Exhibit 99.2
Kronos Incorporated
Unaudited Pro Forma Financial Statements
(dollars in thousands)
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements have been prepared to give effect to the acquisition by Kronos Incorporated (“Kronos”) of all of the outstanding capital stock of Unicru, Inc. using the purchase method of accounting and the assumptions and adjustments described in the accompanying notes to unaudited pro forma combined financial statements.
On August 1, 2006, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and among Kronos Incorporated (the “Registrant”), Blade Acquisition Corp., a wholly owned subsidiary of the Registrant (“Merger Sub”), Unicru, Inc. (“Unicru”), and Brian Ascher, solely in his capacity as the representative of holders of Unicru’s securities, the Registrant acquired all of the outstanding capital stock of Unicru and the Merger Sub merged with and into Unicru, with Unicru surviving as a wholly owned subsidiary of the Registrant (the “Merger”).
Pursuant to the Merger Agreement, all shares of Unicru’s preferred stock were converted into shares of common stock immediately prior to the consummation of the Merger. Thereafter, each share of Unicru’s common stock outstanding immediately prior to the consummation of the Merger was converted into the right to receive $4.15 in cash. The Registrant paid $150 million in cash in the aggregate for all of the outstanding capital stock of Unicru, less certain expenses and other deductions set forth in the Merger Agreement.
Also at the effective time of the Merger (the “Effective Time”), each outstanding option to purchase Unicru’s common stock was terminated and/or cancelled and converted automatically into the right to receive a cash payment equal to the product of (i) the amount by which (A) $4.15 exceeds (B) the exercise price per share of such option, multiplied by (ii) the total number of shares of Unicru’s common stock underlying such option. In addition, at the Effective Time each outstanding warrant to purchase Unicru’s capital stock was terminated and converted automatically into the right to receive a cash payment equal to the product of (i) the amount by which (A) $4.15 exceeds (B) the exercise price per share of such warrant, multiplied by (ii) the total number of shares of Unicru’s capital stock underlying such warrant, except for a certain outstanding warrant of Unicru, which was assumed by the Registrant.
Pursuant to the Merger Agreement, the Registrant deposited $16 million of the cash consideration paid for Unicru’s outstanding capital stock into an escrow fund to secure certain indemnification and other payments under the terms of the Merger Agreement. On or about August 1, 2008, the balance of the escrow fund in excess of any amounts held for unresolved claims will be distributed to the former holders of Unicru securities.
The following unaudited pro forma combined annual statement of operations combines Kronos’ statement of operations data for the year ended September 30, 2005, with Unicru’s statement of operations data for the year ended December 31, 2005, as if the acquisition had been completed on October 1, 2004. The following unaudited pro forma combined interim statement of operations combines Kronos’ statement of operations data for the six months ended April 1, 2006, with Unicru’s statement of operations data for the period October 1, 2005 to March 31, 2006, as if the acquisition had been completed on October 1, 2005.
The following unaudited pro forma combined balance sheet combines Kronos’ and Unicru’s balance sheet data as of April 1, 2006 and March 31, 2006, respectively, as if the acquisition had been completed on April 1, 2006. The pro forma financial information is based upon the historical consolidated financial statements of Kronos and Unicru and the assumptions, estimates and adjustments which are described in the notes to the unaudited pro forma combined financial statements. The assumptions, estimates and adjustments are preliminary and have been made solely for purposes of developing such pro forma information.
The unaudited pro forma combined financial statements include adjustments that have been made to reflect the preliminary purchase price allocations. These preliminary allocations represent estimates made for purposes of these pro forma financial statements and are subject to change upon finalization of management’s assessment of valuation reports from an independent valuation specialist.
The unaudited pro forma combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the consolidated financial position or consolidated results of operations of Kronos that would have been reported had the acquisitions occurred on the dates indicated, nor do they represent a forecast of the consolidated financial position of Kronos at any future date or the consolidated results of operations for any future period. Furthermore, no effect has been given in the unaudited pro forma combined statements of operations for synergistic benefits or cost savings that may be realized through the combination of Kronos and Unicru or costs that may be incurred in integrating the two companies. The unaudited pro forma combined financial statements should be read in conjunction with the historical financial statements and related notes and management’s discussion and analysis of financial condition and results of operations of Kronos which is included in Kronos’ Annual Report on Form 10-K for the year ended September 30, 2005, Kronos’ definitive proxy statement on Schedule 14A filed with the SEC on January 9, 2006 and Kronos’ Quarterly Report on Form 10-Q for the quarterly period ended April 1, 2006, which are incorporated by reference herein, and the historical financial statements and related notes of Unicru included in this Form 8-K/A.
KRONOS INCORPORATED
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF APRIL 1, 2006
(In thousands)
Kronos Historical April 1, 2006 | Unicru Historical March 31, 2006 | Pro forma Adjustments | Pro Forma Combined April 1, 2006 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 62,978 | $ | 4,030 | $ | (55,353 | ) | A, C, E | $ | 11,655 | ||||||
Marketable securities | 51,812 | — | — | 51,812 | ||||||||||||
Accounts receivable, net | 110,650 | 4,797 | 2,187 | A, C | 117,634 | |||||||||||
Deferred income taxes | 8,267 | — | 1,071 | A, H | 9,338 | |||||||||||
Other current assets | 20,343 | 2,564 | 408 | A, C, E | 23,315 | |||||||||||
Total current assets | 254,050 | 11,391 | (51,687 | ) | 213,754 | |||||||||||
Marketable securities | 48,366 | — | — | 48,366 | ||||||||||||
Property, plant and equipment, net | 57,973 | 5,033 | (245 | ) | A, C | 62,761 | ||||||||||
Customer related intangible assets | 30,826 | 93 | 41,624 | A, B | 72,543 | |||||||||||
Other intangible assets | 15,270 | 1,865 | 26,613 | A, B | 43,748 | |||||||||||
Goodwill | 150,691 | — | 84,768 | A | 235,459 | |||||||||||
Capitalized software, net | 22,862 | — | — | 22,862 | ||||||||||||
Other assets | 22,399 | 2,041 | (280 | ) | A, C | 24,160 | ||||||||||
Total assets | $ | 602,437 | $ | 20,423 | $ | 100,793 | $ | 723,653 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 8,995 | $ | 93 | $ | 254 | A, C | $ | 9,342 | |||||||
Accrued compensation | 41,002 | 357 | 1,073 | A, C | 42,432 | |||||||||||
Accrued expenses and other current liabilities | 24,648 | 1,712 | 561 | A, C | 26,921 | |||||||||||
Deferred product revenues | 2,722 | — | — | 2,722 | ||||||||||||
Deferred professional service revenues | 26,661 | — | — | 26,661 | ||||||||||||
Deferred subscription revenues | — | 2,510 | (1,974 | ) | A, C | 536 | ||||||||||
Deferred maintenance revenues | 112,218 | — | — | 112,218 | ||||||||||||
Total current liabilities | 216,246 | 4,672 | (86 | ) | 220,832 | |||||||||||
Deferred maintenance revenues | 7,744 | — | — | 7,744 | ||||||||||||
Deferred subscription revenues | — | 2,224 | (2,224 | ) | A, C | — | ||||||||||
Deferred income taxes | 12,102 | — | 17,521 | A, H | 29,623 | |||||||||||
Notes payable long term | — | — | 97,883 | E | 97,883 | |||||||||||
Other liabilities | 4,715 | 1,219 | 7 | A, C | 5,941 | |||||||||||
— | ||||||||||||||||
Shareholders’ equity: | — | |||||||||||||||
Preferred stock | — | 24,604 | (24,604 | ) | D | — | ||||||||||
Common stock | 321 | 29,151 | (29,151 | ) | D | 321 | ||||||||||
Additional paid-in capital | 66,456 | — | — | 66,456 | ||||||||||||
Notes receivable from stock sales | — | (5,756 | ) | 5,756 | D | — | ||||||||||
Retained earnings | 294,073 | (35,621 | ) | 35,621 | A, D | 294,073 | ||||||||||
Accumulated other comprehensive income: | 780 | (70 | ) | 70 | D | 780 | ||||||||||
Total shareholders’ equity | 361,630 | 12,308 | (12,308 | ) | 361,630 | |||||||||||
Total liabilities and shareholders’ equity | $ | 602,437 | $ | 20,423 | $ | 100,793 | $ | 723,653 | ||||||||
See accompanying notes to the unaudited pro forma financial information.
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KRONOS INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2005
(In thousands, except share and per share amounts)
For the Year Ended September 30, 2005 Kronos | For the Year Ended December 31, 2005 Unicru | Pro Forma Adjustments (Note A) | Pro Forma Combined | |||||||||||||
Net revenues: | ||||||||||||||||
Product | $ | 221,569 | $ | — | $ | — | $ | 221,569 | ||||||||
Maintenance | 170,692 | — | — | 170,692 | ||||||||||||
Subscriptions | — | 37,855 | (1,565 | ) F | 36,290 | |||||||||||
Professional services | 126,397 | — | — | 126,397 | ||||||||||||
518,658 | 37,855 | (1,565 | ) | 554,948 | ||||||||||||
Cost of sales: | ||||||||||||||||
Costs of product | 48,455 | — | 4,368 | B | 52,823 | |||||||||||
Costs of subscriptions | — | 14,289 | — | 14,289 | ||||||||||||
Costs of maintenance and professional services | 151,583 | — | — | 151,583 | ||||||||||||
200,038 | 14,289 | 4,368 | 218,695 | |||||||||||||
Gross profit | 318,620 | 23,566 | (5,933 | ) | 336,253 | |||||||||||
Operating expenses and other income: | ||||||||||||||||
Sales and marketing | 145,643 | 10,345 | (364 | ) I | 155,624 | |||||||||||
Engineering, research and development | 50,659 | 9,885 | — | 60,544 | ||||||||||||
General and administrative | 41,647 | 4,157 | — | 45,804 | ||||||||||||
Amortization of intangible assets | 4,843 | 1,193 | 3,720 | B | 9,756 | |||||||||||
Other income, net | (5,710 | ) | (373 | ) | 5,994 | E | (89 | ) | ||||||||
237,082 | 25,207 | 9,350 | 271,639 | |||||||||||||
Income (loss) before income taxes | 81,538 | (1,641 | ) | (15,283 | ) | 64,614 | ||||||||||
Provision (benefit) for income taxes | 27,634 | (21 | ) | (5,501 | ) H | 22,112 | ||||||||||
Net income (loss) | $ | 53,904 | $ | (1,620 | ) | $ | (9,782 | ) | $ | 42,502 | ||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 1.69 | $ | 1.34 | ||||||||||||
Diluted | $ | 1.65 | $ | 1.30 | ||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 31,804,861 | 31,804,861 | ||||||||||||||
Diluted | 32,593,040 | 32,593,040 | ||||||||||||||
See accompanying notes to the unaudited pro forma financial information.
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KRONOS INCORPORATED
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 1, 2006
(In thousands, except share and per share amounts)
For the Six Months Ended April 1, 2006 Kronos | For the Six Months Ended March 31, 2006 Unicru | Pro Forma Adjustments (Note A) | Pro Forma Combined | |||||||||||||
Net revenues: | ||||||||||||||||
Product | $ | 107,025 | $ | — | — | $ | 107,025 | |||||||||
Maintenance | 93,479 | — | — | 93,479 | ||||||||||||
Subscriptions | — | 20,578 | (836 | ) F | 19,742 | |||||||||||
Professional services | 70,962 | — | — | 70,962 | ||||||||||||
271,466 | 20,578 | (836 | ) | 291,208 | ||||||||||||
Cost of sales: | ||||||||||||||||
Costs of product | 25,469 | — | 2,183 | B | 27,652 | |||||||||||
Costs of subscriptions | 28,766 | 7,741 | 14 | G | 36,521 | |||||||||||
Costs of maintenance and professional services | 60,510 | — | — | 60,510 | ||||||||||||
114,745 | 7,741 | 2,197 | 124,683 | |||||||||||||
Gross profit | 156,721 | 12,837 | (3,033 | ) | 166,525 | |||||||||||
Operating expenses and other income: | ||||||||||||||||
Sales and marketing | 81,167 | 4,867 | 20 | G | 86,054 | |||||||||||
Engineering, research and development | 26,923 | 5,140 | — | 32,063 | ||||||||||||
General and administrative | 24,082 | 1,815 | 54 | G | 25,951 | |||||||||||
Amortization of intangible assets | 3,207 | 483 | 1,835 | B | 5,525 | |||||||||||
Other income, net | (3,365 | ) | (218 | ) | 2,826 | E | (757 | ) | ||||||||
132,014 | 12,087 | 4,735 | 148,836 | |||||||||||||
Income (loss) before income taxes | 24,707 | 750 | (7,768 | ) | 17,689 | |||||||||||
Provision (benefit) for income taxes | 8,629 | 10 | (2,711 | ) H | 5,928 | |||||||||||
Net income (loss) | $ | 16,078 | $ | 740 | $ | (5,057 | ) | $ | 11,761 | |||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.50 | $ | 0.37 | ||||||||||||
Diluted | $ | 0.50 | $ | 0.36 | ||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 31,854,544 | 31,854,544 | ||||||||||||||
Diluted | 32,261,262 | 32,261,262 | ||||||||||||||
Stock-based compensation expense included in the above captions: | ||||||||||||||||
Costs of product | $ | 179 | $ | — | $ | — | $ | 179 | ||||||||
Costs of service | 1,785 | — | 14 | 1,799 | ||||||||||||
Sales and marketing | 2,656 | — | 20 | 2,676 | ||||||||||||
Engineering, research and development | 1,670 | — | — | 1,670 | ||||||||||||
General and administrative | 2,149 | — | 54 | 2,203 | ||||||||||||
$ | 8,439 | $ | — | $ | 88 | $ | 8,527 | |||||||||
See accompanying notes to the unaudited pro forma financial information.
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Kronos Incorporated
Notes to Unaudited Pro Forma Financial Information (in thousands)
1.Acquisition of Unicru
(A) | The estimated purchase price of Unicru, Inc. for purposes of preparing these unaudited pro forma financial statements is $177.8 million, including $149.2 million in cash, $2.3 million in transaction-related costs, $3.0 for a technology-related patent settlement and $23.3 million in assumed liabilities. The allocation of the purchase price is based upon preliminary estimates of the assets and liabilities acquired in accordance with SFAS No 141 “Business Combinations”. A full determination of the purchase price allocation will be made upon receipt of a final valuation analysis of tangible and intangible assets. It is anticipated that the final purchase price allocation will not differ materially from the preliminary allocations. |
The purchase price paid for Unicru is as follows:
Cash paid | $ | 149,221 | |
Transaction costs | 2,317 | ||
Technology-related patent settlement | 3,000 | ||
Accounts payable | 347 | ||
Accrued compensation assumed | 1,430 | ||
Accrued expense and other current liabilities assumed | 2,273 | ||
Deferred revenue | 536 | ||
Deferred income taxes assumed - noncurrent | 17,521 | ||
Other liabilities assumed - noncurrent | 1,227 | ||
Total purchase price | $ | 177,872 | |
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The allocation of the purchase price is estimated as follows:
Cash | $ | 5,331 | |
Accounts receivable | 6,984 | ||
Other current assets | 2,973 | ||
Deferred tax asset – current | 1,071 | ||
Property and equipment | 4,789 | ||
Identifiable intangible assets - Customer Related | 41,717 | ||
Identifiable intangible assets - Other | 28,478 | ||
Goodwill | 84,768 | ||
Other assets | 1,761 | ||
Total purchase price | $ | 177,872 | |
(B) | To record pro forma amortization of intangible assets resulting from Kronos’ acquisition of Unicru from the beginning of the period presented over their estimated useful lives and the reversal of amortization of intangible assets that were removed from Unicru’s books when the acquisition took place as follows: |
Intangible Asset | Estimated Useful Life (years) | Amortization Year Ended September 30, | Amortization Six Months April 1, 2006 | |||||||||||
Core technology acquired | $ | 26,429 | 7.0 | $ | 3,779 | $ | 1,888 | |||||||
Developed technology acquired | 1,768 | 3.0 | 589 | 295 | ||||||||||
Subtotal - technology acquired | 28,197 | 4,368 | 2,183 | |||||||||||
Customer contracts and related customer relationships acquired | 41,717 | 9.0 | 4,632 | 2,317 | ||||||||||
Tradenames acquired | 281 | 0.2 | 281 | — | ||||||||||
Subtotal - intangibles acquired | $ | 70,195 | $ | 9,281 | $ | 4,500 | ||||||||
Less: Unicru intangibles reversed | (1,958 | ) | (1,193 | ) | (482 | ) | ||||||||
Net adjustment | $ | 68,237 | $ | 8,088 | $ | 4,018 | ||||||||
Allocated to: | ||||||||||||||
Cost of goods sold (Technology) | $ | 41,624 | $ | 4,368 | $ | 2,183 | ||||||||
Amortization of intangible assets (Other) | 26,613 | 3,720 | 1,835 | |||||||||||
Total | $ | 68,237 | $ | 8,088 | $ | 4,018 | ||||||||
(C) | Adjustment to certain assets and liabilities reflect changes in the balances from April 1, 2006 to the date of acquisition, August 1, 2006. |
Cash | $ | 1,301 | ||
Accounts receivable | $ | 2,187 | ||
Other current assets | $ | 277 | ||
Property and equipment | $ | (245 | ) | |
Other assets | $ | (280 | ) | |
Accounts payable | $ | 254 | ||
Accrued compensation | $ | 1,073 | ||
Accrued expenses and other current liabilities | $ | 561 | ||
Other liabilities | $ | 7 |
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The following table shows the adjustments made to cash in the pro forma balance sheet:
Pro Forma Adjustment to Cash | ||||
Cash advance from line of credit | $ | 97,884 | ||
Increase in Unicru, Inc. cash | 1,301 | |||
Cash paid for Unicru, Inc. | (149,221 | ) | ||
Cash paid for patent settlement | (3,000 | ) | ||
Cash paid for other transaction costs | (2,317 | ) | ||
Net pro forma adjustment to cash | $ | (55,353 | ) | |
The following table reflects the adjustments to record the difference between the preliminary fair value and the historical amount of Unicru’s deferred revenue (see (F) below):
Unicru Historical | Net Adjustment | Preliminary Fair Value | ||||||||
Deferred subscription revenue – current | $ | 2,510 | $ | (1,974 | ) | $ | 536 | |||
Deferred subscription revenue – long-term | $ | 2,224 | $ | (2,224 | ) | $ | — |
(D) | Adjustment reflects the elimination of the historical stockholders’ equity of Unicru. |
(E) | To record $97.9 million that was drawn on a revolving credit facility in order to finance a portion of the acquisition of Unicru, Inc. and to add interest expense on this debt to Unicru’s statement of operations. Interest expense was estimated using an assumed average interest rate of 6.25% for the twelve months ended September 30, 2005 and 6.08% for the six months ended April 1, 2006. |
Adjustment of approximately $131,000 for debt issuance costs related to revolving credit facility that will be amortized to interest expense over the life of the loan.
Adjustment to record interest income on Unicru, Inc.’s statement of operations for the increase in their cash balance between March 31, 2006 and the date of the acquisition, and to eliminate interest income from Kronos Incorporated’s statement of operations for cash used in the acquisition and not available for investment during the period. Interest income was estimated using an assumed interest rate of 3.0%.
(F) | Adjustments of $(1,565) and $(836) for the year ended September 30, 2005 and the six months ended April 1, 2006, respectively, represent the net reduction in subscription revenue associated with the difference between the preliminary fair value and the historical amount of deferred revenue at the beginning of those periods. The preliminary fair values represent amounts equivalent to the estimated cost plus an appropriate profit margin to perform services related to Unicru’s subscription contracts based on the deferred revenue balances of Unicru. |
(G) | Adjustment reflects stock-based employee compensation expense for 45,000 stock options granted to Unicru employees as part of the acquisition. |
(H) | Adjustments reflect the effect of the acquisition on the provision for income taxes as if Kronos’ effective tax rate of 34% for the year-ended September 30, 2005 and 33.5% for the six months ended April 1, 2006 were applied to the pro forma combined pre-tax income. |
(I) | Adjustment reflects the reversal of stock-based employee compensation expense recorded by Unicru in 2005 for the modification of the terms of stock options that had previously been granted. These options were cancelled on the date of acquisition. |
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