SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 3, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ -------------------- 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.) 400 Fifth Avenue, Waltham, MA 02451 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (781) 890-3232 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------ (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 August 1, 1999, 12,605,995 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 3, 1999 and July 4, 1998 1 Condensed Consolidated Balance Sheets at July 3, 1999 and September 30, 1998 2 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 3, 1999 and July 4, 1998 3 Notes to Condensed Consolidated Financial Statements 4-5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures Exhibit Index PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per share amounts) UNAUDITED Three Months Ended Nine Months Ended --------------------------- --------------------------- July 3, July 4, July 3, July 4, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net revenues: Product ........................................... $ 43,965 $ 35,080 $ 117,788 $ 94,952 Service ........................................... 23,252 17,599 64,230 48,772 ------------ ------------ ------------ ------------ 67,217 52,679 182,018 143,724 Cost of sales: Product ........................................... 9,883 8,636 27,196 23,419 Service ........................................... 13,664 11,440 38,521 32,063 ------------ ------------ ------------ ------------ 23,547 20,076 65,717 55,482 ------------ ------------ ------------ ------------ Gross profit ................................. 43,670 32,603 116,301 88,242 Expenses: Sales and marketing ............................... 23,094 17,670 63,458 49,599 Engineering, research and development ............. 6,988 5,334 19,616 14,215 General and administrative ........................ 4,030 3,526 11,246 9,938 Other (income) expense, net ....................... 106 159 571 (27) ------------ ------------ ------------ ------------ 34,218 26,689 94,891 73,725 ------------ ------------ ------------ ------------ Income before income taxes ................... 9,452 5,914 21,410 14,517 Provision for income taxes ............................. 3,318 2,259 7,515 5,546 ------------ ------------ ------------ ------------ Net income ................................... $ 6,134 $ 3,655 $ 13,895 $ 8,971 ============ ============ ============ ============ Net income per common share: Basic ........................................ $ 0.49 $ 0.29 $ 1.11 $ 0.72 ============ ============ ============ ============ Diluted ...................................... $ 0.47 $ 0.28 $ 1.06 $ 0.70 ============ ============ ============ ============ Average common and common equivalent shares outstanding: Basic ........................................ 12,528,865 12,443,505 12,537,394 12,380,344 ============ ============ ============ ============ Diluted ...................................... 13,115,132 12,848,900 13,051,479 12,767,452 ============ ============ ============ ============ See accompanying notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) UNAUDITED July 3, September 30, 1999 1998 --------- ------------ ASSETS Current assets: Cash and equivalents .................................................... $ 19,250 $ 29,888 Marketable securities ................................................... 17,483 17,501 Accounts receivable, less allowances for doubtful accounts of $1,569 at July 3, 1999 and $1,268 at September 30, 1998 ..................... 56,059 50,904 Deferred income taxes ................................................... 5,188 5,188 Other current assets .................................................... 11,573 8,171 --------- --------- Total current assets ............................................. 109,553 111,652 Property, plant and equipment, net ......................................... 19,648 15,816 Marketable securities ...................................................... 24,350 4,445 Excess of cost over net assets of businesses acquired ...................... 31,629 13,731 Deferred software development costs, net ................................... 11,590 9,541 Other assets ............................................................... 12,905 8,676 --------- --------- Total assets ...................................................... $ 209,675 $ 163,861 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................ $ 7,005 $ 6,427 Accrued compensation .................................................... 17,013 14,503 Accrued expenses and other current liabilities .......................... 29,339 18,570 Deferred maintenance revenues ........................................... 39,434 27,065 --------- --------- Total current liabilities ......................................... 92,791 66,565 Deferred income taxes ...................................................... 911 911 Deferred maintenance revenues .............................................. 14,490 8,830 Other liabilities .......................................................... 192 352 Shareholders' equity: Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares, no shares issued and outstanding Common Stock, par value $.01 per share: authorized 20,000,000 shares, 12,634,728 shares and 12,465,719 shares issued at July 3, 1999 and September 30, 1998, respectively ..................................... 126 125 Additional paid-in capital .............................................. 29,328 29,575 Retained earnings ....................................................... 73,660 59,765 Equity adjustment from translation ...................................... (347) (1,162) Cost of Treasury Stock (54,987 shares and 45,861 shares at July 3, 1999 and September 30, 1998, respectively) ......... (1,476) (1,100) --------- --------- Total shareholders' equity ........................................ 101,291 87,203 --------- --------- Total liabilities and shareholders' equity ........................ $ 209,675 $ 163,861 ========= ========= See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) UNAUDITED Nine Months Ended ------------------------ July 3, July 4, 1999 1998 ---------- --------- Operating activities: Net income ......................................................................... $ 13,895 $ 8,971 Adjustments to reconcile net income to net cash and equivalents provided by operating activities: Depreciation .............................................................. 5,938 5,448 Amortization of excess of cost over net assets of businesses acquired ..... 2,952 1,680 Amortization of deferred software development costs ....................... 4,340 3,263 Changes in certain operating assets and liabilities: Accounts receivable, net .............................................. (4,830) (2,399) Deferred maintenance revenues ......................................... 14,374 6,862 Accounts payable, accrued compensation and other liabilities ............................................. 7,049 746 Other ..................................................................... (7,721) (1,359) -------- -------- Net cash and equivalents provided by operating activities ......... 35,997 23,212 Investing activities: Property, plant and equipment ...................................................... (9,900) (4,936) Capitalization of software development costs ....................................... (6,389) (4,857) Increase in marketable securities .................................................. (19,887) (8,163) Acquisitions of businesses ......................................................... (9,771) (6,296) -------- -------- Net cash and equivalents used in investing activities ............. (45,947) (24,252) Financing activities: Net proceeds from exercise of stock option and employee stock purchase plans ................................................................. 3,835 2,343 Purchase of treasury stock ......................................................... (4,457) (1,361) -------- -------- Net cash and equivalents (used in) provided by financing activities (622) 982 Effect of exchange rate changes on cash and equivalents ................................. (66) (137) -------- -------- Decrease in cash and equivalents ....................................................... (10,638) (195) Cash and equivalents at the beginning of the period ..................................... 29,888 20,698 -------- -------- Cash and equivalents at the end of the period ........................................... $ 19,250 $ 20,503 ======== ======== 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, 1998. The results of operations for the three and nine month periods ended July 3, 1999 are not necessarily indicative of the results for a full fiscal year. Certain amounts have been reclassified in fiscal 1998 to permit comparison with fiscal 1999. NOTE B - Fiscal Quarters The Company utilizes a system of fiscal quarters. Under this system, the first three quarters of each fiscal year end on a Saturday. However, the fourth quarter of each fiscal year will always end on September 30. Because of this, the number of days in the first quarter (94 days in fiscal 1999 and 95 days in fiscal 1998) and fourth quarter (89 days in fiscal 1999 and 88 days in fiscal 1998) of each fiscal year varies from year to year. The second and third quarters of each fiscal year will be exactly thirteen weeks long. This policy does not have a material effect on the comparability of results of operations between quarters. NOTE C - Software Revenue Recognition In November 1997, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition", which the Company adopted in the first quarter of fiscal 1999. The adoption of SOP 97-2 did not have a material effect on the Company's financial statements. NOTE D - Comprehensive Income In September 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130), which the Company adopted in the first quarter of fiscal 1999. SFAS No. 130 establishes standards for reporting comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. For the three and nine months ended July 3, 1999 and July 4, 1998, the Company's comprehensive income was as follows (in thousands): Three Months Ended Nine Months Ended ------------------ ----------------- July 3, July 4, July 3, July 4, 1999 1998 1999 1998 -------- -------- -------- -------- Comprehensive income: Net income $ 6,134 $ 3,655 $ 13,895 $ 8,971 Cumulative translation adjustment 217 (571) 815 (1,006) --------- -------- -------- --------- Total comprehensive income $ 6,351 $ 3,084 $14,710 $ 7,965 ======== ======== ======== ========= NOTE E - Stock Split The Company's Board of Directors approved a three-for-two stock split effected in the form of a 50% stock dividend that was paid on March 9, 1999 to stockholders of record on February 23, 1999. Accordingly, the presentation of shares outstanding and amounts per share have been restated for all periods presented to reflect the split. The par value of the additional shares was transferred from additional paid-in capital to Common Stock. On November 17, 1995, the Company's Board of Directors adopted a Rights Agreement. Under the Agreement, the Company distributed to stockholders a dividend of one Right for each outstanding share of Common Stock. As a result of the stock split, each stockholder has forty four-hundreds of a Right for each share of Common Stock held as of the Record Date. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements This discussion includes certain forward-looking statements about the Company's business and its expectations. Any such statements are subject to risk that could cause the actual results to vary materially from expectations. For a further discussion of the various risks that may affect the Company's business and expectations, see "Certain Factors That May Affect Future Operating Results" at the end of Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Revenues. Revenues for the third quarter of fiscal 1999 amounted to $67.2 million as compared to $52.7 million for the third quarter of the previous year. Revenues for the first nine months of fiscal 1999 were $182.0 million as compared to $143.7 million for the first nine months of the prior year. Revenue growth was 28% and 27% in the three and nine month periods ended July 3, 1999, respectively, as compared to 22% and 19% for each of the comparable periods of the prior year. The revenue growth in the three and nine month periods ended July 3, 1999 was principally driven by customer demand in all distribution channels. Product revenues for the third quarter of fiscal 1999 amounted to $44.0 million as compared to $35.1 million for the third quarter of the prior year. Product revenues for the first nine months of fiscal 1999 were $117.8 million as compared to $95.0 million for the first nine months of the prior year. Product revenue growth of 25% and 24% in the three and nine month periods ended July 3, 1999, respectively, increased from 21% and 17% in each of the comparable periods of the prior year. Product revenue growth in the three and nine month periods ended July 3, 1999 was principally driven by sales of the Company's products to new customers as well as sales into the Company's existing customer base. Service revenues for the third quarter of fiscal 1999 amounted to $23.3 million as compared to $17.6 million for the third quarter of the prior year. Service revenues for the first nine months of fiscal 1999 were $64.2 million as compared with $48.8 million for the first nine months of the prior year. Service revenue growth of 32% in both the three and nine month periods ended July 3, 1999, increased from 24% and 25% for comparable periods of the prior year. The growth in service revenues in the three and nine month periods ending July 3, 1999 reflects an increase in maintenance revenue from the expansion of the installed base and an increase in the level of maintenance contracts and professional services accompanying sales to new customers as well as sales to the Company's existing customer base. Gross Profit. Gross profit as a percentage of revenues increased to 65% and 64% in the three and nine month periods ended July 3, 1999, respectively, as compared with 62% and 61%, respectively, for comparable periods of the prior year. The improvement in gross profit was evidenced in both product and service gross profit. Product gross profit as a percentage of product revenues was 78% and 77% in the three and nine month periods ended July 3, 1999, respectively, increasing from 75% for the comparable periods of the prior year. The improvement in product gross profit in both periods is partially attributable to an increased proportion of product revenues generated by software, which typically generates higher gross profit than other products. The software component of product sales was 46% and 47% in the three and nine month periods ended July 3, 1999, respectively, as compared to 45% for each of the comparable periods of the prior year. In addition, the Company has also realized cost reductions in manufactured hardware components due to higher production volumes. Service gross profit as a percentage of service revenues was 41% and 40% in the three and nine month periods ended July 3, 1999, respectively, increasing from 35% and 34%, respectively, for comparable periods of the prior year. The increase in service gross profit in both periods was primarily attributable to the growth in service revenues without a proportionate increase in service expenses. This has been accomplished by more fully leveraging service resources and improving the efficiency in the delivery of services. Expenses. Total operating expenses as a percentage of revenues were 51% and 52% in the three and nine month periods ended July 3, 1999, respectively, as compared to 51% in the comparable periods of the prior year. Sales and marketing expenses as a percentage of revenues were 34% and 35% in the three and nine month periods ended July 3, 1999, respectively, consistent with the respective comparable periods of the prior year. Engineering expenses as a percentage of revenues were 10% and 11% in the three and nine month periods ended July 3, 1999, respectively, as compared to 10% in the respective comparable periods of the prior year. Engineering expenses of $7.0 million and $5.3 million in the third quarter of fiscal 1999 and 1998, respectively, are net of capitalized software development costs of $2.2 million and $1.8 million, respectively. Engineering expenses of $19.6 million and $14.2 million in the first nine months of fiscal 1999 and 1998, respectively, are net of capitalized software development costs of $6.4 million and $4.9 million, respectively. The growth in engineering, research and development expenses resulted primarily from the development of new products for the client/server and Windows environments. General and administrative expenses as a percentage of revenues were 6% in the three and nine month periods ended July 3, 1999 as compared to 7% in the comparable periods of the prior year. Other (income) expense, net amounted to less than 1% of revenues for all periods presented. Other (income) expense, net is composed primarily of amortization of intangible assets related to acquisitions made by the Company which is offset by interest income earned on its investments. Income Taxes. The provision for income taxes as a percentage of pretax income was 35% in the three and nine month periods ended July 3, 1999, respectively, as compared to 38% in each of the comparable periods of the prior year. The reduction in the Company's effective income tax rate in both periods is primarily attributable to tax benefits resulting from the Company's sale of its South African subsidiary in the second quarter of fiscal 1999 as well as utilization of foreign net operating loss carryforwards. The Company anticipates the effective income tax rate should be approximately 35% for the remainder of the fiscal year. Liquidity and Capital Resources Working capital as of July 3, 1999, amounted to $16.8 million as compared with $45.1 million at September 30, 1998. The decline in working capital is attributable to the Company's investment of approximately $20.0 million in both long term marketable securities and acquisitions of businesses as well as investments of approximately $10.0 million in property, plant and equipment in the nine month period ending July 3, 1999. In the three month period ended July 3, 1999, the Company completed the acquisition of a dealer territory and a labor-tracking software application company. Under the terms of these acquisition agreements, the Company agreed to an initial cash payment, a guaranteed payment within one year and assumed certain maintenance contracts and other professional service obligations. Cash and equivalents and marketable securities increased to $61.1 million as of July 3, 1999 as compared to $51.8 million at September 30, 1998. Cash generated from operations increased to $36.0 million in the first nine months of fiscal 1999 from $23.2 million in the first nine months of the prior year, principally due to increased earnings and deferred maintenance revenues. It is the Company's policy to bill maintenance contracts at the contract start date. The Company has experienced a growth in deferred maintenance revenues as the result of the expansion of the installed base and, to a lesser extent, an increase in the sale of extended maintenance contracts. The Company's increase of approximately $5.0 million in its investment in property, plant and equipment in the first nine months of the fiscal year as compared to the same period of the prior year is principally due to costs related to the construction of the Company's new world headquarters facility. The Company anticipates it will spend approximately $14.0 million in the construction of the facility over the next 12 months. Cash generated from operations was more than sufficient to fund investments in property, plant and equipment, acquisitions of businesses and capitalized software development costs. The Company expects to fund its investments in software development costs and costs related to the construction of the new facility over the remainder of its fiscal year with available cash and investments and operating cash flow. Certain Factors That May Affect Future Operating Results Except for historical matters, the matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company desires to take advantage of the safe harbor provisions of the Act and is including this statement for the express purpose of availing itself of the protection of the safe harbor with respect to all forward looking statements that involve risks and uncertainties. The Company's actual operating results may differ from those indicated by forward looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by management from time to time because of a number of factors including the potential fluctuations in quarterly results, timing and acceptance of new product introductions by the Company and its competitors, competitive pricing pressures, the dependence on alternate distribution channels, potential effects of the century change, the ability to attract and retain sufficient technical personnel, and the dependence on the Company's time and attendance product line and on key vendors, as further described below and in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, which factors are specifically incorporated by reference herein. Potential Fluctuations in Quarterly Results. The Company's quarterly operating results may fluctuate as a result of a variety of factors, including the timing of the introduction of new products and product enhancements by the Company and its competitors, market acceptance of new products, mix of products sold, the purchasing patterns of its customers, competitive pricing pressure and general economic conditions. The Company historically has realized a relatively larger percentage of its annual revenues and profits in the fourth quarter and a relatively smaller percentage in the first quarter of each fiscal year, although there can be no assurance that this pattern will continue. In addition, while the Company has contracts to supply systems to certain customers over an extended period of time, substantially all of the Company's product revenue and profits in each quarter result from orders received in that quarter. If near-term demand for the Company's products weakens or if significant anticipated sales in any quarter do not close when expected, the Company's revenues for that quarter will be adversely affected. The Company believes that its operating results for any one period are not necessarily indicative of results for any future period. Product Development and Technological Change. Continual change and improvement in computer software and hardware technology characterize the markets for frontline labor management systems. The Company's future success will depend largely on its ability to enhance its existing product lines and to develop new products and interfaces to third party products on a timely basis for the increasingly sophisticated needs of its customers. Although the Company is continually seeking to further enhance its product offerings and to develop new products and interfaces, there can be no assurance that these efforts will succeed, or that, if successful, such product enhancements or new products will achieve widespread market acceptance, or that the Company's competitors will not develop and market products which are superior to the Company's products or achieve greater market acceptance. Competition. The frontline labor management industry is highly competitive. Competition is increasing as competitors in related industries, such as human resources management, payroll processing and enterprise resource planning (ERP) enter the market. Advances in software development tools have accelerated the software development process and, therefore, can allow competitors to penetrate certain of the Company's markets. Maintaining the Company's technological and other advantages over competitors will require continued investment by the Company in research and development and marketing and sales programs. There can be no assurance that the Company will have sufficient resources to make such investments or be able to achieve the technological advances necessary to maintain its competitive advantages. Increased competition could adversely affect the Company's operating results through price reductions and/or loss of market share. Dependence on Alternate Distribution Channels. The Company markets and sells its products through its direct sales organization, independent dealers and OEMs. For the fiscal year ended September 30, 1998, approximately 20% of the Company's revenue was generated through sales to dealers and OEMs. Reduction in the sales efforts of the Company's major dealers and/or OEMs, or termination or changes in their relationships with the Company, could have a material adverse effect on the results of the Company's operations. Year 2000. The Company has an executive level steering committee to identify and resolve Year 2000 issues associated with the Company's internal systems (both information technology ("IT") and non-IT), the Company's own products and services, the status of third party products distributed by the Company to its customers as well as the Year 2000 readiness of the Company's suppliers. The Company has completed an assessment of all of its principal IT systems, which include manufacturing, distribution, customer service and financial systems. The Company has, with the assistance of an outside consultant, tested its principal internal enterprise resource planning (ERP) system and believes it to be year 2000 compliant. This ERP system includes order entry, material resource planning, master production scheduling, purchasing, shipping and financial systems. The Company has identified Year 2000 issues in other less significant IT systems, and expects to resolve those issues, by replacements and/or upgrades, by the end of October 1999. The Company is currently performing an assessment and remediation, as necessary, of certain non-IT systems and expects that assessment to be completed prior to the end of 1999. Any such systems determined not to be Year 2000 compliant will be remedied or replaced, if necessary. The Company will replace, prior to the end of October 1999, certain stand alone shop floor test equipment, to ensure Year 2000 compliance. The Company does not plan to assess specifically its facility management systems, or the external forces such as utility or transportation Year 2000 compliance failures that might generally affect industry and commerce. Although the Company is not currently aware of any material operational issues or costs associated with preparing its internal IT and non-IT systems for the Year 2000, the Company may experience material unanticipated problems and costs caused by undetected errors or defects in these internal systems. The Company's Year 2000 compliance plan includes designing its current products to meet the Company's definition of "Year 2000 Compliant" and testing the most recent versions of its current products to determine whether they meet that definition. Testing of products currently manufactured by the Company is approximately 98% completed and is expected to be finished by the end of October 1999. The Company has warranted, and may in the future warrant to certain customers that its products will work in the Year 2000 and beyond. Generally, for products that have been identified to date as needing upgrades/new versions to address Year 2000 issues, the Company has those upgrades/new versions available to customers for purchase or under maintenance agreements. One of the Company's products, which was sold in low volumes, has a Year 2000 deficiency for which there is no upgrade/new version currently available, but the Company intends to correct that deficiency in the product's next maintenance release. Some of the Company's customers are using products and/or product versions that the Company has not tested, and does not support, for Year 2000 compliance. The Company is encouraging these customers to migrate to current products/versions that meet the Company's Year 2000 compliance definition. It is possible that the Company may experience increased expenses in addressing migration issues for these customers. In addition, the Company does not intend to test any of its custom software products for Year 2000 compliance. For third party products that the Company distributes with its products, the Company has sought information and assurances from the manufacturers concerning those products' Year 2000 compliance status. As a result, the Company has identified certain third party products that will require an upgrade to be Year 2000 compliant and is currently notifying affected customers and encouraging them to upgrade. The Company expects to complete its assessment of those third party products by the end of October 1999. Despite the testing of its own products and efforts to obtain assurances on third party products, errors or defects in such products could result in delay or loss of revenue, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could materially affect the Company's business, results of operations, or financial condition. In addition, the unprecedented nature of potential litigation regarding Year 2000 compliance issues makes it uncertain whether the Company will be affected by such litigation. The Company has completed its systematic inquiry of key suppliers to assess their Year 2000 readiness. The Company is not aware of any problems that would materially affect its business, results of operations or financial condition, but the Company has no means of ensuring that assurances received from such suppliers are accurate. The inability of such suppliers to meet Year 2000 requirements could materially impact the ability of the Company to procure material from these suppliers and to meet its obligations to supply products to its customers. The Company does not currently have any information concerning the Year 2000 compliance status of its customers. As with other similarly situated companies, if the Company's current or future customers fail to achieve Year 2000 compliance or if they divert expenditures to address Year 2000 compliance problems, the Company's business, results of operations, or financial condition could be materially affected. The Company is in the process of formulating a contingency plan on Year 2000 readiness. The Company anticipates completing that contingency plan by the end of October 1999. The costs associated with the Company's Year 2000 plan have been funded from operating cash flows and have been charged to operations. To date, the Company has incurred approximately $1.0 million of incremental costs and expects, on a cumulative basis, total costs to be approximately $1.2 million to address its internal IT and non-IT systems and to address Year 2000 compliance problems in its own products and in third party products distributed with its products. The Company does not separately track the internal costs associated with its Year 2000 plan, which are primarily payroll costs for its information systems employees, support and technical personnel and the Year 2000 steering committee. The costs described herein, and the costs to accomplish the other elements of the Company's Year 2000 plan, have not been and are not expected to be material to the Company's financial position, results of operations or cash flows. The cost of completing the Year 2000 plan and the date on which the Company believes the plan will be complete are based upon management's best estimates derived by using numerous assumptions of future events, including the continued availability of certain resources. There can be no guarantee that these estimates will be achieved and the actual results may differ materially from those anticipated. Specific factors that might cause these differences include without limitation, the availability and cost of personnel trained in this area, the ability to make timely and appropriate adjustments to all relevant computer codes and similar uncertainties. Part II. OTHER INFORMATION Item 6. Exhibits and Report on Form 8-K (a) Exhibit 27 Financial Data Schedule (b) Reports of Form 8-K There were no reports on Form 8-K filed during the fiscal quarter ended July 3, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KRONOS INCORPORATED By /s/ Paul A. Lacy Paul A. Lacy Vice President of Finance and Administration (Duly Authorized Officer and Principal Financial Officer) August 13, 1999 KRONOS INCORPORATED EXHIBIT INDEX Exhibit Number Description 27 Financial Data Schedule