 23% in each of the comparable periods in the prior year. As previously indicated, management believes that as a result of customers' Year 2000 compliance efforts during fiscal 1999, Kronos product revenue growth benefited from the combination of unusually strong product demand and accelerated sales cycles. Product revenues were negatively impacted in the first six months of fiscal 2000 as customers postponed orders in the first quarter in anticipation of Year 2000 and, in the second quarter, the sales force was challenged with replenishing its sales pipeline as companies began the process of identifying their non-Year 2000 projects. Management anticipates that Kronos will experience moderate product revenue growth over the remainder of the fiscal year. Service revenues for the second quarter of fiscal 2000 amounted to $29.7 million as compared to $21.0 million for the second quarter of fiscal 1999. Service revenues for the first six months of fiscal 2000 were $58.2 million as compared to $41.0 million for the first six months of the prior year. Service revenue growth of 41% and 42% in the three and six month periods ended April 1, 2000, respectively, increased from 29% and 31% in each of the comparable periods in the prior year. The growth in service revenues in all periods principally reflects an increase in maintenance revenue from expansion of the installed base and the level of services sold to the installed base, and to a lesser extent, an increase in the level of maintenance contracts and professional services accompanying new and upgrade sales. Also contributing to the growth in the three and six month periods ended April 1, 2000 were maintenance and professional service revenues resulting from acquisitions of various dealer territories over the past four quarters. As a result of the level of product revenues achieved in the first six months of fiscal 2000 and, to a lesser extent, due to the normalization of service revenues related to dealer acquisitions in the prior year, management anticipates that the service revenue growth rate over the remainder of the fiscal year will be in the 25% to 30% range. Gross Profit. Gross profit as a percentage of revenues was 60% and 61% in the three and six month periods ended April 1, 2000, respectively, decreasing from 64% and 63% for the comparable periods of the prior year. The decrease in margin is directly attributable to lower product revenues. Service revenue, which generates lower gross margin, has grown faster than product revenue and represents a greater proportion of total revenue in the three and six month periods ended April 1, 2000 than in the comparable periods of the prior year. Management anticipates that gross profit will continue to be negatively impacted over the remainder of the year due to the mix of product and service revenues. Product gross profit as a percentage of product revenues was 76% and 77% in the three and six month periods ended April 1, 2000, respectively, compared to 77% in each of the comparable periods in the prior year. Management anticipates that product gross margin for the remainder of the year to be comparable to that experienced in the first six months of the fiscal year. Service gross profit as a percentage of service revenues was 43% in the three and six month periods ended April 1, 2000, respectively, compared to 39% in each of the comparable periods in the prior year. The increase in service gross profit is primarily attributable to the growth in service revenues without a proportionate increase in service expenses. This has principally been accomplished by improving the efficiency in the delivery of support services by centralizing the software support function, leveraging web-based self-service offerings and, as customers have upgraded to current versions of Kronos' product, reducing the number of versions requiring support. In addition, Kronos has also focused on enhancing the billing for professional services which also improves service gross profit. Kronos intends to invest in its professional service organization over the remainder of the fiscal year. The timing of those investments will affect service gross margin and, accordingly, management believes service gross margin over the remainder of the fiscal year may be less than that experienced in the first six months. Expenses. Expenses as a percentage of revenues were 55% and 53% for the three and six month periods ended April 1, 2000, respectively, as compared to 53% for the comparable periods in the prior year. The increase in expenses in the second quarter of fiscal 2000 as compared to the prior year is attributable to increased product development efforts as well as increased program and infrastructure costs incurred to support anticipated increases in business volume. As a result of the increased spending and lower than anticipated revenues, expenses as a percentage of revenues were unusually high in the second quarter of fiscal 2000. Management anticipates expenses as a percentage of revenues to be less than 53% over the remainder of the fiscal year. Sales and marketing expenses as a percentage of revenues were 36% and 35% in the three and six month periods ended April 1, 2000, respectively, as compared to 35% for the comparable periods in the prior year. Engineering, research and development expenses as a percentage of revenues were 12% in the three and six month periods ended April 1, 2000, respectively, as compared to 11% in each of the comparable periods in the prior year. Engineering expenses of $7.6 million and $6.6 million in the second quarter of fiscal 2000 and 1999, respectively, are net of capitalized software development costs of $2.5 million and $2.2 million, respectively. Engineering expenses of $14.6 million and $12.6 million in the first six months of fiscal 2000 and 1999, respectively, are net of capitalized software development costs of $4.8 million and $4.2 million, respectively. The growth in engineering, research and development expenses resulted principally from the continuing development and integration of new products and acquired technologies. Management anticipates that over the remainder of fiscal 2000 engineering, research and development expenses as a percentage of revenues will be in the 10% to12% range. General and administrative expenses as a percentage of revenues were 7% in the three and six month periods ended April 1, 2000 as compared to 6% in the comparable periods of the prior year. Other (income) expense, net amounted to less than 1% of revenues for all periods presented. Other (income) expense, net is composed primarily of interest income earned on Kronos' investments offset by amortization of intangible assets related to acquisitions made by Kronos. In the second quarter of fiscal 1999, other (income) expense, net also included an immaterial charge resulting from Kronos' sale of its South African subsidiary. This charge related to the write off of the cumulative equity adjustment from the translation of the subsidiary's financial statements. Income Taxes. The provision for income taxes as a percentage of pretax income was 37% in the three and six month periods ended April 1, 2000 as compared to 33% and 35% for the comparable periods in the prior year. The effective income tax rate experienced in fiscal 1999 was primarily attributable to tax benefits resulting from Kronos' sale of its South African subsidiary as well as substantial utilization of foreign net operating loss carryforwards. Liquidity and Capital Resources Working capital as of April 1, 2000, amounted to $7.9 million as compared with $21.1 million at September 30, 1999. The decrease in working capital is principally attributable to Kronos' investment in property, plant and equipment (including the construction of its corporate headquarters facility), the repurchase of common shares under Kronos' Stock Repurchase Program as well as acquisitions of businesses. Cash and equivalents and marketable securities amounted to $51.5 million as of April 1, 2000 and $62.4 million as of September 30, 1999. Cash generated from operations amounted to $22.5 million in the first six months of fiscal 2000 as compared to $22.6 million in the first six months of fiscal 1999. Cash used for property, plant and equipment increased to $14.2 million in the first six months of fiscal 2000 from $4.0 million for the comparable period in the prior year. The increase in the investment in property, plant and equipment was due to costs related to the construction of Kronos' new corporate headquarters facility as well as investments in information systems and infrastructure to improve and support expanding operations. Over the next three months Kronos anticipates it will use approximately $11.0 million in cash for the construction of its headquarters facility and for payments due under the terms of various acquisition agreements. Under Kronos' stock repurchase program, Kronos repurchased 328,500 common shares in the first six months of fiscal 2000 at a cost of $15.6 million. 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 expects to fund its investments in property, plant and equipment, software development costs, cash payments related to acquisitions and any additional stock repurchases over the remainder of fiscal 2000 with available cash and investments and operating cash flow. 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 pressures, potential effects of the century change, 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, 1999, which factors 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. 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. The number of competitors is also increasing as applications and systems providers in related industries, such as human resources management, payroll processing and enterprise resource planning (ERP), enter the market. 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. Year 2000. During the second quarter of fiscal 2000 Kronos disbanded its executive level steering committee which had been previously formed to identify and resolve Year 2000 issues associated with Kronos' internal systems (both information technology ("IT") and non-IT), Kronos' own products and services, the status of third party products distributed by Kronos to its customers, as well as the Year 2000 readiness of Kronos' suppliers. Prior to January 1, 2000, Kronos completed testing of its principal internal enterprise resource planning (ERP) system for year 2000 compliance. This ERP system includes order entry, material resource planning, master production scheduling, purchasing, shipping and financial systems. Kronos identified Year 2000 issues in other less significant IT systems, and resolved those issues, by replacements and/or upgrades. Kronos also completed an assessment and remediation, as necessary, of certain non-IT prior to January 1, 2000. Kronos has replaced certain stand alone shop floor test equipment that was found to be non-compliant. Kronos did not assess specifically its facility management systems, or the external forces such as utility or transportation Year 2000 compliance failures that might have generally affect industry and commerce. Kronos is not currently aware of any material operational issues or costs associated with preparing its internal IT and non-IT systems for the Year 2000, nor is Kronos aware of any unanticipated problems caused by undetected errors or defects in these internal systems as a result of the year 2000. The Company tested the most recent versions of its current products to determine whether they met Kronos' definition of "Year 2000 Compliant". Testing of these products was completed prior to January 1, 2000. Kronos has warranted to certain customers that its products will continue to perform in accordance with applicable published specifications in the Year 2000 and beyond. Where products were identified as needing upgrades/new versions to address Year 2000 issues, Kronos made those upgrades/new versions available to customers for purchase or under maintenance agreements. Some of Kronos' customers were using products and/or product versions that Kronos had not tested, and does not support, for Year 2000 compliance. Kronos encouraged these customers to migrate to current products/versions that meet Kronos' Year 2000 compliance definition. Kronos did not test any of its custom software products for Year 2000 compliance. For third party products that Kronos distributes with its products, Kronos sought information and assurances from the manufacturers concerning those products' Year 2000 compliance status. Kronos completed its assessment of those third party products prior to January 1, 2000. As a result, Kronos identified certain third party products that required an upgrade to be Year 2000 compliant, notified the affected customers and encouraged them to upgrade. In addition, Kronos had previously identified February 29, 2000 as a critical date and had identified potential problems surrounding that date in one of its products. All known customers using this product were notified and offered a free product upgrade. To date, no January 1, 2000 or February 29, 2000 related software problems have been detected in Kronos' standard products, other than problems that had been detected and addressed prior to the critical date. Notwithstanding Kronos' testing of its own products and efforts to obtain assurances concerning third party products, errors or defects in such products could result in delay or loss of revenue, diversion of development resources, damage to Kronos' reputation, or increased service and warranty costs, any of which could materially affect Kronos' business, results of operations, or financial condition. In addition, the unprecedented nature of potential litigation regarding Year 2000 compliance issues makes it uncertain whether Kronos will be affected by such litigation, although no such litigation relating to Kronos' products has been filed so far. The costs associated with Kronos' Year 2000 plan have been funded from operating cash flows and have been charged to operations. To date, Kronos has incurred approximately $1.2 million of incremental costs to address its internal IT and non-IT systems and to address Year 2000 compliance problems in its own products and in third party products distributed with its products. Kronos believes that substantially all of the costs to be incurred associated with Kronos' Year 2000 plan have been recognized. Kronos does not separately track the internal costs associated with its Year 2000 plan, which are primarily payroll costs for its information systems employees, support and technical personnel and the Year 2000 steering committee. The costs described herein, and the costs to accomplish the other elements of Kronos' Year 2000 plan, have not been and are not expected to be material to Kronos' financial position, results of operations or cash flows. PART II. OTHER INFORMATION Item 2. Changes in Securities and of Proceeds. See Note D to the condensed consolidated financial statements, dated April 1, 2000. Item 4. Submission of Matters to a Vote of Security Holders. (a) The 2000 Annual Meeting of Stockholders of Kronos Incorporated was held on February 3, 2000. (b) At the Annual Meeting, Messrs. Mark S. Ain and W. Patrick Decker were elected as Class II Directors for three-year terms expiring in 2003. In addition, the Directors whose terms of office continue after the meeting are two Class I Directors: Messrs. D. Bradley McWilliams and Lawrence Portner and two Class III Directors: Messrs. Richard J. Dumler and Samuel Rubinovitz. The tabulation was as follows: FOR WITHHELD --- -------- Mark S. Ain 11,074,197 373,758 W. Patrick Decker 11,074,318 373,637 (c) An amendment to the Company's Restated Articles of Organization, increasing the number of authorized shares of the Company's common stock from 20,000,000 to 50,000,000, was approved as follows: FOR AGAINST ABSTAIN --- ------- --------- 10,220,719 1,213,385 13,021 (d) An amendment to the Company's 1992 Employee Stock Purchase Plan, increasing the number of shares available under the Plan from 618,750 to 918,750, was approved as follows: FOR AGAINST ABSTAIN --- ------- --------- 11,046,545 214,886 186,524 (e) The other item voted upon at the meeting was the ratification of the selection of Ernst & Young LLP. FOR AGAINST ABSTAIN --- ------- --------- 11,434,132 2,285 11,538 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 Third Amendment dated February 17, 2000, to Software License and Support and Hardware Purchase Agreement dated April 2, 1993, between ADP, Inc. and the Registrant. 27 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fiscal quarter ended April 1, 2000. 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) May 12, 2000 EXHIBIT INDEX Exhibit Number Description 10 Third Amendment dated February 17, 2000, to Software License and Support and Hardware Purchase Agreement dated April 2,1993, between ADP, Inc. and the Registrant. 27 Financial Data Schedule EX-10 2 ADP CONTRACT - THIRD AMEMDMENT Exhibit 10 THIRD AMENDMENT TO SOFTWARE LICENSE AND SUPPORT AND HARDWARE PURCHASE AGREEMENT This Amendment, which shall be effective upon signing by both parties (unless the effective date is otherwise specified herein for a particular provision), is between ADP, Inc., a Delaware corporation ("ADP") with offices at One ADP Boulevard, Roseland, New Jersey 07068, and Kronos Incorporated, a Massachusetts corporation ("Kronos") with offices at 400 Fifth Avenue, Waltham, Massachusetts 02154. WHEREAS, the parties entered a Software License and Support and Hardware Purchase Agreement dated April 2, 1993 ("Agreement"), an Amendment to the Agreement dated July 22, 1996 ("July 22, 1996 Amendment"), a Total Time 120 Amendment dated July 22, 1996 ("Total Time 120 Amendment"), a Development Agreement dated March 21, 1995, and the Second Amendment to the Agreement effective on February 11, 1998 ("Second Amendment"); WHEREAS, the parties desire to amend the Agreement and the Amendments; NOW, THEREFORE, the parties agree as follows: 1. Section 2(b) of the Agreement is amended by deleting the first sentence and replacing it with the following: "Kronos hereby also grants to ADP the right to provide, at any time during the term of this Agreement (and, subject to Section 14 herein, after the term of this Agreement), a Sublicense to any person or entity which is an ADP Client or any person or entity which has up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer)." 2. Section 2(c) is amended by adding, after the words "ADP Clients" in the first sentence, the following: "and to persons or entities which have up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer)." 3. Section 2(g) is amended by adding, after the words "ADP Clients" in the sixth sentence, the following: "and to persons or entities which have up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer)." 4. The second sentence of Section 6(b) of the Agreement is amended by adding, after the words "ADP Clients then employing the ADP Features" the following: "and persons and entities which have up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer) and are then employing the ADP Features." 5. The first two sentences of Section 12(a)(iii) of the Agreement are deleted and replaced with the following: "The above warranty extends to ADP, ADP Clients who receive Total Time service, and any person or entity which has up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer) and who/which receive Total Time service. Warranty claims may be generated to Kronos by ADP, ADP Clients or by any person or entity which is an authorized purchaser of Hardware under this Agreement and which has up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer.)" 6. Section 12(b)(ii) of the Agreement is amended by adding, after the words "ADP Clients," the following: "and by any person or entity which is an authorized purchaser of Hardware under this Agreement and which has up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer)." 7. Section 15(a) of the Agreement is amended by deleting the first sentence, and replacing it with the following: "ADP may provide Total Time to any ADP Client and to any person or entity which has up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer), provided such ADP Client or person or entity, as applicable, shall pay for the Total Time services on a recurring billing basis rather than on a one time basis." 8. Section 15(a) of the Agreement is further amended by adding, after the words "ADP Client" in the second sentence, the following: "or person or entity which has up to 1000 employees on any one software database (i.e., profiles/payrolls maintained on one personal computer)," and by deleting the word "second." 9. Section 16(d) of the Agreement is amended by inserting, after the words "ADP Clients," the following: "or other authorized customer of ADP under this Agreement." 10. Section 20(b) of the Agreement is amended by deleting the first sentence and replacing it with the following sentence: "Kronos hereby authorizes ADP representatives to make use of Kronos' name, trademark or trade name in connection with marketing Total Time to ADP Clients, prospective ADP Clients, and other authorized customers and/or prospective authorized customers of ADP under this Agreement; provided however, that no such use will be made in any written materials, distributed outside of ADP without Kronos' written approval and any such use will be in proper legal form." 11. Section 22(m) of the Agreement, which was added in the July 22, 1996 Amendment, is deleted and replaced with the following: "The parties recognize and agree that the "standalone marketing test" in Houston has been completed and that they have agreed to remove the requirement that ADP Sublicense only to ADP Clients. The terms and conditions in this Third Amendment, the Agreement, the July 22, 1996 Amendment, the Total Time 120 Amendment and the Second Amendment shall govern such Sublicensing." 12. Exhibit B of the July 22, 1996 Amendment is amended by deleting the five paragraphs following the provision starred with four asterisks, beginning with the words "Kronos has determined its standard manufacturing cost ("SMC")" and ending with the words "provisions of the price adjustment paragraphs above." This deletion is effective retroactively to July 22, 1996. 13. Exhibit B-1 of the Total Time 120 Amendment is amended by deleting the last two paragraphs. This deletion is effective retroactively to July 22, 1996. 14. All other terms and conditions of the Agreement, the July 22, 1996 Amendment, the Total Time 120 Amendment and the Second Amendment remain in full force and effect. AGREED TO AND ACCEPTED: KRONOS INCORPORATED ADP, INC. By: /S/ W. Patrick Decker By: /S/ Stuart Sackman ------------------------ --------------------- Name: W. Patrick Decker Name: Stuart Sackman Title: President and COO Title: DVP & GM Time & Labor Date: 2/17/00 Date: 2/8/00 EX-27 3 FDS --
5 This schedule contains summary financial information extracted from the Condensed Consolidated Financial Statements of the Corporation for the six months ended April 1, 2000 and is qualified in its entirety by reference to such financial statements 0000886903 Kronos Incorporated 1,000 U.S. Dollars 6-mos Sep-30-2000 Oct-01-1999 Apr-01-2000 1 12,603 27,958 64,720 7,002 3,889 117,645 81,968 42,445 227,725 109,758 0 0 0 126 99,007 227,725 68,243 126,434 15,857 49,112 67,473 523 0 9,849 3,644 6,205 0 0 0 6,205 0.50 0.47
-----END PRIVACY-ENHANCED MESSAGE-----