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 July 3, 1999
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.)
400 Fifth Avenue, Waltham, MA 02451
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(Address of principal executive offices) (Zip Code)
(781) 890-3232
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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 August 1, 1999, 12,605,995 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
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 Nine Months Ended July 3, 1999 and July 4, 1998 1
Condensed Consolidated Balance Sheets at July 3, 1999
and September 30, 1998 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended July 3, 1999 and July 4, 1998 3
Notes to Condensed Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures
Exhibit Index
<PAGE>
<TABLE>
<CAPTION>
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
--------------------------- ---------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Product ........................................... $ 43,965 $ 35,080 $ 117,788 $ 94,952
Service ........................................... 23,252 17,599 64,230 48,772
------------ ------------ ------------ ------------
67,217 52,679 182,018 143,724
Cost of sales:
Product ........................................... 9,883 8,636 27,196 23,419
Service ........................................... 13,664 11,440 38,521 32,063
------------ ------------ ------------ ------------
23,547 20,076 65,717 55,482
------------ ------------ ------------ ------------
Gross profit ................................. 43,670 32,603 116,301 88,242
Expenses:
Sales and marketing ............................... 23,094 17,670 63,458 49,599
Engineering, research and development ............. 6,988 5,334 19,616 14,215
General and administrative ........................ 4,030 3,526 11,246 9,938
Other (income) expense, net ....................... 106 159 571 (27)
------------ ------------ ------------ ------------
34,218 26,689 94,891 73,725
------------ ------------ ------------ ------------
Income before income taxes ................... 9,452 5,914 21,410 14,517
Provision for income taxes ............................. 3,318 2,259 7,515 5,546
------------ ------------ ------------ ------------
Net income ................................... $ 6,134 $ 3,655 $ 13,895 $ 8,971
============ ============ ============ ============
Net income per common share:
Basic ........................................ $ 0.49 $ 0.29 $ 1.11 $ 0.72
============ ============ ============ ============
Diluted ...................................... $ 0.47 $ 0.28 $ 1.06 $ 0.70
============ ============ ============ ============
Average common and common equivalent shares outstanding:
Basic ........................................ 12,528,865 12,443,505 12,537,394 12,380,344
============ ============ ============ ============
Diluted ...................................... 13,115,132 12,848,900 13,051,479 12,767,452
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
July 3, September 30,
1999 1998
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ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents .................................................... $ 19,250 $ 29,888
Marketable securities ................................................... 17,483 17,501
Accounts receivable, less allowances for doubtful accounts of $1,569
at July 3, 1999 and $1,268 at September 30, 1998 ..................... 56,059 50,904
Deferred income taxes ................................................... 5,188 5,188
Other current assets .................................................... 11,573 8,171
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Total current assets ............................................. 109,553 111,652
Property, plant and equipment, net ......................................... 19,648 15,816
Marketable securities ...................................................... 24,350 4,445
Excess of cost over net assets of businesses acquired ...................... 31,629 13,731
Deferred software development costs, net ................................... 11,590 9,541
Other assets ............................................................... 12,905 8,676
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Total assets ...................................................... $ 209,675 $ 163,861
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 7,005 $ 6,427
Accrued compensation .................................................... 17,013 14,503
Accrued expenses and other current liabilities .......................... 29,339 18,570
Deferred maintenance revenues ........................................... 39,434 27,065
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Total current liabilities ......................................... 92,791 66,565
Deferred income taxes ...................................................... 911 911
Deferred maintenance revenues .............................................. 14,490 8,830
Other liabilities .......................................................... 192 352
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 and 12,465,719 shares issued at July 3, 1999 and
September 30, 1998, respectively ..................................... 126 125
Additional paid-in capital .............................................. 29,328 29,575
Retained earnings ....................................................... 73,660 59,765
Equity adjustment from translation ...................................... (347) (1,162)
Cost of Treasury Stock (54,987 shares and 45,861
shares at July 3, 1999 and September 30, 1998, respectively) ......... (1,476) (1,100)
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Total shareholders' equity ........................................ 101,291 87,203
--------- ---------
Total liabilities and shareholders' equity ........................ $ 209,675 $ 163,861
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
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July 3, July 4,
1999 1998
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<S> <C> <C>
Operating activities:
Net income ......................................................................... $ 13,895 $ 8,971
Adjustments to reconcile net income to net cash and equivalents provided by
operating activities:
Depreciation .............................................................. 5,938 5,448
Amortization of excess of cost over net assets of businesses acquired ..... 2,952 1,680
Amortization of deferred software development costs ....................... 4,340 3,263
Changes in certain operating assets and liabilities:
Accounts receivable, net .............................................. (4,830) (2,399)
Deferred maintenance revenues ......................................... 14,374 6,862
Accounts payable, accrued compensation
and other liabilities ............................................. 7,049 746
Other ..................................................................... (7,721) (1,359)
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Net cash and equivalents provided by operating activities ......... 35,997 23,212
Investing activities:
Property, plant and equipment ...................................................... (9,900) (4,936)
Capitalization of software development costs ....................................... (6,389) (4,857)
Increase in marketable securities .................................................. (19,887) (8,163)
Acquisitions of businesses ......................................................... (9,771) (6,296)
-------- --------
Net cash and equivalents used in investing activities ............. (45,947) (24,252)
Financing activities:
Net proceeds from exercise of stock option and employee stock
purchase plans ................................................................. 3,835 2,343
Purchase of treasury stock ......................................................... (4,457) (1,361)
-------- --------
Net cash and equivalents (used in) provided by financing activities (622) 982
Effect of exchange rate changes on cash and equivalents ................................. (66) (137)
-------- --------
Decrease in cash and equivalents ....................................................... (10,638) (195)
Cash and equivalents at the beginning of the period ..................................... 29,888 20,698
-------- --------
Cash and equivalents at the end of the period ........................................... $ 19,250 $ 20,503
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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, 1998. The results of
operations for the three and nine month periods ended July 3, 1999 are not
necessarily indicative of the results for a full fiscal year. Certain amounts
have been reclassified in fiscal 1998 to permit comparison with fiscal 1999.
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 (94 days in fiscal 1999 and 95 days in
fiscal 1998) and fourth quarter (89 days in fiscal 1999 and 88 days in fiscal
1998) 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 - Software Revenue Recognition
In November 1997, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition", which the
Company adopted in the first quarter of fiscal 1999. The adoption of SOP 97-2
did not have a material effect on the Company's financial statements.
<PAGE>
NOTE D - Comprehensive Income
In September 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130), which the Company adopted in the first quarter of fiscal 1999. SFAS
No. 130 establishes standards for reporting comprehensive income and its
components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources and includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners.
For the three and nine months ended July 3, 1999 and July 4, 1998, the Company's
comprehensive income was as follows (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
-------- -------- -------- --------
Comprehensive income:
Net income $ 6,134 $ 3,655 $ 13,895 $ 8,971
Cumulative translation adjustment 217 (571) 815 (1,006)
--------- -------- -------- ---------
Total comprehensive income $ 6,351 $ 3,084 $14,710 $ 7,965
======== ======== ======== =========
NOTE E - Stock Split
The Company's Board of Directors approved a three-for-two stock split effected
in the form of a 50% stock dividend that was paid on March 9, 1999 to
stockholders of record on February 23, 1999. Accordingly, the presentation of
shares outstanding and amounts per share have been restated for all periods
presented to reflect the split. The par value of the additional shares was
transferred from additional paid-in capital to Common Stock.
On November 17, 1995, the Company's Board of Directors adopted a Rights
Agreement. Under the Agreement, the Company distributed to stockholders a
dividend of one Right for each outstanding share of Common Stock. As a result of
the stock split, each stockholder has forty four-hundreds of a Right for each
share of Common Stock held as of the Record Date.
<PAGE>
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 the
Company's 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 the Company's 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 third quarter of fiscal 1999 amounted to $67.2
million as compared to $52.7 million for the third quarter of the previous year.
Revenues for the first nine months of fiscal 1999 were $182.0 million as
compared to $143.7 million for the first nine months of the prior year. Revenue
growth was 28% and 27% in the three and nine month periods ended July 3, 1999,
respectively, as compared to 22% and 19% for each of the comparable periods of
the prior year. The revenue growth in the three and nine month periods ended
July 3, 1999 was principally driven by customer demand in all distribution
channels.
Product revenues for the third quarter of fiscal 1999 amounted to $44.0
million as compared to $35.1 million for the third quarter of the prior year.
Product revenues for the first nine months of fiscal 1999 were $117.8 million as
compared to $95.0 million for the first nine months of the prior year. Product
revenue growth of 25% and 24% in the three and nine month periods ended July 3,
1999, respectively, increased from 21% and 17% in each of the comparable periods
of the prior year. Product revenue growth in the three and nine month periods
ended July 3, 1999 was principally driven by sales of the Company's products to
new customers as well as sales into the Company's existing customer base.
Service revenues for the third quarter of fiscal 1999 amounted to $23.3
million as compared to $17.6 million for the third quarter of the prior year.
Service revenues for the first nine months of fiscal 1999 were $64.2 million as
compared with $48.8 million for the first nine months of the prior year. Service
revenue growth of 32% in both the three and nine month periods ended July 3,
1999, increased from 24% and 25% for comparable periods of the prior year. The
growth in service revenues in the three and nine month periods ending July 3,
1999 reflects an increase in maintenance revenue from the expansion of the
installed base and an increase in the level of maintenance contracts and
professional services accompanying sales to new customers as well as sales to
the Company's existing customer base.
<PAGE>
Gross Profit. Gross profit as a percentage of revenues increased to 65%
and 64% in the three and nine month periods ended July 3, 1999, respectively, as
compared with 62% and 61%, respectively, for comparable periods of the prior
year.
The improvement in gross profit was evidenced in both product and service gross
profit.
Product gross profit as a percentage of product revenues was 78% and 77%
in the three and nine month periods ended July 3, 1999, respectively, increasing
from 75% for the comparable periods of the prior year. The improvement in
product gross profit in both periods is partially attributable to an increased
proportion of product revenues generated by software, which typically generates
higher gross profit than other products. The software component of product sales
was 46% and 47% in the three and nine month periods ended July 3, 1999,
respectively, as compared to 45% for each of the comparable periods of the prior
year. In addition, the Company has also realized cost reductions in manufactured
hardware components due to higher production volumes. Service gross profit as a
percentage of service revenues was 41% and 40% in the three and nine month
periods ended July 3, 1999, respectively, increasing from 35% and 34%,
respectively, for comparable periods of the prior year. The increase in service
gross profit in both periods was primarily attributable to the growth in service
revenues without a proportionate increase in service expenses. This has been
accomplished by more fully leveraging service resources and improving the
efficiency in the delivery of services.
Expenses. Total operating expenses as a percentage of revenues were 51%
and 52% in the three and nine month periods ended July 3, 1999, respectively, as
compared to 51% in the comparable periods of the prior year. Sales and marketing
expenses as a percentage of revenues were 34% and 35% in the three and nine
month periods ended July 3, 1999, respectively, consistent with the respective
comparable periods of the prior year. Engineering expenses as a percentage of
revenues were 10% and 11% in the three and nine month periods ended July 3,
1999, respectively, as compared to 10% in the respective comparable periods of
the prior year. Engineering expenses of $7.0 million and $5.3 million in the
third quarter of fiscal 1999 and 1998, respectively, are net of capitalized
software development costs of $2.2 million and $1.8 million, respectively.
Engineering expenses of $19.6 million and $14.2 million in the first nine months
of fiscal 1999 and 1998, respectively, are net of capitalized software
development costs of $6.4 million and $4.9 million, respectively. The growth in
engineering, research and development expenses resulted primarily from the
development of new products for the client/server and Windows environments.
General and administrative expenses as a percentage of revenues were 6%
in the three and nine month periods ended July 3, 1999 as compared to 7% 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 amortization of intangible assets related to
acquisitions made by the Company which is offset by interest income earned on
its investments.
<PAGE>
Income Taxes. The provision for income taxes as a percentage of pretax
income was 35% in the three and nine month periods ended July 3, 1999,
respectively, as compared to 38% in each of the comparable periods of the prior
year. The reduction in the Company's effective income tax rate in both periods
is primarily attributable to tax benefits resulting from the Company's sale of
its South African subsidiary in the second quarter of fiscal 1999 as well as
utilization of foreign net operating loss carryforwards. The Company anticipates
the effective income tax rate should be approximately 35% for the remainder of
the fiscal year.
Liquidity and Capital Resources
Working capital as of July 3, 1999, amounted to $16.8 million as
compared with $45.1 million at September 30, 1998. The decline in working
capital is attributable to the Company's investment of approximately $20.0
million in both long term marketable securities and acquisitions of businesses
as well as investments of approximately $10.0 million in property, plant and
equipment in the nine month period ending July 3, 1999. In the three month
period ended July 3, 1999, the Company completed the acquisition of a dealer
territory and a labor-tracking software application company. Under the terms of
these acquisition agreements, the Company agreed to an initial cash payment, a
guaranteed payment within one year and assumed certain maintenance contracts and
other professional service obligations.
Cash and equivalents and marketable securities increased to $61.1
million as of July 3, 1999 as compared to $51.8 million at September 30, 1998.
Cash generated from operations increased to $36.0 million in the first nine
months of fiscal 1999 from $23.2 million in the first nine months of the prior
year, principally due to increased earnings and deferred maintenance revenues.
It is the Company's policy to bill maintenance contracts at the contract start
date. The Company has experienced a growth in deferred maintenance revenues as
the result of the expansion of the installed base and, to a lesser extent, an
increase in the sale of extended maintenance contracts. The Company's increase
of approximately $5.0 million in its investment in property, plant and equipment
in the first nine months of the fiscal year as compared to the same period of
the prior year is principally due to costs related to the construction of the
Company's new world headquarters facility. The Company anticipates it will spend
approximately $14.0 million in the construction of the facility over the next 12
months. Cash generated from operations was more than sufficient to fund
investments in property, plant and equipment, acquisitions of businesses and
capitalized software development costs. The Company expects to fund its
investments in software development costs and costs related to the construction
of the new facility over the remainder of its fiscal year with available cash
and investments and operating cash flow.
<PAGE>
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"). The Company
desires to take advantage of the safe harbor provisions of the Act and is
including this statement for the express purpose of availing itself of the
protection of the safe harbor with respect to all forward looking statements
that involve risks and uncertainties.
The Company's 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 the Company and its competitors,
competitive pricing pressures, the dependence on alternate distribution
channels, potential effects of the century change, the ability to attract and
retain sufficient technical personnel, and the dependence on the Company's time
and attendance product line and on key vendors, as further described below and
in the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1998, which factors are specifically incorporated by reference herein.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results may fluctuate as a result of a variety of factors, including
the timing of the introduction of new products and product enhancements by the
Company and its competitors, market acceptance of new products, mix of products
sold, the purchasing patterns of its customers, competitive pricing pressure and
general economic conditions. The Company 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
the Company has contracts to supply systems to certain customers over an
extended period of time, substantially all of the Company's product revenue and
profits in each quarter result from orders received in that quarter. If
near-term demand for the Company's products weakens or if significant
anticipated sales in any quarter do not close when expected, the Company's
revenues for that quarter will be adversely affected. The Company 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. The Company's future success
will depend largely on its ability to enhance its existing product lines and to
develop new products and interfaces to third party products on a timely basis
for the increasingly sophisticated needs of its customers. Although the Company
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 the Company's competitors will not
develop and market products which are superior to the Company's products or
achieve greater market acceptance.
<PAGE>
Competition. The frontline labor management industry is highly
competitive. Competition is increasing as competitors in related industries,
such as human resources management, payroll processing and enterprise resource
planning (ERP) enter the market. Advances in software development tools have
accelerated the software development process and, therefore, can allow
competitors to penetrate certain of the Company's markets. Maintaining the
Company's technological and other advantages over competitors will require
continued investment by the Company in research and development and marketing
and sales programs. There can be no assurance that the Company will have
sufficient resources to make such investments or be able to achieve the
technological advances necessary to maintain its competitive advantages.
Increased competition could adversely affect the Company's operating results
through price reductions and/or loss of market share.
Dependence on Alternate Distribution Channels. The Company markets and
sells its products through its direct sales organization, independent dealers
and OEMs. For the fiscal year ended September 30, 1998, approximately 20% of the
Company's revenue was generated through sales to dealers and OEMs. Reduction in
the sales efforts of the Company's major dealers and/or OEMs, or termination or
changes in their relationships with the Company, could have a material adverse
effect on the results of the Company's operations.
Year 2000. The Company has an executive level steering committee to
identify and resolve Year 2000 issues associated with the Company's internal
systems (both information technology ("IT") and non-IT), the Company's own
products and services, the status of third party products distributed by the
Company to its customers as well as the Year 2000 readiness of the Company's
suppliers. The Company has completed an assessment of all of its principal IT
systems, which include manufacturing, distribution, customer service and
financial systems. The Company has, with the assistance of an outside
consultant, tested its principal internal enterprise resource planning (ERP)
system and believes it to be year 2000 compliant. This ERP system includes order
entry, material resource planning, master production scheduling, purchasing,
shipping and financial systems. The Company has identified Year 2000 issues in
other less significant IT systems, and expects to resolve those issues, by
replacements and/or upgrades, by the end of October 1999. The Company is
currently performing an assessment and remediation, as necessary, of certain
non-IT systems and expects that assessment to be completed prior to the end of
1999. Any such systems determined not to be Year 2000 compliant will be remedied
or replaced, if necessary. The Company will replace, prior to the end of October
1999, certain stand alone shop floor test equipment, to ensure Year 2000
compliance. The Company does not plan to assess specifically its facility
management systems, or the external forces such as utility or transportation
Year 2000 compliance failures that might generally affect industry and commerce.
Although the Company 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, the Company may experience material unanticipated problems and costs
caused by undetected errors or defects in these internal systems.
<PAGE>
The Company's Year 2000 compliance plan includes designing its current
products to meet the Company's definition of "Year 2000 Compliant" and testing
the most recent versions of its current products to determine whether they meet
that definition. Testing of products currently manufactured by the Company is
approximately 98% completed and is expected to be finished by the end of October
1999. The Company has warranted, and may in the future warrant to certain
customers that its products will work in the Year 2000 and beyond. Generally,
for products that have been identified to date as needing upgrades/new versions
to address Year 2000 issues, the Company has those upgrades/new versions
available to customers for purchase or under maintenance agreements. One of the
Company's products, which was sold in low volumes, has a Year 2000 deficiency
for which there is no upgrade/new version currently available, but the Company
intends to correct that deficiency in the product's next maintenance release.
Some of the Company's customers are using products and/or product versions that
the Company has not tested, and does not support, for Year 2000 compliance. The
Company is encouraging these customers to migrate to current products/versions
that meet the Company's Year 2000 compliance definition. It is possible that the
Company may experience increased expenses in addressing migration issues for
these customers. In addition, the Company does not intend to test any of its
custom software products for Year 2000 compliance.
For third party products that the Company distributes with its
products, the Company has sought information and assurances from the
manufacturers concerning those products' Year 2000 compliance status. As a
result, the Company has identified certain third party products that will
require an upgrade to be Year 2000 compliant and is currently notifying affected
customers and encouraging them to upgrade. The Company expects to complete its
assessment of those third party products by the end of October 1999.
Despite the testing of its own products and efforts to obtain
assurances on third party products, errors or defects in such products could
result in delay or loss of revenue, diversion of development resources, damage
to the Company's reputation, or increased service and warranty costs, any of
which could materially affect the Company's business, results of operations, or
financial condition. In addition, the unprecedented nature of potential
litigation regarding Year 2000 compliance issues makes it uncertain whether the
Company will be affected by such litigation.
The Company has completed its systematic inquiry of key suppliers to
assess their Year 2000 readiness. The Company is not aware of any problems that
would materially affect its business, results of operations or financial
condition, but the Company has no means of ensuring that assurances received
from such suppliers are accurate. The inability of such suppliers to meet Year
2000 requirements could materially impact the ability of the Company to procure
material from these suppliers and to meet its obligations to supply products to
its customers.
<PAGE>
The Company does not currently have any information concerning the Year
2000 compliance status of its customers. As with other similarly situated
companies, if the Company's current or future customers fail to achieve Year
2000 compliance or if they divert expenditures to address Year 2000 compliance
problems, the Company's business, results of operations, or financial condition
could be materially affected.
The Company is in the process of formulating a contingency plan on Year
2000 readiness. The Company anticipates completing that contingency plan by the
end of October 1999.
The costs associated with the Company's Year 2000 plan have been funded
from operating cash flows and have been charged to operations. To date, the
Company has incurred approximately $1.0 million of incremental costs and
expects, on a cumulative basis, total costs to be approximately $1.2 million 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. The Company 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 the Company's Year 2000 plan, have not been and are not expected to
be material to the Company's financial position, results of operations or cash
flows. The cost of completing the Year 2000 plan and the date on which the
Company believes the plan will be complete are based upon management's best
estimates derived by using numerous assumptions of future events, including the
continued availability of certain resources. There can be no guarantee that
these estimates will be achieved and the actual results may differ materially
from those anticipated. Specific factors that might cause these differences
include without limitation, the availability and cost of personnel trained in
this area, the ability to make timely and appropriate adjustments to all
relevant computer codes and similar uncertainties.
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibit
27 Financial Data Schedule
(b) Reports of Form 8-K
There were no reports on Form 8-K filed during the fiscal quarter
ended July 3, 1999.
<PAGE>
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 13, 1999
<PAGE>
KRONOS INCORPORATED
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of the Corporation for the
Nine months ended July 3, 1999 and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<CIK> 0000886903
<NAME> Kronos Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-START> Oct-01-1998
<PERIOD-END> Jul-03-1999
<EXCHANGE-RATE> 1
<CASH> 19,250
<SECURITIES> 17,483
<RECEIVABLES> 57,628
<ALLOWANCES> 1,569
<INVENTORY> 3,275
<CURRENT-ASSETS> 109,553
<PP&E> 56,939
<DEPRECIATION> 37,291
<TOTAL-ASSETS> 209,675
<CURRENT-LIABILITIES> 92,791
<BONDS> 0
0
0
<COMMON> 126
<OTHER-SE> 101,165
<TOTAL-LIABILITY-AND-EQUITY> 209,675
<SALES> 117,788
<TOTAL-REVENUES> 182,018
<CGS> 27,196
<TOTAL-COSTS> 65,717
<OTHER-EXPENSES> 94,891
<LOSS-PROVISION> 808
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 21,410
<INCOME-TAX> 7,515
<INCOME-CONTINUING> 13,895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,895
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.06
</TABLE>
