-----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, VqahwXB2DL+mSYwojWbna3KEYhFs8Xy0BvOpu+P8KjYJpfdUgnDMdYIJWG4lvWkY RXqjl4jPKjpPP2gf2bJPhg== 0000886903-02-000010.txt : 20020513 0000886903-02-000010.hdr.sgml : 20020513 ACCESSION NUMBER: 0000886903-02-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020330 FILED AS OF DATE: 20020513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRONOS INC CENTRAL INDEX KEY: 0000886903 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042640942 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20109 FILM NUMBER: 02643753 BUSINESS ADDRESS: STREET 1: 400 FIFTH AVENUE CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178903232 MAIL ADDRESS: STREET 1: 400 FIFTH AVE CITY: WALTHAM STATE: MA ZIP: 02154 10-Q 1 financial.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ -------------------- Commission file number 0-20109 -------------------------------------------- Kronos Incorporated - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-2640942 - ------------------------------ ---------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 297 Billerica Road, Chelmsford, MA 01824 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (978) 250-9800 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- As of April 27, 2002, 19,678,776 shares of the registrant's common stock, $.01 par value, were outstanding. KRONOS INCORPORATED INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 30, 2002 and March 31, 2001 1 Condensed Consolidated Balance Sheets at March 30, 2002 and September 30, 2001 2 Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 30, 2002 and March 31, 2001 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II.OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts) UNAUDITED
Three Months Ended Six Months Ended --------------------------- -------------------------- March 30, March 31, March 30, March 31, 2002 2001 2002 2001 ----------- ------------ ---------- ------------ Net revenues: Product .......................................... $ 33,979 $ 32,607 $ 69,193 $ 66,581 Service .......................................... 45,955 35,026 86,870 66,233 ------------ ------------ ------------ ------------ 79,934 67,633 156,063 132,814 ------------ ------------ ------------ ------------ Cost of sales: Product .......................................... 8,396 7,939 16,850 15,711 Service .......................................... 22,930 20,342 43,744 38,463 ------------ ------------ ------------ ------------ 31,326 28,281 60,594 54,174 ------------ ------------ ------------ ------------ Gross profit ................................. 48,608 39,352 95,469 78,640 Operating expenses and other income: Sales and marketing .............................. 26,058 24,609 51,249 46,967 Engineering, research and development ............ 9,251 8,416 17,187 16,336 General and administrative ....................... 5,075 4,476 9,607 8,616 Amortization of intangible assets ................ 724 1,853 1,367 3,587 Other income, net ................................ (1,314) (1,559) (2,289) (2,712) Special charge ................................... -- 2,991 -- 2,991 ------------ ------------ ------------ ------------ 39,794 40,786 77,121 75,785 Income before income taxes ................... 8,814 (1,434) 18,348 2,855 Income tax provision (benefit) ......................... 3,041 (502) 6,378 999 ------------ ------------ ------------ ------------ Net income (loss) ............................ $ 5,773 $ (932) $ 11,970 $ 1,856 ============ ============ ============ ============ Net income (loss) per common share: Basic ........................................ $ 0.29 $ (0.05) $ 0.61 $ 0.10 ============ ============ ============ ============ Diluted ...................................... $ 0.28 $ (0.05) $ 0.58 $ 0.10 ============ ============ ============ ============ Average common and common equivalent shares outstanding: Basic ........................................ 19,760,008 18,747,669 19,582,466 18,650,372 ============ ============ ============ ============ Diluted ...................................... 20,765,450 18,747,669 20,576,827 19,254,740 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) UNAUDITED
March 30, September 30, 2002 2001 -------------- ------------- ASSETS Current assets: Cash and equivalents ................................................................ $ 14,250 $ 36,561 Marketable securities ............................................................... 25,516 13,812 Accounts receivable, less allowances of $9,525 at March 30, 2002 and $7,151 at September 30, 2001 ............................... 62,025 75,295 Deferred income taxes ............................................................... 6,917 6,655 Other current assets ................................................................ 22,247 15,819 --------- --------- Total current assets ......................................................... 130,955 148,142 Property, plant and equipment, net ..................................................... 36,563 36,016 Marketable securities .................................................................. 23,400 18,400 Intangible assets ...................................................................... 20,188 17,027 Goodwill ............................................................................... 56,103 34,142 Deferred software development costs, net ............................................... 17,725 17,144 Other assets ........................................................................... 16,684 13,943 --------- --------- Total assets .................................................................. $ 301,618 $ 284,814 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .................................................................... $ 7,470 $ 7,272 Accrued compensation ................................................................ 24,397 26,932 Accrued expenses and other current liabilities ...................................... 14,625 16,073 Deferred professional service revenues .............................................. 28,020 29,740 Deferred maintenance revenues ....................................................... 63,213 57,053 --------- --------- Total current liabilities ..................................................... 137,725 137,070 Deferred maintenance revenues .......................................................... 9,039 12,054 Other liabilities ...................................................................... 4,310 4,674 Shareholders' equity: Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares, no shares issued and outstanding ................................................. -- -- Common Stock, par value $.01 per share: authorized 50,000,000 shares, 19,911,952 and 19,154,138 shares issued at March 30, 2002 and September 30, 2001, respectively .. 199 192 Additional paid-in capital .......................................................... 35,502 20,548 Retained earnings ................................................................... 126,318 114,348 Cost of Treasury Stock (205,685 shares and 95,787 shares at March 30, 2002 and September 30, 2001) ......................................... (9,894) (2,588) Accumulated other comprehensive income (loss): Foreign currency translation ...................................................... (1,468) (1,796) Net unrealized (loss) gain on available-for-sale investments ...................... (113) 312 --------- --------- (1,581) (1,484) Total shareholders' equity .................................................... 150,544 131,016 --------- --------- Total liabilities and shareholders' equity .................................... $ 301,618 $ 284,814 ========= =========
See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) UNAUDITED
Six Months Ended --------------------- March 30, March 31, 2002 2001 --------- --------- Operating activities: Net income .............................................................. $ 11,970 $ 1,856 Adjustments to reconcile net income to net cash and equivalents provided by operating activities: Depreciation .................................................... 4,405 3,862 Amortization of intangible assets ............................... 1,369 3,587 Amortization of deferred software development costs ............. 4,629 4,071 Provision for deferred income taxes ............................. 45 (1,051) Changes in certain operating assets and liabilities: Accounts receivable, net .................................... 21,497 13,077 Deferred maintenance revenue ................................ (3,718) (1,540) Deferred professional service revenue ....................... (3,625) 654 Accounts payable, accrued compensation and other liabilities ................................... (6,717) 687 Taxes payable ............................................... (7,054) (2,729) Non cash portion of special charge .......................... -- 1,253 Other ....................................................... 1,928 480 Tax benefit from exercise of stock options ...................... 9,654 2,304 -------- -------- Net cash and equivalents provided by operating activities 34,383 26,511 Investing activities: Purchase of property, plant and equipment ............................... (4,673) (3,045) Capitalization of software development costs ............................ (5,958) (5,838) Increase in marketable securities ....................................... (16,704) (25,838) Acquisitions of businesses and technology, net of cash acquired ......... (27,311) (2,056) -------- -------- Net cash and equivalents used in investing activities ... (54,646) (36,777) Financing activities: Net proceeds from exercise of stock option and employee stock purchase plans ...................................................... 15,006 5,964 Purchase of treasury stock .............................................. (14,217) (6,453) Net investment in call option ........................................... (2,810) -- -------- -------- Net cash and equivalents used in financing activities ... (2,021) (489) Effect of exchange rate changes on cash and equivalents ...................... (27) (457) -------- -------- Decrease in cash and equivalents ............................................. (22,311) (11,212) Cash and equivalents at the beginning of the period .......................... 36,561 23,201 -------- -------- Cash and equivalents at the end of the period ................................ $ 14,250 $ 11,989 ======== ========
See accompanying notes to condensed consolidated financial statements. KRONOS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - General The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals that management of Kronos Incorporated (the "Company") considers necessary for a fair presentation of the Company's financial position and results of operations as of and for the interim periods presented pursuant to the rules and regulations of the Securities and Exchange Commission. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements for the fiscal year ended September 30, 2001. The results of operations for the three and six months ended March 30, 2002 are not necessarily indicative of the results for a full fiscal year. Certain reclassifications have been made in the accompanying consolidated financial statements in order to conform to the fiscal 2002 presentation. NOTE B - Fiscal Quarters The Company utilizes a system of fiscal quarters. Under this system, the first three quarters of each fiscal year end on a Saturday. However, the fourth quarter of each fiscal year will always end on September 30. Because of this, the number of days in the first quarter (90 days in fiscal 2002 and 91 days in fiscal 2001) and fourth quarter (93 days in fiscal 2002 and 92 days in fiscal 2001) of each fiscal year varies from year to year. The second and third quarters of each fiscal year will be exactly thirteen weeks long. This policy does not have a material effect on the comparability of results of operations between quarters. NOTE C - Other Current Assets Other current assets consists of the following (in thousands): March 30, 2002 September 30, 2001 -------------- ------------------ Inventory $5,823 $5,076 Prepaid income and other taxes 5,483 903 Prepaid commissions 4,163 4,633 Prepaid royalties 2,329 2,251 Prepaid expenses - other 4,449 2,956 ----- ----- Total $22,247 $15,819 ======= ======= NOTE D - Goodwill and Other Intangible Assets - Adoption of Statements 141 and 142 In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets" (the "Statements"). Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. For acquisitions completed prior to June 30, 2001, the Company has applied the new rules on accounting for business combinations and goodwill and other intangible assets beginning in the first quarter of fiscal 2002. For acquisitions completed after June 30, 2001, the Company has applied the new rules beginning in the fourth quarter of fiscal 2001. During the three-month period ended March 30, 2002, the Company completed the initial testing of the impairment of goodwill, as of October 1, 2001. As a result of the test, the Company has concluded that no impairment of goodwill exists as of October 1, 2001. The following table presents the impact of the new standards related to goodwill amortization (and related tax effects) on net income and earnings per share, as if they had been in effect for the three and six months ended March 31, 2001 (in thousands, except per share data).
Three Months Ended Six Months Ended --------------------- ---------------------- March 30, March 31, March 30, March 31, 2002 2001 2002 2001 ---------- --------- ---------- ---------- Reported net income .......................... $ 5,773 $ (932) $ 11,970 $ 1,856 Add back: Goodwill amortization ......... -- 875 -- 1,700 --------- ------- ---------- --------- Adjusted net income ...................... $ 5,773 $ (57) $ 11,970 $ 3,556 ========= ======= ========== ========= Basic earnings-per-share: Reported net income ...................... $ 0.29 $ (0.05) $ 0.61 $ 0.10 Goodwill amortization .................... -- 0.05 -- 0.09 --------- ------- ---------- --------- Adjusted net income ...................... $ 0.29 $ 0.00 $ 0.61 $ 0.19 ========= ======= ========== ========= Diluted earnings-per-share: Reported net income ...................... $ 0.28 $ (0.05) $ 0.58 $ 0.10 Goodwill amortization .................... -- 0.05 -- 0.09 --------- ------- ---------- --------- Adjusted net income ...................... $ 0.28 $ 0.00 $ 0.58 $ 0.18 ========= ======= ========== =========
Acquired intangible assets subject to amortization are presented in the following table. (in thousands) As of March 30, 2002 ---------------------------------------- Gross Carrying Accumulated Amount Amortization -------------- ------------ Customer related $18,875 $5,757 Maintenance relationships 6,004 287 Non-compete agreements and other 2,618 1,265 ------- ------ $27,497 $7,309 ======= ====== For the three and six months ended March 30, 2002, amortization expense for intangible assets was $0.7 million and $1.4 million, respectively. The estimated annual amortization expense for intangible assets for the current and next five fiscal years is as follows (in thousands): Fiscal Year Ending Estimated annual September 30, amortization expense ------------------ -------------------- 2002 $2,843 2003 2,853 2004 2,476 2005 2,029 2006 1,989 2007 1,974 NOTE E - Acquisitions On November 29, 2001, the Company completed the acquisition of certain assets and the ongoing business operations of NW Micro-Technics, Inc. ("NWM"), the former Oregon-based Kronos dealer. The aggregate purchase price was not material to the Company's financial position. The results of NWM's operations, which are not material to the Company's results of operations, have been included in the consolidated financial statements since that date. NWM was engaged in the sale and service of employee time and attendance, employee scheduling, data collection and labor management hardware and software systems, including the resale of the Company's products through a dealer relationship. As a result of the acquisition, the Company gains access to existing and prospective customers in the northwestern United States region through its direct sales and service organizations, as well as access to the existing maintenance revenue stream from NWM customers. On December 28, 2001, the Company completed the acquisition of certain assets and the ongoing business operations of the Integrated Software Business of SimplexGrinnell's Workforce Solutions Division ("SimplexGrinnell"). The aggregate purchase price was $22.1 million in cash. The results of SimplexGrinnell's operations have been included in the consolidated financial statements since that date. SimplexGrinnell was engaged in the development, sales and support of integrated workforce management software solutions. As a result of the acquisition, the Company expects to increase its presence in the mid-market sector, which includes companies with between 100 and 1,000 employees. The transaction was accounted for under the purchase method of accounting and accordingly, the assets and liabilities acquired were recorded at their estimated fair values at the effective date of the acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition (in thousands). At December 28, 2001 -------------------- Accounts receivable $6,773 Intangible assets 3,600 Goodwill 17,783 Other assets 743 -------- Total assets acquired 28,899 Deferred professional services revenue (1,564) Deferred maintenance revenue (5,161) Other liabilities (124) -------- Total liabilities assumed (6,849) -------- Net assets acquired $22,050 ======== Due to the timing of the SimplexGrinnell acquisition, the Company has not finalized the allocation of the purchase price. The following table presents the consolidated results of operations on an unaudited pro forma basis as if the acquisition of SimplexGrinnell had taken place at the beginning of the periods presented. The following table has been prepared on the basis of estimates and assumptions available at the time of this filing that the Company and SimplexGrinnell believe are reasonable under the circumstances (in thousands, except per share data).
Three Months Ended Six Months Ended ------------------------- ------------------------- March 30, March 31, March 30, March 31, 2002 2001 2002 2001 ------------ ----------- ----------- ------------- Total revenues ............. $ 79,934 $ 72,829 $ 162,632 $ 144,386 Net income ................. 5,773 (2,056) 10,807 (1,275) Earnings per share - basic . $ 0.29 $ (0.11) $ 0.55 $ (0.07) Earnings per share - diluted $ 0.28 $ (0.11) $ 0.53 $ (0.07)
The unaudited pro forma results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the periods presented or the results which may occur in the future. On February 20, 2002, the Company completed the acquisition of certain assets and the ongoing business operations of Packard Business Systems, Inc. ("Packard"), the former West Virginia-based Kronos dealer. The aggregate purchase price was not material to the Company's financial position. The results of Packard's operations, which are not material to the Company's results of operations, have been included in the consolidated financial statements since that date. Packard was engaged in the sale and service of employee time and attendance, employee scheduling, data collection and labor management hardware and software systems, including the resale of the Company's products through a dealer relationship. As a result of the acquisition, the Company gains access to existing and prospective customers in the West Virginia area through its direct sales and service organizations, as well as access to the existing maintenance revenue stream from Packard customers. On March 18, 2002, the Company completed the acquisition of the outstanding stock of Data Collection Systems Ltd. ("DCS"), a provider of time and attendance applications headquartered in the U.K. The aggregate purchase price was not material to the Company's financial position. The results of DCS's operations, which are not material to the Company's results of operations, have been included in the consolidated financial statements since that date. As a result of the acquisition, the Company gains access to existing and prospective customers in the U.K. through its subsidiary in the U.K., Kronos Systems Ltd., as well as access to the existing maintenance revenue stream from DCS customers. NOTE F - Source Code License Agreement On March 15, 2002, the Company entered into an agreement with Best Software Inc. ("Best") to acquire a limited license to the source code and object code for Best's human resources and payroll software (Abra Enterprise (TM)). Under the terms of the agreement, Best will provide the Abra Enterprise source code to the Company and give the Company the right to reproduce, market and sublicense the software. The Company will integrate Abra Enterprise into its Workforce Central(TM) suite and will market and sublicense the integrated product suite. Per the terms of the agreement, the Company shall pay to Best a one-time technology delivery fee, a portion of which is being amortized over a five (5) year period and is included in other assets on the balance sheet. The agreement also requires the Company to pay minimum royalties for the first five (5) years of the agreement with royalty payments based on the number of licensed employees continuing for an aggregate period of ten (10) years. NOTE G - Comprehensive Income For the three and six months ended March 30, 2002 and March 31, 2001, comprehensive income (loss) consisted of the following (in thousands):
Three Months Ended Six Months Ended ------------------------ --------------------- March 30, March 31, March 30, March 31, 2002 2001 2002 2001 ---------- ----------- ---------- --------- Comprehensive income (loss): Net income (loss) ............... $ 5,773 $ (932) $ 11,970 $ 1,856 Cumulative translation adjustment 125 (666) 328 (540) Unrealized (loss) gain on available-for-sale securities ... (274) 200 (425) 405 -------- -------- -------- -------- Total comprehensive income (loss) $ 5,624 $ (1,398) $ 11,873 $ 1,721 ======== ======== ======== ========
NOTE H - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):
Three Months Ended Six Months Ended ------------------------ ------------------------ March 30, March 31, March 30, March 31, 2002 2001 2002 2001 ----------- ----------- ----------- ---------- Net income (loss) ............ $ 5,773 $ (932) $ 11,970 $ 1,856 =========== =========== =========== =========== Weighted-average shares ...... 19,760,008 18,747,669 19,582,466 18,650,372 Effect of dilutive securities: Employee stock options ... 1,005,442 -- 994,361 604,368 ----------- ----------- ----------- ----------- Adjusted weighted-average shares and assumed conversions 20,765,450 18,747,669 20,576,827 19,254,740 =========== =========== =========== =========== Basic earnings per share ..... $ 0.29 $ (0.05) $ 0.61 $ 0.10 =========== =========== =========== =========== Diluted earnings per share ... $ 0.28 $ (0.05) $ 0.58 $ 0.10 =========== =========== =========== ===========
NOTE I - Stock Split On October 25, 2001, the Company's Board of Directors approved a three-for-two stock split effected in the form of a 50% stock dividend. This stock dividend was paid on November 15, 2001 to stockholders of record as of November 5, 2001. 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 - New Accounting Pronouncements In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for the Company October 1, 2002, and early adoption is allowed. The Company does not expect SFAS No. 144 to have a material effect on its earnings or financial position. In January 2002, the Emerging Issues Task Force (EITF) issued EITF No. 01-14, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred" (formerly EITF Abstracts, Topic No. D-103). This EITF requires that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement as opposed to a reduction of expenses incurred. Out-of-pocket expenses include travel expenses such as airfare, hotel, mileage and meals that the customer will reimburse the service vendor. The EITF is effective for financial reporting periods beginning after December 15, 2001. As a result of the adoption of the EITF, service revenues and the corresponding cost of sales increased by $0.3 million for the three month periods ended March 30, 2002 and March 31, 2001, and by $0.6 million and $0.5 million for the six month periods ended March 30, 2002 and March 31, 2001, respectively. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements This discussion includes certain forward-looking statements about Kronos' business and its expectations, including statements relating to revenues derived from prior acquisitions, revenue growth rates and gross profit, operating expenses, future acquisitions and available cash, investments and operating cash flow. Any such statements are subject to risk that could cause the actual results to vary materially from expectations. For a further discussion of the various risks that may affect Kronos' business and expectations, see "Certain Factors That May Affect Future Operating Results" at the end of Management's Discussion and Analysis of Financial Condition and Results of Operations. Critical Accounting Policies Management's discussion and analysis of financial condition and results of operations are based upon Kronos' consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Kronos to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. Kronos bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. Kronos has identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of consolidated financial statements. This listing is not a comprehensive list of all of Kronos' accounting policies. Please refer to Note A in the Notes to Consolidated Financial Statements in Item 14 of Kronos' Annual Report on Form 10-K for the year ended September 30, 2001 for further information. Revenue Recognition - Kronos recognizes revenues in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, With Respect to Certain Transactions." Product revenue from sales and sales-type leases is recognized upon shipment when a noncancelable agreement has been signed, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is probable. Revenue earned on software arrangements involving multiple elements which qualify for separate element treatment is allocated to each element based on the relative fair values of those elements based on vendor specific objective evidence. In instances where vendor specific objective evidence does not exist for delivered elements, typically software products, the residual method is used to recognize revenue. Typically software fees are due within one year from date of contract signing. If the fee due from the customer is not fixed or determinable, including payment terms greater than one year from contract signing, revenue is recognized as payments become due and all other conditions for revenue recognition have been satisfied. Revenues from maintenance agreements are recognized ratably over the contractual period and all other service revenues are recognized as the services are performed. Allowance for Doubtful Accounts and Sales Returns Allowance - Kronos maintains an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. This allowance is based on estimates made by Kronos after consideration of factors such as the composition of the accounts receivable aging, bad debt history, and customer creditworthiness. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and bad debt expense may be required. In addition, Kronos maintains a sales returns allowance to reflect estimated losses for sales returns and adjustments. This allowance is established by Kronos using estimates based on historical experience. If Kronos experiences an increase in sales returns and adjustments, additional allowances and charges against revenue may be required. Valuation of Intangible Assets and Goodwill - In assessing the recoverability of goodwill and other intangible assets, Kronos must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, Kronos may be required to record impairment charges against these assets in the reporting period in which the impairment is determined. For intangible assets, this evaluation includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over their estimated useful lives, Kronos will record an impairment charge in the amount by which the carrying value of the assets exceeds their fair value. For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit which houses goodwill to that reporting unit's fair value. The fair value of the reporting unit is based upon the net present value of future cash flows, including a terminal value calculation. If the reporting unit's estimated fair value exceeds the reporting unit's carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed its carrying value, then further analysis would be required to determine the amount of the impairment, if any. For the first six months of fiscal 2002, no impairment was recorded. Capitalization of 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. Costs incurred in the development of software for internal use are charged to expense until it becomes probable that future economic benefits will be realized. Thereafter, certain costs are capitalized and amortized to operating expense on a straight-line basis over the lesser of three years or the estimated economic life of the software. Results of Operations Revenues. Revenues for the three and six month periods ended March 30, 2002 were $79.9 million and $156.1 million, respectively, as compared to $67.6 million and $132.8 million for the comparable periods in the prior year. Revenue growth was 18% for both the three and six month periods ended March 30, 2002, as compared to 9% and 5% in the comparable periods in the prior year. The revenue growth rates experienced in the three and six month periods ended March 30, 2002 were primarily attributable to the continued increase in demand for Kronos' services. In addition, revenues were favorably impacted by acquisition of businesses over the preceding four quarters. The revenue growth rate experienced in the second quarter of fiscal 2001 was principally due to the unusually low growth rate experienced in the second quarter of fiscal 2000. On December 28, 2001, Kronos acquired certain assets and the ongoing business operations of the Integrated Software Business of SimplexGrinnell's Workforce Solutions Division ("SimplexGrinnell"). The revenues and results of operations related to the acquisition are included in the three and six month periods ended March 30, 2002. Kronos presently anticipates that revenue growth, including revenues from customers obtained in the acquisition of businesses, will range between 12% - 17% in the third quarter of fiscal 2002 and range between 14% - 17% for all of fiscal 2002. Product revenues for the quarter increased 4% to $34.0 million as compared to $32.6 million and a product revenue increase of 2% in the second quarter of fiscal 2001. Product revenue for the first six months of fiscal 2002 increased 4% to $69.2 million as compared to $66.6 million and a product revenue decline of 2% in the first six months of fiscal 2001. The product revenue growth experienced in the three and six month periods ended March 30, 2002 was attributable to revenues related to the conversion to Kronos products and add-on sales to customers acquired from other providers of labor management solutions. Product revenue derived from acquired customers was $2.7 million and $3.4 million in the three and six month periods ended March 30, 2002, respectively. Management believes that, as a result of various factors including the broad economic slowdown, many transactions, particularly those of larger transaction value, have been deferred. The deferral of various transactions has negatively impacted the organic revenue growth rates in the three and six month periods ended March 30, 2002. Service revenues for the second quarter of fiscal 2002 increased to $46.0 million as compared to $35.0 million in the second quarter of fiscal 2001. Service revenues for the first six months of fiscal 2002 were $86.9 million as compared to $66.2 million for the first six months of the prior year. Service revenues increased 31% in both the three and six months ended March 30, 2002. Excluding the effect of incremental service revenues from acquisition of businesses in the preceding four quarters, service revenues increased 14% and 18% in the three and six month periods ended March 30, 2002, respectively. In addition to the acquisition of businesses, the growth in service revenues in the three and six month periods ended March 30, 2002 reflects an increase in the level of professional services accompanying new and upgrade sales and, to a lesser extent, an increase in maintenance revenue from the expansion of the installed base and the level of services sold to the installed base. Service revenues grew at a rate of 18% and 14% during the three and six month periods ended March 31, 2001, respectively. The growth in service revenues in these prior periods reflect an increase in maintenance revenue from expansion of the installed base, increased level of services sold to the installed base and, to a lesser extent, incremental maintenance revenues resulting from Kronos' acquisitions of various dealer territories. Gross Profit. Gross profit as a percentage of revenues was 61% for the three and six month periods ended March 30, 2002, as compared to 58% and 59% for the same periods of the prior year. The improvement in gross profit in the three and six month periods ended March 30, 2002 was attributable to an increase in service gross profit, which was partially offset by a decrease in product gross profit in these periods. Management anticipates gross profit to be between 61% and 63% over the remainder of the fiscal year. Product gross profit as a percentage of product revenues was 75% and 76% in the three and six month periods ended March 30, 2002, respectively, compared to 76% in the same periods of the prior year. The decrease in product gross profit in this quarter is primarily related to higher royalty costs, higher production costs attributable to a newly released terminal, and higher costs associated with the SimplexGrinnell product line. This decrease is partially offset by a higher proportion of software sales that typically carry a higher gross profit than hardware sales. Service gross profit as a percentage of service revenues was 50% for the three and six month periods ended March 30, 2002, compared to 42% in the same periods of the prior year. The improvement in service gross profit is attributable to increased productivity in the service organization. The improvement in productivity is the result of leveraging investments in service systems to more effectively manage the resources required to deliver professional services and customer support. Net Operating Expenses. Net operating expenses as a percentage of revenues were 50% and 49% for the three and six month periods ended March 30, 2002, respectively, as compared to 60% and 57% for the same periods in the prior year. The decrease in operating expenses as a percentage of revenues was primarily due to the special charge recorded in the second quarter of fiscal 2001 and the elimination of goodwill amortization due to Kronos' adoption of Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets" effective October 1, 2001 (see Note D in the Notes to Condensed Consolidated Financial Statements). On a pro forma basis, excluding the special charge and amortization expense, net operating expenses as a percentage of revenues for the three and six month periods ended March 31, 2001 were 54% and 53%, respectively. Sales and marketing expenses as a percentage of revenues were 33% for the three and six month periods ended March 30, 2002, as compared to 36% and 35% for the comparable periods in the prior year. The decrease in sales and marketing expense as a percent of revenue was attributable to leveraging our investment in infrastructure to generate higher sales volumes. Engineering, research and development expenses as a percentage of revenues were 12% and 11% for the three and six month periods ended March 30, 2002 as compared to 12% for the comparable periods in the prior year. The decrease as a percentage of revenues for the six month period ended March 30, 2002 as compared to the same period in the prior fiscal year was due to higher sales volume. Engineering expenses of $9.3 million and $8.4 million in the second quarter of fiscal 2002 and 2001, respectively, are net of capitalized software development costs of $3.0 million and $2.8 million, respectively. Engineering expenses of $17.2 million and $16.3 million in the first six months of fiscal 2002 and 2001, respectively, are net of capitalized software development costs of $5.6 million and $5.5 million, respectively. General and administrative expenses as a percentage of revenues were 6% in the three and six month periods ended March 30, 2002 as compared to 7% in three month period ended March 31, 2001 and 6% in the six month period ended March 31, 2001. Amortization of intangible assets as a percentage of revenues was 1% in the three and six month periods ended March 30, 2002 as compared to 3% in the comparable periods of the prior year. The decrease in amortization is the result of the elimination of goodwill amortization described above. Other income, net is principally attributable to interest income earned from Kronos' cash as well as investments in its marketable securities and lease portfolio. Management anticipates that operating expenses, as a percent of revenues in the final six months of fiscal 2002 will be less than that experienced in the first six months of fiscal 2002. Prior Year Special Charge. A special charge in the amount of $3.0 million related to the termination of Kronos' Crosswinds Technology operations was recorded in the second quarter of fiscal 2001. The Crosswinds Technology Group, which was purchased in May 1999, was responsible for the product development, marketing and sales support of time and attendance applications that operated as a Microsoft Outlook plug-in product. Lower than anticipated sales of these applications, redundant infrastructure and ongoing operating losses has resulted in the termination of the stand-alone operating unit. Revenues in the first six months of fiscal 2001 generated by the Crosswinds Technology Group approximated $0.5 million. The $3.0 million charge consists of $1.6 million in termination costs, $1.3 million for the write off of intangible assets and $0.1 million in other costs. Income Taxes. For the three and six month periods ended March 30, 2002, the income tax provisions as a percentage of pretax income were 34.5% and 34.8%, respectively. As a percentage of pretax income, the three month period ended March 31, 2001 had a tax benefit of 35.0% and the six month period ended March 31, 2001 had a tax provision of 35.0%. Kronos' 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. Newly Issued Accounting Standards. In June 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS 141 and SFAS 142. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. For acquisitions completed prior to June 30, 2001, the Company applied the new rules on accounting for business combinations and goodwill and other intangible assets beginning in the first quarter of fiscal year 2002. For acquisitions completed after June 30, 2001, Kronos applied the new rules beginning in the fourth quarter of fiscal 2001. On a pro forma basis, Kronos would have realized an increase in net income of $0.9 million, or $0.05 per diluted share for the three months ended March 31, 2001 and $1.7 million, or $0.09 per diluted share for the six months ended March 31, 2001, if these new standards had been applied to the first six months of fiscal 2001. During the second quarter of fiscal 2002, Kronos completed the initial testing of the impairment of goodwill, as of October 1, 2001. As a result of the test, Kronos has concluded that no impairment of goodwill exists as of October 1, 2001. In October 2001, the FASB issued Statements of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. Kronos does not expect SFAS No. 144 to have a material effect on its earnings or financial position. In January 2002, the Emerging Issues Task Force (EITF) issued EITF No. 01-14, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred" (formerly EITF Abstracts, Topic No. D-103). This EITF requires that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement as opposed to a reduction of expenses incurred. Out-of-pocket expenses include travel expenses such as airfare, hotel, mileage and meals that the customer will reimburse the service vendor. The EITF is effective for financial reporting periods beginning after December 15, 2001. As a result of the adoption of the EITF, service revenues and the corresponding cost of sales increased by $0.3 million for the three month periods ended March 30, 2002 and March 31, 2001, and by $0.6 million and $0.5 million for the six month periods ended March 30, 2002 and March 31, 2001, respectively. Liquidity and Capital Resources As of March 30, 2002, Kronos had negative working capital of $6.8 million as compared to working capital of $11.1 million at September 30, 2001. Kronos believes that this decrease in working capital is principally due to cash spent on the acquisition of businesses and technology and the purchase of treasury stock during the first six months of fiscal 2002. During the first six months of fiscal 2002, working capital was reduced as Kronos used available cash of $27.3 million to complete acquisitions of businesses with a net working capital of $0.5 million and an acquisition of technology. In addition, Kronos completed purchases of common shares of approximately $14.2 million during the first six months of fiscal 2002 for share repurchases pursuant to Kronos' stock repurchase program as well as the purchase of mature stock from employees related to the exercise of stock options. Cash, cash equivalents and marketable securities amounted to $63.2 million as of March 30, 2002, and $68.8 million as of September 30, 2001. The decline in cash, cash equivalents and marketable securities in the first six months of fiscal 2002 is primarily attributable to cash used in the Company's acquisitions and stock repurchases. Cash generated from operations amounted to $34.4 million in the first six months of fiscal 2002 as compared to $26.5 million in the first six months of fiscal 2001. The increase in cash generated from operations is primarily attributable to collections of accounts receivable and an increase in net income, partially offset by a decrease in deferred revenues and payments of bonuses and commissions. Also contributing to the increase in cash generated from operations is an increase in the tax benefit from exercise of stock options, however, this is substantially offset by the corresponding reduction in income taxes payable. Cash used for property, plant and equipment was $4.7 million in the first six months of fiscal 2002 compared to $3.0 million in the same period of fiscal 2001. Kronos' use of cash for the acquisition of businesses and technology in the first six months of fiscal 2002 was principally related to the acquisitions of specified assets and/or businesses of Kronos' dealers and/or other providers of labor management solutions as well as the acquisition of the source code license for the Abra Enterprise human resources and payroll software. Kronos is assessing several acquisition opportunities that may be completed over the next twelve months, although there can be no assurance that these acquisitions will be completed. Excess cash reserves not required for operations, investments in property, plant and equipment or acquisitions are invested in marketable securities. Marketable securities increased by $16.7 million in the first six months of fiscal 2002 compared to an increase of $25.8 million in the first six months of fiscal 2001. Under Kronos' stock repurchase program, Kronos repurchased 230,500 common shares in the first six months of fiscal 2002 at a cost of $10.4 million compared to 202,500 common shares at a cost of $4.9 million for the same period in the prior year. The common shares repurchased under the program are used for Kronos' employee stock option plans and employee stock purchase plan. Cash provided by operations was sufficient to fund investments in capitalized software development costs, property, plant and equipment and stock repurchases. Kronos believes that with cash generated from ongoing operations it has adequate cash and investments and operating cash flow to fund its investments in property, plant and equipment, software development costs, cash payments related to acquisitions, if any, and any additional stock repurchases for the foreseeable future. If the need arose, Kronos believes that based on its current debt-free balance sheet and its financial position, it would be successful in securing financing from the capital markets. During the quarter ended March 30, 2002, Kronos did not engage in: o material off-balance sheet activities, including the use of structured finance or special purpose entities, o trading activities in non-exchange traded contracts, or o transactions with persons or entities that benefit from their non-independent relationship with Kronos. Certain Factors That May Affect Future Operating Results Except for historical matters, the matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Kronos desires to take advantage of the safe harbor provisions of the Act and is including this statement for the express purpose of availing itself of the protection of the safe harbor with respect to all forward looking statements that involve risks and uncertainties. Kronos' actual operating results may differ from those indicated by forward looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by management from time to time because of a number of factors including the potential fluctuations in quarterly results, timing and acceptance of new product introductions by Kronos and its competitors, the dependence on Kronos' time and attendance product line, the ability to attract and retain sufficient technical personnel, competitive pricing pressure, and the dependence on alternate distribution channels and on key vendors, as further described below and in Kronos' Annual Report on Form 10-K for the fiscal year ended September 30, 2001, which are specifically incorporated by reference herein. Potential Fluctuations in Quarterly Results. Kronos' quarterly operating results may fluctuate as a result of a variety of factors, including the purchasing patterns of its customers, mix of products and services sold, the ability of Kronos to effectively integrate acquired businesses into Kronos' operations, the timing of the introduction of new products and product enhancements by Kronos and its competitors, the strategy employed by Kronos to enter the Human Resource (HR)/Payroll market, market acceptance of new products, competitive pricing pressure and general economic conditions. Kronos historically has realized a relatively larger percentage of its annual revenues and profits in the fourth quarter and a relatively smaller percentage in the first quarter of each fiscal year, although there can be no assurance that this pattern will continue. In addition, while Kronos has contracts to supply systems to certain customers over an extended period of time, substantially all of Kronos' product revenue and profits in each quarter result from orders received in that quarter. If near-term demand for Kronos' products weakens or if significant anticipated sales in any quarter do not close when expected, Kronos' revenues for that quarter will be adversely affected. Kronos believes that its operating results for any one period are not necessarily indicative of results for any future period. Product Development and Technological Change. Continual change and improvement in computer software and hardware technology characterize the markets for frontline labor management systems. Kronos' future success will depend largely on its ability to enhance the capabilities and increase the performance of its existing products and to develop new products and interfaces to third party products on a timely basis to meet the increasingly sophisticated needs of its customers. Although Kronos is continually seeking to further enhance its product offerings and to develop new products and interfaces, including products for the HR/Payroll market, there can be no assurance that these efforts will succeed, or that, if successful, such product enhancements or new products will achieve widespread market acceptance, or that Kronos' competitors will not develop and market products which are superior to Kronos' products or achieve greater market acceptance. Dependence on Time and Attendance Product Line. To date, more than 90% of Kronos' revenues have been attributable to sales of time and attendance systems and related services. Although Kronos has announced its intention to enter the licensed HR/Payroll market this fiscal year, Kronos expects that its dependence on the time and attendance product line for revenues will continue for the foreseeable future. Competitive pressures or other factors could cause Kronos' time and attendance products to lose market acceptance or experience significant price erosion, adversely affecting the results of Kronos' operations. Dependence on Alternate Distribution Channels. Kronos markets and sells its products through its direct sales organization, independent dealers and its OEM partner, ADP, Inc ("ADP"). In the first six months of fiscal 2002, approximately 13% of Kronos' revenue was generated through sales to dealers and ADP. Management does not anticipate that its intention to enter the HR/Payroll market will have a negative impact on its relationship with ADP. However, a reduction in the sales efforts of Kronos' major dealers and/or ADP, or termination or changes in their relationships with Kronos, could have a material adverse affect on the results of Kronos' operations. Competition. The frontline labor management industry and the HR/Payroll market are highly competitive. The number of competitors is also increasing as applications and systems providers such as human resources management, payroll processing and enterprise resource planning (ERP), enter these markets. Technological changes such as those allowing for increased use of the Internet have also resulted in new entrants into the markets. Although Kronos believes it has core competencies that are not easily obtainable by competitors, maintaining Kronos' technological and other advantages over competitors will require continued investment by Kronos in research and development and marketing and sales programs. There can be no assurance that Kronos will have sufficient resources to make such investments or be able to achieve the technological advances necessary to maintain its competitive advantages. Increased competition could adversely affect Kronos' operating results through price reductions and/or loss of market share. Attracting and Retaining Sufficient Technical Personnel for Product Development, Support and Sales. Kronos has encountered intense competition for experienced technical personnel for product development, technical support and sales and expects such competition to continue in the future. Any inability to attract and retain a sufficient number of qualified technical personnel could adversely affect Kronos' ability to produce, support and sell products in a timely manner. Protection of Intellectual Property. Kronos has developed, and through its acquisitions of businesses, acquired, proprietary technology and intellectual property rights. Kronos' success is dependent upon its ability to further develop and protect its proprietary technology and intellectual property rights. Kronos seeks to protect products, software, documentation and other written materials primarily through a combination of trade secret, patent, trademark and copyright laws, confidentiality procedures and contractual provisions. While Kronos has attempted to safeguard and maintain its proprietary rights, it is unknown whether Kronos has been or will be successful in doing so. Despite Kronos' efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its products or obtain and use information that is regarded as proprietary. Policing unauthorized use of Kronos' products is difficult. While Kronos is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem, particularly in foreign countries where the laws may not protect proprietary rights as fully as in the United States. Kronos can offer no assurance that it can adequately protect its proprietary rights or that its competitors will not reverse engineer or independently develop similar technology. Infringement of Intellectual Property Rights. Kronos cannot provide assurance that others will not claim that Kronos developed or acquired intellectual property rights are infringing on their intellectual property rights or that Kronos does not in fact infringe on those intellectual property rights. Any litigation regarding intellectual property rights could be costly and time-consuming and divert the attention of Kronos' management and key personnel from business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require Kronos to enter into costly royalty or license agreements, and in this event, Kronos may not be able to obtain royalty or license agreements on acceptable terms, if at all. Kronos may also be subject to significant damages or an injunction against the use of its products. A successful claim of patent or other intellectual property infringement against Kronos could cause immediate and substantial damage to its business and financial condition. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The 2002 Annual Meeting of Stockholders of Kronos Incorporated was held on February 7, 2002. (b) At the Annual Meeting, Messrs. D. Bradley McWilliams and Lawrence Portner were elected as Class I Directors for three-year terms expiring in 2005. In addition, the Directors whose terms of office continue after the meeting are two Class II Directors: Messrs. Mark S. Ain and W. Patrick Decker and two Class III Directors: Messrs. Richard J. Dumler and Samuel Rubinovitz. The tabulation was as follows: FOR WITHHELD --- -------- D. Bradley McWilliams 17,273,846 247,480 Lawrence Portner 17,273,003 248,323 (c) Adoption of the Company's 2002 Stock Incentive Plan was approved as follows: BROKER FOR AGAINST ABSTAIN NON VOTES --- ------- ------- --------- 12,856,775 2,392,134 154,793 2,117,624 (d) Amendments to the Company's 1992 Employee Stock Purchase Plan and an increase in the number of shares available under the Plan from 1,378,125 to 1,678,125, were approved as follows: BROKER FOR AGAINST ABSTAIN NON VOTES --- ------- ------- --------- 14,984,008 260,232 159,462 2,117,624 (e) The other item voted upon at the meeting was the ratification of the selection of Ernst & Young LLP as the Company's independent auditors for the 2002 fiscal year. FOR AGAINST ABSTAIN --- ------- ------- 17,437,064 77,195 7,067 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1(1) Best Software Inc./Kronos Incorporated Agreement, dated as of March 15, 2002 by and between Kronos Incorporated and Best Software, Inc. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fiscal quarter ended March 30, 2002. (1) Confidential treatment requested as to certain portions thereof. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KRONOS INCORPORATED By /s/ Paul A. Lacy ---------------------------------- Paul A. Lacy Executive Vice President, Chief Financial and Administrative Officer (Duly Authorized Officer and Principal Financial Officer) May 13, 2002 KRONOS INCORPORATED EXHIBIT INDEX Exhibit Number Description 10.1(1) Best Software Inc./Kronos Incorporated Agreement, dated as of March 15, 2002 by and between Kronos Incorporated and Best Software, Inc. (1) Confidential treatment requested as to certain portions thereof. EX-10 3 bestagreement.txt Exhibit 10.1 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. BEST SOFTWARE INC./KRONOS INCORPORATED AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into this 15th day of March, 2002, (the "Effective Date") by and between Kronos Incorporated, a Massachusetts corporation, having a place of business at 297 Billerica Road, Chelmsford, MA 01824 (hereinafter called "Kronos"), and Best Software, Inc., a Virginia corporation, having a place of business at 11413 Isaac Newton Square, Reston, Virginia 22090 (hereinafter called "Best"). WHEREAS, Kronos owns certain time and attendance software products and licenses such products to its customers; WHEREAS, Best owns human resources and payroll software products and licenses such products to its customers; WHEREAS, Kronos wishes to integrate its time and attendance software with Best's human resources and payroll software and license the integrated products to its customers; WHEREAS, Kronos desires to obtain, and Best wishes to grant, a limited license to the source code and object code for the Best software on the terms and conditions set forth herein; and WHEREAS, Kronos desires to receive, and Best wishes to provide, certain maintenance and support services and enhancements described herein for its software and Kronos wishes to pay certain technology delivery fees, royalties and other sums to Best; NOW, THEREFORE, in consideration of the mutual covenants of the parties, the parties hereby agree as follows: 1. Definitions. 1.1 "Best Derivative Works" shall mean Derivative Works prepared by Best, other than Upgrades, or Kronos Derivative Works. 1.2 "Competitor" shall mean any company, other than Kronos or Best, in the business of selling Human Resources and/or Payroll record keeping administration services software products. 1.3 "Delivery Date" shall mean the date on which Best completes its initial delivery of the Licensed Materials as described in Section 5.1. 1.4 "Derivative Works" shall mean all modifications, improvements, updates and derivative works of and to the Software, other than Upgrades. 1.5 "Documentation" shall mean all existing printed, typewritten, electronic or other material as specified on Schedule B. 1.6 "Employees" shall mean, for the purpose of calculating payments under this Agreement, persons about whom information is processed through the Software or a Kronos Derivative Work by a Kronos Customer during any portion of a Year for which any payment is made. By way of example, if a Kronos Customer uses the Software to calculate payroll for 375 persons during a Year, then that Kronos Customer has 375 Employees. 1.7 "Hosted Environment" will be the delivery by Kronos of the Royalty Bearing Software in a computer-hosting environment. The Hosted Environment allows Kronos to assume the Information Technology responsibility for the customer to simplify the customer's ongoing usage of the Software. In that environment, Kronos will offer the customer the Royalty Bearing Software with the following incremental services: o Kronos will maintain the servers and server software licenses to house the Royalty Bearing Software and deliver application access to the customer's users. Such access will be over the public Internet or customer specific network connections as required. The servers may be housed at a third party hosting center at Kronos' discretion. o Kronos will deliver the Royalty Bearing Software in a configuration where only one Kronos Customer's data is stored in each database instance so that a Kronos Customer's employee count is clearly uniquely defined as those employees in that one database. At no time will multiple Kronos Customers be combined into a single database instance for access through the Royalty Bearing Software. o Kronos, and the third party hosting center provider if required, will provide normal computer data center management. These would be the same services that an internal Information Technology would provide in a typical internal software implementation. This would include such services as backup and restore, troubleshooting connectivity issues and upgrades of system software. o Kronos may apply Upgrades of the Royalty Bearing Software to the customer's system as housed at the hosting center. 1.8 "Kronos Customer" shall mean all current and future customers to which Kronos or Kronos Resellers Sublicense the Software or a Kronos Derivative Work in accordance with this Agreement, now or in the future. 1.9 "Kronos Derivative Works" shall mean Derivative Works prepared by or on behalf of Kronos. 1.10 "Kronos Reseller" shall mean a third party authorized by Kronos to Sublicense Kronos products, and which is a party to a written agreement with Kronos regarding the same. 1.11 "Licensed Materials" shall mean, collectively, the Software and the Documentation. 1.12 "Net Hosting Fee" shall mean the fees charged by Kronos for use of the Hosted Environment exclusive of any one-time professional service fees. 1.13 "Royalty Bearing Software" shall mean (i) Software and/or Kronos Derivative Works that include functionality that implements computer based administration for Human Resource activities for customers, including in the aggregate, life-cycle maintenance of employment records from hiring to firing, benefits plan definition, benefits plan enrollment, and human resources legislative reporting; and/or (ii) Software and/or Kronos Derivative Works that include functionality that implements computer based administration for Payroll activities for customers, including in the aggregate, payroll deduction definitions, payroll tax (federal, state and local) tax calculations and related required gross-to-net pay calculations. Royalty Bearing Software shall not mean other Kronos software that may contain technology and/or functionality provided to Kronos by Best (such as Workforce Central) that Kronos licenses to its customers for non Human Resources and/or non Payroll activities. 1.14 "Quarter" shall mean a quarter of a Year. 1.15 "Software" shall mean the computer program(s) and database structure(s), on software media in compiled machine-only readable form ("object code") and in user-readable symbolic form ("source code"), as specified on Schedule A, required to develop, build, test, install and maintain in accordance with this Agreement and all subsequently issued Upgrades "Object code" shall include program and database structures whose form is both machine-only readable compiled code and user-and-machine readable symbolic code ("interpreted code"). "Raw source code" shall mean source code that is compiled to machine-only readable code. 1.16 "Sublicense" shall mean a sublicense of the Software or a sublicense or license of a Kronos Derivative Work, in object code only, as permitted under Section 3.3 or, as a verb, to sublicense the Software or sublicense or license a Kronos Derivative Work, in object code only, as permitted under Section 3.3. 1.17 "Term" shall mean the term of this Agreement, as set forth in Section 15.1. 1.18 "Upgrades" shall mean all updates, corrections, bug fixes, tax updates, modifications or enhancements to the Software which Best provides generally to its customers that purchase required upgrades from Best or that have valid maintenance and support agreements in place with Best. For example, an Upgrade would be a change to the version number of the Software that may be either to the left or the right of the decimal number (i.e. 3.04 to 3.05 or 3.05 to 4.00). 1.19 "Year" shall mean (i) any of the year-long periods described in Section 6.2(a) as they relate to royalty payments, or (ii) any of the year-long periods described in Section 6.7 as they relate to minimum royalty payments. Year One shall commence on the first day of the month closest to the date of Kronos' receipt of the first customer purchase order for Royalty Bearing Software or November 1, 2002, which ever first occurs. Year Two shall be one year from the first day of the month closest to the date of Kronos' receipt of the first customer purchase order for Royalty Bearing Software or November 1, 2002, which ever first occurs, and so on through Year Ten, it being understood that Year Ten ends on the tenth anniversary of the Effective Date. 2. Statement of Relationship. 2.1 Independent Contractors. The parties acknowledge that: (a) neither party shall exercise any control over the activities and operations of the other party (except for limitations hereinafter contained); (b) both parties hereto are independent contractors and neither party shall in any way represent itself as an employee, joint venturer, partner, servant, agent or general representative of the other party for any purpose whatsoever; and (c) neither party has any authority to commit the other party to any contract, term or condition not set forth herein, or otherwise make the other party liable, in any manner, cause or undertaking whatsoever including to make any representations, warranties, or guarantees. 3. Grant of License. 3.1 License. Subject to the terms and conditions of this Agreement, Best hereby grants Kronos a nonexclusive, worldwide, non-transferable, perpetual (subject to termination as set forth in Section 15.2) license to reproduce, market, Sublicense and distribute the Software and to create Kronos Derivative Works, as and to the extent expressly authorized herein. Notwithstanding the generality of the foregoing, Kronos shall not, under any circumstances, reproduce, market, display, sublicense or distribute the raw source code for the Software, including, without limitation, as part of a Kronos Derivative Work, to or for any third party, including, without limitation, a Kronos Customer, or otherwise authorize or permit any third party to use or have access to the source code for the Software, without Best's prior written consent. For the avoidance of doubt, the foregoing license does not extend to Best Derivative Works. 3.2 Derivative Works. Under no circumstances may Kronos authorize or permit any Kronos Customer or other third party, through Sublicense or otherwise, to create any Derivative Works from the source code of any Licensed Materials. Kronos may engage a third party to assist Kronos in creating Kronos Derivative Works for Kronos, provided that such third party executes a written agreement with Kronos: (a) acknowledging that the Licensed Materials are Confidential Information, as described in Section 17.1, and (b) agreeing to the restrictions imposed on Kronos pursuant to this Agreement. The limitations set forth in this Section 3.2 shall not be deemed to prevent Kronos Customers or third parties from using any functionality in the Software, as modified by Kronos, to generate customized reports or to take advantage of the Kronos defined application programming interfaces or database interfaces. It is understood that Kronos shall not, under any circumstances, reproduce, market, display, sublicense or distribute the raw source code for the Software, including, without limitation, as part of a Kronos Derivative Work, to or for any third party, including, without limitation, a Kronos Customer, or otherwise authorize or permit any third party to use or have access to the raw source code, without Best's prior written consent. 3.3 Sublicensing of Software. Kronos may sublicense the Software, in object code form only and subject to the terms and conditions of this Agreement, to Kronos Customers. Any such Sublicense shall be pursuant to an executed agreement containing the terms and conditions set forth in Schedule D. To enable Best to facilitate the verification of royalty payments hereunder, within thirty (30) days of the end of each Quarter, Kronos shall provide to Best a list which shall state the number of Employees of each Kronos Customer. 3.4 Kronos Resellers. Kronos may sublicense to Kronos Resellers the right to Sublicense the Software, provided that each such Kronos Reseller executes an agreement containing the terms and conditions set forth in Schedule E. For the purpose of calculating royalties and other payments hereunder, Sublicenses granted by Kronos Resellers shall be deemed to have been granted by Kronos. Kronos shall include Sublicenses entered into by such Kronos Resellers in its quarterly reports to Best pursuant to Section 6.5 as if they were entered into by Kronos. 3.5 Service Bureau Offerings. The following table outlines the primary differences between a Payroll Service Bureau and payroll software deployed in-house or in a Hosted Environment. Payroll Service Bureau Matrix Attribute/Function Payroll Service Bureau In-house or Hosted Environment - ------------------ ---------------------- ------------------------------ Customer licenses No. Customer signs a Yes Software service agreement - ------------------ ---------------------- ------------------------------ 1 Database per No. Typically multiple Yes company companies in same DB - ------------------ ---------------------- ------------------------------ Finishing and Performed by vendor Performed by customer distribution - ------------------ ---------------------- ------------------------------ Tax filing Performed by vendor Performed by customer or third party via file transfer of customer data - ------------------ ---------------------- ------------------------------ Direct deposit Performed by vendor Performed by customer or third party via file transfer of customer data - ------------------ ---------------------- ------------------------------ Kronos shall not use the Royalty Bearing Software to build a Payroll Service Bureau as it is defined in the above Payroll Service Bureau Matrix. In the event a Kronos Customer is using Kronos Royalty Bearing Software and wishes to outsource a portion of their payroll process to a Payroll Service Bureau, Kronos may partner with the Payroll Service Bureau to provide services to the Kronos customer. The following table outlines the primary differences between a HR Service Bureau and HR software deployed in-house or in a Hosted Environment. HR Service Bureau Matrix Attribute/Function HR Service Bureau In-house or Hosted Environment - ------------------ ---------------------- ------------------------------ Customer licenses No. Customer signs a Yes software service agreement - ------------------ ---------------------- ------------------------------ 1 Database per No. Typically multiple Yes company companies in same DB - ------------------ ---------------------- ------------------------------ Collect benefit Performed by vendor Performed by customer or third changes and party via file transfer of distribute to customer data benefit providers - ------------------ ---------------------- ------------------------------ Process employee Performed by vendor Performed by customer or third and job candidate party via file transfer of background checks customer data - ------------------ ---------------------- ------------------------------ Kronos shall not use the Royalty Bearing Software to build an HR service bureau as it is defined in the above HR Service Bureau Matrix. In the event a Kronos Customer is using Kronos Royalty Bearing Software and wishes to outsource a portion of their HR process to a HR Service Bureau, Kronos may partner with the HR Service Bureau to provide services to the Kronos customer. Additional Kronos Service Options Kronos may purchase an existing Payroll or HR service bureau and then offer the Payroll or HR Service Bureau service directly to Kronos Customers so long as Kronos does not utilize or otherwise incorporate the Royalty Bearing Software to deliver that service. Kronos may offer additional business process outsource services other than the HR or Payroll Service Bureaus. For example, a Kronos Customer who is using Royalty Bearing Software requests a compensation management service or a stock option administration service, Kronos may, in its sole discretion, elect to offer such services. 3.6 Escrow by Kronos; Transfers of Sublicenses. Kronos may, if so requested by a Kronos Customer, place a copy of the Software into escrow, provided that: (a) such Software may only be placed into escrow (i) if Kronos also places its own proprietary software into escrow and (ii) on the same terms and conditions as Kronos places its own proprietary software into escrow; and (b) in the event that either (i) for any reason, within five (5) years from the Effective Date, the Software is reasonably anticipated to be released from escrow or, (ii) for any reason, other than that Kronos ceases to do business, beyond five (5) years from the Effective Date, then Kronos shall (i) notify Best in writing no less than thirty (30) business days prior to such release, and (ii) at Best's request, assign to Best, free of charge, all of its rights, duties and obligations under the applicable agreement with the applicable Kronos Customer so that Best may prevent the release of the Software from escrow. 3.7 License to End-User Version of the Software. Best hereby grants Kronos a license to use the Software, in object code form, for its own internal use, subject to the terms and conditions of the Abra Enterprise Software Product End-User License Agreement attached hereto as Schedule M. 4. Title and Ownership; Use of Proprietary Notices. 4.1 Title and Ownership of Licensed Materials and Best Derivative Works. Title to and sole ownership of the Licensed Materials and of any Best Derivative Works, and all patent, trademark, copyright, trade secret and other rights of whatever kind or nature therein now or hereafter existing, shall at all times remain with Best and/or Best's lawful successors and assigns. Any and all rights in the Licensed Materials and in any Best Derivative Works not expressly granted to Kronos are hereby reserved to Best. 4.2 Title and Ownership of Kronos Derivative Works; License to Kronos Derivative Works. In the event that Kronos develops or causes to be developed any Kronos Derivative Works, subject to Best's underlying proprietary rights, including, but not limited to, all patent, trademark, copyright, trade secret and other rights of whatever kind or nature therein now or hereafter existing in the Licensed Materials, title to and sole ownership of any new elements in such Kronos Derivative Works that have been added to the Software, including all patent, trademark, copyright, trade secret and other rights of whatever kind of nature therein now or hereafter existing, shall at all times remain with Kronos. 4.3 Proprietary Notices. Kronos shall ensure that (a) all copies of the Licensed Materials developed and/or provided by Best shall reproduce and include all copyright and other intellectual property rights notices embedded in such Licensed Materials in substantially the same locations as in the original Licensed Materials; and (b) all Kronos Derivative Works shall reproduce and include the intellectual property rights notices set forth in Schedule F in locations as directed by Best. 4.4 No Use of Trademarks. Notwithstanding the provisions of Section 4.2, neither party may use any trade name, trademark or service mark of the other party without the prior written consent of the other party. Kronos may request a single consent from Best for multiple forms of uses of Best trade names, trademarks or service marks within the United States (but not internationally) and, if Best grants such consent in writing, Kronos may continue such use without seeking further consent from Best, provided that such use remains consistent with the forms of use initially approved by Best. Kronos may not use any Best trade names, trademarks or service marks outside the United States without specific prior written consent from Best, which consent shall not be unreasonably withheld or delayed. 5. Technology Delivery. 5.1 Technology Delivery Plan. The parties have developed a plan for delivering from Best to Kronos certain technology and information associated with the Software (such plan, the "Technology Delivery Plan"). The Technology Delivery Plan is attached hereto as Schedule G. 5.2 Milestones. Best shall deliver technology to Kronos according to the milestones set forth below. Kronos shall use its best efforts to assist Best as necessary to ensure that each of the following milestones are achieved within any timeline set forth for such milestone. (a) Milestone I: The parties agree that the following sub-milestones will be completed by [**]: (i) Best shall provide Kronos with: (1) one master copy of the Software (as such Software exists as of the time of delivery) in source code and object code formats, and (2) one electronic and one hard copy of the Documentation related thereto (as such Documentation exists as of the time of delivery); (ii) Best shall successfully complete the Regression Test of the build of the original source code, as further described in the Technology Delivery Plan; (iii) Best shall make available assistance to Kronos to create and test the Kronos Initial Release as further described in the Technology Delivery Plan and (iv) Best shall make available initial training for Kronos' engineers on the design and implementation of the Software, as further described in the Technology Delivery Plan. 6. Payments. 6.1 One-Time Payments. As payment for the technology delivery to Kronos under this Agreement, Kronos agrees to pay Best a non-refundable fee of [**] dollars ($[**]), as follows: (a) [**] dollars ($[**]) upon the execution of this Agreement; (b) [**] dollars ($[**]), paid as follows: (A) [**] Dollars ($[**]) upon the occurrence of the event described in 5. 2(a)(ii) herein; (B) [**] Dollars ($[**]) upon the occurrence of the event described in 5.2(a)(iii) herein; and (C) [**] Dollars ($[**]) upon the occurrence of the event described in 5.2(a)(iv) herein, more specifically, upon the earlier of: (i) [**]; or (ii) the date of Kronos' consumption of [**] hours of Engineering and QA training and [**] hours of CLAD training; or (iii) the receipt by Best of written acceptance from Kronos that the actual amount of training hours consumed by Kronos, if less than the total training hours described in (ii) above, allows Best to meet this initial-training sub-Milestone; and (c) [**] dollars ($[**]) on [**] provided Best is in compliance with all of the terms and conditions of this Agreement. 6.2 Royalties . As payment for the license provided by Best hereunder, Kronos shall pay Best the one-time royalties set forth below upon the Sublicense of the Royalty Bearing Software by a Kronos Customer. (a) Royalties for [**] or fewer Employees: (i) For Kronos Customers that sublicense the Royalty Bearing Software and that have [**] or fewer Employees, the royalties are as follows: (1) Year 1: $[**] per Employee; (2) Year 2: $[**] per Employee; (3) Year 3: $[**] per Employee; (4) Years 4-10: $[**] per Employee; and (b) Royalties for more than [**] Employees: (i) For Kronos Customers that sublicense the Royalty Bearing Software and that have more than [**] Employees, the royalties are as follows: (1) Years 1-3: $ [**] per Employee; (2) Years 4-10: $ [**] per Employee; and (c) Kronos shall pay the royalties described in subsections (a)(i) and (b)(i) until Kronos has paid Best a total of $[**] in royalties and/or maintenance and support fees as described in Section 9.1,in addition to, and independent and exclusive of, the $[**] technology delivery fee described in Section 6.1. Thereafter, for the Term of this Agreement Kronos shall pay Best only the royalties described in subsection (a)(i) for Kronos Customers that sublicense the Royalty Bearing Software and that have [**] or fewer Employees. (d) Kronos shall pay the royalties and maintenance and support fees described in subsection (c) until Kronos has paid Best a total of $[**] in royalties and/or maintenance and support fees as described in Section 9.1, in addition to, and independent and exclusive of, the $[**] technology delivery fee described in Section 6.1. Thereafter, and for the Term of this Agreement, Kronos shall pay Best a one-time royalty of $[**] per Employee for Kronos Customers that Sublicense the Royalty Bearing Software and that have [**] or fewer Employees. (e) The royalty obligations set forth herein shall continue until the [**] anniversary of the Effective Date, after which time Kronos shall discontinue paying Best all royalties. After the [**] anniversary of the Effective Date, Kronos shall have a royalty free, nonexclusive, worldwide, nontransferable and perpetual license to reproduce, market, Sublicense and distribute the software and to create Kronos Derivative Works of the Software. After the [**] anniversary of the Effective Date, Kronos shall also have the unlimited, unrestricted right to use Software and/or Derivative Works to provide Hosted and/or Service Bureau services. 6.3 Deployments of Fewer Than [**] Employees. In the event that a Kronos Customer sublicenses Royalty Bearing Software and has more than [**] Employees, but chooses to deploy or utilize the Royalty Bearing Software in smaller increments at that Kronos Customer's various locations, the royalty shall be paid using the more than [**] Employee rate as described in Section 6.2(b)-(d). 6.4 Licenses by Tier. If Kronos Sublicenses the Royalty Bearing Software by tier then, for Kronos Customers with more than [**] actual Employees, Kronos shall pay Best on the next highest tier level to a Kronos Customer's actual Employee count. For example, if a Kronos Customer has [**] Employees and the nearest tier that Kronos Sublicenses is [**] Employees, Kronos shall pay Best based on the [**] Employee count and the Kronos Customer may utilize the Software for up to [**] Employees. 6.5 Additional Sublicense Sales. In the event a Kronos Customer initially purchases Sublicenses for fewer than [**] Employees and then the same Kronos Customer subsequently purchases additional Sublicenses for additional Employees which raises the total Employee count for that Customer to greater than [**] Employees, then Kronos shall pay Best royalty payments at the "[**] or Fewer Employee" rates for [**] employees and at the "Greater Than [**] Employee" rates for the number of employees over [**] and shall so itemize any such payments in the quarterly Royalty Report. For example Employee Count Pay Rate ------------------------- -------------------------- [**] "[**] or fewer" rate for [**] employees ------------------------- -------------------------- Additional [**] "[**] or fewer" rate for [**] employees and "Greater than [**]" rate for [**] employees ------------------------- -------------------------- 6.6 Royalty Credits. In the event (i) Kronos accepts the cancellation of any Sublicense and return of the Software from any Kronos customer for which Kronos has paid royalties, or (ii) writes off a bad debt for any nonpayment of a Sublicense for which Kronos has paid royalties within six (6) months from the date of such Sublicense then Kronos may apply any such amounts paid or written off as a credit against future royalties owed to Best and Kronos shall reflect such specific information in the quarterly Royalty Report. In the event that Kronos discovers that it made an overpayment during a previous Quarter, it may adjust such overpayment in a subsequent Quarter, adequately documenting such so that an auditor can understand the reason for such credit. In the event that Kronos does not receive payment from a customer and has to write-off the receivable Kronos gets credit for any associated royalties paid against future royalties owed. 6.7 Minimum Royalty Payments. Kronos shall pay Best minimum royalties of $[**] over a [**]-Year period beginning on the commencement of Year One. The first annual minimum royalty payment shall be due on the last day of Year One. Subsequent payments shall be due on the last day of each Year thereafter, during the remainder of the [**] year period. If royalties paid to Best in any Year set forth below are less than the respective amount specified below, Kronos shall pay Best the difference between the actual royalties paid to Best in the applicable Year and the minimum payments specified below: [**] 6.8 Hosted Environments. Kronos may offer Royalty Bearing Software directly to Kronos Customers in a Hosted Environment. Kronos may also permit a Kronos Reseller to offer Royalty Bearing Software to its customers in a Hosted Environment so long as the Hosted Environment is provided to the Kronos Reseller's customer by Kronos. After a Year where [**]% or more of the total employees licensed in such Year are licensed Royalty Bearing Software in a Hosted Environment, Best at its discretion, may elect to forego the one-time license fees defined in Section 6.2 and receive from Kronos the following fees on any new Hosted Environment Royalty Bearing Software sales: (i) For Kronos Customers purchasing Hosted Environment Royalty Bearing Software with [**] or fewer employees, Kronos shall pay Best a royalty of [**]% of the total Net Hosting Fee it receives from Kronos Customer's on a monthly basis, exclusive of any one time professional service fees; and (ii) For Kronos Customers purchasing Hosted Environment Royalty Bearing Software with greater than [**] employees, Kronos shall pay Best a royalty of [**]% of the total Net Hosting Fee it receives from Kronos Customer's on a monthly basis, exclusive of any one time professional service fees. In those cases when a Kronos Customer deploys both Royalty Bearing Software and Kronos products in a Hosted Environment, the following formula will be used to determine the percentage of the Net Hosting Fee due Best on a monthly basis: a. Kronos will give Best notice of its established competitive retail hosting fee for (i) Royalty Bearing Software and (ii) other Kronos products that will be sold in a Hosted Environment. b. The retail hosting fee for the Royalty Bearing Software will be divided by the sum of the all retail hosting fees on the customer order. c. The total of all Net Hosting Fees on the order, will be multiplied by the percentage calculated in section (b) above. d. For Kronos Customers with [**] or fewer employees, Kronos shall pay Best a royalty of [**]% of the dollar value calculated in Section (c) above that Kronos receives from Kronos Customers on a monthly basis, exclusive of any one time professional service fees; and for Kronos Customers purchasing Royalty Bearing Software with greater than [**] employees, Kronos shall pay Best a royalty of [**]% of the dollar value calculated in Section (c) above that Kronos receives from Kronos Customers on a monthly basis, exclusive of any one time professional service fees. EXAMPLE: a. The total Retail Hosting Fee for the products sold is $[**] per employee per month broken down as follows: Royalty Bearing Software $[**] Kronos time and attendance software $[**] Kronos scheduling software $[**] b. $[**] divided by $[**] equals [**] or [**]%. c. The total Net Hosting Fee for the products sold is $[**] per employee. $[**] x [**] equals $[**] per employee. d. For a customer with [**] employees or less, the royalty owed Best is $[**] x [**], or $[**] per employee. For a customer with greater than [**] employees, the royalty owed Best is $[**] x [**] or $[**] per employee. 6.9 Payment Procedures and Reports. All payments due to Best under this Agreement, other than the minimum royalty payments described in Section 6.7, shall be made by Kronos to Best within thirty (30) days from the end of each Quarter. Kronos shall make any required minimum royalty payments within thirty (30) days from the end of the Quarter in which the applicable Year ends. With respect to each Kronos Customer, Kronos shall pay the above-referenced royalties in full at the end of the Quarter in which the Kronos Customer Sublicensed the Royalty Bearing Software. Simultaneously with such payment, Kronos shall provide Best with a written report, substantially in the form of Schedule H, which shall show the quantity of Royalty Bearing Software Sublicensed during the previous Quarter broken down by: (a) royalties due to Best for Kronos Customers that Sublicensed Royalty Bearing Software for [**] or less Employees, and (b) royalties for Kronos Customers that Sublicensed Royalty Bearing Software for greater than [**] Employees. Such reports shall include such information as is reasonably necessary or desirable for Best to verify the accuracy of the information contained therein and the amount of the payment to Best accompanying such report. The one-time payments totaling [**] dollars ($[**]) described in Section 6.1 and all required minimum royalty payments described in Section 6.7 made by Kronos under this Agreement shall be made by means of a wire transfer of immediately available funds to an account specified in writing by Best such that such funds are deposited in such account on or before the date due. All other payments may be made by means of check disbursement drawn from funds in a US commercial bank. 6.10 Late Payments. Time of payment is of the essence under this Agreement. All amounts owed hereunder that are not paid when due and payable will bear interest from the date such amounts are due and payable at the lesser of (a) 1.5 percent (1.5%) per month or (b) the maximum allowable rate of interest permitted by law for transactions between sophisticated commercial parties. 6.11 Taxes. As between Best and Kronos, Kronos shall, in addition to the payments required hereunder, be responsible for all sales, use, value added, transfer or other taxes, duties or other governmental charges, whether national, state or local, however designated, which are levied or imposed by reason of the transaction contemplated hereby; excluding, however, income taxes on profits which may be levied against Best. Kronos shall reimburse Best for the amount of any such taxes paid or accrued by Best as a result of this transaction. 6.12 Payment Disputes. (a) Any good faith dispute over the proper amount of a payment of the royalties described in Section 6.2 shall be resolved in accordance with the provisions of this Agreement. During the pendency of any such dispute, in order to avoid a Default under this Agreement pursuant to Section 16.2, the party making such payment may deposit the amount of such payment that is in dispute with mutually agreed escrow agent. Any escrow fees shall be paid by the party depositing the disputed amount. (b) The escrow agent shall be instructed to release the disputed payment as follows: (i) If either party believes that the dispute over the payment has been resolved, such party may provide to the escrow agent written notice of such resolution and a request for the release of the disputed payment to the proper parties in accordance with such resolution. Upon receipt of such notice, the escrow agent shall provide a copy of the notice to the other party by overnight mail. (ii) From the date the escrow agent mails the copy of the forgoing notice to the other party, such party shall have ten (10) business days to deliver to the escrow agent a written representation by such party that the dispute over the payment amount has not been resolved. Upon receipt of such representation, the escrow agent shall send a copy to the first party by overnight mail. (iii) If the escrow agent receives a representation in accordance with subsection (ii), the escrow agent shall continue to hold the disputed payment amount pending (1) joint instructions from the parties to release the disputed payment, (2) instructions from an arbitration panel convened pursuant to Section 17.1, or (3) order of a court. (iv) If the escrow agent does not receive a representation in accordance with subsection (ii), the escrow agent shall release the disputed payment amount to the first party per the first party's instructions. 7. Audit Procedures. 7.1 Audit. Kronos agrees to keep and maintain, for a period of two (2) years after the end of the Year to which they pertain, complete and accurate records of the Royalty Bearing Software Sublicensed by Kronos, including the names of Kronos Customers and the numbers of Employees of such Kronos Customers, in order to calculate and confirm the royalties required to be paid by Kronos. Upon ten (10) business days' prior notice, Best shall have the right, exercisable not more than once every twelve (12) months, to appoint an independent accounting firm, reasonably acceptable to Kronos, at Best's expense (except as otherwise provided herein), to examine such books, records and accounts during Kronos' normal business hours to verify the royalties due from Kronos to Best under Section 6 above. Although Best may propose any accountant for Kronos' acceptance pursuant to this Section, the accounting firms set forth on Schedule L shall be deemed acceptable to Kronos throughout the Term. In the event such audit discloses an underpayment or overpayment of royalties by Kronos hereunder, then (a) the appropriate party will promptly remit the amounts due to the other party; (b) if such audit discloses an underpayment by an amount greater than five per cent (5%) of the proper amount owed for a Quarter, then Kronos shall reimburse Best for the costs associated with such audit; and (c) if such audit discloses an overpayment of any amount then Best shall pay the cost the audit and shall credit Kronos the amount of the overpayment. 8. Warranties and Representations. 8.1 Best Warranties. Best warrants to Kronos that the media on which Best provides the Software will be free from defects in materials and workmanship and that the Software as delivered on the delivery date performs substantially in accordance with the accompanying Documentation. Additionally, Best represents and warrants that: (a) it has sufficient rights in the Software to grant to Kronos the license granted under this Agreement; (b) to its knowledge, there are no pending claims based on infringement of a patent, copyright or other proprietary right or improper use or misappropriation of a trade secret asserted against Best with respect to the Software that would restrict Kronos' rights to use the Software as permitted under this Agreement; and (c) it has the full corporate right, power and authority to enter into this Agreement and to perform the acts required of it hereunder. 8.2 Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN SECTION 8.1, THE LICENSED MATERIALS AND MEDIA ARE PROVIDED ON AN "AS IS" BASIS. BEST SHALL NOT BE DEEMED TO HAVE MADE, AND BEST HEREBY EXPRESSLY DISCLAIMS, ANY GUARANTEE, WARRANTY (WHETHER ARISING UNDER STATUTE OR OTHERWISE IN LAW OR FROM A COURSE OF DEALING OR USAGE OF TRADE) OR REPRESENTATION OF ANY KIND, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, INCLUDING, WITHOUT LIMITATION, AS TO THE: (a) CONDITION; (b) DESIGN; (c) OPERATION; (d) PERFORMANCE; (e) RELIABILITY OF THE RESULTS GENERATED OR OUTPUT; (f) MERCHANTABILITY; AND(g) FITNESS FOR A PARTICULAR PURPOSE OR INTENDED USE, OF THE LICENSED MATERIALS, MEDIA, DERIVATIVE WORKS OR OTHERWISE. BEST DOES NOT WARRANT THAT USE BY KRONOS, ANY KRONOS CUSTOMER, ANY KRONOS RESELLER OR ANY OTHER THIRD PARTY OF THE LICENSED MATERIALS OR MEDIA PROVIDED UNDER THIS AGREEMENT WILL BE UNINTERRUPTED OR ERROR-FREE. THIS DISCLAIMER OF WARRANTY CONSTITUTES AN ESSENTIAL PART OF THIS AGREEMENT. 8.3 Kronos Warranties. Kronos represents and warrants that it has the full corporate right, power and authority to enter into this Agreement and to execute, deliver and perform its duties and obligations under this Agreement. Kronos represents and warrants that all use of the Licensed Materials shall be performed by technically competent and qualified personnel and shall be performed in accordance with generally accepted professional standards associated with the industry, profession and/or discipline involved. 8.4 Mutual Representations and Warranties. Each party to this Agreement represents and warrants to the other party that: (a) its execution of this Agreement and performance of its obligations hereunder do not and will not violate any agreement to which it is a party or by which it is bound; and (b) when executed and delivered, this Agreement will constitute the legal, valid and binding obligation of such party, enforceable against it in accordance with its terms. 9. Best's Support Obligations. 9.1 Best's Support Obligations. Best shall make available to Kronos the maintenance and support services set forth in the renewable maintenance and support services agreement in Schedule I, which Kronos may utilize at its sole discretion for twelve (12) months from the Effective Support Date as identified in Schedule I. Thereafter, at Kronos' option, Kronos may elect to purchase support and maintenance services from Best for an annual fee of [**] dollars ($[**]) and by executing a copy of the Support and Maintenance Agreement attached hereto as part of Schedule I. In the event that Best discontinues the availability of annual contractual support and maintenance services in the future, Best shall give Kronos at least [**] months advance notice. Notwithstanding the above, Best shall not discontinue the availability of annual contractual maintenance and support service before April 1, 2004. 9.2 Support for Kronos Derivative Works. Notwithstanding anything in this Agreement to the contrary, Best shall have no obligation to provide any support or maintenance services for any Kronos Derivative Works. 9.3 Telephone Support. During the first nine months from the Effective Date of this Agreement, Best shall provide the following telephone support or an equivalent thereof to Kronos in the manner in which it is currently provided to Best's customers. Best shall provide such telephone support in the manner in which the parties mutually agree that such support is relevant to the Software. Best shall provide up to 1200 hours of backup beyond Level 1support as required by Kronos, Monday through Friday, except Best holidays, between the hours of 8:00 a.m. and 8:00 p.m., Eastern Standard Time. Per mutual agreement, both parties will continue to work off-hours and provide support as needed during critical situations. Level Level Definition - --------------------------------- -------------------------------------------- Level I Support (Generalist) Responsible for interfacing with Kronos Customer and triaging problems. This level responsible for resolving basic operation and configuration inquiries. Level I engineers are generalists. - --------------------------------- -------------------------------------------- Level II Support (Specialist) This level responsible for resolving issues, which cannot be resolved by Level I. Level II engineers are specialists. - --------------------------------- -------------------------------------------- Level III Support (Kronos Level III responsible for resolving issues, Engineering Org.) which can be resolved by Level II. If Level III cannot resolve the problem they are responsible for data gathering and fault replication prior to escalation to Kronos engineering organization. Level III will also track and age all escalations to engineering and manage Kronos Customers during this period and will use best efforts to resolve internally before contacting Best engineering organization. - --------------------------------- -------------------------------------------- 9.4 Mentoring Support. Best shall provide the following mentoring support upon request by Kronos: Support: o Kronos may send six (6) support personnel (two (2) at a time)during the first nine (9) months from the Effective Date to Best support center for in-house mentoring up to 27 weeks. While on-site Kronos support personnel will, under the tutelage of Best support engineers, answer in-bound support calls from Best customers. o Kronos agrees to fund all T&E, using Kronos travel policy, for Best support engineers in the event they are on-site at the Kronos Global Support facility. Sales and Marketing The following information to be provided to Kronos within sixty (60) days of the Effective Date. o Overview of the HR/Payroll market. o Overview of the marketing and sales processes that Best Software used. o Information on competitors: positioning, pricing, customer base, strengths and weaknesses, value proposition of Best product versus the competitors, etc. o Guidance on messaging o Information on in-house solutions versus outsourced solutions. o Guidance on where to prospect for personnel, lists of head hunters, and hints on interviewing for Application Engineers. o Guidance on messaging: outsourcing versus in house; Do you usually lead with HR, with Payroll, or with a message about an integrated solution? o All of the above to be delivered in presentations or calls which can be recorded for re-use and on-going training. o Conduct remote demo (2 hour session) for Chelmsford-based Kronos employees. Due to the large number of employees that will want to see this demo, conduct 2-3 sessions within thirty (30) days of Effective Date. 9.5 Training. Scheduling of the training sessions will be determined by mutual agreement of Kronos and Best at a later date. Best shall provide technical, functional and sales training. Technical & Implementation Training (3 sessions allowing up to 15 participants per session. Each standard session will provide [**] hours of course time.) Product Overview o Product Features o System Architecture o Terminology o Navigation o Point-In-Time o Employee & Manager Roles HR/Payroll Setup o Organizations o Code Tables & Code Grouping o Positions o Job Codes o Pay Grades o Benefits o Attendance o Payroll Setup o Compensations o Deductions o Taxes o G/L Setup o Security o Other Basic Employee Information o Key Employee Information & Actions HR/Payroll Processing o HR Actions o Payroll Actions o Reports o Payroll Processing o Time Entry o Calculating Trial Payroll o Payroll Balancing o Finalizing Payroll o Printing Checks & Advices o Creating ACH Files o Exporting to G/L o Quarterly Processing o Year-End Processing Employee & Manager Roles o Overview o Parameter File Structure o Managing Roles o Roles Navigation o Roles Processes Open Enrollment & Life Events o Plan Setup o Implementation o Verification Implementation Methodology o HR Only o HR & Payroll o Payroll Only Launch Tools o Overview o Importing & Exporting o Creating Organizations and Positions o Data Validation Processes o Accumulator Conversions Link Builder o Setup & Customization o Implementation Functional/End User Training (3 sessions allowing up to 15 participants per session. Each standard session will provide [**] hours of course time.) Product Overview o Product Features o System Architecture o Terminology o Navigation o Point-In-Time o Employee & Manager Roles HR/Payroll Setup o Organizations o Code Tables & Code Grouping o Positions o Job Codes o Pay Grades o Benefits o Attendance o Payroll Setup o Compensations o Deductions o Taxes o G/L Setup o Security o Other Basic Employee Information o Key Employee Information & Actions HR/Payroll Processing o HR Actions o Payroll Actions o Reports o Payroll Processing o Time Entry o Calculating Trial Payroll o Payroll Balancing o Finalizing Payroll o Printing Checks & Advices o Creating ACH Files o Exporting to G/L o Quarterly Processing o Year-End Processing Employee & Manager Roles o Overview o Parameter File Structure o Managing Roles o Roles Navigation o Roles Processes Open Enrollment & Life Events o Plan Setup o Implementation o Verification Sales (3 sessions allowing up to 15 participants per session. Each standard session will provide [**] hours of course time.) o Abra Enterprise Sales Cycle o Review of sales tools o Product and technology overview o How to demo - Roles o How to demo -HR & Payroll admin o Needs analysis o Product positioning o Competitive landscape o Sample needs analysis exercise o Needs analysis role playing o Positioning Professional Services Kronos agrees to fund all T&E for Best trainers while on-site at a Kronos teaching facility. 9.6 Tax updates support. Best will provide up to [**] hours of engineering or training necessary to support the successful integration and delivery of the 2002 year end tax updates. This is anticipated by the parties to be completed by February, 2003. 10. Transition Teams. 10.1 Appointment of Transition Team. The parties shall appoint qualified personnel from their management, engineering and sales staffs to a transition team. 10.2 Duties of Transition Team. The duties of the transition team appointed pursuant to Section 11.1 are set forth on Schedule K. 11. Implementation Assistance. 11.1 Implementations: o Best shall designate implementation personnel with qualifications and responsibilities comparable to those described herein for the Kronos Project Manager, Application Consultant, Technology Consultant and Trainer. These individuals will be used to educate their Kronos counterparts on all aspects of implementing a Best solution. This education shall include the use of documentation, sizing tools, implementation methodologies, application installation, application configuration and checklists. Level Kronos Level Definition - ------------------------ ----------------------------------------------------- Project Manager The Project manager is responsible for managing all assigned Kronos implementations including complex projects involving multiple locations and or departments in hardware/software, multi-vendor, multi protocol environments. This position is the focal point for all communications with the customer for Kronos, on their assigned accounts, through the implementation process and will efficiently project manage the customer and internal Kronos resources to meet the established implementation milestones and targeted completion dates. - ------------------------ ----------------------------------------------------- Application Consultant The Application Consultant provides the process knowledge and related Kronos product knowledge to successfully implement a wide array of Kronos core applications and ancillary modules in the customer environment. The AC works in conjunction with the Project manager. The AC acts as an application architect on complex line of business applications and leads the trouble shooting effort on our most complex system problems. - ------------------------ ----------------------------------------------------- Technology Consultant The Technology Consultant provides in-depth technical pre and post-sales support to the Abra Enterprise and Regional Service organizations on an Area-wide basis. The TC is knowledgeable at the system level and is capable of interfacing with senior MIS staff on major accounts. The TC will work with the local Regional personnel (PM & AC), providing the technical expertise necessary to maintain customer satisfaction in the larger, more technically complex situations within each area. In addition, the TC will understand, implement, and support all technology manufacturers that distribute their product through Kronos. - ------------------------ ----------------------------------------------------- Trainer The Trainer is responsible for the development and delivery of training on products for customer's and internal service readiness. - ------------------------ ----------------------------------------------------- o Best shall provide to Kronos the implementation assistance set forth on Schedule I for up to the first six Kronos Customer implementations, but not to exceed an aggregate total of [**] hours. The application variants shall be HR only, HR with Payroll and HR with ESS Link implementations. The parties shall use commercially reasonable best efforts to ensure the most efficient and cost-effective use of implementation resources. In the event that Kronos requires implementation assistance from Best beyond the [**] hours, Best shall make such assistance available on a time and materials basis at the rates set forth in Schedule J. o Kronos may apply the total number of implementation hours at its discretion, however, all hours must be applied within [**] months from the Effective Date. Best implementation personnel will play the lead role, as requested by Kronos, for any initial implementations that are selected by Kronos for each of the application variants. o Kronos agrees to fund all T&E for Best implementation personnel who are working on-site at a customer location within Kronos travel guidelines 12. Non Solicitation. 12.1 Non-Solicitation. The parties agree that they shall not, directly or indirectly, solicit each other's employees during the Term. This shall not prohibit either party, however, from hiring an employee of the other party who has responded to a general solicitation or public advertisement (i.e. internet, employment agency, newspaper or trade journal) for employment. 13. Press Releases. 13.1 Press Releases. Each of Best and Kronos shall forward to the other party, no less than 48 hours prior to the issuance of any press announcement or other public relations ("PR") relating to the relationship of the parties or relating to the other Party's name, logos, trademarks, copyrights, trade secrets or any other proprietary or intellectual property rights, a draft of such PR. Any PR that mentions the other party, or in any way relates to the relationship or any activity between the parties, must be approved in writing by both parties before public or industry dissemination. 14. Indemnification. 14.1 Intellectual Property Indemnification by Best. (a) Best agrees to indemnify and hold harmless Kronos, its affiliates, and their respective officers, directors, employees, consultants, attorneys and agents, from and against any and all claims, costs, fees and expenses (including reasonable attorneys' fees) arising out of any claim that the Licensed Materials, excluding any Kronos Derivative Work, as delivered to Kronos on the Delivery Date, infringe any United States copyright, patent or other intellectual property right of a third party, provided that Best is given prompt written notice of any such claim and has sole control over the investigation, preparation, defense and settlement of such claim, and further provided that Kronos reasonably cooperates with Best in connection with the foregoing and provides Best with all information in Kronos' possession related to such claim and any further assistance reasonably requested by Best. Kronos may, at its expense and in its discretion, participate in the defense of such claim using its own counsel. Best shall have no obligation to indemnify Kronos or any of the foregoing parties to the extent any such claim is based on any Kronos Derivative Work. (b) Should any or all of the Licensed Materials subject to the foregoing indemnity become, or in Best's reasonable opinion be likely to become, the subject of any injunction contained in a final non appealable order of a court of competent jurisdiction, Best shall procure for Kronos the right to continue to use the affected Licensed Materials as contemplated hereunder or replace or modify the Licensed Materials to make their use non-infringing. 14.2 Intellectual Property Indemnification by Kronos. Kronos agrees to indemnify and hold harmless Best, its parent and affiliates, and their respective officers, directors, employees, consultants, attorneys and agents, from and against any and all claims, costs, fees and expenses (including reasonable attorneys' fees) arising out of any claim that any Kronos Derivative Work infringes any United States copyright, patent or other intellectual property right of a third party, provided that Kronos is given prompt written notice of any such claim and has sole control over the investigation, preparation, defense and settlement of such claim, and further provided that Best reasonably cooperates with Kronos in connection with the foregoing and provides Kronos with all information in Best's possession related to such claim and any further assistance reasonably requested by Kronos. Best may, at its expense and in its discretion, participate in the defense of such claim using its own counsel. 14.3 Additional Indemnity. Kronos agrees to indemnify, save and hold harmless Best, its parent and affiliates, and their respective officers, directors, employees, consultants, attorneys and agents, from and against any and all claims, costs, fees and expenses (including reasonable attorneys' fees) arising out of Kronos' gross negligence, willful misconduct or failure to comply with the terms and conditions of the licenses granted hereunder, including, without limitation, (a) the use or disclosure of, or grant of access to, the Software other than as permitted by this Agreement, and (b) the use of any Best trade name, trademark or service mark without Best's prior written consent. 14.4 Additional Indemnity. Best agrees to indemnify, save and hold harmless Kronos from and against claims arising out of material defects in any specific tax updates provided that, prior to any claim, (a) Kronos had incorporated a Best-approved Disclaimer of Warranty specifically relating to tax updates into Kronos' license agreement for the Complainant Customer and/or Complainant Reseller; (b) said disclaimer was rendered as void or invalid by a court of competent jurisdiction in which any said claim was filed; and (c) Kronos provided sufficient documented evidence to Best's reasonable satisfaction that the material defect in the tax update sublicensed by Kronos from which the customer's claim at issue arose also appeared in the corresponding source tax update originally provided by Best to Kronos. 15. Term; Termination; Rights Upon Expiration or Termination. 15.1 Term. The term of this Agreement (the "Term") shall begin on the Effective Date and shall continue for ten (10) years or until sooner terminated as described herein. 15.2 Termination. This Agreement may be terminated upon written notice by either party upon the occurrence of a Default (as defined below) by the other party. (a) A party shall have committed a Default under this Agreement upon the occurrence of any of the following events: (i) breach of the obligation to pay any sum of money due hereunder, which breach has not been cured within ten (10) days after the breaching party has received written notice thereof from the non-breaching party, provided, however, that with respect to payments of the royalties or maintenance and support fees described in Section 6.2, in the event that such unpaid amounts are the subject of a good faith dispute, a Default shall not be deemed to have occurred for so long as the party withholding such monies has deposited the amount of payment in dispute with a mutually agreed upon escrow agent as set forth in Section 6.9; (ii) any material breach of its representations, warranties or covenants contained herein or any material breach of its other obligations hereunder, which breach has not been cured within thirty (30) days after the breaching party has received written notice thereof from the non-breaching party; or (iii)the party (1) ceases business in the ordinary course, (2) files a voluntary petition for bankruptcy, (3) has an involuntary petition for bankruptcy filed against it that is not dismissed within sixty (60) days of filing, (3) makes an assignment for the benefit of its creditors, or (4) any substantial portion of the party's property is subjected to any levy, seizure, assignment, application or sale for or by any creditor or governmental agency, which proceeding, levy, seizure, assignment or application or sale is not dismissed within sixty (60) days. 15.3 Notice of Termination. Upon the occurrence of a Default, the non-defaulting party that desires to terminate the Agreement shall provide the other party with a written notice of termination setting forth the nature of any such Default. Any such notice shall become effective on the date thereof. 15.4 Termination of Licenses. If this Agreement is terminated as a result of a breach by Kronos, then: (a) (i) Kronos may not grant any additional Sublicenses for Royalty Bearing Software but may continue to provide maintenance and support for the Royalty Bearing Software to existing Kronos Customers to whom Kronos is contractually obligated to provide maintenance and support services. Kronos shall be entitled to retain a sufficient number of copies of the Royalty Bearing Software to enable it to provide such maintenance and support services. Kronos shall promptly provide to Best all other copies of the Licensed Materials in its possession or shall destroy all copies of such Licensed Materials and shall provide to Best written certification of such destruction. 15.5 Continuation of Sublicenses. Upon the termination of this Agreement for any reason other than a breach by Kronos, such termination shall not terminate or diminish the right of Kronos Customers to continue to use the Royalty Bearing Software under Sublicenses validly issued during the Term. Additionally, upon such termination, Kronos shall have a, nonexclusive, worldwide, nontransferable and perpetual license to reproduce, market, Sublicense and distribute the Software and to create Kronos Derivative Works of the Software. Kronos' obligation to pay royalties to Best under the terms of this Agreement shall continue through the [**] anniversary of the Effective Date. Kronos shall also have the right to use Software and/or Derivative Works to provide Hosted and/or Service Bureau services. 15.6 Survival. Notwithstanding the termination or expiration of this Agreement for any reason, the rights and duties of the parties under Sections [1-4, 6 (for any payments outstanding as of the date of such termination or expiration) 7, 8.1, 8.4, and 15-21] of this Agreement shall survive such termination or expiration and remain in full force and effect. 16. Confidential Information 16.1 Confidential Information. Best and Kronos recognize that, in the performance of this Agreement, employees of Best and Kronos may learn of or be exposed to trade secrets or other confidential information, including, without limitation, the source code for the Software and all information concerning the business, operations or customers of Best or Kronos, whether designated as confidential or proprietary or not so designated (collectively "Confidential Information"), which are the property of Best or Kronos, respectively. The term "Confidential Information" shall not include any information that: (a) is in or becomes part of the public domain other than by disclosure by Kronos or Best in violation of this Agreement, (b) is demonstrably known to Kronos or Best previously, (c) is independently developed by Kronos or Best without use of Confidential Information of the other party, or (d) is rightfully obtained by Kronos or Best from third parties 16.2 Obligation to Maintain Confidentiality. Each of Kronos and Best shall (a) use the same degree of care in handling the other party's Confidential Information as it uses with regard to its own proprietary and/or confidential information in order to prevent the disclosure thereof, and (b) disclose the Confidential Information only to such employees and consultants as have a need to know such information, and such employees and consultants will be cautioned that such information is confidential. In addition, each of Kronos and Best agree to obtain signed confidentiality agreements from any third parties hired or otherwise engaged by it in connection with this Agreement prior to allowing access to any Confidential Information and to deliver copies of the same to the other upon request. Each party will cause its employees to be bound by the obligation of confidentiality contained herein. 16.3 Required Disclosures. In the event that Best or Kronos is requested or required by law, regulation, supervisory authority or other applicable judicial or governmental order to disclose any Confidential Information of the other party, Best or Kronos will provide the other party with prompt written notice of such request or requirement so that the other party may seek an appropriate protective order. If, failing the entry of a protective order, Best or Kronos is, in the opinion of its counsel, compelled to disclose such Confidential Information, it may disclose only that portion of the Confidential Information that its counsel advises it is compelled to disclose and will exercise reasonable efforts to obtain assurance that confidential treatment will be accorded to that portion of the Confidential Information that is being disclosed. 17. Limitation of Liability. 17.1 Limitation of Liability. EXCEPT FOR (a) CLAIMS INVOLVING THE UNAUTHORIZED USE OR DISCLOSURE OF, OR PROVISION OF ACCESS TO, THE SOFTWARE BY KRONOS OTHER THAN AS PERMITTED UNDER THIS AGREEMENT, AND (b) CLAIMS ARISING PURSUANT TO THE INDEMNIFICATION OBLIGATIONS SET FORTH IN SECTIONS 15.1(a) OR 15.2, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF USE OR DATA, INTERRUPTION OF BUSINESS, OTHER ECONOMIC LOSS, OR FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, EXEMPLARY, PUNITIVE OR OTHER INDIRECT DAMAGES OF ANY KIND OR NATURE, FOR ANY REASON, INCLUDING WITHOUT LIMITATION THE BREACH OF THIS AGREEMENT OR ANY TERMINATION OR EXPIRATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE, EVEN IF THE PARTY HAS BEEN WARNED OF THE POSSIBILITY OF SUCH DAMAGES. WITHOUT LIMITING THE FOREGOING, IN NO EVENT SHALL BEST'S OBLIGATIONS OR LIABILITY TO KRONOS UNDER THIS AGREEMENT OR OTHERWISE EXCEED, IN THE AGGREGATE, THE ROYALTIES PAID TO BEST BY KRONOS FOR THE YEAR (AS DEFINED HEREIN) PRECEDING THE DATE THAT BEST RECEIVES NOTICE FROM KRONOS OF A CLAIM. 18. Arbitration. 18.1 Arbitration. All claims, demands, disputes, controversies, differences or misunderstandings between the parties hereto arising out of or by virtue of this Agreement, upon the failure of good faith negotiation, shall be submitted to mediation and, upon failure to reach resolution thereunder, any unresolved disputes between the parties relating to this Agreement shall be determined by arbitration in Reston, Virginia if initiated by Kronos or Boston, Massachusetts if initiated by Best. If the parties are unable to agree on an arbitrator within ten (10) business days after any party shall have given written notice to the other that it desires to submit any issue to arbitration, then the American Arbitration Association may be designated by any party to appoint one (1) arbitrator and to arbitrate the matter under its rules. If, within ten (10) business days after any party shall have given written notice to the other that it desires to submit any issue to arbitration, either party expresses a desire to have such arbitration conducted by a panel of three (3) arbitrators, then the arbitration shall be conducted by a three (3)-member panel comprised of one (1) arbitrator from each party, and one (1) arbitrator jointly selected by the parties' arbitrators. The award of the arbitrator or arbitration panel shall be made in writing, shall be within the scope of this Agreement, shall not change any of its terms or conditions, shall be binding and conclusive on the parties, and shall include a finding for the payment of costs of the arbitration proceeding, including an award of reasonable attorneys' fees to the prevailing party. It is further agreed that judgment of a court having jurisdiction may be entered upon the award of the arbitrator or arbitration panel. 18.2 Access to the Names of Kronos Customers. In the event that the parties commence an arbitration proceeding, Kronos shall release to Best the names of then-current and past Kronos Customers and the numbers of Employees of such Kronos Customers. 19. General Provisions. 19.1 Force Majeure. Neither party will be liable for any failure to perform any obligation (other than payment obligations) hereunder, or from any delay in the performance thereof, due to causes beyond its control, including industrial disputes of whatever nature, acts of God, public enemy, acts of government, failure of telecommunications or other casualty. 19.2 Non-Waiver. Failure of either party to assert any of its rights on any one occasion under this Agreement shall in no way be construed as a waiver of such rights on any other occasion nor shall a waiver of any right of either party constitute or be deemed a waiver of any other right. 19.3 Amendment. The terms of this Agreement may be amended only by a written instrument signed on behalf of both parties. 19.4 Severability. If any provision of this Agreement shall be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby. 19.5 Governing Law. The terms of this Agreement and any disputes arising therefrom shall be governed by the laws of the Commonwealth of Virginia applicable to agreements entered into and wholly to be performed therein, without giving effect to any conflict or choice of law provision or rule thereof. 19.6 Assignment; Change of Control. This Agreement shall be binding on the parties, their successors and permitted assigns. Neither party may assign its rights, duties or obligations hereunder (exclusive of merger, transfer of all or substantially all assets, change of control, sale of stock, operation of law or the like) without the prior written consent of the other party, which consent shall not be unreasonably withheld, except that in the event that Kronos so assigns to a Competitor, Best's withholding of consent or refusal to consent shall not be deemed to be unreasonable. In the event that Kronos assigns its rights, duties or obligations hereunder, due to business acquisition, merger, transfer of all or substantially all assets, change of control, sale of stock, operation of law or otherwise, then effective upon the date of any such change in control and written notice thereof to Best the one-time royalty of $[**] per Employee as described in 6.2 (d) shall be eliminated immediately and the royalty payments by Kronos shall revert back to those described in 6.2 (a) ("Royalties for [**] or fewer employees") and all royalty payment caps of 6.2(d) shall thereafter be eliminated. In the case of any such an assignment by Kronos, Kronos shall remain liable for the performance of its duties and obligations under this Agreement. Any attempt to assign any rights, duties, or obligations arising out of this Agreement in contravention of this Section shall be null and void and of no force or effect. 19.7 Export. Kronos understands that any export of the Software outside the United States may require an export license and Kronos assumes full responsibility for obtaining such license. 19.8 Notices. All notices, requests, demands, other communications under this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or, if mailed, when mailed by certified or registered mail, or overnight courier, postage prepaid, return receipt requested, to the parties at the addresses set forth below or at such other address as may be given in writing by either party to the other in accordance with this Section. If to Kronos: Kronos Incorporated 297 Billerica Road Chelmsford, Massachusetts 01824 Attn: James Kizielewicz, V.P., Marketing Copy: General Counsel If to Best: Best Software, Inc. 11413 Isaac Newton Square Reston, VA 20190 Attn: Himanshu Palsule, EVP Marketing Copy: General Counsel 19.9 Entire Agreement. This Agreement together with any Schedules attached hereto constitutes the entire Agreement and is the entire understanding between the parties relating to the subject matter of this Agreement and supersedes all prior writings, negotiations, or understandings with respect thereto. 19.10 Counterparts. This Agreement and any amendments to this Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement or amendment, as the case may be. 19.11 Headings. The headings used in this Agreement are included for reference only and shall not affect the meaning or interpretation of this Agreement. 19.12 Superiority. In the event of a conflict between the provisions of the body of this Agreement and the provisions of any Schedule hereto, the provisions in the body of this Agreement shall control. IN WITNESS HEREOF, the parties hereto caused their duly authorized representatives to execute and deliver this Agreement as of the Effective Date: BEST SOFTWARE, INC. KRONOS INCORPORATED By: /s/ James Foster By: /s/ James Kizielewicz - --------------------------- --------------------------------- Title: President & COO Title: V.P. Marketing & Corporate Specialty Products Div. Strategy -----END PRIVACY-ENHANCED MESSAGE-----