-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QVdhV3GVlrOUZ+N+2Ovl3rTo6BsYLgwQXKd1VYlBHdYCR23xQrFc3CfrPf3/35gx 6fKs4UpErhdrLVz8DRCGjA== 0000886903-96-000018.txt : 19970123 0000886903-96-000018.hdr.sgml : 19970123 ACCESSION NUMBER: 0000886903-96-000018 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRONOS INC CENTRAL INDEX KEY: 0000886903 STANDARD INDUSTRIAL CLASSIFICATION: 3579 IRS NUMBER: 042640942 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20109 FILM NUMBER: 96680386 BUSINESS ADDRESS: STREET 1: 400 FIFTH AVENUE CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178903232 MAIL ADDRESS: STREET 1: 400 FIFTH AVE STREET 2: 400 FIFTH AVE CITY: WALTHAM STATE: MA ZIP: 02154 10-K 1 ANNUAL REPORT ON FORM 10-K DATED 9/30/96 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 1996 ------------------------------------------------------- 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 02154 - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 890-3232 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] 1 State the aggregate market value of the voting stock held by non-affiliates of the registrant. Non-Affiliate Voting Aggregate Date Shares Outstanding Market Value November 30, 1996 7,075,763 $201,659,246 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Date Class Outstanding Shares Common Stock, $0.01 par November 30, 1996 value per share 8,132,450 DOCUMENTS INCORPORATED BY REFERENCE. The Company's definitive proxy statement dated December 13, 1996 for the Annual Meeting of Stockholders to be held on January 31, 1997 (Part III - Items 10,11,12 and 13). 2 PART I Item 1. Business Kronos Incorporated (the "Company" or "Kronos") designs, develops, manufactures and markets time and attendance, workforce management and shop floor data collection systems, and application software that enhance productivity in the workplace. The Company's systems consist of fully integrated software and intelligent data collection terminals. Kronos(R) also maintains an extensive service and technical support organization which provides a suite of maintenance, professional and educational services. The Company was organized in 1977 as a Massachusetts corporation. Products and Services Kronos' products include fully-integrated software, intelligent data collection terminals and related components for time and attendance, workforce management and shop floor data collection systems and value-added software designed to expand the functions of its systems. These products are designed for a wide range of businesses and applications from single-user to large multi-site enterprises. In addition, the Company maintains an extensive service and support organization that is responsible for maintaining systems and providing professional and educational services. To date, the majority of the Company's revenues and profits have been derived from its time and attendance systems and services. Time and Attendance, Workforce Management and Shop Floor Data Collection Systems Kronos' Time and Attendance and Workforce Management systems are designed to operate independently or in conjunction with other Kronos systems, or to interface with third party systems. The Shop Floor Data Collection systems are designed to operate independently or to interface with third party Manufacturing Resource Planning ("MRP") systems. The software incorporated in Kronos' systems is parameter-driven, which allows it to be configured upon installation to meet the needs of an individual customer and reconfigured as customer needs evolve. Currently, the Company offers various releases of its software which run on such popular operating systems as Windows, UNIX, DOS, and VMS. The Company's new client/server time and attendance system runs on Windows 95 and Windows NT and integrates with Oracle, Informix and Microsoft databases. In addition, the Company offers an IBM AS/400 based time and attendance package and shop floor data collection package. 3 Kronos provides a wide range of data collection options to accommodate various work environments and markets and to satisfy the price/performance requirements of its customers. The Company manufactures a family of intelligent data collection terminals which collect time and attendance and factory-floor data via keypad, bar code readers, lasers and charged coupled device ("CCD") scanners. Terminal choices include wall-mounted, desk-mounted and hand-held devices which are available in various sizes and models, some of which are designed to operate in harsh environments. The Company also offers desktop computer and telephone based data collection options. The Company believes that the functions and features of its data collection options provide it with an important advantage over its competition. Major Systems The major systems currently offered by the Company include: Time and Attendance Systems. The Timekeeper Central(R), Timekeeper(R)/AS and Timekeeper(R) C/S Systems are designed to reduce payroll preparation time, consistently apply payroll rules, improve labor scheduling and control labor costs. These systems automatically calculate employee hours data according to the payroll policies of the individual customer, which are configured using the parameter capabilities of the systems. In these systems, information is consolidated into a number of standard labor management reports such as absenteeism, tardiness, projected overtime, on-premises, and budget versus actual costs. The Company's new client/server system, Timekeeper C/S, offers open database connectivity and more powerful query and reporting tools. The Company's time and attendance systems work in conjunction with a variety of data collection methods described above. Shop Floor Data Collection Systems. The ShopTrac Data Collection System and Timekeeper/AS Labor Data Collection System consist of intelligent data collection terminals and a suite of software applications for use primarily in manufacturing plants. They are designed for manufacturers who build product in a series of steps, such as job shops, work order based environments and repetitive manufacturing. The systems capture labor and material data to provide real time information on cost, location and completion time. This includes time and attendance data to provide information for the basis of managing labor resources; labor allocation data for the measurement of costs; the status of work-in-process for communication to MRP, quality control and production planning systems as well as quality control data. Workforce Management System. The Workforce Management System is an integrated labor management solution developed for the retail and hospitality markets. It consists of several integrated modules, including Business Forecaster, which predicts the level of activity a location can expect by analyzing key business volume indicators, and WorkForce Planner, which then applies the appropriate work standards to generate the correct staffing level required for the expected level of business. The core of the system is the Smart Scheduler(TM) module, which combines data from the WorkForce Planner, along with detailed employee information about skill level, availability, seniority and work preferences, and produces a complete, detailed work schedule. This information can then be integrated with the applicable Kronos time and attendance system enabling management to compare actual labor costs to budgeted costs. Together these 4 modules provide a full set of tools to increase productivity, manage labor costs and meet customer service goals. Value-Added Software The Company offers optional application software designed to expand and enhance the range of functions performed by its time and attendance and shop floor data collection systems. Such software includes the following: Kronos Scheduling Module. The Kronos Scheduling Module assists in the process of creating and assigning employee schedules and reports to help managers make labor scheduling decisions. Kronos Archive Program. The Kronos Archive Program is designed to automatically perform long-term record keeping by accumulating labor hours, absences, late arrivals, vacation time and wages. Kronos CardSaver(R) Module. The Kronos CardSaver Module automatically saves employee in and out data for wage and hour inquiries, performance reviews or resolving employee grievances. Kronos Accruals Module. The Kronos Accrual Module provides added functionality by automatically calculating the balances of each employee's available benefit time ensuring that benefit time is administered fairly, consistently and automatically across all classes of employees. Kronos Attendance Tracker Module. The Kronos Attendance Tracker module systematically records and documents all types of employee absences and provides for attendance and performance data to be reported in detail or summary reports. Other Products The Company markets Time Bank, a product which provides an interface to most major payroll service bureau software and also supports interfaces to major human resources and automated scheduling based systems. The Company purchases this product from a third party. The Company's Gatekeeper(R) product is used in access control applications and can limit access to only authorized personnel or allow scheduled access based on schedules in the Timekeeper Central system. The Kronos TeleTime(R) System allows customer telephones to serve as data input devices. This product incorporates technology which is licensed from a third party. The Company also markets products called ACES and ACES PLUS, which it obtains from a third party, and which use optical scanning mark sensitive technology to read data from forms and transmit that data to a time and attendance database. The Company also offers an imaging system, ImageKeeper(TM), which utilizes high-resolution video imaging to create and store digital photographs and signatures of employees. Finally, the Company markets a number of other accessories to its products including badges, traditional badge making equipment, time cards, bar code labels and modems. 5 Services and Support Kronos maintains an extensive service and technical support organization which provides a suite of maintenance, professional and educational services. A range of maintenance services are available for hardware and software and are delivered through either the Company's Global Support Center or through local service personnel. The Company's wide range of professional services include project management, technical consulting as well as system integration and optimization. When necessary, the Company may also provide customized software to meet its customers' unique software requirements. The Company's educational services provide a full range of local classroom or computer-based training courses. Marketing and Sales Kronos markets and sells its products in the United States and other countries through its direct sales and support organization and through independent dealers. In addition, the Company has a joint marketing agreement with ADP, Inc. ("ADP"). Under the terms of the agreement, which was recently extended to the year 2001, ADP markets a proprietary version of the Company's PC-based time and attendance software, together with data collection terminals manufactured by the Company. The product is offered to both new and existing ADP clients, and is now also available in a customer-installable version. The Company recognizes that the information needs of businesses in various industries continue to be increasingly specialized and sophisticated. As a result, the Company's marketing, field sales and service personnel are organized into industry specific divisions. These divisions focus on the needs of the manufacturing, healthcare, retail/hospitality and government/education markets. These divisions operate with the following objectives: o To gain expertise in their respective industry environments and pursue opportunities for growth and product leadership. o To focus engineering and marketing resources on industry specific product development efforts required to deliver products and services that meet those industry needs. o Develop long-term business relationships with select industry partners. o Educate and train industry specific sales and service staff. Focusing on industry specific divisions permits Kronos to better understand the needs of its customers and to respond quickly to the opportunities presented by these markets. 6 Direct Sales Organization In fiscal 1996 the Company re-aligned its field sales and service personnel into the industry specific teams discussed above. The Company has 37 direct sales and support offices located in the United States. In addition, the Company has two sales and support offices located in Canada, two in the United Kingdom, one in Mexico and, as of July 1996, two in South Africa and one in Australia. Each direct sales office covers a defined territory, and has sales and support functions. For the fiscal years ended September 30, 1996, 1995 and 1994, the Company's international subsidiaries generated net revenues of $8,025,000, $5,598,000 and $3,620,000, respectively. Total assets at these locations for these periods were $5,496,000, $2,868,000 and $2,196,000, respectively. Dealers Kronos also markets and sells its products through independent dealers within designated geographic territories generally not covered by Kronos' direct sales offices. These dealers provide sales, support, and installation services for Kronos' products. There are presently approximately 40 dealers in the United States actively selling and supporting Kronos' products. Kronos also has dealers in Australia, Argentina, Canada, Guam, Guatemala, Guyana, Hong Kong, Jamaica, Malaysia, Mexico, Netherland Antilles, Panama, Phillipines, Puerto Rico, Singapore, and the West Indies. Sales to independent international dealers for the years ended September 30, 1996, 1995 and 1994 were $2,367,000, $2,508,000 and $1,659,000, respectively. Kronos supports its dealers with training, technical assistance, and major account marketing assistance. Customers The Company estimates it has an installed base of approximately 100,000 customer sites. End-users of the Company's products range from small companies with as few as five employees to some of the world's largest multi-site organizations. The Company believes that the dollar amount of backlog is not material to an understanding of its business. Although the Company has contracts to supply systems to certain customers over an extended period of time, substantially all of the Company's product revenue in each quarter results from orders received in that quarter. Product Development The Company's product development efforts are focused on enhancing and increasing the performance of its existing products, developing new products and developing interfaces to third party products to meet customer needs. During 1996, 1995 and 1994, Kronos' engineering, research and development expenses were $12,730,000, $8,192,000 and $5,593,000, respectively. The Company intends to continue to commit substantial resources to enhance and extend its product lines and develop interfaces to third party products. Although the Company is continually seeking to further enhance its product offerings, develop new 7 products and to develop interfaces to third party products, 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 Company's operations constitute a single segment within the data collection industry--the design, development, manufacture and marketing of integrated time and attendance, workforce management and shop floor data collection systems that enhance productivity in the workplace. The industry is highly competitive, and although the Company believes it has certain technological and other advantages over its current competitors, maintaining such advantages will require continued investment by the Company in research and development, and sales and marketing. Competition could increase as competitors in related industries, such as human resources and payroll, 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. The Company competes primarily on the basis of price/performance, quality, reliability and customer service. In the time and attendance industry, the Company competes against firms that sell automated time and attendance products to many industries (typically to customers with 250 employees or less), against firms that focus on particular industries, and against firms selling related products, such as payroll or human resources products. Proprietary Rights The Company relies on a combination of patents, copyrights, trade secret law and contracts to protect its proprietary technology. The Company generally provides software products to end-users under non-exclusive shrink-wrap licenses or under signed licenses, both of which may be terminated by Kronos if the end-user breaches the terms of the license. These licenses generally require that the software be used only internally subject to certain limitations, such as the number of employees, simultaneous users, computer model and serial number, features and/or terminals for which the end-user has paid the required license fee. The Company authorizes its dealers to sublicense software products to end-users under similar terms. In certain circumstances, the Company also makes master software licenses available to end-users which permit either a specified limited number of copies or an unlimited number of copies of the software to be made for internal use. Some major customers license software products under individually negotiated terms. Despite these precautions, it may be possible to copy or otherwise obtain and use the Company's products or technology without authorization. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. 8 The Company has registered trademarks for Kronos, Timekeeper, Timekeeper Central, Jobkeeper, Jobkeeper Central, Datakeeper, Datakeeper Central, Gatekeeper, Gatekeeper Central, TeleTime, TimeMaker, CardSaver, ShopTrac, the ShopTrac logo, Start.Time, Keep.Trac, Solution In A Box and the Company's logo in the United States. In addition, certain trademarks have been obtained or are in process in various foreign countries. The Company purchases the Time Bank payroll interface software from a single vendor for resale in certain of its time accounting systems. Although the Company believes its relationship with this vendor is good, any interruption or termination of the Company's right to resell such software could delay shipment of certain of the Company's products and require the Company to write its own software to perform this function. Although the Company believes it would be able to produce its own payroll interface software, any delay or problems encountered in doing so could temporarily and adversely affect the Company's results of operations. Manufacturing and Sources of Supply The duplication of the Company's software and the printing of documentation are outsourced to suppliers. The Company currently has four suppliers who have been certified to the Company's manufacturing specifications to perform the software duplication process. The Company's data collection terminals are assembled from the printed circuit board level in its facility in Chelmsford, Massachusetts. Although most of the parts and components included within the Company's products are available from multiple suppliers, certain parts and components are purchased from single suppliers. The Company has chosen to source these items from single suppliers because it believes that the supplier chosen is able to consistently provide the Company with the highest quality product at a competitive price on a timely basis. While the Company has to date been able to obtain adequate supplies of these parts and components, the Company's inability to transition to alternate sources on a timely basis if and as required in the future could result in delays or reductions in product shipments which could have a material adverse effect on the Company's operating results. Employees As of December 9, 1996, the Company had 1,235 employees. None of the Company's employees is represented by a union or other collective bargaining agent, and the Company considers its relations with its employees to be good. 9 Item 2. Properties The Company leases approximately 73,000 square feet at its headquarters in Waltham, Massachusetts and leases 46 sales and support offices located throughout North America, Europe, Africa and Australia. The Company also leases a total of approximately 165,000 square feet in two facilities located in Chelmsford, Massachusetts. The Company's manufacturing operations, Global Support Center and various engineering and administrative operations are located in these facilities. The Company's aggregate rental expense for all of its facilities in fiscal 1996 was approximately $4,761,000. The Company considers its facilities to be adequate for its current requirements and that additional space will be available as needed in the future. Item 3. Legal Proceedings From time to time, the Company is involved in legal proceedings arising in the normal course of business. None of the legal proceedings in which the Company is currently involved is considered material by the Company. Item 4. Submission of Matters to a Vote of Security Holders None. 10 Executive Officers of the Registrant Name Age Position Mark S. Ain 53 Chief Executive Officer and Chairman of the Board W. Patrick Decker 49 President, Chief Operating Officer Verne S. Kayser 53 Vice President, Engineering Paul A. Lacy 49 Vice President, Finance and Administration, Treasurer and Clerk Aron J. Ain 39 Vice President, Marketing and Worldwide Field Operations Lloyd B. Bussell 51 Vice President, Manufacturing Sally J. Wallace 46 Vice President, General Counsel Mark S. Ain, a founder of the Company, has served as Chief Executive Officer and Chairman since its organization in 1977. He also served as President from 1977 until October, 1996. Mr. Ain is the brother of Aron J. Ain, Vice President, Marketing and Worldwide Field Operations of the Company. W. Patrick Decker served as Vice President, Marketing and Field Operations from 1982 until October, 1996, when he was appointed President and Chief Operating Officer. Verne S. Kayser served as Vice President, Engineering from 1984 until November 20, 1996. Paul A. Lacy has been Vice President, Finance and Administration, Treasurer and Clerk since 1988. Aron J. Ain served as Vice President, Sales and Service from 1988 until October, 1996, when he was appointed Vice President, Marketing and Worldwide Field Operations. Mr. Ain is the brother of Mark S. Ain, Chief Executive Officer and Chairman. Lloyd B. Bussell has served as Vice President, Manufacturing since 1987. Sally J. Wallace has served as General Counsel since 1988 and was elected Vice President in October, 1994. Officers of the Company hold office until the first meeting of directors following the next annual meeting of stockholders and, in the case of the President, Treasurer and Clerk, until their successors are chosen and qualified. 11 PART II Item 5. Market for Registrant's Common Equity and Stockholder Matters STOCK MARKET INFORMATION The Company's common stock is traded under the National Association of Securities Dealers Automated Quotation System (NASDAQ) symbol KRON. The following table sets forth the high and low sales prices for fiscal 1996 and fiscal 1995. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. 1996 --------------------------------------------------- High Low - - ---------------------------- ------------------------- ------------------------- First quarter $33 5/8 $25 Second quarter 37 25 1/2 Third quarter 35 1/2 25 1/2 Fourth quarter 37 24 3/4 1995 --------------------------------------------------- High Low - - ---------------------------- ------------------------- ------------------------- First quarter $18 $12 1/2 Second quarter 21 1/4 17 Third quarter 25 1/4 16 1/4 Fourth quarter 32 3/4 24 5/8 Prices reflect the Company's stock split paid on January 29, 1996 to shareholders of record as of January 15, 1996. HOLDERS On November 30, 1996 there were approximately 3,600 shareholders of record of the Company's common stock. DIVIDENDS The Company has not paid cash dividends on its common stock, and the present policy of the Company is to retain earnings for use in its business. 12 Item 6. Selected Financial Data The following table data should be read in conjunction with the consolidated financial statements and notes thereto.
Financial Highlights In thousands, except share data Year Ended September 30, ------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------------- --------------- --------------- --------------- -------------- Operating Data: Net revenues $142,957 $120,373 $92,919 $67,960 $59,784 Income before change in accounting principle $11,425 $8,398 $4,892 $3,606 $3,432 Extraordinary item and change in accounting principle $264 $53 --------------- --------------- --------------- --------------- -------------- Net income $11,425 $8,398 $4,892 $3,870 $3,485 Per share data (1): Income before change in accounting principle $1.37 $1.03 $0.62 $0.47 $0.51 Extraordinary item and change in accounting principle $0.03 $0.01 --------------- --------------- --------------- --------------- -------------- Net income per common share $1.37 $1.03 $0.62 $0.50 $0.52 Average common and common equivalent shares outstanding 8,330,060 8,150,903 7,859,513 7,745,691 6,729,390 Balance Sheet Data: Total assets $104,866 $78,518 $60,284 $46,788 $38,022 Long-term obligations $28 $164 $510
- - -------------------------------------------- (1) The per share data presented above are for primary net income per common share. Fully diluted net income per common share amounts have not been presented as they did not differ significantly from primary net income per common share amounts in any year. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Revenues. Revenues amounted to $143.0 million, $120.4 million and $92.9 million in fiscal 1996, 1995 and 1994, respectively. Annual revenue growth amounted to 19% in fiscal 1996, 30% in fiscal 1995 and 37% in fiscal 1994. While revenue growth in fiscal 1996 approximated the Company's historical growth rate of 20% prior to fiscal 1994, it declined from the accelerated levels experienced in fiscal 1995 and 1994. Revenue growth during fiscal 1995 and 1994 was driven by a variety of factors including customer demand and the acquisition of distribution rights to certain domestic sales territories previously held by certain of the Company's independent dealers. The decline in the rate of revenue growth in fiscal 1996 as compared with fiscal 1995 and 1994 can be attributed to a variety of factors including the accelerated rate of growth experienced in fiscal 1995 and 1994 and a transition of the Company's core products from DOS and Unix platforms to the Windows and client/server environments. The impact of these factors was most significant over the first three quarters of fiscal 1996 which reflected revenue growth of 17% over the comparable period in fiscal 1995. In the fourth quarter of fiscal 1996 revenues grew by 24% over the comparable period in fiscal 1995. During this quarter the Company released a client/server version of its time and attendance product. The Company is also anticipating releases of enhanced versions of its time and attendance product on client/server and Windows platforms in the first part of fiscal 1997. The Company's revenue growth in fiscal 1997 will depend in part on the commercial success of these initiatives. Product revenues amounted to $101.0 million, $87.9 million and $68.4 million in fiscal 1996, 1995 and 1994, respectively. Product revenues grew by 15% in fiscal 1996, 28% in fiscal 1995 and 34% in fiscal 1994. Product revenue growth in fiscal 1996 was principally the result of an increase in sales volume driven by customer demand. The reduced rate of product revenue growth experienced in fiscal 1996 as compared with fiscal 1995 and 1994 is attributable to the factors described above. Consistent with total revenues, product revenue growth increased in the fourth quarter to 22% from 12% over the first nine months of fiscal 1996. Product demand resulting from the Company's small business marketing program with ADP, Inc. contributed approximately one-third of the product revenue increase in fiscal 1996. Product revenue growth in fiscal 1995 was principally the result of increased sales volume driven by customer demand. Product revenue growth in fiscal 1994 was the result of an increase in sales volume driven by customer demand, the impact of the shift of product sales from wholesale to retail pricing for the acquired dealer territories, as well as the unusually strong level of product shipments in the fourth quarter of that fiscal year. 14 Service revenues were $42.0 million, $32.5 million and $24.5 million in fiscal 1996, 1995 and 1994, respectively. Service revenues grew by 29% in fiscal 1996, 33% in fiscal 1995 and 43% in fiscal 1994. Service revenues amounted to 29%, 27% and 26% of total revenues in fiscal 1996, 1995 and 1994, respectively. The growth in service revenues in all periods reflects increases in maintenance revenue from expansion of the installed base, as well as an increase in the level of services accompanying the sale of new products. In addition, the growth rate experienced in fiscal 1994 was impacted by the transition of the acquired dealer territories into direct sales and service districts. Prior to acquisition, all service revenues for these territories were retained by the independent dealers as they were responsible for providing such services. International revenues, which include both revenues from the Company's international subsidiaries and sales to independent international dealers, grew 28% in fiscal 1996 to $10.4 million from $8.1 million in fiscal 1995. International revenues in fiscal 1994 were $5.3 million. The establishment of the Company's Australian and South African subsidiaries in the fourth quarter contributed significantly to the overall increase in fiscal 1996 international revenues. Gross Profit. Gross profit, as a percentage of revenues, was 62%, 59% and 57% in fiscal 1996, 1995 and 1994, respectively. The improvement in gross profit in each of the three fiscal years was evidenced in both product and service gross profit. Product gross profit was 74%, 72% and 69% in fiscal 1996, 1995 and 1994, respectively. The improvement in product gross profit in each of the three fiscal years was a result of increased sales volume and improved product mix. In each of the periods the Company's product revenue was derived from sales of systems in which software, which typically generates higher gross profit, was an increasingly higher proportion of product revenues. In addition, in fiscal 1996 and 1995, the Company experienced increased production volume without proportionate increases in production overhead costs. Product gross profit was negatively impacted in fiscal 1994 by a variety of factors including purchase discounts granted to major account customers and expenses associated with the move of the Company's manufacturing facility. Service gross profit as a percentage of service revenues was 33%, 24% and 22% for fiscal 1996, 1995 and 1994, respectively. The increase in service gross profit is primarily attributable to the growth in service revenues. Also, the Company has been able to absorb the increase in service volume without a proportionate increase in service expenses, favorably impacting gross margins. This has been accomplished by the implementation of programs which focus on revenue enhancement for services provided, as well as improved efficiency in the delivery of such services. Expenses. Expenses as a percentage of revenues were 49% in fiscal 1996, and 48% in fiscal 1995 and 1994. Sales and marketing expenses were $47.0 million, $40.1 million and $31.4 million in fiscal 1996, 1995 and 1994, respectively. The increase in sales and marketing expenses in all periods relates to increased business volume. Sales and marketing expenses as a percentage of sales were 33% in fiscal 1996 and 1995 as compared with 34% in fiscal 1994. The Company anticipates sales and marketing expenses as a percentage of sales to increase somewhat in fiscal 1997 due to increased investment in the Company's international direct sales organization. This increase is anticipated to be partially offset by efficiencies which the Company expects to be realized from the fiscal 1996 consolidation and reorganization of the North American direct sales organization from geographic units into industry specific teams. 15 Engineering, research and development expenses were $12.7 million, $8.2 million and $5.6 million in fiscal 1996, 1995 and 1994, respectively. These expenses are net of capitalized software development costs of $4.0 million, $2.4 million and $1.8 million, respectively. Engineering, research and development expenses as a percentage of revenues were 9% in fiscal 1996, 7% in fiscal 1995 and 6% in fiscal 1994. The growth in engineering, research and development expenses resulted primarily from the development of new products. Increased spending on capitalizable software development costs reflects the Company's commitment to further enhancements of existing products, making them easier to use, and on new product development. The Company anticipates fiscal 1997 engineering, research and development expenses as a percentage of revenues to be comparable or somewhat higher than fiscal 1996. General and administrative expenses were $9.9 million, $8.5 million and $7.3 million in fiscal 1996, 1995 and 1994, respectively. As a percentage of revenues, general and administrative expenses were 7% in fiscal 1996 and 1995 as compared with 8% in fiscal 1994. Fiscal 1996 general and administrative expenses included start-up costs incurred for an internally funded customer lease program as well as certain administrative expenses related to Company programs initiated to improve operating efficiencies. The Company expects fiscal 1997 general and administrative expenses as a percentage of revenues to decrease slightly from fiscal 1996. The decline in general and administrative expenses as a percentage of revenues from fiscal 1994 to fiscal 1995 reflects the benefits and efficiencies realized from the Company's investment in management information and communication systems and the reengineering of certain of its administrative processes. The decline also reflects, to some degree, the impact of leveraging increased revenues on a fixed level of cost for certain general and administration functions. Other expense, net amounted to less than 1% of revenues in fiscal 1996, 1995 and 1994. Other 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 39% in fiscal 1996 and 38% in fiscal 1995 and 1994. The Company's effective income tax rate may fluctuate between periods as a result of various factors, none of which is material, either individually or in the aggregate, to the consolidated results of operations. Accounting Standards. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. While the Company is reviewing the adoption and impact of SFAS 123, it expects to adopt the disclosure-only alternative and, accordingly, this standard will have no impact on the Company's results of operations or its financial position. 16 Liquidity and Capital Resources Working capital as of September 30, 1996 amounted to $36.3 million as compared with $29.1 million at September 30, 1995. Cash and equivalents and marketable securities at those dates amounted to $32.8 million and $21.4 million, respectively. The Company has available a bank line of credit of $3.0 million which expires in June 1998. No amounts were outstanding under the line of credit as of September 30, 1996. Cash provided by operations increased to $23.7 million in fiscal 1996 from $18.3 million in fiscal 1995 and $7.9 million in fiscal 1994. The increase in operating cash flows in fiscal 1996 as compared to fiscal 1995 was principally due to increased earnings and unearned service revenues as well as non-cash charges related to depreciation, amortization and deferred taxes. The Company's investment in the internal customer lease program which it introduced in fiscal 1996 partially offset the cash provided by other operations. The increase in operating cash flows in fiscal 1995 as compared with fiscal 1994 was principally due to increased earnings and better management of accounts receivable from trade customers. Cash provided by operations was more than sufficient to fund investments in equipment and capitalized software development costs in fiscal 1996, 1995 and 1994. Investments in equipment in fiscal 1996, 1995 and 1994 totaled $9.7 million, $4.1 million and $4.8 million, respectively. The Company anticipates that investment in equipment in fiscal 1997 will be comparable to fiscal 1996. The Company expects to finance these investments from available cash and operating cash flow generated in fiscal 1997. In fiscal 1996 the Company has invested a significant portion of its remaining cash balances in short term marketable securities. Certain Factors That May Affect Future Operating Results The following important factors, among others, could cause actual operating results to differ materially from those indicated by forward-looking statements made in this Annual Report and presented elsewhere by management from time to time. Potential Fluctuations in Results. The Company's 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. 17 Product Development and Technological Change. The markets for time and attendance and data collection systems are characterized by continual change and improvement in computer software and hardware technology. 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 time and attendance and data collection industries are highly competitive. Competition could increase as competitors in related industries, such as human resources and payroll, 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. Attracting and Retaining Sufficient Technical Personnel for Product Development, Support and Sales. The Company 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 the Company's ability to produce, support and sell robust products in a timely manner. 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, 1996, approximately 25% 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. Dependence on Time and Attendance Product Line. To date, more than 90% of the Company's revenues have been attributable to sales of time and attendance systems and services. Competitive pressures or other factors could cause the Company's time and attendance products to lose market acceptance or experience significant price erosion, adversely affecting the results of the Company's operations. 18 Reliance on Key Vendors. The Company depends upon the reliability and viability of a variety of software development tools owned by third parties to develop its products. If these tools are inadequate or not properly supported, the Company's ability to release competitive products in a timely manner could be adversely impacted. Also, certain parts and components used in the Company's hardware products are purchased from single vendors. The Company has chosen to source these items from single vendors because it believes that the vendor chosen is able to consistently provide the Company with the highest quality product at a competitive price on a timely basis. While the Company has to date been able to obtain adequate supplies of these parts and components, the Company's inability to transition to alternate sources on a timely basis if and as required in the future could result in delays or reductions in product shipments which could have material adverse effect on the Company's operating results. In addition, the Company purchases payroll interface software from a single vendor for resale in certain of its time and attendance systems. Although the Company believes its relationship with this vendor is good, any interruption or termination of the Company's rights to resell such software could delay shipment of certain of the Company's products and require the Company to write its own software to perform this function. Although the Company believes it would be able to produce its own payroll interface software, any delay or problems encountered in doing so could temporarily and adversely affect the Company's results of operations. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data are listed in the Index to Consolidated Financial Statements at Item 14 of this Form 10-K. Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure None. 19 PART III Item 10. Directors and Executive Officers of the Registrant Information relating to the executive officers of the registrant appears under the caption "Executive Officers of the Registrant" in Part I, following Item 4 of this Form 10-K. Information relating to the directors is incorporated by reference from pages 4 through 6 of the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on January 31, 1997 under the caption "Election of Directors." Item 11. Executive Compensation Incorporated by reference from pages 6 through 12 of the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on January 31, 1997 under the following captions: "Director Compensation," "Executive Compensation," "Option Grants and Exercises," and "Report of Compensation Committee." Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference from pages 2 through 3 of the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on January 31, 1997 under the caption "Security Ownership of Certain Beneficial Owners and Management." Item 13. Certain Relationships and Related Transactions None. 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Related Transactions (a) The following are filed as a part of this report: 1. Financial Statements Page Consolidated Statements of Income for the Years Ended September 30, 1996, 1995 and 1994 F-1 Consolidated Balance Sheets as of September 30, 1996 and 1995 F-2 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended September 30, 1996, 1995 and 1994 F-3 Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994 F-4 Notes to Consolidated Financial Statements F-5 Report of Ernst & Young LLP, Independent Auditors F-16 2. Financial Statement Schedule II - Valuation and Qualifying Accounts F-17 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits Exhibit No. Description 3.1 Articles of Organization of the Registrant, as amended. 3.2* Amended and Restated By-laws of the Registrant. 4* Specimen Stock Certificate. 10.1*(10) 1986A Stock Option Plan. 10.2(10) 1992 Equity Incentive Plan, as amended and restated. 21 3. Exhibits (continued) Exhibit No. Description 10.3(4)(10) 1992 Employee Stock Purchase Plan, as amended and restated. 10.4(3) Lease dated November 16, 1993, between Teachers Realty Corporation and the Registrant, relating to premises leased in Chelmsford, MA. 10.5(6) Lease dated August 8, 1995 between Principal Mutual Life Insurance Company and the Registrant, relating to premises leased in Chelmsford, MA. 10.6(3) Loan Agreement dated June 30, 1993 between Fleet Bank of Massachusetts, N.A. and the Registrant ("Loan Agreement"). 10.6.1(9) Amendment dated June 3, 1996 to Loan Agreement dated June 30, 1993 between Fleet Bank of Massachusetts, N.A. and the Registrant. 10.7(2)(11) Software License and Support and Hardware Purchase Agreement dated April 2, 1993 between ADP, Inc. and the Registrant. 10.7.1(12) Amendments dated July 22, 1996 to Software License and Support and Hardware Purchase Agreement dated April 2, 1993, between ADP, Inc. and the Registrant. 10.8* Sales Agreement dated December 6, 1990, between Integrated Design, Inc. and the Registrant. 10.8.1(7) Amendment dated November 2, 1995 to Sales Agreement dated December 6, 1990, between Integrated Design, Inc. and the Registrant. 10.9(3)(11) Acquisition Agreement dated November 2, 1993 between Interboro Systems Corporation and the Registrant. 10.10* Form of Indemnity Agreement entered into among the Registrant and Directors of the Registrant. 10.11(1) Lease dated November 9, 1992, as amended, between John Hancock Mutual Life Insurance Company and the Registrant, relating to premises leased in Waltham, MA. 10.11.1(8) Amendment dated January 1, 1996 to Lease dated November 9, 1992, as amended, between John Hancock Mutual Life Insurance Company and the Registrant, relating to premises leased in Waltham, MA. 10.12 (5) Agreement of Reorganization among Kronos Incorporated; Kronos S/T Corporation, ShopTrac Data Collection Systems, Inc., Thomas J. O'Malia and Mark J. MacWhirter, dated March 31, 1994. 11 Statement re Computation of Per Share Earnings. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 22 3. Exhibits (continued) * Incorporated by reference to the same Exhibit Number in the Company's Registration Statement on Form S-1 File No. 33-47383. (1) Incorporated by reference to the same Exhibit Number in the Company's Form 10-K for the fiscal year ended September 30, 1992. (2) Incorporated by reference to Exhibit Number 10.1 in the Company's Form 10-Q for the quarterly period ended April 3, 1993. (3) Incorporated by reference to the same Exhibit Number in the Company's Form 10-K for the fiscal year ended September 30, 1993. (4) Incorporated by reference to Exhibit Number 10.1 in the Company's Form 10-Q for the quarterly period ended July 2, 1994. (5) Incorporated by reference to Exhibit Number 2.1 in the Company's Form 10-Q for the quarterly period ended July 2, 1994. (6) Incorporated by reference to Exhibit 10.13 in the Company's Form 10-K for the fiscal year ended September 30,1995. (7) Incorporated by reference to Exhibit Number 10.1 in the Company's Form 10-Q for the quarterly period ended March 30, 1996. (8) Incorporated by reference to Exhibit Number 10.2 in the Company's Form 10-Q for the quarterly period ended March 30, 1996. (9) Incorporated by reference to Exhibit Number 10.1 in the Company's Form 10-Q for the quarterly period ended June 29, 1996. (10) Management contract or compensatory plan or arrangement filed as an exhibit to this Form 10-K pursuant to Items 14(a) and 14(c) of Form 10-K. (11) Confidential treatment was granted for certain portions of this agreement. (12) Confidential treatment requested for certain portions of these amendments, which portions have been omitted and filed separately with the Securities and Exchange Commission. 23 (b) Reports on Form 8-K No reports on Form 8-K were filed during the last fiscal quarter of the fiscal year covered by this report. Kronos, Timekeeper, Timekeeper Central, Jobkeeper, Jobkeeper Central, Datakeeper, Datakeeper Central, Gatekeeper, Gatekeeper Central, TeleTime, TimeMaker, CardSaver, ShopTrac, the ShopTrac logo, Start. Time, Keep.Trac, Solution in a Box and the Company's logo are registered trademarks of the Company. DKC/Datalink, ImageKeeper, WebTime, HyperFind, Smart Scheduler, Starter Series, Start.Labor, Start.WIP, Start.Quality, Labor Plus, WIP Plus, Comm.Mgr, Tempo and the Tempo logo are trademarks of the Company. IBM and OS/2 are registered trademarks of, and AS and AS/400 are trademarks of, International Business Machines Corporation. Total Time is a service mark of ADP, Inc. and ADP is a registered trademark of Automatic Data Processing, Inc. Time Bank is a registered trademark of Integrated Design Inc. UNIX is a registered trademark in the U.S. and other countries, licensed exclusively by X/Open Company Ltd. VMS is a registered trademark of Digital Equipment Corporation. Windows is a registered trademark of Microsoft Corporation. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on December 13, 1996. KRONOS INCORPORATED By /s/ MARK S. AIN Mark S. Ain Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 13, 1996. Signature Capacity /s/ MARK S. AIN Chief Executive Mark S. Ain Officer and Chairman of the Board (Principal Executive Officer) /s/ PAUL A. LACY Vice President, Finance and Paul A. Lacy Administration (Principal Financial and Accounting Officer) /s/ RICHARD J. DUMLER Director Richard J. Dumler /s/ THEODORE G. JOHNSON Director Theodore G. Johnson /s/ DAVID B. KISER Director David B. Kiser /s/ DONALD S. LEVY Director Donald S. Levy /s/ D. BRADLEY McWILLIAMS Director D. Bradley McWilliams /s/ LAWRENCE PORTNER Director Lawrence Portner /s/ SAMUEL RUBINOVITSZ Director Samuel Rubinovitz
Consolidated Statements of Income In thousands, except share data Year Ended September 30, 1996 1995 1994 ---------- ---------- ---------- Net revenues: Product ........................................... $ 100,951 $ 87,879 $ 68,444 Service ........................................... 42,006 32,494 24,475 ---------- ---------- ---------- 142,957 120,373 92,919 Cost of sales: Product ........................................... 26,281 24,762 20,925 Service ........................................... 28,296 24,552 19,143 ---------- ---------- ---------- ---------- 54,577 49,314 40,068 ---------- ---------- ---------- Gross profit ............................. 88,380 71,059 52,851 Expenses: Sales and marketing ............................... 46,982 40,138 31,381 Engineering, research and development ............. 12,730 8,192 5,593 General and administrative ........................ 9,942 8,455 7,326 Other expense, net ................................ 27 693 716 ---------- ---------- ---------- 69,681 57,478 45,016 ---------- ---------- ---------- Income before income taxes .................... 18,699 13,581 7,835 Provision for income taxes ............................. 7,274 5,183 2,943 ---------- ---------- ---------- Net income .................................... $ 11,425 $ 8,398 $ 4,892 ========== ========== ========== Net income per common share: Primary: Net income per common share ................... $ 1.37 $ 1.03 $ 0.62 ========== ========== ========== Fully Diluted: Net income per common share ................... $ 1.37 $ 1.03 $ 0.62 ========== ========== ========== Average common and common equivalent shares outstanding: Primary ........................................... 8,330,060 8,150,903 7,859,513 ========== ========== ========== Fully Diluted ..................................... 8,343,274 8,156,981 7,888,311 ========== ========== ========== See accompanying notes to consolidated financial statements.
F-1
Consolidated Balance Sheets In thousands, except share data September 30, 1996 1995 --------- --------- ASSETS Current assets: Cash and equivalents .............................................................. $ 10,795 $ 14,727 Marketable securities ............................................................. 21,995 6,716 Accounts receivable, less allowances for doubtful accounts of $987 in 1996 and $1,001 in 1995 ............................................................ 30,622 28,159 Inventories ....................................................................... 4,149 4,469 Deferred income taxes ............................................................. 3,025 2,427 Other current assets .............................................................. 3,765 1,273 --------- --------- Total current assets ....................................................... 74,351 57,771 Equipment, net ........................................................................ 14,738 10,079 Excess of cost over net assets of businesses acquired ................................. 7,221 6,606 Other assets .......................................................................... 8,556 4,062 --------- --------- Total assets ............................................................... $ 104,866 $ 78,518 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ............................................. $ 11,894 $ 8,352 Accrued compensation .............................................................. 8,445 7,149 Federal and state income taxes payable ............................................ 1,367 969 Unearned service revenue .......................................................... 16,388 12,185 --------- --------- Total current liabilities .................................................. 38,094 28,655 Deferred income taxes ................................................................. 2,236 912 Other liabilities ..................................................................... 3,438 2,382 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 12,000,000 shares, 8,124,133 shares and 7,940,468 shares issued at September 30, 1996 and 1995, respectively ............................................................ 81 79 Additional paid-in capital ........................................................ 27,512 24,353 Retained earnings ................................................................. 33,773 22,348 Equity adjustment from translation ................................................ (251) (206) Cost of Treasury Stock (583 shares and 170 shares at September 30, 1996 and 1995, respectively) ........................................................... (17) (5) --------- --------- Total shareholders' equity ................................................. 61,098 46,569 --------- --------- Total liabilities and shareholders' equity ................................. $ 104,866 $ 78,518 ========= ========= See accompanying notes to consolidated financial statements.
F-2
Consolidated Statements of Changes in Shareholders' Equity In thousands Equity Common Stock Additional Adjustment Treasury Stock ---------------------- Paid-in Retained from ------------------- Shares Amount Capital Earnings Translation Shares Amount Total -------------------------------- -------------------------------------------------------- Balance at October 1, 1993 7,629 $77 $21,461 $9,058 $(225) 27 $(335) $30,036 Net income 4,892 4,892 Proceeds from exercise of stock options 28 (114) (34) 412 298 Proceeds from employee stock purchase plan 45 389 389 Amortization of compensation expense relating to nonqualified stock option plans (2) (2) Equity adjustment from translation 17 17 Purchase of treasury stock 7 (82) (82) Tax benefit associated with the exercise of stock options 334 334 -------------------- ---------- ---------- ----------- ------------------- --------- Balance at September 30, 1994 7,702 77 22,068 13,950 (208) (5) 35,882 Net income 8,398 8,398 Proceeds from exercise of stock options 186 1 249 (54) 1,077 1,327 Proceeds from employee stock purchase plan 52 1 599 600 Amortization of compensation expense relating to nonqualified stock option plans (1) (1) Equity adjustment from translation 2 2 Purchase of treasury stock 54 (1,077) (1,077) Tax benefit associated with the exercise of stock options 1,438 1,438 -------------------- ---------- ---------- ----------- ------------------- --------- Balance at September 30, 1995 7,940 79 24,353 22,348 (206) (5) 46,569 Net income 11,425 11,425 Proceeds from exercise of stock options 144 2 538 (16) 525 1,065 Proceeds from employee stock purchase plan 40 945 945 Amortization of compensation expense relating to nonqualified stock option plans 68 68 Equity adjustment from translation (45) (45) Purchase of treasury stock 17 (537) (537) Tax benefit associated with the exercise of stock options 1,608 1,608 -------------------- ---------- ---------- ----------- ------------------- --------- Balance at September 30, 1996 8,124 $81 $27,512 $33,773 $(251) 1 $(17) $61,098 ==================== ========== ========== =========== =================== ========= See accompanying notes to consolidated financial statements.
F-3
Consolidated Statements of Cash Flows In thousands Year Ended September 30, 1996 1995 1994 -------- -------- -------- Operating activities: Net income ............................................................. $ 11,425 $ 8,398 $ 4,892 Adjustments to reconcile net income to net cash and equivalents provided by operating activities: Depreciation .................................................... 4,764 3,678 3,067 Provision for deferred income taxes ............................. 726 (636) 621 Amortization of deferred software development costs and other assets ...................................... 3,404 2,571 1,820 Changes in certain operating assets and liabilities: Accounts receivable, net .................................... (2,945) (3,096) (8,275) Inventories ................................................. 330 (21) (646) Unearned service revenue .................................... 5,367 2,392 4,479 Accounts payable, accrued compensation and other liabilities ................................... 5,609 5,214 2,506 Net investment in sales-type leases ......................... (3,766) Other ........................................................... (1,165) (170) (567) -------- -------- -------- Net cash and equivalents provided by operating activities 23,749 18,330 7,897 Investing activities: Purchase of equipment .................................................. (9,656) (4,065) (4,842) Capitalization of software development costs ........................... (4,014) (2,364) (1,789) (Increase) decrease in marketable securities ........................... (15,278) (5,914) 2,979 Acquisitions of businesses ............................................. (1,809) (1,322) (5,285) Other .................................................................. 43 (45) (139) -------- -------- -------- Net cash and equivalents used in investing activities ... (30,714) (13,710) (9,076) Financing activities: Principal payments under capital leases ................................ (27) (116) (392) Net proceeds and tax benefits from exercise of stock option and employee purchase plans ............................................ 3,081 2,286 937 -------- -------- -------- Net cash and equivalents provided by financing activities 3,054 2,170 545 Effect of exchange rate changes on cash and equivalents ..................... (21) (1) 20 -------- -------- -------- Increase (decrease) in cash and equivalents ................................. (3,932) 6,789 (614) Cash and equivalents at the beginning of the period ......................... 14,727 7,938 8,552 -------- -------- -------- Cash and equivalents at the end of the period ............................... $ 10,795 $ 14,727 $ 7,938 ======== ======== ======== See accompanying notes to consolidated financial statements.
F-4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KRONOS INCORPORATED NOTE A--Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Kronos Incorporated and its wholly-owned subsidiaries (the "Company"). All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Translation of Foreign Currencies: The assets and liabilities of the Company's foreign subsidiaries are denominated in each country's local currency and translated at the year-end rate of exchange. The related income statement items are translated at the average rate of exchange for the year. The resulting translation adjustments are excluded from income and reflected as a separate component of shareholders' equity. Realized and unrealized exchange gains or losses arising from transaction adjustments are reflected in operations and are not material. Cash Equivalents: Cash equivalents consist of highly liquid investments with maturities of three months or less at date of acquisition. Marketable Securities: The Company's marketable securities consist of state revenue bonds and market auction preferred stocks. State revenue bonds, which generally mature within one year, are classified as held to maturity and are carried at amortized cost. Market auction preferred stocks are classified as available-for-sale and are carried at cost which approximates fair value. Unrealized gains and losses on investments classified as held to maturity are not recognized until realized or until a decline in fair value below cost is deemed to be other-than-temporary. Unrealized gains and losses, if any, on available-for-sale securities would be reflected as a separate component of shareholders' equity. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE A--Summary of Significant Accounting Policies--(continued) Equipment: Equipment, which includes assets recorded in connection with capital leases, are stated on the basis of cost less accumulated depreciation, provisions for which have been computed using the straight-line method over the estimated useful lives of the assets, which are principally as follows: Estimated Assets Useful Life - - -------------------------------------------------------------------------------- Machinery and equipment 3-5 years Furniture and fixtures 8-10 years Leasehold improvements Shorter of economic life or lease-term Accounting for the Impairment of Long-Lived Assets: Long-lived assets used in operations, such as the excess of cost over net assets of businesses acquired, capitalized software development costs and equipment, are included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. If the impairment evaluation indicates the affected asset is not recoverable, the asset's carrying value would be reduced to fair value. No event has occurred which would impair the value of long-lived assets recorded in the accompanying consolidated financial statements. Revenue Recognition: The Company derives its revenues from the sale of time and attendance, workforce management and shop floor data collection systems as well as sales of application software and parts and components. The Company's systems consist of fully integrated software and intelligent data collection terminals. The Company also derives revenues by providing maintenance, professional and educational services to its direct customers. The Company recognizes revenues from sales of its systems, application software, parts and components at the time of shipment, unless the Company has significant obligations remaining. When significant obligations remain, revenue is not recognized until such obligations have been completed or are no longer significant. The Company recognizes revenues from its sales-type leases of systems at time of shipment. Service revenues are recognized ratably over the contractual period or as the services are performed. The Company provides installation services and certain warranties to its customers. It also provides, without additional charge, certain software product enhancements for customers covered under software maintenance contracts. The provision for these expenses is made at the time revenues are recognized. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE A--Summary of Significant Accounting Policies--(continued) Income Taxes: The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Net Income Per Share: Net income per share is based on the weighted average number of common shares and, when dilutive, common stock equivalents outstanding during the year. Common stock equivalents are attributable to stock options. Reclassifications: Certain amounts in 1995 and 1994 have been reclassified to permit comparison with 1996. Newly Issued Accounting Standard: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. While the Company is reviewing the adoption and impact of SFAS 123, it expects to adopt the disclosure-only alternative and, accordingly, this standard will have no impact on the Company's results of operations or its financial position. NOTE B--Concentration of Credit Risk The Company markets and sells its products through its direct sales organization, through independent dealers and through an OEM agreement with ADP, Inc. The Company's dealers have significantly smaller resources than the Company. The Company's direct sales organization sells to customers who are dispersed across many different industries and geographic areas. The Company reviews a customer's (including dealers) credit history before extending credit and generally does not require collateral. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE C--Inventories Inventories consist of the following (in thousands): September 30, ----------------------------------- 1996 1995 - - -------------------------------------------------------------------------------- Finished goods $2,148 $1,769 Work-in-process 283 315 Raw materials 1,718 2,385 ------ ------ $4,149 $4,469 ====== ====== NOTE D--Equipment Equipment consists of the following (in thousands): September 30, ----------------------------------- 1996 1995 - - -------------------------------------------------------------------------------- Machinery and equipment $24,102 $18,414 Furniture and fixtures 5,363 3,627 Leasehold improvements 3,106 1,758 ------- ------- 32,571 23,799 Less accumulated depreciation and amortization 17,833 13,720 ------- ------- $14,738 $10,079 ======= ======= NOTE E--Acquisitions In fiscal 1996, 1995 and 1994, the Company completed various acquisitions of dealer territories in the United States, Mexico and Australia. These acquisitions were accounted for under the purchase method of accounting and, accordingly, the operating results are included in the consolidated statements of income from the date of each respective acquisition. The combined cost of the acquisitions which amounted to $750,000, $1,000,000 and $5,800,000 in fiscal 1996, 1995 and 1994, respectively, largely relates to intangible assets which are being amortized using the straight-line method over a period of eight years. Related amortization expense amounted to $1,232,000, $1,006,000 and $797,000 in fiscal 1996, 1995 and 1994, respectively. F-8 NOTES TO CONSOLIDATE FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE E--Acquisitions--(continued) Certain acquisition agreements contain provisions for making additional payments, if specified minimum revenue requirements are met, to former shareholders of the acquired companies who have not continued employment with the Company. These provisions expire during fiscal years 1998 and 1999. Amounts earned under the terms of the agreements are recorded as an increase in the excess of the total acquisition cost over the fair value of the net assets acquired. During fiscal 1996 and 1995, $903,000 and $428,000 of such payments were made. NOTE F--Deferred Software Development Costs Costs incurred in the research, design and development of software for sale to others are charged to expense until technological feasibility is established. Thereafter, software development costs are capitalized and amortized to product cost of sales on a straight-line basis over the lesser of three years or the estimated economic lives of the respective products, beginning when the products are offered for sale. The unamortized portion of capitalized software development costs included in other assets amounted to $5,259,000 and $3,361,000 at September 30, 1996 and 1995, respectively. Amortization of capitalized software development costs amounted to $2,115,000, $1,481,000 and $986,000 in fiscal 1996, 1995 and 1994, respectively. Total research and development expenses charged to operations amounted to $9,299,000, $5,060,000 and $3,506,000 in fiscal 1996, 1995 and 1994, respectively. NOTE G--Credit Arrangements The Company maintains a credit agreement, expiring June 1, 1998, providing unsecured borrowings up to $3,000,000. Borrowings under the agreement bear interest at the bank's prime rate or, with the consent of the bank, the London Inter-bank Offered Rate ("LIBOR"). The agreement contains restrictive covenants including the maintenance of a minimum amount of tangible net worth and specific financial statement ratios. There were no borrowings on the line of credit during the three year period ended September 30, 1996. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE H--Lease Commitments The Company leases certain office space, manufacturing facilities and equipment under long-term capital and operating lease agreements. Future minimum rental commitments under operating leases with noncancellable terms of one year or more are as follows (in thousands): Fiscal Year - - ------------------------------------------------------------------------- 1997 .................................... $5,258 1998 .................................... 4,610 1999 .................................... 3,870 2000 .................................... 2,661 2001 .................................... 1,447 Thereafter .............................. 3,110 ------- $20,956 ======= Rent expense was $5,756,000, $4,478,000 and $4,083,000 in fiscal 1996, 1995 and 1994, respectively. NOTE I--Capital Stock The Board of Directors is authorized, subject to any limitations prescribed by law, from time to time to issue up to an aggregate of 1,000,000 shares of Preferred Stock, $1.00 par value per share, in one or more series, each of such series to have such preferences, voting powers (up to 10 votes per share), qualifications, and special or relative rights and privileges as shall be determined by the Board of Directors in a resolution or resolutions providing for the issue of such Preferred 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. Each Right initially represents the right to purchase one one-thousandth of a share of a new series of preferred stock at an exercise price of $236, subject to adjustment. The Company reserved 12,500 shares of its Preferred Stock for issuance under the agreement. The Rights may be exercised, in whole or in part, only if a person or group acquires beneficial ownership of 20% or more of the Company's outstanding Common Stock or announces a tender or exchange offer upon consummation of which, such person or group would beneficially own 25% or more of the Company's Common Stock. When exercisable, each Right will entitle its holder (other than such person or members of such group) to purchase for an amount equal to the then current exercise price, in lieu of preferred stock, a number of shares of the Company's Common Stock having a market value of twice the Right's exercise price. In F-10 NOTES TO CONSOLIDATE FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE I--Capital Stock--(continued) addition, when exercisable, the Company may exchange the Rights, in whole or in part, at an exchange ratio of one share of Common Stock or one one-thousandth of a share of Preferred Stock per Right. In the event that the Company is acquired in a merger or other business combination, the Rights would entitle the stockholders (other than the acquirer) to purchase securities of the surviving company at a similar discount. Until they become exercisable, the Rights will be evidenced by the Common Stock certificates and will be transferred only with such certificates. Under the Agreement, the Company can redeem all outstanding Rights at $.01 per right at any time until the tenth day following the public announcement that a 20% beneficial ownership position has been acquired or the Company has been acquired in a merger or other business combination. The Rights will expire on November 17, 2005. 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 January 29, 1996 to stockholders of record as of January 15, 1996. 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. NOTE J--Employee Benefit Plans Stock Option Plans The 1992 Equity Incentive Plan enables the Compensation Committee of the Board of Directors of the Company to grant awards in the form of options, stock appreciation rights, restricted or unrestricted stock awards, deferred stock awards and performance awards, as defined in the Plan. During fiscal 1996, 1995 and 1994, the Company granted under the Plan stock options to purchase 190,400, 180,150 and 178,725 shares , respectively, of Common Stock at a purchase price equal to the fair value of the Common Stock at the date of grant. No other awards were made under the Plan through September 30, 1996. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE J--Employee Benefit Plans--(continued) The Company also has several nonqualified and incentive stock option plans adopted from 1979 through 1987. No additional options may be granted under these plans. The following schedule summarizes the changes in stock options issued under various plans for the three fiscal years in the period ended September 30, 1996. At September 30, 1996, options to purchase 312,896 shares were exercisable.
Number of Shares Exercise Price Per Share - - -------------------------------------------------------- -------------------------- ---------------------------------- Outstanding at October 1, 1993 751,923 $0.22 -$13.67 Granted 178,725 10.33 - 11.33 Exercised (63,893) 0.22 - 8.00 Canceled (16,414) 0.22 - 13.67 -------- -------------- Outstanding at September 30, 1994 850,341 0.22 - 13.67 Granted 180,150 13.50 - 23.33 Exercised (239,664) 0.22 - 13.67 Canceled (21,432) 0.22 - 13.67 -------- -------------- Outstanding at September 30, 1995 769,395 0.22 - 23.33 Granted 190,400 27.00 - 34.50 Exercised (160,727) 0.22 - 20.33 Canceled (41,214) 0.22 - 32.50 -------- -------------- Outstanding at September 30, 1996 757,854 $0.22 - $34.50 ======== ==============
Stock Purchase Plan In accordance with the 1992 Employee Stock Purchase Plan, eligible employees may authorize payroll deductions of up to 10% of their compensation (not to exceed $3,000 in a six month period) to purchase shares at the lower of 85% of the fair market value of the Company's Common Stock at the beginning or end of the six month option period. During fiscal 1996, 39,763 shares were issued to employees at prices ranging from $21.04 to $26.92 per share. F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE J--Employee Benefit Plans--(continued) Defined Contribution Plan The Company sponsors a defined contribution savings plan for the benefit of substantially all employees. Total expense under the plan was $777,000, $501,000 and $369,000 in fiscal 1996, 1995 and 1994, respectively. NOTE K--Income Taxes The provision for income taxes consists of the following (in thousands):
Year Ended September 30, --------------------------------------------------- 1996 1995 1994 - - ------------------------------------------------------------- ---------------- ----------------- ---------------- Current: Federal $5,566 $4,984 $1,965 State 951 835 357 Foreign 31 ------ ------ ------ 6,548 5,819 2,322 Deferred: Federal 654 (555) 541 State 72 (81) 80 726 (636) 621 ------ ------ ------ $7,274 $5,183 $2,943 ====== ====== ======
At September 30, 1996, a total of 1,598,767 shares of Common Stock were reserved for issuance. Included in this amount are 1,163,467 shares for the 1992 Equity Incentive Plan, 235,946 shares for the Employee Stock Purchase Plan and 199,354 shares for the various stock option plans adopted in the period 1979 through 1987. F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE K--Income Taxes--(continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. For financial reporting purposes, the Company has determined that recognition of the deferred tax asset resulting from net operating loss carryforwards of foreign subsidiaries does not meet the "more likely than not" criteria of the Standard and, therefore, has provided a valuation allowance for related future tax benefits. Significant components of the Company's deferred tax assets and liabilities were as follows (in thousands):
September 30, ------------------------------- 1996 1995 - - ------------------------------------------------------------------------------------------------ --------------- Deferred tax assets: Inventory reserves $ 492 $ 424 Accounts receivable reserves 370 359 Accrued expenses 2,264 1,663 Net operating loss carryforwards of foreign subsidiaries 694 532 -------- -------- Total deferred tax assets 3,820 2,978 Valuation allowance (694) (532) -------- -------- 3,126 2,446 Deferred tax liabilities: Capitalized software development costs (2,130) (1,277) Other (207) 346 -------- -------- Net deferred tax assets $ 789 $1,515 ======== ========
The effective tax rate differed from the United States statutory rate as follows: Year ended September 30, 1996 1995 1994 - - ---------------------------------------------------------------- --------------- ---------------- --------------- Statutory rate 35% 34% 34% State income taxes, net of federal income tax benefit 4 4 4 Foreign losses not benefited 1 Use of foreign net operating loss carryforwards (1) (1) Income tax credits (1) (1) Other 2 1 ---- ---- ---- 39% 38% 38% ==== ==== ====
F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED KRONOS INCORPORATED NOTE K--Income Taxes--(continued) There were $200,000 and $328,000 of net operating loss carryforwards utilized in fiscal 1996 and 1995. At September 30, 1996, the Company had $1,714,000 of available net operating loss carryforwards from foreign operations which may be used to reduce future income taxes payable in their respective countries. Of these carryforwards, $1,053,000 expire from 1997 through 2003. The remaining carryforwards, totaling $661,000, may be carried forward indefinitely. The Company made income tax payments of $4,424,000, $4,352,000 and $1,496,000 in fiscal 1996, 1995 and 1994, respectively. F-15 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Kronos Incorporated We have audited the accompanying consolidated balance sheets of Kronos Incorporated as of September 30, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1996. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kronos Incorporated at September 30, 1996 and 1995, and the consolidated results of operations and cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Boston, Massachusetts October 24, 1996 F-16
KRONOS INCORPORATED SCHEDULE II - Valuation and Qualifying Accounts (In thousands) ==================================================================================================================================== COL. A COL. B COL. C COL. D COL. E - - ------------------------------------------------------------------------------------------------------------------------------------ Additions ----------------------------- Charged to Balance at Charged to Other Balance at Beginning Costs and Accounts- Deductions- End Description of Period Expenses Describe Describe of Period - - ------------------------------------------------------------------------------------------------------------------------------------ Year ended September 30, 1994: Deducted from asset accounts: Allowance for doubtful accounts $809 $264 $209 (1) $864 ============ =========== =========== ============ ============ Year ended September 30, 1995: Deducted from asset accounts: Allowance for doubtful accounts $864 $571 $434 (1) $1,001 ============ =========== =========== ============ ============ Year ended September 30, 1996: Deducted from asset accounts: Allowance for doubtful accounts $1,001 $322 $336 (1) $987 ============ =========== =========== ============ ============
(1) Uncollectible accounts written off, net of recoveries. Exhibit Index Exhibit No. Description 3.1 Articles of Organization of the Registrant, as amended. 3.2* Amended and Restated By-laws of the Registrant. 4* Specimen Stock Certificate. 10.1*(10) 1986A Stock Option Plan. 10.2(10) 1992 Equity Incentive Plan, as amended and restated. 10.3(4)(10) 1992 Employee Stock Purchase Plan, as amended and restated. 10.4(3) Lease dated November 16, 1993, between Teachers Realty Corporation and the Registrant, relating to premises leased in Chelmsford, MA. 10.5(6) Lease dated August 8, 1995 between Principal Mutual Life Insurance Company and the Registrant, relating to premises leased in Chelmsford, MA. 10.6(3) Loan Agreement dated June 30, 1993 between Fleet Bank of Massachusetts, N.A. and the Registrant ("Loan Agreement"). 10.6.1(9) Amendment dated June 3, 1996 to Loan Agreement dated June 30, 1993 between Fleet Bank of Massachusetts, N.A. and the Registrant. 10.7(2)(11) Software License and Support and Hardware Purchase Agreement dated April 2, 1993 between ADP, Inc. and the Registrant. 10.7.1(12) Amendments dated July 22, 1996 to Software License and Support and Hardware Purchase Agreement dated April 2, 1993, between ADP, Inc. and the Registrant. 10.8* Sales Agreement dated December 6, 1990, between Integrated Design, Inc. and the Registrant. 10.8.1(7) Amendment dated November 2, 1995 to Sales Agreement dated December 6, 1990, between Integrated Design, Inc. and the Registrant. 10.9(3)(11) Acquisition Agreement dated November 2, 1993 between Interboro Systems Corporation and the Registrant. 10.10* Form of Indemnity Agreement entered into among the Registrant and Directors of the Registrant. 10.11(1) Lease dated November 9, 1992, as amended, between John Hancock Mutual Life Insurance Company and the Registrant, relating to premises leased in Waltham, MA. 10.11.1(8) Amendment dated January 1, 1996 to Lease dated November 9, 1992, as amended, between John Hancock Mutual Life Insurance Company and the Registrant, relating to premises leased in Waltham, MA. 10.12 (5) Agreement of Reorganization among Kronos Incorporated; Kronos S/T Corporation, ShopTrac Data Collection Systems, Inc., Thomas J. O'Malia and Mark J. MacWhirter, dated March 31, 1994. 11 Statement re Computation of Per Share Earnings. 21 Subsidiaries of the Registrant. Exhibit Index (continued) Exhibit No. Description 23 Consent of Independent Auditors. 27 Financial Data Schedule. * Incorporated by reference to the same Exhibit Number in the Company's Registration Statement on Form S-1 File No. 33-47383. (1) Incorporated by reference to the same Exhibit Number in the Company's Form 10-K for the fiscal year ended September 30, 1992. (2) Incorporated by reference to Exhibit Number 10.1 in the Company's Form 10-Q for the quarterly period ended April 3, 1993. (3) Incorporated by reference to the same Exhibit Number in the Company's Form 10-K for the fiscal year ended September 30, 1993. (4) Incorporated by reference to Exhibit Number 10.1 in the Company's Form 10-Q for the quarterly period ended July 2, 1994. (5) Incorporated by reference to Exhibit Number 2.1 in the Company's Form 10-Q for the quarterly period ended July 2, 1994. (6) Incorporated by reference to Exhibit 10.13 in the Company's Form 10-K for the fiscal year ended September 30,1995. (7) Incorporated by reference to Exhibit Number 10.1 in the Company's Form 10-Q for the quarterly period ended March 30, 1996. (8) Incorporated by reference to Exhibit Number 10.2 in the Company's Form 10-Q for the quarterly period ended March 30, 1996. (9) Incorporated by reference to Exhibit Number 10.1 in the Company's Form 10-Q for the quarterly period ended June 29, 1996. Exhibit Index (continued) Exhibit No. Description (10) Management contract or compensatory plan or arrangement filed as an exhibit to this Form 10-K pursuant to Items 14(a) and 14(c) of Form 10-K. (11) Confidential treatment was granted for certain portions of this agreement. (12) Confidential treatment requested for certain portions of these amendments, which portions have been omitted and filed separately with the Securities and Exchange Commission. EX-3.(I) 2 AMENDMENT TO ARTICLES OF ORGANIZATION EXHIBIT 3.1 FORM CD-26-5M-8-83 The Commonwealth of Massachusetts William Francis Galvin Secretary of the Commonwealth RAL IDENTIFICATION ONE ASHBURTON PLACE, BOSTON, MASS. 02108 NO. 04-2640942 CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK General Laws, Chapter 156B, Section 26 ----------- We, Mark S. Ain , President and Paul A. Lacy , Clerk of Kronos Incorporated .......................................................... 400 Fifth Avenue, Waltham, Massachusetts 02154 located at ................................................... do hereby certify that at a meeting of the directors of the corporation held on November 17 ............ 19 95 , the following vote establishing and designating a series of a class of stock and determining the relative rights and preferences thereof was duly adopted:- See Continuation Sheet 2A (Pages 1 through 10) NOTE: Votes for which the space provided above is not sufficient should be set out on continuation sheets to be numbered 2A, 2B etc. Continuation sheets must have a left-hand margin 1 inch wide for binding and shall be 8 1/2" x 11". Only one side should be used. -1- CONTINUATION OF SHEET 2A RESOLVED: That pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Restated Articles of Organization, the Board of Directors hereby creates a series of Preferred Stock, $1.00 par value (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences and limitations thereof as follows: Series A Junior Participating Preferred Stock: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be Twelve Thousand Five Hundred (12,500). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $.01 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds of the Corporation legally available for the payment of dividends, quarterly dividends payable in cash on the last day of each fiscal quarter of the Corporation in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share -2- amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time (i) declare or pay any dividend on the Common Stock payable in shares of Common Stock, or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) (except, with respect to subsections (i) or (ii) above, in such case that the Corporation simultaneously declares or pays a dividend on, or effects a subdivision, combination or consolidation of, the Series A Preferred Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In the event the Corporation shall at any time declare or pay any dividend on the Series A Preferred Stock payable in shares of Series A Preferred Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Series A Preferred Stock (by reclassification or otherwise than by payment of a dividend in shares of Series A Preferred Stock) into a greater or lesser number of shares of Series A Preferred Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the first sentence of this Section 2(A) shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Series A Preferred Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Series A Preferred Stock outstanding immediately after such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than -3- a dividend payable in shares of Common Stock) and the Corporation shall pay such dividend or distribution on the Series A Preferred Stock before the dividend or distribution declared on the Common Stock is paid or set apart; provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 10 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification -4- or otherwise than by payment of a dividend in shares of Common Stock) (except, with respect to subsections (i) and (ii) above, in such case that the Corporation simultaneously declares or pays a dividend on, or effects a subdivision, combination or consolidation of, the Series A Preferred Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In the event the Corporation shall at any time (i) declare or pay any dividend on the Series A Preferred Stock payable in shares of Series A Preferred Stock, or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Series A Preferred Stock (by reclassification or otherwise than by payment of a dividend in shares of Series A Preferred Stock) into a greater or lesser number of shares of Series A Preferred Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Series A Preferred Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Series A Preferred Stock outstanding immediately after such event. (B) Except as otherwise provided herein, in the Restated Articles of Organization, as amended, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C)(i) If at any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the holders of the Series A Preferred Stock, voting as a separate series from all other series of Preferred Stock and classes of capital stock, shall be entitled to elect two members of the Board of Directors in addition to any Directors elected by any other series, class or classes of securities and the authorized number of Directors will automatically be increased by two. Promptly thereafter, the Board of -5- Directors of this Corporation shall, as soon as may be practicable, call a special meeting of holders of Series A Preferred Stock for the purpose of electing such members of the Board of Directors. Said special meeting shall in any event be held within 45 days of the occurrence of such arrearage. (ii) During any period when the holders of Series A Preferred Stock, voting as a separate series, shall be entitled and shall have exercised their right to elect two Directors, then and during such time as such right continues (a) the then authorized number of Directors shall be increased by two, and the holders of Series A Preferred Stock, voting as a separate series, shall be entitled to elect the additional Directors so provided for, and (b) each such additional Director shall not be a member of any existing class of the Board of Directors, but shall serve until the next annual meeting of stockholders for the election of Directors, or until his successor shall be elected and shall qualify, or until his right to hold such office terminates pursuant to the provisions of this Section 3(C) (iii) A Director elected pursuant to the terms hereof may be removed with or without cause by the holders of Series A Preferred Stock entitled to vote in an election of such Director. (iv) If, during any interval between annual meetings of stockholders for the election of Directors and while the holders of Series A Preferred Stock shall be entitled to elect two Directors, there is no such Director in office by reason of resignation, death or removal, then, promptly thereafter, the Board of Directors shall call a special meeting of the holders of Series A Preferred Stock for the purpose of filling such vacancy and such vacancy shall be filled at such special meeting. Such special meeting shall in any event be held within 45 days of the occurrence of such vacancy. (v) At such time as the arrearage is fully cured, and all dividends accumulated and unpaid on any shares of Series A Preferred Stock outstanding are paid, and, in addition thereto, at least one regular dividend has been paid subsequent to curing such arrearage, the term of office of any Director elected pursuant to this Section 3(C), or his successor, shall automatically terminate, and the authorized number of Directors shall automatically decrease by two, the rights of the holders of the shares of the Series A Preferred Stock to vote as provided in this Section 3(C) shall cease, subject to -6- renewal from time to time upon the same terms and conditions, and the holders of shares of the Series A Preferred Stock shall have only the limited voting rights elsewhere herein set forth. (D) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series -7- A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Restated Articles of Organization, as amended, or in any other Certificate of Designation creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $10 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the -8- total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. (B) Neither the consolidation, merger or other business combination of the Corporation with or into any other corporation nor the sale, lease, exchange or conveyance of all or any part of the property, assets or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. (C) In the event the Corporation shall at any time (i) declare or pay any dividend on the Common Stock payable in shares of Common Stock, or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock)(except, with respect to subsections (i) or (ii) above, in such case that the Corporation simultaneously declares or pays a dividend on, or effects a subdivision, combination or consolidation of, the Series A Preferred Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of paragraph (A) of this Section 6 shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In the event the Corporation shall at any time declare or pay any dividend on the Series A Preferred Stock payable in shares of Series A Preferred Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Series A Preferred Stock (by reclassification or otherwise than by payment of a dividend in shares of Series A Preferred Stock) into a greater or lesser number of shares of Series A Preferred Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of paragraph (A) of this Section 4 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Series A Preferred Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Series A Preferred Stock outstanding immediately after such event. -9- Section 7. Consolidation, Merger, etc. Notwithstanding anything to the contrary contained herein, in case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time (i) declare or pay any dividend on the Common Stock payable in shares of Common Stock, or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) (except, with respect to subsections (i) and (ii) above, in such case that the Corporation simultaneously declares or pays a dividend on, or effects a subdivision, combination or consolidation of, the Series A Preferred Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In the event the Corporation shall at any time declare or pay any dividend on the Series A Preferred Stock payable in shares of Series A Preferred Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Series A Preferred Stock (by reclassification or otherwise than by payment of a dividend in shares of Series A Preferred Stock) into a greater or lesser number of shares of Series A Preferred Stock, then in each such case the amount set forth in the first sentence of this Section 7 with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Series A Preferred Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Series A Preferred Stock outstanding immediately after such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. -10- Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Preferred Stock issued either before or after the issuance of the Series A Preferred Stock, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Restated Articles of Organization, as amended, of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. Section 11. Fractional Shares. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series A Preferred Stock. -11- IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 30th day of November in the year 1995. S/ Mark S. Ain ........................................................., President S/ Paul A. Lacy ........................................................., Clerk -12- THE COMMONWEALTH OF MASSACHUSETTS Certificate of Vote of Directors Establishing A Series of a Class of Stock (General Laws, Chapter 156B, Section 26) I hereby approve the within certificate and, the filing fee in the amount of $ 100.00 having been paid, said certificate is hereby filed this 4th day of December 1995 . S/ William Francis Galvin William Francis Galvin Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION PHOTO COPY OF CERTIFICATE TO BE SENT TO: Sally J. Wallace, Esq........... Vice President, General Counsel Kronos Incorporated............ 400 Fifth Avenue............... Waltham, MA 02154.............. ........................................ ........................................ Telephone......617-890-3232........... -13- EXHIBIT 3.1 (CONTINUED) The Commonwealth of Massachusetts MICHAEL JOSEPH CONNOLLY Secretary of State Federal Identification ONE ASHBURTON PLACE, BOSTON, MASS. 02108 No. 04-2640942 RESTATED ARTICLES OF ORGANIZATION General Laws, Chapter 156B, Section 74 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the restated articles or organization. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. ---------- We, Mark S. Ain , President/and Paul A. Lacy , Clerk of . . . . . . . . . . . . . . . . Kronos Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Name of Corporation) located at . . . . . . . . 62 Fourth Avenue, Waltham, MA 02154 . . . . . . . . do hereby certify that the following restatement of the articles of organization of the corporation was duly adopted at a meeting held on April 16 , 1992 , by vote of . 1,127,890 . shares of .Common Stock out of .. 1,234,798 . shares outstanding, (Class of Stock) .20,152.. shares of Series A. Preferred Stock . out of . 21,855 shares (Class of Stock) outstanding, and . . . . . . shares of . . . . . . . . . out of. . . . . . shares outstanding, (Class of Stock) being at least two-thirds of each class of stock outstanding and entitled to vote and of each class or series of stock adversely affected thereby: - 1. The name by which the corporation shall be known is: - Kronos Incorporated 2. The purposes for which the corporation is formed are as follows: - See Page 2A attached hereto. Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one article may be continued on a single sheet so long as each article requiring each such addition is clearly indicated. 3. The total number of shares and the par value, if any, of each class of stock which the corporation is authorized to issue is as follows: WITHOUT PAR VALUE WITH PAR VALUE CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARES PAR VALUE Preferred 1,000,000 $1.00 Common 12,000,000 $ .01 *4. If more than one class is authorized, a description of each of the different classes of stock with, if any, the preferences, voting powers, qualifications, special or relative rights or privileges as to each class thereof and any series now established: See Pages 4A through 4M attached hereto. *5. The restrictions, if any, imposed by the articles of organization upon the transfer of shares of stock of any class are as follows: None *6. Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Pages 6A through 6G attached hereto. *If there are no such provisions, state "None". Article 2 - - --------- Purposes (a) to develop, manufacture and market electrical, electronic and mechanical products of any kind, and to conduct research in connection with any of the foregoing. (b) to carry on any manufacturing, mercantile, selling, management, service or other business, operation or activity which may be lawfully carried on by a corporation organized under the Business Corporation Law of The Commonwealth of Massachusetts, whether or not related to those referred to in the foregoing paragraph. -2A- Continuation Sheet 4A ARTICLE 4 PROVISIONS RELATING TO CAPITAL STOCK The capital stock of the Corporation shall consist of (i) 12,000,000 shares of Common Stock, $.01 par value per share and (ii) 1,000,000 shares of preferred stock, $1.00 par value per share, issuable in one or more series (the "Series Preferred Stock"), of which 21,855 shares shall be designated Series A Cumulative Convertible Preferred Stock (the "Series A Preferred"). SERIES PREFERRED STOCK AND COMMON STOCK 1. The shares of Series Preferred Stock may be issued from time to time in one or more series. To the extent not inconsistent with the other provisions of this Article 4, the Board of Directors is authorized to establish and designate the different series, and to fix and determine the variations and the relative rights and preferences among the different series, provided that all shares of Series Preferred Stock shall be identical except for variations so fixed and determined among the different series to the extent permitted by Massachusetts General Laws, Chapter 156B, Section 26 and any successor to that Section. 2. The preferences, voting powers, qualifications, special or relative rights or privileges of the Common Stock, the Series Preferred Stock and the Series A Preferred are as follows: (a) Liquidation Preference. Upon any liquidation, dissolution or winding up of this Corporation, whether voluntary or involuntary and after provision for the payment of creditors, the holders of each series of Series Preferred Stock shall be entitled, before any distribution or payment is made upon any shares of Common Stock, to be paid the amount fixed and determined by the Board of Directors for such series plus (except as otherwise provided for any series of Series Preferred Stock) an amount equal to dividends accrued to the date of payment, and to no further payment. Except as otherwise provided for any series of Series Preferred Stock, in the event that the assets of this Corporation available for distribution to holders of Series Preferred Stock shall be insufficient to permit payment to such holders of such amounts, then all the assets of the Corporation then remaining shall be distributed among the series of Series Preferred Stock ratably on the basis of the relative aggregate liquidation preferences of each series and, -4A- within each such series, ratably among the holders of the shares of such series. The aggregate amount of payments to be made to holders of Series Preferred Stock upon any liquidation, dissolution or winding up of this Corporation may be fixed at any amount up to the full amount legally available for distribution to stockholders. After payment in full has been made to all holders of Series Preferred Stock, then, and only then, the remaining assets of this Corporation may be distributed to the holders of Common Stock. The holders of any series of Series Preferred Stock shall be entitled to participate in any such distribution to holders of Common Stock to the extent, if any, specified for such series by the Board of Directors. Except as otherwise provided for any series of Series Preferred Stock, neither the purchase or redemption by this Corporation of shares of any class or series of its capital stock in any manner permitted by the Restated Articles of Organization, nor the merger or consolidation of this Corporation with or into any other corporation or corporations, nor the sale or transfer by this Corporation of all or any part of its assets, shall be deemed to be a liquidation, dissolution or winding up of this Corporation for the purposes of this Article 4. (b) Dividend Preference. Holders of Series Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the purpose, dividends at such annual rate or rates, and no more, as are fixed for each series of Series Preferred Stock by the Board of Directors, payable in cash or in property or in shares of any series of Series Preferred Stock, or in Common Stock, or in any combination thereof. Holders of Series Preferred Stock may receive in the aggregate dividends equal to the full amount of funds legally available for the payment of dividends. Except as otherwise provided for any series of Series Preferred Stock, until all accrued dividends, if any, on all shares of Series Preferred Stock shall have been declared and set apart for payment, no dividend or distribution shall be made to holders of Common Stock, other than a dividend payable in Common Stock of this Corporation, nor shall any shares of Common Stock be repurchased, redeemed or otherwise retired. The holders of any series of Series Preferred Stock shall be entitled to participate in any dividend or distribution to holders of Common Stock to the extent, if any, specified for such series by the Board of Directors. (c) Voting Powers and Qualifications. Each share of Common Stock shall entitle the holder thereof to one vote on all matters presented to stockholders. The holders of Series Preferred Stock shall be entitled to vote separately as a class, or in combination with the holders -4B- of Common Stock as a single class, to the extent (if any), and in regard to such matters and transactions (if any), as the Board of Directors may specify in establishing any such series or as may be otherwise required by law. Matters and transactions as to which the Board of Directors, in establishing any series, may specify a separate class vote of holders of Series Preferred Stock or any series thereof may include, without limitation, the election of a specified number or percentage of the directors, changes in this Corporation's authorized capital stock, amendments to this Corporation's Restated Articles of Organization or By-laws, mergers, a sale of substantially all of the assets of this Corporation, and dissolution of this Corporation. The Board of Directors may specify the percentage of votes required to approve any matter or transaction requiring a separate vote of the Series Preferred Stock or any series thereof. As to matters and transactions as to which the Series Preferred Stock is entitled to vote in combination with holders of Common Stock as a single class, the Board of Directors, in establishing any such series, may specify that the voting power of each share of such series may be greater or less than the voting power of each share of Common Stock, provided that Series Preferred Stock shall have no more than ten votes per share, or such greater number as is equivalent to the number of shares of Common Stock into which such shares of Series Preferred Stock are convertible. (d) Additional Special or Relative Rights or Privileges. Holders of any series of Series Preferred Stock shall enjoy such additional special or relative rights or privileges vis-a-vis the holders of Common Stock as the Board of Directors (subject to the limitations imposed by this Article 4) may specify in the votes creating such series, including, without limitation, rights of redemption, sinking or purchase fund provisions and conversion rights. (e) Series A Preferred. The rights, preferences, privileges and restrictions granted to or imposed on the Series A Preferred and the Common Stock or the holders thereof are as follows: 1. Dividends. 1.1. The holders of the Series A Preferred shall be entitled to receive, out of funds legally available therefor, dividends at the rate of $2.025 per share per annum, payable quarterly beginning on June 30, 1988 and in preference and priority to any payment of any dividend on any class of stock or series thereof of the Corporation -4C- for such year. The right to such dividends on the Series A Preferred shall accrue and cumulate on the books of this Corporation as an obligation of the Corporation on a quarterly basis, whether or not declared, beginning on July 31, 1987, provided, however, that if the Series A Preferred is automatically converted pursuant to Section 4.2 hereof on or prior to July 1, 1988, the holders of the Series A Preferred shall not be entitled to receive any dividends which, on or prior to such date, have accrued pursuant to this section. No dividend shall be paid on any class of stock or series thereof in any year, other than dividends payable solely in Common Stock, until all accrued dividends have been declared and paid on the Series A Preferred. 1.2. Increase in Dividend. If the Corporation shall fail to pay any dividend when due in accordance with this Section 1 or if the Corporation shall fail to make a mandatory redemption of the Series A Preferred in accordance with Section 7 hereof, then the rate at which dividends are payable, and, if dividends are not paid, the rate at which they accrue and cumulate, shall be increased by $0.1125 per share for each quarter that such dividend shall remain unpaid or that such mandatory redemption shall not be made, and shall be increased by $0.05625 for each successive quarter; provided that the maximum dividend payable in any quarter shall not exceed $0.8375 per share. 2. Liquidation Preference. 2.1. In the event of any liquidation, dissolution, or winding up of the Corporation, either voluntary or involuntary, distributions to the stockholders of the Corporation shall be made in the following manner: The holders of the Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of any class of stock or series thereof of the Corporation by reason of their ownership of such stock, the amount of $22.50 per share for each share of Series A Preferred then held by them, and, in addition, an amount equal to all accrued but unpaid dividends on the Series A Preferred held by them. If the assets and funds thus distributed among the holders of the Series A Preferred shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation so distributed shall be distributed ratably among the holders of the Series A Preferred in proportion to the aggregate preferential amount of all shares of Series A Preferred then held by them bears to the aggregate preferential -4D- amount of all shares of Series A Preferred outstanding as of the date of the distribution upon the occurrence of such event. After payment has been made to the holders of the Series A Preferred of the full amounts to which they shall be entitled as aforesaid, the holders of the Common Stock shall be entitled to share ratably in the remaining assets, based on the number of shares of Common Stock held by each of them. 3. Voting Rights. The holder of each share of Series A Preferred issued and outstanding shall be entitled to the number of votes per share as shall equal the number of shares of Common Stock into which each share of Series A Preferred is then convertible, and the holders of Series A Preferred shall be entitled to vote on all matters as to which the holders of Common Stock shall be entitled to vote, voting together with the holders of Common Stock as a single class. The holder of each share of Common Stock issued and outstanding shall be entitled to one vote per share of such Common Stock. 4. Conversion. The holders of the Series A Preferred have conversion rights as follows (the "Conversion Rights"): 4.1. Right of Conversion. Each share of Series A Preferred shall be convertible (at the option of the holder thereof) at any time after the date of issuance at the office of the Corporation or any transfer agent for the Series A Preferred into the number of shares of the Common Stock of the Company obtained by dividing $22.50 by the conversion price in effect at the time of conversion, determined as hereinafter provided (the "Conversion Price"). The initial Conversion Price shall be $22.50 per share. All calculations under this Section 4 shall be made to the nearest cent. 4.2. Automatic Conversion. Each share of Series A Preferred shall automatically be converted into shares of Common Stock at the then effective Conversion Price, at the option of the Corporation, upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public generally at a price per share (prior to underwriting commissions and offering expenses) of not less than $35 per share (appropriately adjusted for any recapitalizations, stock splits, stock combinations and stock dividends) in which the aggregate proceeds received by the Corporation (after underwriting discounts and commissions) equal or exceed $7,500,000. In the event of such automatic conversion of the Series A Preferred, such conversion shall not be -4E- deemed to have occurred until the person(s) entitled to receive the Common Stock issuable upon such conversion of Series A Preferred has received from the Corporation all accrued and unpaid dividends owed on such person's Series A Preferred. 4.3. Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Series A Preferred. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price. Before any holder of Series A Preferred shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred, and shall give written notice to the Corporation at such office that he elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Section 4.2, the outstanding shares of Series A Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Series A Preferred are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates provided that nothing contained herein shall require the holder to provide a surety or indemnity bond where the Common Stock issued is registered in the same name as the Series A Preferred surrendered for conversion. The Corporation shall, as soon as practicable after such delivery, or such agreement of indemnification in the case of a lost certificate, but in no event later than ten (10) business days after such delivery or agreement of indemnification, issue and deliver at such office to such holder of Series A Preferred, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock plus all accrued and unpaid dividends on such holder's Series A Preferred. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of -4F- such surrender of the shares of Series A Preferred to be converted, or in the case of automatic conversion on the date immediately prior to closing of the public offering (provided that all accrued and unpaid dividends have been paid prior to such date), and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Series A Preferred surrendered for conversion, the Corporation shall issue and deliver to the holder of the certificate so surrendered for conversion, at the expense of the Corporation, a new certificate covering the number of shares of Series A Preferred representing the unconverted portion of the certificate so surrendered. 4.4. Adjustment of Conversion Price for Subdivisions, Combinations, or Consolidation of Common Stock. In the event the outstanding shares of Common Stock shall be subdivided (by stock split, or otherwise) into a greater number of shares of Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. 4.5. Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger, consolidation or sale of assets transaction provided for elsewhere herein), provision shall be made so that the holders of the Series A Preferred shall thereafter be entitled to receive upon conversion of the Series A Preferred the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred) shall be applicable after that event in as nearly an equivalent manner as may be practicable. -4G- 4.6. No Impairment. The Company will not, by amendment of its Articles of Organization or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred against impairment. 4.7. Reservation of Shares. The Company agrees that, so long as any share of Series A Preferred shall remain outstanding, the Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized capital stock, for the purpose of issue upon conversion of the Series A Preferred, the full number of shares of Common Stock then issuable upon exercise of all outstanding shares of Series A Preferred. 4.8. Validity of Shares. The Company agrees that it will from time to time take all such actions as may be requisite to assure that all shares of Common Stock which may be issued upon conversion of any share of the Series A Preferred will, upon issuance, be validly issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof; and, without limiting the generality of the foregoing, the Company agrees that it will from time to time take all such action as may be requisite to assure that the par value per share, if any, of the Common Stock is at all times equal to or less than the then current Conversion Price of the Series A Preferred. 4.9. Notice of Adjustment. Upon each adjustment of the Conversion Price, the Company shall give prompt written notice thereof addressed to the registered holder of each share of the Series A Preferred at the address of such holder as shown on the records of the Company, which notice shall state the Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares issuable upon the conversion of his shares of Series A Preferred, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 4.10. Notice of Capital Changes. If at any time: (a) the Company shall declare any dividend or distribution payable to the holders of its Common Stock; -4H- (b) the Company shall offer for subscription pro rata to the holders of Common Stock any additional shares of stock of any class or other rights; (c) there shall be any proposed capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or business organization; or (d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall give the registered holders of the Series A Preferred written notice, by registered or certified mail, of the date on which a record shall be taken for such dividend, distribution or subscription rights or for determining stockholders entitled to vote upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up and of the date when any such transaction shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the transaction in question and not less than 10 days prior to the record date with respect thereto. 4.11. Taxes. The Company will pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery of shares of the Series A Preferred or Common Stock upon conversion of the Series A Preferred. 5. Status of Converted Stock. In case any shares of any series of Series A Preferred shall be converted pursuant to Section 4 hereof, the shares so converted shall be restored to authorized and undesignated, but unissued shares of Series Preferred Stock of the Company. 6. Optional Redemption. (a) The Corporation may, at any time, redeem -4I- any or all shares of the Series A Preferred on a pro rata basis. If the Corporation so elects it shall issue a Notice of Redemption (the "Redemption Notice") to the holders of record of the Series A Preferred. The Redemption Notice shall set forth the Redemption Date, which shall be at least thirty (30) days after the date of the Notice of Redemption, the number of such holder's shares of Series A Preferred to be redeemed, and the applicable Redemption Amount. The Redemption Amount of the Series A Preferred shall be equal to the product of (a) the number of shares of Series A Preferred of the holder which are subject to redemption multiplied by the sum of (b) $27.00 plus (c) the aggregate of all accrued and unpaid dividends per share but in no event shall the total of the Redemption Amounts paid to the holders of the Series A Preferred be less than $750,000. The Redemption Date shall be as specified in the Redemption Notice. The Redemption Amount shall be paid in a lump sum payment on the Redemption Date. (b) The Corporation shall deposit the Redemption Amount in an escrow account with a state or national bank at least two (2) days prior to the Redemption Date and shall notify the holders of the Series A Preferred of such deposit immediately thereafter. Failure to make such deposit or notify the holders shall invalidate the Redemption Notice and no redemption under this Section 6 may be made until such failure is cured. The holders of the Series A Preferred shall have the right to convert their shares pursuant to Section 4 at any time prior to the Redemption Date. (c) The Redemption Amount set forth in this Section 6 shall be subject to equitable adjustment whenever there shall occur a stock split, dividend, combination, reclassification or other similar event involving the Series A Preferred. (d) Each holder of shares of Series A Preferred to be redeemed shall surrender his or her certificate or certificates representing such shares to the Corporation at the place designated in the Redemption Notice, and thereupon the applicable Redemption Amount for such shares as set forth in this Section 6 shall be paid to the order of the person whose name appears on such certificate or certificates and each surrendered certificate shall be cancelled and retired. (e) If any shares of Series A Preferred are not redeemed solely because a holder fails to surrender -4J- the certificate or certificates representing such shares as required by Section 6(d) hereof, then, from and after the Redemption Date, and except for the right to receive payment under this Section 6, such shares of Series A Preferred thereupon subject to redemption shall not be entitled to any further right as Series A Preferred, including but not limited to the conversion provisions set forth in Section 4 hereof. 7. Mandatory Redemption. (a) On August 31, 1991 the Corporation shall redeem fifty percent (50%) of all of the shares of the Series A Preferred then outstanding and on August 31, 1992 the Corporation shall redeem the balance of the shares of Series A Preferred (the date on which such shares are redeemed by the Corporation referred to herein as the "Mandatory Redemption Date"). The redemption price for each share of Series A Preferred redeemed pursuant to this Section 7 shall be $22.50 per share plus all accrued and unpaid dividends on such share, whether or not earned or declared, up to and including the date fixed for redemption (the "Redemption Price"). Each redemption of Series A Preferred shall be made so that the number of shares of Series A Preferred held by each registered owner shall be reduced in an amount which shall bear the same ratio to the total number of shares of the Series A Preferred being so redeemed as the number of shares of Series A Preferred then held by such registered owner bears to the aggregate number of shares of Series A Preferred then outstanding. (b) The Redemption Price set forth in this Section 7 shall be subject to equitable adjustment whenever there shall occur a stock split, dividend, combination, reclassification or other similar event involving the Series A Preferred. (c) At least 45 days before any Mandatory Redemption Date pursuant to Section 7(a), written notice (hereinafter referred to as the "Mandatory Redemption Notice") shall be mailed, postage prepaid, to each holder of record of the Series A Preferred which is to be redeemed, at its address shown on the records of the Corporation; provided, however, that the holders of Series A Preferred shall have the right to covert their shares pursuant to Section 4 at any time prior to the Mandatory Redemption Date; provided, further, that the Corporation's failure to give such Mandatory Redemption Notice shall in no way affect its obligation to redeem the shares of Series A Preferred as provided in Section 7(a) hereof. -4K- (d) Each holder of shares of Series A Preferred to be redeemed shall surrender his or her certificate or certificates representing such shares to the Corporation at the place designated in the Mandatory Redemption Notice, and thereupon the applicable Redemption Price for such shares as set forth in this Section 7 shall be paid to the order of the person whose name appears on such certificate or certificates and each surrendered certificate shall be cancelled and retired. (e) If any shares of Series A Preferred are not redeemed solely because a holder fails to surrender the certificate or certificates representing such shares pursuant to Section 7, then, from and after the Redemption Date, and except for the right to receive payment under this Section 7, such shares of Series A Preferred thereupon subject to redemption shall not be entitled to any further right as Series A Preferred, including but not limited to the conversion provisions set forth in Section 4 hereof. 8. Protective Provisions. The Corporation shall not, without the affirmative consent of the holders of shares representing at least 662/3% in voting power (90% in voting power with respect to Section 8(b) below) of the Series A Preferred then outstanding, acting separately as one class, given by written consent or by vote at a meeting called for such purpose for which notice shall have been given to the holders of the Series A Preferred: (a) in any manner authorize, create, or issue any class or series of capital stock (i) ranking, either as to payment of dividends, distribution of assets, or redemptions, prior to or on a parity with the Series A Preferred (other than the Series A Preferred itself), or (ii) that in any manner adversely affects the holders of Series A Preferred, or authorize, create, or issue any shares of any class or series or any bonds, debentures, notes, or other obligations convertible into or exchangeable for, or having optional rights to purchase, any shares having any such preference or priority or so adversely affecting the holders of Series A Preferred; (b) in any manner alter or change the designations or the powers, preferences, or rights, or the qualifications, limitations, or restrictions of the Series A Preferred; (c) reclassify the shares of Common Stock or any other shares of any class or series of capital stock hereafter created junior to the Series A Preferred into shares of any class or series of capital stock (i) -4L- ranking, either as to payment of dividends, distribution of assets, or redemptions prior to or on a parity with the Series A Preferred, or (ii) that in any manner otherwise adversely affects the holders of Series A Preferred; (d) sell or otherwise transfer all or substantially all of the Corporation's rights in its technology or intellectual property such that the Corporation no longer owns or has any right to such technology or intellectual property; (e) merge or consolidate with or into, or permit any subsidiary to merge with or into, any other corporation or corporations, or other entity or entities (in which merger or consolidation the shareholders of the Corporation receive distributions of cash or securities of another issuer as a result of such merger or consolidation). -4M- Article 6 - - --------------------------------- Other Lawful Provisions 6.1 The Corporation may carry on any business, operation or activity referred to in Article 2 to the same extent as might an individual, whether as principal, agent, contractor or otherwise, and either alone or in conjunction or a joint venture or other arrangement with any corporation, association, trust, firm or individual. 6.2 The Corporation may carry on any business, operation or activity through a wholly or partly owned subsidiary. 6.3 The Corporation may be a partner in any business enterprise which it would have power to conduct by itself. 6.4 The Board of Directors may make, amend or repeal the By-laws of the Corporation in whole or in part, except with respect to any provision thereof which by law or the By-laws requires action by the stockholders and subject to the right of the stockholders entitled to vote with respect thereto to amend or repeal By-laws made by the Board of Directors as provided for in these Restated Articles of Organization. The affirmative vote of two thirds of the total number of votes of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for the adoption, amendment or repeal of By-laws by the stockholders of the Corporation. Subject to the provisions set forth herein, the Corporation reserves the right to amend, alter, repeal or rescind any provision contained in these Restated Articles of Organization in the manner now or hereafter prescribed by law. 6.5 Meetings of the stockholders may be held anywhere in the United States. 6.6 Except as otherwise provided by law, no stockholder shall have any right to examine any property or any books, accounts or other writings of the Corporation if there is reasonable ground for belief that such examination will for any reason be adverse to the interests of the Corporation, and a vote of the directors refusing permission to make such examination and setting forth that in the opinion of the directors such examination would be to the interests of the Corporation shall be prima facie evidence that such examination would be adverse to the interests of the Corporation. Every such examination shall be subject to such reasonable regulations as the directors may establish in regard thereto. 6.7 The directors may specify the manner in which the accounts of the Corporation shall be kept and may determine what constitutes net earnings, profits and surplus, what amounts, if -6A- any, shall be reserved for any corporate purpose, and what amounts, if any, shall be declared as dividends. Unless the Board of Directors otherwise specifies, the excess of the consideration for any share of its capital stock with par value issued by it over such par value shall be surplus. The Board of Directors may allocate to capital stock less than all of the consideration for any share of its capital stock without par value issued by it, in which case the balance of such consideration shall be surplus. All surplus shall be available for any corporate purpose, including the payment of dividends. 6.8 The purchase or other acquisition or retention by the Corporation of shares of its own capital stock shall not be deemed a reduction of its capital stock. Upon any reduction of capital or capital stock, no stockholder shall have any right to demand any distribution from the Corporation, except as and to the extent that the stockholders shall have provided at the time of authorizing such reduction. 6.9 (a) A director who has a financial, family or other interest in a contract or other transaction may be counted for purposes of establishing the existence of a quorum at a meeting of the board of directors (or of a committee of the board of directors) at which action with respect to the transaction is taken and may vote to approve the transaction and any related matters. (b) A contract or other transaction in which a director or officer has a financial, family or other interest shall not be void or voidable for that reason, if any one of the following is met: (1) The material facts as to the director's or officer's interest are disclosed or are known to the board of directors or committee of the board of directors acting on the transaction, and the board or committee authorizes, approves or ratifies the transaction by the affirmative vote of a majority of the disinterested directors (or, if applicable, the sole disinterested director) on the board of directors or committee, as the case may be, even though the disinterested directors be less than a quorum; or (2) The material facts as to the director's or officer's interest are disclosed or are known to the holders of the shares of the corporation's capital stock then entitled to vote for directors, and such holders, voting such shares as a single class, by a majority of the votes cast on the question, specifically authorize, approve or ratify the transaction; or (3) The transaction was fair to the corporation as of the time it was entered into by the corporation. -6B- A failure to meet any of the requirements in subparagraphs (1), (2) or (3) shall not create an inference that the transaction is void or voidable for that reason. (c) The directors shall have the power to fix from time to time their own compensation. 6.10 A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liability is not permitted under the Massachusetts Business Corporation Law as in effect at the time such liability is determined. No amendment or repeal of this paragraph 6.10 shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. 6.11 The Corporation shall have all powers granted to Corporations by the laws of The Commonwealth of Massachusetts, provided that no such power shall include any activity inconsistent with the Business Corporation Law or the general laws of said Commonwealth. 6.12 Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting. 6.13 In determining what he reasonably believes to be in the best interests of the Corporation in the performance of his duties as a director, a director may consider, both in the consideration of tender and exchange offers, mergers, consolidations and sales of all or substantially all of the Corporation's assets and otherwise, such factors as the Board of Directors determines to be relevant, including, without limitation: (i) the long-term and short-term interests of the Corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the Corporation; (ii) whether the proposed transaction might violate federal or state laws; (iii) if applicable, not only the consideration being offered in a proposed transaction, in relation to the then current market price for the outstanding capital stock of the Corporation, but also to the market price for the capital stock -6C- of the Corporation over a period of years, the estimated price that might be achieved in a negotiated sale of the Corporation as a whole or in part or through orderly liquidation, the premiums over market price for the securities of other corporations in similar transactions, current political, economic and other factors bearing on securities prices and the Corporation's financial condition and future prospects; and (iv) the interests of the Corporation's employees, suppliers, creditors and customers, the economy of the state, region and nation, and community and societal considerations. In connection with any such evaluation, the Board of Directors is authorized to conduct such investigations and to engage in such legal proceedings as the Board of Directors may determine. 6.14 Subject to the rights of the holders of shares of any class or series of Preferred Stock, the Board of Directors of the Corporation is authorized from time to time to enact by resolution, without additional authorization by the stockholders of the Corporation, By-laws of the Corporation, in such form and with such additional terms as the Board of Directors may determine, with respect to the matters of corporate proceedings set forth below: (a) Regulation of the procedure for submitting nominations of persons to be elected directors, which shall be made only at a meeting of stockholders, including requirements that nominations of persons to be elected directors, other than nominations submitted on behalf of the incumbent Board of Directors, be (i) accompanied by a petition in support of such nominations signed by at least that number of holders of record of that percentage of shares of capital stock of the Corporation entitled to vote in the election of directors as are specified in such By-law (but a number of record holders not greater than 100 and a percentage of such shares not greater than 1%); and (ii) submitted to the clerk or other designated officer or agent of the Corporation at least that number of days before the meeting of the stockholders at which such election is to be held as is specified in such By-law (but not more than sixty days before such meeting). The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the provisions prescribed by this paragraph 6.14 or any By-law adopted pursuant hereto, and if he so determines, he shall so declare to the meeting, and the defective nomination shall be disregarded. (b) Regulation of business to be conducted at meetings of stockholders, including requirements that only such business shall be conducted and only such proposals shall be acted upon as are directed by the Board of Directors or as are made by a -6D- stockholder who has submitted notice thereof to the clerk or other designated officer or agent of the Corporation at least that number of days before the meeting of stockholders at which such proposal is to be made as is specified in such By-law (but not more than sixty days before such meeting) setting forth such proposal, the reasons therefor, the identity of the stockholder or stockholders making such proposal, the number of shares of capital stock which are beneficially owned by them and any financial interest of such stockholders in such proposal as specified in such By-law. The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that proposed business or a proposal was not made in accordance with the provisions prescribed by this paragraph 6.14 or any By-law adopted pursuant hereto, and if he so determines, he shall so declare to the meeting, and any such business shall not be transacted or any such proposal shall be disregarded. (c) Regulation of the order of business and conduct of stockholder meetings and the authority of the presiding officer and of the attendance at annual or special meetings of the stockholders of the Corporation, including the limitation of attendance through a ticket procedure pursuant to which persons who wish to attend such meetings would be required to provide written notice to the clerk or other designated officer or agent of the Corporation at least that number of days prior to the date of such meeting specified in such By-law (but not more than thirty days before such meeting) of their intent to attend in person, and the clerk or other designated officer or agent of the Corporation would issue a single admission ticket to each holder of shares of the stock of the Corporation entitled to vote at such meeting and to such other persons as the Board of Directors may direct, and admission to such meeting would be limited to holders of such tickets and officers and directors of, counsel to, and the auditors of, the Corporation and, to the extent authorized by the Board of Directors, the presiding officer at such meeting, employees or other agents of the Corporation. Application of any such By-law, if adopted, in any particular case would be permitted to be waived by the presiding officer at such meeting. In the event that any such By-law is adopted pursuant to this paragraph 6.14, such By-law may only be amended or repealed upon the affirmative vote of two thirds of the total number of votes then outstanding represented by shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, at any regular or special meeting of the stockholders, but only if notice of the proposed amendment or repeal was contained in the notice of such meeting. 6.15(A) After the consummation of an initial public offering of the Corporation's common stock registered with the -6E- Securities and Exchange Commission (the "Public Offering Time"), the directors of the Corporation, subject to the rights of the holders of shares of any class or series of Preferred Stock, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as shall be provided in the By-laws of the Corporation, one class ("Class I") whose term expires at the first annual meeting of stockholders to be held after the Public Offering Time, and another class ("Class II") whose term expires at the second annual meeting of stockholders to be held after the Public Offering Time, and another class ("Class III") whose term expires at the third annual meeting of stockholders to be held after the Public Offering Time, with each class to hold office until its successors are elected and qualified. The classes shall be initially comprised of directors serving on the Board of Directors at the Public Offering Time, and the membership of each class shall be initially determined by the Board of Directors at such time. At each annual meeting of the stockholders of the Corporation after the Public Offering Time, the date of which shall be fixed by or pursuant to the By-laws of the Corporation, and subject to the rights of the holders of shares of any class or series of Preferred Stock, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Any director elected to fill a newly created directorship or any vacancy on the Board of Directors resulting from any death, resignation, removal or other cause shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. (B) After the Public Offering Time and subject to the rights of the holders of shares of any class or series of Preferred Stock, any director or directors may be removed from office at any time, but only for cause and only by the affirmative vote of 80% of the total number of votes of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Any vacancy in the Board of Directors resulting from any such removal may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and any director so chosen shall hold office until the next election of the class for which such director shall have been chosen and until such director's successor shall be elected and qualified or until such director's earlier death, resignation or removal. For purposes of this subparagraph (B), "cause" shall mean the (1) conviction of a felony, (2) declaration of unsound mind by order of court, (3) gross dereliction of duty, (4) commission of an action involving moral turpitude, or (5) commission of an action -6F- which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Corporation. (C) In the event of any increase or decrease in the authorized number of directors, the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal as possible. No decreases in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 6.16 Notwithstanding any other provisions of these Restated Articles of Organization or the By-laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, these Restated Articles of Organization or the By-laws of the Corporation), the affirmative vote of 80% of the total number of votes of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class shall be required to amend or repeal, or to adopt any provision inconsistent with the purpose or intent of paragraphs 6.4, 6.9, 6.10 and 6.13 through 6.16 of Article 6 of these Restated Articles of Organization. -6G- *We further certify that the foregoing restated articles of organization effect no amendments to the articles of organization of the corporation as heretofore amended, except amendments to the following articles ....2,.3,.4.&.6............ ................................................................................ (*If there are no such amendments, state "None") Briefly describe amendments in space below: Article 2 The language describing the purposes of the corporation has been revised to delete paragraphs (c) and (d). Said paragraphs (c) and (d) now appear as paragraphs 6.2 and 6.1 respectively of Article 6. Article 3 The amount of authorized capital stock of the corporation has been increased to an aggregate of (i) 12,000,000 shares of Common Stock, $.01 par value per share, and (ii) 1,000,000 shares of Preferred Stock, $1.00 par value per share. Article 4 The capitalization of the corporation has been amended so that the number of authorized shares of (i) Common Stock, $.01 par value per share, has been increased from 2,500,000 shares to 12,000,000 shares and (ii) Preferred Stock, $1.00 par value per share, has been increased from 250,000 shares to 1,000,000 shares. The voting rights that the Board of Directors may grant to any series of the Corporation's Preferred Stock, $1.00 par value per share, have been increased from one (1) vote per share to up to ten (10) votes per share. Paragraph 5 of the Certificate of Designation of Series A Cumulative Convertible Preferred Stock has been amended to clarify that converted shares revert to the status of authorized and undesignated, but unissued shares of the corporation's Preferred Stock, $1.00 par value per share. Article 6 New provisions have been added to Article 6 and some existing provisions have been revised. New provisions added, include but are not limited to, provisions relating to (i) stockholder action by written consent, (ii) interested transactions, (iii) a staggered board of directors, (iv) supermajority voting requirements to amend certain provisions of these Restated Articles of Organization and (v) the ability of the corporation's directors to consider special factors when evaluating corporate action. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 11th day of May in the year 19 92. ................/S/ Mark S. Ain........................ President .............../S/ Paul A. Lacy............................ Clerk EX-10 3 AMENDMENT TO 1992 EQUITY INCENTIVE PLAN EXHIBIT 10.2 As amended through November 8, 1996 KRONOS INCORPORATED 1992 EQUITY INCENTIVE PLAN 1. PURPOSE The purpose of this Equity Incentive Plan (the "Plan") is to advance the interests of Kronos Incorporated (the "Company") by enhancing its ability to attract and retain employees and other persons or entities who are in a position to make significant contributions to the success of the Company and its subsidiaries through ownership of shares of the Company's common stock ("Stock"). The Plan is intended to accomplish these goals by enabling the Company to grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans or Supplement Grants, or combinations thereof, all as more fully described below. 2. ADMINISTRATION The Plan will be administered by the Board of Directors of the Company (the "Board"). The Board will have authority, not inconsistent with the express provisions of the Plan and in addition to other authority granted under the Plan, to (a) grant Awards at such time or times as it may choose; (b) determine the size of each Award, including the number of shares of Stock subject to the Award; (c) determine the type or types of each Award; (d) determine the terms and conditions of each Award; (e) waive compliance by a Participant (as defined below) with any obligations to be performed by the Participant under an Award and waive any term or condition of an Award; (f) amend or cancel an existing Award in whole or in part (and if an award is canceled, grant another Award in its place on such terms as the Board shall specify), except that the Board may not, without the consent of the holder of an Award, take any action under this clause with respect to such Award if such action would adversely affect the rights of such holder; (g) prescribe the form or forms of instruments that are required or deemed appropriate under the Plan, including any written notices and elections required of Participants, and change such forms from time to time; (h) adopt, amend and rescind rules and regulations for the administration of the Plan; and (i) interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations and actions of the Board, and all other determinations and actions of the Board made or taken under 1 authority granted by any provision of the Plan, will be conclusive and will bind all parties. Nothing in this paragraph shall be construed as limiting the power of the Board to make adjustments under Section 7.3, Section 7.4 or Section 8.6. The Board may, in its discretion, delegate some or all of its powers with respect to the Plan to a committee (the "Committee"), in which event all references (as appropriate) to the Board hereunder shall be deemed to refer to the Committee. The Committee, if one is appointed, shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. On and after registration of the Stock under the Securities Exchange Act of 1934 (the "1934 Act"), the Board may delegate any or all of its powers under the Plan to a Committee, each member of which shall be an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and a "non-employee director" as defined in Rule 16b-3 promulgated under the 1934 Act. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan will become effective on the date on which it is approved by the stockholders of the Company. Grants of Awards under the Plan may be made prior to that date (but after Board adoption of the Plan), subject to such approval of the Plan. No Award may be granted under the Plan after March 27, 2002, but Awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN Subject to the adjustment as provided in Section 8.6 below, the aggregate number of shares of Stock that may be delivered under the Plan will be 1,237,500. If any Award requiring exercise by the Participant for delivery of Stock terminates without having been exercised in full, or if any Award payable in Stock or cash is satisfied in cash rather than Stock, the number of shares of Stock as to which such Award was not exercised or for which cash was substituted will be available for future grants. Stock delivered under the Plan may be either authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. 5. ELIGIBILITY AND PARTICIPATION Those eligible to receive Awards under the Plan ("Participants") will be persons in the employ of the Company or 2 any of its subsidiaries ("Employees") and other persons or entities (including without limitation non-Employee directors of the Company or a subsidiary of the Company) who, in the opinion of the Board, are in a position to make a significant contribution to the success of the Company or its subsidiaries. A "subsidiary" for purposes of the Plan will be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. Subject to adjustment as provided in Section 8.6 below, the maximum number of shares of Stock with respect to which Awards may be granted to any employee under the Plan in any one calendar year shall not exceed 75,000 Shares. For the purpose of calculating such maximum number, (a) an Award shall continue to be treated as outstanding notwithstanding its repricing, cancellation or expiration and (b) the repricing of an outstanding option or the issuance of a new option in substitution for a cancelled option shall be deemed to constitute the grant of a new additional option separate from the original grant of the option that is repriced or cancelled. 6. TYPES OF AWARDS 6.1. OPTIONS (a) Nature of Options. An Option is an Award entitling the recipient on exercise thereof to purchase Stock at a specified exercise price. Both "incentive stock options," as defined in Section 422 of the Code (any Option intended to qualify as an incentive stock option being hereinafter referred to as an "ISO"), and Options that are not incentive stock options, may be granted under the Plan. ISOs shall be awarded only to Employees. (b) Exercise Price. The exercise price of an Option will be determined by the Board subject to the following: (1) The exercise price of an ISO shall not be less than 100% (110% in the case of an ISO granted to a ten-percent shareholder) of the fair market value of the Stock subject to the Option, determined as of the time the Option is granted. A "ten-percent shareholder" is any person who at the time of grant owns, directly or indirectly, or is deemed to own by reason of the attribution rules of section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its subsidiaries. (2) In no case may the exercise price paid for Stock which is part of an original issue of authorized Stock be less than the par value per share of the Stock. 3 (3) The Board may reduce the exercise price of an Option at any time after the time of grant, but in the case of an Option originally awarded as an ISO, only with the consent of the Participant. (c) Duration of Options. The latest date on which an Option may be exercised will be the tenth anniversary (fifth anniversary, in the case of an ISO granted to a ten-percent shareholder) of the day immediately preceding the date the Option was granted, or such earlier date as may have been specified by the Board at the time the Option was granted. (d) Exercise of Options. An Option will become exercisable at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which all or any part of the Option may be exercised. Any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any documents required by the Board and (2) payment in full in accordance with paragraph (e) below for the number of shares for which the Option is exercised. (e) Payment for Stock. Stock purchased on exercise of an Option must be paid for as follows: (1) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the instrument evidencing the Option (or in the case of an Option which is not an ISO, by the Board at or after grant of the Option), (i) through the delivery of shares of Stock which have been outstanding for at least six months (unless the Board expressly approves a shorter period) and which have a fair market value on the last business day preceding the date of exercise equal to the exercise price, or (ii) by delivery of a promissory note of the Option holder to the Company, payable on such terms as are specified by the Board, or (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment; provided, that if the Stock delivered upon exercise of the Option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock must be paid other than by the Option holder's promissory note. (f) Discretionary Payments. If the market price of shares of Stock subject to an Option (other than an Option which is in tandem with a Stock Appreciation Right as described in Section 6.2 below) exceeds the exercise price of the Option at the time of its exercise, the Board may cancel the Option and cause the Company to pay in cash or in shares of Common Stock (at a price per share equal to the fair market value per share) to the person exercising the Option an amount equal to the difference between the fair 4 market value of the Stock which would have been purchased pursuant to the exercise (determined on the date the Option is canceled) and the aggregate exercise price which would have been paid. The Board may exercise its discretion to take such action only if it has received a written request from the person exercising the Option, but such a request will not be binding on the Board. 6.2. Stock Appreciation Rights. (a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is an Award entitling the recipient on exercise of the Right to receive an amount, in cash or Stock or a combination thereof (such form to be determined by the Board), determined in whole or in part by reference to appreciation in Stock Value. In general, a Stock Appreciation Right entitles the Participant to receive, with respect to each share of Stock as to which the Right is exercised, the excess of the share's fair market value on the date of exercise over its fair market value on the date the Right was granted. However, the Board may provide at the time of grant that the amount the recipient is entitled to receive will be adjusted upward or downward under rules established by the Board to take into account the performance of the Stock in comparison with the performance of other stocks or an index or indices of other stocks. The Board may also grant Stock Appreciation Rights that provide, that following a Change in Control of the Company as defined in Appendix 1 hereto that the holder of such Right will be entitled to receive, with respect to each share of Stock subject to the Right, an amount equal to the excess of a specified value (which may include an average of values) for a share of Stock during a period preceding such Change in Control over the fair market value of a share of Stock on the date the Right was granted. (b) Grant of Stock Appreciation Rights. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. A Stock Appreciation Right granted in tandem with an Option which is not an ISO may be granted either at or after the time the Option is granted. A Stock Appreciation Right granted in tandem with an ISO may be granted only at the time the Option is granted. (c) Rules Applicable to Tandem Awards. When Stock Appreciation Rights are granted in tandem with Options, the following will apply: (1) The Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable and will be exercisable in accordance with the procedure required for exercise of the related Option. 5 (2) The Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right. (3) The Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right. (4) The Stock Appreciation Right will be transferable only with the related Option. (5) A Stock Appreciation Right granted in tandem with an ISO may be exercised only when the market price of the Stock subject to the Option exceeds the exercise price of such option. (d) Exercise of Independent Stock Appreciation Rights. A Stock Appreciation Right not granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which all or any part of the Right may be exercised. Any exercise of an independent Stock Appreciation Right must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by any other documents required by the Board. 6.3. Restricted and Unrestricted Stock. (a) Nature of Restricted Stock Award. A Restricted Stock Award entitles the recipient to acquire, for a purchase price equal to par value, shares of Stock subject to the restrictions described in paragraph (d) below ("Restricted Stock"). (b) Acceptance of Award. A Participant who is granted a Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to the Company accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument acceptable to the Board. (c) Rights as a Stockholder. A Participant who receives Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other conditions imposed by the Board at the time of grant. Unless the Board otherwise determines, certificates evidencing shares of 6 Restricted Stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan. (d) Restrictions. Except as otherwise specifically provided by the Plan, Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and if the Participant ceases to be an Employee or otherwise suffers a Status Change (as defined at Section 7.2(a) below) for any reason, must be offered to the Company for purchase for the amount of cash paid for the Stock, or forfeited to the Company if no cash was paid. These restrictions will lapse at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which the restrictions on all or any part of the shares will lapse. (e) Notice of Election. Any Participant making an election under Section 83(b) of the Code with respect to Restricted Stock must provide a copy thereof to the Company within 10 days of the filing of such election with the Internal Revenue Service. (f) Other Awards Settled with Restricted Stock. The Board may, at the time any Award described in this Section 6 is granted, provide that any or all the Stock delivered pursuant to the Award will be Restricted Stock. (g) Unrestricted Stock. The Board may, in its sole discretion, approve the sale to any Participant of shares of Stock free of restrictions under the Plan for a price which is not less than the par value of the Stock. 6.4. Deferred Stock. A Deferred Stock Award entitles the recipient to receive shares of Stock to be delivered in the future. Delivery of the Stock will take place at such time or times, and on such conditions, as the Board may specify. The Board may at any time accelerate the time at which delivery of all or any part of the Stock will take place. At the time any Award described in this Section 6 is granted, the Board may provide that, at the time Stock would otherwise be delivered pursuant to the Award, the Participant will instead receive an instrument evidencing the Participant's right to future delivery of Deferred Stock. 6.5. Performance Awards; Performance Goals. (a) Nature of Performance Awards. A Performance Award entitles the recipient to receive, without payment, an amount in cash or Stock or a combination thereof (such form to be determined by the Board) following the attainment of Performance Goals. Performance Goals may be related to personal performance, corporate performance, departmental performance or any other category of performance deemed by the Board to be important to the success of the Company. The Board will determine the Performance Goals, 7 the period or periods during which performance is to be measured and all other terms and conditions applicable to the Award. (b) Other Awards Subject to Performance Condition. The Board may, at the time any Award described in this Section 6 is granted, impose the condition (in addition to any conditions specified or authorized in this Section 6 or any other provision of the Plan) that Performance Goals be met prior to the Participant's realization of any payment or benefit under the Award. 8 6.6. Loans and Supplemental Grants. (a) Loans. The Company may make a loan to a Participant ("Loan"), either on the date of or after the grant of any Award to the Participant. A Loan may be made either in connection with the purchase of Stock under the Award or with the payment of any Federal, state and local income tax with respect to income recognized as a result of the Award. The Board will have full authority to decide whether to make a Loan and to determine the amount, terms and conditions of the Loan, including the interest rate (which may be zero), whether the Loan is to be secured or unsecured or with or without recourse against the borrower, the terms on which the Loan is to be repaid and the conditions, if any, under which it may be forgiven. However, no Loan may have a term (including extensions) exceeding ten years in duration. (b) Supplemental Grants. In connection with any Award, the Board may at the time such Award is made or at a later date, provide for and grant a cash award to the Participant ("Supplemental Grant") not to exceed an amount equal to (1) the amount of any federal, state and local income tax on ordinary income for which the Participant may be liable with respect to the Award, determined by assuming taxation at the highest marginal rate, plus (2) an additional amount on a grossed-up basis intended to make the Participant whole on an after-tax basis after discharging all the Participant's income tax liabilities arising from all payments under this Section 6. Any payments under this subsection (b) will be made at the time the Participant incurs Federal income tax liability with respect to the Award. 7. EVENTS AFFECTING OUTSTANDING AWARDS 7.1. Death. If a Participant dies, the following will apply: (a) All Options and Stock Appreciation Rights held by the Participant immediately prior to death, to the extent then exercisable, may be exercised by the Participant's executor or administrator or the person or persons to whom the Option or Right is transferred by will or the applicable laws of descent and distribution, at any time within the one year period ending with the first anniversary of the Participant's death (or such shorter or longer period as the Board may determine) and shall thereupon terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Board, all Options and Stock Appreciation Rights held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by the Board, all Restricted Stock held by the Participant must be transferred to the 9 Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to death will be forfeited and the Award canceled as of the time of death, unless otherwise determined by the Board. 7.2. Termination of Service (Other Than By Death). If a Participant who is an Employee ceases to be an Employee for any reason other than death, or if there is a termination (other than by reason of death) of the consulting, service or similar relationship in respect of which a non-Employee Participant was granted an Award hereunder (such termination of the employment or other relationship being hereinafter referred to as a "Status Change"), the following will apply: (a) Except as otherwise determined by the Board, all Options and Stock Appreciation Rights held by the Participant that were not exercisable immediately prior to the Status Change shall terminate at the time of the Status Change. Any Options or Rights that were exercisable immediately prior to the Status Change will continue to be exercisable for a period of three months (or such longer period as the Board may determine), and shall thereupon terminate, unless the Award provides by its terms for immediate termination in the event of a Status Change or unless the Status Change results from a discharge for cause which in the opinion of the Board casts such discredit on the Participant as to justify immediate termination of the Award. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the Board, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which section 424(a) of the Code applies. (b) Except as otherwise determined by the Board, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. 10 (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to the Status Change will be forfeited and the Award canceled as of the date of such Status Change unless otherwise determined by the Board. 7.3. Change in Control. Notwithstanding any other provision of the Plan or of any Award to the contrary, in the event of a Change in Control as defined in Appendix 1 the following will apply: (a) Each outstanding Option and Stock Appreciation Right will immediately become exercisable in full unless otherwise expressly provided at the time of grant. (b) Each outstanding share of Restricted Stock will immediately become free of all restrictions and conditions. (c) Conditions on Deferred Stock Awards, Performance Awards and Supplemental Grants which relate only to the passage of time and continued employment will be removed. Performance or other conditions (other than conditions relating only to the passage of time and continued employment) will continue to apply unless otherwise provided in the instrument evidencing the Awards or in any other agreement between the Participant and the Company or unless otherwise agreed to by the Committee. 7.4. Certain Corporate Transactions. Subject to Section 7.3, in the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of substantially all the Company's assets or a dissolution or liquidation of the Company (a "covered transaction"), all outstanding Awards will terminate as of the effective date of the covered transaction, and the following rules shall apply: (a) Subject to paragraphs (b) and (c) below, the Board may in its sole discretion, prior to the effective date of the covered transaction, (1) make each outstanding Option and Stock Appreciation Right exercisable in full, (2) remove the restrictions from each outstanding share of Restricted Stock, (3) cause the Company to make any payment and provide any benefit under each outstanding Deferred Stock Award, Performance Award, and Supplemental Grant which would have been made or provided with the passage of time had the transaction not occurred and the Participant not suffered a Status Change (or died), and (4) forgive all or any portion of the principal of or interest on a Loan. 11 (b) If an outstanding Award is subject to performance or other conditions (other than conditions relating only to the passage of time and continued employment) which will not have been satisfied at the time of the covered transaction, the Board may in its sole discretion remove such conditions. If it does not do so, however, such Award will terminate as of the date of the covered transaction notwithstanding paragraph (a) above. (c) With respect to an outstanding Award held by a Participant who, following the covered transaction, will be employed by or otherwise providing services to a corporation which is a surviving or acquiring corporation in such transaction or an affiliate of such a corporation, the Board may, in lieu of or in addition to any action described in paragraph (a) above, arrange to have such surviving or acquiring corporation or affiliate grant to the Participant a replacement award which, in the judgment of the Board, is substantially equivalent to the Award. 8. GENERAL PROVISIONS 8.1. Documentation of Awards. Awards will be evidenced by such written instruments, if any, as may be prescribed by the Board from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms thereof. 8.2. Rights as a Stockholder, Dividend Equivalents. Except as specifically provided by the Plan, the receipt of an Award will not give a Participant rights as a stockholder; the Participant will obtain such rights, subject to any limitations imposed by the Plan or the instrument evidencing the Award, upon actual receipt of Stock. However, the Board may, on such conditions as it deems appropriate, provide that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the Participant's Award had such Stock been outstanding. Without limitation, the Board may provide for payment to the Participant of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Participant. 8.3. Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restriction from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws 12 and regulation have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 8.4. Tax Withholding. The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Stock may be delivered, the Board will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Board with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Board may permit the Participant or such other person to elect at such time and in such manner as the Board provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the withholding requirement. If at the time an ISO is exercised the Board determines that the Company could be liable for withholding requirements with respect to a disposition of the Stock received upon exercise, the Board may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code) of Stock received upon exercise, and (b) to give such security as the Board deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Board to preserve the adequacy of such security. 13 8.5. Nontransferabilty of Awards. Except as otherwise provided in a specific Award agreement, no Award (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may be transferred other than by will or by the laws of descent and distribution, and during an employee's lifetime an Award requiring exercise may be exercised only by the Participant (or in the event of the Participant's incapacity, the person or persons legally appointed to act on the Participant's behalf.) 8.6. Adjustments in the Event of Certain Transactions. (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution to common stockholders other than normal cash dividends, after the effective date of the Plan, the Board will make any appropriate adjustments to the maximum number of shares that may be delivered under the Plan under Section 4 above. (b) In any event referred to in paragraph (a), the Board will also make any appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change. The Board may also make such adjustments to take into account material changes in law or in accounting practices or principles, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if it is determined by the Board that adjustments are appropriate to avoid distortion in the operation of the Plan. 8.7. Employment Rights, Etc. Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued retention by the Company or any subsidiary as an Employee or otherwise, or affect in any way the right of the Company or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Board in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Company to the Participant. 8.8. Deferral of Payments. The Board may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made. 14 8.9. Past Services as Consideration. Where a Participant purchases Stock under an Award for a price equal to the par value of the Stock the Board may determine that such price has been satisfied by past services rendered by the Participant. 9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION Neither adoption of the Plan nor the grant of awards to a Participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock be issued to Employees. The Board may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards, provided that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify for the award of ISOs under section 422 of the Code and to continue to qualify under Rule 16b-3 promulgated under Section 16 of the 1934 Act. 15 Appendix 1 "Change in Control" shall be deemed to have occurred if: (a) any `person' as such term is used in Sections 13(d) and 14(d) of the 1934 Act (other than (i) the Company, (ii) any subsidiary of the Company, (iii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of any subsidiary of the Company, or (iv) any Company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company) is or becomes the `beneficial owner' (as defined in Section 13(d) of the 1934 Act), together with all Affiliates and Associates (as such terms are used in Rule 12b-2 of the General Rules and Regulations under the 1934 Act) of such person, directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities (other than as a result of acquisition of such securities from the Company); or (b) during any period of two consecutive years (not including any period prior to the effective date of the Plan), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a) of this definition) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute at least a majority thereof. 16 EX-10 4 AMENDMENTS TO ADP AGREEMENTS EXHIBIT 10.7.1 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. TOTAL TIME 120 AMENDMENT This Amendment, dated as of 7/22/96_______, is between ADP, Inc., a Delaware corporation ("ADP") with offices at One ADP Boulevard, Roseland, New Jersey 07068, and Kronos Incorporated, a Massachusetts corporation ("Kronos") with offices at 400 Fifth Avenue, Waltham, Massachusetts 02154. WHEREAS, the parties entered a Software License and Support and Hardware Purchase Agreement dated April 2, 1993 as amended on [date of main contract amendment,] ("Agreement"), and a Development Agreement dated March 21, 1995; WHEREAS, the parties desire to add new products to the Agreement and to amend the Agreement in part with respect to those new products; NOW, THEREFORE, the parties agree as follows: 1. Definitions The following definitions are added to the Agreement: (a) "Total Time 120" shall mean the software which meets the specifications attached to this Agreement as Exhibit A-1. "Total Time 120" shall also be considered "Kronos Software" and "Total Time Software," as those terms are defined in the Agreement; provided, however, that the only part of Exhibit C which applies to Total Time 120 shall be the additions contained on Exhibit C-1 added herein. (b) "ADP 150" and "ADP 154" shall mean the hardware which meets the specifications attached to this Agreement as Exhibit A-2. "ADP 150" and "ADP 154" shall also be considered "Hardware," as that term is defined in the Agreement; provided, however, that the only part of Exhibit B which applies to such items shall be the additions contained on Exhibit B-1 added herein. 2. Applicability of the Agreement ADP and Kronos agree that all terms and conditions of the Agreement shall apply to Total Time 120, ADP 150 and ADP 154, except that, with respect to Total Time 120, ADP 150 and ADP 154, the following modifications shall apply: (a) Each time the words "Exhibit B" appear, they shall be deleted and replaced with "Exhibit B-1". Each time the words "Exhibit C" appear, they shall be deleted and replaced with "Exhibit C-1". 1 (b) Section 2(b) is amended by deleting, in the first sentence, the clause "which is an ADP Client" and by adding, after the first sentence, the following: "Notwithstanding the preceding sentence, and subject to the provisions of Section 2(g), ADP shall have the right to Sublicense Total Time 120 only to any person or entity which has 120 or fewer employees using the Total Time 120 at any individual location. In addition, ADP shall have the right to Sublicense Total Time 120 only to any person or entity using the Total Time 120 with an ADP 150 or ADP 154, or using Total Time 120 independent of any hardware, (not including Devices) unless Kronos has given ADP its prior written consent to Sublicense Total Time 120 on different Hardware for a particular person or entity. Furthermore, ADP shall only have the right to Sublicense Total Time 120 to any person or entity located in the Territory of Interboro Systems Corporation, as defined herein if such person is an ADP Client." Section 2(b) is further amended by adding the following paragraph to the end thereof: "Subject to the provisions of sections 2(d) and (e) below, Kronos may license/sublicense, directly or indirectly, the Total Time 120 (which will be renamed by Kronos for Kronos sublicensing) only to any person or entity which has 120 or fewer employees using the renamed Total Time 120 at any individual location. In addition, Kronos agrees to sublicense, directly or indirectly, the renamed Total Time 120 only to any person or entity using the renamed Total Time 120 with a Model 150 or Model 154, or using renamed Total Time 120 independent of any hardware, (not including Devices) or on hardware for which Kronos has given its written consent to ADP pursuant to the preceding paragraph." (c) Section 2(c) is amended by deleting subsection (ii) and replacing it with the following: "(ii)to combine Total Time 120 or any part thereof only with the ADP 150 or ADP 154, unless Kronos gives ADP its prior written consent for a particular person or entity. In addition, Kronos grants to ADP the right to combine Total Time 120 with Devices, as defined in Section 2.(c) of the Agreement, and Kronos shall waive the $25.00 fees which would otherwise apply to such combinations. In the event that ADP desires to combine Total Time 120 with any data collection equipment other than ADP 150, ADP 154 or Devices, ADP shall be required to obtain Kronos' prior written consent; provided that if such equipment, which is non-Kronos data collection equipment, is materially different from, and not competitive with, any 2 data collection equipment then being sold by Kronos, ADP shall first request that Kronos develop equipment equivalent to such non-Kronos equipment; if Kronos declines to develop such equipment, Kronos shall not unreasonably withhold its consent for ADP to combine Total Time 120 with the desired non-Kronos data collection equipment. ADP can market/sublicense such Total Time 120 and non-Kronos equipment only to ADP Clients, if within the Territory of Interboro Systems Corporation. If ADP believes, for any calendar year during the term of this Agreement, that the failure rate of all the ADP 150's and 154's sold by Kronos to ADP within the preceding five (5) years and that are five years old or newer and are no longer under warranty by Kronos, is greater than twenty-five percent (25%) in that year, ADP shall notify Kronos in writing and provide Kronos with verification of such failure rate. The parties agree that any failures attributable to reasons specified in Section 12(b) shall be excluded. If Kronos agrees that the failure rate exceeded 25%, the parties agree that Kronos shall have six (6) months to correct the failure rate problem. If Kronos is unable to correct the failure rate problem within such six (6) month period, Kronos agrees to sell the Kronos 440 (without modem) terminal to ADP at the same price as the Total Time 150 and the Kronos 440 (with modem) at the same price as the ADP 154 for the next six (6) months. If Kronos has not corrected the failure rate problem by the end of that second six (6) months period, until Kronos does correct the failure rate problem, Kronos agrees to waive the provisions of this Section 2(c) which require ADP to combine Total Time 120 only with the ADP 150, ADP 154 and/or Devices. As soon as the failure rate problem is corrected, that waiver shall no longer remain in effect and the provisions of this Section 2(c) shall remain in full force and effect. The termination of the waiver under the preceding sentence shall not affect combinations of Total Time 120 validly made while the waiver was in effect. (d) Section 2(g) is amended be deleting the last sentence and replacing it with the following:, "In addition, ADP will combine the ADP 150 and/or the ADP 154 Hardware only with Total Time 120, unless Kronos gives ADP its prior written consent for a particular person or entity. In the event that ADP desires to combine the ADP 150 or ADP 154 with software other than Total Time 120, ADP shall be required to obtain Kronos' prior written consent; provided that if such non-Total Time 120, is materially different from, and not competitive with, any 3 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. software then being sold/licensed by Kronos, ADP shall first request that Kronos develop software substantially equivalent to such non-Total Time 120; if Kronos declines to develop such software, Kronos shall not unreasonably withhold its consent for ADP to combine the desired software with ADP 150 or ADP 154 and Sublicense such software." (e) Section 5(a)(i). The following shall be inserted after the word "copy" on the second line: "or bundled". (f) Sections 5(b) shall apply only to Sublicensees of Total Time 120 to Sublicensees, who pay for the Total Time services on a recurring basis, rather than a one-time basis. (g) Section 5(c) is deleted and replaced with the following: (c) If at any time during the term of this Agreement, Kronos shall reduce the list prices for the Total Time 120 licensed hereunder, so that the applicable price charged to ADP on Exhibit C-1 is greater than the Kronos list price less a *** discount, then the applicable price listed on Exhibit C-1 shall be reduced to the sum of the following two amounts: (i) the Kronos list price, less a *** discount, plus (ii) the Kronos standard manufacturing cost for that item. If Kronos reduces the list price for the Total Time 120 licensed hereunder, so that the applicable price charged to ADP on Exhibit C-1 is greater than the Kronos list price less a *** discount, ADP may, at its option, reproduce/manufacture the Total Time 120, and the parties agree they will negotiate mutually acceptable audit terms and conditions , so that Kronos has adequate assurances that it will receive the applicable C-1 license price for each copy of the Total Time 120 reproduced/manufactured by ADP. (h) Section 7(d) is amended by deleting the words "Initial Custom Software" each time they appear and replacing them with the words "Total Time 120", and by deleting the last sentence entirely. (i) Section 8 is amended by adding the following proviso at the end of the second sentence: "; provided however, that as to the ADP 150 and ADP 154, such updates or enhancements shall include only firmware enhancements and time and attendance (not including features specifically designed for Kronos' Workforce Management products, such Workforce Management products to be defined as automated scheduling, business forecasting and workforce planning) modifications to the Hardware." 4 In addition Section 8 is amended by adding the following at the end: "Unless Kronos has given ADP its prior written consent, ADP agrees that it shall have the right to sell, lease, rent or otherwise transfer the ADP 150 and the ADP 154 only to persons or entities which are "Sublicensees" of Total Time 120 under Section 2(b). It is understood that in no event may ADP sell, lease, rent or transfer the ADP 150 or ADP 154: (a) to any person or entity which is competitor of Kronos and (b) within the Territory of Interboro Systems Corporation, to any person or entity which is not an ADP Client. (j) The following shall be added to the end of the second sentence of Section 9(a): ;provided however, that each order of Total Time 120 shall be required to contain at least 200 units (i.e., a "unit" is considered to be one "bundled" package or one separately ordered Total Time 120 or separately ordered ADP 150 or ADP 154.), with such units to be delivered to a single delivery point. (k) The last five sentences of Section 9(a) shall be deleted and replaced with the following: "Commencing on the signing of this Amendment, ADP shall provide to Kronos quarterly forecasts of the expected volume of Hardware orders for the following four quarters; provided however, that ADP shall have the right to revise the forecasts for either or both of the two latest (i.e.,farthest away in time from the revision) quarters in its most current four-quarter forecasts by notifying Kronos in writing. Notwithstanding the second preceding sentence, in the event actual orders for any quarter exceed forecasted orders for such quarter by up to 20% of such forecast, Kronos shall be required to deliver an amount equal to 120% of such forecast within 30 days after receipt of the P.O. Kronos shall not be obliged to deliver an amount in excess of the 120% of forecasted orders within 30 days after Order Acceptance Date. However, Kronos will use its best efforts to deliver such excess amounts as soon as practicable and for amounts up to 200% of the original forecast, no later than 120 days after receipt of the P.O. Kronos shall in any event confirm the delivery dates with respect to all P.O.'s." (l) Section 9(b) is amended by adding the following proviso: "; provided however, that ADP may not cancel any order received within four (4) months prior to the termination of this Total Time 120 Amendment." (m) Section 9(c) is amended by deleting the word "three" in the second sentence, and replacing it with the word "ten". 5 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. (n) Section 10(a) is amended by deleting the last four sentences and replacing them with the following sentence: "If at any time during the term of this Agreement, Kronos shall reduce the list prices of items of Hardware (or replacement or new items described in preceding clauses (i)and (ii)) purchasable by ADP hereunder so that the applicable price charged to ADP on Exhibit B-1 for an item is greater than *** ******* ***** ** ***** ***** **** **** **** ** *** * ******* ********** **** *** * ********** ****** ****, **** * ** ********, then the applicable price listed on Exhibit B-1 shall be reduced to *** ******* ***** ** ***** ***** **** **** **** ** *** ****** ***** *** ****** *** ******** *** ****** ******* ***** *** **** ****** ****, **** * ** ********. *** ******* ***** ** ***** ***** **** **** **** ** *** * ******* (excluding ADP), for any particular fiscal year and item shall be determined by calculating the average prices at which ***** * ******* purchased that item in that fiscal year. Any price decreases pursuant to this section shall apply prospectively only. The calculation of average price at which Kronos sold an item ** *** ******* shall be made at the end of each Kronos fiscal year. ***** *** ******* ***** ** ******* ** *** ******** ** ***** ******* ***** *** *** ******* ***** ********** *** ******* ************* ******** ********* ** *** ***** ******** ** ***** ******. (o) Section 10(e) is amended by deleting the first two sentences and replacing them with the following sentences: "Kronos shall issue one invoice for each shipment. Invoices shall be directed to ADP corporate headquarters". (p) Section 14(a) is amended by deleting the first sentence and replacing it with the following: "The initial term of this Total Time 120 Amendment shall commence on the date of signing and continue until April 2, 2001." (q) Section 15(a) is deleted, and replaced with the following: "Kronos and ADP agree that if Kronos develops new hardware and/or new software during the term of the Agreement which is to be sold/sublicensed to End-Users with fewer than 120 employees, Kronos will permit ADP to sell/sublicense such hardware and software, subject to mutually agreed terms and conditions, and Kronos further agrees to abide by the restrictions contained in the last sentence of Section 2.(d) of the Agreement for such hardware and software." (r) Section 15(b) is amended by adding the following to the end of the first sentence: "on a one-time, paid-up 6 sublicense basis". (s) All other terms and conditions of the Agreement remain in full force and effect. AGREED TO AND ACCEPTED: KRONOS INCORPORATED ADP, INC. By: S/ W. Patrick Decker By: S/ Ron Clarke (Signature) (Signature) Name: W. Patrick Decker Name: Ron Clarke (Please print) (Please print) Title: Vice President, Marketing Title: President, Electronics and Field Operations Services Division Date: 7/22/96 Date: 7/22/96 7 EXHIBIT A-1 PRODUCT DESCRIPTIONS PRODUCT SPECIFICATIONS System 400 Man, Operators ADP/400 System 100 Man, Users 100/Kronos Term TKC V8 Man, Procedural Guide, TKC V8C/D TimeMaker II Man, User Manual, TimeMaker II 8A CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. EXHIBIT B-1 ADP 150 and ADP 154 Hardware Description and Pricing If the ADP 150 and/or ADP 154 is purchased by ADP separately from the Total Time 120 Software, the prices are as follows: Price ADP 150 **** ADP 154 (Modem) **** If the ADP 150 and/or ADP 154 is purchased by ADP "bundled" with the Total Time 120 Software, the "bundled" prices specified on Exhibit C-1 shall apply. The prices specified above are F.O.B. Chelmsford, Massachusetts, exclude freight and tax costs, and are valid only for shipments of a minimum of 200 units per order to a single delivery point. The prices include the user manual/installation guide. On October 1, 1997, Kronos shall determine the standard manufacturing cost ("SMC") for the Kronos 150 for Kronos' fiscal year 1996. Beginning in Kronos' fiscal year 1998 (i.e., October 1, 1997) and continuing for each fiscal year thereafter during the term of this Amendment, if the SMC for the preceding fiscal year is less than the SMC for fiscal year 1996, Kronos will reduce the Price (stated above) on the ADP 150 by *** of the reduction in the SMC. In addition, the same procedure described herein will be done on the Kronos 154, with decrease in price to be applied to the ADP 154. Any decrease in price resulting from the procedure described herein will apply prospectively only (i.e., beginning on October 1, 1997). The procedure described herein will be repeated at the beginning of each Kronos fiscal year during the term of this Amendment. 8B CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. EXHIBIT C-1 Total Time 120 Software Description and Pricing If Total Time 120 is purchased by ADP separately from the ADP 150 or ADP 154 Hardware, the price of Total Time 120 is ****. Total Time 120 includes the ADP Central Controller, the Scheduler, the Archiver and CardSaver, whether Total Time 120 is purchased separately or on "bundled" basis. If Total Time 120 is purchased by ADP "bundled" with the ADP 150 or ADP 154, the following prices shall apply: ADP 150 Total Time 120 50 badges 100 feet of cable Bundled Price is **** ADP 154 (includes modem) Total Time 120 50 badges 100 feet of cable Bundled price is **** No sales/licenses of Total Time 120, whether sold separately or on "bundled" basis, shall be counted toward the 15,000 units listed on Exhibit C of the Agreement. The prices specified above are F.O.B. Chelmsford, Massachusetts, exclude freight and tax costs, and are valid only for shipments of a minimum of 200 units per order to a single delivery point. A "bundled" package counts as one unit. The prices include the user manual/installation guide. 9 EXHIBIT 10.7.1 (CONTINUED) CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. AMENDMENT TO SOFTWARE LICENSE AND SUPPORT AND HARDWARE PURCHASE AGREEMENT This Amendment, which shall be effective as of ___________7/22/96__________________, is between ADP, Inc., a Delaware corporation ("ADP") with offices at One ADP Boulevard, Roseland, New Jersey 07068, and Kronos Incorporated, a Massachusetts corporation ("Kronos") with offices at 400 Fifth Avenue, Waltham, Massachusetts 02154. WHEREAS, the parties entered a Software License and Support and Hardware Purchase Agreement dated April 2, 1993 ("Agreement"), and a Development Agreement dated March 21, 1995; WHEREAS, the parties desire to amend the Agreement; NOW, THEREFORE, the parties agree as follows: 1. Section 1 is amended by adding the following subsection: "(ee) Territory of Interboro Systems Corporation" shall mean Puerto Rico; the following counties in New York: Nassau, Suffolk, Bronx, Kings, New York, Queens, Richmond, Orange, Putnam, Rockland, Westchester; and the following counties in New Jersey: Atlantic; Bergen, Essex, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris Ocean, Passaic, Somerset, Sussex, Union, and Warren." 2. Section 2.(c) is amended by adding the following sentences at the end: "Subject to the requirements of the following three sentences, Kronos hereby grants to ADP the right to combine Total Time Software with telephone data collection devices (comparable to TALX's system), swipe readers, point of sale systems, palm readers, scanners, portable hand-held data collectors, excluding personal computers (hereafter collectively "Devices"); provided however, that such portable hand-held collectors must be used in a mobile-type of application i.e., not secured to a stationary object for operation. In each calendar year, ADP shall purchase from Kronos a minimum of eighty per cent (80%) of the total number of Devices (for which Kronos has a comparable product) that ADP purchases in that year, so long as Kronos will sell to ADP such Devices at a competitive price for similar quantities, functionality and warranty coverage. If ADP sublicenses Total Time Software for use with any Device (including Devices for which Kronos has no comparable product) ADP did not purchase from Kronos, ADP shall pay Kronos a fee of twenty-five dollars ($25.00) for each copy of Total 1 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. Time Software combined with one or more Devices which ADP did not purchase from Kronos. The fee required under the preceding sentence shall not apply if the End-User purchasing such a Device also purchases, as part of the same order, at least one unit of Hardware (i.e., clock) which is connected to the Total Time Software, or the End-User already had installed at that same location at least one unit of Hardware (i.e., clock), or the Total Time Software is connected via modem to a unit of Hardware located elsewhere." 3. Section 2.(d) is amended by deleting the second sentence and replacing it with the following: "In addition, during the term of this Agreement, Kronos shall not in *** ****** ****** ** ******* ***** **** *** ***** ******* ** ***** ********* ********* ** ******* *********** **** *** ********** ** *** ** *** ******* ********** ******** ** ***** ********* ********** ******** ******** *** *** ******* ** ********** ******** *********** ** *********** ****** **** *** ********** ** ********** ******** **** **** ************ ******* ********** ******** ** ***** ********* ********** ********. If Kronos ****** **** * ***** ******* ** ***** ********* ********* ** ******* *********** **** ** *** ********** ********** **** ************ ******** ***** *** *** ******* ********** ** ***** ********* ********** ********, Kronos agrees, for one year after the termination of this Agreement, that Kronos will *** ***** **** *** ***** ******* ** ***** ********* ********* ** ******* *********** **** **** ********** ********** **** ************ ******* ********** ** ***** ********* ********** ********. 4. Section 2.(d) is amended by deleting the last sentence and replacing it with the following: "Furthermore, Kronos covenants and agrees that, during the term of this Agreement, it will not in *** ****** ******* ** ******* ***** * ****** **** ** ****** **** ****** ** *** ****** ****** *** ******** ** *** **** ******* ** *** ********* ********** ***** ******* ******* **** ****** ******** ***** **** * **** ***** *** *** **** ********* **************** ****** ********* ***** *** * **** ********** ** **** ******** ********* *** ******** ********* ***** *** *** ******* ********* 5. Section 2.(g) is deleted and replaced with the following: "Except as provided in the following sentence, ADP hereby covenants and agrees that during the term of this Agreement it will not enter into any joint venture or joint marketing agreement or similar arrangement with any third party for the purpose of 2 developing, marketing, and/or manufacturing time and attendance or scheduling hardware or software. Kronos agrees that ADP may enter a joint venture or joint marketing agreement or similar arrangement with, or acquire, a third party developing, marketing or manufacturing time and attendance or scheduling software or hardware, so long as (i) such agreement is limited to sales/licenses into European countries or, (ii) such agreement concerns time and attendance or scheduling software (not hardware) and such time and attendance or scheduling software does not compete with Kronos products. If any such third party develops, markets and/or manufactures time and attendance or scheduling hardware or software, and ADP enters into a joint venture or joint marketing agreement or similar arrangement concerning that third party's products which are not time and attendance or scheduling hardware or software, ADP agrees, for one year after the termination of this Agreement, that ADP will not enter into any joint venture or joint marketing agreement or similar arrangement with that third party concerning that third party's time and attendance or scheduling hardware or software. ADP further agrees that, during the term of this Agreement, it will not develop, other than pursuant to this Agreement, any time and attendance or scheduling hardware or software which shall compete with Kronos products. The parties agree that, for purposes of the three preceding sentences, the following shall not be deemed to compete with Kronos products: (i) software which allows businesses to collect employees' time worked by client/activity for the purpose of generating bills/invoices, and (ii) electronic capture of employees' time where processing is limited to basic arithmetic (i.e., subtracting start/stop times and adding totals across activities or days); provided however, that this exception shall not include any if/then type logic, such as rounding, overtime calculations, premium calculations, etc. In addition, ADP will not combine Hardware with any non-Total Time software without the prior written consent of Kronos; provided further that in the event that ADP desires to combine Hardware with non-Total Time software, which is materially different from, and not competitive with, any software then being sold/licensed by Kronos, ADP shall first request that Kronos develop software substantially equivalent to such non-Total Time software; if Kronos declines to develop such software, Kronos shall not unreasonably withhold its consent for ADP to combine the desired software with Hardware and sublicense such software to ADP Clients." 3 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. 6. Section 2 is further amended by adding the following subsection: "(i) The obligations and rights of Kronos specified in Section 2 of the Agreement shall be deemed to apply to each Kronos "Subsidiary", as "Subsidiary" is defined in the Agreement. The obligations and rights of ADP shall be deemed to apply to each ADP "Subsidiary", as "Subsidiary" is defined in the Agreement." 7. Exhibit B is deleted and replaced with the Exhibit B attached to this Amendment. 8. Section 11 is amended by deleting the second and third sentences in the third paragraph and replacing them with the following: "In addition, ADP may engage a third party to provide on-site maintenance and/or installation to Total Time customers of the Hardware and Software; provided however, that such third party shall not be a direct competitor of Kronos. In addition, ADP may engage the same, or a different, third party to perform depot maintenance services, provided however, that such third party shall not be a direct competitor of Kronos. 9. Section 12.(a)(i) is amended by striking the first sentence and replacing it with the following: "Kronos warrants that the Kronos 440, 460 and 480 Hardware shipped hereunder will be free from defects in material or workmanship and will perform in accordance with its published specifications for a period of *** days from the date of shipment by Kronos, and the ADP 140, 144, 150 and 154 Hardware shipped hereunder will be free from defects in material or workmanship and will perform in accordance with its published specifications for a period of ******* **** months from the date of shipment by Kronos, (such *** day and such ** month periods, as applicable, hereafter shall be called "Warranty Period")." 10. Section 14.(a) is amended by deleting "April 2, 1998" and replacing it with "April 2, 2001". 11. Section 22 is amended by adding the following subsection (m): "The parties agree to conduct a twelve month "standalone marketing test," subject to the following requirements. The parties agree that the test shall last for twelve (12) months, shall be conducted in Houston only, and that there will be a ninety (90) day period after the end of the twelve (12) month test when the parties negotiate and mutually 4 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. agree to terms and conditions governing the "standalone" product. During the period of the test and for the geographic territory covered by the test, all terms and conditions of this Agreement shall apply, except that Kronos agrees to waive the requirement of subsection 2(b) of this Agreement that ADP Sublicense only to ADP Client(s) and permit ADP to Sublicense to persons or entities other than ADP Clients. If, at the end of the ninety (90) day period following the completion of standalone marketing test, ADP desires to continue the sublicensing on a standalone basis but Kronos does not agree to such further sublicensing, the parties agree to take the following steps: (i) make good faith efforts to negotiate the terms and conditions under which Kronos would develop, and ADP would sublicense, a modified kind of Total Time Software for standalone sublicenses, and/or, upon mutual agreement, for sublicenses to ADP Clients as well; and (ii) if the parties are unable to agree to the terms and conditions in (i) above, (including pricing), the following will occur: (a) ADP may enter a joint venture or joint marketing agreement or similar arrangement with one third party developing, marketing or manufacturing time and attendance or scheduling software subject to the following restrictions: (i) ADP can have such an arrangement with only one such third party at any point in time; (ii) ADP is permitted to sublicense such third party's software only to persons or entities having between one hundred (100) and one thousand (1000) employees on any one software database (i.e., profiles/payrolls maintained on one personal computer); (iii) the third party software must either work independently of any hardware, or if sold to be used on hardware (excluding personal computers), such software must be sold/sublicensed in conjunction with Hardware or in conjunction with Devices; provided however that the use of Devices shall be subject to all the requirements of Section 2(c); and (iv) ADP shall notify Kronos in advance in writing of any contact ADP has with any third party developing, marketing or manufacturing time and attendance or scheduling software, with which ADP is considering a joint venture, joint marketing agreement or similar arrangement. (b) If ADP enters into a joint venture or joint marketing agreement or similar arrangement pursuant to the terms of paragraph (a) above, then Kronos may ***** * ****** **** ** ****** **** ******* ** *** ****** 5 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. ****** *** ******** ** *** **** ******* ** *** *** *** ***** ** ***** ******* ********** ********* ******* ** ***** ********* ********** ******** ******* ** ***** * ***** ******* ** ***** ********* ********* ** ******* *********** **** *** *** *** ***** ** ***** ******* ********** ******** ******* ** ***** ********* ********** ******** ******** ******** ******** **** *** **** ******** ***** ******** *** ********* ********* ** ******* *********** shall not be deemed to include the right to sell Hardware; and provided further that such ******** ** ******* ********** ******** ******* ** ***** ********* ********** ******** ******* may only license, sell or otherwise transfer the Software to persons or entities having between one hundred (100) and one thousand (1000) employees on any one software database (i.e., profiles/payroll maintained on one personal computer). Kronos agrees to notify ADP in advance in writing of any contact Kronos has with *** ***** ***** ******* ********** ******** ******* ** ***** ********* ********** ******** ******** to which Kronos is considering ******** **** ******* ** **** ***** ****** ** *********** * ***** ******** ***** ********* ** ******* ************ 12. All other terms and conditions of the Agreement remain in full force and effect. AGREED TO AND ACCEPTED: KRONOS INCORPORATED ADP, INC. By: S/W. Patrick Decker By: S/Ron Clarke (Signature) (Signature) Name: W. Patrick Decker Name: Ron Clarke (Please Print) (Please Print) Title: VICE PRESIDENT, Title: PRESIDENT, MARKETING & FIELD OPERATIONS ELECTRONICS SERVICES DIVISION Date: 7/22/96 Date: 7/22/96 6 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. EXHIBIT B Hardware Description and Pricing Unit Price Per Unit Kronos 440 Basic Bar Code 128K $ *** Kronos 460 Full Bar Code 128K $ *** Kronos 440 Basic Bar Code Modem 128K $ *** Kronos 460 Full Bar Code Modem 128K $ *** Kronos 480 Full 256K $ *** Kronos 480 Full 512K $***** ADP 140 Bar Code $ *** ADP 144 Bar Code (Modem) $ *** ALL COMPATIBLE PERIPHERAL SERVICES Ethernet Daughter Board Kit $ *** Printer Option Upgrade for 460's & 480's $ *** Smart Converter $ ** Remote Reader $ *** Bell Relay Kit $ ** Battery Back-up Modem $ *** Secure Wall Mount $ ** * Should new versions of the 140, 144, 440 and 460 firmware be released by Kronos which contain features designed to work in conjunction with newly released software features being used by ADP, these firmware versions will be provided to ADP at no additional cost. ** Kronos will provide a *** discount on all Kronos manufactured peripheral devices. *** ADP recognizes and agrees that the ADP 140 and the ADP 144 are designed for use at locations with fifty (50) or fewer employees a day and will only permit fifty (50) or fewer employees to punch during a day. **** Should ADP decide to purchase the 440, 460, and/or 480 in lots of 100, and have them shipped to one central location, a discount of *** per terminal may be applied. Kronos has determined its standard manufacturing cost ("SMC") for Kronos' fiscal year 1995. Beginning in Kronos' fiscal year 1997 (i.e., October 1, 1996), if the SMC for the preceding fiscal year is less than the SMC for fiscal year 1995, Kronos will reduce the Price Per Unit (stated above) on the Kronos 440, 460, and 480 by *** of the reduction in the 7 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS. SMC. For example, if Kronos determines, at the beginning of its fiscal year 1997, that the SMC for the System 400 was *** less in fiscal year 1996 than in fiscal year 1995, Kronos would reduce the price per unit on the Kronos 440, 460 and 480 by *** so that the price charged to ADP, beginning on October 1, 1996, would be ****. Any decrease in price will apply prospectively only beginning with all orders received after September 30 (i.e., orders placed on or after October 1). The procedure described herein will be repeated at the beginning of each Kronos fiscal year during the term of this Agreement. In addition, beginning in Kronos' fiscal year 1997, Kronos will determine the average selling price ("ASP") for the System 440, 460, 480, 300, (including modem and only if sold with TKC 250 or TKC for fewer than 250 employees) for the preceding fiscal year. If the ASP is below ****, Kronos will reduce the Price Per Unit (stated above) on the Kronos 440, 460 and 480 by *** of the amount by which the ASP is less than *****. For example, if the ASP in fiscal year 1996 was *****, Kronos would reduce the price per unit charged to ADP by ***, beginning on October 1, 1996. Any decrease in price will apply prospectively only beginning with all orders received after September 30. The procedure described herein will be repeated at the beginning of each Kronos fiscal year during the term of this Agreement. On October 1, 1997, Kronos will determine its standard manufacturing cost ("SMC") for the Kronos 140 for Kronos' fiscal year 1996. Beginning in Kronos' fiscal year 1998 (i.e., October 1, 1997) and continuing for each fiscal year thereafter, if the SMC for the preceding fiscal year is less than the SMC for fiscal year 1996, Kronos will reduce the Price Per Unit (stated above) on the ADP 140 by *** of the reduction in the SMC. In addition, the same procedure described herein will be done on the Kronos 144, with any decrease in price applied to the ADP 144. Any decrease in price will apply prospectively only (i.e. beginning on October 1, 1997). The procedure described in this paragraph will be repeated for each fiscal year during the term of this Agreement, beginning in Kronos' fiscal year 1998. In addition, beginning in Kronos' fiscal year 1998 (i.e., October 1, 1997) Kronos will determine the ASP for the Kronos 140 and the Kronos 144. If the ASP is below ****, Kronos will reduce the Price Per Unit (stated above) on the Kronos 140 and/or 144, as applicable, by *** of the amount by which the ASP is less than ****. Any decrease in price will apply prospectively only. The procedure described herein will be repeated at the beginning of each Kronos fiscal year during the term of this Agreement. On April 2, 1998, the parties agree to review, in good faith, the provisions of the price adjustment paragraphs above. 8 EX-11 5 COMPUTATION OF PER SHARE EARNINGS
KRONOS INCORPORATED EXHIBIT 11 - Statement re Computation of Per Share Earnings (In thousands, except share and per share amounts) September 30, --------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Income before change in accounting principle $11,425 $8,398 $4,892 Cumulative effect of change in accounting principle ------------- ------------- ------------- Net income $11,425 $8,398 $4,892 ============= ============= ============= Net income per common share: Primary: Weighted average shares outstanding 8,041,428 7,824,279 7,653,387 Common Stock equivalents 288,632 326,624 206,126 ------------- ------------- ------------- Total 8,330,060 8,150,903 7,859,513 ============= ============= ============= Income before change in accounting principle $1.37 $1.03 $0.62 Cumulative effect of change in accounting principle ------------- ------------- ------------- Net income per common share $1.37 $1.03 $0.62 ============= ============= ============= Fully diluted: Weighted average shares outstanding 8,041,428 7,824,279 7,653,387 Common Stock equivalents 301,846 332,702 234,924 ------------- ------------- ------------- Total 8,343,274 8,156,981 7,888,311 ============= ============= ============= Income before change in accounting principle $1.37 $1.03 $0.62 Cumulative effect of change in accounting principle ------------- ------------- ------------- Net income per common share $1.37 $1.03 $0.62 ============= ============= =============
EX-21 6 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 - Subsidiaries of the Registrant Jurisdiction Corporation of Incorporation - - ----------- ---------------- Kronos Computerized Time Systems, Inc. Canada Kronos Systems Limited United Kingdom Kronos International Sales Corp. U.S. Virgin Islands Kronos Securities Corporation Massachusetts Kronos S/T Corporation Massachusetts Kronos de Mexico, S.A. de C.V. Mexico Kronos Australia Pty. Ltd. Australia Kronos Solutions Pty. Ltd. South Africa EX-23 7 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-08987) pertaining to the 1992 Equity Incentive Plan of our report dated October 24, 1996 with respect to the consolidated financial statements and schedule of Kronos Incorporated included in this Annual Report (Form 10-K) for the year ended September 30, 1996. Ernst & Young LLP Boston, Massachusetts December 10, 1996 EX-27 8 FDS --
5 This schedule contains summary financial information extracted from the Consolidated Financial Statements of the Corporation for the twelve months ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 0000886903 Kronos Inc. 1,000 U.S. Dollars 12-mos Sep-30-1996 Oct-01-1995 Sep-30-1996 1 10,795 21,995 31,609 987 4,149 74,351 32,571 17,833 104,866 38,094 0 0 0 81 61,017 104,866 100,951 142,957 26,281 54,577 0 322 0 18,699 7,274 11,425 0 0 0 11,425 1.37 1.37
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