Room 4561
April 5, 2006
Aron J. Ain
Chief Executive Officer
Kronos Incorporated
297 Billerica Road
Chelmsford, MA 01824
Re: Kronos Incorporated
Form 10-K for Fiscal Year Ended September 30, 2005
Filed December 9, 2005
Form 10-Q for the Quarterly Period Ended December 31, 2005
Filed February 9, 2006
Form 8-K filed January 30, 2006
File no. 0-20109
Dear Mr. Ain:
We have reviewed the above referenced filings and have the
following comments. Please note that we have limited our review
to
the matters addressed in the comments below. Where indicated, we
think you should revise your document in response to these
comments.
If you disagree, we will consider your explanation as to why our
comment is inapplicable or a revision is unnecessary. Please be
as
detailed as necessary in your explanation. In some of our
comments,
we may ask you to provide us with supplemental information so we
may
better understand your disclosure. After reviewing this
information,
we may or may not raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-K for the Fiscal Year Ended September 30, 2005
Management`s Discussion & Analysis (MD&A) of Financial Condition
and
Results of Operations
Critical Accounting Policies and Estimates, page 15
1. We note your discussion of Critical Accounting Policies and
Estimates in MD&A. Please note that the disclosure in the MD&A
related to your critical accounting policies should enhance and
supplement the description of the accounting policies in the Notes
to
the Consolidated Financial Statements, and is not intended to be a
duplication of the disclosure included in the notes. Such
disclosures should describe how estimates and related assumptions
were derived, how accurate estimates/assumptions have been in the
past, whether the estimates/assumptions are reasonably likely to
change in the future and any other disclosures related to the
estimates and assumption involved in the application of generally
accepted accounting principles that impact your reported financial
condition and operating performance, or the comparability of
reported
information over different reporting periods.. Tell us what
consideration you have given to provide quantitative as well as
qualitative information pursuant to SEC Release 33-8350.
Liquidity and Capital Resources, page 28
2. Your disclosures on page 28 indicate that as a result of the
change in billing your customers in arrears for professional
services
rather than in advance of the service delivery, the Company
experienced and you expect to continue to experience a short-term
negative impact on your cash flows from operations. We further
note
from you Consolidated Statement of Cash Flows that the changes in
deferred product revenues, deferred professional services revenues
and deferred maintenance revenues in fiscal 2005 were ($17,499),
($6,649) and ($14,388), respectively. Please reconcile these
amounts
to the changes as calculated from the Consolidated Balance Sheet
of
($5,906), ($3,995) and $12,709, respectively, which do not appear
to
reflect a negative impact on operating cash flows. Also, tell us
if
the change in the timing of your billings had any impact in the
timing of revenue recognition for such services.
Consolidated Statements of Operations, page 59
3. We note that you separately disclose revenues from maintenance
and
professional services. Tell us how you considered Rule 5-03(b)(2)
of
Regulation S-X to separately disclose the cost of maintenance and
professional services.
Notes To Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
Revenue Recognition, page F-6
4. We note your disclosures in Note A where you indicate that the
Company`s arrangements do not include any rights of return. Your
disclosures on page F-8, however, indicate that the Company
maintains
a sales return allowance to reflect estimated losses for sales
returns and adjustments due to incorrect ordering of product,
general
customer satisfaction issues or incorrect billing. Please explain
how these disclosures compare to those in your revenue recognition
policy where you indicate the customer has a right to refund if
the
product does not meet the "Company`s published specification."
Tell
us how you concluded that you do not offer rights of return or
explain how you considered paragraph 6 of SFAS 48 in accounting
for
such rights. Also, explain your disclosures in Note E where you
indicate that the Company records an allowance for sales returns
and
adjustments and yet you record individual charges for sales
returns
and adjustments directly to revenue as incurred. Why are these
charges not recorded against the allowance?
5. You indicate that the deferred amounts related to arrangements
with extended payment terms other than the financing arrangements
are
removed from deferred revenue and accounts receivable until the
payment becomes due. You further state "the Company reports the
allocated fair value of revenues related to the product element of
arrangements as current liability because of the expectation that
these revenues will be recognized within 12 months of the balance
sheet date." Are the deferred product revenues you refer to from
contracts that include extended payment arrangements? If so, it
appears you`re your disclosures are different for the product
element
than the service elements as deferred services are not reflected
in
accounts receivable or deferred revenues until the payments become
due. Please explain. Tell us when you bill the customers in
extended payment arrangements (i.e. at inception of contract,
quarterly, monthly, etc.) When payments become due and you
reflect
such amount in accounts receivable do you recognize the offset as
deferred revenue or directly to revenue? Also, tell us the
deferred
and accounts receivable amounts removed from such arrangements for
the periods presented. Tell us what consideration you have given
to
including a discussion of such amounts in MD&A.
Note H. Goodwill and Other Intangible Assets, page F-15
6. We note that the Company is amortizing certain intangibles,
such
as customer related, maintenance relationships and purchased
technology over a period of ten to twelve years. Tell us how you
determined the adequacy of these amortization periods.
Note J. Capitalized Software, page F-18
7. We note your disclosures in Note A where you include a
discussion
of the Company`s accounting for software costs incurred in the
development of software to be sold to others (SFAS 86) and
software
developed for internal use (SOP 98-1). Tell us if your
disclosures
in Note J are for the SFAS 86 software costs, the SOP 98-1
software
costs or both. If the latter is the case, then provide a
breakdown
of the capitalized costs and accumulated amortization between the
SFAS 86 software and the SOP 98-1 software and include the
amortization expense for each type as well. Also, tell us what
consideration you have given to including separate footnote
disclosures for these costs.
Form 8-K dated January 30, 2006
8. We note your use of the non-GAAP measures under Item 9.01 of
the
Form 8-K noted above which excludes a number of recurring items.
Tell us how you considered Item 10(e)(1)(i) and Question 8 of
Frequently Asked Questions Regarding the Use of Non-GAAP Financial
Measures to include the following disclosures:
* the manner in which management uses the non-GAAP measure to
conduct
or evaluate its business;
* the economic substance behind management`s decision to use such
a
measure;
* the material limitations associated with use of the non-GAAP
financial measure as compared to the use of the most directly
comparable GAAP financial measure;
* the manner in which management compensates for these limitations
when using the non-GAAP financial measure; and
* the substantive reasons why management believes the non-GAAP
financial measure provides useful information to investors.
For example, you indicate that stock based compensation does not
provide meaningful insight income the Company`s ongoing
operations.
Tell how you came to these conclusions considering the Company has
historically used stock options as a form of compensation and it
appears that you are continuing to do so. Therefore, tell us why
compensation expense would not be meaningful to a company`s
operations. Also, you indicate that operating results under GAAP
may
include items that are not necessarily relevant to understand
Kronos`
business. Why would the acquisition related intangibles not be
relevant to your business, particularly considering the Company
had
10 acquisitions during the past two fiscal years?
9. Your Non- GAAP Consolidated Statements of Income appear to
include
a number of measures, such as non-GAAP cost of sales, non-GAAP
operating expenses and other income, non-GAAP provision for income
taxes, etc., for which you have not included the disclosures
required
by Item 10(e)(1) of Regulation S-K. Also, it is not clear to us
whether the presentation of a non-GAAP statement of operations
would
comply with Item 100(b) of Regulation G. Please explain.
Form 10-Q for the Quarterly Period Ended December 31, 2005
Note C. Stock-Based Compensation, page 4
10. We note your summary of option activity on page 6 and your
summary of the status of non-vested stock options on page 7
exclude
70,500 restricted stock units granted to employees during the
quarter
ended, December 31, 2005 and 100 restricted stock units cancelled
during such period. Were these unit grants also excluded from
your
compensation expense calculated pursuant to SFAS 123R for the
quarter? Please explain.
As appropriate, please amend your filing and respond to these
comments within 10 business days or tell us when you will provide
us
with a response. Please submit all correspondence and
supplemental
materials on EDGAR as required by Rule 101 of Regulation S-T. You
may wish to provide us with marked copies of any amendment to
expedite our review. Please furnish a cover letter with any
amendment that keys your responses to our comments and provides
any
requested information. Detailed cover letters greatly facilitate
our
review. Please understand that we may have additional comments
after
reviewing any amendment and your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Kari Jin, Staff Accountant, at (202) 551-
3481
or me at (202) 551-3730 if you have questions regarding these
comments.
Sincerely,
Kathleen Collins
Accounting Branch Chief
Mr. Aron J. Ain
Kronos Incorporated
April 5, 2006
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