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
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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)
400 Fifth Avenue, Waltham, MA 02154
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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 April 30, 2000, 12,432,840 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 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
<PAGE>
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
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ---------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</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>
April 1, September 30,
2000 1999
--------- ---------
ASSETS
<S> <C> <C>
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
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<PAGE>
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended
--------------------
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
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
======== ========
</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, 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):
<TABLE>
<CAPTION>
April 1, September 30,
2000 1999
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
<PAGE>
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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ---------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
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
======= ======= ======== ========
</TABLE>
<PAGE>
NOTE F - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- --------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
<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
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.
<PAGE>
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
<PAGE>
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.
<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)
May 12, 2000
<PAGE>
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
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
<TABLE> <S> <C>
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<LEGEND>
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
</LEGEND>
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<NAME> Kronos Incorporated
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