-----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, HYMooK1T22umeeZE41g2kv707oIISBEup22v4Q9lv2szP4fCtBlutKS14Q3zH+nK gh1WKwIrgmoXdOCgsgk/zQ== 0000886903-03-000193.txt : 20031223 0000886903-03-000193.hdr.sgml : 20031223 20031223112940 ACCESSION NUMBER: 0000886903-03-000193 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031223 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20109 FILM NUMBER: 031069863 BUSINESS ADDRESS: STREET 1: 297 BILLERICA ROAD CITY: CHELMSFORD STATE: MA ZIP: 01824 BUSINESS PHONE: 978-250-9800 MAIL ADDRESS: STREET 1: 297 BILLERICA ROAD CITY: CHELMSFORD STATE: MA ZIP: 01824 10-K 1 form10k.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 2003 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) Registrant's telephone number, including area code (978) 250-9800 ____________________________ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share Series A Junior Preferred Participating Stock, $1.00 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes X No ----- ----- State the aggregate market value of the voting stock held by non-affiliates of the registrant. Non-Affiliate Voting Aggregate Date Shares Outstanding Market Value March 29, 2003 19,584,610 $473,294,768 Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The registrant has no shares of non-voting stock authorized or outstanding. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Date Class Outstanding Shares Common Stock, $0.01 par November 29, 2003 value per share 30,751,302 DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year end, are incorporated by reference into Items 10-14 of Part III hereof. With the exceptions of the portions of the Proxy Statement expressly incorporated by reference, such document shall not be deemed filed with this Form 10-K. PART I Item 1. Business Kronos Incorporated (the "Company" or "Kronos") was organized in 1977 as a Massachusetts corporation. As part of its employee relationship management ("ERM") solution, the Company develops, manufactures, and markets human resources, payroll, scheduling, and time and labor systems. These solutions enable organizations to reduce costs and increase productivity, improve employee satisfaction, align employee performance with organizational objectives, and put real-time information in the hands of decision makers. Kronos solutions collect data from, and deliver information to, all employees, including hourly workers, hourly professionals, and salaried professionals. Specifically, they collect time and labor data and other information using a variety of technologies such as desktop applications, Web-based applications, remote transmission applications for use with personal digital assistants (PDAs), intelligent data collection terminals that the Company manufactures and interactive voice response and biometrics for employee identification. The Company's systems are designed for a wide range of businesses, which can include everything from single-site companies to large, multi-site enterprises. These solutions can be purchased or financed from Kronos, or they can be obtained on a subscription basis via Kronos' application service provider delivery model. The company's ERM solution can operate independently in a desktop environment, or it can be interfaced with related applications and technologies at many points throughout the enterprise to optimize the use of labor resources. In addition, the Company maintains an extensive services and technical support organization that maintains systems and provides professional and educational services. These services can be delivered on-site or via the Web. The Company also collaborates with many industry-leading vendors who market products and services that are synergistic with Kronos solutions. These include major enterprise resource planning system (ERP) providers; manufacturing execution system (MES) providers; human resources, finance, scheduling, and payroll application providers; and consulting and systems integration firms. To date, substantially all of the Company's revenues and profits have been derived from its time and labor applications and related products and services. The Company introduced its human resources and payroll products during the course of fiscal 2002 and 2003. Stock Split in the Form of 50% Common Stock Dividend - ---------------------------------------------------- On September 26, 2003, the Board of Directors declared a three-for-two split of the Company's common stock, payable on October 31, 2003 to all stockholders of record as of the close of business on October 20, 2003. The stock split was effected in the form of a 50% common stock dividend. All share and per share amounts in this Annual Report on Form 10-K have been restated to reflect the retroactive effect of the stock split. Kronos Products The Kronos Employee Relationship Management Solution The Kronos ERM solution enables organizations to reduce costs and increase productivity, improve employee satisfaction, align employee performance with organizational objectives and put real-time information in the hands of decision makers. Kronos' ERM solution consists of the following components: human resources, payroll, scheduling, time and labor, data collection and self-service, as well as analytics. These components can be deployed together or independently to meet the unique needs of various organizations. The Workforce Central(R) Suite ------------------------------ Using Web-based technology, the Workforce Central suite is a closely integrated system of human resources, payroll, scheduling and time and labor applications. It can be deployed individually or as a comprehensive solution for employee relationship management. The Workforce Central suite incorporates powerful applications for analytics and employee self-service, and employs a broad range of Kronos' own industry-leading data collection devices. Each component of the Workforce Central suite provides unmatched functionality, streamlined workflow technology, and an intuitive user interface. The Workforce Central solutions include: Human resources Workforce HR(TM) manages and automates human resources processes, from recruiting to benefits administration, so that organizations have more time to focus on strategic initiatives. Because it empowers employees to manage their own personal information, Workforce HR reduces operational expenses while it fosters employee satisfaction compared to a manual system. It provides superior control over critical processes and enables real-time sharing of employee information, all of which contributes to better decision-making and improved organizational performance. Workforce Recruiter(TM) is a Web-based recruiting application designed to help identify qualified candidates faster, more efficiently, and more cost-effectively. It enables organizations to automate the sourcing, management, and hiring of job candidates, and reduces time and costs to hire, while it helps them focus on the organization's strategic goals. Payroll Workforce Payroll(TM) manages all of the complex information required to administer and complete payment of wages, bonuses, and other forms of compensation. With streamlined payroll processing in house, organizations will enjoy more flexibility and control, with quick and easy access to the critical data an organization needs. Workforce Tax Filing(TM) is a cost-effective solution to managing payroll tax filing activities without the resource demands that weigh heavily on productivity. Workforce Tax Filing is backed by Federal Liaison Services, Inc., or FLS, a compliance leader with more than 15 years of experience in managing payroll tax filing for more than 5,000 customers. Scheduling Workforce Smart Scheduler(TM) is an expanded employee scheduling solution for retailers. Based on a history of key business drivers derived from a point-of-sale system, Workforce Smart Scheduler forecasts expected business, then translates that forecast into required staffing levels according to pre-determined labor standards. Workforce Smart Scheduler is designed to match the best employees to an organization's required staffing based on availability, skills, and preferences, freeing managers from the burden of processing schedules and enhancing productivity at minimum cost. Workforce Scheduler(TM) is a powerful, all-in-one solution to an organization's scheduling challenges. It provides the tools managers need to plan staff coverage -- by shift, by employee, or by job description -- and react with speed and effectiveness when unforeseen circumstances put productivity at risk. This product is planned for release during the second fiscal quarter of fiscal 2004. Time and labor Workforce Timekeeper(TM) automates and streamlines the management, collection, and distribution of employee hours, eliminating the need for manual timesheets. Workforce Timekeeper has a robust, flexible pay rules engine that applies complex work and pay rules accurately and consistently throughout an organization. Workforce Accruals(R) provides a tightly integrated module for controlling leave liability and complying with corporate policies or contracts. It is designed to ensure accuracy across an organization with minimal supervision, enabling employees and managers to manage leave time easily and efficiently. Workforce Accruals has the flexibility to facilitate an organization's most complex leave and benefit policies. Workforce Record Manager(TM) makes maintaining Workforce Timekeeper database faster, easier, and more effective. It enables IT managers to easily move data from one Workforce Timekeeper database to another, and provides the functionality needed to create archiving processes. Workforce Activities(TM) enables real-time tracking of activity data for individual employees and teams. It reconciles direct and indirect labor to time paid, and enables an organization to compare productivity against standards. Workforce Activities also eliminates the process of manually entering job-costing data into ERP systems. Going beyond weekly or daily reporting, Workforce Activities provides up-to-the-minute information so that managers can adjust to the shifting demands of a production environment. This product is planned for release during the second fiscal quarter of fiscal 2004. Data collection Kronos 4500(TM) badge terminals are high speed, network-centric data collection devices that capture and manage labor data easily and effectively. The Kronos 4500 terminals provide access to key self-service functionality, and their centralized configuration makes them easy to deploy and maintain. The Kronos 4500 terminals are designed with "swipe and go" badge functionality and keypads for fast interaction. Kronos 4500(TM) Touch ID terminal, like the Kronos 4500 badge terminal, is a high speed, network-centric data collection device that captures and manages labor data easily and effectively. The Kronos 4500 Touch ID terminal incorporates leading fingerprint verification technology, ideal for eliminating "buddy punching." Workforce TeleTime(R) leverages the convenience and accessibility of the telephone to collect time and labor information from employees on the move. Workforce TeleTime provides a solution for these employees and managers, whether they telecommute, work in multiple facilities, travel frequently, or otherwise don't have access to a data collection terminal or the Web. These employees can use this interactive touchtone application for a range of time and labor transactions, all completed through the telephone. Workforce MobileTime(TM) allows users to record and transmit labor information via personal digital assistants (PDAs), ideal for the mobile employees who routinely work away from the office or move from job site to job site during a workday. It supports reliable data collection when working offline, and is designed for overall ease of use -- no PC experience is required. Self-service Workforce Employee(TM) is an intuitive, browser-based interface that employees can use to enter time and labor data and access human resources and payroll information and processes. It allows them to view hours worked, approve timecards, or even sign up for available shifts. Workforce Employee also provides convenient Web access to a breadth of human resources information, including available training, job openings, and benefits enrollment. Workforce Manager(TM) is designed to be a significant time saver in that it alerts managers to the issues that require immediate attention, such as an employee approaching an overtime threshold. Workforce Manager provides managers with broad visibility into their staff, including skills, experience, and completed training, all of which is essential to helping them optimize the workforce. Analytics Workforce Decisions(R) is a complete analytics application that extends the value of labor data captured by our Kronos time and labor systems, providing managers with a method for tracking workforce performance against business targets. Visionware(R) is a labor analytics system for organizations in industries such as healthcare, where controlling labor costs is a significant challenge. Visionware enables organizations to manage productivity, reduce labor costs, and most importantly, align labor decisions with strategic objectives. The Kronos iSeries Central suite -------------------------------- The Kronos iSeries Central suite is comprised of time and labor applications designed specifically for the IBM eServer iSeries. The Kronos iSeries Central suite automates time and labor management processes on the frontline and provides access to real-time data for better decision-making. It employs a broad range of Kronos' own industry-leading data collection devices. Kronos iSeries Central product solutions include: Kronos iSeries Timekeeper is designed to automate and streamline the management, collection, and distribution of employee hours, eliminating the need for manual timesheets. Kronos iSeries Accruals is a tightly integrated module designed to manage leave liability and complying with corporate policies or contracts. Kronos iSeries Attendance is designed to allow an organization to automate a no-fault attendance program by capturing lost time exceptions and absences. Kronos iSeries Shopfloor is designed to put an organization in control of manufacturing operations by capturing time, labor, and throughput at every stage of the production process and reconciling it with time and attendance in Kronos iSeries Timekeeper. Kronos iSeries Decisions is designed to provide sophisticated reporting capabilities that extend the value of employee data to decision makers throughout an organization. Kronos iSeries Access and Gatekeeper(R) terminals are an integrated solution designed to manage employee admittance into controlled areas in any facility. Kronos iSeries interface is a host of interfaces tailored specifically for a system, designed to interact with payroll, human resources, and manufacturing systems. The Timekeeper Central(R) system -------------------------------- The Timekeeper Central(R) system is an advanced time and attendance system for small and medium sized companies deploying on a site by site basis. It is designed to automate the capture, management, and distribution of critical employee labor data. The Timekeeper Central system runs on Windows and Citrix platforms. It eliminates the need for manual timesheets and helps ensure an organization's ability to produce an accurate payroll, measure variations in labor productivity, and administer time-related benefits. Timekeeper Central software modules include a: Scheduling module designed to speed the process of creating and assigning employee schedules. Accruals module designed to ensure consistent benefit time administration. CardSaver(R) module designed to store individual punch history data for easy retrieval. Archive module designed to store historical work totals for easy retrieval. Database Poster designed to export time and attendance data to other software applications. Messaging module designed to download messages to employee terminals. Complementary products ---------------------- In addition to our core products, Kronos offers a variety of solutions designed to help maximize ERM capabilities. Data collection devices from Kronos provide powerful and convenient methods for capturing employees' time and labor information, and offer a wide range of interaction methods: badge terminals, biometrics, telephony, handheld devices, and more. Workforce Connect(TM) is an integration solution that reduces delays and modification costs. Data can be imported and exported quickly and easily from a variety of sources. It supports over 250 payroll systems and other essential integration needs. Gatekeeper(R) provides a method to control and track access to areas of an organization that require monitoring. NexTrak Attendance Management(TM) software automates almost any attendance program. It allows organizations to efficiently manage employee attendance and reduce absenteeism. NexTrak Leave Management(TM) software automates the process of managing and tracking earned employee leave time. ShopTrac Pro(R) helps to control manufacturing operations by capturing time, labor, and throughput at every stage of the production process. Kronos e-Central(TM) is a time and labor solution in a completely hosted ASP service model. Services and Support Kronos maintains an extensive professional service and technical support organization that provides a suite of maintenance, professional and educational services. These services are designed to support the Company's customers throughout the product life cycle. Maintenance service options are delivered through the Company's centralized Global Support operation or through local service personnel. The Company also provides a wide range of customer self-service options through the Internet. The Company's professional services include implementation support, technical and business consulting as well as system integration and optimization. The Company's educational services offer a full range of curriculae that are delivered through local training centers or via computer based training courses. Marketing and Sales Kronos markets and sells its products to the major market (organizations up to 1,000 employees), the enterprise market (organizations with 1,000-10,000 employees) and the national market (organizations with 10,000 or more employees). The Company sells and markets in the United States and other countries through its direct sales and support organization and through independent resellers. In addition, the Company has a joint marketing agreement with Automatic Data Processing, Inc. ("ADP"), under which ADP markets proprietary versions of the Company's Timekeeper Central system, Workforce Central Suite and data collection terminals manufactured by the Company. The Company's direct sales force is organized to focus on the distinct market segments (major market, enterprise, national) and in some cases on distinct vertical industries or product lines. The direct sales force is organized by geographic region and the marketing department is organized into functional groups. Marketing Organization: The responsibilities of the marketing organization include: o developing product strategy, positioning and marketing; o vertical market strategy and programs; o interaction with press, industry analysts and the investment community; o management of the customer database and customer relationship programs; o lead generation programs, events and advertising; o marketing communications; and o management of strategic alliances. Direct Sales Organization - ------------------------- The Company has 46 direct sales and support offices located in the United States. In addition, the Company has four sales and support offices located in Canada, three in the United Kingdom, two in Mexico, five in Australia, and one in New Zealand. Each direct sales office covers a defined territory, and has sales and support functions. To capitalize on the specialization of the Company's Visionware product and the focus on major market, enterprise market and national market prospects, the Company has dedicated Visionware, major market, enterprise market, and national market sales teams within its direct sales organization. For the fiscal years ended September 30, 2003, 2002, and 2001, the Company's direct sales and support offices in the U.S. generated net revenues of $320.6 million, $279.1 million, and $230.2 million, respectively. For the fiscal years ended September 30, 2003, 2002, and 2001, the Company's international subsidiaries generated net revenues of $37.5 million, $25.8 million, and $23.4 million, respectively. Total assets at the Company's international subsidiaries for these periods were $29.8 million, $24.8 million, and $19.9 million, respectively. The increase in total assets in fiscal 2003 is attributable to increases in cash and accounts receivable balances in certain of the international subsidiaries. Resellers - --------- Kronos also markets and sells its products through independent resellers within designated geographic territories generally not covered by Kronos' direct sales offices. These resellers provide sales, support and installation services for Kronos' products. There are presently approximately 10 resellers in the United States actively selling and supporting Kronos' products. Sales to independent U.S. resellers for the years ended September 30, 2003, 2002, and 2001 were $10.8 million, $14.5 million, and $17.3 million, respectively. The decrease in revenues in fiscal 2003 and 2002 was principally due to the acquisitions by Kronos of various resellers during fiscal 2003, 2002 and 2001. Kronos also has resellers in Argentina, Bahamas, Bahrain, Barbados, Bermuda, Brazil, Chile, Columbia, Ghana, Guam, Guyana, Jamaica, Lebanon, Netherlands Antilles, Netherlands, Nigeria, Norway, Panama, The Philippines, Puerto Rico, Romania, Singapore, South Africa, Trinidad, and United Arab Emerites. Sales to independent international resellers were not material in any of the fiscal years 2001- 2003. Kronos supports its resellers with training, technical assistance, and major account marketing assistance. Original Equipment Manufacturers (OEM) - -------------------------------------- The Company has a joint marketing agreement with ADP under which ADP markets proprietary versions of the Company's Timekeeper Central system, Workforce Central Suite and data collection terminals manufactured by the Company. During fiscal 2003, the Company and ADP signed an agreement extending their business relationship for an additional term of five years. A reduction in the sales efforts of the Company's major resellers and/or ADP, or termination or changes in their relationships with the Company, could have a material adverse effect on the results of the Company's operations. Customers/Backlog End-users of the Company's products include companies of virtually all sizes from many varied sectors such as manufacturing, healthcare, service, retail and government sectors. The Company believes that the dollar amount of backlog is not material to an understanding of its business. Although the Company has contracts to supply systems to certain customers over an extended period of time, substantially all of the Company's product revenues in each quarter result from orders received in that quarter. Product Development The Company's product development efforts are focused on enhancing the capabilities and increasing the performance of its existing products as well as developing new products and standard interfaces to third party products on a timely basis to meet the increasingly sophisticated needs of its customers. During fiscal 2003, 2002, and 2001, Kronos' engineering, research and development expenses were $38.5 million, $37.0 million, and $33.3 million, respectively. The Company intends to continue to commit substantial resources to enhance and extend its product lines and develop interfaces to third party products. Although the Company continually seeks to further enhance its product offerings and to develop new products and interfaces, including products for the ERM 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 the Company's competitors will not develop and market products which are superior to the Company's products or achieve greater market acceptance. The Company also depends upon the reliability and viability of a variety of software products owned by third parties to develop its products. If these products are inadequate or not properly supported, the Company's ability to release competitive products in a timely manner could be adversely impacted. Competition The ERM market, which includes time and labor, scheduling, human resources and payroll, is highly competitive. Technological changes such as those allowing for increased use of the Internet have resulted in new entrants into the market. Increased competition could adversely affect Kronos' operating results through price reductions and/or loss of market share. With Kronos' efforts to expand its labor management offering with the recent introduction of its human resources and payroll product suite, Kronos will continue to meet strong competition. Many of these competitors may be able to adapt more quickly to new or emerging technologies or to devote greater resources to the promotion and sale of their human resources and payroll products. Many of Kronos' human resources and payroll competitors have significantly greater financial, technical and sales and marketing resources than Kronos, as well as more experience in delivering human resources and payroll solutions. Although Kronos believes it has core competencies that position it strongly in the marketplace, 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. There can be no assurance that Kronos will be able to compete successfully in the human resources and payroll marketplace, and its failure to do so could have a material adverse impact upon its business, prospects, financial condition and operating results. Proprietary Rights The Company has developed, and through its acquisitions of businesses and technology, acquired, proprietary technology and intellectual property rights. The Company's success is dependent upon its ability to further develop and protect its proprietary technology and intellectual property rights. The Company 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 the Company has attempted to safeguard and maintain its proprietary rights, it is unknown whether the Company has been or will be successful in doing so. Despite the Company's 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 the Company's products is difficult. While the Company 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. The Company 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. The Company has registered trademarks for Kronos, Kronos TouchID, My Genies, Timekeeper, Timekeeper Central, TimeWeb, Jobkeeper Central, Datakeeper, Datakeeper Central, Gatekeeper, Gatekeeper Central, Imagekeeper, TeleTime, CardSaver, ShopTrac, ShopTrac Pro, the ShopTrac logo, Keep.Trac, Solution In A Box, Visionware, the Visionware logo, Workforce Central, Workforce Genie, Workforce Accruals, Workforce TeleTime, Workforce Express, Workforce Decisions, eForce, PeoplePlanner, PeoplePlanner design, StarComm, StarPort, StarSaver, StarTimer, and the Company's logo in the United States and other countries. In addition, Kronos eCentral, Timekeeper Web, Workforce Connect, FasTrack, Workforce Activities, Workforce Scheduler, Workforce Smart Scheduler, Workforce Manager, Workforce MobileTime, Workforce Timekeeper, FasTrack, Hyperfind, Kronos 4500, Kronos 4500 Touch ID, Labor Plus, Schedule Assistant, Winstar, Winstar Elite, WIP Plus, Workforce HR, Workforce View, Workforce Employee, Workforce Mobiletime, Smart Scheduler, StartLabor, StartQuality, StartWIP, Starter Series, Timekeeper Decisions, VisionPlus, Workforce Payroll, Workforce Record Manager, Workforce Recruiter, Workforce Tax Filing, and Workforce Web are trademarks of the Company. Certain trademarks have been obtained or are in process in various foreign countries. IBM is a registered trademark of, and iSeries and eServer are trademarks of, International Business Machines Corporation. ADP is a registered trademark of Automatic Data Processing, Inc. Microsoft is a registered trademark of Microsoft Corporation. PeopleSoft is a registered trademark of PeopleSoft, Inc. J.D. Edwards is a registered trademark of J.D. Edwards and Company. Lawson is a registered trademark of Lawson Associates, Inc. SAP is a trademark of SAP AG. Manufacturing and Sources of Supply The duplication of the Company's software and the printing of documentation are outsourced to suppliers. The Company currently has two suppliers who have been certified to the Company's manufacturing specifications to perform the software duplication process. The majority of the assembly of the printed circuit boards used in the Company's data collection terminals is completed at the Company's facility in Chelmsford, Massachusetts. A portion of this assembly is completed by approved suppliers. All final assembly and testing of the Company's data collection terminals is completed at the Company's Chelmsford facility. Although most of the parts and components included within the Company's products are available from multiple suppliers, certain parts and components are purchased from single suppliers. The Company has chosen to source these items from single suppliers because it believes that the supplier chosen is able to consistently provide the Company with the highest quality product at a competitive price on a timely basis. While the Company has to date been able to obtain adequate supplies of these parts and components, the Company's inability to transition to alternate sources on a timely basis if and as required in the future could result in delays or reductions in product shipments which could have a material adverse effect on the Company's operating results. Acquisitions The Company completed several acquisitions during fiscal 2003, none of which are material to the Company's business. Please refer to Note H of the Notes to Consolidated Financial Statements for further information. Employees As of September 30, 2003, the Company had approximately 2,400 employees. None of the Company's employees is represented by a union or other collective bargaining agreement, and the Company considers its relations with its employees to be good. The Company has historically encountered intense competition for experienced technical personnel for product development, technical support and sales and expects such competition to continue in the future. Any inability to attract and retain a sufficient number of qualified technical personnel could adversely affect the Company's ability to produce, support and sell products in a timely manner. Available Information Kronos maintains an internet website at www.kronos.com. Kronos makes available, free of charge through its website, the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and each amendment to these reports. Each such report is posted on Kronos' website as soon as reasonably practicable after such report is filed with the SEC via the EDGAR system. The information on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this Annual Report. The Company's website address is included in this Annual Report as an inactive textual reference only. Item 2. Properties The Company owns its 129,000 square foot corporate headquarters facility and leases approximately 195,000 square feet in two additional facilities, all located in Chelmsford, Massachusetts. The Company's manufacturing operations, Global Support Center and various engineering and administrative operations are located in these leased facilities. The Company additionally leases 60 sales and support offices located throughout North America, Europe, Australia and New Zealand. The Company's aggregate rental expense for all of its facilities in fiscal 2003 was approximately $10.8 million. The Company considers its facilities to be adequate for its current requirements and believes that additional space will be available as needed in the future. Item 3. Legal Proceedings From time to time, the Company is involved in legal proceedings arising in the normal course of business. None of the legal proceedings in which the Company is currently involved is considered material by the Company. Item 4. Submission of Matters to a Vote of Security Holders None. Item 4A. Executive Officers Executive Officers of the Registrant Name Age Position - ---- --- -------- Mark S. Ain 60 Chief Executive Officer and Chairman Paul A. Lacy 56 Executive Vice President, Chief Financial and Administrative Officer Aron J. Ain 46 Executive Vice President, Chief Operating Officer Lloyd B. Bussell 58 Vice President, Manufacturing James Kizielewicz 44 Vice President, Marketing and Corporate Strategy Peter C. George 43 Vice President, Engineering and Chief Technology Officer Joseph DeMartino 54 Vice President, Customer Service Laura Vaughan 55 Vice President, Sales Mark S. Ain, a founder of the Company, has served as Chief Executive Officer and Chairman since its organization in 1977. He also served as President from 1977 through September, 1996. Mr. Ain sits on the Board of Directors for the following public companies: KVH Industries, Inc., LTX Corporation and Park Electrochemical Corp. Mr. Ain is the brother of Aron J. Ain, Executive Vice President, Chief Operating Officer of the Company. Paul A. Lacy has served as Executive Vice President, Chief Financial and Administrative Officer since April 2002. Previously, Mr. Lacy served as Vice President, Finance and Administration, Treasurer and Clerk from 1988 until April 2002. Aron J. Ain has served as Executive Vice President, Chief Operating Officer since April 2002. Previously, Mr. Ain served as Vice President, Worldwide Sales and Service from November 1998 until April 2002, as Vice President, Marketing and Worldwide Field Operations from September 1996 until November 1998, and as Vice President, Sales and Service from 1988 through September, 1996. Mr. Ain is the brother of Mark S. Ain, Chief Executive Officer and Chairman. Lloyd B. Bussell has served as Vice President, Manufacturing since 1987. James Kizielewicz has served in a variety of capacities at the Company from 1981 until his appointment as Vice President, Marketing and Corporate Strategy in January, 1997. Peter George has served as Vice President, Engineering, Chief Technology Officer since February 2002. Previously, Mr. George served as Vice President, Software Development since 1997 where he was responsible for the management of the development of the Company's software products. Joseph DeMartino has served as Vice President, Customer Service since June 2002. Previously, Mr. DeMartino served as Vice President, North America Field Service since 1998 where he was responsible for the management of the customer service delivery functions, including consulting, education and technical support, for the Company's North America operations. Laura Vaughan has served in a variety of capacities at the Company from 1992 until her appointment as Vice President, Sales in 2000. In this role, Ms. Vaughan is responsible for the Company's field sales operations for the U.S., Canada, Caribbean and Latin America territories. Ms. Vaughan was appointed to her current position as an executive officer in June 2002. Officers of the Company hold office until the first meeting of directors following the next annual meeting of stockholders at which time officers are appointed for the following fiscal year. PART II Item 5. Market for Registrant's Common Equity and Stockholder Matters Stock Market Information - ------------------------ The prices per share have been restated to reflect the Company's three-for-two stock split effected in the form of a 50% common stock dividend that was paid on October 31, 2003 to stockholders of record as of October 20, 2003. The Company's common stock is traded on the NASDAQ National Market under the symbol KRON. The following table sets forth the high and low sales prices for fiscal 2003 and 2002. Such over-the-counter market quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. 2003 ---------------------------------------------------- Fiscal High Low - -------------------------------------------------------------------------------- First quarter $31.287 $15.853 Second quarter 29.960 22.000 Third quarter 33.287 23.367 Fourth quarter 40.900 32.720 2002 ---------------------------------------------------- Fiscal High Low - -------------------------------------------------------------------------------- First quarter $35.367 $16.955 Second quarter 40.267 28.000 Third quarter 31.727 17.340 Fourth quarter 22.700 15.640 Holders - ------- On November 29, 2003 there were approximately 4,500 stockholders of record of the Company's common stock. Dividends - --------- The Company has not paid cash dividends on its common stock, and the present policy of the Company is to retain earnings for use in its business. Item 6. Selected Financial Data The following selected consolidated financial data should be read in conjunction with the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations included elsewhere in this Annual Report on Form 10-K. The balance sheet data as of September 30, 2003 and 2002 and the statements of operations data for the years ended September 30, 2003, 2002, and 2001 have been derived from the audited consolidated financial statements for such years, included elsewhere in this Annual Report on Form 10-K. The balance sheet data as of September 30, 2001, 2000, and 1999 and the statements of operations data for the years ended September 30, 2000 and 1999 have been derived from the audited consolidated financial statements for such years, not included in this Annual Report on Form 10-K.
Financial Highlights In thousands, except share data Year Ended September 30, ---------------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Operating Data: Net revenues ................... $397,355 $342,377 $295,290 $271,195 $256,191 Net income ..................... $ 34,666 $ 28,827 $ 16,504 $ 15,701 $ 22,378 Net income per common share (1): Basic ...................... $ 1.16 $ 0.98 $ 0.59 $ 0.56 $ 0.79 Diluted .................... $ 1.12 $ 0.94 $ 0.57 $ 0.54 $ 0.76 Balance Sheet Data: Total assets ................... $412,806 $333,024 $289,098 $240,641 $229,711
(1) The presentation of amounts per share have been restated to reflect the Company's three-for-two stock split effected in the form of a 50% common stock dividend that was paid on October 31, 2003 to stockholders of record as of October 20, 2003.
Selected Quarterly Financial Data In thousands, except share data Three Months Ended (1) -------------------------------------------------- Sept. 30, June 28, March 29, Dec. 28, 2003 2003 2003 2002 --------- -------- --------- -------- Net revenues ................. $112,949 $ 98,216 $ 96,481 $ 89,709 Gross profit ................. $ 69,654 $ 59,963 $ 57,925 $ 54,409 Net income ................... $ 11,971 $ 8,384 $ 7,262 $ 7,049 Net income per share (2): Basic ....... $ 0.40 $ 0.28 $ 0.24 $ 0.24 Diluted ..... $ 0.38 $ 0.27 $ 0.24 $ 0.23
Three Months Ended (1) ----------------------------------------------- Sept. 30, June 29, March 30, Dec. 29, 2002 2002 2002 2001 --------- -------- --------- -------- Net revenues ............ $99,244 $87,070 $79,934 $76,129 Gross profit ............ $63,076 $52,194 $48,608 $46,861 Net income .............. $10,360 $ 6,497 $ 5,773 $ 6,197 Net income per share (2): Basic ...... $ 0.35 $ 0.22 $ 0.19 $ 0.21 Diluted .... $ 0.35 $ 0.21 $ 0.19 $ 0.20
(1) The Company follows a system of fiscal months as opposed to calendar months. Under this system, the first eleven months of each fiscal year end on a Saturday. The last month of the fiscal year always ends on September 30. (2) The presentation of amounts per share have been restated to reflect the Company's three-for-two stock split effected in the form of a 50% common stock dividend that was paid on October 31, 2003 to stockholders of record as of October 20, 2003. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This discussion and the discussion under "Business" includes certain forward-looking statements about Kronos' business and its expectations, including statements relating to the timing of new product launches, product and service revenues, revenue growth rates, operating expenses, gross profit, future acquisitions, capital expenditures, customer purchase patterns, income tax rates, available cash, investments and operating cash flow, and the future effects of accounting pronouncements. 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. The risks and uncertainties discussed herein do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this Annual Report was filed with the Securities and Exchange Commission and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Overview Kronos is a single-source provider of human resources, payroll, scheduling, and time and labor solutions. Kronos' solutions are designed for a wide range of businesses from single-site to large multi-site enterprises. Kronos derives revenues from the licensing of its software solutions, sales of its hardware solutions and providing professional services as well as ongoing customer support and maintenance. Although Kronos has been successful in continuing to increase annual revenues in all periods presented, management believes that the continued economic environment may result in many customers deferring or reducing their technology purchases in the future. While management believes the impact on technology purchasing may be temporary, the effect may continue to cause delays or reductions in customer purchases of Kronos products and services in the future. 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 for further information. Revenue Recognition - The Company licenses software and sells data collection hardware and related ancillary products to end-user customers through its direct sales force as well as indirect channel customers, which include ADP and other independent resellers. Substantially all of the Company's software license revenue is earned from perpetual licenses of off-the-shelf software requiring no modification or customization. The software license, data collection hardware and related ancillary product revenues from the Company's end-user customers and indirect channel customers are generally recognized using the residual method when: o Persuasive evidence of an arrangement exists, which is typically when a non-cancelable sales and software license agreement has been signed; o Delivery, which is typically FOB shipping point, is complete for the software (either physically or electronically), data collection hardware and related ancillary products; o The customer's fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties; o Collectibility is probable; and o Vendor-specific objective evidence of fair value exists for all undelivered elements, typically maintenance and professional services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue, assuming all other conditions for revenue recognition have been satisfied. Substantially all of the Company's product revenue is recognized in this manner. If the Company cannot determine the fair value of any undelivered element included in an arrangement, the Company will defer revenue until all elements are delivered, services are performed or until fair value can be objectively determined. As part of an arrangement, end-user customers typically purchase maintenance contracts as well as professional services from the Company. Maintenance services include telephone and Web-based support as well as rights to unspecified upgrades and enhancements, when and if the Company makes them generally available. Professional services are deemed to be non-essential and typically are for implementation planning, loading of software, installation of the data collection hardware, training, building simple interfaces, running test data, and assisting in the development and documentation of pay rules and best practices consulting. Revenues from maintenance services are recognized ratably over the term of the maintenance contract period based on vendor-specific objective evidence of fair value. Vendor-specific objective evidence of fair value is based upon the amount charged when purchased separately, which is typically the contract's renewal rate. Maintenance services are typically stated separately in an arrangement. The Company has classified the allocated fair value of revenues pertaining to the contractual maintenance obligations that exist for the 12-month period subsequent to the balance sheet date as a current liability, and the contractual obligations with a term beyond 12 months as a non-current liability. Revenues from time and material maintenance services are recognized as the services are delivered. Revenues from professional services are generally recognized based on vendor-specific objective evidence of fair value when: o A non-cancelable agreement for the services has been signed or a customer's purchase order has been received; and o The professional services have been delivered. Vendor-specific objective evidence of fair value is based upon the price charged when these services are sold separately and are typically an hourly rate for professional services and a per-class rate for training. Based upon the Company's experience in completing product implementations, it has determined that these services are typically delivered within a 12-month period subsequent to the contract signing and therefore classifies deferred professional services as a current liability. The Company's arrangements with its end-user customers and indirect channel customers do not include any rights of return or price protection, nor do arrangements with indirect channel customers include any acceptance provisions. Generally, the Company's arrangements with end-user customers also do not include any acceptance provisions. However, if an arrangement does include acceptance provisions, they typically are based on the Company's standard acceptance provision. The Company's standard acceptance provision provides the end-user customer with a right to a refund if the arrangement is terminated because the product did not meet Kronos' published specifications. Generally, the Company determines that these acceptance provisions are not substantive and therefore should be accounted for as a warranty in accordance with SFAS No. 5. At the time the Company enters into an arrangement, the Company assesses the probability of collection of the fee and the terms granted to the customer. For end-user customers, the Company's typical payment terms include a deposit and subsequent payments, based on specific due dates, such that all payments for the software license, data collection hardware and related ancillary products, as well as services included in the original arrangement are ordinarily due within one year of contract signing. The Company's payment terms for its indirect channel customers are less than 90 days and typically due within 30 days of invoice date. If the payment terms for the arrangement are considered extended or if the arrangement includes a substantive acceptance provision, the Company defers revenue not meeting the criterion for recognition under SOP 97-2 and classifies this revenue as deferred revenue, including deferred product revenue. This revenue is recognized, assuming all other conditions for revenue recognition have been satisfied, when the payment of the arrangement fee becomes due and/or when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee. The Company reports the allocated fair value of revenues related to the product element of arrangements as a current liability because of the expectation that these revenues will be recognized within 12 months of the balance sheet date. Since fiscal 1996, the Company has had a standard practice of providing creditworthy end-user customers the option of financing arrangements beyond one year. These arrangements, which encompass separate fees for software license, data collection hardware and ancillary products, maintenance and support contracts and professional services, are evidenced by distinct standard sales, license and maintenance agreements and typically require equal monthly payments. The term of these arrangements typically range between 18 and 48 months. At the time the Company enters into an arrangement, the Company assesses the probability of collection and whether the arrangement fee is fixed or determinable. The Company considers its history of collection without concessions as well as whether each new transaction involves similar customers, products and arrangement economics to ensure that the history developed under previous arrangements remains relevant to current arrangements. If the fee is not determined to be collectible, fixed or determinable, the Company will initially defer the revenue and recognize when collection becomes probable, which typically is when payment is due assuming all other conditions for revenue recognition have been satisfied. 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 and bad debt history. 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. Sales returns and adjustments are generally due to incorrect ordering of product, general customer satisfaction issues or incorrect billing. 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 these 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. Kronos has only one reporting unit. 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. If Kronos determines that there is an impairment in either an intangible asset, or goodwill, Kronos may be required to record an impairment charge in the reporting period in which the impairment is determined, which may have a negative impact on earnings. During the three-month period ended September 30, 2003, the Company completed its annual testing of the impairment of goodwill, as of June 29, 2003. As a result of the test, the Company has concluded that no impairment of goodwill existed as of June 29, 2003. Therefore, as a result of this impairment test, no impairment was recorded in fiscal 2003. 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. 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. Income Taxes - Kronos accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Kronos records a valuation allowance in accordance with generally accepted accounting principles to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. While Kronos has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance will not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on Kronos' income tax provision and net income in the period in which such determination is made. Results of Operations Revenues. Revenues amounted to $397.4 million, $342.4 million and $295.3 million in fiscal 2003, 2002 and 2001, respectively. Annual revenue growth amounted to 16% in fiscal 2003 and 2002, and 9% in fiscal 2001. Revenues from core business (business generated from customers that have not been part of an acquired business transaction over the preceding four fiscal quarters) accounted for 13% of Kronos' revenue growth in fiscal 2003, 5% in fiscal 2002 and 7% in fiscal 2001. The principal factors driving revenue growth were increased demand for Kronos products from new customers, including increased customer demand for the newest data collection hardware, as well as software capacity upgrades and platform conversions, continued demand for Kronos' professional and maintenance services from new and existing customers, and revenues attributable to acquisitions of businesses over the last four fiscal quarters. Revenues attributable to acquisitions of businesses over the last four fiscal quarters accounted for 3% of Kronos' revenue growth in fiscal 2003, 11% in fiscal 2002 and 2% in fiscal 2001. The revenue growth experienced in fiscal 2002 was attributable to the effect of incremental revenues derived from customers obtained from acquisitions of businesses over the preceding four quarters and core business growth resulting from increased demand for Kronos' services. Management presently anticipates that revenue growth will range between 12% - 16% for fiscal 2004. Product revenues amounted to $178.6 million, $158.5 million and $154.1 million in fiscal 2003, 2002 and 2001, respectively. Product revenues increased 13% in fiscal 2003, 3% in fiscal 2002 and 1% in fiscal 2001. The principal factors driving product revenue growth in fiscal 2003 were increased demand for Kronos products from new and existing customers, including demand for the newest data collection hardware, as well as software capacity upgrades and platform conversions. Although product revenues increased during fiscal 2003 as compared to the prior year, management believes that the continued economic environment may result in customers deferring or reducing their technology purchases. While management believes the impact on technology purchasing may be temporary, the effect may cause delays or reductions in customer purchases of Kronos products and services in the future. The product revenue growth during fiscal 2002 was attributable to revenues related to the conversion to Kronos products by, and add-on sales to, customers acquired from other providers of labor management solutions. Product revenue derived from acquired customers was $2.5 million during fiscal 2003 as compared to $10.7 million in fiscal 2002 and $0.4 million in fiscal 2001, respectively. Maintenance revenues amounted to $124.9 million, $105.5 million and $80.4 million in fiscal 2003, 2002 and 2001, respectively. Maintenance revenues increased 18% in fiscal 2003 as compared to 31% and 20% in fiscal 2002 and 2001, respectively. Maintenance revenue from core business accounted for 13% of Kronos' maintenance revenue growth in fiscal 2003 as compared to 14% and 15% of Kronos' maintenance revenue growth in fiscal 2002 and 2001, respectively. Maintenance revenue growth attributable to acquisitions of businesses over the preceeding four quarters was 5% in fiscal 2003, as compared to 17% and 5% in fiscal 2002 and 2001, respectively. The principal increase in maintenance revenues in all periods was the result of expansion of the installed base, an increase in the value of maintenance contracts, and incremental maintenance revenues attributable to customers obtained from the acquisition of businesses. The increase in the value of the maintenance contracts was principally attributable to the platform upgrade of existing customers to Kronos' new products. Platform and capacity upgrade sales typically result in an increased value of maintenance contracts. In fiscal 2003, maintenance revenue growth also benefited from an improvement in the billing process which appropriately captures the effective date of contract reinstatements. Professional services revenues amounted to $93.8 million, $78.4 million and $60.8 million in fiscal 2003, 2002 and 2001, respectively. Professional services revenues increased 20% in fiscal 2003, as compared to 29% and 19% in fiscal 2002 and 2001, respectively. Professional services revenue from core business accounted for 16% of Kronos' professional services revenue growth in fiscal 2003 as compared to 17% and 15% of Kronos' professional services revenue growth in fiscal 2002 and 2001, respectively. Professional services revenue growth attributable to acquisitions of businesses over the preceeding four quarters was 4% in fiscal 2003 and 12% and 4% in fiscal 2002 and 2001, respectively. The growth in professional services revenues in fiscal 2003 was primarily due to an increase in demand for professional services accompanying sales to new customers, and an increase in the level of professional services accompanying new and platform conversion sales. The growth in core business professional service revenues in fiscal 2002 and 2001 was attributable to an increase in the level of professional services accompanying new and platform conversion sales, an increase in the level of follow-on services sold to the installed base, and an increase in delivery of professional services resulting from improving the efficiency of Kronos' services organization. Deferred maintenance revenues increased 10% from September 30, 2002. Current deferred maintenance revenues increased 13% and long-term deferred maintenance revenues decreased 15% from September 30, 2002. Maintenance revenues have grown at a faster rate than deferred maintenance primarily due to the positive impact on the improvement in the billing process which appropriately captures the effective date of contract reinstatements, as well as the effect of the expiration of multi-year maintenance contracts sold in previous fiscal years. As the multi-year maintenance contracts approach the end of their term, the revenue will remain constant, however, the deferred maintenance revenue balance continues to decrease. The decrease in the long-term portion was due to Kronos' decision to curtail the practice of selling multi-year maintenance contracts. Professional services revenues increased 20% in fiscal 2003, which approximates the 18% growth in deferred professional services revenues from September 30, 2002. International revenues, which include revenues from Kronos' international subsidiaries and sales to independent international resellers, amounted to $39.2 million, $27.1 million and $25.6 million in fiscal 2003, 2002 and 2001, respectively. International revenues grew by 45% in fiscal 2003 and 6% in fiscal 2002 and 2001. International revenues amounted to 10%, 8% and 9% of total revenues in fiscal 2003, 2002 and 2001, respectively. The growth in international revenues in fiscal 2003 was primarily attributable to the timing of several large customer orders which were executed during fiscal 2003. Kronos does not believe that the revenue growth experienced in fiscal 2003 is indicative of future results and expects the future year's revenue growth to be more consistent with that experienced in fiscal 2002 and 2001. Gross Profit. Gross profit as a percentage of revenues was 61% in fiscal 2003 and 62% in fiscal 2002 and 2001, respectively. The decline in gross profit in fiscal 2003 is primarily attributable to a higher proportion of service revenues, which typically carries a lower gross profit and a decline in service gross profit as compared to fiscal 2002. Product gross profit as a percentage of product revenues was 76% in fiscal 2003 and 2002, as compared to 78% in fiscal 2001. Although hardware revenues, which typically carry a lower gross profit than software revenues, were a greater proportion of total product revenues in fiscal 2003 than fiscal 2002, the negative impact on product margin was offset by a decrease in sales of third-party product for resale, which typically carry the lowest product gross profit. The decrease in product gross profit in fiscal 2002, as compared to fiscal 2001, is primarily related to higher production costs attributable to the Kronos 4500(TM) terminal and related modules. This decrease was partially offset by a higher proportion of software sales, which typically carry a higher gross profit than hardware sales. Service gross profit as a percentage of professional service and maintenance revenues was 48% in fiscal 2003 as compared to 49% and 44% in fiscal 2002 and 2001, respectively. The decrease in service gross profit in fiscal 2003 was primarily attributable to increased spending in support of Kronos' human resources and payroll product rollout, partially offset by growth in maintenance revenues and further leveraging of the existing support organization to support the increasing customer base. The improvement in gross profit in fiscal 2002, as compared to fiscal 2001, was primarily attributable to increased productivity in the service organization, which was 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 for fiscal 2003 increased $21.1 million, or 13%, to $187.4 million as compared to an increase of $9.2 million, or 6%, to $166.2 million in fiscal 2002. The increase in actual spending in fiscal 2003 was primarily attributable to investments in personnel and related compensation and support costs in response to increased customer demand and to support the development of new products, as well as increased spending for outside consultants and professional fees. Net operating expenses as a percentage of revenues were 47% in fiscal 2003, as compared to 49% and 53% in fiscal 2002 and 2001, respectively. The decrease in net operating expenses as a percentage of revenues in fiscal 2003 was primarily attributable to the leveraging of investments in infrastructure to generate higher sales volumes, and continued corporate-wide efforts to contain costs. The decrease in net operating expenses as a percentage of revenues in fiscal 2002 was primarily due to the special charges recorded in the second and third quarters of fiscal 2001 and the elimination of goodwill amortization due to Kronos' adoption of Statements of Financial Accounting Standards No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets", effective October 1, 2001. On a proforma basis, excluding the special charge and amortization expense, net operating expenses as a percentage of revenues were 50% in fiscal 2001. Although management intends to decrease operating expenses as a percentage of revenues during fiscal 2004, principally through continued productivity improvements, uncertainty related to the current economic climate and its impact on the timing of customers' purchases, as well as increased investments in productivity programs and infrastructure to support the anticipated increase in sales volume, may prevent decreases in operating expenses as a percentage of revenues from being realized. Sales and marketing expenses were $123.9 million, $109.8 million and $99.8 million in fiscal 2003, 2002 and 2001, respectively. Sales and marketing expenses for fiscal 2003 increased $14.2 million, or 13%, as compared to an increase of $10.0 million, or 10% in fiscal 2002. The increase in actual spending in fiscal 2003 was primarily attributable to Kronos' investment in sales personnel and related compensation and support costs to add new customers and to maximize the penetration of existing accounts, additional spending on programs related to the expansion of market awareness of Kronos products and services, as well as additional spending for personnel training. The increase in sales and marketing expenses in fiscal 2002 and 2001 was attributable to Kronos' investments in sales personnel and related support costs, as well as, to a lesser extent, the impact of converting Kronos' reseller operations to direct sales operations. As a percentage of revenues, sales and marketing expenses were 31%, 32% and 34% in fiscal 2003, 2002 and 2001, respectively. The decrease in sales and marketing spending as a percentage of total revenues in fiscal 2003 and 2002 was primarily attributable to leveraging the investments in infrastructure to generate higher sales volumes. These infrastructure investments include investments in information systems as well as investments in training programs. Engineering, research and development expenses were $38.5 million, $37.0 million and $33.3 million in fiscal 2003, 2002 and 2001, respectively. Engineering, research and development expenses increased $1.5 million, or 4%, as compared to an increase of $3.6 million, or 11%, in fiscal 2002. The increase in actual spending in fiscal 2003 was principally attributable to an increase in compensation-related expenses, expenses associated with the introduction of the new human resources and payroll products, as well as an increase in training expenses, partially offset by the reallocation of certain engineering resources focused upon information systems support to general and administrative expenses. The increase in spending in fiscal 2002 was primarily due to an increase in salary-related expenses, partially offset by a reduction in spending related to contract consultants. As a percentage of revenues, engineering, research and development expenses were 10% in fiscal 2003 as compared to 11% in both fiscal 2002 and 2001. The decrease as a percentage of revenues in fiscal 2003, as compared to fiscal 2002, was primarily due to higher sales volume in fiscal 2003. These expenses are net of capitalized software development costs of $12.1 million, $11.2 million and $11.1 million, in fiscal 2003, 2002 and 2001, respectively. The significant project development efforts in fiscal 2003 principally related to further development and enhancement of the Workforce Central(R) suite, Workforce HR(TM), Workforce Payroll(TM), and the Kronos 4500 terminal. General and administrative expenses were $25.9 million, $21.2 million and $18.5 million in fiscal 2003, 2002 and 2001, respectively. General and administrative expenses increased $4.7 million, or 22%, in fiscal 2003, as compared to an increase of $2.7 million, or 14% in fiscal 2002. General and administrative expenses primarily consist of personnel and overhead-related expenses for administrative, information technology, finance, legal, and human resources support functions. The increase in general and administrative expenses in fiscal 2003 was primarily due to Kronos' investment in personnel and related compensation and support costs (including those costs associated with the previously discussed reallocation of engineering resources to general and administrative expenses), an increase in fees related to tax planning and other professional services, and continued investment in infrastructure to support the growth of operations. The increase in general and administrative expenses in fiscal 2002 is primarily due to Kronos' investment in personnel and other infrastructure to support the growth of operations. As a percentage of revenues, general and administrative expenses were 7% in fiscal 2003 as compared to 6% in fiscal 2002 and 2001. Amortization of intangible assets as a percentage of revenues were 1% in fiscal 2003 and 2002, as compared to 3% in fiscal 2001. The decrease in amortization in fiscal 2002 as compared to fiscal 2001 was the result of the elimination of goodwill amortization described in this Annual Report and/or Form 10-K. Other income, net as a percentage of revenues was 1% in fiscal 2003 and 2002, as compared to 2% in fiscal 2001. Other income, net is principally interest income earned from Kronos' cash as well as investments in its marketable securities and financing arrangements. Special Charge - Fiscal 2001. A special charge in the amount of $3.7 million was recorded in fiscal 2001. Approximately $3.0 million of the special charge was recorded in the second quarter of fiscal 2001 related to the termination of Kronos' Crosswinds Technology operations. 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 resulted in the termination of the standalone operating unit. The $3.0 million charge consisted of $1.6 million in termination costs, $1.3 million for the write-off of intangible assets and $0.1 million in other costs. Approximately $0.7 million of the special charge was recorded in the third quarter of fiscal 2001 related to termination costs from a reduction in workforce of approximately 90 employees. This charge was the result of management's effort to streamline operations to better align costs with expected revenues. As of September 30, 2002, Kronos did not have any remaining liability related to the special charge. Income Taxes. The provision for income taxes as a percentage of pre-tax income was 36.5% in fiscal 2003, 35.2% in fiscal 2002 and 35.0% in fiscal 2001. Kronos' effective income tax rate may fluctuate between periods as a result of various factors, including income tax credits, foreign tax rate differentials and state income taxes. Management currently anticipates that the income tax rate will decline in fiscal 2004 as Kronos implements certain tax management strategies. Newly Issued Accounting Standards. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. The statement amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. Kronos accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of FASB Statement No. 123. The transition provisions are effective for fiscal years ending after December 15, 2002. The disclosure provisions are effective for interim periods beginning after December 15, 2002. Kronos implemented the required disclosure provisions in the three-month period ended March 29, 2003. The adoption of this statement did not have any impact on Kronos' consolidated financial position, results of operations or cash flows and Kronos does not anticipate making the voluntary change to the fair value method of accounting for stock-based compensation. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." FIN No. 46 requires certain variable interest entities, or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all VIEs created or acquired after January 31, 2003. In October 2003, the FASB issued FIN No. 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities." This FASB Staff Position deferred the effective date for applying the provisions of FIN No. 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003. A public entity need not apply the provisions of FIN No. 46 to an interest held in a variable interest entity or potential variable interest entity until the end of the first interim or annual period ending after December 15, 2003 if both of the following apply: o The variable interest entity was created before February 1, 2003. o The public entity has not issued financial statements reporting interests in variable interest entities in accordance with FIN No. 46, other than certain required disclosures. Kronos currently has no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46-6 will not have a material effect on Kronos' consolidated financial position, results of operations or cash flows. Liquidity and Capital Resources Kronos funds its business through cash generated by operations. If near-term demand for Kronos' products weakens or if significant anticipated sales in any quarter do not close when expected, the availability of such funds may be adversely impacted. Kronos believes that it has more than adequate financing to sustain its operations through the next fiscal year. Cash, cash equivalents and marketable securities (which includes both short- and long-term securities) amounted to $131.0 million as of September 30, 2003 and $74.7 million as of September 30, 2002. This increase in cash, cash equivalents and marketable securities is due to cash generated from operations. Working capital as of September 30, 2003 amounted to $21.2 million as compared with $2.4 million at September 30, 2002. This increase in working capital is primarily due to an increase in cash resulting from cash provided by operations. Cash provided by operations amounted to $82.6 million in fiscal 2003 as compared to $70.2 million and $54.4 million in fiscal 2002 and 2001, respectively. The increase in cash provided by operations in fiscal 2003 is principally attributable to higher net income, an increase in accruals related to taxes and compensation expenses due to the timing of payments, as well as increased non-cash charges that are added back in the calculation of cash flow from operations. These are partially offset by an increase in accounts receivable due to higher sales volume. The increase in cash provided by operations in fiscal 2002 is principally attributable to an increase in net income, collection of accounts receivable from trade customers and the tax benefit from the exercise of stock options. These are partially offset by a reduced rate of increase in Kronos' deferred revenues as well as an increase in cash used due to timing of compensation-related payments. Cash used for property, plant and equipment was $11.6 million in fiscal 2003 compared to $11.6 million in fiscal 2002 and $7.6 million in fiscal 2001. Kronos' use of cash for property, plant and equipment in all periods presented includes investments in information system and infrastructure to improve and support expanding operations. Kronos' use of cash for the acquisition of businesses and software in all periods presented was principally related to the acquisitions of specified assets and/or businesses of Kronos' resellers and/or other providers of labor management solutions. In addition, during fiscal 2002, Kronos' use of cash for the acquisition of businesses and software included cash used for 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. Management anticipates making significant capital investments during fiscal 2004 in conjunction with the replacement of information technology systems. These investments could approximate up to 1% of total revenues in fiscal 2004. Excess cash reserves not required for operations, investments in property, plant and equipment or acquisitions are invested in marketable securities. Net investments in marketable securities increased by $20.5 million in fiscal 2003 compared to an increase of $8.4 million in fiscal 2002 and an increase of $4.0 million in fiscal 2001. Under Kronos' stock repurchase program, Kronos repurchased 535,050 shares of common stock in fiscal 2003 at a cost of $13.2 million, compared to 814,425 shares of common stock at a cost of $21.3 million in fiscal 2002 and 532,012 shares of common stock at a cost of $8.7 million in fiscal 2001. The common stock repurchased under the program is used for Kronos' employee stock option plans and employee stock purchase plan. During the first quarter of fiscal 2003, Kronos received $2.6 million upon the maturity of a call option arrangement. As of September 30, 2003, Kronos did not have any outstanding call option arrangements. Please refer to Note A in the Notes to Condensed Consolidated Financial Statements for further details regarding call option arrangements. Cash provided by operations was sufficient to fund investments in capitalized software development costs, property, plant and equipment and stock repurchases. Kronos leases certain office space, manufacturing facilities and equipment under long-term operating lease agreements. In addition, certain acquisition agreements contain provisions that require Kronos to make a guaranteed payment and/or contingent payments based upon profitability of the business unit or if specified minimum revenue requirements are met. Future minimum rental commitments under operating leases with non-cancelable terms of one year or more, and future payment obligations related to guaranteed payments are as follows (in thousands):
Payments Due by Period --------------------------------------------------------------------- More Than More Than 1 Year, 3 Year, Less Than Less Than Less Than More Than Contractual Obligations Total 1 Year 3 Years 5 Years 5 Years - ----------------------- ------- --------- --------- --------- --------- Operating lease obligations .. $34,665 $ 9,441 $14,541 $ 6,364 $ 4,319 Guaranteed payment obligations 3,652 1,713 1,939 -- -- ------- ------- ------- ------- ------- Total ........................ $38,317 $11,154 $16,480 $ 6,364 $ 4,319 ======= ======= ======= ======= =======
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 requirements under operating leases, cash payments related to acquisitions, if any, and any additional stock repurchases for the foreseeable future. Certain Factors That May Affect Future Operating Results Except for historical matters, the matters discussed in this Annual Report and/or Form 10-K 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 Annual Report and/or Form 10-K 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 labor product line, the ability to attract and retain sufficient technical personnel, the protection of Kronos' intellectual property and the potential infringement on Kronos' intellectual property rights, competitive pricing pressure, and the dependence on alternate distribution channels and on key vendors, as further described below. Potential Fluctuations in Results. Kronos' operating results, including revenue growth, sources of revenue, effective tax rate and liquidity, 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 resources and 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 third and fourth quarters and a relatively smaller percentage in the first and second quarters of each fiscal year, although there can be no assurance that this pattern will continue. In addition, 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. Competition. The employee relationship management ("ERM") market, which includes time and labor, scheduling, human resources and payroll, is highly competitive. Technological changes such as those allowing for increased use of the Internet have resulted in new entrants into the market. Increased competition could adversely affect Kronos' operating results through price reductions and/or loss of market share. With Kronos' efforts to expand its labor management offering with the recent introduction of its human resources and payroll product suite, Kronos will continue to meet strong competition. Many of these competitors may be able to adapt more quickly to new or emerging technologies or to devote greater resources to the promotion and sale of their human resources and payroll products. Many of Kronos' human resources and payroll competitors have significantly greater financial, technical and sales and marketing resources than Kronos, as well as more experience in delivering human resources and payroll solutions. Although Kronos believes it has core competencies that position it strongly in the marketplace, 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. There can be no assurance that Kronos will be able to compete successfully in the human resources and payroll marketplace, and its failure to do so could have a material adverse impact upon its business, prospects, financial condition and operating results. Dependence on Time and Labor Product Line. To date, more than 90% of Kronos' revenues have been attributable to sales of labor management systems and related services. Although Kronos has introduced products for the licensed human resources and payroll market during fiscal 2002, Kronos expects that its dependence on the time and labor product line for revenues will continue for the foreseeable future. Competitive pressures or other factors could cause Kronos' time and labor products to lose market acceptance or experience significant price erosion, adversely affecting the results of Kronos' operations. Product Development and Technological Change. Continual change and improvement in computer software and hardware technology characterize the markets for ERM 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 ERM offerings and to develop new products and interfaces, there can be no assurance that these efforts will succeed, or that, if successful, such product enhancements or new products will achieve widespread market acceptance, or that Kronos' competitors will not develop and market products which are superior to Kronos' products or achieve greater market acceptance. Dependence on Alternate Distribution Channels. Kronos markets and sells its products through its direct sales organization, independent resellers and ADP under an OEM agreement. In fiscal 2003, approximately 10% of Kronos' revenue was generated through sales to resellers and ADP. Management does not anticipate that its entrance into the human resources and payroll market will have a negative impact on its relationship with ADP. During fiscal 2003, Kronos and ADP signed an agreement extending their business relationship for an additional term of five years. However, a reduction in the sales efforts of either Kronos' major resellers or ADP, or termination or changes in their relationships with Kronos, could have a material adverse effect on the results of Kronos' operations. 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 and software, 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 infringe 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. Additional Stock Option Program Information Option Program Description. The Company intends that its stock option program be its primary vehicle for offering long-term incentives and rewarding its executives and key employees. Stock options are granted to key employees based upon prior performance, the importance of retaining their services for the Company and the potential for their performance to help the Company attain its long-term goals. However, there is no set formula for the award of options to individual executives or employees. Stock options are generally granted annually in conjunction with the Compensation Committee's formal review of the individual performance of its key executives, including its Chief Executive Officer, and their contributions to the Company. In fiscal 2003, 76% of the options granted went to employees other than the top five officers ("Named Executive Officers"). All the options awarded are granted from the same plan. Options, which are granted at the fair market value on the date of grant, typically vest in four equal annual installments beginning one year from the date of grant and have a contractual life of four years and six months. The presentation of share and per share amounts have been restated to reflect the Company's three-for-two stock split effected in the form of a 50% common stock dividend that was paid on October 31, 2003 to stockholders of record as of October 20, 2003. Distribution and Dilutive Effect of Options. Employee and Executive Option Grants as of September 30, 2003 2002 2001 ----- ----- ----- Net grants during period as % of 4.1% 4.7% 4.2% outstanding shares Grants to Named Executive Officers* 24.1% 25.3% 17.0% during period as % of options granted Grants to Named Executive Officers* 1.0% 1.2% 0.7% during period as % of shares outstanding *The following individuals are Kronos' Named Executive Officers for fiscal 2003: Mark S. Ain Chief Executive Officer and Chairman Paul A. Lacy Executive Vice President, Chief Financial and Administrative Officer Aron J. Ain Executive Vice President, Chief Operating Officer Peter C. George Vice President, Engineering and Chief Technology Officer James Kizielewicz Vice President, Marketing and Corporate Strategy The figures for fiscal 2002 and 2001 reflect the Named Executive Officers as reported in the Company's definitive proxy statement for those years. General Option Information. Summary of Option Activity (in thousands, except per share data) Weighted-Average Shares Available Number of Exercise Price for Options Shares per Share ---------------- --------- ---------------- Outstanding at September 30, 2002 2,436 3,962 $15.45 Grants (1,243) 1,243 16.91 Exercises -- (1,415) 12.95 Cancellations (1) 36 (150) 16.22 ----- ----- ------ Outstanding at September 30, 2003 1,229 3,640 $16.89 ===== ===== ====== (1) Includes 114,000 shares cancelled under the 1992 Equity Incentive Plan, which expired under its terms on March 27, 2002. In-the-Money and Out-of-the-Money Option Information as of September 30, 2003 (in thousands, except per share data)
Exercisable Unexercisable Total --------------------- -------------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Price per Price per Price per Shares Share Shares Share Shares Share ------ ----- ------ ----- ------ ----- In-the-Money ............ 645 $16.61 2,995 $16.95 3,640 $16.89 Out-of-the-Money (1) .... -- -- -- -- -- -- ---- ------ ----- ------ ----- ------ Total Options Outstanding 645 $16.61 2,995 $16.95 3,640 $16.89 ==== ====== ===== ====== ===== ======
(1) Out-of-the-Money options are those options with an exercise price equal to or above the closing price of $35.27 at the end of the fiscal year. Executive Options. The following tables summarize option grants and exercises during the fiscal year ended September 30, 2003 to the Company's Named Executive Officers and the value of the options held by such persons at the end of fiscal 2003. Options Granted to Named Executive Officers
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term(4) ----------------------------------------------------- ------------------------ Number of Percent of Securities Total Options Underlying Granted to Exercise Options Employees in or Base Granted Friscal Price per Expiration Name (1) Year (2) Share (3) Date 5% 10% - ---- ---------- ------------- --------- ---------- -- --- Mark S. Ain ............ 90,000 7.2% $16.57 04/07/07 $366,775 $801,444 CEO and Chairman Paul A. Lacy ........... 60,000 4.8% 16.57 04/07/07 244,517 534,296 Exec. V.P. and Chief Financial and Administrative Officer Aron J. Ain ............ 60,000 4.8% 16.57 04/07.07 244,517 534,296 Exec. V.P. and Chief Operating Officer Peter C. George ........ 45,000 3.6% 16.57 04/07/07 183,388 400,722 V.P., Engineering and Chief Technology Officer James Kizielewicz ...... 45,000 3.6% 16.57 04/07/07 183,388 400,722 V.P., Marketing and Corporate Strategy
(1) Each option vests in four equal annual installments commencing one year from the date of grant. (2) Based on an aggregate of 1,242,600 shares subject to options granted to employees of the Company in fiscal 2003. (3) The exercise price of each option was equal to the fair market value of the Company's common stock on the date of grant as reported by The NASDAQ National Market(R). (4) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date (and are shown net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares.) Actual gains, if any, on stock option exercises will depend on the future performance of the common stock, the optionholder's continued employment with the Company through the option vesting period and the date on which the options are exercised. Option Exercises and Remaining Holdings of Named Executive Officers
Number of Securities Underlying Value of Unexercised Unexercised Options In-The-Money Options at at Fiscal Year-End Fiscal Year-End (2) Shares Acquired on Value Realized Exercisable/ Exercisable/ Name Exercise (1) Unexercisable Unexercisable - ---- ----------- -------------- -------------------- ----------------------- Mark S. Ain .......... 101,250 $1,890,675 144,000/229,500 $2,688,360/4,154,130 Paul A. Lacy ......... 102,375 1,920,668 16,875/147,750 262,894/2,658,874 Aron J. Ain .......... 116,438 2,147,980 2,813/147,750 16,706/2,658,874 Peter C. George ...... 25,875 459,189 54,000/110,250 1,056,660/1,997,310 James Kizielewicz .... 58,500 1,118,055 2,250/112,500 13,365/2,013,930
(1) Represents the difference between the exercise price and the fair market value of the common stock on the date of exercise. (2) Based on the fair market value of the common stock on September 30, 2003 ($35.27), the last day of the Company's 2003 fiscal year, less the option exercise price. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Kronos is exposed to a variety of market risks, including changes in interest rates affecting the return on its investments, foreign currency fluctuations and decreases in its common stock price affecting capped call options. Refer to Note A, "Summary of Significant Accounting Policies", in the Notes to Consolidated Financial Statements for further discussion regarding marketable securities, foreign currency forward exchange contracts and capped call option arrangements. Kronos' marketable securities that expose it to market rate risks are comprised of debt securities. A decrease in interest rates would not adversely impact interest income or related cash flows pertaining to securities held at September 30, 2003, as all of these securities have fixed rates of interest. A 100 basis point increase in interest rates would not adversely impact the fair value of these securities by a material amount due to the size and average duration of the portfolio. Kronos' exposure to market risk for fluctuations in foreign currency relate primarily to the amounts due from subsidiaries. Exchange gains and losses related to amounts due from subsidiaries have not been material. For foreign currency exposures existing at September 30, 2003, a 10% unfavorable movement in the foreign exchange rates for each subsidiary location would not expose the Company to material losses in earnings or cash flows. The calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. Kronos has periodically entered into short-term capped call options in conjunction with its stock repurchase initiatives. During the first quarter of fiscal 2003, Kronos received $2.6 million upon the maturity of a call option arrangement. For more information on this call option, please refer to Note A in the Notes to Condensed Consolidated Financial Statements. As of September 30, 2003, there were no capped call option arrangements outstanding. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data are included herein under Item 6 and in the Consolidated Financial Statements and related notes thereto. See Item 15 of this Form 10-K. Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure None. PART III Item 9A. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30, 2003. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2003, the Company's disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Changes in Internal Controls. No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal year ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Item 10. Directors and Executive Officers of the Registrant Information relating to the executive officers of the registrant appears under the caption "Executive Officers of the Registrant" in Part I, following Item 4 of this Form 10-K. Information relating to the directors is incorporated by reference from the Company's definitive proxy statement for the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under the captions "Election of Directors" and "Board of Directors and Committees." Item 11. Executive Compensation Incorporated by reference from the Company's definitive proxy statement for the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under the following captions: "Director Compensation," "Executive Compensation," "Option Grants and Exercises," "Equity Compensation Plan Information," and "Report of Compensation Committee." Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated by reference from the Company's definitive proxy statement for the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under the caption "Security Ownership of Certain Beneficial Owners and Management." The disclosure required by Item 201(d) of Regulation S-K is incorporated by reference from the Company's definitive proxy statement for the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under the caption "Equity Compensation Plan Information". Item 13. Certain Relationships and Related Transactions Information related to executive officers' retention agreements is incorporated by reference from the Company's definitive proxy statement for the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under the caption "Employment Contracts and Retention Agreements." Item 14. Principal Accountant Fees and Services Incorporated by reference from the Company's definitive proxy statement for the 2004 Annual Meeting of Stockholders to be held on February 12, 2004 under the caption "Relationship with Independent Auditors." PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements The following are filed as a part of this report: 1. Financial Statements Page ---- Consolidated Statements of Income for the Years Ended F-1 September 30, 2003, 2002 and 2001 Consolidated Balance Sheets as of September 30, 2003 and 2002 F-2 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2003, 2002 and 2001 F-3 Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001 F-4 Notes to Consolidated Financial Statements F-5 Report of Ernst & Young LLP, Independent Auditors F-25 2. Financial Statement Schedules Information required by schedule II is shown in the Notes to Consolidated Financial Statements. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) Reports on Form 8-K On July 24, 2003, the Company furnished a Current Report on Form 8-K under Item 12, containing a copy of its earnings release, dated July 24, 2003, for the period ended June 28, 2003. On October 28, 2003, the Company furnished a Current Report on Form 8-K under Item 12, containing a copy of its earnings release, dated October 28, 2003, for the period ending September 30, 2003. On October 7, 2003, the Company furnished a Current Report on Form 8-K under Item 5, containing a copy of its press release announcing the declaration of a three-for-two stock split of the Company's common stock, in the form of a 50% common stock dividend. (c) Exhibits The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index following the audit report to this Form 10-K and are incorporated herein by reference. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on December 23, 2003. KRONOS INCORPORATED By /s/ Mark S. Ain ------------------------------------- Mark S. Ain Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 23, 2003. Signature Capacity - --------- -------- /s/ Mark S. Ain Chief Executive Officer - ------------------------- and Chairman of the Board Mark S. Ain (Principal Executive Officer) /s/ Paul A. Lacy Executive Vice President, Chief Financial - ------------------------- and Administrative Officer Paul A. Lacy (Principal Financial and Accounting Officer) /s/ Aron J. Ain Executive Vice President, Chief Operating - ------------------------- Officer Aron J. Ain /s/ W. Patrick Decker Director - ------------------------- W. Patrick Decker /s/ Richard J. Dumler Director - ------------------------- Richard J. Dumler /s/ D. Bradley McWilliams Director - ------------------------- D. Bradley McWilliams /s/ Lawrence Portner Director - ------------------------- Lawrence Portner /s/ Samuel Rubinovitz Director - ------------------------- Samuel Rubinovitz /s/ David B. Kiser Director - ------------------------- David B. Kiser
Consolidated Statements of Income In thousands, except share and per share data Year Ended September 30, 2003 2002 2001 ------------ ------------ ------------ Net revenues: Product ...................................... $ 178,607 $ 158,466 $ 154,064 Maintenance .................................. 124,911 105,519 80,393 Professional services ........................ 93,837 78,392 60,833 ------------ ------------ ------------ 397,355 342,377 295,290 Cost of sales: Costs of product ............................. 42,507 37,577 33,993 Costs of maintenance and professional services 112,897 94,061 78,808 ------------ ------------ ------------ 155,404 131,638 112,801 ------------ ------------ ------------ Gross profit ............................. 241,951 210,739 182,489 Operating expenses and other income: Sales and marketing .......................... 123,937 109,780 99,767 Engineering, research and development ........ 38,463 36,970 33,333 General and administrative ................... 25,884 21,196 18,520 Amortization of intangible assets ............ 3,481 2,970 7,557 Other income, net ............................ (4,375) (4,668) (5,768) Special charge ............................... -- -- 3,689 ------------ ------------ ------------ 187,390 166,248 157,098 ------------ ------------ ------------ Income before income taxes ............... 54,561 44,491 25,391 Provision for income taxes ....................... 19,895 15,664 8,887 ------------ ------------ ------------ Net income ............................... $ 34,666 $ 28,827 $ 16,504 ============ ============ ============ Net income per common share: Basic .................................... $ 1.16 $ 0.98 $ 0.59 ============ ============ ============ Diluted .................................. $ 1.12 $ 0.94 $ 0.57 ============ ============ ============ Weighted-average common shares outstanding: Basic .................................... 29,834,942 29,413,316 28,134,765 ============ ============ ============ Diluted .................................. 31,003,019 30,543,812 29,019,492 ============ ============ ============
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets In thousands, except share and per share data September 30, 2003 2002 ---------- ---------- ASSETS Current assets: Cash and equivalents .................................................................. $ 69,884 $ 34,117 Marketable securities ................................................................. 17,056 16,096 Accounts receivable, less allowances of $7,833 ........................................ 84,275 84,128 at September 30, 2003 and $9,697 at September 30, 2002 Deferred income taxes ................................................................. 8,427 6,893 Other current assets .................................................................. 18,649 17,835 --------- --------- Total current assets .......................................................... 198,291 159,069 Property, plant and equipment, net ......................................................... 39,263 38,635 Marketable securities ...................................................................... 44,065 24,534 Intangible assets .......................................................................... 22,938 20,545 Goodwill ................................................................................... 70,446 56,167 Capitalized software, net .................................................................. 23,012 22,237 Other assets ............................................................................... 14,791 11,837 --------- --------- Total assets .................................................................. $ 412,806 $ 333,024 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ...................................................................... $ 6,584 $ 6,212 Accrued compensation .................................................................. 35,655 32,674 Accrued expenses and other current liabilities ........................................ 16,169 10,831 Deferred product revenues ............................................................. 3,387 6,853 Deferred professional service revenues ................................................ 39,745 33,551 Deferred maintenance revenues ......................................................... 75,505 66,550 --------- --------- Total current liabilities ..................................................... 177,045 156,671 Deferred maintenance revenues .............................................................. 7,319 8,588 Deferred income taxes ...................................................................... 8,190 4,565 Other liabilities .......................................................................... 3,655 3,531 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, 30,439,778 and 29,867,928 shares issued at September 30, 2003 and September 30, 2002, respectively 304 299 Additional paid-in capital ............................................................ 38,110 31,394 Retained earnings ..................................................................... 177,841 143,175 Cost of Treasury Stock (260 shares and 549,093 shares at September 30, 2003 and September 30, 2002, respectively) .......................... (6) (14,020) Accumulated other comprehensive income/(loss): Foreign currency translation ...................................................... (8) (1,372) Net unrealized gain on available-for-sale investments ............................. 356 193 --------- --------- 348 (1,179) Total shareholders' equity .................................................... 216,597 159,669 --------- --------- Total liabilities and shareholders' equity .................................... $ 412,806 $ 333,024 ========= =========
See accompanying notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity
In thousands Accumulated Common Stock Additional Other Treasury Stock ---------------- Paid-in Retained Comprehensive ---------------- Shares Amount Capital Earnings Income (Loss) Shares Amount Total ---------------- ---------- -------- ------------- ---------------- -------- Balance at September 30, 2000 .. 28,428 $285 $23,683 $ 97,844 $(1,366) 698 $(12,656) $107,790 Net income .................... -- -- -- 16,504 -- -- -- 16,504 Foreign currency translation .. -- -- -- -- (518) -- -- (518) Net unrealized gain on available-for-sale securities -- -- -- -- 400 -- -- 400 -------- Comprehensive income ........ -- -- -- -- -- -- -- 16,386 Proceeds from exercise of stock options ............... 303 3 (6,660) -- -- (891) 15,560 8,903 Proceeds from employee stock purchase plan ............... -- -- (2,053) -- -- (327) 5,534 3,481 Purchase of treasury stock .... -- -- -- -- -- 665 (11,026) (11,026) Tax benefit from the exercise of stock options and other -- -- 5,482 -- -- -- -- 5,482 ------ ---- ------- -------- ------- ------- -------- -------- Balance at September 30, 2001 .. 28,731 288 20,452 114,348 (1,484) 145 (2,588) 131,016 Net income .................... -- -- -- 28,827 -- -- -- 28,827 Foreign currency translation .. -- -- -- -- 424 -- -- 424 Net unrealized loss on available-for-sale securities -- -- -- -- (119) -- -- (119) -------- Comprehensive income ........ -- -- -- -- -- -- -- 29,132 Proceeds from exercise of stock options ............... 1,012 10 4,115 -- -- (411) 10,041 14,166 Proceeds from employee stock purchase plan ............... 125 1 402 -- -- (125) 3,666 4,069 Purchase of treasury stock .... -- -- (13) -- -- 940 (25,139) (25,152) Tax benefit from the exercise of stock options and other -- -- 9,248 -- -- -- -- 9,248 Net investment in call options -- -- (2,810) -- -- -- -- (2,810) ------ ------ --------- -------- ------- ------- -------- -------- Balance at September 30, 2002 .. 29,868 299 31,394 143,175 (1,179) 549 (14,020) 159,669 Net income .................... -- -- -- 34,666 -- -- -- 34,666 Foreign currency translation .. -- -- -- -- 1,364 -- -- 1,364 Net unrealized gain on available-for-sale securities -- -- -- -- 163 -- -- 163 -------- Comprehensive income ........ -- -- -- -- -- -- -- 36,193 Proceeds from exercise of stock options ............... 441 4 (6,158) -- -- (975) 24,489 18,335 Proceeds from employee stock purchase plan ............... 131 1 1,238 -- -- (165) 4,214 5,453 Purchase of treasury stock .... -- -- (15) -- -- 591 (14,689) (14,704) Tax benefit from the exercise of stock options and other -- -- 9,054 -- -- -- -- 9,054 Proceeds from call options .... -- -- 2,597 -- -- -- -- 2,597 ------ ---- ------- -------- ------- ------- -------- -------- Balance at September 30, 2003 .. 30,440 $304 $38,110 $177,841 $ 348 -- $ (6) $216,597 ====== ==== ======= ======== ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows In thousands Year Ended September 30, 2003 2002 2001 -------- -------- -------- Operating activities: Net income ...................................................... $ 34,666 $ 28,827 $ 16,504 Adjustments to reconcile net income to net cash and equivalents provided by operating activities: Depreciation ............................................... 11,210 9,513 8,362 Amortization of intangible assets .......................... 3,481 2,970 7,557 Amortization of capitalized software ....................... 11,470 9,511 8,249 Provision for deferred income taxes ........................ 2,223 4,759 1,976 Changes in certain operating assets and liabilities: Accounts receivable, net ................................ (3,005) 4,724 (5,659) Deferred product revenues ............................... (3,545) 2,716 3,049 Deferred professional service revenues .................. 4,853 2,216 5,524 Deferred maintenance revenues ........................... 3,092 (1,282) 771 Accounts payable, accrued compensation and other liabilities ................................... 6,347 226 3,887 Taxes payable ........................................... 2,431 (2,118) (1,039) Non-cash portion of special charge ...................... -- -- 1,753 Other ................................................... 315 (1,096) (2,043) Tax benefit from exercise of stock options and other ....... 9,054 9,248 5,482 -------- -------- -------- Net cash and equivalents provided by operating activities 82,592 70,214 54,373 Investing activities: Purchase of property, plant and equipment ....................... (11,559) (11,557) (7,585) Capitalized internal software development costs ................. (12,128) (11,216) (11,059) Increase in marketable securities ............................... (20,491) (8,417) (3,974) Acquisitions of businesses and software, net of cash acquired ... (15,605) (31,859) (19,506) -------- -------- -------- Net cash and equivalents used in investing activities ... (59,783) (63,049) (42,124) Financing activities: Net proceeds from exercise of stock options and employee purchase plans ....................................... 23,788 18,235 12,384 Purchase of treasury stock ...................................... (14,704) (25,152) (11,026) Proceeds from (net investment in) call options .................. 2,597 (2,810) -- -------- -------- -------- Net cash and equivalents provided by/(used in) financing activities ................................. 11,681 (9,727) 1,358 Effect of exchange rate changes on cash and equivalents ........... 1,277 118 (247) -------- -------- -------- Increase (decrease) in cash and equivalents ....................... 35,767 (2,444) 13,360 Cash and equivalents at the beginning of the period ............... 34,117 36,561 23,201 -------- -------- -------- Cash and equivalents at the end of the period ..................... $ 69,884 $ 34,117 $ 36,561 ======== ======== ========
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KRONOS INCORPORATED NOTE A--Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Kronos Incorporated and its wholly-owned subsidiaries (the "Company"). All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications, which are not material, have been made in the accompanying consolidated financial statements in order to conform to the fiscal 2003 presentation. The Company operates in one business segment, the development, manufacturing and marketing of employee relationship management systems that improve workforce productivity and the utilization of labor resources. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Translation of Foreign Currencies: The assets and liabilities of the Company's foreign subsidiaries are denominated in each country's local currency and translated at the year-end rate of exchange. The related income statement items are translated at the average rate of exchange for the year. The resulting translation adjustments are excluded from income and reflected as a separate component of shareholders' equity. Realized and unrealized exchange gains or losses arising from transaction adjustments are reflected in operations. The Company may periodically have certain intercompany foreign currency transactions that are deemed to be of a long-term investment nature. Exchange adjustments related to those transactions are made directly to a separate component of shareholders' equity. Stock Split: On September 26, 2003, the Company's Board of Directors approved a three-for-two stock split, effective on October 7, 2003, in the form of a 50% stock dividend. This stock dividend was paid on October 31, 2003 to stockholders of record as of October 20, 2003. Accordingly, the presentation of shares outstanding and amounts per share have been restated for all periods presented to reflect the split. Cash Equivalents: Cash equivalents consist of highly liquid investments with maturities of three months or less at date of acquisition. Marketable Securities: The Company's marketable securities consist of United States government agency bonds, corporate bonds and state revenue bonds. Bonds with a maturity of 12 months or longer at the balance sheet date are classified as non-current marketable securities. At September 30, 2003, no bonds had effective maturities that extend beyond October 2008. Marketable securities are carried at fair value as determined from quoted market prices. Interest income earned on the Company's cash, cash equivalents and marketable securities are included in other income, net and amounted to $1,779,000, $1,740,000, and $2,490,000, in fiscal 2003, 2002 and 2001, respectively. Financial Instruments: The carrying value of the Company's financial instruments, which include cash and cash equivalents, marketable securities, current and non-current accounts receivable and accounts payable, approximated their fair value at September 30, 2003 and September 30, 2002, respectively, due to the short-term nature of these instruments. Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost less accumulated depreciation, provisions for which have been computed using the straight-line method over the estimated useful lives of the assets, which are principally as follows: Estimated Assets Useful Life - -------------------------------------------------------------------------------- Building 30 years Machinery, equipment and software 3-5 years Furniture and fixtures 8-10 years Leasehold improvements Shorter of economic life or lease-term Valuation of Intangible Assets and Goodwill: In assessing the recoverability of goodwill and other intangible assets, the Company must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or their related assumptions change in the future, the Company 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, the Company 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 Company has only one reporting unit. 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. No impairment was recorded during fiscal 2003. See Note G for a discussion of the Company's impairment tests and related results. Revenue Recognition: The Company licenses software and sells data collection hardware and related ancillary products to end-user customers through its direct sales force as well as indirect channel customers, which include ADP and other independent resellers. Substantially all of the Company's software license revenue is earned from perpetual licenses of off-the-shelf software requiring no modification or customization. The software license, data collection hardware and related ancillary product revenues from the Company's end-user customers and indirect channel customers are generally recognized using the residual method when: o Persuasive evidence of an arrangement exists, which is typically when a non-cancelable sales and software license agreement has been signed; o Delivery, which is typically FOB shipping point, is complete for the software (either physically or electronically), data collection hardware and related ancillary products; o The customer's fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties; o Collectibility is probable; and o Vendor-specific objective evidence of fair value exists for all undelivered elements, typically maintenance and professional services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue, assuming all other conditions for revenue recognition have been satisfied. Substantially all of the Company's product revenue is recognized in this manner. If the Company cannot determine the fair value of any undelivered element included in an arrangement, the Company will defer revenue until all elements are delivered, services are performed or until fair value can be objectively determined. As part of an arrangement, end-user customers typically purchase maintenance contracts as well as professional services from the Company. Maintenance services include telephone and Web-based support as well as rights to unspecified upgrades and enhancements, when and if the Company makes them generally available. Professional services are deemed to be non-essential and typically are for implementation planning, loading of software, installation of the data collection hardware, training, building simple interfaces, running test data, and assisting in the development and documentation of pay rules and best practices consulting. Revenues from maintenance services are recognized ratably over the term of the maintenance contract period based on vendor-specific objective evidence of fair value. Vendor-specific objective evidence of fair value is based upon the amount charged when purchased separately, which is typically the contract's renewal rate. Maintenance services are typically stated separately in an arrangement. The Company has classified the allocated fair value of revenues pertaining to the contractual maintenance obligations that exist for the 12-month period subsequent to the balance sheet date as a current liability, and the contractual obligations with a term beyond 12 months as a non-current liability. Revenues from time and material maintenance services are recognized as the services are delivered. Revenues from professional services are generally recognized based on vendor-specific objective evidence of fair value when: o A non-cancelable agreement for the services has been signed or a customer's purchase order has been received; and o The professional services have been delivered. Vendor-specific objective evidence of fair value is based upon the price charged when these services are sold separately and are typically an hourly rate for professional services and a per-class rate for training. Based upon the Company's experience in completing product implementations, it has determined that these services are typically delivered within a 12-month period subsequent to the contract signing and therefore classifies deferred professional services as a current liability. The Company's arrangements with its end-user customers and indirect channel customers do not include any rights of return or price protection, nor do arrangements with indirect channel customers include any acceptance provisions. Generally, the Company's arrangements with end-user customers also do not include any acceptance provisions. However, if an arrangement does include acceptance provisions, they typically are based on the Company's standard acceptance provision. The Company's standard acceptance provision provides the end-user customer with a right to a refund if the arrangement is terminated because the product did not meet Kronos' published specifications. Generally, the Company determines that these acceptance provisions are not substantive and therefore should be accounted for as a warranty in accordance with SFAS No. 5. At the time the Company enters into an arrangement, the Company assesses the probability of collection of the fee and the terms granted to the customer. For end-user customers, the Company's typical payment terms include a deposit and subsequent payments, based on specific due dates, such that all payments for the software license, data collection hardware and related ancillary products, as well as services included in the original arrangement are ordinarily due within one year of contract signing. The Company's payment terms for its indirect channel customers are less than 90 days and typically due within 30 days of invoice date. If the payment terms for the arrangement are considered extended or if the arrangement includes a substantive acceptance provision, the Company defers revenue not meeting the criterion for recognition under SOP 97-2 and classifies this revenue as deferred revenue, including deferred product revenue. This revenue is recognized, assuming all other conditions for revenue recognition have been satisfied, when the payment of the arrangement fee becomes due and/or when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee. The Company reports the allocated fair value of revenues related to the product element of arrangements as a current liability because of the expectation that these revenues will be recognized within 12 months of the balance sheet date. Since fiscal 1996, the Company has had a standard practice of providing creditworthy end-user customers the option of financing arrangements beyond one year. These arrangements, which encompass separate fees for software license, data collection hardware and ancillary products, maintenance and support contracts and professional services, are evidenced by distinct standard sales, license and maintenance agreements and typically require equal monthly payments. The term of these arrangements typically range between 18 and 48 months. At the time the Company enters into an arrangement, the Company assesses the probability of collection and whether the arrangement fee is fixed or determinable. The Company considers its history of collection without concessions as well as whether each new transaction involves similar customers, products and arrangement economics to ensure that the history developed under previous arrangements remains relevant to current arrangements. If the fee is not determined to be collectible, fixed or determinable, the Company will initially defer the revenue and recognize when collection becomes probable, which typically is when payment is due assuming all other conditions for revenue recognition have been satisfied. Allowance for Doubtful Accounts and Sales Returns Allowance: The Company 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 the Company after consideration of factors such as the composition of the accounts receivable aging and bad debt history. In addition, the Company maintains a sales returns allowance to reflect estimated losses for sales returns and adjustments. Sales returns and adjustments are generally due to incorrect ordering of product, general customer satisfaction issues or incorrect billing. This allowance is established by the Company using estimates based on historical experience. 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. 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. Stock-Based Compensation: The Company accounts for its stock-based compensation plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations. Under APB 25, no compensation expense is recognized as the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: September 30, -------------------------------------- 2003 2002 2001 - -------------------------------------------------------------------------------- Expected volatility 60.0% 55.8% 50.9% Risk-free interest rate 2.5% 3.9% 5.6% Expected lives (in years) 4.0 4.0 4.0 The Company has not paid and does not anticipate paying cash dividends; therefore, the expected dividend yield is assumed to be zero. The weighted-average fair value of options granted under the 1992 Equity Incentive Plan during fiscal 2002 and 2001 was $8.17 and $6.36, respectively. The weighted-average fair value of options granted under the 2002 Equity Incentive Plan during fiscal 2003 and 2002 was $8.07 and $12.63, respectively. For purposes of the pro forma disclosure below, the estimated fair value of the Company's stock-based compensation plan and the estimated benefit derived from the Company's 1992 Employee Stock Purchase Plan is amortized to expense over the options' vesting period. The Company's pro forma net income and net income per share for the years ended September 30, 2003, 2002 and 2001 are as follows (in thousands, except per share data):
2003 2002 2001 ---- ---- ---- Net income, as reported .................. $ 34,666 $ 28,827 $ 16,504 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ...................... 7,533 6,821 4,764 -------- -------- ---------- Pro forma net income ..................... $ 27,133 $ 22,006 $ 11,740 ======== ======== ========== Earnings per share: Basic - as reported ................ $ 1.16 $ 0.98 $ 0.59 ======== ======== ========== Basic - pro forma .................. $ 0.91 $ 0.75 $ 0.42 ======== ======== ========== Diluted - as reported .............. $ 1.12 $ 0.94 $ 0.57 ======== ======== ========== Diluted - pro forma ................ $ 0.88 $ 0.72 $ 0.40 ======== ======== ==========
Income Taxes: The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Net Income Per Share: Net income per share is based on the weighted-average number of common shares and, when dilutive, includes stock options and put options (see Notes M and N). Derivatives: The Company from time to time holds foreign currency forward exchange contracts having durations of no more than 12 months. These forward exchange contracts offset the impact of exchange rate fluctuations on intercompany payables due from the Company's foreign subsidiaries. Forward exchange contracts are accounted for as cash flow hedges and are recorded on the balance sheet at fair value. Changes in the fair value are recognized in other comprehensive income until the gain or loss of the hedged item is recognized in earnings, at which time the change in the fair value is reclassified to earnings. For fiscal 2003, the difference between the cumulative change in the fair value of the hedge instruments and the cumulative change in the value of the hedged transactions was not material. As of September 30, 2003, the fair value of these forward contracts was not material. In addition, the Company has periodically entered into a limited number of call option arrangements. A call option arrangement provides the Company an opportunity to lock in a repurchase price for shares under the Company's stock repurchase program. There are no dividend and liquidation preferences, participation rights, sinking-fund requirements, unusual voting rights or any other significant terms pertaining to these call option arrangements. The Company has classified the call option arrangements as an equity instrument in accordance with the provisions of Emerging Issues Task Force ("EITF") 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." A call option matured during fiscal 2003. At maturity, the Company's stock price exceeded the strike price of $16.67 per share and the Company received a return of its cash investment and a premium totaling approximately $2.6 million, which was credited to additional paid-in capital. If at maturity, the Company's stock price was less than the strike price, the Company would use its cash investment to purchase Company shares at a predetermined price. As of September 30, 2003, there were no call option arrangements outstanding. Newly Issued Accounting Standards: In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. The statement amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. Kronos accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of FASB Statement No. 123. The transition provisions are effective for fiscal years ending after December 15, 2002. The disclosure provisions are effective for interim periods beginning after December 15, 2002. Kronos implemented the required disclosure provisions in the three-month period ended March 29, 2003. The adoption of this statement did not have any impact on Kronos' consolidated financial position, results of operations or cash flows and Kronos does not anticipate making the voluntary change to the fair value method of accounting for stock-based compensation. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." FIN No. 46 requires certain variable interest entities, or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all VIEs created or acquired after January 31, 2003. In October 2003, the FASB issued FIN No. 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities." This FASB Staff Position deferred the effective date for applying the provisions of FIN No. 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003. A public entity need not apply the provisions of FIN No. 46 to an interest held in a variable interest entity or potential variable interest entity until the end of the first interim or annual period ending after December 15, 2003 if both of the following apply: o The variable interest entity was created before February 1, 2003. o The public entity has not issued financial statements reporting interests in variable interest entities in accordance with FIN No. 46, other than certain required disclosures. Kronos currently has no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46-6 will not have a material effect on Kronos' consolidated financial position, results of operations or cash flows. NOTE B--Concentration of Credit Risk The Company markets and sells its products through its direct sales organization, independent resellers and an OEM agreement with ADP. The Company's resellers have significantly smaller resources than the Company. The Company's direct sales organization sells to customers who are dispersed across many different industries and geographic areas. The Company does not have a concentration of credit or operating risk in any one industry or any one geographic region within or outside of the United States. The Company reviews a customer's (including reseller's) credit history before extending credit and generally does not require collateral. The Company establishes its allowances based upon factors including the credit risk of specific customers, historical trends and other information. NOTE C - Marketable Securities The following is a summary of marketable securities (in thousands):
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ------- ---------- ---------- --------- September 30, 2003 Available-for-sale securities: United States government and agency debt securities $13,019 $ 57 $ 10 $13,066 Municipal debt securities 36,229 243 19 36,453 U.S. corporate securities 11,517 120 35 11,602 ------- ------- ------- ------- $60,765 $ 420 $ 64 $61,121 ======= ======= ======= ======= September 30, 2002 Available-for-sale securities: United States government and agency debt securities $ 5,605 $ 40 $ -- $ 5,645 Municipal debt securities 15,982 17 120 15,879 U.S. corporate securities 18,850 281 25 19,106 ------- ------- ------- ------- $40,437 $ 338 $ 145 $40,630 ======= ======= ======= =======
The Company recorded gross proceeds from the sale of available-for-sale securities of $43.1 million, $22.5 million and $23.7 million in fiscal 2003, 2002 and 2001, respectively, and recorded a gross realized gain of $434,000 and $298,000 in fiscal 2003 and 2002, respectively, and a gross realized loss of $296,000 in fiscal 2001. In fiscal 2003, 2002 and 2001, the net unrealized gain of $163,000, the net unrealized loss of $119,000, and the net unrealized gain of $400,000, respectively, is included as a separate component of shareholders' equity. The amortized costs and estimated fair value of debt securities at September 30, 2003 are shown below by effective maturity. Effective maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties (in thousands). Estimated Fair Cost Value ---- --------- Available-for-sale securities: Due in one year or less $16,972 $17,056 Due after one year through two years 24,115 24,211 Due after two years through four years 18,490 18,671 Due after four years 1,188 1,183 --------- --------- $60,765 $61,121 ========= ========= NOTE D -Accounts Receivable Accounts receivable consists of the following (in thousands):
September 30, ---------------------------------------- 2003 2002 2001 -------- -------- -------- Trade accounts receivable ................. $ 92,108 $ 93,825 $ 88,202 Non-current trade accounts receivable ..... 14,435 11,386 12,679 -------- -------- -------- 106,543 105,211 100,881 Less: Allowance for doubtful accounts ........... 4,455 6,546 5,099 Allowance for sales returns and adjustments 3,378 3,151 3,524 -------- -------- -------- 7,833 9,697 8,623 -------- -------- -------- $ 98,710 $ 95,514 $ 92,258 ======== ======== ========
Non-current trade accounts receivable relate to balances not due within the next 12 months and are included in other assets. Allowance activity consists of the following (in thousands):
September 30, --------------------------------------- 2003 2002 2001 ------- ------- ------- Beginning balance .................. $ 9,697 $ 8,623 $ 7,462 Plus: Provisions ......................... 1,183 924 2,357 Acquired accounts receivable reserve -- 1,628 -- Recoveries ......................... (1,077) (365) -- ------- ------- ------- 106 2,187 2,357 Less: Write-offs ......................... (1,970) (1,113) (1,196) ------- ------- ------- $ 7,833 $ 9,697 $ 8,623 ======= ======= =======
In fiscal 2001 provisions of $2,357,000 included reserves for specific accounts, which were substantially recovered during fiscal 2003 and 2002. In fiscal 2002, $1,628,000 was reserved for accounts receivable acquired via acquisitions and recorded through purchase accounting. Charges against the allowances of $1,970,000, $1,113,000, and $1,196,000 in fiscal 2003, 2002 and 2001, respectively, principally relate to uncollectible accounts written off. Included in the fiscal 2003 charges were $1,284,000 of write-offs of acquired accounts receivable. It is the Company's practice to record an estimated allowance for sales returns and adjustments based on historical experience and to record individual charges for sales returns and adjustments directly to revenue as incurred. NOTE E - Other Current Assets Other current assets consists of the following (in thousands): September 30, -------------------------------- 2003 2002 ------- ------- Inventory $ 5,197 $ 6,492 Prepaid expenses 13,452 11,343 ------- ------- Total $18,649 $17,835 ======= ======= NOTE F--Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): September 30, ------------------------- 2003 2002 -------- ------- Land $ 2,810 $ 2,810 Building 13,522 13,522 Machinery, equipment and software 69,366 62,038 Furniture and fixtures 15,503 13,768 Leasehold improvements 6,925 5,870 -------- ------- 108,126 98,008 Less accumulated depreciation 68,863 59,373 -------- ------- $ 39,263 $38,635 ======== ======= NOTE G--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 September 30, 2003, the Company completed its annual testing of the impairment of goodwill, as of June 29, 2003. As a result of the test, the Company has concluded that no impairment of goodwill existed as of June 29, 2003. Therefore, as a result of this impairment test, no impairment was recorded in fiscal 2003. 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 fiscal year ended September 30, 2001 (in thousands, except per share data).
Twelve Months Ended September 30, ---------------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Reported net income ....... $ 34,666 $ 28,827 $ 16,504 Add back: Goodwill amortization .............. -- -- 3,544 ---------- ---------- ---------- Adjusted net income ... $ 34,666 $ 28,827 $ 20,048 ========== ========== ========== Basic earnings per share: Reported net income ... $ 1.16 $ 0.98 $ 0.59 Goodwill amortization . -- -- 0.13 ---------- ---------- ---------- Adjusted net income ... $ 1.16 $ 0.98 $ 0.71 ========== ========== ========== Diluted earnings per share: Reported net income ... $ 1.12 $ 0.94 $ 0.57 Goodwill amortization . -- -- 0.12 ---------- ---------- ---------- Adjusted net income ... $ 1.12 $ 0.94 $ 0.69 ========== ========== ==========
Certain earnings per share amounts may not sum to the total due to rounding. Acquired intangible assets subject to amortization are presented in the following table (in thousands).
Weighted Average Gross Life in Carrying Accumulated Net Book Years Value Amortization Value -------- -------- ------------ -------- As of September 30, 2003: Intangible assets: Customer related ........ 9.7 $21,327 $ 9,261 $12,066 Maintenance relationships 11.9 8,092 1,101 6,991 Tax benefits ............ 10.7 2,144 527 1,617 Non-compete agreements .. 4.0 4,060 1,796 2,264 ------- ------- ------- Total intangible assets ..... $35,623 $12,685 $22,938 ======= ======= ======= As of September 30, 2002: Intangible assets: Customer related ........ 9.5 $19,166 $ 6,851 $12,315 Maintenance relationships 11.9 6,267 535 5,732 Tax benefits ............ 10.7 2,127 309 1,818 Non-compete agreements .. 5.1 1,908 1,228 680 ------- ------- ------- Total intangible assets ..... $29,468 $ 8,923 $20,545 ======= ======= =======
The amount of goodwill acquired during fiscal 2003 and 2002 is $14.3 million and $22.0 million, respectively. During fiscal 2003, the Company recorded amortization expense for intangible assets of $3.5 million. The estimated annual amortization expense for intangible assets for the next five fiscal years is as follows (in thousands): Fiscal Year Ending Estimated Annual September 30, Amortization Expense ------------------ -------------------- 2004 $3,791 2005 3,293 2006 2,865 2007 2,476 2008 2,370 NOTE H--Acquisitions On May 16, 2003, the Company completed the acquisition of the Abra Enterprise customer base from Best Software. The aggregate purchase price was not material to the Company's financial position. The results of operations related to the purchase of these customers, which is 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 gained access to the existing Abra Enterprise customers through its direct sales and service organizations, which broadens the Company's presence in the human resources and payroll market. In addition, the Company gained access to the existing maintenance revenue stream from these customers. The deferred revenue related to the maintenance revenue stream, which was recorded at fair value, was recognized as the Company had assumed a legal performance obligation as described in EITF 01-03. On May 6, 2003, the Company completed the acquisition of certain assets of Simplex International Pty Ltd. ("Simplex International"). Based in Australia, Simplex International was engaged in the marketing, selling, supporting and maintaining integrated workforce management software solutions. The aggregate purchase price was not material to the Company's financial position. The results of Simplex International'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 expects to increase its presence in the mid-market sector in Australia, through its subsidiary in Australia, Kronos Australia Pty. Ltd. The mid market sector includes companies with between 250 and 1,000 employees. In connection with the acquisition, the Company assumed obligations to provide services associated with maintenance contracts and obligations to provide professional services, primarily installation services. The deferred revenue related to the maintenance and professional services revenue streams, which was recorded at fair value, was recognized as the Company had assumed a legal performance obligation as described in EITF 01-03. On March 11, 2003, the Company completed the acquisition of certain assets of Ban-koe Systems, Inc. ("BKS"), the former Minnesota-based Kronos reseller. The aggregate purchase price was not material to the Company's financial position. The results of BKS's operations, which are not material to the Company's results of operations, have been included in the consolidated financial statements since that date. BKS 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 reseller relationship. As a result of the acquisition, the Company gained access to existing and prospective customers in several states (including Michigan, Illinois, Iowa, Wisconsin, and Minnesota) through its direct sales and service organizations, as well as access to the existing maintenance revenue stream from BKS customers. In connection with the acquisition, the Company assumed obligations to provide services associated with maintenance contracts and obligations to provide professional services, primarily installation services. The deferred revenue related to the maintenance and professional services revenue streams, which was recorded at fair value, was recognized as the Company had assumed a legal performance obligation as described in EITF 01-03. On January 20, 2003, the Company completed the acquisition of the maintenance agreements of DataPro Solutions, Inc. ("DP"), the former Washington State-based Kronos reseller. The aggregate purchase price was not material to the Company's financial position. The results of DP operations, which are not material to the Company's results of operations, have been included in the consolidated financial statements since that date. DP 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 reseller relationship. As a result of the acquisition, the Company gained access to the existing maintenance revenue stream from DP customers. The deferred revenue related to the maintenance revenue stream, which was recorded at fair value, was recognized as the Company had assumed a legal performance obligation as described in EITF 01-03. On November 20, 2002, the Company completed the acquisition of certain assets and the ongoing business operations of Hi-Tek Special Systems, Inc. ("HT"), the former Texas-based Kronos reseller. The aggregate purchase price was not material to the Company's financial position. The results of HT's operations, which are not material to the Company's results of operations, have been included in the consolidated financial statements since that date. HT 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 reseller relationship. As a result of the acquisition, the Company gained access to existing and prospective customers in the Texas, New Mexico and Mexico area through its direct sales and service organizations, as well as access to the existing maintenance revenue stream from HT customers. In connection with the acquisition, the Company assumed obligations to provide services associated with maintenance contracts and obligations to provide professional services, primarily installation services. The deferred revenue related to the maintenance and professional services revenue streams, which was recorded at fair value, was recognized as the Company had assumed a legal performance obligation as described in EITF 01-03. 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 has increased its presence in the mid-market sector, which includes companies with between 250 and 1,000 employees. The SimplexGrinnell 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 goodwill recognized is deductible for income tax purposes. 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 $ 6,678 Customer related intangible asset (amortized over 1,100 12 years) Maintenance relationships intangible asset 2,500 (amortized over 12 years) Goodwill 17,655 Other assets 768 ------- Total assets acquired 28,701 Deferred professional services revenue (1,564) Deferred maintenance revenue (4,747) Other liabilities (340) ------- Total liabilities assumed (6,651) ------- Net assets acquired $22,050 ======= In connection with the acquisition of the assets and liabilities of SimplexGrinnell in December 2001, the Company acquired obligations to provide services associated with maintenance contracts and obligations to provide professional services, primarily installation services. The amounts of deferred revenue ascribed to acquired maintenance obligations and professional services amounts to $4.8 million and $1.6 million, respectively. The deferred revenue, which was recorded at fair value, was recognized as the Company had assumed a legal performance obligation as described in EITF 01-03. The acquired maintenance arrangements required the Company to provide phone support, bug fixes and unspecified upgrades for the remaining contract terms. The acquired professional services obligations required the Company to provide installation services. 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). Twelve Months Ended September 30, (unaudited) --------------------------- 2002 2001 -------- -------- Total revenues $348,946 $321,699 Net income 27,664 12,732 Earnings per share - basic $0.94 $0.45 Earnings per share - diluted $0.91 $0.44 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. Certain agreements related to the Company's acquisitions contain provisions that require the Company to make a guaranteed payment and/or contingent payments based upon profitability of the business unit or if specified minimum revenue requirements are met. These provisions expire at various dates through 2006. Guaranteed payments are accrued at the time of the acquisition and are included in the purchase price allocation. Contingent payments due under the terms of the agreements are recognized when earned and are principally recorded as goodwill. However, under certain circumstances, a portion of the contingent payment may be recorded as compensation expense. During fiscal 2003, 2002, and 2001, $2.6 million, $1.0 million and $1.1 million, respectively, of contingent payments were earned, all of which were recorded as goodwill, except for approximately $0.2 million and $0.3 million in fiscal 2003 and 2001, respectively, which were recorded as compensation expense. There are several contingent payment arrangements currently outstanding, on which the Company may have future payment obligations, contingent upon the achievement of various financial performance goals. As of September 30, 2003, the Company has the obligation to pay $3.7 million in guaranteed payments, which is included in the September 30, 2003 balance sheet as accrued expenses and other liabilities. These payments will be made at various dates through fiscal 2006. NOTE I--Capitalized Software Capitalized software and accumulated amortization consists of the following (in thousands): September 30, ----------------------- 2003 2002 -------- -------- Internal development costs $ 71,182 $ 59,054 Acquired from third parties 4,051 3,934 -------- -------- 75,233 62,988 Less accumulated amortization 52,221 40,751 -------- -------- $23,012 $22,237 ======== ======== Total internal development costs capitalized were $12,128,000, $11,216,000 and $11,059,000 in fiscal 2003, 2002 and 2001, respectively. Amortization of capitalized software amounted to $11,470,000, $9,511,000 and $8,249,000 in fiscal 2003, 2002 and 2001, respectively. Total research and development expenses charged to operations amounted to $20,200,000, $19,700,000 and $17,300,000 in fiscal 2003, 2002 and 2001, respectively. Total expenses for engineering activities related to the maintenance of existing products charged to operations amounted to $18,300,000, $17,300,000 and $16,000,000 in fiscal 2003, 2002 and 2001, respectively. NOTE J -Special Charge A special charge in the amount of $3.7 million was recorded during fiscal 2001. In the second quarter of fiscal 2001, the Company recorded a special charge in the amount of $3.0 million related to the termination of the Company's Crosswinds Technology operations. 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 resulted in the termination of the stand-alone operating unit. The $3.0 million charge consisted of $1.6 million in termination costs, $1.3 million for the write-off of intangible assets and $0.1 million in other costs. In addition, $0.7 million was recorded in the third quarter of fiscal 2001 related to termination costs from a reduction in workforce of approximately 90 employees. The charge was the result of management's effort to streamline operations to better align costs with expected revenues. As of September 30, 2002, the Company did not have any remaining liability related to the special charge. NOTE K--Lease Commitments The Company leases certain office space, manufacturing facilities and equipment under long-term operating lease agreements. Future minimum rental commitments under operating leases with non-cancelable terms of one year or more are as follows (in thousands): Operating Lease Fiscal Year Commitments ------------------------------------------------- 2004 $ 9,441 2005 8,320 2006 6,221 2007 4,336 2008 2,028 Thereafter 4,319 ------- $34,665 ======= Rent expense was $12,066,000, $11,704,000 and $9,715,000 in fiscal 2003, 2002 and 2001, respectively. NOTE L--Income Taxes The provision for income taxes consists of the following (in thousands):
Year Ended September 30, --------------------------------- 2003 2002 2001 ------- ------- ------- Current: Federal ................................................................ $14,877 $ 8,313 $ 5,280 State .................................................................. 1,841 1,694 1,140 Foreign ................................................................ 954 898 491 ------- ------- ------- 17,672 10,905 6,911 ------- ------- ------- Deferred: Federal ................................................................ 1,941 4,164 1,729 State .................................................................. 282 595 247 ------- ------- ------- 2,223 4,759 1,976 ------- ------- ------- $19,895 $15,664 $ 8,887 ======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
September 30, ----------------------- 2003 2002 -------- -------- Deferred tax assets: Accounts receivable reserves ........................... $ 2,545 $ 2,115 Inventory reserves ..................................... 557 706 Accrued expenses ....................................... 2,813 1,688 Deferred maintenance revenues .......................... 2,414 4,695 Intangible and goodwill-related amortization ........... 253 1,581 Net operating loss carryforwards of foreign subsidiaries 120 125 -------- -------- Total deferred tax assets .............................. 8,702 10,910 Less valuation allowance ............................. 120 125 -------- -------- 8,582 10,785 Deferred tax liabilities: Capitalized internal development costs ................. (8,185) (7,893) Other .................................................. (160) (564) -------- -------- Net deferred tax assets .............................. 237 2,328 Less non-current portion in other liabilities ........ 8,190 4,565 -------- -------- Net current deferred tax asset ....................... $ 8,427 $ 6,893 ======== ========
The effective tax rate differed from the United States statutory rate as follows: Year Ended September 30, ---------------------------- 2003 2002 2001 ---- ---- ---- Statutory rate 35% 35% 35% State income taxes, net of federal income tax benefit 3 3 3 Goodwill --- --- 2 Tax exempt interest (1) (1) (1) Foreign tax rate differentials --- 1 --- Income tax credits (2) (3) (6) Other 1 --- 2 --- --- --- 36% 35% 35% === === === As of September 30, 2003, $314,000 of net operating loss carryforwards from foreign operations remain available to reduce future income taxes payable. These net operating loss carryforwards may be carried forward indefinitely. The Company has fully reserved for the net operating loss carryforwards due to the uncertainty of their realizability. The Company made income tax payments of $6,796,000, $6,054,000, and $3,641,000 in fiscal 2003, 2002, and 2001, respectively. NOTE M--Net Income Per Share The following table sets forth the computation of basic and diluted earnings per share:
Year Ended September 30, ------------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Net income (in thousands) ... $ 34,666 $ 28,827 $ 16,504 =========== =========== =========== Weighted-average shares ..... 29,834,942 29,413,316 28,134,765 Effect of dilutive securities: Employee stock options ...... 1,168,077 1,130,496 884,727 ----------- ----------- ----------- Adjusted weighted-average shares and assumed conversions ..... 31,003,019 30,543,812 29,019,492 =========== =========== =========== Basic earnings per share ....... $ 1.16 $ 0.98 $ 0.59 =========== =========== =========== Diluted earnings per share ..... $ 1.12 $ 0.94 $ 0.57 =========== =========== ===========
NOTE N--Capital Stock, Stock Repurchase Program and Stock Rights Agreement Capital Stock: The Board of Directors is authorized, subject to any limitations prescribed by law, from time to time to issue up to an aggregate of 1,000,000 shares of preferred stock, $1.00 par value per share, in one or more series, each of such series to have such preferences, voting powers (up to 10 votes per share), qualifications and special or relative rights and privileges as shall be determined by the Board of Directors in a resolution or resolutions providing for the issue of such preferred stock. The Company has periodically entered into a limited number of call option arrangements. A call option arrangement provides the Company an opportunity to lock in a repurchase price for shares under the Company's stock repurchase program. There are no dividend and liquidation preferences, participation rights, sinking-fund requirements, unusual voting rights or any other significant terms pertaining to these call option arrangements. The Company has classified the call option arrangements as an equity instrument in accordance with the provisions of EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." A call option matured during fiscal 2003. At maturity, the Company's stock price exceeded the strike price of $16.67 per share and the Company received a return of its cash investment and a premium totaling approximately $2.6 million, which was credited to additional paid-in capital. Stock Repurchase Program: In fiscal 1997, the Company's Board of Directors implemented a stock repurchase program under which it periodically authorizes, subject to certain business and market conditions, the repurchase of the Company's outstanding common shares to be used for the Company's employee stock option plans and employee stock purchase plan. As of September 30, 2003, the Company's Board of Directors had authorized the repurchase of 5,437,500 common shares, of which 964,912 remain to be repurchased. Under the stock repurchase program, the Company repurchased 535,050, 814,425 and 532,012 common shares in fiscal 2003, 2002 and 2001, respectively, at a cost of $13,212,000, $21,301,000 and $8,671,000, respectively. In addition, the Company is also authorized to and does repurchase stock held for at least six months from employees related to the exercise of stock options. Stock Rights Agreement: The Company has a Stock Rights Agreement, under which each holder of a share of common stock also has one right that initially represents the right to purchase one one-thousandth of a share of a new series of preferred stock at an exercise price of $236, subject to adjustment. The Company reserved 12,500 shares of its preferred stock for issuance under the agreement. The rights may be exercised, in whole or in part, only if a person or group acquires beneficial ownership of 20% or more of the Company's outstanding common stock or announces a tender or exchange offer upon consummation of which, such person or group would beneficially own 25% or more of the Company's common stock. When exercisable, each right will entitle its holder (other than such person or members of such group) to purchase for an amount equal to the then current exercise price, in lieu of preferred stock, a number of shares of the Company's common stock having a market value of twice the right's exercise price. In addition, when exercisable, the Company may exchange the rights, in whole or in part, at an exchange ratio of one share of common stock or one one-thousandth of a share of preferred stock per right. In the event that the Company is acquired in a merger or other business combination, the rights would entitle the stockholders (other than the acquirer) to purchase securities of the surviving company at a similar discount. Until they become exercisable, the rights will be evidenced by the common stock certificates and will be transferred only with such certificates. Under the Agreement, the Company can redeem all outstanding rights at $.01 per right at any time until the tenth day following the public announcement that a 20% beneficial ownership position has been acquired or the Company has been acquired in a merger or other business combination. The rights will expire on November 17, 2005. NOTE O--Employee Benefit Plans Stock Option Plans: In February 2002, the stockholders approved the adoption of the 2002 Stock Incentive Plan. Under this plan, the Compensation Committee of the Board of Directors may grant awards in the form of stock options as defined by the plan. During fiscal 2003 and 2002, under the 2002 Stock Incentive Plan, the Company granted stock options to purchase 1,242,600 and 114,225 shares, respectively, at a purchase price equal to the fair value of the common stock at the date of grant. Options granted in fiscal 2003 and 2002 under the 2002 Stock Incentive Plan are exercisable in equal installments over a four-year period beginning one year from the date of grant and have a contractual life of four years and six months. As of September 30, 2003, there are 1,229,025 options available for grant. The 1992 Equity Incentive Plan, which expired under its terms on March 27, 2002, also enabled the Compensation Committee of the Board of Directors of the Company to grant awards in the form of options as defined in the plan. During fiscal 2002 and 2001, the Company granted under the plan stock options to purchase 1,258,013 and 1,193,850 shares, respectively, of common stock at a purchase price equal to the fair value of the common stock at the date of grant. Options granted in fiscal 2002 and 2001 under the 1992 Equity Incentive Plan are exercisable in equal installments over a four-year period beginning one year from the date of grant and have a contractual life of four years and six months. No further grants may be made under this plan. The Company also had several nonqualified and incentive stock option plans adopted from 1979 through 1987. No additional options were granted under these plans since fiscal 1992, all outstanding options have been exercised and all the plans have expired. The following schedule summarizes the changes in stock options issued under various plans for the three fiscal years in the period ended September 30, 2003. Options exercisable under the plans were 644,598, 880,110 and 1,042,855 in fiscal 2003, 2002 and 2001, respectively.
Weighted - Average Exercise Price Exercise Price Number of Shares Per Share Per Share ---------------- ------------------ -------------- Outstanding at September 30, 2000 4,400,006 $10.56 $1.45 - 28.89 Granted .......... 1,193,850 14.25 12.42 - 17.86 Exercised ........ (1,193,559) 7.46 1.45 - 16.95 Canceled ......... (239,796) 12.34 5.19 - 16.95 ---------- ------ -------------- Outstanding at September 30, 2001 4,160,501 12.41 1.48 - 28.89 Granted .......... 1,372,238 18.89 17.77 - 29.33 Exercised ........ (1,424,016) 9.95 1.48 - 18.45 Canceled ......... (146,942) 14.67 5.19 - 26.61 ---------- ------ -------------- Outstanding at September 30, 2002 3,961,781 15.45 8.19 - 29.33 Granted .......... 1,242,600 16.91 16.57 - 27.98 Exercised ........ (1,415,399) 12.95 8.19 - 27.55 Cancelled ........ (149,433) 16.22 8.19 - 27.07 ---------- ------ -------------- Outstanding at September 30, 2003 3,639,549 $16.89 $10.22 - 29.33 ========== ====== ==============
As discussed in Note A, the Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and continues to account for stock-based compensation under APB 25. Generally no compensation expense is recorded with respect to the Company's stock option and employee stock purchase plans. The following summarizes information about options outstanding and exercisable at September 30, 2003: Outstanding Exercisable ------------------------------------ -------------------- Weighted- Weighted- Weighted- Average Average Average Remaining Exercise Exercise Exercise Price Number Contractual Price Per Number Price Per Per Share of Shares Life Share of Shares Share - -------------- --------- ----------- --------- --------- --------- $10.22 - 13.55 273,906 1.3 years $12.42 118,761 $12.41 13.75 - 15.09 576,336 1.6 years 14.34 134,670 14.34 15.33 - 17.07 1,596,287 2.7 years 16.59 195,957 16.65 17.77 - 23.47 972,670 2.5 years 17.77 142,092 17.77 24.21 - 29.33 220,350 2.9 years 27.42 53,118 28.49 - -------------- --------- ---------- --------- --------- --------- $10.22 - 29.33 3,639,549 2.4 years $16.89 644,598 $16.61 ============== ========= ========== ========= ========= ========= Stock Purchase Plan: In February 2003, the stockholders approved the adoption of the 2003 Employee Stock Purchase Plan. Under this plan, eligible employees may authorize payroll deductions of up to 10% of their compensation (not to exceed $12,500 in a six month period) to purchase shares at the lower of 85% of the fair market value of the Company's common stock at the beginning or end of the six-month option period. No shares were issued under this plan during fiscal 2003. In accordance with the 1992 Employee Stock Purchase Plan, which expired by its terms on June 30, 2003, eligible employees could authorize payroll deductions of up to 10% of their compensation (not to exceed $12,500 in a six month period) to purchase shares at the lower of 85% of the fair market value of the Company's common stock at the beginning or end of the six-month period. During fiscal 2003, 295,752 shares were issued to employees at prices ranging from $16.43 to $20.97 per share. At September 30, 2003, a total of 5,918,574 shares of common stock were reserved for issuance. Included in this amount are 2,546,625 shares for the 2002 Stock Incentive Plan, 2,321,949 shares for the 1992 Equity Incentive Plan, and 1,050,000 shares for the 2003 Employee Stock Purchase Plan. Defined Contribution Plan: The Company sponsors a defined contribution savings plan for the benefit of substantially all employees. Company contributions to the plan are based upon a matching formula applied to employee contributions. Total expense under the plan was $2,602,000, $2,477,000 and $2,210,000 in fiscal 2003, 2002 and 2001, respectively. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Kronos Incorporated We have audited the accompanying consolidated balance sheets of Kronos Incorporated as of September 30, 2003 and 2002, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kronos Incorporated at September 30, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States. As discussed in Note G to the financial statements, the Company changed its method of accounting for acquisitions consummated subsequent to June 30, 2001 and effective October 1, 2001 the Company changed its method of accounting for goodwill. /s/ ERNST & YOUNG LLP Boston, Massachusetts October 24, 2003 Exhibit Index Exhibit No. Description - ------- ----------- 3.1(5) Restated Articles of Organization of the Registrant, as amended. 3.2* Amended and Restated By-laws of the Registrant. 4.1* Specimen Stock Certificate. 10.1(5)(6) 1992 Equity Incentive Plan, as amended and restated. 10.2(6)(10) 2002 Employee Stock Incentive Plan 10.3(6)(11) Kronos Incorporated 2003 Employee Stock Purchase Plan as amended. 10.4(1) Lease dated November 16, 1993, between Teachers Realty Corporation and the Registrant, relating to premises leased in Chelmsford, MA. 10.5(2) Lease dated August 8, 1995, between Principal Mutual Life Insurance Company and the Registrant, relating to premises leased in Chelmsford, MA. 10.6(4) Fleet Bank Letter Agreement and Promissory Note dated January 1, 1997, relating to amendment of $3,000,000 credit facility. 10.7(8) Software License, Hardware Purchase and Support Agreement dated July 24, 2003 between ADP, Inc. and the Registrant, superceding the Restated Software License & Support & Hardware Purchase Agreement dated September 25, 2000. 10.8* Form of Indemnity Agreement entered into among the Registrant and Directors of the Registrant. 10.9(9) Lease Agreement Between W/9TIB Real Estate Limited Partnership, as Landlord, and Kronos Incorporated, as Tenant Dated 2/26/99 10.10(7) Construction Agreement Between Cranshaw Construction of New England Limited Partnership and Kronos Incorporated Dated March 10, 1999. 10.11(7) Agreement of Purchase and Sale Beyond Between W/9TIB Real Estate Limited Partnership and Kronos Incorporated Dated March 29, 1999. 10.12(6) Form of Senior Executive Retention Agreement with accompanying schedule. 10.13(8)(9) Asset Purchase Agreement, dated as of December 28, 2001 by and among the Registrant and SimplexGrinnell L.P., Tyco International Canada, Ltd., Simplex International Pty. Ltd., and ADT Services A.G. 10.14(8)(10) Best Software Inc./Kronos Incorporated Agreement, dated as of March 15, 2002 by and between Kronos Incorporated and Best Software, Inc. 14.1 Code of Ethics of Registrant 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors. 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-4(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-4(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Incorporated by reference to the same Exhibit Number in the Company's Registration Statement on Form S-1 (File No. 33-47383). (1) Incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1993. (2) Incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30,1995. (3) Incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1996. (4) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended December 28, 1996. (5) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended April 4, 1998. (6) Management contract or compensatory plan or arrangement filed as an exhibit to this Form 10-K. (7) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended April 3, 1999. (8) Confidential treatment was requested for certain portions of this agreement. (9) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended December 29, 2001. (10) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended March 30, 2002. (11) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended June 28, 2003. EX-10 4 exhibit10-7.txt Exhibit No. 10.7 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SOFTWARE LICENSE HARDWARE PURCHASE AND SUPPORT AGREEMENT dated as of July 24, 2003 between ADP, Inc. and Kronos Incorporated THIS AGREEMENT, dated as of July 24, 2003 is between ADP, Inc., a Delaware corporation ("ADP"), its Subsidiaries and Affiliates, with offices at One ADP Boulevard, Roseland, New Jersey 07068, and Kronos Incorporated, a Massachusetts corporation ("Kronos"), its Subsidiaries and Affiliates, with offices at 297 Billerica Road, Chelmsford, Massachusetts 01824. WHEREAS, the parties have agreed to revise and replace the Restated Agreement dated as of September 25, 2000 (the "Prior Agreement") with this Agreement; WHEREAS, ADP desires Kronos to provide, and Kronos desires to provide to ADP, a license to use the ADP Time & Attendance Software or any part thereof, the right to sublicense the same to ADP Clients, and certain other rights in connection therewith; and WHEREAS, ADP also desires to purchase and Kronos desires to sell to ADP, certain units of hardware manufactured by Kronos for the purpose of providing such hardware to ADP Clients; WHEREAS, ADP also desires Kronos to provide, and Kronos desires to provide to ADP, certain maintenance, support, training and technical assistance with respect to the ADP Time & Attendance Software and Hardware, all in accordance with the terms and conditions set forth herein; and WHEREAS, Kronos desires to offer certain human resources and payroll software to its customers in accordance with the terms and conditions set forth herein; NOW, THEREFORE, the parties hereto agree as follows: 1. Definitions. (a) "ADP Acquired Time & Attendance Software" shall mean time and attendance software acquired from a third party (non-Kronos) company. (b) "ADP Clients" shall mean all current and future clients and customers of ADP and its Subsidiaries and Affiliates who are now or will be in the future receiving any of the ADP Services. (c) "ADP Features" shall mean the following ADP developed additional features and/or improvements that resulted from the licensing of TKC and Lite Software Source Code: (i) e-Time payroll interface utility (ii) hand punch interface to RSI utility and (iii) punch detail utility. (d) "ADP Services" shall mean any or all of the payroll processing, payroll tax filing, human resources and employee benefits administration and other related services offered by ADP and its Subsidiaries and Affiliates, now or in the future (including, without limitation, the ADP Time & Attendance Services). (e) "ADP Time & Attendance Services" shall mean the time and attendance services, which includes the Hardware and ADP Time & Attendance Software, provided by ADP to ADP Clients. (f) "ADP Time & Attendance Software" shall mean the eTime 1000 Software, eTime 100 Software and the Enterprise eTime Software, all as defined herein. (g) "Affiliate" shall mean, with respect to any entity, any other entity that directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with, such entity; provided however, that any Affiliate of ADP shall be required to be within the ADP Employer Services Group. (h) "Bug" shall mean, when measured against the Kronos user guide documentation applicable to the comparable (as to version and type) Kronos Software, and against any additional specifications for enhancements made by Kronos if such specifications are agreed upon in writing by the parties, (i) a reproducible error that causes the ADP Time & Attendance Software to (a) produce erroneous, distorted or misleading information, (b) abnormally cease to operate or (c) interpret input in an erroneous, distorted or misleading fashion or (ii) a malfunction in the ADP Time & Attendance Software that has been reported and documented by three or more independent users. (i) "Devices" shall mean telephony data collection devices (comparable to Kronos' TeleTime or Workforce TeleTime), swipe readers in which the computer that the swipe reader is attached to records the swipe, point of sale systems, palm readers, scanners, portable handheld data collectors (which must be used in a mobile type of application i.e. not secured to a stationary operation), personal computers, kiosks and wall mount pc kiosks. (j) "eLabor Software" shall mean all Time & Attendance software that was originally obtained by ADP from eLabor Inc. and all software derived from such original software, including, but not limited to, bug-fixes, corrections, modifications, enhancements, versions, and releases. (k) "Enterprise eTime Software" shall mean the WFC Software (referred to in the Prior Agreement as "ADP WFC Software") as enhanced or modified pursuant to Section 5.2 or pursuant to other specifications mutually agreed upon by the parties. (l) "eTime 100 Software" and "eTime 100" shall mean the software (referred to in the Prior Agreement as "ADP-ized Lite Software"), as enhanced or modified under previous agreement(s), or herein pursuant to Section 5.1 or pursuant to other specifications mutually agreed upon by the parties. (m) "eTime 1000 Software" and "eTime 1000" shall mean the TKC Software (referred to in the Prior Agreement as "ADP-ized TKC Software") as enhanced or modified under a previous agreement(s), or herein pursuant to Section 5.1 or pursuant to other specifications mutually agreed upon by the parties. (n) "End-Users" shall mean all current and future clients (including ADP) of Kronos who are now or will be in the future sub-licensing the Software or any part thereof. (o) "Event of Default" shall have the meaning set forth in Section 13(b) hereof. (p) "Hardware" shall mean the units of hardware developed and manufactured by Kronos, as more fully described on Exhibit A ("ADP Price List") attached hereto, as such Exhibit may be amended from time to time, and any other hardware added to this Agreement under Section 7. (q) "Hardware Delivery Period" shall mean that ADP shall be entitled to order Hardware pursuant to this Agreement by issuing P.O.'s during the term hereof for delivery not later than 90 days after the expiration of the term hereof. (r) "Hardware Warranty Period" shall have the meaning set forth in Section 11(a)(i) hereof. (s) "Hosted Environment" shall mean the utilization of software installed in a data center or other similar facility. (t) "Hosting Services Company" shall mean a company that hosts third party software applications in a data center or other similar facility on behalf of the user of such software application. (u) "Kronos Software" shall mean the Workforce Central(R) Software, Timekeeper Central(R) Software and Lite Software, as such terms are defined herein and custom software developed for such Kronos software, if any. (v) "License Fee" shall have the meaning set forth in Section 6(a)(i). (w) "Licensed Basis" shall mean software licensed to a customer that is paid for by the customer on a one-time basis and not on a recurring billing basis. (x) "Lite Software" shall mean the software programs and modules developed by or for, and owned by, Kronos, as generally described on Exhibit B and as listed on Exhibit A attached hereto. Lite Software shall also include (if any, at Kronos' sole option) software programs and/or modules that are released by Kronos as a corrective or Bug-fix release during the term of this Agreement, standard modifications, standard enhancements and future versions of the Lite Software; provided, however, that software developed/manufactured by third parties other than Kronos shall not constitute Lite Software unless such third party software is embedded in the Lite Software or is offered for resale/sublicensing by Kronos to ADP under this Agreement; and provided further that inclusion of modifications, enhancements and future versions, if any, within this definition shall not automatically imply that such items and maintenance of those items are free of charge. (y) "Materials" shall mean at any given time the then current version of all standard documentation provided by Kronos with respect to the Kronos Software or Hardware or any part thereof, including without limitation, any product descriptions and specifications, users' manuals, installation and training guides and data sheets, distributed to its End-Users. (z) "No Start" shall mean a Sublicense to an ADP Client for which ADP has already paid Kronos the applicable License Fee but the Sublicensee has not paid ADP any licensing fee applicable within six (6) months from shipment of the ADP Time & Attendance Software by Kronos for Enterprise eTime and three (3) months from shipment by ADP for eTime 1000 and/or eTime 100. (aa) "Object Code" shall mean computer programs in machine executable form stored on magnetic or electronic recording media. (bb) "Order Acceptance Date" shall mean the date that Kronos receives a complete P.O. from ADP for Hardware. (cc) "Payroll Processing Services" shall mean the provision of payroll processing services in a service bureau environment, including a Hosted Environment. (dd) "P.O." shall mean a Purchase Order or other agreed upon order form. (ee) "Scheduling" shall mean specifying the times a person starts/stops different work activities and/or the process of forecasting and planning a schedule, as such schedule relates to the scheduling of people for work. (ff) "Software" shall mean the Kronos Software and the ADP Time & Attendance Software. (gg) "Source Code" shall mean, with respect to any software program or module, a set of instructions written by computer programmers in a higher level, human-readable programming language (including, if any, systems and other documentation in existence on or after the date hereof that are maintained by Kronos for purposes of maintaining and supporting the Software) which will enable a user to direct computer functions and maintain and support such software programs and modules. (hh) "Sublicense" shall mean any re-licensing by ADP of the ADP Time & Attendance Software or any part thereof to any ADP Client or other authorized Sublicensee pursuant to a sublicense validly issued under this Agreement. (ii) "Sublicensee" shall mean any person or entity Sublicensed by ADP to use the ADP Time & Attendance Software. (jj) "Subsidiary" shall mean any company or other legal entity, at least fifty percent (50%) of whose outstanding stock or other ownership interest entitled to vote for election of directors, or such other control as may exist, is now or hereafter owned or controlled by an entity, either directly or through one or more Subsidiaries or both. (kk) "Subscription" shall mean a service whereby a customer is charged for the use of software on a recurring basis. (ll) "Termination Loss" shall mean that the Sublicensee had paid ADP a Subscription licensing fee applicable to the ADP Time & Attendance Software, but has terminated its arrangement with ADP to receive ADP Time & Attendance, is no longer paying ADP any Subscription licensing fee applicable to the ADP Time & Attendance Software, and notifies ADP in writing that it is no longer using the ADP Time & Attendance Software and all copies thereof. (mm) "Time & Attendance" shall mean collecting worked and non-worked time (which may include activity details as necessary); and applying work policies/workrules, in either case, for use in calculating total time (e.g. regular hours, overtime hours, sick time, etc.) to pay the individual who worked (it being understood that the absence of a work policy/workrule can defacto be deemed a work policy/workrule). (nn) "Timekeeper Central Software(R)" or "TKC Software" shall mean the software programs and modules developed by or for, and owned by, Kronos, as generally described on Exhibit B and as listed on Exhibit A attached hereto. TKC Software shall also include additional software programs and/or modules that are developed for and/or by Kronos and released by Kronos as part of a corrective or Bug-fix release to its End-Users during the term of this Agreement; standard modifications and standard enhancements made to the TKC Software by Kronos and future versions of the TKC Software; provided, however, that inclusion of future versions, enhancements and upgrades within this definition shall not automatically imply that such items and maintenance of such items are free of charge. (oo) "TRM Software" shall mean the Time$aver or TimeCare Software, which was originally obtained by ADP from Time Resources Management, Inc., and all software derived from such original software, including but not limited to bug-fixes, corrections, modifications, enhancements, versions, and releases. (pp) "Workforce Central(R)Software" or "WFC Software" shall mean the software programs and modules developed by or for, and owned by, Kronos, as generally described on Exhibit B and as listed on Exhibit A attached hereto and future modules added. WFC Software shall also include (if any) software programs and/or modules that are released by Kronos as a corrective or Bug-fix release to its End-Users during the term of this Agreement, standard modifications and standard enhancements or new versions developed by Kronos that are offered by Kronos to its End-Users during the term of this Agreement as part of the Workforce Central Suite product line; provided, however, that inclusion of such Bug-fix releases, modifications, enhancements and new versions, if any, within this definition of WFC Software shall not automatically imply that such items are free of charge. For the purposes of this Agreement, Workforce HR and Workforce Payroll software, tax filing or check printing services and any other human resources and/or payroll related Kronos software shall not constitute WFC Software. (qq) "Workforce HR(TM) Software" shall mean software that electronically stores baseline employee demographic data. (rr) "Workforce Payroll(TM) Software" shall mean software that calculates from the gross pay amount to the net pay. 2. Grant of Software License to ADP; Right to Sublicense. Subject to the terms, conditions and restrictions set forth herein (including, without limitation, in this Section 2 and in Section 2.1), Kronos hereby grants to ADP the following: (a) a worldwide and non-exclusive Object Code license to the ADP Time & Attendance Software; (b) the right to provide, at any time during the term of this Agreement a Sublicense to any Sublicensee; (c) the limited right to duplicate (directly, or indirectly through a third party) the eTime 1000 Software and eTime 100 Software (but not the Enterprise eTime Software) at ADP's sole cost and expense; (d) the right to copy, reproduce, modify and distribute the Materials under ADP's name and service mark in connection with ADP's marketing of ADP Time & Attendance Software and in support of Sublicensees; (e) a worldwide, royalty-free and non-exclusive license (i) under any patents owned or licensed by Kronos at any time during the term of this Agreement to the extent necessary to exercise any right or license granted under this Agreement and (ii) except as restricted elsewhere in this Agreement, to combine the ADP Time & Attendance Software or any part thereof with any data collection equipment or other Scheduling or Time & Attendance software; (f) the right to access, use and operate the software internally by ADP as needed to support and provide maintenance to Sublicensees; (g) the right to use, execute, perform, display, and operate the ADP Time & Attendance Software as necessary for ADP to promote, sell, demonstrate, advertise, showcase, publicize, and otherwise generate market interest in the ADP Time & Attendance Software; and (h) the right to combine the ADP Time & Attendance Software with Devices. 2.1 Permitted Methods of Sublicensing and Use by ADP of ADP Time & Attendance Software. (a) All Sublicenses issued by ADP under this Agreement shall convey an object code (but not a source code) license to the Sublicensees. For those ADP Clients having [**] or less employees, ADP may Sublicense ADP Time & Attendance Software either on a Licensed Basis or on a Subscription basis. For those ADP Clients having greater than [**] employees, ADP Time & Attendance Software may only be offered on a Subscription basis. In either case, such ADP Time & Attendance Software may be installed either at an ADP Client location or in a Hosted Environment (regardless of whether ADP or a third party acts as the Hosting Services Company). In connection therewith, ADP shall deliver a copy of the ADP Time & Attendance Software or any part thereof to any such Sublicensee (or to a Hosting Services Company for the benefit of any such Sublicensee) only pursuant to a "shrink wrap" or "click wrap" license agreement substantially in the form of Annex I attached hereto. ADP shall report in writing to Kronos any breach of the terms of the shrink wrap or click wrap license terms known by ADP. ADP agrees to take all reasonable steps to enforce the terms of the shrink wrap or click wrap license and shall cooperate with Kronos in enforcing its terms. For purposes of clarity, any person or entity that receives the benefit of the use of such ADP Time & Attendance Software without actually receiving a copy of such ADP Time & Attendance Software (i.e. such software is hosted by ADP or by a third party Hosting Services Company) shall be considered to be, and shall be, a Sublicensee and ADP shall pay Kronos a separate License Fee for each such person or entity, in the same manner as if such Sublicensee received a copy of such Software and any such use shall be subject to the Annex I terms and conditions, but ADP shall not be required to pay a License Fee with respect to such Hosting Services Company itself. (b) With respect to eTime 100 Software only, the following provisions shall apply: ADP shall only have the right to Sublicense such Software: (i) to any person or entity that has [**] or fewer employees; and (ii) to any person or entity using the eTime 100 Software with Hardware that is a [**], or using such Software independent of any hardware (not including Devices) unless Kronos has given ADP its written consent to Sublicense such Software on different Hardware for a particular person or entity. (c) ADP's use of the ADP Time & Attendance Software for its own internal business and employees shall be subject to Kronos' standard "shrink wrap" license agreement and the terms of this Agreement do not apply to such internal use by ADP. (d) For the purposes of this Agreement, when calculating restrictions relating to the maximum number of employees allowed, such as in this section or in section 3.1, the measurement of employees shall be as of the time of the sale, it being understood that such number of employees may increase. Additionally, such employees may be employed by a part of a legal entity that employs more than the employee restrictions specified herein, provided that the single employer is on a separate and distinct worksite and has the authority to make the decision for the purchase of employer related services independently at such worksite, (as opposed to the decision being required to be made centrally by such legal entity). 3.0 Restrictions on Kronos. (a) Other Payroll Providers. Subject to the exceptions contained in the remainder of this Section 3(a), during the term of this Agreement Kronos will not, in the United States (excluding Puerto Rico), [**] software owned by Kronos or licensed by it from any third party, including, without limitation, the Kronos Software or any part thereof (collectively, "Kronos Time & Attendance Software") or [**] a Payroll Processing Services company [**] with that company [**] used in conjunction with that company's Payroll Processing Services with respect to clients having [**] or more employees. (i) Kronos may offer [**] to a company that provides payroll software, [**] shall be used only in conjunction with such company's licensed payroll software product and [**]. If any company provides Payroll Processing Services in addition to providing a payroll product on a Licensed Basis, [**] described in the initial sentence of this Section 3(a)(i) with such Payroll Processing Services company with respect to the Licensed Basis business of such company. (ii) The foregoing restrictions shall not apply to Kronos' existing joint marketing agreements with Pentamation Enterprises, Inc. and Siemens Medical Systems Healthcare Information Solutions, formerly known as Shared Medical Systems Corporation, subject to the limitations and requirements set forth in Exhibit C. (b) Direct Provision of Payroll Services. Subject to the exceptions contained in the remainder of this Section 3(b), during the term of this Agreement Kronos will not, in the United States (excluding Puerto Rico), provide Payroll Processing Services to clients having [**] or more employees. For purposes of the preceding sentence, the term "Payroll Processing Services" shall specifically exclude tax filing services. (i) With respect to any clients who desire to license the Workforce HR and/or Workforce Payroll Software (or any other software products performing substantially the same functionality as Workforce HR and/or Workforce Payroll, but licensed under a different name by Kronos (collectively, the "Kronos Workforce Software")) Kronos may do so on a Licensed Basis. With respect to any clients that desire to install such software in a Hosted Environment, Kronos shall [**] to such clients, subject to the following conditions: (A) Kronos may [**] with respect to the performance of such hosting services, (B) Kronos shall [**] and (C) such customers shall contract directly [**]. (ii) Kronos shall [**] services to clients having [**] or more employees [**] under the same conditions and restrictions applicable to Kronos Workforce Software (as specified in the immediately preceding clause (i) of this Section 3(b)). (iii)Notwithstanding the foregoing, an acquisition by Kronos of any business that includes Payroll Processing Services will not be deemed to be, or treated as, a violation of Sections 3.0(a) or (b) above if Kronos abides by the following provisions with respect to the business acquired in such acquisition: A. The term "Prohibited Kronos Acquired Products/Services" shall mean that portion of the Payroll Processing Services business acquired by Kronos [**] pursuant to Sections 3.0(a) or (b) above. B. Kronos shall [**] provide any support or maintenance with respect thereto except that [**], Kronos may accommodate the needs of the client base that are using such products or services at the time such acquisition is consummated (including any successors to or assignees from such client base (the "Kronos Acquired Client Base")) by selling capacity upgrade licenses and by providing support or maintenance which shall [**] (other than bug fixes). C. Kronos shall [**] ADP's Payroll Processing Services. (c) The restrictions on Kronos contained in this section shall also apply to Kronos' Affiliates and Subsidiaries. 3.1 Restrictions on ADP. (a) Other Time & Attendance Providers. Subject to the exceptions contained in the remainder of this Section 3.1, during the term of this Agreement ADP will not, in the United States (excluding Puerto Rico): (A) acquire or enter into any joint venture or joint marketing agreement or similar arrangement with any third party for the purpose of developing, marketing and/or manufacturing Time & Attendance software or hardware for use by clients having [**] or more employees or (B) offer or provide any ADP Acquired Time & Attendance Software to any clients having [**] or more employees. For purposes of this Section 3.1, the terms "Time & Attendance software" and "ADP Acquired Time & Attendance Software" shall specifically exclude Scheduling software. (i) ADP shall be permitted to provide services using any ADP Acquired Time & Attendance Software to clients that employ between [**] and [**] employees, provided that ADP shall only offer such Acquired Time & Attendance Software in a Hosted Environment and on a Subscription basis. (ii) Notwithstanding the foregoing, an acquisition by ADP of any business that includes Time & Attendance software and/or hardware will not be deemed to be, or treated as, a violation of Section 3.1(a) above (including clause (i) thereof) if ADP abides by the following provisions with respect to the business acquired in such acquisition: A. The term "Prohibited ADP Acquired Products/Services" shall mean that portion of the Time & Attendance software and/or hardware acquired by ADP that, [**] pursuant to Section 3.1(a) (including clause (i) thereof). B. ADP shall not be permitted to sell or sublicense any additional Prohibited ADP Acquired Products/Services or provide any support or maintenance with respect thereto except that for up to [**] years from the date of the acquisition of such Prohibited ADP Acquired Products/Services, ADP may accommodate the needs of the client base that are using such products or services at the time such acquisition is consummated (including any successors to or assignees from such client base (the "ADP Acquired Client Base")) by selling capacity upgrade licenses and by providing support or maintenance which shall [**] such products or services (other than bug fixes). C. ADP shall not attempt to transition the Acquired Client Base to any alternative Time & Attendance software and/or hardware other than ADP Time & Attendance Software and/or Hardware (or other products or services provided by Kronos), [**]Software or any other ADP Acquired Time & Attendance Software that is not a Prohibited ADP Acquired Product/Service. (b) Distributors/Resellers. During the term of this Agreement ADP will not, in the United States (excluding Puerto Rico), offer ADP Time & Attendance Software or any Acquired Time & Attendance Software through third party distributors or resellers, to clients having [**] or more employees, except that ADP may offer or distribute [**] Software through such third party distributors or resellers to clients of any size on a licensed or subscription basis and deployed either at a client's location or in a Hosted Environment and, in connection therewith, the [**] Software may be combined with [**]. In the event ADP desires to offer or distribute any other ADP Acquired Time & Attendance Software through third party distributors or resellers, it shall obtain the prior written consent of Kronos, which Kronos shall not unreasonably withhold or delay. (d) Hardware. During the term of this Agreement ADP will not, in the United States (excluding Puerto Rico), combine ADP Time & Attendance Software or ADP Acquired Time & Attendance Software with [**] (other than Devices) with respect to Clients having [**] or more employees, except as otherwise provided in Section 3.1(b) above and Section 3.2 below. (e) The restrictions on ADP contained in this section shall also apply to ADP's Affiliates and Subsidiaries. (f) For purposes of clarity, it is understood and agreed that none of the restrictions contained in this Section 3.1 shall apply with respect to the [**] Software, except as follows: any individual, whether an ADP employee or contractor, working on the engineering or development of the [**] Software shall be strictly prohibited from having any access to Kronos confidential information (as defined in Section 17); provided, however, that the following individuals may be given access to Kronos confidential information solely to the extent required to perform their responsibilities in connection with ADP's performance of this Agreement: (a) marketing/product management individuals; (b) individuals developing an interface from a Kronos or [**] Software product to an internally developed ADP module or to third party hardware or software; (c) individuals installing and/or providing service support for ADP Time & Attendance Software; and (d) one individual who has management responsibility for development of both [**] Software product/technology and ADP Time & Attendance Software or Hardware. 3.2 Hardware Interface for ADP Acquired Time & Attendance Software. Kronos will work with ADP to develop a software interface that will enable any ADP Acquired Time & Attendance Software to communicate with the Hardware. The parties shall jointly agree on the product requirements for such software interface, which to the extent developed by Kronos, shall be owned by Kronos. ADP will provide Kronos with all technical information, software and/or assistance necessary for the parties to develop such software interface, including the development by ADP of the ADP file transfer dynamic linking library ("DLL"), which is required for the software interface to be operable, and to the extent developed by ADP, shall be owned by ADP. The parties agree to use commercially reasonable efforts to develop such software interface(s) and DLL(s) promptly. Until the Kronos component of any such interface is final and ready for use by Sublicensees and for the thirty (30) day period thereafter, ADP shall be permitted to combine the applicable ADP Acquired Time & Attendance Software with [**]. If, after the delivery of such software interface to ADP, ADP continues to combine such software with [**], ADP must pay Kronos for the equivalent Hardware. 3.3 [**]. Notwithstanding anything to the contrary contained herein, ADP may enter into or continue, a direct marketing, reseller or similar arrangement with [**] software to users of ADP Time & Attendance Software or ADP Acquired Time & Attendance Software) [**]. 3.4 ADP Marketing and Pricing. ADP shall determine in its sole discretion and from time to time hereafter the fees it will charge ADP Clients for the ADP Time & Attendance services and the degree of effort to be expended by ADP in support, promotion and marketing of the ADP Time & Attendance Software or any part thereof; provided however, that ADP agrees to make a good faith effort to support, promote and market the ADP Time & Attendance Software. 4. Title, Ownership and Use of Kronos Software. (a) Title to, sole ownership and all rights in the Kronos Software as it presently exists or as it is developed by Kronos in the future shall at all times remain with Kronos and Kronos may use the Kronos Software in any manner it chooses without having to account to ADP, subject, however, to the restrictions set forth in Section 3. (b) Notwithstanding anything to the contrary contained herein, ADP shall include Kronos' copyright notice on the inside cover or title page of each volume of the Materials and on the user's log-on screen and on any eTime 100 or eTime 1000 Software copied, reproduced, modified or distributed. Except as otherwise indicated in the preceding sentence, ADP shall not be required to use or include Kronos' name, trademarks or service marks in connection with ADP's use or sublicensing of the ADP Time & Attendance Software and/or the Materials, although ADP shall have the right in its discretion to use such name or marks; provided however, that any such use in written material distributed outside of ADP shall be subject to the prior written consent of Kronos and shall comply with legal requirements for proper trademark and service mark usage and protection against mark dilution. In the event that any modifications are made to the Materials by ADP, ADP shall be solely responsible for such modifications and to the extent that such modifications impair Kronos' ability to perform its obligations under this Agreement, ADP agrees that Kronos shall be released from such obligations to the same extent. ADP may request, (and Kronos will reasonably consider such request), to modify the Materials to ADP's specifications, with any such modifications to be at ADP's expense. (c) Kronos shall use commercially reasonable standards in determining whether to enforce its rights against all infringers of its copyrights in the Software and/or the Materials. A failure of Kronos to so enforce its rights against any infringer of such copyrights within a reasonable period of time after appropriate notification, which failure results or is likely to result in a material loss of value of the licenses and rights granted to ADP herein, shall be deemed to be an Event of Default for purposes of Section 13(b). (d) In the event Kronos elects to provide any beta software releases to ADP, such beta software will be provided for a limited test period only and is subject to the Annex I terms and conditions, except that ADP shall not be required to pay a licensing fee for such beta software. Any such beta software is to be used for evaluation and testing purposes only and may be Sublicensed to ADP Clients only for evaluation and testing purposes and only if the Sublicensee acknowledges in writing that such beta software is pre-release software and may contain bugs. In addition, ADP acknowledges, and any Sublicensee must acknowledge in writing, the following: ADP AND ITS THIRD PARTY LICENSORS (INCLUDING KRONOS) DO NOT PROVIDE ANY WARRANTY, EXPRESS OR IMPLIED, ON SUCH BETA SOFTWARE. IN NO EVENT WILL ADP OR KRONOS BE LIABLE FOR ANY DAMAGES, INCLUDING LOST PROFITS OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, ARISING OUT OF THE USE OR THE INABILITY TO USE THE BETA SOFTWARE, WHETHER CLAIMED UNDER THIS AGREEMENT OR OTHERWISE. In addition, at the end of the specified test period, all beta software (and all copies thereof) will be returned to Kronos by ADP or will be destroyed by ADP. 5. Software, Maintenance and Support Obligations; Training. 5.1 For TKC Software and Lite Software (a) Throughout the term of this Agreement, Kronos shall provide to ADP, at no further charge in excess of the amounts specified on Exhibit A and in Section 5.1, the following maintenance and support services for the latest version of eTime 1000 Software (including Version 3A thereof, as provided below) and the eTime 100 Software provided to ADP by Kronos; provided however, that support for the ADP Features shall be as specified in Section 5.1(d) and support for new modules not listed on Exhibit A at the time of signing of this Agreement shall be as specified in Section 5.1(c) ("Software Maintenance Services"): (i) correcting Bugs in eTime 1000 (with respect to Version 3A of eTime 1000 Software, for as long as Kronos corrects Bugs in the comparable (as to version and type) TKC Software and, at Kronos' sole option, in eTime 100); provided however, that Kronos reserves the right to correct any such Bug via a workaround and/or to correct any Bug through an enhancement or update provided under Section 5.1(a)(iii) and it shall be ADP's obligation to supply such update or enhancement to its customers; and provided further, that in correcting Bugs in the eTime 1000 Software and eTime 100 Software, Kronos shall provide such fixes or such workarounds, enhancements or updates using the same criteria and priorities with regard to correcting Bugs, including the selection of the means of correction, as Kronos uses for the comparable (as to version and type) TKC Software and Lite Software; (ii) providing ADP with updates to the Materials and/or providing ADP with replacement documentation, in each case to reflect changes that were made by the incorporation of Bug-fixes and/or other corrections; provided however, that ADP may request, (and Kronos will reasonably consider such request) to modify the Materials to ADP's specifications, with any such modification to be at ADP's expense; and (iii)providing ADP with any enhancements or updates (with respect to TKC Software, at Kronos' sole option); provided however, that for upgrades that increase the number of users and/or the number of employees, the upgrade fees shall be as specified in Exhibit A. For the term of this Agreement, Kronos' obligations under this Section 5.1(a) will continue. Thereafter, unless otherwise agreed, Kronos shall have no further license or support obligations. (b) At the end of each quarter during the term of this Agreement, ADP shall pay Kronos for phone support personnel for the eTime 1000 Software and eTime 100 Software at Kronos' then-current time and materials rate; provided that without written approval by ADP, such quarterly support shall not exceed $[**]. Such phone support personnel shall be available during Kronos' standard support hours, exclusive of Kronos holidays. For Kronos holidays, Kronos' technical support team shall be available in accordance with Kronos' standard holiday coverage. The Kronos phone support personnel shall not be required to respond to any inquiries from ADP other than those received from ADP's central help desk. (c) The parties recognize and agree that, Kronos has provided the following features and services for the eTime 1000 Software: (i) enabling eTime 1000 Software to communicate with ADP's blue time clocks/terminals; (ii) providing for automatic import of employees into the eTime 1000 Software database from ADP payroll processing products; (iii)incorporating the payroll interface utility developed by ADP into the eTime 1000 Software; (iv) making changes in text for the TKC Software and DCM including replacing "Kronos" with "ADP", replacing "Timekeeper Central" with "e-Time", replacing "CardSaver(R)" with "CardTracker", replacing "Database Poster" with "DataPoster"; replacing "Timekeeper(R) terminals" with "timeclocks"; and removing "Kronos" before the words "Accruals", "Archiver", "Scheduler" and "Messaging"; (v) modifying the DKPARM's (or any methodology that substitutes for DKPARM's and is used to implement licensing levels) to support only four licensing levels; (vi) deleting certain items in the Kronos help menus; and (vii)conducting quality assurance testing on the eTime 1000 Software prior to releasing it to ADP. Kronos agrees that for any future releases of eTime 1000 Software provided to ADP under this Agreement, Kronos will continue to include these features and services; provided however, that for any new modules (i.e. modules other than those listed on Exhibit A at the time of signing of the Agreement), Kronos will perform the services listed in Section 5.1(c)(i), (ii), (iii), (v) and (vii) to enable such new module to work in conjunction with the eTime 1000 Software but will not perform the services listed in Section 5.1(c)(iv) and (vi) within the new module. If the new module does not work with Kronos' non-ADP time clocks, Kronos shall not be required to perform the service listed in Section 5.1(c)(i) for such new module. (d) If Kronos makes a change in the TKC Software that makes an ADP Feature unable to perform the functions it performed prior to such change, Kronos agrees, promptly upon ADP's written request and free of charge, to restore the prior functionality. If ADP makes a change in an ADP Feature that makes it unable to perform the functions it performed with eTime 1000 Software prior to such change, and ADP requests assistance from Kronos to correct such deficiency, or ADP adds a new Device or TKC Interface and requests Kronos' assistance to make such new Device or Interface work in conjunction with the eTime 1000 Software, Kronos agrees to provide such consulting assistance at Kronos' then effective rates, promptly upon ADP's written request. (e) If ADP requests new features or development for Software, Kronos shall consider, and respond to ADP in a timely manner to, such requests and such custom software shall be licensed to ADP pursuant to the terms and conditions of Kronos' standard custom software license agreement, subject to any additional charges as may be agreed upon by the parties. It is understood and acknowledged, however, that it is Kronos' intention not to undergo any further development of the eTime 100 Software or the eTime 1000 Software, including related modules and import/export functionality. (f) ADP shall direct to the applicable third party all requests for support, modification and/or enhancement of third party software used in conjunction with the TKC Software, eTime 1000 Software or the Lite Software and eTime 100 Software, but not embedded within such Software or resold/sublicensed to ADP by Kronos hereunder, and Kronos shall not be responsible for such support. (g) Kronos agrees that if it develops import/export functionality for TKC Software, it shall provide such functionality to ADP at such time. In addition, during the term of this Agreement, if ADP provides Kronos with written notice that, notwithstanding the capabilities within the eTime 1000 Software in Section 5.1 a.-g., ADP is unable to proceed with interfacing eTime 1000 Software to a Device or is unable to create a TKC Interface to ADP's Payroll Processing Services (but not to any other product or service), Kronos agrees to supply ADP with the additional information Kronos reasonably believes is required to enable ADP to proceed in a reasonable manner, subject to Section 5.1(d). 5.2 For WFC Software (a) Kronos agrees to provide the following support/maintenance services for the Enterprise eTime Software, subject to ADP's payment of the fees specified in Sections 5.2(b) and 6(a)(ii), and for as long as Kronos continues to license and support the comparable (as to version and type) WFC Software (but in no event less than the term of this Agreement): (i) correcting Bugs; provided however, that Kronos reserves the right to correct any Bug via a workaround and/or to correct any Bug through an enhancement or update provided under Section 5.2(a)(iii), and it shall be ADP's obligation to supply such update or enhancement to its customers; and provided further that in correcting Bugs in the ADP WFC Software, Kronos shall provide such fixes or such workarounds, enhancements or updates using the same criteria and priorities with regard to correcting Bugs, including the selection of the means of correction, as Kronos uses for the comparable (as to version and type) WFC Software. (ii) providing ADP with updates to the Materials and/or providing ADP with replacement documentation in each case to reflect changes that were made by the incorporation of Bug-fixes and/or other corrections; provided however, that ADP may request, (and Kronos will reasonably consider such request) to modify the Materials to ADP's specifications, with any such modifications to be at ADP's expense; and (iii)providing ADP with any enhancements or updates to the extent such enhancements or updates are released by Kronos as part of the Workforce Central Software Suite product line; provided however, that for upgrades that increase the number of users and/or the number of employees, ADP shall pay the difference as specified on Exhibit A. (b) At the end of each quarter during the term of this Agreement, ADP shall pay Kronos for phone support for the Enterprise eTime Software at Kronos' then current time and materials rate; provided that, without written approval by ADP, such annual support shall not exceed $[**]. The phone support personnel shall be assigned to support telephone inquiries from a central ADP help desk concerning Enterprise eTime Software and shall be subject to the same restrictions specified in the last three sentences of Section 5.1(b). (c) ADP shall direct to the applicable third party all requests for support, modification and/or enhancement of third party software used in conjunction with the WFC Software and the Enterprise eTime Software, but not embedded within such WFC Software or Enterprise eTime Software or resold/sublicensed to ADP by Kronos hereunder, and Kronos shall not be responsible for such support. (d) If ADP requests new features or development for Software, Kronos shall consider and respond to ADP in a timely manner to such requests and such custom software shall be licensed pursuant to the terms and conditions of Kronos' standard custom software license agreement. (e) Kronos agrees that if it develops import/export functionality for WFC Software, it shall provide such functionality to ADP for Enterprise eTime Software at such time. In addition, during the term of this Agreement, if ADP provides Kronos with written notice that, notwithstanding the capabilities within WFC Software in Section 5.2(e)(i) - (viii), ADP is unable to proceed with interfacing Enterprise eTime Software to a Device or is unable to create a WFC Interface to ADP's Payroll Processing Services, (but not to any other product or service), Kronos agrees to supply ADP with the additional information Kronos reasonably believes is required to enable ADP to proceed in a reasonable manner and if ADP requests Kronos' assistance to make such Device or Interface work in conjunction with Enterprise eTime Software, Kronos agrees to provide such consulting assistance at Kronos' then effective rates, promptly upon ADP's written request. 5.3 Training. (a) Kronos shall provide ADP employees with access to standard Kronos training classes on the Kronos Software and Hardware at rates as specified in Exhibit A. Such training shall be held at either an ADP site or at Kronos' corporate headquarters, or at a mutually agreed alternative location. ADP shall be responsible for all costs of such training, and of ADP personnel during all training and technical assistance provided by Kronos pursuant to this Agreement, including, without limitation, all wages, salaries and travel expenses. (b) Kronos will provide ADP's training department with training materials relating to the Hardware and ADP Time & Attendance Software, by providing to ADP, [**], one camera-ready copy of all applicable Kronos prepared training materials on TKC Software, WFC Software and Lite Software. Kronos shall also supply ADP with one copy of such materials in electronic form, if available. Alternatively, ADP may, at its option and its expense, engage Kronos to modify the Kronos training materials to ADP's specifications. The fee payable by ADP with respect to such modifications shall be determined by the parties prior to the commencement of any such modifications. 6. Payments to Kronos for Software and Support. (a) In consideration of Kronos' (i) grant to ADP of the license and other rights described in Section 2 herein, and (ii) as to eTime 1000 Software and eTime 100 Software, the provision of Software Maintenance Services to ADP pursuant to Section 5.1(a) herein, and as to the Enterprise eTime Software, the provision of the services pursuant to Section 5.2(a) herein, ADP shall pay to Kronos the following fees: (i) For each Sublicense, the applicable per copy license fee set forth on Exhibit A attached hereto ("License Fee"). (ii) For Enterprise eTime maintenance, the fees specified in the "ADP/Kronos Enterprise eTime Software Maintenance Policy", attached hereto as Exhibit D. (iii)The fees specified on Exhibit A for eTime 1000 Software shall remain in effect throughout the term of the Agreement. The fees specified on Exhibit A for Enterprise eTime Software shall remain in effect until September 30, 2004. Thereafter such fees may be increased by Kronos by up to [**] percent ([**]%) per year, if Kronos increases its list prices [**]. Kronos shall increase such fees by the same percentage increase as to the list prices for[**]. If at any time during the term of this Agreement Kronos shall [**]. No later than the tenth business day following the end of each month, ADP shall submit to Kronos a report, certified and signed by the comptroller of the ADP Time & Attendance division, which specifies all copies shipped during such month of eTime 1000 and eTime 100, all copies of modules, all version upgrades, employee capacity, all user upgrades and all platform upgrades. (b) Kronos shall issue a credit for purposes of reusing a Sublicense to ADP monthly for any ADP T &A Software or maintenance fees associated with No Starts. Such No Starts shall be netted out of the yearly installed base for the purpose of maintenance billing calculations. In addition, all Termination Losses shall be netted out of the yearly software maintenance billing calculation with respect to Enterprise eTime. The parties acknowledge and agree that at the end of the Agreement or when ADP discontinues purchasing ADP T&A Software, no monetary credit shall be payable to ADP by Kronos for any unused credits, as defined above. (c) In the event of an increase in the number of employees of a company using ADP Acquired Time & Attendance Software, as contemplated in section 3.1(a), to greater than [**]employees, ADP may continue to utilize such ADP Acquired Time & Attendance Software for such client, as allowed in this Agreement, but ADP shall pay Kronos a fee equal to the equivalent employee license for eTime 1000 Software. 7. Purchase and Sales of Hardware. Kronos agrees to sell and ADP agrees to purchase from time to time, certain items of Hardware, all as more fully described in Exhibit A attached hereto, subject to the terms and conditions of this Agreement. If at any time during the term of this Agreement, Kronos shall discontinue any Hardware purchasable hereunder with less than [**] notice to ADP and the only replacement for such Hardware offered by Kronos is [**] the original Hardware, [**] after the discontinuance. Thereafter, the parties agree to negotiate in good faith concerning the price for such replacement. In addition, for updates or enhancements to Hardware that are offered by Kronos during the term of this Agreement when the original Hardware is not discontinued, the parties agree to negotiate in good faith concerning the applicable prices and terms. 8. Order of Hardware. Exhibit E attached hereto contains the agreed procedures and terms regarding the ordering of Hardware and related matters including shipping, cancellations of orders, risk of loss during shipping and return of Hardware. 9. Hardware Purchase Price; Payment; Taxes. (a) The purchase prices for the Hardware purchased by ADP hereunder shall be the prices listed on Exhibit A attached hereto, which shall remain in effect throughout the term of the Agreement. (b) Kronos will provide ADP with a [**]% discount from list price on all Kronos manufactured parts and peripheral devices, and standard dealer discounts on all parts, peripherals and consumables not manufactured by Kronos which are not listed in Exhibit A. In addition, ADP may purchase parts, peripherals and consumables directly from any commercial source, but Kronos shall have no responsibility for such peripherals and consumables, or for their effects upon the Hardware. (c) Unless otherwise expressly stated by Kronos, all prices are exclusive of federal, state, local, excise, sales, use or similar taxes. ADP shall be liable for all such taxes. ADP shall provide Kronos with a properly executed resale or tax exemption certificate acceptable to the taxing authorities, or in lieu thereof, shall remit to Kronos the full amount of such tax as shall be separately stated on the face of the invoice. (d) Kronos shall issue one monthly invoice to ADP for eTime 1000 Software and eTime 100 Software and ADP shall pay such invoice [**] days from receipt. Kronos shall invoice ADP upon shipment, for all other Kronos Software, Hardware, peripheral devices, and other items, and ADP shall pay such invoices net [**] days. If partial shipments are authorized by ADP, each shipment shall be paid for when due without regard to other scheduled shipments. Such invoice shall contain any applicable credits for the purpose of re-using a Sublicense for any No Starts from the previous month. 10. Hardware Maintenance. On a year to year basis, ADP has engaged Kronos to perform maintenance services with respect to the Hardware. Such services are described on Exhibit F attached hereto and incorporated by reference herein, which Exhibit also sets forth the amounts payable by ADP for such services. In addition, Kronos shall be subject to the obligations set forth on Exhibit F attached hereto during the term of this Agreement. Notwithstanding ADP's retention of Kronos to provide maintenance services with respect to the Hardware, ADP may perform such maintenance itself. In addition, ADP may [**]. In addition, ADP may [**]. For so long as ADP continues to engage Kronos to perform maintenance with respect to the Hardware, the revenue to Kronos from ADP attributable to such maintenance shall equal or exceed $[**] for every calendar quarter. In the event the Agreement expires or is terminated and Kronos is no longer providing Hardware maintenance services for ADP, the parties agree that Kronos will comply with the provisions of Exhibit F relating to spare parts in order to allow ADP to maintain and support the existing Hardware. 11. Hardware Warranty Coverage. (a) The following warranty shall apply to the Hardware specified: (i) Kronos warrants that the Kronos 140, 144, 420, 440, 480 and 4500 Hardware shipped hereunder will be free from defects in material or workmanship and will perform in accordance with its published specifications for a period of 120 days from the date of shipment by Kronos, and the ADP 150 and 154 Hardware shipped hereunder will be free from defects in material or workmanship and will perform in accordance with its published specifications for a period of fifteen (15) months from the date of shipment by Kronos, (such 120 day and such 15 month periods, as applicable, hereafter shall be called "Hardware Warranty Period"). If the Hardware covered by the warranty does not function in accordance with such specifications, ADP or its designee may contact Kronos' Technical Support Department for telephone assistance in attempting to isolate and correct the problem at no charge to ADP; provided that if such problem is not the result of a Hardware defect, such assistance shall be billed to ADP at Kronos' customary rates. (ii) Kronos shall repair or replace Hardware returned to it within ten working days after the same has been received by Kronos' factory or repair depot. ADP shall be responsible for one-way shipping charges to Kronos' factory or repair depot and Kronos shall be responsible for the return shipping charges to ADP. (iii)The above warranty extends to ADP, and to Sublicensees that receive Hardware. Warranty claims may be generated to Kronos by ADP or by Sublicensees. The repair or replacement of parts or Hardware shall not extend the original Warranty Period, but each item repaired or replaced shall have a warranty for the greater of: (i) 30 days from the date of ADP's or Sublicensee's receipt of shipment of a repaired or replaced item and (ii) the remainder of the original warranty period regarding such item of Hardware. (b) The foregoing warranty shall not apply in the following circumstances: (i) accident, neglect or misuse by ADP or Sublicensees; (ii) alterations, which shall include, but not be limited to, installation or removal of Kronos features or any other modification, whenever any of the foregoing is performed by entities or persons other than the maintenance provider designated pursuant to Section 11; provided that, notwithstanding the foregoing, installation of Hardware by Sublicensees and by any person or entity that is an authorized purchaser of Hardware under this Agreement in accordance with Kronos' installation procedures shall not cause the warranty to be inapplicable; (iii)failure to provide and maintain a suitable installation environment, with all facilities prescribed by the appropriate Kronos functional specifications (including, but not limited to, failure of, or failure to provide, adequate electrical power, air conditioning or humidity control) or from use of supplies or materials not meeting Kronos specifications; and (iv) the use of the Hardware for other than the purposes for which designed. (c) If ADP modifies the ADP Time & Attendance Software, the Hardware or the Materials, ADP shall be solely responsible for such modifications and to the extent such modifications impair Kronos' ability to perform its obligations under this Agreement, ADP agrees that Kronos shall be released from such obligations to the same extent. (d) EXCEPT FOR THE WARRANTIES SET FORTH IN THIS SECTION 11 AND SECTION 14 KRONOS DISCLAIMS ALL WARRANTIES WITH REGARD TO THE HARDWARE, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE; AND THE STATED EXPRESS WARRANTIES ARE IN LIEU OF ALL OBLIGATIONS OR LIABILITIES ON THE PART OF KRONOS FOR DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF GOODWILL, LOSS OF DATA, OR OTHER ECONOMIC LOSS, OR ANY COLLATERAL, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (WHETHER IN TORT, CONTRACT OR OTHERWISE) OF ANY KIND. 12. [**]. [**] under this Agreement [**] at the commencement of each Kronos fiscal year, for purchases/licenses of similar hardware and software, excluding upgrades, in similar quantities (it being understood that Kronos may [**]. Kronos agrees, while this Agreement is in effect, that if the Hardware Fees and Software License [**], then ADP shall [**] . In no event shall Kronos be subject to any restrictions [**]. [**], Kronos shall, upon request from ADP, [**]. [**] Kronos shall [**] shall take effect. 13. Term and Termination; Rights Upon Termination. (a) The term of this Agreement shall commence on the date hereof and shall continue until April 3, 2008, unless earlier terminated in accordance with this Agreement. Thereafter, this Agreement shall automatically be renewed for [**], unless terminated by either party upon notice to the other party, such notice to be given in writing at least [**] days prior to the commencement of any renewal term. (b) Notwithstanding anything to the contrary contained herein, either party hereto may terminate this Agreement upon written notice upon the occurrence of an Event of Default (as defined below) caused by the other party. A party shall have committed an Event of Default under this Agreement upon the occurrence of any of the following events: (i) failure to pay any sum of money due hereunder for more than [**] days after the same has become due and payable and written notice of such failure to pay has been received, provided, in the event that such unpaid amounts are the subject of a good faith dispute, an Event of Default shall not be deemed to have occurred for so long as the party withholding such monies has deposited such monies with a mutually agreed upon escrow agent, (ii) any material breach of its representations, warranties or covenants contained herein or failure to perform any of its other obligations hereunder for a period of [**] days after the giving of notice of such breach or failure by the other party; provided however that a breach of subsections (a) or (b) of Section 3.0 shall be subject to Section 13(e) and provided further that a breach of a subsection (a) of Section 3.1 shall be subject to Section 14(f); (iii) commission of an act of bankruptcy or becoming the subject of any proceeding under the U.S. Bankruptcy Code or any state bankruptcy laws or becoming insolvent, or the subjection of any substantial part of such party's property to any levy, seizure, assignment, application or sale for or by any creditor or governmental agency, which proceeding, levy, seizure, assignment or application for sale shall not have been dismissed within [**] days, or (iv) failure to remain in the business or provide the products or services contemplated hereby for a period of [**] days after the giving of notice of such failure by the other party. (c) Upon the occurrence of an Event of Default, the non-defaulting party may provide the other party with notice of termination setting forth the nature of such Event of Default. Any such notice shall become effective on the date it is deemed to be given pursuant to Section 22(e). (d) In the event that either party shall terminate this Agreement on account of an Event of Default committed by the other party, ADP shall have no further rights to duplicate eTime 1000 or eTime 100 Software, or to market and provide new Sublicenses of ADP Time & Attendance Software from and after the effective date of such termination except as provided in Section 13(e). ADP shall immediately provide to Kronos all copies of the ADP Time & Attendance Software and Materials in its possession, other than copies of the ADP Time & Attendance Software and Materials validly licensed by ADP for its own internal use (which use shall be only as described in Annex I) or shall destroy all such copies and shall provide to Kronos certification of such destruction. However, notwithstanding the foregoing, ADP may retain copies of the ADP Time & Attendance Software and Materials for the limited purpose of continuing to support existing Sublicensees with valid Sublicenses issued prior to termination and for a sufficient period of time to allow fulfillment of orders pursuant to Section 13(h). Upon any such termination, (i) ADP shall pay any amounts that are then due and owing to Kronos and (ii) any further or future payment obligations hereunder shall be null and void; except that if the termination is on account of an Event of Default by ADP, ADP shall be required to pay all amounts owed under Section 13(f). (e) (1) Except as provided in the clause (3) of this Section 13(e), it is understood and agreed that with respect to a breach of subsections (a) or (b) of Section 3.0 by Kronos, Kronos shall have [**] days following the receipt of written notice from ADP of such breach to cure such breach, subject to the following: (i) during such cure period, Kronos shall be required to cease any sales/licenses, services, implementation or development activity giving rise to such breach within [**] days of Kronos' receipt of such notice, provided that concerning the provision by Kronos of ongoing support to any installed client base giving rise to such breach after such [**] day period, Kronos shall be required, as soon as reasonably practicable, to: a. discontinue all service/support to such installed base; or b. recommend the conversion of such installed base to ADP Payroll Processing Services; provided however, that after such initial [**] day period following notice, if Kronos is unable to accomplish such discontinuance or conversion, Kronos shall be required to pay ADP all revenue derived by Kronos if any, from such installed base for the support giving rise to such breach at prices equivalent to the prices charged by ADP for the comparable support; and (ii) any cure shall be the ceasing of all activities giving rise to such breach going forward (which shall include, but not be limited to, the termination/cancellation of any contract/arrangement giving rise to such breach) and the payment by Kronos to ADP of any actual damages resulting to ADP during the period of breach; provided however, that in the case of a bona fide dispute concerning the amount of the actual damages owed, Kronos shall immediately pay ADP all actual damages not in dispute and, within [**] days after written notice from ADP of the amount of the remaining actual damages, Kronos shall either pay such damages or commence arbitration pursuant to Section 22(l) concerning such damages; and provided further that until the arbitrator rules concerning such remaining disputed actual damages, Kronos shall not be deemed to have failed to cure such breach solely because of its failure to pay such damages, but Kronos shall not be relieved of any of its other obligations concerning cure. (2) If Kronos pays ADP such actual damages (whether prior to or after arbitration), but Kronos is still in breach of its cure obligations hereunder and therefore ADP is permitted to reproduce the ADP Time & Attendance Software for Sublicensing as specified in clause (3) of this Section 13(e), ADP shall be required to refund to Kronos the amount of such actual damages prior to reproducing and Sublicensing any such ADP Time & Attendance Software. (3) [**] if Kronos fails to cure such breach as specified herein, ADP shall terminate this Agreement but shall retain the right to continue to Sublicense the ADP Time & Attendance Software to ADP Clients for a period equal to the remaining term of this Agreement had no termination notice been given (but in no event for a period exceeding [**] months) and ADP shall be entitled to combine such ADP Time & Attendance Software with any hardware; provided that, after termination of this Agreement as contemplated by this Section 13(e), no License Fees shall be payable by ADP, and Kronos shall not be obligated to provide ADP with copies of the ADP Time & Attendance Software or Materials, but ADP shall be entitled to reproduce the same solely for Sublicensing to ADP Clients for the remaining term of this Agreement, (but in no event for a period exceeding [**] months). Such rights shall be ADP's exclusive remedies in the event of Events of Default described in clause (1) of this Section 13(e). (4) In addition, [**], Kronos shall be required to notify ADP in writing within [**] days (which notice shall be deemed to constitute the written notice of ADP as specified in clause (1) of this Section 13(e)) and Kronos shall have an opportunity to cure such breach as specified in this Section 13(e), and if Kronos fails to cure such breach, ADP shall have the right to Sublicense the ADP Time & Attendance Software, subject to the requirements in clause (3) of this Section 13(e). (f) (1) Except as provided in clause (3) of this Section 13(f), it is understood and agreed that with respect to a breach of subsection (a) of Section 3.1 by ADP, ADP shall have [**] days following the receipt of written notice from Kronos of such breach to cure such breach, subject to the following: (i) during such cure period, ADP shall be required to cease any sales/licenses, services, implementation and development activity giving rise to such breach within [**] days of ADP's receipt of such notice, provided that concerning the provision of ongoing support to any installed client base giving rise to such breach after such [**] day period ADP shall be required, as soon as reasonably practicable, to: a. discontinue all service/support to such installed client base; or b. convert such installed base to ADP Time & Attendance Software and Hardware; provided however, that after such initial [**]day period following notice, if ADP is unable to accomplish such discontinuance or conversion, ADP shall be required to pay Kronos all revenue derived by ADP from such installed base for the support giving rise to such breach, at prices that are equivalent to the prices charged by ADP for a comparable Kronos product support; and (ii) any cure shall be the ceasing of all activities giving rise to such breach going forward (which shall include, but not be limited to, the termination/cancellation of any contract/arrangement giving rise to such breach) and the payment by ADP to Kronos of any actual damages resulting to Kronos during the period of breach of such subsection (a) of Section 3.1; provided however, that in the case of a bona fide dispute concerning the amount of the actual damages owed, ADP shall immediately pay Kronos all actual damages not in dispute and, within [**] days after written notice from Kronos of the amount of the remaining actual damages, ADP shall either pay such damages or commence arbitration pursuant to Section 22(l) concerning such damages; and provided further that until the arbitrator rules concerning such remaining disputed actual damages, ADP shall not be deemed to have failed to cure such breach solely because of its failure to pay such damages, but ADP shall not be relieved of any of its other obligations concerning cure. (2) If ADP pays Kronos such actual damages (whether prior to or after arbitration), but ADP is still in breach of its cure obligations hereunder and therefore required to pay the amount specified in clause (3) of this Section 13(f), the amount of actual damages paid by ADP to Kronos shall be credited toward such amount specified in clause (3) of this Section 13(f). (3) [**] if ADP fails to cure such breach as required herein, Kronos shall have the right to receive from ADP an amount equal to [**] dollars ($[**]), multiplied by the number of months (or fractions thereof) remaining in the term of this Agreement, but in no event shall such number of months exceed [**]. It is agreed and understood by the parties that Kronos shall have no obligation to supply ADP Time & Attendance Software or Hardware, or services, and ADP shall have no rights to duplicate any ADP Time & Attendance Software in exchange for Kronos' receipt of the amount specified in the preceding sentence. After ADP has paid Kronos such amount, subsection (a) and (b) of Section 3.0 and subsection (a) of Section 3.1 shall no longer be in effect, and either party may terminate this Agreement, upon written notice to the other party. In the event either party elects to terminate this Agreement, the provisions of Section 13(d) shall apply. (4) In addition, [**], ADP shall be required to notify Kronos in writing within ten (10) days (which notice shall be deemed to constitute the written notice of Kronos specified in clause (1) of this Section 13(f)) and ADP shall have an opportunity to cure such breach as specified in this Section 13(f), and if ADP fails to cure such breach, Kronos shall have a right to receive from ADP the amount specified in clause (3) of this Section 13(f). (g) The remedies described in Sections 13(e) and 13(f) for the Events of Default described in each such section shall be the sole and exclusive remedy for such Events of Defaults. All other remedies provided to ADP and Kronos for Events of Defaults other than under Sections 13(e) and 13(f) herein shall not be deemed exclusive but shall be cumulative and in addition to all other remedies provided by law or in equity. Both parties hereto acknowledge that the performance of their obligations hereunder and the rights granted hereunder are of a unique character that gives them a special value, the loss of which may not be adequately compensated in damages in an action at law, that a breach of this Agreement by either party may cause the other party irreparable injury and, therefore, that either party may be entitled to injunctive relief to prevent such injury. (h) Notwithstanding anything to the contrary contained in this Agreement, it is hereby expressly agreed that upon the expiration or termination of this Agreement for any reason whatsoever, such expiration or termination shall not terminate or diminish in any way the right of those Sublicensees then using the Hardware or ADP Time & Attendance Software or any part thereof under Sublicenses validly issued during the term of the Agreement to continue to use the Hardware or ADP Time & Attendance Software or any part thereof. If this Agreement is terminated by Kronos for any reason other than ADP's default, ADP shall have the right to continue to fulfill the terms of any outstanding agreements and/or proposals that are in effect prior to the effective date of any such termination. 14. Representations, Warranties and Covenants of Kronos. Kronos represents, warrants and covenants that: (a) Kronos has, and will have at all times during the term of this Agreement, the right to enter into this Agreement, and abide by its terms, and no other person or entity shall have any rights to interfere with or prohibit the activities under this Agreement, in each case other than as covered under Section 16(a). The individual signing this Agreement on behalf of Kronos has the authority to sign on behalf of Kronos Affiliates and Subsidiaries, as well as on behalf of Kronos. (b) Neither the rights granted to ADP hereunder nor the exercise of any such rights will infringe upon or conflict with any rights held by any third party under any copyright, patent, trademark or other proprietary right; provided that Kronos makes no representation with respect to the Total Time service mark or the ADP service mark or trademark. The Hardware to be furnished pursuant to this Agreement will be free from any claims of infringement of any United States patent, copyright, trademark or proprietary right. (c) Kronos will have good and marketable title to the Hardware, free and clear of all liens, claims, encumbrances and security interests of any kind whatsoever, in each case, other than as covered under Section 16(a). WITH RESPECT TO SUBSECTIONS (a), (b) AND (c) OF THIS SECTION 14, IT IS UNDERSTOOD AND AGREED THAT ADP'S SOLE REMEMDY FOR BREACH OF ANY REPRESENTATION, WARRANTY OR COVENANT UNDER SUCH SUBSECTIONS, SHALL, TO THE EXTENT COVERED BY SECTION 16(a), BE PURSUANT TO SUCH 16(a) AND SHALL BE SUBJECT TO THE DAMAGE LIMITATION THEREIN. (d) The eTime 1000 Software will perform in accordance with the applicable published user guides for the comparable (as to version and type) TKC Software, as modified in accordance with Section 5.1(c). The Enterprise eTime Software will perform in accordance with the applicable Kronos electronic on-line documentation for the comparable (as to version and type) WFC Software. These warranties shall not apply in the following circumstances: (i) accident, neglect or misuse; (ii) alterations other than in accordance with Kronos' installation procedures; and (iii) failure to provide and maintain a suitable installation environment, including, but not limited to, failure to provide adequate electrical power, air conditioning or humidity control. ADP's SOLE REMEDY, AND THE SOLE LIABILITY OF KRONOS, FOR ANY BREACH BY KRONOS OF THIS SECTION 14(d) SHALL BE PURSUANT TO SECTION 5.1 FOR THE ETIME 1000 SOFTWARE AND PURSUANT TO SECTION 5.2 FOR THE WFC SOFTWARE AND ENTERPRISE ETIME SOFTWARE. (e) Kronos agrees to obtain Underwriters Laboratory ("UL") certification for the Hardware and to provide ADP with evidence of such approval when granted. The Hardware shall comply with all government and regulatory requirements such as FCC and CSA. If and when changes are required to be made to any Hardware in order to obtain UL certification or to comply with other standards, Kronos agrees to make all changes to such Hardware at Kronos' factory at no charge to ADP and to pay all expenses associated with the retrofitting of all such changes to previously delivered Hardware at no charge to ADP. (f) Kronos has not intentionally inserted any virus, time bomb or other similar device into the Software, and it has used commercially reasonable business methods to test the Software for such viruses, time bombs or other similar devices. EXCEPT FOR THE WARRANTIES SET FORTH IN THIS AGREEMENT, KRONOS DISCLAIMS ALL WARRANTIES WITH RESPECT TO TKC SOFTWARE, ETIME 1000 SOFTWARE, LITE SOFTWARE, ETIME 100 SOFTWARE, WFC SOFTWARE, AND ENTERPRISE ETIME SOFTWARE, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 15. Representations, Warranties and Covenants of ADP. ADP represents, warrants and covenants that ADP has, and will have at all times during the term of this Agreement, the right to enter into this Agreement, and abide by its terms, and no other person or entity shall have any rights to interfere with or prohibit the activities under this Agreement, and that the individual signing this Agreement on behalf of ADP has the authority to sign on behalf of ADP Affiliates and Subsidiaries, as well as on behalf of ADP. 16. Indemnification. (a) Kronos agrees to defend ADP and its Sublicensees, at Kronos' own cost and expense, against any claim, suit or proceeding in connection with any allegation that the Hardware or the ADP Time & Attendance Software or any part of either thereof (or the Materials) infringes upon or interferes with any patent, trademark, copyright or other proprietary right of a third party, except to the extent such allegation is based on modifications or enhancements made by ADP (or by a third party or by Kronos, at ADP's request or direction). Kronos will pay damages assessed against ADP and its Sublicensees (whether by court award or by settlement) that are attributable to any such claim, but only on the condition that (i) Kronos is promptly notified in writing of any claim of infringement and furnished with all papers received in connection therewith and (ii) Kronos shall have sole direction and control of any negotiations or of any suit that may be brought and ADP shall assist Kronos in any reasonable way required by Kronos in its defense, and (iii) ADP takes all reasonable steps to mitigate any potential damages that may result from such claim, suit or proceeding. If ADP's or a Sublicensee's use of the Hardware or the ADP Time & Attendance Software or any part of either thereof shall be prevented by an injunction based on an alleged infringement, Kronos shall have the right to substitute for the infringing Hardware or ADP Time & Attendance Software or part of either thereof another suitable product substantially equivalent in performance, or, at Kronos' option, obtain for ADP and its Sublicensees the right to continue the use of the ADP Time & Attendance Software or part thereof. KRONOS' AGGREGATE DOLLAR OBLIGATION FOR ALL CLAIMS, SUITS OR PROCEEDINGS INDEMNIFIED UNDER THIS SECTION 16(a), INCLUDING EXPENSES FOR DEFENSE AND COSTS, SHALL BE LIMITED TO [**] MILLION DOLLARS, NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT. (b) Kronos further agrees to defend ADP, at Kronos' own cost and expense, against any claim, suit or proceeding in connection with any allegation that the Hardware sold to a Sublicensee with the eTime 1000 Software or eTime 100 Software, or the eTime 1000 Software or eTime 100 Software or any part of either thereof caused or causes damages to be incurred by a Sublicensee and/or another third-party; provided however, that this agreement is subject to ADP's having sublicensed the eTime 1000 Software or eTime 100 Software, as applicable, under provisions substantially equivalent to those in Annex I. However, Kronos shall have no liability or obligation pursuant to this Section 16(b) to the extent that such allegation is based on or damage is caused by modifications or enhancements made by ADP or its Sublicensees (or by another third party or Kronos at ADP's request or direction) or installations not in accordance with Kronos' installation procedures. Kronos will pay damages assessed against ADP (whether by court award or by settlement) that are attributable to any such claim, but only on the condition that (i) Kronos is promptly notified in writing of any such claim, suit or proceeding and furnished with all papers received in connection therewith and (ii) Kronos shall have sole direction and control of any negotiations or of any suit that may be brought and ADP shall assist Kronos in any reasonable way required by Kronos in its defense, and (iii) ADP takes all reasonable steps to mitigate any potential damages that may result from such claim, suit or proceeding. KRONOS' AGGREGATE DOLLAR OBLIGATION FOR ALL CLAIMS, SUITS OR PROCEEDINGS INDEMNIFIED UNDER THIS SECTION 16(b), INCLUDING EXPENSES FOR DEFENSE AND COSTS, SHALL BE LIMITED TO [**]MILLION DOLLARS, NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT. (c) ADP agrees to defend Kronos, at ADP's own cost and expense, against any claim, suit or proceeding in connection with any allegation that the Hardware or the ADP Time & Attendance Software or any part of either infringes upon or interferes with any patent, trademark, copyright or other proprietary right of a third party to the extent that the Hardware or ADP Time & Attendance Software incorporates any modifications, enhancements, functions or features that are made by ADP (or by a third party or Kronos at ADP's request or direction) and such claim, suit or proceeding results from such modifications, enhancements, functions or features. ADP will pay damages assessed against Kronos (whether by court award or by settlement) attributable to any such claim, but only on the condition that (i) ADP is promptly notified in writing of any claim of infringement and furnished with all papers received in connection therewith and (ii) ADP shall have sole direction and control of any negotiations or of any suit that may be brought and Kronos shall assist ADP in any reasonable way required by ADP in its defense, and (iii) Kronos shall take all reasonable steps to mitigate any damages that may result from such suit, claim or proceeding. To the extent that Kronos has reason to believe or suspect that any present or proposed modification, enhancement, function or feature made by ADP (or by Kronos or a third party at ADP's request or direction) may or will infringe upon or interfere with any patent, copyright, trademark or other proprietary right of a third-party, Kronos will immediately notify ADP. ADP's AGGREGATE DOLLAR OBLIGATION FOR ALL CLAIMS, SUITS AND PROCEEDINGS INDEMNIFIED UNDER THIS SECTION 16(c), INCLUDING EXPENSES FOR DEFENSE AND COSTS, SHALL BE LIMITED TO [**] MILLION DOLLARS. (d) ADP further agrees to defend Kronos, at ADP's own cost and expense, against any claim, suit or proceeding in connection with any allegation that the Hardware sold to a Sublicensee with the eTime 1000 Software or eTime 100 Software, or the eTime 1000 Software or eTime 100 Software or any part of either thereof caused or causes damages to be incurred by a Sublicensee and/or another third-party to the extent that such Hardware or ADP Time & Attendance Software incorporates any modifications, enhancements, functions or features that are made by ADP (or by a third-party or Kronos at ADP's request or direction) and such claim, suit and proceeding results from such modifications, enhancements, functions or features. ADP will pay damages assessed against Kronos (whether by court award or by settlement) that are attributable to any such claim, but only on the condition that (i) ADP is promptly notified in writing of any claim, suit or proceeding and furnished with all papers received in connection therewith and (ii) ADP shall have sole direction and control of any negotiations or of any suit that may be brought and Kronos shall assist ADP in any reasonable way required by ADP in its defense, and (iii) Kronos shall take all reasonable steps to mitigate any damages that may result from such suit, claim or proceeding. ADP'S AGGREGATE DOLLAR OBLIGATION FOR ALL CLAIMS, SUITS AND PROCEEDINGS INDEMNIFIED UNDER THIS SECTION 16(d), INCLUDING EXPENSES FOR DEFENSE AND COSTS, SHALL BE LIMITED TO [**] MILLION DOLLARS. 17. Confidentiality. (a) ADP and Kronos recognize that, in the performance of this Agreement, employees of ADP and Kronos may learn of or be exposed to trade secrets or other confidential information (including, without limitation, any information concerning the business, operations or clients of ADP or Kronos which are the property of ADP or Kronos, respectively). In order to provide the unrestricted basis of communication required for the successful and expeditious performance of this Agreement, Kronos and ADP agree that they will take all reasonable efforts to prevent such trade secrets or other confidential information from being used for any purpose other than in connection with this Agreement and from becoming known to anyone except bona fide employees only on a need-to-know basis, and such employees will be cautioned that such information is confidential. In addition, Kronos and ADP each 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 such 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. Unless and until any such information is (i) in or becomes part of the public domain other than by disclosure by Kronos or ADP in violation of this Agreement, (ii) demonstrably known to Kronos or ADP previously, (iii) independently developed by Kronos or ADP outside of this Agreement or (iv) rightfully obtained by Kronos or ADP from third parties, Kronos and ADP shall use the same degree of care in the handling of such information as they would use with regard to their own proprietary and/or confidential information in order to prevent the disclosure thereof. (b) ADP and Kronos shall each return to the other any confidential information obtained from the other or provide proof of destruction of such confidential information upon the expiration or sooner termination of this Agreement or upon request by the other party. (c) Kronos shall not reveal the names or addresses of any ADP Clients or other authorized customer of ADP under this Agreement to any local Kronos office, except as required to perform its responsibilities under this Agreement and provided that Kronos complies with the requirements stated herein in connection with any such disclosure. Neither party may provide the customer lists of the other to any third party, except as required by Kronos to perform its maintenance responsibilities under this Agreement and provided that Kronos complies with the requirements stated herein in connection with any third party disclosure. It is understood and agreed that the confidentiality provisions of Kronos' agreements with its dealers signed prior to the Prior Agreement shall satisfy the obligation under this section to obtain signed confidentiality agreements. 18. Force Majeure. With respect to Hardware or Software, Kronos shall not be liable for any loss, damage or penalty for delay in delivery or for failure to give notice of delay when such delay is due to causes beyond the reasonable control of Kronos; provided, however, that if ADP demonstrates to Kronos that ADP has thereby lost an order, then ADP may, upon written notice to Kronos cancel such order without any charge therefor. The time for performance hereunder shall be extended by a period of time equal to the time lost because of any such delay. 19. Use of Name. (a) With respect to any Hardware purchased by ADP hereunder to be used with ADP Time & Attendance Software and ADP Acquired Time & Attendance Software (other than those products that ADP purchases from Kronos in nominal or relatively insignificant amounts), Kronos hereby agrees to replace external Kronos markings or other insignia (except serial numbers, patent notices and safety agency approval plates) that are affixed to Hardware with ADP's markings or other markings designed by ADP for such purpose. (b) Kronos hereby authorizes ADP representatives to make use of Kronos' name, trademark or trade name in connection with marketing ADP Time & Attendance to ADP Clients, prospective ADP Clients, and other authorized customers and/or prospective authorized customers of ADP under Agreement; provided however, that no such use will be made in any written materials, distributed outside of ADP without Kronos' written approval and any such use will be in proper legal form. (c) Subject to Section 22(h), each party expressly prohibits the other party from any direct or indirect use, reference to, or other employment of its name, trademarks or trade names or of any name, trademark or trade name exclusively licensed to such party, except as specified in this Agreement or as expressly authorized in writing. 20. Relationship of the Parties. (a) The parties acknowledge that the relationship between Kronos and ADP shall be construed solely as that of licensor and licensee in the case of Software and vendor and vendee in the case of Hardware. The parties further acknowledge that any and all rights not expressly granted pursuant to this Agreement are reserved to the respective party and that neither party shall have any right, power or authority to in any way obligate the other to any contract, term or condition not set forth herein. (b) The parties hereto acknowledge that both parties hereto are independent contractors. Neither party shall in any way represent itself as a partner, joint-venturer, agent, employee or general representative of the other party. 21. Limitation Of Liability And Indemnification. EXCEPT AS PROVIDED IN SECTIONS 16 AND SECTION 13(e), IN NO EVENT SHALL KRONOS OR ADP OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE TO THE OTHER PARTY OR ITS SUBSIDIARIES, AFFILIATES OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS FOR LOST DATA, LOST PROFITS OR LOST REVENUES OR ANY SPECIAL, CONSEQUENTIAL, PUNITIVE OR INCIDENTAL DAMAGES OF ANY KIND WHATSOEVER ARISING FROM KRONOS' TECHNOLOGY, LICENSE OR SALE OF PRODUCTS OR SERVICES OR OTHERWISE IN CONNECTION WITH ANY PREVIOUS AGREEMENT, WITH THIS AGREEMENT OR WITH ANY OF THE ACTIVITIES THEREUNDER OR HEREUNDER. EXCEPT FOR KRONOS' INDEMNIFICATION OBLIGATIONS UNDER SECTIONS 16(a) AND 16(b), IN NO EVENT WHATSOEVER SHALL KRONOS' LIABILITY UNDER THIS AGREEMENT OR FROM ANY AND ALL CAUSES OR OTHERWISE EXCEED IN GENERAL MONEY DAMAGES A TOTAL CUMULATIVE MAXIMUM AMOUNT OF [**] OF THE AMOUNTS ACTUALLY PAID TO KRONOS UNDER THIS AGREEMENT. THE EXISTENCE OF MORE THAN ONE CLAIM OR SUIT WILL NOT ENLARGE OR EXTEND THESE LIMITS. THE LIMITATIONS IN THIS SECTION SHALL BE THE FULL EXTENT OF KRONOS' AND ADP'S LIABILITY UNDER THIS AGREEMENT WHETHER THE ACTION OR ACTIONS AGAINST KRONOS OR ADP, AS APPLICABLE, ARE BROUGHT BY REASON OF ANY BREACH OF ANY REPRESENTATION OR WARRANTY UNDER OR ANY OTHER BREACH THIS AGREEMENT OR BY REASON OF NEGLIGENCE, STRICT LIABILITY OR ANY OTHER TORT OR CAUSE OF ACTION. 22. Miscellaneous. (a) This Agreement and the Exhibits attached hereto and incorporated herein contain the entire agreement of the parties with respect to its subject matter and supersede all existing agreements, including the Agreement, and all other oral, written or other communications between them concerning its subject matter, including, without limitation, any summaries of terms and conditions hereof. This Agreement shall not be modified in any way except by a writing signed by authorized representatives of both parties. (b) This Agreement shall be binding upon and inure to the benefit of ADP and Kronos and their respective successors and permitted assigns. This Agreement, and the rights and obligations conveyed hereby, shall not be assigned or otherwise transferred, voluntarily, by operation of law, or otherwise by either party without the prior written consent of the other party, and any attempt to assign any rights, duties or obligations that arise under this Agreement without such consent will be void. In the event of a "Change of Control" of one party, as defined in the following sentence, the other party shall have the option to terminate this Agreement by providing written notice to the party affected by the Change of Control, within thirty (30) days of the event causing the Change of Control. "Change of Control" shall mean: (i) the acquisition of "beneficial ownership" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934) of securities representing 50% or more of the combined voting power of a company's then outstanding securities by any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934; (ii) the complete liquidation of a company; (iii) the sale of all or substantially all of the assets of a company; or (iv) a merger or consolidation that would result in the voting securities of a company outstanding immediately prior thereto continuing to represent less than 50% of the combined voting power of that company or the surviving or acquiring entity outstanding immediately after such merger or consolidation. In the event of a Change of Control of Kronos, the surviving or acquiring entity shall be required to offer to ADP all hardware and software being marketed/licensed by Kronos at the time of the Change in Control (including, without limitation, IBM iSeries product line, ShopTrac Pro(R)) with pricing at discounts equal to the discounts applicable to Enterprise eTime Software and Hardware under this Agreement. (c) If any provision of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remainder of this Agreement shall not in any way be affected or impaired thereby. (d) This Agreement shall be governed in all respects by the laws of the State of New Jersey without giving effect to principles of conflicts of law. (e) All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be deemed to have been given (i) on the date delivered, if by personal delivery, (ii) one day after being sent by overnight courier service, or (iii) three days after being mailed, by certified or registered mail, return receipt requested, in any United States post office or box addressed to the address of the parties stated below or to such changed address as such party may have fixed by written notice: If to Kronos: 297 Billerica Road Chelmsford, MA 01824 Attention: Executive Vice President, Chief Operating Officer with a copy to the General Counsel at the same address If to ADP: ADP, Inc. One ADP Boulevard Roseland, New Jersey 07068 Attention: President, Employer Services Group with a copy to the General Counsel at the same address provided, however, that any notice of change of address shall be effective only upon receipt. (f) A waiver of any Event of Default under this Agreement shall not be a waiver of any other or subsequent Event of Default. Failure or delay by either party to enforce compliance with any terms or conditions of this Agreement shall not constitute a waiver of such terms or conditions. (g) The persons executing this Agreement on behalf of Kronos and ADP represent and warrant that they respectively have been and are on the date of this Agreement duly authorized by all necessary and appropriate corporate action to enter into and execute this Agreement. (h) The parties agree that promptly after the execution of this Agreement they will cooperate, in good faith, to develop a press release concerning this Agreement and they shall jointly issue that press release. Except as otherwise specifically provided herein, or as required by law, each of the parties agrees that it will not publicly release (through a press release or otherwise) the fact that they have entered into this Agreement, or use other party's name, logo or service mark in connection with any advertising, sales or promotional activities unless the President of ADP's Employer Services Group or the Executive Vice President of Kronos as applicable, gives prior written consent in each instance. (i) ADP agrees to maintain adequate financial records of all transactions contemplated by this Agreement. Not more than four times in any calendar year, Kronos shall be entitled to audit and examine the records maintained by ADP in connection with the transactions contemplated by this Agreement. Any such audit shall be during normal business hours and upon at least ten business days prior written notice. The cost of any such audit shall be borne by Kronos; provided however, that if such audit demonstrates that ADP has underpaid any amounts owed to Kronos by more than 7 1/2 % for the audited period, the cost of the audit shall be borne by ADP. (j) The headings in this Agreement are intended for convenience of reference and this Agreement shall not be affected or impaired thereby. (k) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one agreement. (l) Any dispute, controversy or claim arising out of or in connection with this Agreement shall be determined and settled by arbitration in Hartford, Connecticut. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in a court having competent jurisdiction. The party submitting such dispute shall request the American Arbitration Association to: (i) appoint an arbitrator who is knowledgeable in the microcomputer area and familiar with the personal computer software industry and who will follow substantive rules of law; (ii) allow for the parties to request discovery pursuant to the rules then in effect upon the Federal Rules of Civil Procedure for a period not to exceed sixty (60) days; (iii) require the testimony to be transcribed; and (iv) require the award to be accompanied by findings of fact and a statement of reasons for the decision. Each party shall bear its own costs and expenses, including attorney's fees, in connection with such arbitration. The parties hereto further agree that the preceding clause (l)(i) shall not prevent either party from seeking injunctive relief in a judicial proceeding as provided further in Section 13(g). (m) If there is any inconsistency between the terms set forth in this Agreement and the terms of any Exhibit or Annex attached hereto, the terms of the Agreement shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ADP, INC. KRONOS INCORPORATED By: /s/Russell Fradin By: /s/Aron Ain - ---------------------------------- ---------------------------------- (Authorized Signature) (Authorized Signature) Name: Russell Fradin Name: Aron Ain - ---------------------------------- ---------------------------------- (please print) (please print) Title: President-Employer Services Title: Executive V.P. & Chief - ---------------------------------- Operating Officer ---------------------------------- EXHIBIT A ADP PRICE LIST HARDWARE, SOFTWARE AND TRAINING Price book and its contents Valid as of 6/19/03, Subject to Change ADP Price List Description and Pricing for ADP Hardware, eTIME Heavy Software, Lite Software, Badges and Accessories ADP 400 and 100 Clocks - -------------------------------------------------------------------------------- Description Part Number ADP Price - -------------------------------------------------------------------------------- ADP Timeclock 440 Basic 512K 8600615-429 $[**] - -------------------------------------------------------------------------------- ADP Timeclock 420 Gate w\Relay 512K 8600615-430 $[**] - -------------------------------------------------------------------------------- ADP Timeclock 460 w/Print Op/modem 512K 8600615-411 $[**] - -------------------------------------------------------------------------------- ADP Timeclock 480 512K 8600615-427 $[**] - -------------------------------------------------------------------------------- ADP Timeclock 480 512K Alphanumeric 8600615-428 $[**] - -------------------------------------------------------------------------------- ETIME Lite Clock 150 8601003-001 $[**] - -------------------------------------------------------------------------------- ETIME Lite Clock w\ Modem 154 8601003-011 $[**] - -------------------------------------------------------------------------------- ETIME Heavy 140 8601001-001 $[**] - -------------------------------------------------------------------------------- ETIME Heavy w\Modem 144 8601001-011 $[**] - -------------------------------------------------------------------------------- 4500 Full Numeric Bar Code 10/100 Mbit Ethernet 8602000-401 $[**] - -------------------------------------------------------------------------------- 4500 Full Numeric Mag Stripe 10/100 Mbit Ethernet 8602000-402 $[**] - -------------------------------------------------------------------------------- 4500 Full Numeric Proximity 10/100 Mbit Ethernet 8602000-403 $[**] - -------------------------------------------------------------------------------- ** Please note Alpha numeric key pads not numeric - -------------------------------------------------------------------------------- 4500 Full Alpha Bar Code 10/100 Mbit Ethernet** 8602000-451 $[**] - -------------------------------------------------------------------------------- 4500 Full Alpha Mag Stripe 10/100 Mbit Ethernet** 8602000-452 $[**] 4500 Full Alpha Proximity 10/100 Mbit Ethernet** 8602000-453 $[**] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4500 Full Alpha Bar Code Modem** 8602000-461 $[**] - -------------------------------------------------------------------------------- 4500 Full Alpha Mag Stripe Modem** 8602000-462 $[**] - -------------------------------------------------------------------------------- 4500 Full Alpha Proximity Modem** 8602000-463 $[**] - -------------------------------------------------------------------------------- 4500 Install Manual Kit 8700366-002 $[**] - -------------------------------------------------------------------------------- Battery Back Up Kit (all supported countries) 8601763-002 $[**] - -------------------------------------------------------------------------------- Internal AC Outlet Kit (U.S., Canada, Mexico) 8601824-001 $[**] - -------------------------------------------------------------------------------- 4500 Linear Imager Bar Code Reader Kit (all supported countries) 8601982-002 $[**] - -------------------------------------------------------------------------------- 4500 Laser Imager Kit 8601983-002 $[**] - -------------------------------------------------------------------------------- 4500 Interface Board Kit 8601965-003 $[**] - -------------------------------------------------------------------------------- ADP HIGH RES Wand Kit 8601979-004 $[**] - -------------------------------------------------------------------------------- ADP MED RES Wand Kit - OBSOLETE 8601979-005 $[**] - -------------------------------------------------------------------------------- ADP LOW RES Wand Kit - OBSOLETE 8601979-006 $[**] - -------------------------------------------------------------------------------- Terminal Debug Kit (Hyper Terminal serial cable) 8601762-001 $[**] - -------------------------------------------------------------------------------- ADP 4500 Power Transformer 7800100-005 $[**] - -------------------------------------------------------------------------------- ADP4500 Power Cord - 6 Feet 7200200-001 $[**] - -------------------------------------------------------------------------------- ADP4500 Power Cord - 12 Inches 7200201-001 $[**] - -------------------------------------------------------------------------------- ADP Smart Convertor 8600737-002 $[**] - -------------------------------------------------------------------------------- ADP Modem kit 8601183-003 $[**] - -------------------------------------------------------------------------------- ADP Remote Reader RS485 Kit 8600826-001 $[**] - -------------------------------------------------------------------------------- ADP Relay Kit 8600669-005 $[**] - -------------------------------------------------------------------------------- Gasket Kit 8600764-001 $[**] - -------------------------------------------------------------------------------- Wand Kit 8600759-004 $[**] - -------------------------------------------------------------------------------- Internal AC Surge Protector 8600619-002 $[**] - -------------------------------------------------------------------------------- External Surge Protector AP00535-003 $[**] - -------------------------------------------------------------------------------- 485 PC Board 8600909-001 $[**] - -------------------------------------------------------------------------------- Wrenches for clocks 8900018-001 $[**] - -------------------------------------------------------------------------------- ADP Battery Back Up Kit 8600670-002 $[**] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Lithium Battery 7900002-001 $[**] - -------------------------------------------------------------------------------- Power Supply Cord for Clock 7800008-001 $[**] - -------------------------------------------------------------------------------- Clock Security Screws 9000108-001 $[**] each - -------------------------------------------------------------------------------- ADP CCD Scanner Kit* 8600775-004 $[**] - -------------------------------------------------------------------------------- ADP I\O Board*need this for scanner 8600671-003 $[**] - -------------------------------------------------------------------------------- Auxillary Power 8600603-001 $[**] Inactive - -------------------------------------------------------------------------------- ADP Ethernet Kit 8600947-002 $[**] - -------------------------------------------------------------------------------- Key Pad Repl 3600390-001 $[**] - -------------------------------------------------------------------------------- Alt Reader Mag 8600767-057 $[**] - -------------------------------------------------------------------------------- Rem Rdr Kit Mag 8600556-012 $[**] - -------------------------------------------------------------------------------- 128K to 256K Memory upgrade 8600797-001 $[**] Inactive - -------------------------------------------------------------------------------- 512k Ram Upgrade 8601184-001 $[**] - -------------------------------------------------------------------------------- ADP minimum order fee (any order $200) 9999ADP-MIN - -------------------------------------------------------------------------------- Cable, Bell Relay, 400 3600440-001 $[**] - -------------------------------------------------------------------------------- Boxes Qty's of 280 9800314-002 $[**] each - -------------------------------------------------------------------------------- Foam Corner Caps Qty's of 280 9800313-001 [**] each - -------------------------------------------------------------------------------- Pkg inserts Qty's of 280 9800315-001 [**] each - -------------------------------------------------------------------------------- Mag Reader Track I 8600556-008 $[**] - -------------------------------------------------------------------------------- Mag Reader Track II 8600556-012 $[**] - -------------------------------------------------------------------------------- I/O Daughter Board Kit 8600671-001 $[**] - -------------------------------------------------------------------------------- Alternate I/O Option Board 8600767-xxx $[**] (Custom Format and/or Site Code) - -------------------------------------------------------------------------------- Alternate Reader I/O Daughter Board 8600767-001 $[**] (If using Kronos standard Format HID Proximity Cards) - -------------------------------------------------------------------------------- Multi Reader I/O 8600767-080 or $[**] any 8600767-xxx part - -------------------------------------------------------------------------------- Proximity Interface Kit (Custom?) 8600732-012 $[**] - -------------------------------------------------------------------------------- Mini Proximity Reader Option Kit 8600732-009 $[**] (includes Multi Reader I/O P/N 8600732-012) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Proximity Pro Reader Option Kit 8600732-010 $[**] (includes Multi Reader I/O P/N 8600732-012) - -------------------------------------------------------------------------------- One-time Custom Format Fee 9990155-155 $[**] (to create a version of the I/O Option Board for formats not currently available from Kronos) - -------------------------------------------------------------------------------- One-time Custom Site Code Fee 9990155-156 $[**] (to create a version of the I/O Option Board for Site Code formats not currently available from Kronos) - -------------------------------------------------------------------------------- ADP Bar Code Stickers packs of 50 9900127-002 $[**] - -------------------------------------------------------------------------------- Insert Bar Code Stickers packs of 50 BG00034-000 $[**] each - -------------------------------------------------------------------------------- ADP New Style Employee Badges packs of 50 6800132-001 $[**] - -------------------------------------------------------------------------------- ADP New Style Supervisor Badges ordered in singles 6800133-001 $[**] - -------------------------------------------------------------------------------- ADP New Style Maintenance Badges ordered in singles 6800134-001 $[**] - -------------------------------------------------------------------------------- Badge Racks AP00003-005 $[**] - -------------------------------------------------------------------------------- Function Key Labels\set 9900164-001 $[**] - -------------------------------------------------------------------------------- ADP 4500/400 Employee Proximity Badge packs of 50 6800202-001 $[**] - -------------------------------------------------------------------------------- ADP 4500 Maintenance Proximity Badge ordered in singles 6800203-001 $[**] - -------------------------------------------------------------------------------- ADP 4500 Supervisor Proximity Badge ordered in singles 6800204-001 $[**] - -------------------------------------------------------------------------------- I/O to Main 3600398-001 $[**] - -------------------------------------------------------------------------------- I/O to Main 3600398-001 $[**] - -------------------------------------------------------------------------------- DB9-25 Adapter 3600474-001 $[**] - -------------------------------------------------------------------------------- Smart Converter Cable 3600448-001 $[**] - -------------------------------------------------------------------------------- 6 Position Connectors 5100015-001 $[**] - -------------------------------------------------------------------------------- Total Time Lite 100 ft cable 3600527-001 $[**] - -------------------------------------------------------------------------------- Printer Clock Cable 25ft 3600661-001 $[**] Inactive - -------------------------------------------------------------------------------- Total Time Lite 250 ft cable 3600527-002 $[**] - -------------------------------------------------------------------------------- 5 Position Connectors 5100004-001 $[**] - -------------------------------------------------------------------------------- 7 Position Connectors 5100013-001 $[**] - -------------------------------------------------------------------------------- 140,144 Power Cord 7800010-002 $[**] - -------------------------------------------------------------------------------- 4 Pin bell relay connector 5103537-000 $[**] - -------------------------------------------------------------------------------- Ethernet Standoff 8200200-001 $[**] - -------------------------------------------------------------------------------- Modem Standoff 8200109-001 $[**] - -------------------------------------------------------------------------------- Total Time V9.1 S\U 1000 8601355-001 $[**] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Time V9.1 S\U 5000 8601356-001 $[**] - -------------------------------------------------------------------------------- Total Time V9.1 M\U 1000 8601355-002 $[**] - -------------------------------------------------------------------------------- Total Time V9.1 M\U 5000 8601356-002 $[**] - -------------------------------------------------------------------------------- Accruals S\U V9.0, 9.1 & e-TIME 9990145-ACR $[**] - -------------------------------------------------------------------------------- Accruals M\U V9.0, 9.1 & e-TIME 9990146-ACR $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 3A Single User 1000 8601272-001 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 3A Single User 5000 8601272-002 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 3A Multi User 1000 8601273-001 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 3A Multi User 5000 8601273-002 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 3A Single User Accruals 9990150-ACR $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 3A Multi User Accruals 9990151-ACR $[**] - -------------------------------------------------------------------------------- e-TIME Scheduler S\U (3.x) 9990152-KSM $[**] - -------------------------------------------------------------------------------- e-TIME Scheduler M\U (3.x) 9990153-KSM $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 4.x S\U 1000 8601553-001 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 4.x S\U 3000 8601583-001 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 4.x M\U 1000 8601553-002 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 4.x M\U 3000 8601583-002 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 4.x Syb upg S\U 1000 8601554-001 $[**] - -------------------------------------------------------------------------------- e-TIME Heavy 4.x Syb upg M\U 1000 8601554-002 $[**] - -------------------------------------------------------------------------------- e-TIME Messaging S\U (4.x) 9990150-MSG $[**] - -------------------------------------------------------------------------------- e-TIME Messaging M\U (4.x) 9990151-MSG $[**] - -------------------------------------------------------------------------------- e-TIME Scheduler S\U (4.x) 9990152-KSM $[**] - -------------------------------------------------------------------------------- e-TIME Scheduler M\U (4.x) 9990153-KSM $[**] - -------------------------------------------------------------------------------- e-TIME Accruals S\U (4.x) 9990150-ACR $[**] - -------------------------------------------------------------------------------- e-TIME Accruals M\U (4.x) 9990151-ACR $[**] - -------------------------------------------------------------------------------- e-TIME Lite 200 ee Cap Release ** 8601282-001 $[**] - -------------------------------------------------------------------------------- Total Time Lite 1000 Cap Release ** Special Line "8A" $[**] - -------------------------------------------------------------------------------- ** Prior to purchasing a CAP Release, you MUST first purchase the Core Software - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EBS Heavy 3A (150 support) total time lite DOS clients only 8601360-001 $[**] - -------------------------------------------------------------------------------- e-TIME Lite Software 9999ADP-ETL $[**] - -------------------------------------------------------------------------------- NOTE: If ADP wants to upgrade a customer to a higher user and employee level for software, ADP shall pay the difference between the two software packages - -------------------------------------------------------------------------------- **must be purchased in [**] quantity for this pricing - -------------------------------------------------------------------------------- RJ11 100 Foot Cable 3600527-001 $[**] - -------------------------------------------------------------------------------- Transformer 7800010-002 $[**] - -------------------------------------------------------------------------------- Mounting Wedge 8400332-001 $[**] - -------------------------------------------------------------------------------- Adaptor RJ11 to DB9 3600525-001 $[**] - -------------------------------------------------------------------------------- Manual kit 140\150 8700124-001 $[**] - -------------------------------------------------------------------------------- Adaptor RJ11 to DB25F 3600526-001 $[**] - -------------------------------------------------------------------------------- Wall Anchor Plastic 8900052-001 $[**] - -------------------------------------------------------------------------------- Screw 9000151-001 $[**] each - -------------------------------------------------------------------------------- Mtg Screw Height Guage 8400343-001 $[**] - -------------------------------------------------------------------------------- Connector Cover 8400342-001 $[**] - -------------------------------------------------------------------------------- Cable Tele Cord 7ft 3600340-001 $[**] - -------------------------------------------------------------------------------- Cable Tele Cord 10.5in 3600340-003 $[**] - -------------------------------------------------------------------------------- 100 series install manual 4701137-001 $[**] - -------------------------------------------------------------------------------- Comm board test kit 8601172-001 $[**] tooling fee applies if less than [**] ordered - -------------------------------------------------------------------------------- (all fees are per clock) - -------------------------------------------------------------------------------- Restocking fee (new equip 400's) 9990145-RST $[**] - -------------------------------------------------------------------------------- Refurbish fee (used returned for credit 400's) 9990145-RFB $[**] - -------------------------------------------------------------------------------- Repair & return clocks no problem found 400 9990140-NPF $[**] - -------------------------------------------------------------------------------- Repair & return w\o modem no refurb 400 9990140-RNR $[**] - -------------------------------------------------------------------------------- Repair & return w\modem no refurb 400 9990141-RNR $[**] - -------------------------------------------------------------------------------- Repair & return w\o modem & w\refurb 400 9990140-RAR $[**] - -------------------------------------------------------------------------------- Repair & return w\modem & w\refurb 400 9990141-RAR $[**] - -------------------------------------------------------------------------------- 140\144 Series Out of Warranty Charge 9990140-OOW $[**] - -------------------------------------------------------------------------------- 100 Series Unopened, under 1 year old 9990140-UNO $[**] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 100 Series Opened, under 1 year old 9990140-OPN $[**] - -------------------------------------------------------------------------------- 150\154 Series Out of Warranty Charge 9990150-OW $[**] - -------------------------------------------------------------------------------- Repair depot upgrade 9990140-UPG - -------------------------------------------------------------------------------- 100 Series No Problem Found Mt. Clockmor 9990150-NPF* $[**] - -------------------------------------------------------------------------------- Temp # for Transition of IBM Inventory SVCS 9990140-INV $[**] - -------------------------------------------------------------------------------- ADP Unit Repair for Services Business 9990140-RPR $[**] - -------------------------------------------------------------------------------- ADP Peripheral Repair for Svcs Business 9990140-PER $[**] - -------------------------------------------------------------------------------- ADP Svcs Install 9900145-INS $[**] - -------------------------------------------------------------------------------- " " " each additional clock per site same trip " " " $[**] - -------------------------------------------------------------------------------- ADP Svcs De-install 9990145-DEI $[**] - -------------------------------------------------------------------------------- " " " each additional clock per site same trip " " " $[**] - -------------------------------------------------------------------------------- ADP Svcs Clock Move 9990145-MOV $[**] - -------------------------------------------------------------------------------- " " " each additional clock per site same trip " " " $[**] - -------------------------------------------------------------------------------- ADP Svcs Dead Run 9990145-DDR $[**] - -------------------------------------------------------------------------------- ADP Upgrade & Refurb to 480 clock 9990145-480 $[**] - -------------------------------------------------------------------------------- ADP Service Call 9990145-SVC $[**] - -------------------------------------------------------------------------------- Depot exchange 9990145-DPO $[**] - -------------------------------------------------------------------------------- ADP depot units over 45 days 9990400-NRT $[**] - -------------------------------------------------------------------------------- National Accounts Orange to Blue upgrade 9990400-RFB $[**] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [**]% [**]% - -------------------------------------------------------------------------------- Kronos Training ADP Customer ADP Internal ADP Internal - -------------------------------------------------------------------------------- Valid as of 4/1/03 and subject at ADP site at ADP site At Kronos to change - -------------------------------------------------------------------------------- Description Min 10 Students Min 8 Students - -------------------------------------------------------------------------------- New pricing as of 9/1/02 Plus T&E Plus T&E - -------------------------------------------------------------------------------- Per Student Per student $ Per student - -------------------------------------------------------------------------------- Workforce Central V4 - -------------------------------------------------------------------------------- Workforce Central 4 $[**] $[**] $[**] Pre-Implementation Workshop (2 days) - -------------------------------------------------------------------------------- Workforce Central 4 $[**] $[**] $[**] Daily Operations (1 day) - -------------------------------------------------------------------------------- Workforce Central 4 Pay $[**] $[**] $[**] Period Operations (1/2 day)* - -------------------------------------------------------------------------------- Workforce Central 4 $[**] $[**] $[**] Scheduling (1/2 day)* - -------------------------------------------------------------------------------- Workforce Central 4 Setup $[**] $[**] $[**] and Administration (1 day) - -------------------------------------------------------------------------------- Workforce Central 4 Database $[**] $[**] $[**] Overview and Maintenance (1 day) - -------------------------------------------------------------------------------- Workforce Central 4 Basic $[**] $[**] $[**] Configuration (4 days) - -------------------------------------------------------------------------------- Workforce Central 4 Advanced $[**] $[**] $[**] Configuration (5 days) - -------------------------------------------------------------------------------- Workforce Central $[**] $[**] $[**] System Settings (1/2 day) - -------------------------------------------------------------------------------- Workforce Central 4 $[**] $[**] $[**] Upgrade Workshop (1 day) - -------------------------------------------------------------------------------- Workforce Accruals $[**] $[**] $[**] Configuration (1 day) - -------------------------------------------------------------------------------- Workforce 4 Database $[**] $[**] $[**] Conversion (2 days) - -------------------------------------------------------------------------------- Data Collection Manager $[**] $[**] $[**] Configuration and Support for WFC 4 (1 day) - -------------------------------------------------------------------------------- Workforce Central Department $[**] $[**] $[**] Manager (1/2 day) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Workforce Record Manager (1 day) $[**] $[**] $[**] - -------------------------------------------------------------------------------- Workforce Central 4 Sizing $[**] $[**] $[**] Workshop (2 days) - -------------------------------------------------------------------------------- Workforce Central 4 Install $[**] $[**] $[**] and Troubleshooting (5 days) - -------------------------------------------------------------------------------- 3rd PARTY VENDORS COURSES CAN NOT BE DISCOUNTED [**] - -------------------------------------------------------------------------------- Workforce Central 4 Introduction [**] [**] $[**] to the API (2 days) - -------------------------------------------------------------------------------- Workforce Central 4 Using Java to [**] [**] $[**] Develop API Applications (1 day) - -------------------------------------------------------------------------------- Introduction to Java (5 days) [**] [**] $[**] - -------------------------------------------------------------------------------- Introduction to Crystal Reports [**] [**] $[**] (3 days) - -------------------------------------------------------------------------------- Advanced Crystal Reports (3 days) [**] [**] $[**] - -------------------------------------------------------------------------------- Oracle DBA Light (4 days) [**] [**] $[**] - -------------------------------------------------------------------------------- Constructing SQL Queries (3 days) [**] [**] $[**] - -------------------------------------------------------------------------------- Oracle Advanced Database [**] [**] $[**] Administration (3 days) - -------------------------------------------------------------------------------- Essential in UNIX for Workforce [**] [**] $[**] Central Internal (2 days) - -------------------------------------------------------------------------------- ** ADP to contact vendor directly for pricing and course scheduling - -------------------------------------------------------------------------------- Kronos Connect - -------------------------------------------------------------------------------- Kronos Connect Basic $[**] $[**] $[**] Programming (3 days) - -------------------------------------------------------------------------------- Kronos Connect Advanced $[**] $[**] $[**] Programming (4 days) - -------------------------------------------------------------------------------- * Kronos will only provide full day on site training (both classes combined) - -------------------------------------------------------------------------------- EXHIBIT B 1. MORE COMPLETE DESCRIPTION OF "LITE SOFTWARE": A time and attendance software solution with a user-configurable rules engine for consistent application of pay policies in small business applications where payroll processing is performed independently by site. 2. MORE COMPLETE DESCRIPTION OF "TIMEKEEPER CENTRAL SOFTWARE(R)" OR "TKC SOFTWARE": A time and attendance software solution with a user-configurable rules engine for consistent application of pay policies in mid market applications where payroll processing is performed independently by site. 3. MORE COMPLETE DESCRIPTION OF "WORKFORCE CENTRAL(R) SOFTWARE" OR "WFC SOFTWARE": A time and attendance software solution with a user configurable rules engine for consistent application of pay policies across the enterprise. WFC Software also provides access to the software for licensed managers and may contain leave management solutions for employee benefit time such as personal, vacation, compensatory, medical and other forms of leave. It may also contain a web deployed time entry module for hours and exceptions providing the professional workforce with a self-service method to submit labor data from diverse environments. EXHIBIT C Terms of Kronos' Pentamation Enterprises, Inc. & Siemens Medical Systems Healthcare Information Solutions Arrangements 1. Kronos will [**]. 2. Kronos will [**]. 3. Kronos will [**] for Kronos products. 4. Kronos will [**]. Kronos may [**]. 5. Kronos may [**]. 6. The agreements [**]. EXHIBIT D ADP/Kronos Enterprise eTime Software Maintenance Policy Effective December 2002, Kronos and ADP agreed that ADP will not be required to calculate maintenance amounts on Enterprise eTime orders submitted to Kronos. This will include all types of orders (i.e. original, upgrade). The purpose of this process is to streamline the way maintenance is handled and to avoid a cumbersome manual system. The procedure will be as followed; ADP will submit orders to Kronos without maintenance dollars ADP will submit to Kronos monthly, detailed Enterprise eTime SW Reports, one for Major Accounts (ADP NJ) and one for National Accounts (ADP FL). These reports will include; Additions, Install base, No Starts and Terminations for the previous months activities. The reports are due to Kronos on the 10th business day of the month. Kronos will "bulk bill" ADP annually based on the Enterprise eTime install base, less any Terminations o The bulk billing will be as of April 1st of any given year o Kronos and ADP will agree on the install base figure. The agreement shall come from a true-up of above mentioned ADP report against the Kronos system reports Discrepancies between the install base figures will be brought to ADP's attention. o The following general rule will apply; so long as Kronos can provide documentation that the order in question has shipped ADP will include that order in the install base figure. The monthly reports should be sent to: ssouthland@kronos.com And sgenest@kronos.com Maintenance dollars owed to Kronos will be calculated on a percentage of the purchased price of the software and billed to ADP annually. o The current percentage is a calculated rate of [**]% of the software purchase price There will be separate reporting billings for ADP Majors and ADP National accounts Credits for maintenance will be processed for No Starts only, that where included in the April 1st install base (see No Start Procedure). o No Starts must meet the Kronos criteria in the contract definition in order to be credited Maintenance Policy for No Starts No Start Procedure; Need to be included in the Enterprise eTime SW Report on a separate sheet and totaled by month o No Starts will need to be netted out of the install base Example: If Company ABC had an addition date of June 1st and was a No Start as of August 1st then Company ABC would need to be listed on the No Start sheet separate from the install base as well as placed on the install base report and netted out. Anything placed on the No Start sheet needs to be countered in the install base report o In the report/spreadsheet ADP must provide original addition date as well as No Start date. This is important for credit procedures Example A: If company ABC has an addition date of February 1st and a No Start date of June 1st then maintenance would be credited because they would have been included in the April 1st install base (this is for any given year) and maintenance would have been paid to Kronos Example B: If company ABC has an addition date of June 1st and a No Start date of October 1st then maintenance would not be credited due to the dollars not being in the install base report and maintenance never being billed to ADP Kronos will credit for software only (there will not be credits for shipping or hardware). Credits will be handled on a monthly basis against the install base No Starts report once verified by Kronos o Other than No Starts, no other credits will be issued throughout the year Termination Procedure: Need to be included in the monthly Enterprise eTime SW Report only on the Termination sheet (tab) and not netted out of the total install base o In the report/spreadsheet ADP must provide original addition date as well as Termination date At the time of the annual maintenance billing, Termination totals for the year will be deducted from the total install base figure EXHIBIT E Procedures Regarding Hardware (a) Any Hardware ordered by ADP and delivered by Kronos shall be pursuant to the issuance of a P.O. Each P.O. shall state the quantities, Hardware description (including part number), applicable prices, requested delivery date, delivery destination and delivery instructions. On the Order Acceptance Date, such order shall be deemed to be a firm order and to have been accepted by Kronos in the quantity stated in such order. If the requested delivery date is less than [**] days after the Order Acceptance Date with respect to any order of Hardware for use with Lite Software or less than [**] days with respect to any other order, Kronos shall use its best efforts to confirm such date, but if Kronos is unable to confirm such date the confirmed scheduled delivery date shall not in any event be later than [**] days after the Order Acceptance Date of such order for Hardware for use with Lite Software or [**] days for any other order. ADP shall provide to Kronos a [**] forecast of the expected monthly volume of Hardware and Kronos Software orders and ADP shall update such rolling forecasts quarterly. Notwithstanding the second preceding sentence, in the event actual orders for any month exceed forecasted orders for such month by up to [**]% of such forecast, Kronos shall be required to deliver an amount equal to 130% of such forecast within 90 days after receipt of the P.O. for Hardware for use with Lite Software and within [**] days after receipt of the P.O. for all other orders. Kronos shall not be obliged to deliver an amount in excess of [**]% of forecasted orders within [**] days after Order Acceptance Date. Kronos agrees to deliver amounts in excess of [**]% of forecasted orders up to and including [**]% of forecasted orders within [**] days following receipt of the applicable P.O., for all orders other than for Hardware for use with Lite Software and within [**] days after receipt of the applicable P.O. for all orders for Hardware for use with Lite Software. For orders in excess of [**]% of the forecasted order, Kronos shall use its best efforts to deliver such excess amount as expeditiously as possible. Kronos shall in any event confirm the delivery dates with respect to all P.O.'s. (b) ADP may cancel a P.O. for Hardware for use with Lite Software at no charge if such cancellation notice is received at least [**] days prior to the originally scheduled delivery date of such Hardware, and may cancel a P.O. for all other Hardware at no charge if cancellation notice is received at least [**] days prior to the originally scheduled delivery date of such Hardware. ADP may not cancel any order for Hardware received within [**] months prior to the termination of this Agreement. (c) Notice by ADP to Kronos changing the destination of a scheduled delivery of Hardware shall not be considered to be a rescheduling or a cancellation of a delivery. ADP may change the delivery destination for any delivery provided that Kronos is given notice at least [**] days prior to the scheduled delivery date for Hardware for use with Lite Software and [**] days prior to the scheduled delivery date for all other Hardware. (d) Shipment shall be F.O.B. Kronos' shipping dock upon transfer to either a common carrier or ADP itself. Kronos shall select a common carrier on behalf of ADP, which carrier shall not be construed to be the agent of Kronos. Title to Hardware and all risk of loss shall pass to ADP upon point of shipment. (e) Procedure for Return/Refurbishment of Certain Hardware 1. This Procedure only applies to the ADP 4500, 400, 140 and 144 Hardware. The Procedure does not apply to the 150/154 series Hardware or any other Hardware. 2. This Procedure applies when ADP or an ADP Customer returns a Hardware terminal to Kronos requesting refurbishment for any reason, except that this Procedure does not apply when Hardware Maintenance is required under Exhibit F. 3. Upon the return of a terminal to which this Procedure applies, Kronos agrees to refurbish that terminal and place it into an inventory for ADP to purchase. New Hardware orders from ADP will be filled through this inventory and will be at the prices specified in Exhibit A of the Agreement. 4. ADP will pay Kronos a refurbishing fee of $[**] for the ADP 4500 terminals, $[**] for each for the ADP 400 terminals and $[**] for each 140/144 terminals. In addition, Kronos will [**] the then current selling price of the applicable terminal. 5. Kronos will not refurbish, or grant ADP any credit for, any terminal on which the main board has been damaged or the main board revision is too old to make into a new terminal. Hardware that is considered scrap material will not be refurbished into new units and no credit will be issued to ADP. 6. Kronos reserves the right to modify or discontinue this Procedure at any time, upon [**] advance written notice to ADP. 7. At the end of the Agreement term, or upon [**] advance notice, Kronos will cease the procedure in full or for the specified Hardware, and ADP shall pay Kronos for Hardware held for ADP's benefit. EXHIBIT F HARDWARE MAINTENANCE TERMS (INCL. PRICES) The prices in price chart below shall be substituted, as and when applicable, for the prices specified in the Description of Services below. The parties agree to a [**]% increase annually effective July 1, 2003, based upon prices then in effect. If either party does not desire to have Kronos continue to perform the maintenance described herein, that party shall give the other party [**] days advance written notice prior to July 1 of the applicable year. In addition, if at any time during a year, ADP believes the Maintenance provided by Kronos fails to satisfy the description herein, ADP agrees to provide Kronos with written notice of such failure(s), and give Kronos [**] days to correct such failure. If Kronos fails to correct such failure(s) by the end of such [**] day period, ADP may terminate the engagement of Kronos to perform maintenance services. - -------------------------------------------------------------------------------- Prices Prices Prices Prices Prices Prices - -------------------------------------------------------------------------------- Services 7/1/01 7/1/03 7/1/04 7/1/05 7/1/06 7/1/07 - -------------------------------------------------------------------------------- To To To To To To - -------------------------------------------------------------------------------- 6/30/03 6/30/04 6/30/05 6/30/06 6/30/07 6/30/08 - -------------------------------------------------------------------------------- On-site $[**] $[**] $[**] $[**] $[**] $[**] Service Call - -------------------------------------------------------------------------------- Repair and $[**] $[**] $[**] $[**] $[**] $[**] Replacement - -------------------------------------------------------------------------------- Peripheral Part $[**] $[**] $[**] $[**] $[**] $[**] Replacement - -------------------------------------------------------------------------------- Installation of $[**] $[**] $[**] $[**] $[**] $[**] First Hardware - -------------------------------------------------------------------------------- Each additional Hardware install per $[**] $[**] $[**] $[**] $[**] $[**] location on same trip - -------------------------------------------------------------------------------- De-Installation of First $[**] $[**] $[**] $[**] $[**] $[**] Hardware - -------------------------------------------------------------------------------- Each additional Hardware de-install per $[**] $[**] $[**] $[**] $[**] $[**] location on same trip - -------------------------------------------------------------------------------- Move of First $[**] $[**] $[**] $[**] $[**] $[**] Hardware - -------------------------------------------------------------------------------- Each additional Hardware move per location on $[**] $[**] $[**] $[**] $[**] $[**] same trip - -------------------------------------------------------------------------------- Dead Run $[**] $[**] $[**] $[**] $[**] $[**] - -------------------------------------------------------------------------------- Depot Exchange $[**] $[**] $[**] $[**] $[**] $[**] per incident - -------------------------------------------------------------------------------- Terms Above service and pricing is for the 400 Hardware Series Hardware only. 100 and 4500 Series Hardware are serviced only though the Kronos Repair Center (Depot Exchange). Penalty/Bonus clause for response times variations for on-site service calls. All penalty/bonus provisions apply only to the [**] described below: o for response times averaging less than [**]%, Kronos pays ADP $[**] for that quarter o for response times averaging [**]% to [**]%, Kronos pays ADP $[**] for that quarter o for response times averaging [**]% to [**]%, Kronos pays ADP $[**] for that quarter o for response times averaging [**]% to [**]%, there is no penalty/bonus paid to Kronos or ADP o for response times averaging greater than [**]%, ADP pays Kronos a bonus of $[**] for that quarter On-Site Service Call: Request must be received from ADP help desk before 3:00 P.M. EST to respond [**], Monday-Friday, Kronos holidays excluded. Beyond [**], the service will be through the Kronos Repair Center (Depot Exchange). If ADP specifically requests on-site services [**], Kronos will make reasonable efforts not to exceed [**] response time. Hardware Installation: Request must be received from ADP help desk between 8:00 A.M. to 8:00 P.M. EST, Monday-Friday, Kronos holidays excluded. ADP will notify Kronos [**] in advance before scheduling an on-site installation. Hardware De-Installation: Request must be received from ADP help desk between 8:00 A.M. to 8:00 P.M. EST, Monday-Friday, Kronos holidays excluded. ADP will notify Kronos [**] in advance before scheduling an on-site De-Installation Hardware Move: Request must be received from ADP help desk between 8:00 A.M. to 8:00 P.M. EST, Monday-Friday, Kronos holidays excluded. ADP will notify Kronos [**] in advance before scheduling an on-site Hardware Move. Hardware Dead Run: o ADP will pay the associated fee if a Service Representative goes on-site in response to a service call and the ADP customer refuses the service for any reason. o ADP must have initiated the service request. Hardware Repair Center (Depot Exchange): Request must be received from ADP from 8:00 A.M. to 8:00 P.M. EST, Monday-Friday, Kronos holidays excluded. ADP is required to own the field inventory for replacement Hardware and spare parts but Kronos shall bear the risk of loss for such field inventory, so long as it is in Kronos' custody. Based upon ADP's installed base of approximately 16,000 units of Hardware, Kronos recommended that ADP have 360-400 Hardware for adequate field inventory. ADP agrees to notify Kronos in writing if the installed base of Hardwares goes up [**]% or greater, so that Kronos can appropriately adjust its field inventory recommendation. ADP's services billings must equal or exceed $[**] for any quarter. If ADP does not pay Kronos at least $[**] for actual services (as described in this Exhibit F) in a quarter, ADP agrees to pay Kronos an amount sufficient to bring the total paid for services to $[**] for that quarter. Kronos will invoice ADP for, and ADP will pay Kronos any such amounts within [**] after the end of the applicable quarter. The prices herein are only offered as a complete services package and are not available as separately priced items. Kronos does not provide on-site support for the RSI hand punch devices. The services descriptions and pricing above is applicable only in the continental United States. For Canada, only depot exchange is applicable. (i) DESCRIPTION OF SERVICES - NOTE: PRICES STATED HEREIN ARE APPLICABLE ONLY UNTIL JUNE 30, 2003. PRICES IN THE CHART ABOVE SHALL REPLACE THESE PRICES ON THE APPLICABLE DATES. On-Site Per Incident Pricing: On-site service for Kronos TK 400's is priced on a per incident basis to ADP. For every service call dispatched by ADP's help desk to a Kronos dealer or district office there will be a fee of $[**] to go on-site. If it is determined at that call that a part needs to be replaced, a Field Replaceable Unit (FRU) will be exchanged for an additional $[**]. This $[**] will include the repair, replacement, and refurbishment through the Kronos repair center. If it's determined that the FRU is not defective in the Kronos Repair Center, the $[**] charge to ADP for repair will be waived. If it is determined at that call that a peripheral part needs to be replaced (i.e. internal modem, I/O board, Bell Relay) a Field Replaceable Unit (FRU) will be exchanged for an additional $[**]. This $[**] will include the replacement through the Kronos Repair Center. If it is determined that the peripheral part is not defective in the Kronos Repair Center, the $[**] charge to ADP for repair will be waived. The Kronos dealer or district service representative will be expected to have the necessary parts to repair the unit when they arrive for the service call. The Kronos dealer or district service representative will give their best effort to reprogram the Hardware to the state it was before the malfunction. The $[**]on-site cost will be waived for any additional on-site call that is a result of a service representative not having the correct part to resolve the original service call. On-Site Cost $[**] Repair and Replacement Cost $[**] Peripheral Part Replacement Cost $[**] Hardware Installation Pricing: On-site installation for Kronos TK 400's is priced on a per installation basis to ADP. For every installation dispatched by ADP to Kronos dealer or district office there will be a fee of $[**] for the first Hardware installed and $[**] for each additional Hardware installed in the same location on the same trip. If an installation has remote locations they will be priced at $[**] for the first Hardware installed and $[**] for each additional unit of Hardware installed in that same remote location on the same trip. If an additional install is requested in the future which would require a separate trip, that installation would be charged at $[**] for the first Hardware installed and $[**] for each additional unit of Hardware installed. Install of First Hardware $[**] Install of each additional Hardware (on the same trip) $[**] De-Installation Pricing: On-site de-installation for TK 400's is priced on a per de-installation basis to ADP. For every de-installation dispatched by ADP to a Kronos dealer or district office there will be an on-site fee of $[**] for the first Hardware de-installed and $[**] for each additional de-install in the same location on the same trip. If a de-installation has remote locations, they will be priced at $[**] for the first Hardware de-installed and $[**] for each additional unit of Hardware in that same remote location on the same trip. If an additional de-install is requested in the future which would require a separate trip, that de-installation would be charged at $[**] for the first Hardware de-installed and $[**] for each additional Hardware de-installed on the same trip. The Hardware that are de-installed will be shipped to the Kronos repair center to be refurbished for $[**]. De-installation of First Hardware $[**] De-installation of each additional Hardware (on the same trip) $[**] Hardware Move Pricing: On-site moves for TK 400's are priced on a per move basis to ADP. For every move of a Hardware dispatched by ADP to a Kronos dealer or district office there will be a fee of $[**] for the first Hardware moved and $[**] for each additional unit of Hardware moved in the same location on the same trip. The pricing is similar to an install due to the same time and service requirements. The Kronos dealer or district service representative will give their best effort to reprogram the Hardware to its originate state before it was moved. If a Hardware move has remote locations, they will be priced at $[**] for the first Hardware moved and $[**] for each additional unit of Hardware moved in that same remote location on the same trip. If an additional Hardware move is requested in the future which would require a separate trip, that Hardware move would be charged at $[**] for the first Hardware moved and $[**] for each additional Hardware moved on the same trip. Move of First Hardware $[**] Move of each additional Hardware (on the same trip) $[**] Dead Run Pricing: ADP will be billed $[**] if a Kronos district or dealer service representative goes on-site to a service call or an implementation and the customer refuses the service for any reason. This service call or implementation must have been initiated by ADP to go on-site. Dead Run Cost $[**] Depot Exchange: Kronos will ship a replacement unit to a customer via next day service, for all calls received prior to 3:00 P.M. Eastern Standard Time, Monday-Friday, Kronos holidays excluded. All calls received after 3:00 P.M. Eastern Standard Time, Monday-Friday, Kronos holidays excluded, will be shipped on the following business day. ADP's help desk is required to validate the problem in question. All Hardware shipped from the Depot Center is at the latest revision, and Kronos pays freight both ways. A prepaid UPS shipping document is included with each shipment. The ADP customer is required to return the failed Hardware to Kronos in the same container and packaging in which the replacement was sent. Kronos will give a [**] day timeframe for Hardware to be returned from the ADP customers to the Kronos repair center. After the [**]days, ADP will be invoiced for, and agrees to pay, the full price of the Hardware. It will be ADP's responsibility to manage Hardware returns after the [**] day timeframe. Depot Exchange Cost $[**] Testing. All records of inspections and tests of Hardware will be made available to ADP for review during regular business hours upon reasonable prior notice. ADP or its designee shall also have the right to witness Kronos' inspections and tests during regular business hours upon reasonable prior notice. Spare Parts: a) For a period of [**] after the date of the last shipment of Hardware under this Agreement, Kronos shall make commercially obtainable spare parts for the Hardware available to ADP if available through Kronos' suppliers, and if Kronos makes such spare parts available to its own customers and dealers. During the term of this Agreement, spare parts shall be priced in accordance with Kronos' published dealer spare parts price list. Thereafter, spare parts shall be priced at Kronos' then effective price. (i) Orders for spare parts placed on a "rush" basis and received by Kronos on or before 12:00 noon eastern standard time, Monday through Friday, exclusive of Kronos holidays, will be shipped to ADP on the day the order is received, so long as the spare part is in Kronos' stock at the time the order is placed. Kronos will charge ADP $[**] for each rush order processed. (ii) Orders for in-stock spare parts not designated as "rush" ordered by ADP will be shipped [**].[**] 3. Installation, Acceptance and Quality Control (a) Kronos shall assemble and test all Hardware [**] prior to shipment to ADP or ADP Clients. (b) If at any time ADP can document that a greater than [**]% failure rate on Hardware is experienced by ADP or any ADP Client in any sequential [**] items of Hardware delivered or in Hardware delivered during any consecutive [**] period, Kronos shall, at ADP's option and promptly after ADP's demand therefore: (i) supply on-site technical support at ADP's designated locations to repair all Hardware [**]. If Kronos provides such on-site support and it is determined that the Hardware is not defective, ADP shall pay for the related service calls at the then existing standard rate for such service; and/or (ii) perform a quality audit at Kronos' factory; and/or (iii)permit ADP to return all affected Hardware and all other Hardware delivered during the period such problems were experienced to Kronos' factory for either repair or replacement [**], and [**]. The date ADP and Kronos mutually agree that such quality problems have been cured by Kronos shall be the date ADP executes an acceptance on a written notice from Kronos notifying ADP of such cure, which acceptance shall not be unreasonably withheld. The warranty period for all Hardware of the same model designation delivered during a period of quality problems shall be [**] pursuant to this Section 3(b). (c) ADP will install or arrange for the installation of the Hardware at its final destination at its cost and expense, if any. 4. Hardware Changes a) Kronos, at no charge to ADP, reserves the right upon [**] days prior written notice to ADP, at any time prior to delivery of any Hardware, to make changes to the Hardware or any component modules (i) which do not affect physical or functional interchangeability or compatibility or performance at a higher level of assembly, or (ii) when required for purposes of safety, or (iii) to meet Kronos' product specifications, provided, that in the case of changes for purposes of safety or to meet Kronos' products specifications, such changes shall not affect the Hardware's physical or functional interchangeability or compatibility or performance at a higher level of assembly, and provided further, that in each of the above instances Kronos will supply ADP with engineering documentation with respect to such changes. In no event shall such engineering documentation be provided by ADP to any third party. All Hardware of the same model designation purchased by ADP hereunder shall be interchangeable and compatible or, if such Hardware is not interchangeable or compatible, Kronos agrees that it will, at its option, either (i) provide supplemental spare parts or subassemblies to ADP sufficient to maintain the new Hardware at no charge to ADP, or (ii) make all such changes to the previously delivered Hardware so as to retrofit such Hardware, at no charge to ADP. b) Although Kronos shall be under no obligation to do so, ADP may request that Kronos make changes in specifications, capabilities and/or configuration to the Hardware provided that: i) ADP requests such changes in writing not less than [**]days in advance; and ii) any reasonable delay in delivery of the Hardware resulting from the implementation of such changes shall not constitute a breach hereunder; and iii) ADP pays the cost of any such changes. c) Kronos agrees to advise ADP, as promptly as practicable after announcement of any safety changes to any Hardware previously purchased by ADP, and to deliver to ADP, without cost to ADP (so long as such safety changes are generally made available by Kronos to its customers on a no charge basis), all parts necessary to make such safety changes so as to maintain the Hardware at its then most current safety level. If ADP requests installation of a safety change by Kronos for which Kronos charges its customers, Kronos reserves the right to charge ADP for such services. 5. Field Change Order a) If any changes, other than changes for the purpose of safety which are covered in Section 4 (c), are in Kronos' reasonable opinion, required in order to make any Hardware sold hereunder operate correctly or meet the agreed upon specifications or comply with the warranties set forth in this Agreement, Kronos shall correct any such deficiency and provide ADP with adequate notice of such change in accordance with its existing dealer notification process. In the event of Kronos making such a change, at its option, Kronos may direct the ADP Clients using the Hardware to return the Hardware to Kronos, at Kronos' cost, so that Kronos may install such change. b) In addition, it is recognized by the parties that there may be other changes which are designated to improve the efficiency of the Hardware which are optional field change orders. Within [**] days after formal issuance of any such change, Kronos shall make kits of materials and documentation available to ADP. Such materials and documentation, together with the cost of implementing any change, shall be invoiced by Kronos to ADP at the then appropriate Kronos dealer price applicable to the unit to which such change order applies. 6. Hardware Documentation a) Kronos shall supply a set of Operating Manuals with each unit of Hardware shipped hereunder at no charge to ADP. ADP may, at its option, purchase additional sets of the Operating Manuals at the then current standard dealer price. b) Kronos shall provide ADP with up to [**]complete sets of the applicable technical service documentation (including diagnostic software) each year for the duration of this Agreement at no charge to ADP. Each additional set will be at a cost to be agreed to by Kronos and ADP. ADP may reproduce service documentation, at no charge. Kronos shall put ADP on automatic distribution of all service documentation at no cost to ADP. Kronos will also provide current information on any new or revised course materials and provide copies of new materials or aids upon request at Kronos' cost. c) It is understood and agreed that all Hardware Documentation provided under this Section 6 (including, but not limited to Operating Manuals, technical service documentation, diagnostic software and new or revised course materials) shall constitute the Confidential Information under this Agreement. ANNEX I "click wrap" "shrink wrap" sublicense terms WARNING: ADP IS WILLING TO LICENSE ADP(R) TIME AND ATTENDANCE AND RELATED SOFTWARE TO YOU ONLY UPON THE CONDITION THAT YOU ACCEPT ALL OF THE TERMS CONTAINED IN THIS ADP SOFTWARE LICENSE. PLEASE READ THESE TERMS CAREFULLY BEFORE USING THE SOFTWARE. ACCESSING AND USING THIS SOFTWARE WILL INDICATE YOUR ASSENT TO THESE TERMS. IF YOU DO NOT AGREE TO THOSE TERMS, ADP IS UNWILLING TO LICENSE THE SOFTWARE TO YOU, YOU SHOULD RETURN THE SOFTWARE TO ADP AND YOUR MONEY WILL BE REFUNDED. ADP SOFTWARE LICENSE The Software is the licensed and/or owned property of, and embodies the proprietary trade secret technology of ADP and/or its licensor. Unauthorized use and copying of such Software is prohibited by law, including United States and foreign copyright law. The price you pay to ADP for a copy of the program constitutes a license fee that entitles you to use the program as set forth below and if you discontinue paying ADP, the license is terminated and the provisions of F. below shall apply. License Terms. ADP grants to Customer a non-exclusive, nontransferable License to use the Software included in this package (the "Software"). This License may be terminated by ADP by written notice to Customer upon any material breach by Customer. This License is subject to all of the terms of this Agreement, including those set forth below: A. Customer recognizes and agrees that the license to use the Software is limited, based upon the amount of the license fee paid by Customer. Limitations may include the number of employees, simultaneous or active users, product modules, features, computer model and serial number and/or the number of terminals to which the Software is permitted to be connected. Customer agrees to: 1) use the Software only for the number of employees, simultaneous or active users, computer model and serial number and/or terminals permitted by the applicable license fee; 2) use only the product modules and/or features permitted by the applicable license fee; and 3) use the Software only in support of Customer's own business. Customer agrees not to increase the number of employees, simultaneous or active users, terminals, product modules, or features, or to upgrade the model, as applicable, unless and until Customer pays the applicable fee for such increase or upgrade. Customer may not relicense or sublicense the Software to, or otherwise permit use of the Software (including timesharing or networking use) by any third party. Customer may not provide service bureau or other data processing services that make use of the Software without the express prior written consent of ADP. Customer may use any embedded database or remote support software only in conjunction with ADP products and services. B. Customer may use the computer programs included in the Software (the "Programs") in object code form only, and shall not reverse compile, disassemble or otherwise convert the Programs into uncompiled or unassembled code. C. Customer may copy the Programs only as reasonably necessary to load and execute the Programs and for backup purposes. All copies of the Programs or any part thereof, whether in printed or machine readable form and whether on storage media or otherwise, are the licensed and/or owned property of ADP and are subject to all the terms of this License, and all copies of the Programs or any part of the Programs shall include the copyright and proprietary rights notices contained in the Programs as delivered to the Customer. D. Customer may not sell, assign, convey, or otherwise transfer the Software to any third party without the prior written consent of ADP. E. In the event that ADP supplies updates, corrections, modifications, new versions or new releases of the Software, (collectively referred to as "Updates"), such Updates shall be part of the Software and the provisions of this License shall apply to such Updates and to the Software as modified thereby. If an Update is provided, Customer may utilize either the Update or prior version of the Software, but never both at the same time. F. Customer may terminate this License at any time by returning to ADP the original copy of the Software and destroying all other copies of the Software.(1) Upon termination of this License by ADP, Customer will also return the original Software to ADP and destroy all other copies of the Software. G. Customer shall be solely responsible for compliance with any laws, rules and regulations governing the export of the Software outside the U.S.. Customer shall not export or re-export the Software, directly or indirectly, without first obtaining the written approval or required license from the U.S. Department of Commerce or any other agency of the U.S. Government having jurisdiction over such transaction. The assurances in this Section shall survive termination of this License. Limited Warranty. ADP warrants to Customer that the media on which the Programs are recorded shall be free from defects in materials or manufacture under normal use for a period of 90 days from the date of shipment of the media. Programs found to have a defect in the media will be replaced at no charge to Customer if returned to ADP within such 90 day period. If the defect results from accident, abuse or mishandling or Customer's failure to provide a suitable installation environment, ADP will have no responsibility to replace the media. (1) For avoidance of doubt or confusion, notwithstanding the substantive tex above in these Annexes, certain ADP clients' agreements with ADP contain specified contract term lengths that cannot be shortened by the client (without consequence to the client) merely by returning software to ADP. Same applies to Shrinkwrap terms. EXCEPT AS PROVIDED ABOVE, THE SOFTWARE, INCLUDING DOCUMENTATION, IS PROVIDED "AS IS" AND NO WARRANTY OF ANY KIND, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IS MADE BY OR AUTHORIZED TO BE MADE ON BEHALF OF ADP. CUSTOMER ASSUMES THE ENTIRE RISK OF THE RESULTS OF PERFORMANCE OF THE SOFTWARE OR OF THE FAILURE OF THE SOFTWARE TO PERFORM. Limitation of Liability. ADP's entire liability to Customer and Customer's exclusive remedy shall be replacement of defective media as provided above, or if ADP is unable to deliver a replacement that is free of media defects, Customer may terminate this Agreement and receive a refund of the License fee. IN NO EVENT WILL ADP BE LIABLE FOR ANY DAMAGES, INCLUDING LOST PROFITS OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, ARISING OUT OF THIS LICENSE OR THE USE OR INABILITY TO USE THE SOFTWARE, WHETHER CLAIMED UNDER THIS LICENSE OR OTHERWISE. Nondisclosure. The Programs, terms, pricing and all information identified as confidential under this Agreement are considered confidential information ("Confidential Information"). Confidential Information shall not include information that: a) becomes part of the public domain without breach of this Agreement by Customer; b) has been published or is generally known to the public at the time of its disclosure to Customer; c) was at the time of receipt otherwise lawfully known to Customer; or d) is disclosed with the written approval of ADP. Customer agrees not to make Confidential Information available in any form to any third party and not to use Confidential Information for any purpose other than the implementation of this Agreement. Customer agrees to take all reasonable steps to ensure that Confidential Information is not disclosed in violation of the terms of this Agreement. U.S. Government Restricted Rights. The Software and written materials accompanying the Software are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions set forth in subparagraph (c) (1) (ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software Restricted Rights 48 CFR 52.227-19, as applicable. Contractor is ADP, Inc., 1 ADP Boulevard, Roseland, NJ 07068. Manufacturer is Kronos Incorporated, 297 Billerica Road, Chelmsford, Massachusetts 01824. Kronos reserves all rights under the copyright laws of the United States. General. No action, regardless of form, may be brought by either party more than one (1) year after the cause of action has arisen, except that an action for non-payment may be brought by ADP within two (2) years after the last payment by Customer. This License Agreement shall be governed by the laws of the State of New Jersey. Click here to acknowledge you have read and accept these license terms and to access the Software. ACCEPT _____ DECLINE/DO NOT ACCEPT ______ ADP is a registered trademark of ADP of North America, Inc. (C)Automatic Data Processing, Inc. 2003 ANNEX I: ADP SOFTWARE LICENSE CAREFULLY READ ALL OF THE TERMS AND CONDITIONS OF THIS LICENSE BEFORE BREAKING THE SEAL OF THE MEDIA. OPENING THE MEDIA CONSTITUTES ACCEPTANCE OF ALL OF THE TERMS AND CONDITIONS OF THIS LICENSE. If you do not agree to these terms and conditions, you may return the media and the other components of this product to the place from which you acquired it and obtain a refund. No refund will be given if the seal has been broken on the media. The Software is the licensed and/or owned property of, and embodies the proprietary trade secret technology of ADP and/or its licensor. Unauthorized use and copying of such Software is prohibited by law, including United States and foreign copyright law. The price you pay to ADP for a copy of the program constitutes a license fee that entitles you to use the program as set forth below and if you discontinue paying ADP, the license is terminated and the provisions of F. below shall apply. License Terms. ADP grants to Customer a non-exclusive, nontransferable License to use the Soft-ware included in this package (the "Software"). This License may be terminated by ADP by written notice to Customer upon any material breach by Customer. This License is subject to all of the terms of this Agreement, including those set forth below: A. Customer recognizes and agrees that the license to use the Software is limited, based upon the amount of the license fee paid by Customer. Limitations may include the number of employees, simultaneous or active users, prod-uct modules, features, computer model and serial number and/or the number of terminals to which the Software is permitted to be connected. Customer agrees to: 1) use the Soft-ware only for the number of employees, simultaneous or active users, computer model and serial number and/or terminals permitted by the applicable license fee; 2) use only the product modules and/or features permitted by the applicable license fee; and 3) use the Soft-ware only in support of Customer's own business. Customer agrees not to increase the number of employees, simultaneous or active users, terminals, product modules, or features, or to upgrade the model, as applicable, unless and until Customer pays the applicable fee for such increase or upgrade. Customer may not relicense or sublicense the Software to, or otherwise permit use of the Software (including timesharing or networking use) by any third party. Customer may not provide service bureau or other data processing services that make use of the Software without the express prior written consent of ADP. Customer may use any embedded database or remote support software only in conjunction with ADP products and services. B. Customer may use the computer programs included in the Software (the "Programs") in object code form only, and shall not reverse compile, disassemble or otherwise convert the Programs into uncompiled or unassembled code. C. Customer may copy the Programs only as reasonably necessary to load and execute the Programs and for backup purposes. All copies of the Programs or any part thereof, whether in printed or machine readable form and whether on storage media or otherwise, are the licensed and/or owned property of ADP and are subject to all the terms of this License, and all copies of the Programs or any part of the Programs shall include the copyright and proprietary rights notices contained in the Programs as delivered to the Customer. D. Customer may not sell, assign, convey, or otherwise transfer the Software to any third party without the prior written consent of ADP. E. In the event that ADP supplies updates, co-rections, modifications, new versions or new releases of the Software, (collectively referred to as "Updates"), such Updates shall be part of the Software and the provisions of this License shall apply to such Updates and to the Software as modified thereby. If an Update is provided, Customer may utilize either the Update or prior version of the Software, but never both at the same time. F. Customer may terminate this License at any time by returning to ADP the original copy of the Software and destroying all other copies of the Software. Upon termination of this License by ADP, Customer will also return the original Soft-ware to ADP and destroy all other copies of the Software. G. Customer shall be solely responsible for compliance with any laws, rules and regulations governing the export of the Software outside the U.S.. Customer shall not export or re-export the Software, directly or indirectly, without first obtaining the written approval or required license from the U.S. Department of Commerce or any other agency of the U.S. Government having jurisdiction over such transaction. The assurances in this Section shall survive termination of this License. Limited Warranty. ADP warrants to Customer that the media on which the Programs are recorded shall be free from defects in materials or manufacture under normal use for a period of 90 days from the date of shipment of the media. Programs found to have a defect in the media will be replaced at no charge to Customer if returned to ADP within such 90 day period. If the defect results from accident, abuse or mishandling or Customer's failure to provide a suitable installation environment, ADP will have no responsibility to replace the media. EXCEPT AS PROVIDED ABOVE, THE SOFT-WARE, INCLUDING DOCUMENTATION, IS PRO-VIDED "AS IS" AND NO WARRANTY OF ANY KIND, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IS MADE BY OR AUTHORIZED TO BE MADE ON BEHALF OF ADP. CUSTOMER ASSUMES THE ENTIRE RISK OF THE RESULTS OF PERFORMANCE OF THE SOFTWARE OR OF THE FAILURE OF THE SOFTWARE TO PERFORM. Limitation of Liability. ADP's entire liability to Customer and Customer's exclusive remedy shall be replacement of defective media as provided above, or if ADP is unable to deliver a replacement that is free of media defects, Customer may terminate this Agreement and receive a refund of the License fee. IN NO EVENT WILL ADP BE LIABLE FOR ANY DAMAGES, INCLUDING LOST PROFITS OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, ARISING OUT OF THIS LICENSE OR THE USE OR INABILITY TO USE THE SOFTWARE, WHETHER CLAIMED UNDER THIS LICENSE OR OTHERWISE. Nondisclosure. The Programs, terms, pricing and all information identified as confidential under this Agreement are considered confidential information ("Confidential Information"). Confidential Information shall not include information that: a) becomes part of the public domain without breach of this Agreement by Customer; b) has been published or is generally known to the public at the time of its disclosure to Customer; c) was at the time of receipt otherwise lawfully known to Customer; or d) is disclosed with the written approval of ADP. Customer agrees not to make Confidential Information available in any form to any third party and not to use Confidential Information for any purpose other than the implementation of this Agreement. Customer agrees to take all reasonable steps to ensure that Confidential Information is not disclosed in violation of the terms of this Agreement. U.S. Government Restricted Rights. The Soft-ware and written materials accompanying the Soft-ware are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions set forth in subparagraph (c) (1) (ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or sub-paragraphs (c)(1) and (2) of the Commercial Computer Software Restricted Rights 48 CFR 52.227-19, as applicable. Contractor is ADP, Inc., 1 ADP Boulevard, Roseland, NJ 07643. Manufacturer is Kronos Incorporated, 297 Billerica Road, Chelmsford, Massachusetts 01824. Kronos reserves all rights under the copyright laws of the United States. General. No action, regardless of form, may be brought by either party more than one (1) year after the cause of action has arisen, except that an action for non-payment may be brought by ADP within two (2) years after the last payment by Customer. This License Agreement shall be governed by the laws of the State of New Jersey. Part No. 9900771-001 Rev. A EX-10 5 exhibit10-12.txt EXHIBIT 10.12 KRONOS INCORPORATED SUMMARY OF TERMS SENIOR EXECUTIVE RETENTION AGREEMENT 1. Nature of Agreement. This Agreement is not an employment contract and does not specify any terms or conditions of employment. It provides for certain severance benefits to the Executive in the event his employment is terminated under specified circumstances following a Change in Control of the Company. 2. Term of Agreement. This Agreement takes effect upon execution and expires on October 4, 2005; provided that (i) it is subject to automatic one-year extensions unless prior notice of termination is given by the Company and (ii) the Executive is entitled to the severance benefits provided therein if a Change in Control occurs during the term of this Agreement and the Executive's employment is terminated under specified circumstances within 36 months after such Change in Control. 3. Key Definitions. a. Change in Control means, in summary: (i) the acquisition by a party or a group of 20% or more of the outstanding stock of the Company; (ii) a change, without Board of Directors approval, of a majority of the Board of Directors; (iii) the acquisition of the Company by means of a reorganization, merger, consolidation or asset sale; or (iv) the approval of a liquidation or dissolution of the Company. b. Cause means, in summary: (i) the Executive's willful and continued failure to substantially perform his reasonable assigned duties (which failure continues after a 90-day cure period); or (ii) the Executive's willful engagement in illegal conduct or gross misconduct injurious to the Company. c. Good Reason means, in summary, a good faith determination by the Executive that there has occurred (i) a diminution in the Executive's position, authority or responsibilities; (ii) a reduction in his salary or benefits; (iii) a relocation of the Executive; or (iv) a breach of an employment contract with the Executive. In addition, a resignation by the Executive, for any reason, during the 30-day period immediately following the one-year anniversary of the Change in Control shall be deemed to be a termination for Good Reason. 4. Severance Benefits. a. Termination Without Cause or for Good Reason Within 12 Months of a Change in Control. If the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason within 12 months of a Change in Control, the Executive shall receive (i) accrued compensation (including a pro rata bonus payment) through the date of termination; (ii) a payment equal to three times the sum of the Executive's highest base salary and highest bonus for any year during the five-year period prior to the Change in Control, payable, at the prior written election of the Executive, in cash, either (A) in one lump sum, within 30 days after the Executive's termination or (B) in 36 equal monthly installments, with an annual interest rate on the unpaid principal balance equal to the minimum applicable Federal rate in effect on the Date of Termination, beginning 30 days after the Executive's termination; (iii) a continuation of all employee benefits during the twelve-month period following employment termination; and (iv) any other post-termination benefits which the Executive is eligible to receive under any plan or program of the Company. b. Termination Without Cause or for Good Reason Following 12 Months After a Change in Control. If the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason on a date that is greater than 12 months following a Change in Control, the Executive shall receive (i) accrued compensation (including a pro rata bonus payment) through the date of termination; (ii) a payment equal to two times the sum of the Executive's highest base salary and highest bonus for any year during the five-year period prior to the Change in Control, payable, at the prior written election of the Executive, in cash, either (A) in one lump sum, within 30 days after the Executive's termination or (B) in 24 equal monthly installments, with an annual interest rate on the unpaid principal balance equal to the minimum applicable Federal rate in effect on the Date of Termination, beginning 30 days after the Executive's termination; (iii) a continuation of all employee benefits during the twelve-month period following employment termination; and (iv) any other post-termination benefits which the Executive is eligible to receive under any plan or program of the Company. c. Other Employment Terminations. In general, if the Executive's employment terminates for any other reason following a Change in Control, the Executive shall receive only the benefits described in clauses (i) and (iv) of the preceding paragraphs (provided that the pro rata bonus payment shall not be made in the event of a termination by the Company for Cause). d. Tax Treatment. The Internal Revenue Code imposes certain tax penalties on both the Company and the Executive if the amount of severance payments to the Executive following a Change in Control exceeds certain limits (generally three times the average of the Executive's compensation over the previous five years). The Retention Agreement provides that the amount of severance benefits payable to the Executive shall be reduced by an amount necessary to avoid triggering the penalty taxes only if such reduction results in greater net after-tax benefits to the Executive. e. No Mitigation. The severance benefits payable to the Executive are not reduced by payments received by the Executive from a subsequent employer. 5. Expenses. The Company must pay, as incurred, all expenses which the Executive reasonably incurs as a result of any dispute relating to this Agreement (regardless of the outcome of such dispute). In addition, the Company is obligated to continue to pay to the Executive his base salary and benefits during the pendency of such a dispute; following the resolution of such dispute, the payments to the Executive during such dispute shall either be deducted from the benefits to which the Executive is entitled or repaid to the Company. KRONOS INCORPORATED Senior Executive Retention Agreement THIS SENIOR EXECUTIVE RETENTION AGREEMENT, by and between Kronos Incorporated, a Massachusetts corporation (the "Company"), and [_________________] (the "Executive") is made as of October 5, 2000 (the "Effective Date"). WHEREAS, the Company recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among key personnel, may result in the departure or distraction of key personnel to the detriment of the Company and its stockholders, and WHEREAS, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of the Company's key personnel without distraction from the possibility of a change in control of the Company and related events and circumstances. NOW, THEREFORE, as an inducement for and in consideration of the Executive remaining in its employ, the Company agrees that the Executive shall receive the severance benefits set forth in this Agreement in the event the Executive's employment with the Company is terminated under the circumstances described below subsequent to a Change in Control (as defined in Section 1.1). 1. Key Definitions. As used herein, the following terms shall have the following respective meanings: 1.1 "Change in Control" means an event or occurrence set forth in any one or more of subsections (a) through (d) below (including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection): (a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 20% or more of either (i) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section 1.1; or (b) such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term "Continuing Director" means at any date a member of the Board (i) who was a member of the Board on the date of the execution of this Agreement or (ii) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or (c) the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company's assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the "Acquiring Corporation") in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively; and (ii) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination); or (d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. 1.2 "Change in Control Date" means the first date during the Term (as defined in Section 2) on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if (a) a Change in Control occurs, (b) the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and (c) it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the "Change in Control Date" shall mean the date immediately prior to the date of such termination of employment. 1.3 "Cause" means: (a) the Executive's willful and continued failure to substantially perform his reasonable assigned duties as an officer of the Company (other than any such failure resulting from incapacity due to physical or mental illness or any failure after the Executive gives notice of termination for Good Reason), which failure is not cured within 90 days after a written demand for substantial performance is received by the Executive from the Board of Directors of the Company which specifically identifies the manner in which the Board of Directors believes the Executive has not substantially performed the Executive's duties; or (b) the Executive's willful engagement in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this Section 1.3, no act or failure to act by the Executive shall be considered "willful" unless it is done, or omitted to be done, in bad faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. 1.4 "Good Reason" means the occurrence, without the Executive's written consent, of any of the events or circumstances set forth in clauses (a) through (g) below. Notwithstanding the occurrence of any such event or circumstance, such occurrence shall not be deemed to constitute Good Reason if, prior to the Date of Termination specified in the Notice of Termination (each as defined in Section 3.2(a)) given by the Executive in respect thereof, such event or circumstance has been fully corrected and the Executive has been reasonably compensated for any losses or damages resulting therefrom (provided that such right of correction by the Company shall only apply to the first Notice of Termination for Good Reason given by the Executive). (a) the assignment to the Executive of duties inconsistent in any material respect with the Executive's position (including status, offices, titles and reporting requirements), authority or responsibilities in effect immediately prior to the earliest to occur of (i) the Change in Control Date, (ii) the date of the execution by the Company of the initial written agreement or instrument providing for the Change in Control or (iii) the date of the adoption by the Board of Directors of a resolution providing for the Change in Control (with the earliest to occur of such dates referred to herein as the "Measurement Date"), or any other action or omission by the Company which results in a material diminution in such position, authority or responsibilities; (b) a reduction in the Executive's annual base salary as in effect on the Measurement Date or as the same was or may be increased thereafter from time to time; (c) the failure by the Company to (i) continue in effect any material compensation or benefit plan or program (including without limitation any life insurance, medical, health and accident or disability plan and any vacation or automobile program or policy) (a "Benefit Plan") in which the Executive participates or which is applicable to the Executive immediately prior to the Measurement Date, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan or program, (ii) continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, than the basis existing immediately prior to the Measurement Date or (iii) award cash bonuses to the Executive in amounts and in a manner substantially consistent with past practice in light of the Company's financial performance; (d) a change by the Company in the location at which the Executive performs his principal duties for the Company to a new location that is both (i) outside a radius of 35 miles from the Executive's principal residence immediately prior to the Measurement Date and (ii) more than 35 miles from the location at which the Executive performed his principal duties for the Company immediately prior to the Measurement Date; or a requirement by the Company that the Executive travel on Company business to a substantially greater extent than required immediately prior to the Measurement Date; (e) the failure of the Company to obtain the agreement from any successor to the Company to assume and agree to perform this Agreement, as required by Section 6.1; (f) a purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3.2(a); or (g) any failure of the Company to pay or provide to the Executive any portion of the Executive's compensation or benefits due under any Benefit Plan within seven days of the date such compensation or benefits are due, or any material breach by the Company of this Agreement or any employment agreement with the Executive. (h) In addition, the termination of employment by the Executive for any reason or no reason during the 30-day period beginning on the first anniversary of the Change in Control Date shall be deemed to be termination for Good Reason for all purposes under this Agreement. The Executive's right to terminate his employment for Good Reason shall be made in good faith and shall not be affected by his incapacity due to physical or mental illness. 1.5 "Disability" means the Executive's absence from the full-time performance of the Executive's duties with the Company for 180 consecutive calendar days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. 2. Term of Agreement. This Agreement, and all rights and obligations of the parties hereunder, shall take effect upon the Effective Date and shall expire upon the first to occur of (a) the expiration of the Term (as defined below) if a Change in Control has not occurred during the Term, (b) the date 36 months after the Change in Control Date, if the Executive is still employed by the Company as of such later date, or (c) the fulfillment by the Company of all of its obligations under Sections 4 and 5.2 and 5.3 if the Executive's employment with the Company terminates within 36 months following the Change in Control Date. "Term" shall mean the period commencing as of the Effective Date and continuing in effect through October [_], 2005; provided, however, that commencing on October [_], 2005 and each October [_] thereafter, the Term shall be automatically extended for one additional year unless, not later than 90 days prior to the scheduled expiration of the Term (or any extension thereof), the Company shall have given the Executive written notice that the Term will not be extended. 3. Employment Status; Termination Following Change in Control. 3.1 Not an Employment Contract. The Executive acknowledges that this Agreement does not constitute a contract of employment or impose on the Company any obligation to retain the Executive as an employee and that this Agreement does not prevent the Executive from terminating employment at any time. If the Executive's employment with the Company terminates for any reason and subsequently a Change in Control shall occur, the Executive shall not be entitled to any benefits hereunder except as otherwise provided pursuant to Section 1.2. 3.2 Termination of Employment. (a) If the Change in Control Date occurs during the Term, any termination of the Executive's employment by the Company or by the Executive within 36 months following the Change in Control Date (other than due to the death of the Executive) shall be communicated by a written notice to the other party hereto (the "Notice of Termination"), given in accordance with Section 7. Any Notice of Termination shall: (i) indicate the specific termination provision (if any) of this Agreement relied upon by the party giving such notice, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specify the Date of Termination (as defined below). The effective date of an employment termination (the "Date of Termination") shall be the close of business on the date specified in the Notice of Termination (which date may not be less than 15 days or more than 120 days after the date of delivery of such Notice of Termination), in the case of a termination other than one due to the Executive's death, or the date of the Executive's death, as the case may be. In the event the Company fails to satisfy the requirements of Section 3.2(a) regarding a Notice of Termination, the purported termination of the Executive's employment pursuant to such Notice of Termination shall not be effective for purposes of this Agreement. (b) The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting any such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (c) Any Notice of Termination for Cause given by the Company must be given within 90 days of the occurrence of the event(s) or circumstance(s) which constitute(s) Cause. Prior to any Notice of Termination for Cause being given (and prior to any termination for Cause being effective), the Executive shall be entitled to a hearing before the Board of Directors of the Company at which he may, at his election, be represented by counsel and at which he shall have a reasonable opportunity to be heard. Such hearing shall be held on not less than 15 days prior written notice to the Executive stating the Board of Directors' intention to terminate the Executive for Cause and stating in detail the particular event(s) or circumstance(s) which the Board of Directors believes constitutes Cause for termination. Any such Notice of Termination for Cause must be approved by an affirmative vote of two-thirds of the members of the Board of Directors. (d) Any Notice of Termination for Good Reason given by the Executive must be given within 90 days of the occurrence of the event(s) or circumstance(s) which constitute(s) Good Reason. 4. Benefits to Executive. 4.1 Compensation. If the Change in Control Date occurs during the Term and the Executive's employment with the Company terminates within 36 months following the Change in Control Date, the Executive shall be entitled to the following benefits: (a) Termination Without Cause or for Good Reason Within 12 Months of the Change in Control Date. If the Executive's employment with the Company is terminated by the Company (other than for Cause, Disability or Death), by the Executive for Good Reason within 12 months of the Change in Control Date or by the Executive in accordance with Section 1.4(h), then the Executive shall be entitled to the following benefits: (i) the Company shall pay to the Executive, at the prior written election of the Executive tendered to the Company on or before the Change in Control Date, in cash, either (A) in one lump sum, within 30 days after the Executive's termination or (B) in 36 equal monthly installments, with an annual interest rate on the unpaid principal balance equal to the minimum applicable Federal rate in effect on the Date of Termination, beginning 30 days after the Date of Termination, the aggregate of the following amounts: (1) the sum of (A) the Executive's base salary through the Date of Termination, (B) the product of (x) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed fiscal year and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (C) the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not previously paid (the sum of the amounts described in clauses (A), (B), and (C) shall be hereinafter referred to as the "Accrued Obligations"); and (2) the amount equal to (A) three multiplied by (B) the sum of (x) the Executive's highest annual base salary for any year during the five-year period prior to the Change in Control Date and (y) the Executive's highest annual bonus for any year during the five-year period prior to the Change in Control Date. (ii) for 12 months after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to the Executive and the Executive's family at least equal to those which would have been provided to them if the Executive's employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date or, if more favorable to the Executive and his family, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive a particular type of benefits (e.g., health insurance benefits) from such employer on terms at least as favorable to the Executive and his family as those being provided by the Company, then the Company shall no longer be required to provide those particular benefits to the Executive and his family; (iii)to the extent not previously paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive following the Executive's termination of employment under any plan, program, policy, practice, contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (iv) for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits to which the Executive is entitled, the Executive shall be considered to have remained employed by the Company until 12 months after the Date of Termination. (b) Termination Without Cause or for Good Reason Following 12 Months After the Change in Control Date. If the Executive's employment with the Company is terminated by the Company (other than for Cause, Disability or Death) or by the Executive for Good Reason (other than a termination by the Executive in accordance with Section 1.4(h) hereof) on a date which is more than 12 months following the Change in Control Date, then the Executive shall be entitled to the following benefits: (i) the Company shall pay to the Executive, at the prior written election of the Executive tendered to the Company on or before the Change in Control Date, in cash, either (A) in one lump sum, within 30 days after the Executive's termination or (B) in 36 equal monthly installments, with an annual interest rate on the unpaid principal balance equal to the minimum applicable Federal rate in effect on the Date of Termination, beginning 30 days after the Date of Termination, the aggregate of the following amounts: (1) the sum of (A) the Executive's base salary through the Date of Termination, (B) the product of (x) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed fiscal year and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (C) the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not previously paid (the sum of the amounts described in clauses (A), (B), and (C) shall be hereinafter referred to as the "Accrued Obligations"); and (2) the amount equal to (A) two multiplied by (B) the sum of (x) the Executive's highest annual base salary for any year during the five-year period prior to the Change in Control Date and (y) the Executive's highest annual bonus for any year during the five-year period prior to the Change in Control Date. (ii) for 12 months after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to the Executive and the Executive's family at least equal to those which would have been provided to them if the Executive's employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date or, if more favorable to the Executive and his family, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive a particular type of benefits (e.g., health insurance benefits) from such employer on terms at least as favorable to the Executive and his family as those being provided by the Company, then the Company shall no longer be required to provide those particular benefits to the Executive and his family; (iii)to the extent not previously paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive following the Executive's termination of employment under any plan, program, policy, practice, contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (iv) for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits to which the Executive is entitled, the Executive shall be considered to have remained employed by the Company until 12 months after the Date of Termination. (c) Resignation without Good Reason; Termination for Death or Disability. If the Executive voluntarily terminates his employment with the Company within 12 months following the Change in Control Date, excluding a termination for Good Reason, or if the Executive's employment with the Company is terminated by reason of the Executive's death or Disability within 12 months following the Change in Control Date, then the Company shall (i) pay the Executive (or his estate, if applicable), at the prior written election of the Executive tendered to the Company on or before the Change in Control Date, in cash, either (A) in one lump sum, within 30 days after the Executive's termination or (B) in 36 equal monthly installments, with an annual interest rate on the unpaid principal balance equal to the minimum applicable Federal rate in effect on the Date of Termination, beginning within 30 days after the Date of Termination, the Accrued Obligations and (ii) timely pay or provide to the Executive the Other Benefits. (d) Termination for Cause. If the Company terminates the Executive's employment with the Company for Cause within 36 months following the Change in Control Date, then the Company shall (i) pay the Executive, in a lump sum in cash within 30 days after the Date of Termination, the sum of (A) the Executive's annual base salary through the Date of Termination and (B) the amount of any compensation previously deferred by the Executive, in each case to the extent not previously paid, and (ii) timely pay or provide to the Executive the Other Benefits. (e) Effect of Failure to Make Election. In the event the Executive fails to make an election with respect to the payment of amounts payable pursuant to Section 4.1(a)(i) or (a)(ii) hereof on or before the Change in Control Date, the Company shall pay such amounts due to the Executive hereunder in one lump sum, within 30 days after the Executive's termination. 4.2 Taxes. (a) Notwithstanding any other provision of this Agreement, except as set forth in Section 4.2(b), in the event that the Company undergoes a "Change in Ownership or Control" (as defined below), the Company shall not be obligated to provide to the Executive a portion of any "Contingent Compensation Payments" (as defined below) that the Executive would otherwise be entitled to receive to the extent necessary to eliminate any "excess parachute payments" (as defined in Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code")) for the Executive. For purposes of this Section 4.2, the Contingent Compensation Payments so eliminated shall be referred to as the "Eliminated Payments" and the aggregate amount (determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30 or any successor provision) of the Contingent Compensation Payments so eliminated shall be referred to as the "Eliminated Amount." (b) Notwithstanding the provisions of Section 4.2(a), no such reduction in Contingent Compensation Payments shall be made if (i) the Eliminated Amount (computed without regard to this sentence) exceeds (ii) 110% of the aggregate present value (determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-31 and Q/A-32 or any successor provisions) of the amount of any additional taxes that would be incurred by the Executive if the Eliminated Payments (determined without regard to this sentence) were paid to him (including, state and federal income taxes on the Eliminated Payments, the excise tax imposed by Section 4999 of the Code payable with respect to all of the Contingent Compensation Payments in excess of the Executive's "base amount" (as defined in Section 280G(b)(3) of the Code), and any withholding taxes). The override of such reduction in Contingent Compensation Payments pursuant to this Section 4.2(b) shall be referred to as a "Section 4.2(b) Override." For purpose of this paragraph, if any federal or state income taxes would be attributable to the receipt of any Eliminated Payment, the amount of such taxes shall be computed by multiplying the amount of the Eliminated Payment by the maximum combined federal and state income tax rate provided by law. (c) For purposes of this Section 4.2 the following terms shall have the following respective meanings: (i) "Change in Ownership or Control" shall mean a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company determined in accordance with Section 280G(b)(2) of the Code. (ii) "Contingent Compensation Payment" shall mean any payment (or benefit) in the nature of compensation that is made or made available (under this Agreement or otherwise) to a "disqualified individual" (as defined in Section 280G(c) of the Code) and that is contingent (within the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change in Ownership or Control of the Company. (d) Any payments or other benefits otherwise due to the Executive following a Change in Ownership or Control that could reasonably be characterized (as determined by the Company) as Contingent Compensation Payments (the "Potential Payments") shall not be made until the dates provided for in this Section 4.2(d). Within 30 days after each date on which the Executive first becomes entitled to receive (whether or not then due) a Contingent Compensation Payment relating to such Change in Ownership or Control, the Company shall determine and notify the Executive (with reasonable detail regarding the basis for its determinations) (i) which Potential Payments constitute Contingent Compensation Payments, (ii) the Eliminated Amount and (iii) whether the Section 4.2(b) Override is applicable. Within 30 days after delivery of such notice to the Executive, the Executive shall deliver a response to the Company (the "Executive Response") stating either (A) that he agrees with the Company's determination pursuant to the preceding sentence, in which case he shall indicate, if applicable, which Contingent Compensation Payments, or portions thereof (the aggregate amount of which, determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30 or any successor provision, shall be equal to the Eliminated Amount), shall be treated as Eliminated Payments or (B) that he disagrees with such determination, in which case he shall set forth (i) which Potential Payments should be characterized as Contingent Compensation Payments, (ii) the Eliminated Amount, (iii) whether the Section 4.2(b) Override is applicable, and (iv) which (if any) Contingent Compensation Payments, or portions thereof (the aggregate amount of which, determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30 or any successor provision, shall be equal to the Eliminated Amount, if any), shall be treated as Eliminated Payments. In the event that the Executive fails to deliver an Executive Response on or before the required date, the Company's initial determination shall be final and the Contingent Compensation Payments that shall be treated as Eliminated Payments shall be determined by the Company in its absolute discretion. If the Executive states in the Executive Response that he agrees with the Company's determination, the Company shall make the Potential Payments to the Executive within three business days following delivery to the Company of the Executive Response (except for any Potential Payments which are not due to be made until after such date, which Potential Payments shall be made on the date on which they are due). If the Executive states in the Executive Response that he disagrees with the Company's determination, then, for a period of 60 days following delivery of the Executive Response, the Executive and the Company shall use good faith efforts to resolve such dispute. If such dispute is not resolved within such 60-day period, such dispute shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Company shall, within three business days following delivery to the Company of the Executive Response, make to the Executive those Potential Payments as to which there is no dispute between the Company and the Executive regarding whether they should be made (except for any such Potential Payments which are not due to be made until after such date, which Potential Payments shall be made on the date on which they are due). The balance of the Potential Payments shall be made within three business days following the resolution of such dispute. Subject to the limitations contained in Sections 4.2(a) and (b) hereof, the amount of any payments to be made to the Executive following the resolution of such dispute shall be increased by amount of the accrued interest thereon computed at the prime rate announced from time to time by The Wall Street Journal (or if unavailable, by such other nationally recognized financial publication published daily) compounded monthly from the date that such payments originally were due. (f) The provisions of this Section 4.2 are intended to apply to any and all payments or benefits available to the Executive under this Agreement or any other agreement or plan of the Company under which the Executive receives Contingent Compensation Payments. 4.3 Mitigation. The Executive shall not be required to mitigate the amount of any payment or benefits provided for in this Section 4 by seeking other employment or otherwise. Further, except as provided in Section 4.1(a)(ii) or (b)(ii), the amount of any payment or benefits provided for in this Section 4 shall not be reduced by any compensation earned by the Executive as a result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise. 4.4 Outplacement Services. In the event the Executive is terminated by the Company (other than for Cause, Disability or Death), or the Executive terminates employment for Good Reason, within 36 months following the Change in Control Date, the Company shall provide outplacement services through one or more outside firms of the Executive's choosing up to an aggregate of $12,000, with such services to extend until the earlier of (i) 12 months following the termination of Executive's employment or (ii) the date the Executive secures full time employment. 5. Disputes. 5.1 Settlement of Disputes; Arbitration. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board of Directors of the Company and shall be in writing. Any denial by the Board of Directors of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board of Directors shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 5.2 Expenses. The Company agrees to pay as incurred, to the full extent permitted by law, all legal, accounting and other fees and expenses which the Executive may reasonably incur as a result of any claim or contest (regardless of the outcome thereof) by the Company, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive regarding the amount of any payment or benefits pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 5.3 Compensation During a Dispute. If the Change in Control Date occurs during the Term and the Executive's employment with the Company terminates within 36 months following the Change in Control Date, and the right of the Executive to receive benefits under Section 4 (or the amount or nature of the benefits to which he is entitled to receive) are the subject of a dispute between the Company and the Executive, the Company shall continue (a) to pay to the Executive his base salary in effect as of the Measurement Date and (b) to provide benefits to the Executive and the Executive's family at least equal to those which would have been provided to them, if the Executive's employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date, until such dispute is resolved either by mutual written agreement of the parties or by an arbitrator's award pursuant to Section 5.1. Following the resolution of such dispute, the sum of the payments made to the Executive under clause (a) of this Section 5.3 shall be deducted from any cash payment which the Executive is entitled to receive pursuant to Section 4; and if such sum exceeds the amount of the cash payment which the Executive is entitled to receive pursuant to Section 4, the excess of such sum over the amount of such payment shall be repaid (without interest) by the Executive to the Company within 60 days of the resolution of such dispute. 6. Successors. 6.1 Successor to Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement and shall constitute Good Reason if the Executive elects to terminate employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law or otherwise. 6.2 Successor to Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive or his family hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 7. Notice. All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) prepaid via a reputable nationwide overnight courier service, in each case addressed to the Company, at Kronos Incorporated, 297 Billerica Road. Chelmsford, Massachusetts, 01824 (Attn: General Counsel) and to the Executive at [_____________] (or to such other address as either the Company or the Executive may have furnished to the other in writing in accordance herewith). Any such notice, instruction or communication shall be deemed to have been delivered five business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. Either party may give any notice, instruction or other communication hereunder using any other means, but no such notice, instruction or other communication shall be deemed to have been duly delivered unless and until it actually is received by the party for whom it is intended. 8. Miscellaneous. 8.1 Employment by Subsidiary. For purposes of this Agreement, the Executive's employment with the Company shall not be deemed to have terminated solely as a result of the Executive continuing to be employed by a wholly-owned subsidiary of the Company. 8.2 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 8.3 Injunctive Relief. The Company and the Executive agree that any breach of this Agreement by the Company is likely to cause the Executive substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Executive shall have the right to specific performance and injunctive relief. 8.4 Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal laws of the Commonwealth of Massachusetts, without regard to conflicts of law principles. 8.5 Waivers. No waiver by the Executive at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provision at any subsequent time. 8.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together shall constitute one and the same instrument. 8.7 Tax Withholding. Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law. 8.8 Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled. 8.9 Amendments. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Executive. IN WITNESS WHEREOF, the parties hereto have executed this Senior Executive Employee Retention Agreement as of the day and year first set forth above. KRONOS INCORPORATED By:________________________________ Name: Title: ----------------------------------- [Insert Name of Executive] - -------------------------------------------------------------------------------- Schedule to Exhibit 10.12 - -------------------------------------------------------------------------------- Name Date of Agreement Length of Agreement - -------------------------------------------------------------------------------- Mark S. Ain October 5, 2000 36 months after Change in Control as defined in Section 3.a. - -------------------------------------------------------------------------------- Aron Ain October 5, 2000 36 months after Change in Control as defined in Section 3.a. - -------------------------------------------------------------------------------- Paul Lacy October 5, 2000 36 months after Change in Control as defined in Section 3.a. - -------------------------------------------------------------------------------- James Kizielewicz February 11, 2002 36 months after Change in Control as defined in Section 3.a. - -------------------------------------------------------------------------------- Peter George December 8, 2003 36 months after Change in Control as defined in Section 3.a. - -------------------------------------------------------------------------------- Laura Vaughan December 8, 2003 36 months after Change in Control as defined in Section 3.a. - -------------------------------------------------------------------------------- Joseph DeMartino December 8, 2003 36 months after Change in Control as defined in Section 3.a. - -------------------------------------------------------------------------------- Lloyd Bussell October 5, 2000 36 months after Change in Control as defined in Section 3.a. - -------------------------------------------------------------------------------- EX-14 6 exhibit14-1.txt Exhibit 14.1 CODE OF BUSINESS CONDUCT AND ETHICS This Code of Business Conduct and Ethics (the "Code") sets forth legal and ethical standards of conduct for directors, officers and employees of Kronos (the "Company"). This Code is intended to deter wrongdoing and to promote the conduct of all Company business in accordance with high standards of integrity and in compliance with all applicable laws and regulations. This Code applies to the Company and all of its subsidiaries and other business entities controlled by it worldwide. If you have any questions regarding this Code or its application to you in any situation, you should contact your supervisor, department head, VP of Human Resources, General Counsel or Chief Financial Officer (CFO). Compliance with Laws, Rules and Regulations The Company requires that all employees, officers and directors comply with all laws, rules and regulations applicable to the Company wherever it does business. You are expected to use good judgment and common sense in seeking to comply with all applicable laws, rules and regulations and to ask for advice when you are uncertain about them. If you become aware of the violation of any law, rule or regulation by the Company, whether by its officers, employees, directors, or any third party doing business on behalf of the Company, it is your responsibility to promptly report the matter to your supervisor, department head, VP of Human Resources, General Counsel or Chief Financial Officer. While it is the Company's desire to address matters internally, nothing in this Code should discourage you from reporting any illegal activity, including any violation of the securities laws, antitrust laws, environmental laws or any other federal, state or foreign law, rule or regulation, to the appropriate regulatory authority. Employees, officers and directors shall not discharge, demote, suspend, threaten, harass or in any other manner discriminate or retaliate against an employee because he or she reports any such violation, unless it is determined that the report was made with knowledge that it was false. This Code should not be construed to prohibit you from testifying, participating or otherwise assisting in any state or federal administrative, judicial or legislative proceeding or investigation. Conflicts of Interest Employees, officers and directors must act in the best interests of the Company. You must refrain from engaging in any activity or having a personal interest that presents a "conflict of interest." A conflict of interest occurs when your personal interest interferes, or appears to interfere, with the interests of the Company. A conflict of interest can arise whenever you, as an officer, director or employee, take action or have an interest that prevents you from performing your Company duties and responsibilities honestly, objectively and effectively. Employees and Officers. Employees and officers must not: - ---------------------- o perform services as a consultant, employee, officer, director, advisor or in any other capacity, or permit any close relative to perform services as an officer or director, for a significant customer, significant supplier or competitor of the Company, other than at the request of the Company; o have, or permit any close relative to have, a financial interest in a significant supplier or significant customer of the Company, other than an investment representing less than one percent (1%) of the outstanding shares of a publicly-held company or less than five percent (5%) of the outstanding shares of a privately-held company; o have, or permit any close relative to have, a financial interest in a competitor of the Company, other than an investment representing less than one percent (1%) of the outstanding shares of a publicly-held company; o supervise, review or influence the job evaluation or compensation of a member of his or her immediate family; or o engage in any other activity or have any other interest that the Board of Directors of the Company determines to constitute a conflict of interest. If you intend to perform work for any other company, organization or on your own behalf, and if you think that doing so would be in conflict with the above, or when the outside work exceeds twenty (20) hours per week, you should notify and obtain approval from your immediate manager. In any event, outside work cannot be performed on Company time. You cannot use the Company's equipment, materials, resources or "inside" information for outside work. You should not solicit business or clients or perform outside work on the Company's premises. The Company does not object to employees spending reasonable time on civic responsibilities, professional associations or as a member of a Board of Directors of another company. However, when participation in such activities involves time during the business day or the use of Company facilities or resources, you should first obtain permission from your immediate supervisor. Participation as a member of a Board of Directors of an outside company requires the permission from the Company's Board of Directors. This policy is not intended to prohibit incidental use of such items as the Company fax machines or the telephone system for activities which are permitted pursuant to this Code of Conduct and Ethics. However, extensive personal use of any Company property is prohibited. Directors. Directors must not: - --------- o perform services as a consultant, employee, officer, director, advisor or in any other capacity, or permit any close relative to perform services as an officer or director, for a competitor of the Company; o have, or permit any close relative to have, a financial interest in a competitor of the Company, other than an investment representing less than one percent (1%) of the outstanding shares of a publicly-held company; o use his or her position with the Company to influence any decision of the Company relating to a contract or transaction with a significant supplier or significant customer of the Company if the director or a close relative of the director: o performs services as a consultant, employee, officer, director, advisor or in any other capacity for such significant supplier or significant customer; or o has a financial interest in such significant supplier or significant customer, other than an investment representing less than one percent (1%) of the outstanding shares of a publicly-held company. o supervise, review or influence the job evaluation or compensation of a member of his or her immediate family; or o engage in any other activity or have any other interest that the Board of Directors of the Company determines to constitute a conflict of interest. A "close relative" means a spouse, dependent child or any other person living in the same home with the employee, officer or director. "Immediate family" means a close relative and a parent, sibling, child, mother- or father-in-law, son- or daughter-in-law or brother- or sister-in-law. A "significant customer" is a customer that has made during the Company's last full fiscal year, or proposes to make during the Company's current fiscal year, payments to the Company for property or services in excess of one percent (1%) of (i) the Company's consolidated gross revenues for its last full fiscal year or (ii) the customer's consolidated gross revenues for its last full fiscal year. A "significant supplier" is a supplier to which the Company has made during the Company's last full fiscal year, or proposes to make during the Company's current fiscal year, payments for property or services in excess of one percent (1%) of (i) the Company's consolidated gross revenues for its last full fiscal year or (ii) the customer's consolidated gross revenues for its last full fiscal year. It is your responsibility to disclose any material transaction or relationship that reasonably could be expected to give rise to a conflict of interest to the General Counsel or, if you are an executive officer or director, to the Board of Directors, who shall be responsible for determining whether such transaction or relationship constitutes a conflict of interest. Insider Trading Employees, officers and directors who have material non-public information about the Company or other companies, including our suppliers and customers, as a result of their relationship with the Company are prohibited by law and Company policy from trading in securities of the Company or such other companies, as well as from communicating such information to others who might trade on the basis of that information. To help ensure that you do not engage in prohibited insider trading and avoid even the appearance of an improper transaction, the Company has adopted an Insider Trading Policy, which is available by clicking on "Handbook" under the HR section of home.kronos.com. If you are uncertain about the constraints on your purchase or sale of any Company securities or the securities of any other company that you are familiar with by virtue of your relationship with the Company, you should consult with the General Counsel before making any such purchase or sale. Confidentiality Employees, officers and directors must maintain the confidentiality of confidential information entrusted to them by the Company or other companies, including our suppliers and customers, except when disclosure is authorized by a supervisor or legally mandated. Unauthorized disclosure of any confidential information is prohibited. Additionally, employees should take appropriate precautions to ensure that confidential or sensitive business information, whether it is proprietary to the Company or another company, is not communicated within the Company except to employees who have a need to know such information to perform their responsibilities for the Company. Third parties may ask you for information concerning the Company. Employees, officers and directors (other than the Company's authorized spokespersons) must not discuss internal Company matters with, or disseminate internal Company information to, anyone outside the Company, except as required in the performance of their Company duties and after an appropriate confidentiality agreement is in place. This prohibition applies particularly to inquiries concerning the Company from the media, market professionals (such as securities analysts, institutional investors, investment advisers, brokers and dealers) and stock holders. All responses to inquiries on behalf of the Company must be made only by the Company's authorized spokespersons. If you receive any inquiries of this nature, you must decline to comment and refer the inquirer to your supervisor or one of the Company's authorized spokespersons. Any questions regarding these prohibitions should be directed to the CFO or Director of Investor Relations. All employees are required to execute a Proprietary Rights and Confidentiality Agreement as a condition of employment. The Agreement states, among other things, that ideas developed by an employee relating to the Company or its products are the sole property of the Company. The principle embodied in that document and the implied trust it requires are expected of each employee. You also must abide by any lawful obligations that you have to your former employer. These obligations may include restrictions on the use and disclosure of confidential information, restrictions on the solicitation of former colleagues to work at the Company and non-competition obligations. Honest and Ethical Conduct and Fair Dealing Employees, officers and directors should endeavor to deal honestly, ethically and fairly with the Company's suppliers, customers, competitors and employees. Statements regarding the Company's products and services must not be untrue, misleading, deceptive or fraudulent. You must not take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practices. Relations with Suppliers. A supplier is any business or individual which furnishes goods or services of the Company. It is the policy of Kronos to select suppliers in a totally impartial manner based upon price, quality and services offered. Each employee, officer or director is expected to avoid any action which would imply selection of a supplier on any basis other than in the best interest of the Company or that would give one supplier an unfair advantage over another. Employees who deal with suppliers have an obligation to avoid even the appearance of beneficial relationship with suppliers. Because of their position and fiduciary responsibility, their actions must conform to the highest standards of ethical conduct. Relations with Customers. The Company will prosper to the degree, and only to the degree, that we continue to serve our customers well. It has always been the Company's policy to provide the best possible products and services to our customers. We must sell on the merits or our own products and services, not by disparaging competitors or their products and services. Our competitive appeal must be based on this concept of quality and service and the competence and honesty of our sales presentations. No payments or other inducements should be made to any person, public official or political party, either domestic or foreign for the purpose if influencing that person or party to assist the Company is obtaining or retaining business. Relations with the Public and Host Communities. As a growing multinational company with facilities throughout the world, we have responsibilities to the many countries in which we do business. Those responsibilities involve knowing the different laws and understanding their customs and abiding by them. We recognize that we must become part of the host community. We must behave as citizens rather than as foreigners and realize that we will be welcome only so long as we make a responsible contribution to the societies in which we operate. The Company recognizes that it has no future unless it can operate in a strong and free society. We recognize that we can only exist when people are well educated and free to make their own decisions. We have an obligation to help foster such a culture. The Company conducts its business according to accepted principles of free and open competition and trade. Employees, officers and directors shall not discuss or agree to participate in a boycott of any country's goods or services nor shall any employee, officer or director enter into any arrangements or agreements with competitors affecting pricing, market conditions, marketing policies, customers or products. Respect for Others. During the typical workday, we inevitably come in contact with fellow employees, job applicants, suppliers, customers and others. The men and women we meet may have educational backgrounds, racial characteristics, religious beliefs, political affiliations and other points of view that are different from our own. We have worked very hard at creating an environment where such differences are welcomed and are part of our corporate culture. The Company will not tolerate any situation within a Company setting or while representing Kronos outside of the Company, where an employee treats others in a discriminatory or hostile manner based upon race, religious belief, gender, sexual preference, age, physical appearance or other differences. Incidents of such discrimination, sexual or other forms or harassment must be reported to your manager or a corporate officer as soon as discovered. These actions may be illegal and patently unethical. Such matters will be aggressively investigated by the Human Resources department and senior management and will be dealt with accordingly. Protection and Proper Use of Corporate Assets Employees, officers and directors should seek to protect the Company's assets. Theft, carelessness and waste have a direct impact on the Company's financial performance. Employees, officers and directors must use the Company's assets and services solely for legitimate business purposes of the Company and not for any personal benefit or the personal benefit of anyone else. Employees, officers and directors must advance the Company's legitimate interests when the opportunity to do so arises. You must not take for yourself personal opportunities that are discovered through your position with the Company or the use of property or information of the Company. Gifts and Gratuities The use of Company funds or assets for gifts, gratuities or other favors to employees or government officials is prohibited, except to the extent such gifts are in compliance with applicable law, nominal in amount and not given in consideration or expectation of any action by the recipient. Employees, officers and directors must not accept, or permit any member of his or her immediate family to accept, any gifts, gratuities or other favors from any customer, supplier or other person doing or seeking to do business with the Company, other than items of nominal value. Any gifts that are not of nominal value should be returned immediately and reported to your supervisor. If immediate return is not practical, they should be given to the Company for charitable disposition or such other disposition as the Company believes appropriate in its sole discretion. Common sense and moderation should prevail in business entertainment engaged in on behalf of the Company. Employees, officers and directors should provide, or accept, business entertainment to or from anyone doing business with the Company only if the entertainment is infrequent, modest and intended to serve legitimate business goals. Bribes and kickbacks are criminal acts, strictly prohibited by law. You must not offer, give, solicit or receive any form of bribe or kickback anywhere in the world. Accuracy of Books and Records and Public Reports Employees, officers and directors must honestly and accurately report all business transactions. You are responsible for the accuracy of your records and reports. Accurate information is essential to the Company's ability to meet legal and regulatory obligations. All Company books, records and accounts shall be maintained in accordance with all applicable regulations and standards and accurately reflect the true nature of the transactions they record. The financial statements of the Company shall conform to generally accepted accounting rules and the Company's accounting policies. No undisclosed or unrecorded account or fund shall be established for any purpose. No false or misleading entries shall be made in the Company's books or records for any reason, and no disbursement of corporate funds or other corporate property shall be made without adequate supporting documentation. It is the policy of the Company to provide full, fair, accurate, timely and understandable disclosure in reports and documents filed with, or submitted to, the Securities and Exchange Commission and in other public communications. Concerns Regarding Accounting or Auditing Matters Employees with concerns regarding questionable accounting or auditing matters or complaints regarding accounting, internal accounting controls or auditing matters may confidentially, and anonymously if they wish, submit such concerns or complaints in writing to the Company's Audit Committee by using the confidential and anonymous website, http://accounting.kronos.com/auditing_concerns.htm . All such concerns and complaints will be forwarded to the Audit Committee of the Board of Directors and the General Counsel of the Company. The Audit Committee and General Counsel will evaluate the merits of any concerns or complaints received by it and authorize such follow-up actions, if any, as it deems necessary or appropriate to address the substance of the concern or complaint. The Company will not discipline, discriminate against or retaliate against any employee who reports a complaint or concern, unless it is determined that the report was made with knowledge that it was false. Waivers of this Code of Business Conduct and Ethics While some of the policies contained in this Code must be strictly adhered to and no exceptions can be allowed, in other cases exceptions may be possible. Any employee or officer who believes that an exception to any of these policies is appropriate in his or her case should first contact his or her immediate supervisor. If the supervisor agrees that an exception is appropriate, the approval of the Vice President, Human Resources must be obtained. The Vice President, Human Resources shall be responsible for maintaining a complete record of all requests for exceptions to any of these policies and the disposition of such requests. Any executive officer or director who seeks an exception to any of these policies should contact the Chair of the Audit Committee. Any waiver of this Code for executive officers or directors or any change to this Code that applies to executive officers or directors may be made only by the Board of Directors of the Company and will be disclosed as required by law or stock market regulation. Reporting and Compliance Procedures Every employee, officer and director has the responsibility to ask questions, seek guidance, report suspected violations and express concerns regarding compliance with this Code. Any employee, officer or director who knows or believes that any other employee or representative of the Company has engaged or is engaging in Company-related conduct that violates applicable law or this Code should report such information to his or her supervisor or to the General Counsel, as described below. You may report such conduct openly or anonymously without fear of retaliation. The Company will not discipline, discriminate against or retaliate against any employee who cooperates in any investigation or inquiry regarding such conduct or who reports such conduct, unless it is determined that the report was made with knowledge that it was false. Any supervisor who receives a report of a violation of this Code must immediately inform the General Counsel. You may report violations of this Code, on a confidential or anonymous basis, by contacting the Company's General Counsel by fax at 978-367-5909, mail at 297 Billerica Road, Chelmsford, MA 01824 or e-mail at amoore@kronos.com. In addition, the Company has established an anonymous website at http://legal.kronos.com/ethics_concerns.htm where you may leave a message about any violation or suspected violation of this Code. While we prefer that you identify yourself when reporting violations so that we may follow up with you, as necessary, for additional information, you may leave messages anonymously if you wish. If the General Counsel receives information regarding an alleged violation of this Code, he or she shall, as appropriate, (a) evaluate such information, (b) if the alleged violation involves an executive officer or a director, inform the Chief Executive Officer and Board of Directors of the alleged violation, (c) determine whether it is necessary to conduct an informal inquiry or a formal investigation and, if so, initiate such inquiry or investigation and (d) report the results of any such inquiry or investigation, together with a recommendation as to disposition of the matter, to the Vice President, Human Resources and CFO for action, or if the alleged violation involves an executive officer or a director, report the results of any such inquiry or investigation to the Board of Directors or a committee thereof. Employees, officers and directors are expected to cooperate fully with any inquiry or investigation by the Company regarding an alleged violation of this Code. Failure to cooperate with any such inquiry or investigation may result in disciplinary action, up to and including discharge. The Company shall determine whether violations of this Code have occurred and, if so, shall determine the disciplinary measures to be taken against any employee who has violated this Code. In the event that the alleged violation involves an executive officer or a director, the Chief Executive Officer and the Board of Directors, respectively, shall determine whether a violation of this Code has occurred and, if so, shall determine the disciplinary measures to be taken against such executive officer or director. Failure to comply with the standards outlined in this Code will result in disciplinary action including, but not limited to, reprimands, warnings, probation or suspension without pay, demotions, reductions in salary, discharge and restitution. Certain violations of this Code may require the Company to refer the matter to the appropriate governmental or regulatory authorities for investigation or prosecution. Moreover, any supervisor who directs or approves of any conduct in violation of this Code, or who has knowledge of such conduct and does not immediately report it, also will be subject to disciplinary action, up to and including discharge. Dissemination and Amendment This Code shall be distributed to each new employee, officer and director of the Company upon commencement of his or her employment or other relationship with the Company and shall also be distributed annually to each employee, officer and director of the Company, and each employee, officer and director shall certify that he or she has received, read and understood the Code and has complied with its terms. The Company reserves the right to amend, alter or terminate this Code at any time for any reason. The most current version of this Code can be found by clicking on "Handbook" under the HR section of home.kronos.com. This document is not an employment contract between the Company and any of its employees, officers or directors and does not alter the Company's at-will employment policy. Certification I, ______________________________ do hereby certify that: (Print Name Above) 1. I have received and carefully read the Code of Business Conduct and Ethics of Kronos Incorporated. 2. I understand the Code of Business Conduct and Ethics. 3. I have complied and will continue to comply with the terms of the Code of Business Conduct and Ethics. Date: __________________________ __________________________________ (Signature) EACH EMPLOYEE, OFFICER AND DIRECTOR IS REQUIRED TO SIGN, DATE AND RETURN THIS CERTIFICATION TO THE LEGAL DEPARTMENT WITHIN FOURTEEN (14) DAYS OF ISSUANCE. FAILURE TO DO SO MAY RESULT IN DISCIPLINARY ACTION. EX-21 7 exhibit21-1.txt EXHIBIT 21.1 Subsidiaries of the Registrant Jurisdiction Corporation of Incorporation - ----------- ---------------- Kronos Computerized Time Systems, Inc. Canada Kronos Systems Limited United Kingdom Kronos International Sales Corp. U.S. Virgin Islands Kronos Securities Corporation Massachusetts Kronos Technology Systems, LP Massachusetts Kronos Research Systems, LP Texas Kronos de Mexico, S.A. de C.V. Mexico Kronos Australia Pty. Ltd. Australia Kronos Brasil Ltda Brazil EX-23 8 exhibit23-1.txt Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of our report dated October 24, 2003, with respect to the consolidated financial statements of Kronos Incorporated (the "Company") included in this Annual Report (Form 10-K) for the year ended September 30, 2003. o Form S-8 Nos. 333-08987, 333-52209, 333-59444 and 33-49430 relating to the Company's 1992 Equity Incentive Plan; o Form S-8 No. 333-82370 relating to the Company's 2002 Stock Incentive Plan; and o Form S-8 No. 333-107572 pertaining to the 2003 Employee Stock Purchase Plan. /s/ Ernst & Young LLP Boston, Massachusetts December 19, 2003 EX-31 9 exhibit31-1.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Mark S. Ain, certify that: 1. I have reviewed this annual report on Form 10-K of Kronos Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 23, 2003 /s/ Mark S. Ain ----------------------- Mark S. Ain Chief Executive Officer EX-31 10 exhibit31-2.txt Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Paul A. Lacy, certify that: 1. I have reviewed this annual report on Form 10-K of Kronos Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 23, 2003 /s/ Paul A. Lacy ----------------------------------------- Paul A. Lacy Executive Vice President, Chief Financial and Administrative Officer EX-32 11 exhibit32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Kronos Incorporated (the "Company") for the fiscal year ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Mark S. Ain, Chief Executive Officer of the Company, and Paul A. Lacy, Executive Vice President, Chief Financial and Administrative Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Mark S. Ain ------------------------------------ Dated: December 23, 2003 Mark S. Ain Chief Executive Officer /s/ Paul A. Lacy ------------------------------------ Dated: December 23, 2003 Paul A. Lacy Executive Vice President, Chief Financial and Administrative Officer A signed original of this written statement required by Section 906 has been provided to Kronos Incorporated and will be retained by Kronos Incorporated and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----