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 1, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------ Commission file number 0-20109 ------------------------------------- Kronos Incorporated - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2640942 - -------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 297 Billerica Road, Chelmsford, MA 01824 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (978) 250-9800 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 400 Fifth Avenue, Waltham, MA 02154 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- As of July 29, 2000, 12,334,935 shares of the registrant's Common Stock, $.01 par value, were outstanding. KRONOS INCORPORATED INDEX PART I. FINANCIAL INFORMATION Page Item 1.Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended July 1, 2000 and July 3, 1999 1 Condensed Consolidated Balance Sheets at July 1, 2000 and September 30, 1999 2 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 1, 2000 and July 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 - 12 PART II. OTHER INFORMATION Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit Index 15 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 1, July 3, July 1, July 3, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net revenues: Product .......................................... $ 38,602 $ 43,965 $ 106,845 $ 117,788 Service .......................................... 29,531 23,252 87,722 64,230 ----------- ----------- ----------- ----------- 68,133 67,217 194,567 182,018 Cost of sales: Product .......................................... 8,729 9,883 24,586 27,196 Service .......................................... 17,813 13,664 51,068 38,521 ----------- ----------- ----------- ----------- 26,542 23,547 75,654 65,717 ----------- ----------- ----------- ----------- Gross profit ................................ 41,591 43,670 118,913 116,301 Expenses: Sales and marketing .............................. 24,147 23,094 68,492 63,458 Engineering, research and development ............ 7,245 6,988 21,834 19,616 General and administrative ....................... 4,409 4,030 12,853 11,246 Other expense, net ............................... 533 106 628 571 ----------- ----------- ----------- ----------- 36,334 34,218 103,807 94,891 ----------- ----------- ----------- ----------- Income before income taxes .................. 5,257 9,452 15,106 21,410 Provision for income taxes ............................. 1,945 3,318 5,589 7,515 ----------- ----------- ----------- ----------- Net income .................................. $ 3,312 $ 6,134 $ 9,517 $ 13,895 =========== =========== =========== =========== Net income per common share: Basic ....................................... $ 0.27 $ 0.49 $ 0.76 $ 1.11 =========== =========== =========== =========== Diluted ..................................... $ 0.26 $ 0.47 $ 0.73 $ 1.06 =========== =========== =========== =========== Average common and common equivalent shares outstanding: Basic ....................................... 12,404,310 12,528,865 12,460,641 12,537,394 =========== =========== =========== =========== Diluted ..................................... 12,734,592 13,115,132 13,016,507 13,051,479 =========== =========== =========== =========== See accompanying notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) UNAUDITED July 1, September 30, 2000 1999 --------- --------- ASSETS Current assets: Cash and equivalents .................................................... $ 10,654 $ 20,148 Marketable securities ................................................... 13,683 20,893 Accounts receivable, less allowances of $7,472 at July 1, 2000 and $6,791 at September 30, 1999 ....................... 64,810 66,817 Deferred income taxes ................................................... 6,139 5,414 Other current assets .................................................... 13,817 11,872 --------- --------- Total current assets ............................................. 109,103 125,144 Property, plant and equipment, net ......................................... 39,486 23,981 Marketable securities ...................................................... 16,000 21,400 Excess of cost over net assets of businesses acquired, net ................. 29,167 29,946 Deferred software development costs, net ................................... 14,108 12,218 Other assets ............................................................... 15,696 15,554 --------- --------- Total assets .................................................... $ 223,560 $ 228,243 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................ $ 7,329 $ 8,503 Accrued compensation .................................................... 16,532 21,106 Accrued expenses and other current liabilities .......................... 37,286 32,753 Deferred maintenance revenues ........................................... 46,206 41,636 --------- --------- Total current liabilities ....................................... 107,353 103,998 Deferred maintenance revenues .............................................. 17,079 18,818 Other liabilities .......................................................... 1,370 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 issued at July 1, 2000 and September 30, 1999 ....... 126 126 Additional paid-in capital .............................................. 19,553 31,087 Retained earnings ....................................................... 91,660 82,143 Accumulated other comprehensive loss .................................... (1,088) (337) Cost of Treasury Stock (302,426 shares and 192,165 shares at July 1, 2000 and September 30, 1999, respectively) ......... (12,493) (8,761) --------- --------- Total shareholders' equity ...................................... 97,758 104,258 --------- --------- Total liabilities and shareholders' equity ...................... $ 223,560 $ 228,243 ========= ========= See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) UNAUDITED Nine Months Ended ------------------ July 1, July 3, 2000 1999 -------- -------- Operating activities: Net income ......................................................................... $ 9,517 $ 13,895 Adjustments to reconcile net income to net cash and equivalents provided by operating activities: Depreciation .............................................................. 5,826 5,938 Amortization of excess of cost over net assets of businesses acquired ..... 4,842 2,952 Amortization of deferred software development costs ....................... 5,356 4,340 Provision for deferred income taxes ....................................... (3,808) Changes in certain operating assets and liabilities: Accounts receivable, net .............................................. 2,685 (4,830) Deferred maintenance revenue .......................................... 2,115 14,374 Accounts payable, accrued compensation and other liabilities ............................................ (898) 7,049 Other ................................................................. 1,025 (7,721) -------- -------- Net cash and equivalents provided by operating activities ........ 26,660 35,997 Investing activities: Purchase of property, plant and equipment .......................................... (16,959) (9,900) Capitalization of software development costs ....................................... (7,246) (6,389) Decrease (increase) in marketable securities ....................................... 12,610 (19,887) Acquisitions of businesses ......................................................... (9,009) (9,771) -------- -------- Net cash and equivalents used in investing activities ............ (20,604) (45,947) Financing activities: Net proceeds from exercise of stock option and employee stock purchase plans ................................................................. 5,931 3,835 Purchase of treasury stock ......................................................... (21,365) (4,457) Proceeds from sale of put options .................................................. 169 -------- -------- Net cash and equivalents used in financing activities ............ (15,265) (622) Effect of exchange rate changes on cash and equivalents .................................. (285) (66) -------- -------- Decrease in cash and equivalents ......................................................... (9,494) (10,638) Cash and equivalents at the beginning of the period ...................................... 20,148 29,888 -------- -------- Cash and equivalents at the end of the period ............................................ $ 10,654 $ 19,250 ======== ======== See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - General The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of the Company's financial position and results of operations as of and for the interim periods presented pursuant to the rules and regulations of the Securities and Exchange Commission. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements for the fiscal year ended September 30, 1999. The results of operations for the three and nine months ended July 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 - Revenue Recognition The Company recognizes revenues from sales and sales-type leases of its systems, application software, parts and components when a noncancelable agreement has been signed, the product shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. From time to time customers request delayed shipment, usually because of scheduling for systems integration and /or lack of storage space at the customers' facilities during the implementation. In such bill and hold transactions, the Company recognizes revenue when the criteria of Staff Accounting Bulletin No. 101 are satisfied. Revenues from maintenance agreements are recognized ratably over the contractual period and all other service revenues are recognized as the services are performed. NOTE D - Marketable Securities A portion of the Company's portfolio of state revenue bonds and government agency bonds was placed under the direction of an investment advisor during fiscal year 2000 in order to better meet the Company's investment objectives. As a result, the Company has reclassified $25,428,000 of these marketable securities from held-to-maturity to available-for-sale at July 1, 2000. The related unrealized loss as of July 1, 2000 was $206,000 and is included in Other Comprehensive Loss. NOTE E - Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following (in thousands): July 1, September 30, 2000 1999 ------- ------- Deferred professional service revenue ....... $17,153 $17,262 Accrued acquisition payments ................ 1,201 6,461 Federal and state taxes payable ............. 7,461 2,522 Accrued construction costs .................. 4,285 -- Accrued other ............................... 7,186 6,508 ------- ------- $37,286 $32,753 ======= ======= NOTE F - Comprehensive Income For the three and nine months ended July 1, 2000 and July 3, 1999 comprehensive income consisted of the following (in thousands): Three Months Ended Nine Months Ended -------------------- --------------------- July 1, July 3, July 1, July 3, 2000 1999 2000 1999 --------- --------- --------- --------- Comprehensive income: Net income .............................. $ 3,312 $ 6,134 $ 9,517 $13,895 Cumulative translation adjustment ....... (236) 217 (545) 815 Cumulative unrealized losses on available-for-sale securities ..... (206) -- (206) -- --------- --------- --------- --------- Total comprehensive income .................. $ 2,870 $ 6,351 $ 8,766 $14,710 ========= ========= ========= ========= NOTE G - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Nine Months Ended --------------------------- --------------------------- July 1, July 3, July 1, July 3, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net income (in thousands) ...... $ 3,312 $ 6,134 $ 9,517 $ 13,895 =========== =========== =========== =========== Weighted-average shares ........ 12,404,310 12,528,865 12,460,641 12,537,394 Effect of dilutive securities: Put options ................. -- -- 10,266 -- Employee stock options ...... 330,282 586,267 545,600 514,085 ----------- ----------- ----------- ----------- Adjusted weighted-average shares and assumed conversions ..... 12,734,592 13,115,132 13,016,507 13,051,479 =========== =========== =========== =========== Basic earnings per share ....... $ 0.27 $ 0.49 $ 0.76 $ 1.11 =========== =========== =========== =========== Diluted earnings per share ..... $ 0.26 $ 0.47 $ 0.73 $ 1.06 =========== =========== =========== =========== 7 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 nine months ended July 1, 2000 amounted to $68.1 million and $194.6 million, respectively, as compared to $67.2 million and $182.0 million in the respective comparable periods in the prior year. Revenue grew 1% and 7% in the three and nine month periods ended July 1, 2000, respectively, as compared to 28% and 27% in the respective comparable periods in the prior year. The revenue growth rate experienced in 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 that period. Management believes that demand continues to exist for Kronos' products and services and that Kronos is experiencing a more elongated sales cycle during fiscal 2000. The elongation of the sales cycle is, management believes, the result of the combination of customers delaying investment in new applications after the significant investments made in preparation for the Year 2000 and increased complexity in the sales process for Kronos products and services. The increased complexity in the sales process can be attributed to factors including more complex product technology and an increase in average transaction size. Product revenues for the quarter amounted to $38.6 million as compared to $44.0 million in the same period of fiscal 1999. Product revenues for the first nine months of fiscal 2000 were $106.8 million as compared to $117.8 million in the first nine months of the prior year. Product revenue declined 12% and 9% in the three and nine month periods ended July 1, 2000, respectively, and increased 25% and 24% in the respective 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. Management believes product revenues have been negatively affected in fiscal 2000 for the reasons described above and anticipates that product revenues will continue to be similarly affected over the remainder of the fiscal year. Service revenues for the third quarter of fiscal 2000 amounted to $29.5 million as compared to $23.3 million in the third quarter of fiscal 1999. Service revenues for the first nine months of fiscal 2000 were $87.7 million as compared to $64.2 million in the first nine months of the prior year. Service revenue growth was 27% and 37% in the three and nine month periods ended July 1, 2000, respectively, as compared to 32% in each of the comparable periods in the prior year. The growth in service revenues in all periods principally reflected 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 nine month periods ended July 1, 2000 were maintenance and professional service revenues resulting from acquisitions of various dealer territories over the past four quarters. Management anticipates that the service revenue growth rate over the remainder of the fiscal year will be less than that experienced in the third quarter due to (i) the level of product revenues achieved in the first nine months of fiscal 2000 and (ii) the normalization of service revenues which had been affected by dealer acquisitions in the prior year. Gross Profit. Gross profit as a percentage of revenues was 61% in the three and nine month periods ended July 1, 2000, decreasing from 65% and 64% in the respective comparable periods in the prior year. The decrease in margin was 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 nine month periods ended July 1, 2000 than in the comparable periods of the prior year. Management anticipates that gross profit will continue to be negatively affected over the remainder of the fiscal year due to the anticipated mix of product and service revenues. Product gross profit as a percentage of product revenues was 77% in the three and nine month periods ended July 1, 2000 as compared to 78% and 77% in the respective comparable periods in the prior year. Software, which typically generates higher gross profit, was a greater proportion of product revenues in the three and nine month periods ended July 1, 2000 as compared to the prior year. However, higher software development amortization and production costs due to lower sales volume and, to a lesser extent, discounting of manufactured product on certain significant transactions, offset the effect of this favorable mix. Management anticipates that product gross margin for the remainder of the fiscal year will be comparable to that experienced in the first nine months of the fiscal year. Service gross profit as a percentage of service revenues was 40% and 42% in the three and nine month periods ended July 1, 2000, respectively, compared to 41% and 40% in the comparable periods of the prior year. The decrease in service gross profit in the third quarter as compared to the first six months of the fiscal year was principally due to the timing of increased investments in its service organization, including program spending and additional headcount related to a dealer acquisition that occurred at the end of the prior quarter. The increase in service gross profit in the nine month period ended July 1, 2000 was 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 more accurately and fully billing for professional services, which also improve service gross profit. Management anticipates that service gross margin for the remainder of the fiscal year will be comparable to that experienced in the first nine months of the fiscal year. Expenses. Expenses as a percentage of revenues were 53% for the three and nine month periods ended July 1, 2000, as compared to 51% and 52% in the respective comparable periods in the prior year. The increase in expenses in the three and nine month periods ended July 1, 2000 as compared to the prior year was attributable to increases in program and infrastructure costs incurred to support anticipated increases in business volume, product development efforts and amortization of intangible assets related to acquisitions. Management anticipates expenses as a percentage of revenues over the remainder of the fiscal year will be less than that experienced in the third quarter. Sales and marketing expenses as a percentage of revenues were 35% in the three and nine month periods ended July 1, 2000, as compared to 34% and 35% for the respective comparable periods in the prior year. Management anticipates sales and marketing expenses as a percentage of revenues over the remainder of the fiscal year will be less than that experienced in the third quarter. Engineering, research and development expenses as a percentage of revenues were 11% in the three and nine month periods ended July 1, 2000 as compared to 10% and 11% in the respective comparable periods in the prior year. Engineering expenses of $7.2 million and $7.0 million in the third quarter of fiscal 2000 and 1999, respectively, are net of capitalized software development costs of $2.4 million and $2.2 million, respectively. Engineering expenses of $21.8 million and $19.6 million in the first nine months of fiscal 2000 and 1999, respectively, are net of capitalized software development costs of $7.2 million and $6.4 million, respectively. The growth in engineering, research and development expenses this year resulted principally from the continuing development and integration of new products and acquired technologies. Management anticipates that over the remainder of fiscal year engineering, research and development expenses as a percentage of revenues will be comparable to that experienced in the first nine months of the fiscal year. General and administrative expenses as a percentage of revenues were 6% and 7% in the three and nine month periods ended July 1, 2000, respectively, as compared to 6% in each of the comparable periods in the prior year. Other expense, net amounted to less than 1% of revenues for all periods presented. Other expense, net is composed primarily of interest income earned on Kronos' investments offset by amortization of intangible assets related to acquisitions made by Kronos. Income Taxes. The provision for income taxes as a percentage of pretax income was 37% in the three and nine month periods ended July 1, 2000 as compared to 35% for each of the comparable periods in the prior year. The lower 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 July 1, 2000, amounted to $1.7 million as compared to $21.1 million at September 30, 1999. The decrease in working capital was 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 and, to a lesser extent, payments related to acquisitions of businesses. Cash and equivalents and marketable securities amounted to $40.3 million as of July 1, 2000 and $62.4 million as of September 30, 1999. Cash generated from operations amounted to $26.7 million in the first nine months of fiscal 2000 as compared to $36.0 million in the first nine months of fiscal 1999. The decrease is principally attributable to a declining rate of increase in the sale of standard and extended maintenance contracts and lower earnings partially offset by increased collection of accounts receivable from trade customers. Cash used for property, plant and equipment increased to $17.0 million in the first nine months of fiscal 2000 from $9.9 million in the comparable period of the prior year. The increase in the investment in property, plant and equipment was due to costs related to the construction of Kronos' 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 $4.0 million in cash for the completion of its headquarters facility. Under Kronos' stock repurchase program, Kronos repurchased 494,000 common shares in the first nine months of fiscal 2000 at a cost of $21.4 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 believes it has available adequate cash and investments and operating cash flow to fund its investments in property, plant and equipment, software development costs, cash payments related to acquisitions and any additional stock repurchases over the remainder of the fiscal year. Certain Factors That May Affect Future Operating Results Except for historical matters, the matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Kronos desires to take advantage of the safe harbor provisions of the Act and is including this statement for the express purpose of availing itself of the protection of the safe harbor with respect to all forward looking statements that involve risks and uncertainties. Kronos' actual operating results may differ from those indicated by forward looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by management from time to time because of a number of factors including the potential fluctuations in quarterly results, timing and acceptance of new product introductions by Kronos and its competitors, the ability to attract and retain sufficient technical personnel, competitive pricing pressure, the dependence on Kronos' time and attendance product line, and the dependence on alternate distribution channels and on key vendors, as further described below and in Kronos' Annual Report on Form 10-K for the fiscal year ended September 30, 1999, which are specifically incorporated by reference herein. Potential Fluctuations in Quarterly Results. Kronos' quarterly operating results may fluctuate as a result of a variety of factors, including the purchasing patterns of its customers, mix of products and services sold, the timing of the introduction of new products and product enhancements by Kronos and its competitors, market acceptance of new products, competitive pricing pressure and general economic conditions. Kronos historically has realized a relatively larger percentage of its annual revenues and profits in the fourth quarter and a relatively smaller percentage in the first quarter of each fiscal year, although there can be no assurance that this pattern will continue. In addition, while Kronos has contracts to supply systems to certain customers over an extended period of time, substantially all of Kronos' product revenue and profits in each quarter result from orders received in that quarter. If near-term demand for Kronos' products weakens or if significant anticipated sales in any quarter do not close when expected, Kronos' revenues for that quarter will be adversely affected. Kronos believes that its operating results for any one period are not necessarily indicative of results for any future period. Product Development and Technological Change. Continual change and improvement in computer software and hardware technology characterize the markets for frontline labor management systems. Kronos' future success will depend largely on its ability to enhance the capabilities and increase the performance of its existing products and to develop new products and interfaces to third party products on a timely basis to meet the increasingly sophisticated needs of its customers. Although Kronos is continually seeking to further enhance its product offerings and to develop new products and interfaces, there can be no assurance that these efforts will succeed, or that, if successful, such product enhancements or new products will achieve widespread market acceptance, or that Kronos' competitors will not develop and market products which are superior to Kronos' products or achieve greater market acceptance. 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. PART II. OTHER INFORMATION Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fiscal quarter ended July 1, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KRONOS INCORPORATED By /s/ Paul A. Lacy Paul A. Lacy Vice President of Finance and Administration (Duly Authorized Officer and Principal Financial Officer) August 14, 2000 KRONOS INCORPORATED EXHIBIT INDEX Exhibit Number Description 27 Financial Data Schedule