UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
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GK INTELLIGENT SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 84-1079784
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
5555 SAN FELIPE, SUITE 625
HOUSTON, TEXAS 77056
(Address of principal executive offices)
(713) 840-7722
(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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None None
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This filing contains certain forward-looking statements. Although the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business operations, there can be no
assurance that actual results will not differ materially from its expectations.
For factors that may cause actual results to differ materially from expectations
and underlying assumptions, see reports by the Company filed with the Securities
and Exchange Commission. The Company is a development-stage company that has
generated no revenues since inception. The Company is dependent upon additional
financing to effect its business plan and there can be no assurance that any
such financing can be obtained. Key terms and phrases are defined in
"-Glossary".
GENERAL
GK Intelligent Systems, Inc., a Delaware corporation ("Company"), is a
development stage enterprise currently developing "intelligent" computer
software training and performance support products and applications. The Company
intends to make such products and applications available via the Internet or
other network systems on a fee per use basis. The products and applications
being developed incorporate several new software technologies such as artificial
intelligence, intelligent semantic agents, conceptual querying, adaptive dynamic
interfaces, intelligent tutoring, object- oriented programming and active and
visible graphical interfaces and databases. The Company's efforts to date have
centered primarily on (i) the acquisition and development of its core software
technologies from which a comprehensive range of future products and
applications is being created, (ii) the establishment of long-term relationships
with key individuals and institutions which management believes are critical to
its long-term marketing plans, and (ii) securing the services of competent
individuals capable of carrying out the Company's detailed development plans.
During the period from inception (October 4, 1993) through May 31, 1997, the
Company has realized no revenues and has an accumulated deficit of $12,201,379.
The Company was incorporated in Delaware in February 1988 under the name
Technicraft Financial, Ltd. In October 1991, its name was changed to LBM-US,
Inc. ("LBM-US"). Pursuant to an agreement effective August 1994, GK-Texas
transferred all of its assets and liabilities to LBM-US, a Delaware shell
corporation with no significant assets or liabilities, in exchange for 6,758,920
shares of LBM-US Common Stock. The remaining 963,275 shares of LBM-US Common
Stock out of a total of 7,722,195 shares outstanding were retained by the former
owners of LBM-US in a transaction treated for accounting purposes as a purchase
of the Company by GK-Texas, referred to as a "reverse merger". As the former
stockholders of GK-Texas acquired approximately 88% of the capital stock of the
Company pursuant to the reverse merger transaction, the Company's historical
financial statements present the assets and liabilities of GK-Texas at their
carrying values and include the historical operations of GK-Texas for all
periods presented. Of the LBM-US shares of Common Stock issued to GK-Texas, a
total of 6,375,000 shares were issued to Gary F. Kimmons and his family
partnership. GK-Texas had been formed in February 1994 to produce and market
multimedia computer-based skill-oriented training and performance support
systems using artificial intelligence. The necessary technologies were acquired
from I-NET Intelligent Systems, Inc., a Delaware corporation
("I-NET(Delaware)"), which Mr. Kimmons had formed prior to forming GK-Texas. In
October 1993, I- NET(Delaware) had contracted with AT&T to develop the SMART ONE
training program template pursuant to an Industrial Design Services Agreement
("AT&T Agreement"). In February 1994, the intellectual property and all rights
and obligations under the AT&T Agreement were assigned by I-NET(Delaware) to
GK-Texas. In August 1994, after acquiring all of the technology of GK-Texas, the
Company, still named LBM-US, changed its name to GK Intelligent Systems, Inc.
In November 1995, the Company acquired from Microelectronics and Computer
Corporation ("MCC") the non-exclusive, worldwide, perpetual right and license to
use various computer software tools and languages (referred to as CARNOT
technology) via the issuance to MCC of 883,333 shares of the Company's Series A
Preferred Stock. MCC is a consortium of nearly 80 corporations, public and
non-profit agencies and universities who are cooperating and sharing information
and technology in order to gain competitive business advantages for its members.
The Company is not a member of MCC. The CARNOT tools and languages will allow
the development of customized software applications capable of, among other
things, heterogenous access to disparate databases, conceptual querying, data
mining, adaptive dynamic interfaces, multimedia authoring, artificial
intelligence and intelligent semantic agents.
Using the purchased and licensed technologies described above, the Company's
business strategy is to economically integrate information, enhance the value of
the information to the market place by adding intelligent capabilities, and make
it available world-wide on a fee per use basis. To implement its business plan,
the Company is in the process
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of establishing an international GLOBAL INTELLIGENT NETWORK ("GIN"). This
virtual network will serve as a distribution mechanism for an international
service bureau providing corporate, governmental, academic and individual
clients accessed to the Companys' intelligent performance support (expert
assistance) products and applications to facilitate daily work activities, which
the Company calls its SMART SUPPORT family of technologies. The three principal
forms of intelligent performance support will be the Company's SMART PERFORM
service (using intelligent agent technology for heterogeneous access of
information in disparate databases and multimedia database authoring tools to
present the information), SMART ENTERPRISE (a strategic resource model manager
using intelligent agent technology and the heterogeneous access capability of
SMART PERFORM) and SMART ONE (a computer based training system utilizing
multimedia technology, artificial intelligence, an adaptive dynamic interface
and advanced training methodologies to deliver a state-of-the-art training
experience). Through its SMART SUPPORT family of technologies, management's goal
is to NETWORK HUMAN INTELLIGENCE, by creating mechanisms that allow access by
Lesser Developed Countries ("LDC's") of the Third World to technology of the
Developed Countries. The Company's vision is a "virtual organization" linking
its employees with strategic allies in aligned corporations and academic
institutions around the world.
In August 1995, the stockholders of the Company amended and restated its
Certificate of Incorporation in its entirety primarily to increase the number of
shares of capital stock and to adopt more favorable officers and directors
indemnification and limitation of liability provisions available under Delaware
law. In September 1997, GK-Texas was merged into the Company after approval by
the boards of directors and majority shareholders of both companies. The
Company's principal place of business is located at 5555 San Felipe, Suite 625,
Houston, Texas 77056 and its telephone number is (713) 840-7722.
UN "FLAG TECHNOLOGY" DESIGNATION
In October 1996, the SMART ONE trainer and the SMART SUPPORT family of
technologies, including all of its corporate intranet applications, qualified
for designation as a United Nations "Flagship Technology." The United Nations
("UN"), acting through the Global Technology Group ("GTG") of the United Nations
Development Program ("UNDP"), identified the Company's technologies as
appropriate to transfer to 130 LDCs. The mission of the GTG is to (i) increase
LDCs' productive capacity through technology transfer, (ii) enhance LDCs'
livelihood systems by making available to them state of the art technologies
from the Developed Countries, and (iii) create comprehensive means for
technology adaptation in LDCs through enterprise support, including private
sector funding. The GTG uses the UN Flagship Technology Program ("UNFTP") as
part of the implementation of its mission, to bring needed technology,
entrepreneurs and production facilities together in LDCs.
The UNFTP designation has recently become recognized as a legitimizing force
and joins a list of other "sustainability labels" for technology, in the same
manner that underwriter's laboratory ("UL") is recognized as a label for safety
in technology. The Flagship Technology designation generates enthusiasm and
commitment to such values as environmental care, social benefit, and local
sourcing for talent and employment. The UNFTP designation has become a coveted
label for companies seeking private sector financing and enables the GTG to
mediate between the private sector and the needs of less developed countries. In
some cases, the GTG has taken, and will continue to take, an active role in
steering the enterprises participating in the UNFTP. Management believes that
the UNFTP designation will provide a platform to market its SMART SUPPORT family
of technologies on a world-wide basis.
GLOBAL INTELLIGENT NETWORK
The Global Intelligent Network ("GIN") will serve as the distribution
mechanism for an international service bureau providing corporate, governmental,
academic and individual clients with intelligent performance support to
facilitate daily activities. The Company has reached a written agreement with
the United Nations Office of Projects and Services ("UNOPS") division of the
United Nations to implement the SMART SUPPORT system on a first-step prototype
basis within the UN's New York facilities. The initial focus of the prototype
will involve both the human resource and information technology functions of the
United Nations. The ultimate objective is to create a full intelligent service
bureau to link over 100,000 United Nations personnel, experts, scientists and
affiliates. The suite of artificial intelligence technologies will provide
comprehensive global cross network platform access to the thousands of
heterogeneous United Nations on-line databases and records, creating a
relational facility with records, projects and planning functions. The SMART
SUPPORT suite of technologies will allow the UN to integrate complex information
needs and thereby create a more powerful and intuitive information delivery
system. Management believes that the UN will obtain a higher efficiency and
lower cost basis through the system's implementation.
This technology in conjunction with the GIN also provides a multiple
platform search capability that can reach
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beyond the United Nations' databases and onto the global Internet, should a more
qualified candidate exist. The objective of the prototype is to demonstrate the
Company's unparalleled agent technologies targeting an area of need specified by
the UN. One such specified area is the need to simplify and expedite the process
of qualifying potential candidates for UN job vacancies. Using GKIS' advanced
data mining and semantic agent technologies, UN personnel will now have
unparalleled access to potential candidates both on their internal databases and
across the vast sources on the Internet. The Company's agents will query the UN
personnel, then search continuously and autonomously for potential candidates,
reporting back when the UN person logs back in to his or her computer. In
addition, these agents will monitor the activity of "their" person, learning his
or her habits and patterns, so the agents may offer unsolicited assistance or
information related to the person's job. The agents could also be allowed to
otherwise enhance "their" person's performance with job candidates which may
work but which were outside any search parameters set by the person initially
invoking the agents.
The GIN represents an abstract layer of understanding that is the
unification of related data on disparate systems located throughout the
Internet. It is designed for multiple uses including intelligent performance
support, data analysis, data acquisition, electronic commerce, resource
management, information dissemination, and education. As one example, through
the use of "Requester" and "Broker" agents, information can be brokered by the
Company to members of the GIN. Institutions that have valuable research can
recoup their research and development costs by selling that research to other
institutions which will be saving research and development costs by not
duplicating the same results. Individuals at institutions which are members of
the GIN can have "Requester" agents constantly accessing information resources
on the Internet acting in their proxy by searching for specific types of
information on an on-going basis and returning those findings to the requesting
individual. The Company intends to bill for the use of its products on the GIN
utilizing a small per unit of use charge, based on time and bandwidth used. To
that end it is negotiating with a few selected software companies, such as Xpert
Systems. Ltd. in Israel, with the proper network accounting software, as
identified by the UN Global Technology Group.
SMART ONE TRAINER
DESCRIPTION OF TECHNOLOGY
The Company's SMART ONE trainer is an advanced technology based on
specifications determined by Mr. Kimmons and developed for the Company on a
contract basis by AT&T Global Information Solutions ("AT&T GIS"), a division of
Lucent Technologies. This technology is a component in the comprehensive line of
products and applications the Company is planning to market. The SMART ONE
trainer is capable of real-time adaptation and customization of training to the
individual, and as a template or engine, is ready for any content to be added to
suit the customer's need. With an artificial intelligence ("AI") based engine,
the program can provide instruction that is tailored to the needs of the
individual and can guide the user to the most appropriate next step. The SMART
ONE trainer provides individualized skill-oriented instruction, which will
permit government agencies and corporations to provide more effective, timely
and efficient training of employees with respect to applicable work procedures
through the use of interactive multimedia computer software.
The Company is presently developing several applications of the SMART ONE
trainer, including an Internet trainer for all levels of computer users, from
novice to experienced. The first such course will address the skills training
required in understanding basic Internet operations. Entitled "Around the Web in
80 minutes", this introductory Internet training course will utilize the
proprietary GKIS SMART ONE training engine to determine each user's initial
skill level and provide the appropriate learning experience for that individual.
The Internet training course will incorporate a functional dynamic user
interface capable of capturing and recording the current performance level of
the user, evaluating such user's performance against an expert user model, and
adjusting the instructional session accordingly. "Around the Web in 80 Minutes",
as well as all subsequent courses, will possess the full range of functionality,
robustness, and architectural integrity typically found in commercial grade
products. To date, no revenues have been derived from this product.
The Company's SMART SUPPORT system applications will be designed to provide
individual users with interactive training and skills support for a wide variety
of products and services. The core of the system is the proprietary SMART ONE
program which can be adapted to a wide variety of training applications. The
first SMART ONE training program, developed for the Company by AT&T, is a
PC-based template which guides the user through a series of lessons on the
proper operation of a specific piece of equipment or machinery. For instance, a
gas inspector can be taught to operate a gas meter through a series of on-screen
instructional videos, graphics and tests. The program will teach the individual
everything from how to turn the machine on to how to analyze a meter reading.
Using a touch screen,
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mouse, joystick or keyboard, the student can interact with the training session
and actually attempt to perform skills immediately following a tutorial. With
the AI algorithms built into the programming, the SMART ONE training system can
quickly determine how proficient the user is and then skip unnecessary training
programs or suggest additional training which is already embedded in the system.
Because of the program's ability to assess the individual's skills, this system
can be used by experts who simply need to refresh their knowledge of certain
skills, or learn new ones, but do not need to go through the cumbersome process
of relearning skills that they are already proficient in, as well as by novices.
The SMART SUPPORT system has also been designed with the flexibility to be
used on the job to help support certain technical skills and to serve as an
expert resource. A technician working with a gas company, for instance, could
use the system to help him locate a certain valve in a housing complex and then
show him the proper technique and tools necessary to close or open the valve.
Unlike a standard training system, this flexibility makes the SMART SUPPORT
system significantly more useful and cost effective because it can be used both
in the classroom setting as well as in the field. The system has also been
designed to work on a variety of computer platforms. The platform can range from
a simple stand-alone 386 or 486 PC-based CD-ROM multimedia workstation to a
local or wide-area network (LAN or WAN) delivery configuration. Initially,
management strategy is to out-source the production and incorporation of visual
and audio media, while Company personnel will configure the system and
incorporate the AI algorithms.
The SMART ONE trainer delivers a solution that provides skills development
training in addition to the dissemination of knowledge. The system delivers
multimedia-based training that selectively and uniquely adjusts to the needs of
each individual being trained. Utilizing the latest technology, a multimedia
enabled computer emerges as a highly personal and sophisticated "learning
assistant". The training process includes both an initial assessment as well as
a skill- building phase. In the assessment phase, the computer assesses the
unique knowledge and skill level (I.E., strength and deficiencies) of the
individual. Based on this assessment, the computer formulates a totally unique
and personalized learning experience for the individual on a real-time basis.
Strengths are acknowledged and rewarded. Skill and knowledge deficiencies are
resolved "on-the-fly", with the computer-based intelligent tutoring system
tailoring the experience as the individual proceeds. All of the individual's
decisions and actions are recorded so that a complete picture of the person's
skills and knowledge can be demonstrated.
The SMART ONE training software has its development based on an end-user
focused design process whereby training tasks are studied to determine how the
individual learns, thinks, and performs a required task. From this evaluation,
course content descriptions are generated to guide the software development
process.
The training software is capable of tailoring the training modules to what
each student knows, and is capable of tailoring the module to the way each
student likes to learn. The software is able to compare the student s
performance to "expert" performance and adapts itself accordingly. It also
recognizes the student's approach to learning and, when in doubt, asks for the
student's preferences. The software then uses this information so that all users
can learn at their own pace and in their own style.
The SMART ONE training software provides the right amount of support at the
right time by monitoring user performance, user interaction history and current
task constraints. It is able to modify the level of support accordingly, giving
the less skilled user prompts and menus that are not provided to the more
experienced user. This training software technology is combined with superior
multimedia interfaces to make training and performance support more useful,
effective, timely and fun. The user learns actively by making choices, and the
system responds with a full and varied array of graphics, animation, video,
sound effects and touch interaction that reinforces correct performance and
remedies incorrect performance.
The SMART ONE training program has been designed as a series of training
modules. Each module consists of approximately five multimedia skill building
lessons which can run for as long as 30 minutes each. In general, a complete
training course will consist of approximately 20 training modules. Since each
individual to be trained has a different level of proficiency, the amount of
time spent on each skill can vary from as little as two or three minutes for the
system to quickly verify the proficiency of an expert to as many as 30 minutes
to train someone who has no knowledge of a particularly difficult skill. Hence,
an individual who is new to a skill could spend as many as 50 hours in training
while an expert may only need a few hours to receive complete recertification
training. The economics of this are particularly important to companies and
government organizations which spend millions of dollars annually to send their
staff to training programs or to recertify technical people on certain skills.
These off-site programs also may include a significant amount of redundant
materials and will result in the loss of productivity while the individual is
away from the job.
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CHANGES IN TRAINING AND EDUCATION MARKET
The market for training and education is undergoing a revolutionary change
as new technologies are reshaping the way people learn. Often, the traditional
concept of a classroom setting with one teacher lecturing to a group of students
is replaced or supplemented, in many instances, with interactive multimedia
tools such as video terminals and computers which can provide each student with
more individualized instruction. Computer-based multimedia training is becoming
more popular as the benefits become more defined. Companies are beginning to
discover that the savings of training staff on-site using advanced technologies
are considerable. Even though the costs to produce a multimedia training program
are significant, they compare favorably to the travel, lost work time and
expenses associated with most training programs.
Government initiatives and comprehensive legislation increase the demand for
additional cost-effective training systems. An example of such legislation is
the Pipeline Safety Act of 1991 which outlines safety concerns and training
requirements for the operation of pipelines transporting gas and hazardous
liquids. Government workers and pipeline company employees will need to be
trained under new government standards. Other legislation regarding the handling
and transportation of hazardous materials and worker safety has also created a
large demand for more comprehensive training.
COMPANY'S PRODUCTS FOR THE CHANGING MARKET
The demand for more cost effective and efficient educational training
systems that use advanced technologies has created a market niche that many
software and computer companies are trying to capitalize on. The Company
believes that its SMART ONE trainer will be well-positioned to be a leading
product in this market.
In the training and education marketplace, the Company is involved in the
design, development and production of computer-based, multimedia educational
training and occupation-related performance support software. The software uses
the latest advances in adaptive dynamic interface technology and AI. The Company
has identified specific market segments within select industries and
governmental agencies which it believes have an immediate need for the rapid
development and implementation of' personnel training programs. These
governmental agencies include Department of Transportation ("DOT"), Department
of Defense ("DOD") and the General Services Agency ("GSA"). Mr. Kimmons has had
a long relationship with the DOT, including its Transportation Safety Institute.
As a contractor to DOT, Mr. Kimmons prepared job task analyses and training
specifications for state and federal pipeline safety inspectors. During the same
period, Mr. Kimmons also developed training courses for pipeline safety training
for and in joint venture with major pipeline companies, which entailed his
working closely with DOT personnel to ensure compliance with DOT training
standards. Because of this longstanding relationship, Mr. Kimmons was favorably
received when the Company asked the DOT which area of training it perceived to
be the most critical. The DOT identified the area of hazardous materials
handling ("Haz Mat") to be the most critical need for not only itself, but also
the DOD and the GSA, both with which DOT shares responsibility for Haz Mat
training. Because of this response and Mr. Kimmons' prior dealings with DOT, the
Company is currently actively reviewing Haz Mat materials and personnel for
content to load into the SMART ONE training engine for its next series of
training courses.
As the Company's core interactive training technology, SMART ONE has been
designed to be adapted to a wide variety of educational applications and can
potentially be delivered to a large population base. Since the system can be
used both in the classroom as well as in the field to support certain technical
skills, the extra utility makes it easier for companies to justify the costs
related to implementing SMART ONE training. Initially, management intends to
market the SMART ONE training technology, in the financial services, medical,
manufacturing and government markets. These markets, which are driven by
regulatory pressures from agencies such as the Securities and Exchange
Commission, Department of Transportation, Environmental Protection Agency and
the Occupational Safety and Health Administration, should provide the Company
with an opportunity to introduce its products. It particularly applies to
government employees who are involved in inspection and quality control and need
to be trained in the proper operation of certain equipment and systems. Based on
Mr. Kimmons' relationship with the DOT, the Company was invited to present its
SMART ONE trainer to key decision makers in Washington affiliated with the
Pentagon, Department of Transportation, and General Services Administration. Key
personnel within these agencies have expressed an interest towards a future
implementation of not only the Company's SMART ONE training technology but also
its network delivery system as well. To date, no commitment has been made by the
government and any implementation will involve the government budgeting and
procurement processes, a lengthy process.
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An important component to the Company's growth strategy is maintaining
control of the programming content. Management's strategy is for companies or
organizations interested in developing a specific training course to contract
with the Company to develop the program and then license from the Company the
use of the software to train employees. This strategy has been adopted to
maintain quality standards for all SMART ONE products, to foster a steady and
growing revenue stream from each customer, as well as to assist the company in
expanding its library of training programs and market opportunities.
The Company intends to license its SMART ONE Trainer software programs to
various private and public organizations on a fee-per-use basis. While it is
expected that contract terms will vary based on expected usage and the
complexity of the program that needs to be developed, management's current
intent is to charge an average rate of $1.00 per minute per individual. Hence,
an expert who only needs a few hours of recertification training may incur a
lower expenditure while a novice learning a new job in its entirety could take
numerous hours and incur a higher expenditure. Management believes that the
average training per individual will be about 15 minutes per lesson, and,
assuming 30 lessons, an average training program would probably take about 7.5
hours and cost about $450 per employee (under current pricing expectations).
Based on its long- term experience in developing similar and related training
applications (as explained above) and Mr. Kimmons' experience as training
director for major corporations, management believes that this is approximately
two-thirds less than the current cost of traditional classroom and
computer-based training.
COMPETITION IN THE TRAINING AND EDUCATION MARKETPLACE
There are many companies which are developing interactive multimedia
training products which address the Company's market, most of which have
significantly greater financial, technical and personnel resources. Many of the
major software companies have developed some form of educational product that
can be run on PC-based systems. The majority of these products are designed for
mass market appeal with a particular focus on the home market. Companies such as
IBM and Microsoft, however, are involved in developing training products for the
industrial marketplace and for schools and educational institutions. Other
companies which produce educational software products for both the educational
and industrial marketplace include Scholastic, Broderbund and Softkey
International.
However, very few of the computer based training programs utilize any
significant artificial intelligence ("AI") in their implementation or interface
with the user. A key reason why AI has experienced minimal competition to date
has been the high cost of AI product (software code) reproduction . While the
cost of "cloning" AI software has been a deterrent in the past, the Company's
SMART ONE Trainer contains reusable code which minimizes any changes. This makes
it possible for the AI "engine" which drives the Company's SMART ONE training to
be used with minimal modification in a broad range of training applications and
scenarios.
SMART PERFORM
SMART PERFORM AND INTELLIGENT, SEMANTIC AGENTS
SMART PERFORM will be a "suite" of computer programs, designed with the
complexity of today's computer systems in mind. Today's complex computer systems
are comprised of different types of hardware and software, many of which are
extremely sophisticated, but are unable to communicate with each other. This
means that accessing and sharing information across different systems is often
impossible. In addition, the amount of information stored and accessed on
computer systems is increasing at virtually immeasurable rates and is expressed
and stored in different ways. These factors have created an interesting problem
for those intent on creating a single "information superhighway".
How does one find and retrieve information when and where it is needed, and
in a form that is desirable? How can one determine what is actually available to
be known and used? What is involved in integrating, structuring and managing
complex information systems? SMART PERFORM is being developed as a solution to
these problems and to others. With the SMART PERFORM it will be possible for a
person to seek and obtain specific information in a specific form, such as text,
video, or graphics. The information may be located on different computers in
different places around the world. The context in which the information is
sought may be that of a business presentation to be made, a training program to
be developed, or a marketing plan to be written. This effectively eliminates
problems related to differences in data format and accessibility. With SMART
PERFORM, the information is accessed, retrieved, and
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returned to the user in a form compatible with the user's system.
This is all accomplished with advanced computing technologies such as
"semantic agents". In the computing world, agents are software which has been
designed to perform sophisticated duties often bordering on the "thinking"
capability of humans. Agents, for example, are assigned specific
responsibilities such as accessing and retrieving information, or searching for
trends and similarities among different forms of information. These activities
may be triggered by a user's request, or they may occur without solicitation,
although ultimately serving to benefit the user's needs.
The advanced CARNOT technology licensed from MCC makes SMART PERFORM
possible. SMART PERFORM is being designed as is a system for integrating
information located in heterogeneous, distributed database systems throughout an
enterprise or multiple enterprises, as well as locating, evaluating, retrieving
and merging information in environments such as the Internet, where new
information and new sources of information are constantly being added.
When complete, SMART PERFORM will have the ability to dynamically integrate
audio, video, text, database, movie and virtually any type of data file into one
seamless, user friendly work space from anywhere on the Internet. For example
SMART PERFORM would allow users at sites around the world to collaborate through
a single, integrated environment, all working to finalize one document that has
statistical data from the US, video files from China, music from India, and
spreadsheets from Burma.
As a suite of technologies, SMART PERFORM will offer the capability to
perform conceptual searches of heterogeneous information on disparate computer
systems, data mining, conceptual searches, network security, and intelligent
performance support through the use of intelligent network "agents". The agents
are highly sophisticated and capable of representing the needs, interests and
work requirements of the user. In the financial services market, for example,
SMART PERFORM could be applied to the specific needs and interests of stock
brokers. For example, using SMART PERFORM'S intelligent agents designed for the
financial sector, stock brokers could receive "expert" assistance in performing
their jobs. With SMART PERFORM's intelligent agents working in the background,
brokers could receive advanced guidance in making buy-sell decisions and
tracking investments.
Intelligent network agents (INA's) provide communication and support
services enabling efficient navigation, retrieval, and integration of
information contained in distributed databases on networks such as the Internet.
These agents incorporate the use of software sub-routines that operate in the
background of a system and perform actions on behalf of the user. Agents can be
designed to perform autonomous context-sensitive database searches, integrating
the data and returning only usable information. Intelligent agent technology
should dramatically increase the effectiveness and efficiency of businesses.
With instant access to the internal information used to manage the business,
employees will be able to make optimal decisions based on a clear knowledge of
the present state of the business. With instant access to external information
sources on industry trends, competitors, and foreign and domestic markets,
employees will be able to evaluate their decisions in the context of the broader
marketplace.
SALES AND MARKETING
The rapid growth of information sources in both corporate networks and the
Internet and the increased difficulty in finding and making effective use of
that information has created a significant market opportunity. The Company
believes that SMART PERFORM applications that incorporate its powerful and
proprietary intelligent agent technology will assume leadership positions in
their respective fields .
In the field of INA technology, the Company is involved in the application
and marketing of CARNOT intelligent agent technology acquired by license from
MCC. The Company's business strategy is to apply and exploit CARNOT technology
as SMART SUPPORT and additional content for the GIN. The Company will also
provide turnkey application development and implementation services to clients
desiring to incorporate INA technology in their existing line of business
applications. In addition, the Company intends to provide SMART PERFORM services
to clients through a service bureau model.
Using various elements of SMART PERFORM, those with information to share
with others will be able to use the Company's proprietary intelligent agents to
describe the information so it can be found by others. For those needing
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information, other similar agents will cooperate with each other to find the
information and bring it to them. SMART PERFORM's agents can be dispatched to
continuously filter information, monitor activity, and represent the client in
the network. The more sophisticated, or "smart" these agents are, the more value
they provide and thus will command significant revenue.
The Company intends to market the use of its SMART PERFORM technology to
information rich/dependent organizations in financial services, high technology
suppliers, network providers, information resellers, and the government. To
date, no revenues have been derived from this product.
COMPETITION
Most of the competition for SMART PERFORM provides methodologies,
management, design, and consulting services (e.g., Ariel PCS, Beacon Knowledge
Group, Consultec, Gery Associates, PSS Group, RMR Conferences, User Technology,
WPI, and Cognitive Technologies). Others do provide limited software support,
but more oriented towards integrating existing software packages at a given
client's site (e.g. Baydon Ltd., BNG Expert Systems, PTS Learning Systems, RWD
Technologies, TTG Systems, and Usability Sciences). None claims to provide the
intelligent, dynamic composition of resource information in the same manner as
will SMART PERFORM.
The use of intelligent network agents (INA's) in commercial applications
like the INTERNET'S WORLD WIDE WEB is a relatively new phenomena. The increased
use of INA's has been brought about by the surging use of first generation
INTERNET search engines that exist in the market. These search engines are
limited to key word searches that often provide much more information than can
be practically used. INA's alleviate this problem by providing more useful
context-sensitive information to the user. Potential competitors in the area of
INA's are companies like Agents, Inc., an outgrowth of the Massachusetts
Institute of Technology's Media Lab; WebWatcher, created at Carnegie Mellon
University, AUTONOMY network agents created by Cambridge Neurodynamics; and
U-MEDIA, created by Empirical Media. These organizations are in the very early
stages of market deployment and enjoy no unique competitive advantage. The
Company believes that rapid market deployment of its CARNOT technology and
applications will lead to early prominence in the emerging market for network
performance support and intranet security.
SMART ENTERPRISE
Imagine the chief executive officer of a fortune 1000 corporation. The
problem: managing an increasingly complex enterprise without the benefit of
real-time, comprehensive and accurate information. The demand is increasing for
the executive to make the right decision the first time, every time. Drawing
upon revolutionary new computing technologies, the Company, has developed a
dramatic new solution which brings the organization directly to the executive's
fingertips. Now, the CEO can manage the company from the desktop. SMART
ENTERPRISE will offer a real-time window to any organization, from top to
bottom. Through the SMART ENTERPRISE portal, anyone with the proper authority
has the capability of accessing the corporation's vital information, information
which heretofore was inaccessible and virtually useless due to legacy hardware
and software. It will be a powerful new tool which any CEO can use to make key
strategic and operational decisions. Accounting data, inventory status, sales
revenues, product margins, and other vital data are accessible on a real-time
basis. In addition, SMART ENTERPRISE's powerful intelligent agents will assist
in monitoring and reporting their status. SMART ENTERPRISE offers a whole new
world of management capabilities such as reduced work effort, lower cost and the
elimination of inefficient processes, increased stewardship, feedback and
control. To date, no revenues have been derived from this product.
DATA CRYSTAL, acquired under exclusive worldwide license from the University
of Southern California is a project that applies advanced data mining
technologies to discovering useful patterns and trends from very large data
sets. It uses a general mechanism called "metapatterns"' to integrate deductive
database techniques, inductive data analysis tools, and human intuition into a
continuous discovery loop that is both interactive and autonomous. It has been
applied successfully in several real-world applications, including discovering
common-sense regularities from a large knowledge base, finding circuit patterns
from a telecommunications database, building prediction models from a chemical
research database, and constructing fault detection rules from a semiconductor
manufacturing control database. It will be used to complement Smart Enterprise.
To date, no revenues have been derived from this product.
SMART BEHAVIORAL MODEL MANAGER ("SBMM") is a specialized application of the
data mining technology inherent
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in CARNOT and DATA CRYSTAL. When complete, the Company expects it to be one of
the industry's most advanced device modeling applications. Modeling physical
network devices by their behavioral characteristics in reference to the
environment in which they operate will give the Network Administrator a better
understanding of the true "health" of the network. SBMM is designed to
interrogate the historical data collected and stored by any major, industry
standard network management server ("NMS") in order to create optimal "Envelope
Of Operation". These "Envelopes" can be created for virtually any industry
standard management value. The first version of SBMM will implement standard
SNMP data sets.
SALES AND MARKETING
SBMM is being designed for use in conjunction with standard network
management server products from companies like Cabletron, HP, Sun Microsystems
and IBM who already have large, well trained sales and support staff to support
their NMS products. GKIS will leverage off of those organizations in order to
reduce the cost of supporting the SBMM. These products will be marketed for a
price based on network size, similar to the way the underlying management
software is marketed. The marketing will be done for the most part by the
salespeople for the underlying NMS product. The Company's software is a valued
added that helps sell the underlying product. To date, no revenues have been
derived from this product.
Management believes that the anticipated market for SMART ENTERPRISE over
the next twelve months is mid to large sized enterprises which are experiencing
the need to improve the timeliness and quality of key enterprise data. Potential
near-term markets include SAP customers, the "Big-Six" accounting firms, and the
Fortune 1000.
COMPETITION
The Company is unaware of any direct competitor of Smart Enterprise, however
it should be assumed that there will be competitors. Indirect competitors are
work flow-enabled software products such as STAFFWARE, FLOWMARK, FLOWMAKER, SAP
and others.
INTELLECTUAL PROPERTY
The Company has applied for trademarks on Smart Support, Smart One Trainer,
Smart Enterprise, Smart Perform and Global Intelligent Network. There can be no
assurance that any trademarks will be issued. The Company has not filed for any
patent protection with the United States Government, and relies upon licensed
intellectual property.
In November 1995 the Company exchanged 883,333 shares of Series A Preferred
Stock in return for a non-exclusive, worldwide right and license to use the MCC
technology. This license precludes the Company from granting sub-license and the
terms for use are perpetual, provided the Company is not in breach. With this
agreement, the Company gained access to key technology with which it will
augment its three core product lines and technologies: SMART ONE, SMART PERFORM
and SMART ENTERPRISE as it designs and provides content for the GLOBAL
INTELLIGENT NETWORK.
In May 1997, the Company acquired from the University of Southern California
the Data Crystal License for a $25,000 license fee and certain royalty payments
of 5%- 40% from sales related to the licensed technology, not less than $25,000
nor more than $200,000 per year. The license is perpetual and exclusive. The
technology will be utilized in a substantial number of the Company's products.
In October 1993, the Company entered into a sub-contract agreement with AT&T
wherein AT&T developed for the Company a working prototype computer-based
training system to address skills training for the operation of combustible gas
indicators. The Company acquired this working prototype and paid AT&T
approximately $445,000. This prototype combined features of the Company's
proprietary SMART ONE program with tools developed by AT&T to provide a
functional adaptive dynamic user interface capable of capturing and recording
the current performance level of the user, evaluating that performance against
an expert user model, and adjusting the instructional session accordingly. This
prototype was the logical precursor to the current SMART ONE training product,
and serves as the architecture for current products.
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PRODUCT RESEARCH AND DEVELOPMENT
As a development stage company, the Company has had no revenue to date and
has incurred approximately $3.1 million in development stage cash outlays since
inception, as well as the issuance of the preferred shares issued to MCC. For
the fiscal years ending May 31, 1996 and 1997, research and development costs
were $59,629 and $52,884, respectively, which represent internally created
computer software products. It is expected that these expenses will continue,
and likely increase, in the future. Pursuant to contractual agreement, certain
third parties, including possibly customers, may perform research and
development activities in the future.
EMPLOYEES
As of August 29, 1997, the Company had nine employees. Of the nine
employees, three are executive officers, three are product managers, two are
research and development employees, and one is an administrative employee. None
of the Company's employees is covered by a collective bargaining agreement. The
Company believes that its employee relations are good. The Company intends to
hire additional personnel, as needed, in the future.
GLOSSARY
"Adaptive dynamic interfaces" Software which adjusts the presentation of
data or information in reaction to the
user's input, including evaluation by the
software of the user's response to the
computer program.
"AI algorithms" Mathematical formulae which allow computers
to sort data systematically and derive
conclusions from such data in a manner that
mimics human intelligence to some degree.
"Application software" Computer instructions designed to perform
tasks or produce results for a user. For
example, word processors, spreadsheets, and
database management systems fall under the
category of applications software.
"Artificial intelligence" Software which simulates the reaction of a
human being to data or external stimuli. The
abbreviated term is "AI".
"Autonomous context-sensitive
database searches" The ability of computer software to scan
through information contained in a
particular system without user direction or
control to find requested information in a
manner which changes based on the software's
perception of the type of data encountered.
"Computer data" The information stored in some form readable
by a computer which is created by or acted
upon by the computer system and its user.
"Computer hardware" The physical components of a computer. The
storage devices and display devices are
hardware.
"Computer software" The directions or instructions which control
a computer and produce the desired work
product or effect from its use, including
both operating system software and
applications software, as well as the data
itself. Anything that can be stored
electronically is software.
"Conceptual querying" The ability of software to search for
information based on descriptive terminology
which discriminates among data by its
characteristics or the relative value of the
chosen characteristics.
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"Data mining" The process of extracting useful information
from large volumes of seemingly meaningless
data.
"Developed Countries" Also called "First World" countries. Those
countries which have most optimally
exploited their natural resources, whose
citizens have higher natural living
standards, productivity and other
measurements of relative wealth.
"Disparate computer systems" Computer systems which differ in operating
systems or physical construction such that
direct use of one computer's data by the
other is difficult. See "disparate
databases".
"Disparate databases" Information stored on different types of
computer systems, whether the differences
are in operating systems, software or
hardware. Usually direct access to data in
the form it is stored on a computer is
limited to other systems using the same
operating system and/or the same software
which created the record.
"Dynamic Hyperlinking" The capability to create "on-the-fly"
presentations from various text or other
media files with no regard to the files'
locations or type.
"Functionality, robustness, and
architectural integrity" Description of the greater usefulness,
absence of failure and consistency of
performance exhibited by mature software
products sold to typical consumers.
"Heterogeneous access" The ability to extract or otherwise use data
(or information) contained in the database
(or storage device or memory) of different
types of computer systems which normally
don't communicate readily with systems not
using the same software or operating system.
"Hyperlink" An Internet term describing the word or
phrase in a Web site document which gives
the viewer ability to jump from one data
location to another by mouse clicking.
"Intelligent tutoring" The use of intelligent agents and adaptive
dynamic interfaces to train or educate the
user of the software in a manner approaching
that of a human tutor.
"Internet" A loose confederation of computer networks
around the world. The networks that make up
the Internet are connected through several
backbone networks. The Internet grew out of
the U.S. Government ARPAnet project, and is
specifically designed to have no central
governing authority.
"Lesser Developed Countries (LDCs)" Also called Third World countries. The
countries are described by the United
Nations as in need of technology from the
developed countries in an effort to improve
relative to the wealthier countries.
"Multimedia database
authoring tools" Software which stores all types of images,
text, or other data and then arranges all
into a coherent presentation based on rules
or directions established by the user (the
"author").
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"Object-oriented programming" Software which treats data, hardware
devices, or even certain aspects of the
software as objects which can be manipulated
or addressed for further use.
"On-the-job training" Personalized training programs provided to
users according to their preferences.
"Operating system" The underlying software which allows
application software to function without
having to directly address each individual
computer's hardware components.
"Performance support" Providing as needed support to individuals
in the course of their daily routine.
"Semantic agents" Advanced computing technologies. In the
computing world, agents are software which
has been designed to perform sophisticated
duties often bordering on the thinking
capability of humans. Agents could be
assigned specific responsibilities such as
accessing and retrieving information, or
searching for trends and similarities among
different forms of information. These
activities may be triggered by a user's
request, or they may occur without
solicitation, although ultimately serving to
benefit the user's needs.
"Strategic resource model manager" Software which creates a representation of a
business or government's distinctive
characteristics or attributes and allows the
user to manipulate each characteristic
separately and realistically in a
predictable manner.
"Systems software" Includes the operating system software and
all the utilities software that enable the
computer to function.
"Virtual organization" An economic, business or governmental entity
which has little infrastructure, relying
instead on subcontractors and vendors to
perform most of its functions.
"Web site" A site (location) on the World Wide Web.
Each Web site contains a home page, which is
the first document users see when they enter
the site. The site might also contain
additional documents and files. Each site is
owned and managed by an individual, company
or organization.
"World Wide Web" A system of Internet servers that support
specially formatted documents. The documents
are formatted in a language called HTML
(HyperText Markup Language) that supports
links to other documents, as well as
graphics, audio, and video files. This means
the user can jump from one document to
another simply by clicking on hyper links.
Not all Internet servers are part of the
World Wide Web. There are software
applications called Web browsers that make
it easy to access the World Wide Web; two of
the most popular are Netscape Navigator and
Microsoft's Internet Explorer.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical and pro forma financial data set forth below for
each of the years ended May 31, 1997 and
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1996 and for the period from inception (October 4, 1993) through May 31, 1997
have been derived from the Company's historical financial statements. The
selected pro forma balance sheet as of May 31, 1997 gives effect to the issuance
of 2,900,000 million shares of Common Stock to the majority stockholder,
employees and key professionals subsequent to May 31, 1997 as if the issuance
had occurred on or before May 31, 1997.
The Company is a development stage enterprise engaged in the acquisition,
development and marketing of sophisticated software products and applications.
To date, the Company has realized no revenues and its activities have been
limited to the acquisition of software assets used to develop a comprehensive
foundation for its planned line of intelligent products and applications,
research and development of software products and initial marketing activities.
As a result, management does not consider the historical results of operations
to be representative of future results of operations of the Company.
<TABLE>
<CAPTION>
Historical
-----------------------------------
Inception Year ended
(October 4, May 31, Pro
1993) through -------------------- Forma at
May 31, 1997 1996 1997 May 31, 1997(1)
------------- --------- -------- ---------------
(In thousands, except per share data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .............................................. $ -- $ -- $ --
Expenses:
Depreciation and amortization ....................... 1,345 496 820
Software research and development ................... 113 60 53
President's compensation ............................ 3,308 357 2,523
Employee compensation ............................... 890 -- 890
Professional services ............................... 5,821 629 4,964
Other general and administrative .................... 724 257 278
-------- -------- --------
Net loss .............................................. $(12,201) $ (1,799) $ (9,528)
======== ======== ========
Net loss per share .................................... $ (1.44) $ (.21) $ (.89)
======== ======== ========
Weighted average number of shares outstanding ......... 8,461 8,392 10,671
======== ======== ========
</TABLE>
BALANCE SHEET DATA:
Assets:
Current assets ...................................... $ 407 $ 407
Computer software costs, net ........................ 2,757 2,757
Other assets ........................................ 225 225
-------- --------
Total assets .......................................... $ 3,389 $ 3,389
======== ========
Liabilities and stockholders' equity (capital deficit):
Accrued compensation ................................ $ 5,800 $ --
Other current liabilities ........................... 330 330
Capital lease obligations, less current portion ..... 93 93
Stockholders' equity (capital deficit) .............. (2,834) 2,966
-------- --------
Total liabilities and stockholders' equity
(capital deficit) ................................... $ 3,389 $ 3,389
======== ========
- -------------------
(1) The proforma presentation assumes that the issuance of 2,900,000 shares
of the Company's Common Stock to the majority stockholder, employees and
key professionals subsequent to May 31, 1997, occurred on or before May
31, 1997.
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GENERAL
The Company was formed in October 1993 and the results of operations for the
period from October 4, 1993 (inception) to May 31, 1997 and for the years ended
May 31, 1996 and 1997 reflect start-up costs and the costs of developing and
commercializing the Company's software. The Company had a net loss of
$12,201,379 and no revenues for the period from inception. The Company is
currently completing (i) its first reseller end-user license of its SMART ONE
Trainer with SGD Corporation ("SGD") to sell the Company's Internet trainer
software with SGD's notebook computers and (ii) a demonstration (or pilot)
project for the United Nations Office of Project Services ("UNOPS"). In May
1997, the Company entered into an agreement with SGD where it provided $2.5
million of barter credits to be used by the Company to reduce its cost of
certain goods and services that are purchased through SGD subsequent to the date
of the agreement. As of August 29, 1997, the Company had received no revenues
from either the United Nations or SGD and there can be no assurance that any
revenues will be received.
Expenses incurred in connection with development projects are primarily
related to staff salaries and subcontract costs and may sometimes be offset by
any expense reimbursements paid by the customer for the development project.
Costs of internally created computer software products are charged to expense
when incurred as research and development until technological feasibility has
been established for the product. The timing of any revenues from a successful
development project will vary by project.
Any Company revenues may vary significantly both in the case of consecutive
quarters and in the case of a quarter compared to the corresponding quarter of
the preceding year. Such variations may result from, among other factors,
lengthy development and testing for SMART ONE Trainer and CARNOT derived
applications that the Company might develop, timing of new product and service
introductions by the Company and its competitors, changes in levels of the
Company's operating expenditures, including the Company's expenditures on
research and development, the size and timing of customer orders, the amount and
timing of royalty payments and license fees by licensees, as well as consulting,
training and maintenance fees, increased competition, reduced prices, the effect
of currency exchange rate fluctuations, delays in the development of new
products, the costs associated with the introduction of new products and the
general state of national and global economies. The Company expects to derive
substantially all of its revenues from transaction fees associated with the use
of its software by end users, as well as royalties and license fees, and
transaction, training and maintenance fees. Accordingly, any Company revenues
will vary with the demand for its products and services. In addition, the
Company expects that it typically will require significant up-front payments
from customers if it establishes a site or entity-wide license arrangement.
Accordingly, the timing of receipt of payments and the recognition of revenues
in a given period could result in significant periodic fluctuations in liquidity
and financial results. As a result of such factors, any revenues for any
particular quarter are not necessarily indicative of any future results.
The Company has suffered recurring operating loses since its inception that
raise substantial doubt about its ability to meet future expected expenditures
necessary to fully develop its software products and applications and to
continue as a going concern. The Company's independent accountants have issued
an explanatory paragraph in their opinion with respect to the Company's
financial statements for the year ended May 31, 1997 regarding the uncertainty
concerning the Company's ability to continue as a going concern. The current
cash forecast indicates that there will be negative cash flow from operations
for at least the first three quarters of the fiscal year ended May 31, 1998. The
Company is currently seeking short and long time debt or equity financing
sufficient to fund projected working capital and software product development
needs. However, there is no assurance that any proceeds will be obtained or that
the Company will reach a positive cash flow position in the future. Failure to
obtain sufficient funding will adversely impact the Company's financial
position.
NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS
128). This pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with Accounting Principles Board
Opinion (APB) No. 15, EARNINGS PER SHARE. SFAS 128 provides for the calculation
of "basic" and "diluted" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share.
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The Company will adopt SFAS 128 in 1998 and its implementation is not expected
to have a material effect on the financial statements.
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods ending
after December 15, 1997, establishes standards for disclosing information about
an entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 19 is not
expected to have an effect on the Company's financial statements as it currently
discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued the two
following disclosure standards; results of operations and financial position
will be unaffected by implementation of these new standards.
(a) Statement of Financial Accounting Standards 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SPAS 130 requires all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
(b) Statement of Financial Accounting Standards 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers . SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to evaluate the impact, if any, they may have on
future financial statement disclosures.
RECENT DEVELOPMENTS
For the year ended May 31, 1997, the Company incurred a net operating loss
of $9,528,473, incurred in large part due to (i) the Board's actions in awarding
2,900,000 shares of the Company's common stock valued at $ 5.8 million to
officers, directors, employees and key professionals in recognition of their
services and loyalty to the Company and (ii) expenses for corporate matters
undertaken with respect to its underlying technology contracts and to prepare
for the Company's initial filing of Form 10-SB. The Company's net loss for the
year ended May 31, 1997 included $820,497 of depreciation and amortization. At
May 31, 1997, the Company's total current assets (pro forma) were $406,988 and
its total assets (pro forma) were $3,388,703. Current liabilities (pro forma) at
May 31, 1997 were $329,714, total long-term liabilities (pro forma) were $93,353
and stockholders' equity (pro forma) was $2,965,636.
RESULTS OF OPERATIONS
REVENUES. There were no revenues for the year ended May 31, 1997 and none
for the period from October 4, 1993 (inception) to May 31, 1997. The Company
does not expect to begin to realize any significant revenues from such
agreements until at least the end of the third quarter of the fiscal year ended
May 31, 1998. The Company has also entered into an exclusive licensing agreement
with a computer manufacturing which calls for only non cash consideration in the
stated amount of $2,500,000, which the Company expects to utilize to reduce its
future cash operating costs, primarily in the area of major media advertising.
EXPENSES. The Company's expenses are primarily officers and employee
compensation and related employee costs,
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research and development costs, professional fees, depreciation and amortization
and other general and administrative expenses.
Expenses during the fiscal year ended May 31, 1997 increased by $7,728,956
(430%) over the year ended May 31, 1996, primarily due to increases in officers
compensation and professional fees. Research and development expenses decreased
by 11 % to $52,884 in the fiscal year ended May 31, 1997, compared to $59,629 in
the fiscal year ended May 31, 1996. The Company expects to incur substantially
increasing research and development expenses in the foreseeable future.
Marketing expenses were inconsequential in these years but are expected to
increase in the future. General and administrative expense increased by 8% to
$278,436 in the fiscal year ended May 31, 1997, compared to $256,954 in the
fiscal year ended May 31, 1996. Employee compensation increased to $889,527 in
the fiscal year ended May 31, 1997, compared to none in the fiscal year ended
May 31, 1996. In addition, for the fiscal year ended May 31,1997 there were an
average of six employees compared to none for the fiscal year ended May 31,
1996. The increase in general and administrative expense was primarily because
the Company moved its offices, consisting of 1400 square feet, from Atlanta to
Houston, and increased the offices' size to 4500 square feet.
Depreciation and amortization increased by 65% to $820,497 in the fiscal
year ended May 31, 1997 compared to $496,127 in the fiscal year ended May 31,
1996. Depreciation increased because of new furniture and equipment purchased
for the new location and amortization increased because major acquisitions of
software were amortized longer periods of time in 1997 than in 1996.
Officers compensation increased by 606% to $2,523,443 in the fiscal year
ended May 31, 1997 from $357,473 in the fiscal year ended May 31, 1996.
Professional fees increased by 689% to 4,963,686 in the fiscal year ended May
31, 1997, compared to $629,334 in the fiscal year ended May 31, 1996. These
increases were principally due to the fact that in the fiscal year ended May 31,
1997, the Company awarded 2,900,000 shares of its restricted common stock to
officers, employees and key professionals in recognition of their services and
loyalty to the Company from inception or hire date, and the shares were valued
at the market value on the date of the award. However, since the shares were not
formally issued until after May 31, 1997, the pro forma balance sheet as of May
31, 1997 reflects the common stock issuance as if it had occurred on or before
May 31, 1997. Most of the remaining increase represents approximately $100,000
in legal fees associated with financing activities and the filing of Form 10-SB
to become a reporting company. The Company expects continued significant legal
costs to be incurred in connection with corporate matters undertaken in
compliance with the reporting obligations applicable to it as a newly reporting
public company .
As of May 31, 1997, for federal income tax purposes, the Company reported an
aggregate of approximately $4,859,000 of available net operating loss ("NOL")
carry-forwards incurred during the period from its inception (October 4, 1993)
to May 31, 1997. These NOL carry-forwards may be available to the Company to
offset future taxable income through the year 2012. However, the conversion of
some or all of the outstanding shares of Series A Preferred Stock or outstanding
common stock warrants, or other future issuances of common or preferred stock
may result in a change in control for federal income tax purposes that could
significantly limit the amount of the NOL that could be used to offset future
taxable income in any one year. There can be no assurance that the Internal
Revenue Service will not challenge the existence or the amount of such NOL carry
forwards.
FOREIGN EXCHANGE.
The Company currently has no exposure to foreign currency exchange rate
fluctuations. The Company will seek to minimize its exposure to foreign currency
exchange rate fluctuations by requesting that its customers, distributors, and
VARs enter into contracts denominated in United States dollars or by entering
into transactions to attempt to hedge some of the risks of foreign currency
exchange rate fluctuations.
HISTORICAL CASH FLOWS.
OPERATING ACTIVITIES. Cash used in operating activities for the year ended
May 31, 1997 was $1,238,289, an increase of $478,331 from that of the year ended
May 31, 1996 and more than half of the $2,237,426 cash used in operations for
the period from October 4, 1993 (inception) to May 31, 1997. The cash was used
primarily to pay the Company's expenses for officers and employee compensation
and related employee costs, research and development costs, professional fees,
and other general and administrative expenses.
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INVESTING ACTIVITIES. In addition to funding its operating activities, the
Company used cash to purchase software and other capital items, $131,143 and
$39,215, respectively, during the year ended May 31, 1997 and $130,000 and
$13,136, respectively, during the year ended May 31, 1996. Including
organization costs of $78,745, the Company has used $798,366 for software and
other capital expenditures since inception (October 4, 1993) through May 31,
1997.
FINANCING ACTIVITIES. The Company has financed its operating and investing
activities since inception (October 4, 1993) primarily from the proceeds of
private placements, which total $2,936,965 through May 31, 1997. Over one-half
of the total proceeds from private placements, or $1,806,156, was received in
the year ended May 31, 1997 and almost one-third, or $904,408, received in the
year ended May 31, 1996. The company also received financing in the form of
loans, primarily from investors and not financial institutions. Of the total of
$566,269 in loans received by the Company from inception (October 4, 1993)
through May 31, 1997, the Company repaid $471,257 via the issuance of 250,000
restricted shares of its Common Stock during the year ended May 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through private
sales of its equity securities. The Company has raised a total of approximately
$3,408,222. Of this total, $471,257 was raised in connection with the initial
capitalization of the Company at its merger with LBM-US, Inc. and the conversion
of the related debt in the year ended May 31, 1996, $226,401 was raised in
private placements of equity securities in the period from inception (October 4,
1993) through May 31, 1995, $904,408 in private placements of equity securities
in the year ended May 31, 1996 and $1,806,156 in private placements of equity
securities in the year ended May 31, 1997. In addition to the sale of equity
securities, the Company issued its convertible preferred shares for software
technology valued at $3,389,432 in the year ended May 31, 1996.
Accounts payable and accrued compensation increased by $5,535,038 to
$6,107,566 at May 31, 1997 from $572,528 at May 31, 1996. Such increase in
accounts payable and accrued expenses is primarily due to an increase in accrued
compensation arising from the Board's actions in awarding 2,900,000 shares of
stock to officers, directors, employees and key professionals for services. At
May 31, 1997, the Company had negative working capital of $5,722,726, arising
from the valuation of the accrued stock compensation of $5,800,000. Pro forma
working capital at May 31, 1997, reflecting the issuance of stock in payment of
the accrued compensation after balance sheet date, was $77,274.
Based on the Company's current plan of operations it is anticipated that its
current cash balance will provide sufficient working capital for at least three
months. The Company will need additional financing during such three month
period and thereafter if demand for SMART ONE training or its other products is
sufficiently great to require expansion at a faster rate than anticipated, or if
research and development expenditures or the extent of service and customer
support that the Company is required to provide are greater than expected or
other opportunities arise which require significant investment. Additionally,
the Company may require significant additional financing to complete any
acquisition. If financing is required, such financing may be raised through
additional equity offerings, joint ventures or other collaborative
relationships, borrowings and other sources. To date, the Company has no
commitment for any such additional financing and there can be no assurance that
any such financing will be available or, if it is available, that it will be
available on acceptable terms. If adequate funds are not available to satisfy
either short or long-term capital requirements, the Company may be required to
limit its operations significantly. The Company does not expect that its
internal source of liquidity will improve until net cash is provided by
operating activities and, until such time, the company will rely upon external
sources for liquidity.
Over the next 12 months, the Company intends to develop SMART ONE training
products, as well as its SMART ENTERPRISE products and its SMART SUPPORT
products such as SMART BEHAVIORAL MODEL MANAGER, SMART PERFORM and the UN demo
project, carry out research and development on other potential intelligent
agent- heterogenous access, Carnot derived applications and market SMART
ENTERPRISE to large scale computer users and SMART BEHAVIORAL MODEL MANAGER to
various VARs. Additionally, the Company will seek to offer the use of SMART ONE
Hazardous Materials Trainer through a joint venture with the U.S. Department of
Transportation, as a service bureau offering electronic data interchange
services using SMART ONE to customers who believe their need for SMART ONE
training is not constant enough to warrant a direct end-user license. The
Company expects that the initial start-up costs for the DOT/HazMats Division
will not exceed $250,000. Because no one customer is expected to generate
significant revenue, the profitability of the DOT/HazMats Division will depend
upon the Division having a large
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<PAGE>
volume of customers. The Company intends to add approximately 20 staff members
during the next 12 months. These will be primarily for (i) installation,
consulting and support relating to SMART ONE training applications, SMART
BEHAVIORAL MODEL MANAGER and SMART ENTERPRISE and (ii) sales and marketing to
large scale computer users and VARs. Employee costs are expected to increase
significantly as a result of the salaries and benefits of the additional
personnel who will be hired during the next twelve months.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases approximately 4,500 square feet of office space in
Houston, Texas, at an approximate cost of $15 per square foot pursuant to a
five-year lease, which it believes will be adequate to meet its current needs.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 29, 1997, the number and
percentage of outstanding shares of Company Common Stock owned by (i) each
person known to the Company to beneficially own more than 5% of its outstanding
Common Stock, (ii) each director, (iii) each named executive officer, and (iv)
all executive officers and directors as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES OF COMMON PERCENTAGE OF
BENEFICIAL OWNER (1) STOCK BENEFICIALLY OWNED OWNERSHIP
-------------------- ------------------------ ---------
<S> <C> <C>
Kimmons Family Partnership, 6,375,000 40.5%
Ltd.(2)
Gary F. Kimmons 9,754,080(3) 66.2%
Joseph D. Ben-Dak 1,000,000(4) 6.4%
Rodney L. Norville 1,050,000(5) 6.7%
Jedson Enterprises, Trustee(6) 1,050,000 6.7%
All executive officers and directors
as a group (3 persons) 11,804,080 77.8%
</TABLE>
- --------------------------
(1) The business address of each principal stockholder is the same as the
address of the Company's principal executive offices.
(2) Mr. Kimmons controls a family limited partnership of which he is general
partner, and as such has the sole voting, investment and disposition power
over the 6,375,000 shares of Company stock owned by the partnership. Prior
to September 2, 1997, these shares were owned by GK-Texas, which formally
merged with the Company on September 2, 1997.
(3) Includes the 6,375,000 shares owned of record by the Kimmons Family
Partnership, which Mr. Kimmons controls, and warrants to purchase 2,000,000
shares of Company Common Stock expiring in 2001.
(4) Dr. Ben-Dak's shares do not include his unvested warrants to purchase
500,000 shares of Company Common Stock expiring in 2001.
(5) Includes the 1,050,000 shares owned of record by Jedson Enterprises, Inc.,
Trustee for Jenifer and Lara Norville, daughters of Rodney L. Norville.
(6) Mr. Norville is an officer and director of Jedson Enterprises, Inc., which
is trustee of trusts which own 1,050,000 shares of Company common stock, and
as such has the voting, investment and disposition power over these shares.
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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Company's directors and executive officers are:
NAME AGE POSITION
---- --- --------
Gary F. Kimmons 46 Chairman of the Board of Directors,
Chief Executive Officer and President
Joseph D. Ben-Dak, Ph.D. 53 Vice Chairman of the Board and
Senior Vice President-International
Affairs
Rodney L. Norville 50 Vice President and General Counsel
GARY F. KIMMONS has served as chairman of the board and chief executive
officer of the Company since August 1994. Mr. Kimmons is also a director,
officer and principal shareholder of GK-Texas, I-NET(Delaware) and Gary Anthony,
Inc., a Texas corporation. Mr. Kimmons has extensive experience in the design,
development and implementation of business management and technical training
systems. From 1986 until forming I-NET(Delaware) in 1993, Mr. Kimmons operated
Gary Anthony, Inc, a privately held corporation specializing in developing
training programs. From 1981 to 1986, Mr. Kimmons was the manager of human
resource development and employee communications at Reading & Bates Corporation.
Mr. Kimmons received a bachelor of science degree in psychology, anthropology
and behavioral science from Rice University in 1973 and a masters degree in
applied industrial psychology and management science from Stevens Institute of
Technology in 1975.
JOSEPH D. BEN-DAK, PH.D. has served as vice chairman of the board of
directors, in charge of international affairs, since September 1996. He has
recently undertaken the full-time project on behalf of the Company, as Senior
Vice president, to establish world wide alliances in furtherance of the
Company's Global Intelligent Network. He is currently on leave of absence from
the United Nations, where his last position was as Chief of the Global
Technology Group of the United Nations Development Program. Dr. Ben-Dak's
professional credentials include international intellectual property rights, and
assignments as a governmental advisor on matters including strategic economic
planning, security and defense. He has been an advisor to the countries of
Japan, Korea, Tanzania, Papua New Guinea, Colombia, and Brazil, as well as sixty
other nations ranging from the Pacific Rim to Africa to Central America and
North America. He was the Academic Director of the Israeli Air Force School for
Senior Officers. He recently held positions, from 1989-91, as a Senior UN
Official in building strategic management and joint venture development for
newly industrialized countries. Dr. Ben-Dak has authored more than ten books and
received Ph.D.s from the University of Michigan in Organizational Sociology and
Conflict Resolution. He has also taught or lectured in 10 universities in seven
different countries. Additionally, he is the United Nations representative on
the World Trade Association of Industrial, Technological and Research
Organization (WAITRO).
RODNEY L.("ROD") NORVILLE has served as vice president and general counsel
since December 1996. Mr. Norville has been a certified public accountant since
1971, has had his own legal practice since 1978, and is Board Certified in Tax
Law by the Texas State Board of Legal Specialization. From 1975 to 1980, Mr.
Norville was an assistant professor in the School of Business at Texas Southern
University. Mr. Norville received a bachelor of arts degree in economics and
business administration in 1969 from Rice University, a bachelor of science
degree in accounting in 1970 from Rice University, a master of accounting degree
in 1975 from the Jones Graduate School of Administration at Rice University, and
a juris doctor degree from the University of Houston's Bates College of Law in
1978.
The directors of the Company hold office until the next annual meeting of
stockholders of the Company and until their successors in office are elected and
qualified. The Company has not established and does not maintain any
compensation, audit, executive or nominating committees. All officers serve at
the discretion of the Board of Directors.
There are no family relationships between executive officers and directors.
A non-executive officer, Kathryn Kimmons, is the wife of Gary Kimmons. Other
than the director's compensation paid to Dr. Ben-Dak pursuant to his
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<PAGE>
consulting agreement as disclosed in "Executive Compensation," no fees or other
compensation are paid to directors for serving as a director.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Bonus/
Other Securities
Annual Underlying All Other
Name and Principal Fiscal Compen- Stock Options/ LTIP Compen-
Position Year Salary sation Award(1)(2) SARs Payouts sation
- ------------------- ---- -------- ------- --------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary F. Kimmons, .. 1997 $240,000(2)(3) -- 100,000 2,000,000 -- --
CEO ............... 1996 $240,000 -- 240,000 -- -- --
1995 $240,000 -- 92,580 -- -- --
Rodney L. Norville, 1997 $ 60,000 -- 200,000 -- -- --
V.P ............... 1996 -- -- -- -- -- --
1995 -- -- -- -- -- --
Joseph D. Ben-Dak, 1997 $ 45,000 -- 50,000 500,000 -- --
Sr. V.P ........... 1996 -- -- -- -- -- --
1995 -- -- -- -- -- --
</TABLE>
- ---------------------
(1) These issuances of Company Common Stock were awarded for services
rendered.
(2) In fiscal 1998, Messrs. Kimmons, Norville and Ben-Dak were issued
1,000,000 shares, 800,000 shares and 950,000 shares, respectively, for
services rendered.
(3) As of May 31, 1997, $154,723 of this salary was accrued.
In December 1993, Mr. Kimmons entered into a three-year employment agreement
with the Company that automatically renews at the end of the term for
consecutive one-year terms, and which provides for an annual base salary of
$240,000, plus incentives (annual and long-term), retirement benefits, welfare
benefits and fringe benefits customary for the Company's industry. Upon the
termination of the employment agreement by the Company, other than for cause or
disability, (i) the Company shall pay the employee an amount equal to
approximately three times the sum of the annual base salary and the average of
the last three annual incentive bonuses actually paid, and (ii) any such options
owned by Mr. Kimmons shall immediately vest. In addition, in the event that any
payment or distribution by the Company to Mr. Kimmons is determined to be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code,
the Company shall pay to Mr. Kimmons an additional "gross-up payment" to
compensate for such excise tax.
In December 1996, Mr. Norville entered into a three-year employment
agreement with the Company which provides for an annual salary of $120,000, plus
retirement benefits, welfare benefits and fringe benefits customary for
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<PAGE>
the Company's industry. Upon the termination of the employment agreement by the
Company, other than for cause or disability, (i) the Company shall pay the
employee an amount equal to approximately three times the sum of the annual base
salary and the average of the last three annual incentive bonuses actually paid,
and (ii) any such options owned by Mr. Norville shall immediately vest. In
addition, in the event that any payment or distribution by the Company to Mr.
Norville is determined to be subject to the excise tax imposed by Section 4999
of the Internal Revenue Code, the Company shall pay to Mr. Norville an
additional "gross-up payment" to compensate for such excise tax. In September,
1997, the Board increased Mr. Norville's salary to $180,000 and appointed him to
a membership position on the Board of Directors.
In September 1996, Dr. Ben-Dak entered into an outside director's and
consulting contract which provides for director's fees of $5,000 per month,
warrants to purchase 500,000 shares of Company Common Stock vesting over a five
year period, as well as incentives for referrals and assistance with sales. In
connection therewith, Dr. Ben-Dak was issued 50,000 shares of Company Common
Stock. In June 1997, Dr. Ben-Dak's fee was increased to $20,000 monthly (or
$240,000 annually) and his consulting services became full-time for the period
of his leave of absence from the United Nations. At the same time, Dr. Ben-Dak
was named Senior Vice President for International Affairs. In August 1997, Dr.
Ben-Dak received 950,000 shares as compensation.
In September 1997, the Company voted to pay Kathryn Kimmons a salary of
$60,000 for her services as corporate secretary (a non-executive office).
STOCK OPTIONS AND WARRANTS
During 1996 the Company adopted, and the Board of Directors approved, the
1995 Stock Option Plan. Pursuant to the plan, options to purchase up to
1,000,000 shares of Common stock may be granted to employees, officers and
directors of the Company. The terms of such options are to be determined by a
committee appointed by the Board of Directors and the exercise price of options
must be 100% of the fair market value of a share of Common Stock on the date the
option is granted. No options have been granted under the Company's Stock Option
Plan. The Company does not maintain any long-term retirement or other benefit
plan.
The warrants to Dr. Ben-Dak and Mr. Kimmons were not granted under such
plan. The following table provides information on the warrants granted by
contract to the indicated officer and director:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NAME SHARES UNDERLYING PERCENT OF EXERCISE PRICE EXPIRATION DATE
WARRANTS GRANTED TOTAL GRANTS
<S> <C> <C> <C> <C>
Joseph D. Ben-Dak 500,000 33.3% 75% of Market 09/30/06
Gary Kimmons 2,000,000 66.7% $1.00 09/01/01
</TABLE>
AGGREGATED WARRANT EXERCISES IN 1996
AND YEAR-END WARRANT VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF
NAME ACQUIRED VALUE UNDERLYING UNEXERCISED UNEXERCISED
ON REALIZED OPTIONS IN-THE-MONEY
EXERCISE OPTIONS(1)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Gary Kimmons - - 2,000,000 - $1,250,000 $ 0
Joseph Ben-Dak - - - 500,000 $ 0 $203,125
</TABLE>
- ----------
(1) Computed based on the differences between the fair market value and
aggregate exercise prices.
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<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's acquisition of intellectual property from
GK-Texas, the Company issued Gary F. Kimmons and his family partnership
6,375,000 shares of Common Stock. In connection with the inception of the
Company, Mr. Kimmons conveyed the intellectual property to a predecessor of
GK-Texas for nominal consideration. From inception through fiscal 1995, Mr.
Kimmons was issued 92,580 shares of Common Stock for services rendered for
nominal consideration. During the fiscal year ended May 31, 1996, Mr. Kimmons
was issued an aggregate of 240,000 shares of Common Stock for services rendered
to the Company for nominal consideration. In September 1996, Mr. Kimmons was
issued a five year warrant to purchase 2,000,000 shares of Company Common Stock
at an exercise price of $1. During the Fiscal year ended May 31, 1997, Mr.
Kimmons was issued an additional 100,000 shares of Common Stock for nominal
consideration. In August 1997, Mr. Kimmons was issued 1,000,000 shares for
nominal consideration. As of May 31, 1997, $154,723 of Mr Kimmons' salary was
accrued.
Jedson Enterprises, Inc. - Trustee, an entity controlled by Mr. Norville,
acquired 24,000 shares of Common Stock at a purchase price of $.50 per share in
May 1994, 26,000 shares of Common Stock for nominal consideration in January
1995, 100,000 shares of Common Stock for nominal consideration in December 1996,
100,000 shares of Common Stock for nominal consideration in May 1997, and
800,000 shares for nominal consideration in August 1997.
In September 1996, Dr. Ben-Dak was issued a ten year warrant to purchase
500,000 shares of Company Common Stock at an exercise price of 75% of the market
value on the date of exercise, and 50,000 shares of Company Common Stock. In
August 1997, Dr. Ben-Dak was issued 950,000 shares of Company Common Stock as
compensation for services rendered.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company commencing on page F-1 have been
audited by BDO Seidman, LLP, independent certified public accountants, to the
extent and for the periods set forth in their reports (which contain an
explanatory paragraph regarding the Company's ability to continue as a goring
concern) appearing elsewhere herein and are included in reliance upon such
reports given upon the authority of said firm as experts in auditing and
accounting.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
of which 15,736,929 shares are issued and outstanding as of August 29, 1997, and
4,215,432 shares are reserved for issuance pursuant to the exercise of
outstanding warrants.
The holders of shares of Common Stock are entitled to one vote per share on
each matter submitted to a vote of stockholders. In the event of liquidation,
holders of Common Stock are entitled to share ratably in the distribution of
assets remaining after payment of liabilities. Holders of Common Stock have no
cumulative voting rights, and, accordingly, the holders of a majority of the
outstanding shares have the ability to elect all of the directors. Holders of
Common Stock have no preemptive or other rights to subscribe for shares. Holders
of Common Stock are entitled to such dividends as may be declared by the Board
of Directors out of funds legally available therefor.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock, $.001 par value per share. The Preferred Stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion, redemption rights and
sinking fund provisions.
SERIES A PREFERRED STOCK
In February 1996, the Board of Directors created the convertible redeemable
series A preferred stock, stated value $6.00 per share ("Series A Preferred
Stock"), and authorized the issuance of 883,333 shares thereof. Commencing
January 1, 1998, the Series A Preferred Stock: (i) accrues cumulative cash
dividends per share at an annual rate equal to 6%, payable in equal semi-annual
installments; (ii) is redeemable at the option of the Company; and (iii) is
convertible by the holders thereof at an initial conversion price of $6.00 per
share. The Series A Preferred Stock carries a liquidation preference of $6.00
per share. The holders of the Series A Preferred Stock are entitled to vote,
beginning January 1, 1998, even if not converted, together with the shares of
the Company's Common Stock, on all matters presented at any annual or special
meeting of the stockholders of the Company, or may act by written consent in
same manner as the holders of the Company's Common Stock. Each holder of Series
A Preferred Stock shall be entitled to
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<PAGE>
cast that number of votes for each share of Preferred Stock held by such holder
on the record date fixed for such meeting or on the effective date of such
written consent, as shall be equal to the number of shares of the Company's
Common Stock into which each of such shares of Preferred Stock is convertible
immediately after the close of business on the appropriate record date. The
voting rights of the holders of the Company's Common Stock will be diluted upon
conversion of the Preferred Stock and the holders of the Preferred Stock will
have preferential dividend and liquidation rights over the holders Common Stock.
The issuance of any additional shares of Preferred Stock could adversely affect
the rights of the holders of Common Stock and, therefore, reduce the value of
the Common Stock. In February 1996, the Company issued all 883,333 shares of its
Series A Preferred Stock to MCC pursuant to the Company's license agreement with
MCC dated November 1995.
WARRANTS
The Company has issued, or committed to issue, 4,215,432 warrants, with
exercise prices ranging from $.875 to $2.00 per share, the latter of which
expire February 2007. The warrants contain anti-dilution provisions, providing
for appropriate adjustments in the event of any recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
holders of warrants have no voting, dividend or other rights as shareholders of
the Company with respect to the shares underlying the warrants until the
warrants are exercised.
REGISTRATION RIGHTS
The holder of 883,333 shares of Company preferred stock has been granted one
right to demand registration in a secondary offering by means of shelf
registration under Rule 415 of the Securities Act that may be requested by the
holder in January 1998, and unlimited rights to register on a piggyback basis in
a firm commitment underwritten offering of Company securities. The holder's
rights expire two years after the preferred stock has expired.
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<PAGE>
PART II
ITEM 1. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock trades under the symbol "GKIS" on the OTC
Electronic Bulletin Board. The market for the Company Common Stock on the OTC
Electronic Bulletin Board is limited, sporadic and highly volatile. The
following table sets forth the high and low bid prices per share of the
Company's Common Stock since trading commenced on the OTC Electronic Bulletin
Board on October 3, 1994, as reported by the OTC Electronic Bulletin Board.
These prices reflect inter-dealer prices, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.
HIGH LOW
--------- --------
FISCAL 1996
First Quarter ...... $ 8 1/4 $ 7 3/4
Second Quarter ..... 3 3/4 1 1/4
Third Quarter ...... 3 1/2 5/8
Fourth Quarter ..... 1 3/4 3/8
FISCAL 1997
First Quarter ...... $ 1 5/8 $ 1/2
Second Quarter ..... 2 3/8 3/4
Third Quarter ...... 3 3/8 2 1/16
Fourth Quarter ..... 2 9/16 1 3/4
On August 29, 1997, the last sales price of the Company's Common Stock as
reported by the OTC Electronic Bulletin Board was $1 1/16. The Company believes
that as of August 29, 1997, there were over 250 record owners of its Common
Stock.
It is the present policy of the Company not to pay cash dividends and to
retain future earnings to support the Company's growth. Any payment of cash
dividends in the future will be dependent upon the amount of funds legally
available therefor, the Company's earnings, financial condition, capital
requirements and other factors that the Board of Directors may deem relevant.
The Company does not anticipate paying any cash dividends in the foreseeable
future
ITEM 2. LEGAL PROCEEDINGS
None.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Alonzo & Wells, LLP, the Company's independent accountants resigned on
August 3, 1997. The reports of Alonzo & Wells, LLP on the financial statements
for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle except that they were modified as to uncertainty as
follows, "The Company has suffered recurring losses from operations, which raise
substantial doubt about its ability to continue as a going concern." In
connection with its audits for the
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<PAGE>
two most recent fiscal years and through August 3, 1997, there have been no
disagreements with Alonzo & Wells, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Alonzo & Wells, LLP would
have caused them to make reference thereto in their report on the financial
statements for such years.
On August 3, 1997, the Company engaged BDO Seidman LLP as its principal
accountant to audit the Company's financial statements for the fiscal years
ending May 31, 1996 and 1997 and for the period from inception (October 4, 1993)
through May 31, 1997. BDO Seidman LLP was not engaged by the Company during the
Company's two most recent fiscal years or the interim period from June 1, 1997
(the beginning of the Company's current fiscal year) through August 3, 1997.
ITEM 4. SALES OF UNREGISTERED SECURITIES
In October 1993, the Company effectively issued 6,375,000 shares of Common
Stock to Gary F. Kimmons and the Kimmons Family Partnership for the initial
capitalization of the Company which gives retroactive effect to the reverse
merger transaction occurring in August 1994.
From April 1994 through July 1994, the Company issued 178,800 shares of
Common Stock at $.50 per share to twenty-eight accredited investors.
In June 1994, the Company issued 10,000 shares of Common Stock at $1.00 per
share to one accredited investor.
In August 1994, the Company issued 963,275 shares of Common Stock to
existing LBM-US stockholders in connection with the reverse merger transaction
with GK-Texas.
From December 1994 through April 1995, the Company issued 67,801 shares of
Common Stock at $2.00 per share to eight accredited investors.
From December 1994 through April 1995, the Company issued 11,500 shares of
Common Stock at $2.50 per share to nine accredited investors.
In April 1995, the Company issued 33,333 shares of Common Stock at $1.50 per
share to one accredited investor.
From May 1994 through May 1995, the Company issued 176,370 shares of Common
Stock to an aggregate twenty accredited investors, professionals and employees
for services rendered.
From June 1995 through May 1996, the Company issued 440,166 shares of Common
Stock to an aggregate of twenty accredited investors, professionals and
employees for services rendered.
From June 1995 through May 1996, the Company issued 326,784 shares of Common
Stock to thirty-four accredited investors at a purchase price of $1.00 per
share.
From June 1995 through May 1996, the Company issued 255,452 shares of Common
Stock to twenty-six accredited investors at a purchase price of $2.00 per share.
From June 1995 through May 1996, the Company issued 21,800 shares of Common
Stock to four accredited investors at a purchase price of $2.50 per share.
From June 1995 through May 1996, the Company issued 3,333 shares of Common
Stock to three accredited investors at a purchase price of $3.00 per share.
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<PAGE>
In July 1995 five-year warrants to purchase an aggregate 365,000 shares of
Common Stock at an exercise price of $2.00 per shares were issued to two
accredited investors pursuant to a placement exempt under Rule 506 of Regulation
D.
In July 1995 a five-year warrant to purchase an aggregate 100,000 shares of
Common Stock at an exercise price of $1.50 per share was issued to one entity
pursuant to a placement exempt under Rule 506 of Regulation D.
In October 1995, the Company issued 883,333 shares of Series A Preferred
Stock to MCC in exchange for the Carnot Software Technology.
In August 1995, the Company issued 250,000 shares of Common Stock for
convertible debt at a price of $1.88 per share.
In December 1995, two-year warrants to purchase an aggregate of 404,003
shares of Common Stock at an exercise price of $1.00 per share were issued to
twenty-six accredited investors pursuant to a placement exempt under Rule 506 of
Regulation D.
In September 1996, a five-year warrant to purchase an aggregate of 2,000,000
shares of Common stock at an exercise price of $1.00 per share was issued to an
employee for services rendered.
In September 1996, a ten-year warrant to purchase an aggregate of 500,000
shares of Common Stock at an exercise price of 75% of the three-month average
fair-market value was issued to a director in exchange for services rendered.
In October and November 1996, the Company issued 1,140,000 shares of Common
Stock to a twenty-six investors at a purchase price of $.875 per share pursuant
to a placement exempt under Rule 504 of Regulation D.
From June 1996 to May 1997, the Company issued 1,231,653 shares of Common
Stock to forty-nine investors at a purchase price of $1.00 per share pursuant to
a placement exempt under Rule 506 of Regulation D. During the same period, the
Company issued an additional 804,762 restricted shares to an aggregate
thirty-three employees, professionals and directors of the Company for services
rendered and reimbursement of expenses.
In December 1996 a warrant to purchase an aggregate of 50,000 shares of
Common Stock at an exercise price of $2.00 per share was issued to a consultant
in exchange for services rendered.
In February 1997 ten-year warrants to purchase an aggregate of 300,000
shares of Common Stock at an exercise price of $1.00 per share were issued to
two employees for services rendered.
In May 1997 the Company issued a ten-year warrant to purchase 325,000 shares
of Common Stock at an exercise price of $.875 per share to a consultant for
services rendered, and a warrant to purchase 171,429 shares of Common Stock at
an exercise price of $.875 per share which expires at the end of 1997.
From June 1997 to August 29, 1997, the Company issued 82,000 shares of
Common Stock to two employees for nominal consideration and 464,900 shares of
Common Stock at a purchase price of $1.00 to twenty-seven investors.
On August 29, 1997, the Company issued 2,900,000 shares of Common Stock to
officers, directors and key employees and consultants for services rendered.
In each instance described herein (except for all placements pursuant to
Rule 504 of Regulation D), the issuance of shares was exempt from registration
under Section 4(2) of the Act thereof as a transaction by an issuer not
involving any public offering. In each instance, except for the Rule 506
offering, the purchaser had a pre-existing relationship with the Company or its
founder, the offers and sales were made without any public solicitation, the
certificates bear restrictive legends and appropriate stop transfer instructions
have been or will be given to the transfer agent. No underwriter was involved in
the transactions and no commissions were paid, other than in shares of the
Company's
-26-
<PAGE>
restricted common stock with respect to the Rule 506 exempt placement. The
Company believes that each of the investors in the placements pursuant to
Section 4(2) were sophisticated. The Company believes that the placement
pursuant to Rule 504 of Regulation D complied with the Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and by-laws have incorporated
provisions of ss. 145 of the Delaware General Corporation law which eliminates,
subject to certain exceptions, the personal liability of directors of the
Company or its stockholders for monetary damages for breaches of fiduciary duty
of such directors. The Certificate of Incorporation does not provide for the
elimination of or any limitation on the personal liability of a director for (i)
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful corporate distributions, or (iv)
any transaction from which such director derives an improper personal benefit.
This provision of the Certificate of Incorporation will limit the remedies
available to the stockholder who is dissatisfied with a decision of the Board of
Directors protected by this provision; such stockholder's only remedy may be to
bring a suit to prevent the action of the Board. This remedy may not be
effective in many situations, because stockholders are often unaware of a
transaction or an event prior to Board action in respect of such transaction or
event. In these cases, the stockholders and the Company could be injured by a
Board's decision and have no effective remedy.
PART F/S
The financial statements of the Company appearing in this Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their reports (which
contain an explanatory paragraph regarding the Company's ability to continue as
a going concern) appearing elsewhere herein and are included in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting.
PART III
ITEM 1. EXHIBITS
The following exhibits are to be filed as part of the Registration
Statement:
Exhibit No. Identification Of Exhibit
----------- -------------------------
2.1(2) Certificate of Merger
3(i)(1) Certificate of Incorporation of the Company, and
Amendments thereto.
3(ii)(1) By-laws of the Company
4.1(1) Common Stock Certificate
4.2(1) Form of Warrant
10.1(1) Agreement with Microelectronics Computer Corporation
10.2(1) Agreement with AT&T
10.3(1) Gary Kimmons Employment Agreement
10.4(1) Rodney L. Norville Employment Agreement
10.5(1) Employee Stock Option Plan
10.6(2) Data Crystal Agreement
23.1(2) Consent of Independent Certified Public Accountants
- ----------
(1) Filed previously on registration statement Form 10-SB SEC File No.
000-22057.
(2) Filed herewith.
-27-
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants........................ F-2
Balance Sheet as of May 31, 1997 and pro forma Balance Sheet as of May
31, 1997 restated for subsequent event (Note 12)........................ F-3
Statements of Loss for the years ended May 31, 1997 and 1996 and the
period from inception (October 4, 1993) through May 31, 1997............ F-4
Statements of Stockholders' Equity (Capital Deficit) for the years ended
May 31, 1997 and 1996 and the period from inception (October 4, 1993)
through May 31, 1997.................................................... F-5
Statements of Cash Flows for the years ended May 31, 1997 and 1996 and
the period from inception (October 4, 1993) through May 31, 1997........ F-6
Notes to Financial Statements............................................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
GK Intelligent Systems, Inc.
We have audited the balance sheet of GK Intelligent Systems, Inc. (a development
stage enterprise) as of May 31, 1997, and the related statements of loss,
stockholders' equity and cash flows for the years ended May 31, 1997 and 1996
and for the period from inception (October 4, 1993) through May 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform an 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 financial position of GK Intelligent Systems, Inc. as
of May 31, 1997 and the results of its operations and its cash flows for the
years ended May 31, 1997 and 1996 and for the period from inception (October 4,
1993) through May 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring operating losses which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
BDO Seidman, LLP
Houston, Texas
August 29, 1997
F-2
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
MAY 31, MAY 31,
1997 1997 (NOTE 12)
------------ ------------
<S> <C> <C>
ASSETS
Current:
Cash .................................................................. $ 348,465 $ 348,465
Prepaid expenses ...................................................... 58,523 58,523
------------ ------------
Total Current Assets .................................................... 406,988 406,988
------------ ------------
Computer software costs, net (Notes 4 and 8) ............................ 2,757,246 2,757,246
Other equipment, net (Note 3) ........................................... 177,722 177,722
Organization costs, net ................................................. 39,372 39,372
Other ................................................................... 7,375 7,375
------------ ------------
Total Assets ............................................................ $ 3,388,703 $ 3,388,703
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities .............................. $ 152,843 $ 152,843
Accrued compensation (Note 12) ........................................ 5,800,000 --
Due to majority stockholder (Note 7) .................................. 154,723 154,723
Capital lease obligations, current portion (Note 5) ................... 22,148 22,148
------------ ------------
Total Current Liabilities ............................................... 6,129,714 329,714
------------ ------------
Capital lease obligations, less current portion (Note 5) ................ 93,353 93,353
Commitments and Contingencies (Notes 2, 5, 7 and 9)
Stockholders' Equity (Capital Deficit) (Notes 1, 4, 7, 8, 9, 11 and 12):
Series A preferred stock; redeemable and convertible
with liquidation preference of $6.00 per share ...................... 3,389,432 3,389,432
Common stock .......................................................... 12,290 15,190
Additional paid-in capital ............................................ 5,965,293 11,762,393
Deficit accumulated during the development stage ...................... (12,201,379) (12,201,379)
------------ ------------
Total Stockholders' Equity (Capital Deficit) ............................ (2,834,364) 2,965,636
------------ ------------
Total Liabilities and Stockholders' Equity .............................. $ 3,388,703 $ 3,388,703
============ ============
</TABLE>
F-3
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Enterprise)
STATEMENTS OF LOSS
<TABLE>
<CAPTION>
INCEPTION
YEAR ENDED MAY 31, (OCTOBER 4, 1993)
----------------------------- THROUGH
1997 1996 MAY 31, 1997
------------ ----------- ------------
<S> <C> <C> <C>
Revenues ........................................... $ -- $ -- $ --
Costs and expenses:
Depreciation and amortization .............. 820,497 496,127 1,345,549
Software research and development .......... 52,884 59,629 112,999
President's compensation ................... 2,523,443 357,473 3,308,457
Employee compensation ...................... 889,527 -- 889,527
Professional services ...................... 4,963,686 629,334 5,821,042
Other general and administrative ........... 278,436 256,954 723,805
------------ ----------- ------------
Net loss ........................................... $ (9,528,473) $(1,799,517) $(12,201,379)
============ =========== ============
Net Loss Per Share of Common Stock ................. $ (.89) $ (.21) $ (1.44)
============ =========== ============
Weighted Average Number of Shares of
Common Stock Outstanding .......................... 10,671,092 8,392,380 8,461,118
============ =========== ============
</TABLE>
F-4
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK (A) COMMON STOCK (B) ADDITIONAL DURING THE
------------------- ------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
------- ---------- ---------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization by majority stockholder ... -- $ -- 6,375,000 $ 6,375 $ -- $ -- $ 6,375
Shares issued in private placements at $.50,
$1.00, $1.50, $2.00 and $2.50 per share (net
of commissions of $94,115) ..................... -- -- 301,434 301 219,886 -- 220,187
Shares issued to majority stockholder for services -- -- 92,580 93 51,036 -- 51,129
Shares issued for professional services .......... -- -- 83,790 84 41,811 -- 41,895
Shares issued in connection with reverse merger .. -- -- 963,275 963 (963) -- --
Net loss ......................................... -- -- -- -- -- (873,389) (873,389)
------- ---------- ---------- ------- ----------- ------------ -----------
BALANCE, May 31, 1995 ............................ -- -- 7,816,079 7,816 311,770 (873,389) (553,803)
Series A preferred shares issued in connection
with acquisition of software (Notes 4 and 8) ... 883,333 3,389,432 -- -- -- -- 3,389,432
Shares issued in private placements at $1.00,
$2.00, $2.50 and $3.00 per share (net of
commissions of $1,065) ......................... -- -- 607,369 607 903,801 -- 904,408
Shares issued to majority stockholder for services -- -- 240,000 240 185,385 -- 185,625
Shares issued for professional services .......... -- -- 200,166 200 297,179 -- 297,379
Shares issued in settlement of debt .............. -- -- 250,000 250 471,007 -- 471,257
Net loss ......................................... -- -- -- -- -- (1,799,517) (1,799,517)
------- ---------- ---------- ------- ----------- ------------ -----------
BALANCE, May 31, 1996 ............................ 883,333 3,389,432 9,113,614 9,113 2,169,142 (2,672,906) 2,894,781
Shares issued in private placements at $.875 and
$1.00 per share (net of commissions of $61,306) -- -- 2,371,653 2,372 1,802,134 -- 1,804,506
Shares issued to majority stockholder and
employees for services ......................... -- -- 296,110 296 706,716 -- 707,012
Shares issued for professional services
and expenses ................................... -- -- 508,652 509 940,665 -- 941,174
Warrants issued to employees ..................... -- -- -- -- 56,040 -- 56,040
Warrants issued for professional services ........ -- -- -- -- 290,596 -- 290,596
Net loss ......................................... -- -- -- -- -- (9,528,473) (9,528,473)
------- ---------- ---------- ------- ----------- ------------ -----------
BALANCE, May 31, 1997 ............................ 883,333 $3,389,432 12,290,029 $12,290 $ 5,965,293 $(12,201,379) $(2,834,364)
======= ========== ========== ======= =========== ============ ===========
</TABLE>
Notes:
- ------------
(A) $.001 par; 10,000,000 shares authorized
(B) $.001 par; 25,000,000 shares authorized
F-5
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Inception
Year ended May 31, (October 4,
-------------------------- 1993) Through
1997 1996 May 31, 1997
----------- ----------- ------------
<S> <C> <C> <C>
Operating activities:
Net loss ........................................ $(9,528,473) $(1,799,517) $(12,201,379)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ............... 820,497 496,127 1,345,549
Issuance of common stock and warrants
for various expenses ...................... 7,681,831 483,004 8,258,020
Changes in assets and liabilities:
Other current assets ...................... (58,523) -- (58,523)
Accounts payable and accrued liabilities .. (153,621) 60,428 418,907
----------- ----------- ------------
Net cash used in operating activities ... (1,238,289) (759,958) (2,237,426)
----------- ----------- ------------
Investing activities:
Purchased software .............................. (131,143) (130,000) (655,971)
Organization costs .............................. -- -- (78,745)
Other capital expenditures ...................... (39,215) (13,136) (63,650)
----------- ----------- ------------
Net cash used in investing activities ... (170,358) (143,136) (798,366)
----------- ----------- ------------
Financing activities:
Proceeds from private placements ................ 1,806,156 904,408 2,936,965
Proceeds from borrowings ........................ -- 53,547 566,269
Repayment of borrowings ......................... (68,327) (50,650) (118,977)
----------- ----------- ------------
Net cash provided by financing activities 1,737,829 907,305 3,384,257
----------- ----------- ------------
Net increase in cash .............................. 329,182 4,211 348,465
Cash at beginning of period ....................... 19,283 15,072 --
----------- ----------- ------------
Cash at end of period ............................. $ 348,465 $ 19,283 $ 348,465
=========== =========== ============
</TABLE>
F-6
<PAGE>
GK INTELLIGENT SYSTEMS,INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
BUSINESS
GK Intelligent Systems, Inc. (the "Company"), formerly LBM-US, Inc. ("LBM"), is
a development stage enterprise organized in the State of Delaware in 1988. The
Company is principally engaged in the development and marketing of software
products capable of (a) sophisticated real-time access to and interpretation of
data and (b) interaction with, and adaptation to, the needs of software users
(referred to as "intelligent" software). To date, the Company has realized no
revenues and its activities have been limited primarily to the acquisition of
software assets used to develop future products and applications, research and
development of software products and initial marketing activities.
The software products described in (a) above include the Company's proprietary
CARNOT technology, which is capable of accessing and evaluating large amounts of
data on network systems, such as the Internet. The Company is currently
developing specific business applications from this technology called SMART
PERFORM and SMART ENTERPRISE.
The software technology described in (b) above, capable of evaluating a users'
competence level and adapting training programs to the user's specific needs, is
referred to as SMART ONE technology. This technology is currently being used to
develop specific training software products (e.g., Internet training and
Hazardous Material Disposal training).
REVERSE MERGER
Pursuant to an agreement effective August 15, 1994, LBM issued 6,758,920 shares
of its common stock in exchange for all of the assets and liabilities of GK
Intelligent Systems, Inc., a Texas corporation (GKIS-Texas), formerly I-NET
Intelligent Systems, Inc. ("I-Net"). The remaining 963,275 common shares out of
a total of 7,722,195 common shares were retained by the former owners of LBM.
Prior to, and in conjunction with the transaction, LBM authorized a stock split
of three and one-half shares to one for its existing shareholders. On August 18,
1994, LBM changed its name to GK Intelligent Systems, Inc.
This transaction resulted in the former stockholders of GKIS-Texas acquiring
approximately 88% of the Company. Accordingly, the transaction has been treated
for accounting purposes as a purchase of the Company by GKIS-Texas, referred to
as a "reverse merger". As GKIS-Texas (formerly I-Net) is deemed to be the
acquirer for accounting purposes, (a) its assets and liabilities are included in
the financial statements of the continuing entity at their carrying values, (b)
its operations are presented for all periods prior to August 15, 1994 and (c)
its outstanding shares for periods prior to August 15, 1994 have been
retroactively restated giving effect to the reverse merger transaction.
2. GOING CONCERN UNCERTAINTY AND MANAGEMENT PLANS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
operating losses since its inception that raise substantial doubt about its
ability to meet future expected expenditures necessary to fully develop its
software products and applications and to continue as a going concern. The
financial statements do not reflect any adjustments that might result from the
outcome of this uncertainty. In this regard, the Company is currently seeking
short and long term debt or equity financing sufficient to fund projected
working capital and software product development needs and is anticipating the
general release of several software products into the market during 1998.
However, there can be no assurance that the amount and terms of such debt or
equity financing, or that the profits from the sale of software products in 1998
will be sufficient to fund the Company's software development expenditure
requirements. Accordingly, the Company will continue to seek additional sources
of financing as may be necessary.
F-7
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES
COMPUTER SOFTWARE COSTS
Costs of purchased software having alternative future uses (e.g., in developing
other software products) are (a) capitalized when acquired, (b) amortized on a
straight-line basis over their expected useful life of five years and (c)
reported at the lower of unamortized cost or net realizable value.
Costs of internally created computer software products are charged to expense
when incurred as research and development until technological feasibility has
been established for the product. Technological feasibility is considered
established upon completion of a detailed program design or, in its absence,
completion of a working model. Thereafter, all software production costs are
capitalized and subsequently reported at the lower of unamortized cost or net
realizable value. Capitalized costs are amortized based on the ratio of current
revenue to current and future revenue for each product with an annual minimum
equal to the straight-line amortization over the remaining estimated economic
life of the product.
ORGANIZATION COSTS
Certain legal and professional fees associated with the organization of the
Company have been capitalized as organization costs and are being amortized
using the straight-line method over five years.
OTHER EQUIPMENT
Other equipment consists primarily of (a) office furniture and computer
equipment under capital lease with a cost basis of $139,466 and (b) other
purchased office equipment with a cost basis of $56,275. Other equipment is
presented net of accumulated depreciation of $9,184 for assets under capital
lease and $8,835 for other purchased assets in the accompanying balance sheets.
Depreciation is provided generally on a straight-line basis over the lesser of
the lease term or the estimated useful life of the asset over an average period
of five years.
INCOME TAXES
The Company uses the liability approach for accounting for income taxes. Under
the liability approach, the Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance to amounts expected to
be realized.
LOSS PER COMMON SHARE
Net loss per share has been calculated using the weighted average number of
common shares outstanding and any common stock equivalents, if dilutive, during
the period presented. For the period from inception (October 4, 1993) through
May 31, 1997, the weighted average number of common shares outstanding gives
retroactive recognition to the reverse merger transaction described in Note 1.
ACCOUNTING ESTIMATES
The accompanying financial statements are prepared in conformity with generally
accepted accounting principles which requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The actual results could differ from those estimates.
F-8
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS
128). This pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with Accounting Principles Board
Opinion (APB) No. 15, EARNINGS PER SHARE. SFAS 128 provides for the calculation
of "Basic" and "Diluted" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share. The Company will adopt SFAS 128 in 1998 and its implementation is not
expected to have a material effect on the financial statements.
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129") effective for periods ending after December
15, 1997, establishes standards for disclosing information about an entity's
capital structure. SFAS 129 requires disclosure of the pertinent rights and
privileges of various securities outstanding (stock, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 is not
expected to have an effect on the Company's financial statements as it currently
discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued the two following
disclosure standards; results of operations and financial position will be
unaffected by implementation of these new standards.
o Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
o Statement of Financial Accounting Standards 131, "Disclosure about Segments
of a Business Enterprise" ("SFAS 131"), establishes standards for the way
that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the
public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
F-9
<PAGE>
4. COMPUTER SOFTWARE COSTS
Computer software costs consisted of the following as of May 31, 1997:
Cost of purchased software used to develop
other software products:
Training software technology ....................... $ 444,833
CARNOT software tools and languages ................ 3,389,432
Other tools and product costs ........................ 211,138
-----------
4,045,403
Less accumulated amortization ........................ (1,288,157)
-----------
$ 2,757,246
===========
The CARNOT software tools and languages were acquired on November 2, 1995 via
the issuance of 883,333 shares of the Company's Series A preferred stock (see
Note 8). The cost basis of the software was determined using the estimated fair
market value of the preferred shares at the date the agreement was signed.
Amortization of software costs during the years ended May 31, 1997 and 1996
amounted to $794,016 and $474,399, respectively. Amortization of software costs
from inception (October 4, 1993) through May 31, 1997 amounted to $1,288,157.
5. LEASES
The Company leases office furniture and equipment under capital lease agreements
and office space and equipment under operating leases expiring through 2002.
A schedule by years of future minimum lease payments under the capital leases
together with the present value of the net minimum lease payments as of May 31,
1997, and future minimum rental payments required under the long-term operating
leases as of May 31, 1997 are as follows:
CAPITAL OPERATING
YEAR ENDING MAY 31, LEASES LEASES
- ------------------- --------- --------
1998 ............................................... $ 38,633 $101,662
1999 ............................................... 32,249 103,541
2000 ............................................... 32,249 102,568
2001 ............................................... 32,249 88,637
2002 ............................................... 29,562 75,132
--------- --------
Total minimum lease payments ....................... 164,942 $471,540
========= ========
Less - amount representing interest ................ (49,441) --
--------- --------
Present value of net minimum lease payments ........ 115,501
Less - current maturities .......................... (22,148) --
--------- --------
Long-term portion .................................. $ 93,353 --
========= ========
Rent expense under operating leases was approximately $32,400 and $70,400,
respectively, in 1997 and 1996. Rent expense for the period from inception
(October 4, 1993) through May 31, 1997 was approximately $107,600.
F-10
<PAGE>
6. INCOME TAXES
The Company uses the liability method to record deferred income taxes. Under the
liability method, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Net deferred income tax assets are comprised of the
following at May 31, 1997:
AMOUNT
-----------
Net operating loss carryforwards ......................... $ 1,652,000
Differences between the financial
reporting and income tax bases
of accrued compensation resulting
from the issuance of stock and
warrants for services .................................. 2,778,000
-----------
Gross deferred tax assets ................................ 4,430,000
-----------
Difference between the financial
reporting and income tax bases of:
Computer software costs .............................. (297,000)
Other equipment ...................................... (7,000)
-----------
Gross deferred tax liability ............................. (304,000)
-----------
4,126,000
Valuation allowance .................................... (4,126,000)
-----------
Net deferred tax asset ................................. $ --
===========
The income tax benefit differs from the amount of income tax determined by
applying the applicable statutory federal income tax rate to pretax loss from
operations due to the effect of net operating losses that are not currently
utilizable.
Approximately $4,859,000 of tax loss carryforwards remain at May 31, 1997. The
carryforwards expire in the following years:
YEAR AMOUNT
- ----- ----------
2009 ............................................... $ 239,000
2010 ............................................... 655,000
2011 ............................................... 1,607,000
2012 ............................................... 2,358,000
----------
$4,859,000
==========
Section 382 of the Internal Revenue Code of 1986, as amended, limits the
availability of the net operating loss ("NOL") carryforwards if there is a
change of ownership of more than 50% of the Company within a retroactive three
year period. This limitation, if applied, would limit the utilization of the NOL
carryforwards in each taxable year to an amount equal to the product of the
federal long-term tax-exempt bond rate prescribed by the Internal Revenue
Service and the fair market value of the Company immediately prior to the time
of the ownership change. The Company anticipates, however, that should a
cumulative change in ownership of the Company in excess of 50% be deemed to
occur within a retroactive three year period in connection with the conversion
of outstanding Series A preferred stock, the conversion of outstanding common
stock warrants or other securities transaction, the resulting limitation would
not have a material impact on the Company's financial position as a 100% reserve
has been established against the Company's net operating loss carryforwards.
F-11
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7. COMMITMENTS AND CONTINGENCIES
SOFTWARE SALES/BARTER CREDIT AGREEMENT
In an agreement dated May 25, 1997, the Company agreed to sell its Smart One
training software to SGD for use on SGD's laptop computers exclusively for one
year in exchange for SGD providing $2.5 million of barter credits to the
Company. The barter credits are to be used by the Company to reduce its cost of
certain goods and services that are purchased through SGD subsequent to the date
of the agreement. Sales of Smart One software under this agreement will be
recorded as revenue by the Company; however, the savings from barter credits
received will be reflected as a reduction of the cost of goods and services
purchased, as they are utilized. The transaction had no effect on the financial
statements for the year ended May 31, 1997.
EMPLOYMENT AGREEMENTS
In December 1993, the Company entered into a three-year employment agreement
with the president and majority stockholder that automatically renews at the end
of its term for consecutive one-year periods, and which provides for annual base
compensation of $240,000. In the event the employment agreement is terminated by
the Company, other than for cause or disability, the agreement generally
provides that (i) the Company must pay an amount equal to approximately three
times the sum of the annual base salary and the average of the last three annual
incentive bonuses actually paid, and (ii) any unvested warrants shall
immediately vest.
At May 31, 1997, $154,723 of base compensation to the majority stockholder
remained unpaid and is reflected as due to majority stockholder in the
accompanying financial statements.
In December 1996, the Company entered into a three-year employment agreement
with an officer of the Company containing identical terms to the employment
agreement of the president and majority stockholder, except for an annual base
compensation of $120,000. In September, 1997, the Company increased the
officer's annual base compensation to $180,000 and appointed him as a member of
the board of directors.
CONSULTING AGREEMENTS
During the year ended May 31, 1997, the Company entered into long term
compensation agreements with a director and other sales, marketing and software
development consultants. Minimum future commitments under such agreements are
summarized in the following table:
YEAR ENDING
MAY 31, AMOUNT
- ----------- --------
1998 ................................................ $174,000
1999 ................................................ 84,000
2000 ................................................ 84,000
2001 ................................................ 84,000
2002 ................................................ 44,000
--------
$470,000
========
BUSINESS RISK
The Company has filed for trademark and servicemark protection for its various
products and applications. However, even though there are no pending
applications for any patents filed in either the U.S. or foreign countries with
respect to any of the Company's technologies, no patents have been awarded to
the Company to date. In the event that the trademark and servicemark rights are
not ultimately granted to the Company, and the Company is not able to otherwise
protect its proprietary information, there could be a material adverse effect on
the Company's business, operating results and financial condition.
F-12
<PAGE>
8. SERIES A PREFERRED STOCK
Effective November 2, 1995, the Company issued 883,333 shares of Series A
convertible, redeemable preferred stock to Microelectronics and Computer
Technology Corporation ("MCC") in exchange for an exclusive license to
commercialize certain computer software technology developed by MCC under its
CARNOT Project (see Note 4). The Series A preferred stock has a stated value of
$6.00 per share, a par value of $.001 per share, accrues dividends at 6% per
annum beginning January 1,1998 and is convertible into 883,333 shares of the
Company's common stock beginning January 1, 1998. Also beginning January 1,
1998, the Company has the right to redeem the shares at their stated value of
$6.00 per share, plus any accrued and unpaid dividends. However, once notified
of the Company's intention to redeem, MCC has the option to convert the
preferred shares to common prior to the Company exercising its redemption
rights. In addition, the preferred shares are entitled to vote beginning January
1, 1998 even if not converted. No redemption rights are held by the Series A
preferred stockholders.
No Series A preferred stock dividends have been recorded in the accompanying
financial statements as the period of dividend accrual does not commence until
January 1, 1998. Furthermore, the preferred shares have not been included in the
calculation of net loss per share for all periods presented as they are not
convertible until January 1, 1998 and their effect, if convertible, would be
anti-dilutive.
9. COMMON STOCK WARRANTS
ISSUED FOR PROFESSIONAL SERVICES
During the year ended May 31, 1997, the Company granted vesting and non-vesting
common stock warrants to consultants to purchase shares of the Company's common
stock as follows:
DATE EXERCISE EXPIRATION
GRANTED PRICE DATE NUMBER VESTED
- -------- -------- ---------- --------- -------
9/30/96 .............. (1) 9/30/06 500,000 --
12/24/96 .............. $ 2.00 -- 50,000 --
5/16/97 .............. .875 5/16/07 325,000 --
5/16/97 .............. .875 12/31/97 171,429 171,429
--------- -------
1,046,429 171,429
========= =======
(1) - 75% of three-month average fair market value
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123 (SFAS No., 123), "Accounting for Stock Based Compensation", combined
compensation expense for the above warrants of $1,075,580 will be recognized
over the period that the warrants vest. Compensation expense recognized during
the year ended May 31, 1997 amounted to $290,596 and is included in professional
services in the accompanying financial statements.
As of May 31, 1997, no warrants had been exercised. The net loss per share of
common stock for the year ended May 31, 1997 does not reflect the weighted
average number of shares that would be outstanding assuming exercise of these
warrants as the effect of such exercise would be anti-dilutive.
F-13
<PAGE>
ISSUED TO OFFICER AND EMPLOYEES
The Company has elected to continue to account for common stock warrants issued
to officers and employees in accordance with Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees". During the year ended May 31,
1997, the Company granted common stock warrants to the president and majority
stockholder to purchase 2,000,000 shares of the Company's common stock at an
exercise price in excess of the market price of the stock at the date of grant.
Accordingly, no compensation expense was recorded as a result of this
transaction. Also during 1997, the Company granted vesting common stock warrants
to certain key employees at exercise prices lower than the market prices of the
stock at the dates of grant. Accordingly, total related compensation expense of
$581,250 will be recognized over the period the warrants vest. Compensation
expense recognized during the year ended May 31, 1997 amounted to $56,040 and is
included in employee compensation in the accompanying financial statements.
Effective for the years ended May 31, 1997 and 1996, the Company was required to
adopt the disclosure provisions of SFAS No. 123. This statement requires the
Company to provide pro forma information regarding net income or loss applicable
to common shareholders and net income or loss per share as if compensation cost
for the Company's common stock warrants had been determined in accordance with
certain fair value assumptions used for grants in 1997, as follows: dividend
yield of 0% for all years, expected volatility of 110%; an average risk free
interest rate of 5.9% and an average expected life of 2.5 years.
Had compensation cost for the options issued during 1997 been determined based
on fair value at the grant date, consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per share would have increased to the pro
forma amounts indicated below:
INCEPTION
(OCTOBER 4,
YEAR ENDED 1993) THROUGH
MAY 31, 1997 MAY 31, 1997
-------------- --------------
Net loss:
As reported .................. $ 9,528,473 $ 12,201,379
-------------- --------------
Pro forma .................... $ 10,630,229 $ 13,303,135
-------------- --------------
Net loss per share:
As reported .................. $ (.89) $ (1.44)
-------------- --------------
Pro forma .................... $ (1.00) $ (1.57)
-------------- --------------
F-14
<PAGE>
The following table summarizes information regarding officer and employee common
stock warrants outstanding at May 31, 1997:
DATE EXERCISE EXPIRATION
GRANTED PRICE DATE NUMBER VESTED
- ------- -------- ------- --------- ---------
9/01/96 .............. $ 1.00 9/01/01 2,000,000 2,000,000
2/07/97 .............. 1.00 2/07/07 150,000 --
2/21/97 .............. 1.00 2/21/07 150,000 --
--------- ---------
2,300,000 2,000,000
========= =========
ISSUED IN PRIVATE PLACEMENTS
During the year ended May 31, 1996, the Company issued common stock warrants in
connection with certain private placements with terms as follows:
DATE EXERCISE EXPIRATION
GRANTED PRICE DATE NUMBER VESTED
- ------- -------- -------- --------- ---------
7/31/95 ................ $ 2.00 7/31/00 365,000 365,000
7/31/95 ................ 1.50 7/31/00 100,000 100,000
12/01/95 ................ 1.00 12/01/97 404,003 404,003
--------- ---------
869,003 869,003
========= =========
As of May 31, 1997, no warrants had been exercised. The net loss per share of
common stock for the years ended May 31, 1997 and 1996 does not reflect the
weighted average number of shares that would be outstanding assuming exercise of
these warrants as the effect of such exercise would be anti-dilutive.
STOCK OPTION PLAN
During 1996, the Company adopted, and the board of directors approved, the 1995
Incentive Stock Option Plan. Pursuant to the plan, options to purchase up to
1,000,000 shares of common stock may be granted to employees, officers and
directors of the Company. The terms of such options are to be determined by a
committee appointed by the board of directors and the exercise price of options
must be 100% of the fair market value of a share of common stock on the date the
option is granted. As of May 31, 1997, no options had been granted under the
plan.
10. RELATED PARTIES
On September 1, 1996, the Company granted common stock warrants to the president
and majority stockholder of the Company to purchase 2,000,000 shares of the
Company's common stock (see Note 9).
The Company incurred non-cash compensation expense via the issuance of common
stock to the president and majority stockholder during the period from inception
(October 4, 1993) through May 31, 1997 as more fully described in Note 11.
The president and majority stockholder has provided working capital loans to the
Company during 1996 and 1995 on an as needed basis. As of May 31, 1997, no loans
were outstanding.
F-15
<PAGE>
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash compensation expense incurred during the period from inception (October
4, 1993) through May 31, 1997 was determined using the estimated fair market
value of the Company's common stock or common stock warrants on the date such
instruments were granted.
During the year ended May 31, 1997, the Company incurred non-cash compensation
expense via the issuance of (i) 100,000 shares of common stock to the president
and majority stockholder valued at $262,500, (ii) 444,443 shares of common stock
for professional services and expenses valued at $829,083, (iii) 196,110 shares
of common stock to key employees valued at $443,612, (iv) warrants for
professional services valued at $290,596, and (v) warrants to key employees
valued at $56,040.
During the year ended May 31, 1996, the Company incurred non-cash compensation
expense via the issuance of (i) 240,000 shares of common stock to the president
and majority stockholder valued at $185,625 and (ii) 200,166 shares of common
stock for professional services valued at $297,379.
For the period from inception (October 4, 1993) through May 31, 1997, the
Company incurred non-cash compensation expense via the issuance of (i) 432,580
shares of common stock to the president and majority stockholder valued at
$499,415, (ii) 728,399 shares of common stock for professional services valued
at $1,168,357, (iii) 196,110 shares of common stock to key employees valued at
$443,612, (iv) warrants for professional services valued at $290,596, and (v)
warrants to key employees valued at $56,040.
Accounts payable and accrued liabilities totalling $111,341 for professional
services and expenses were converted to common stock during the year ended May
31, 1997.
The Company issued 883,333 shares of Series A preferred stock in exchange for
computer software technology during the year ended May 31, 1996 (see Notes 4 and
8).
The Company issued 250,000 shares of its common stock in settlement of a note
payable in the amount of $471,257 during the year ended May 31, 1996.
12. SUBSEQUENT EVENT
On April 18, 1997, the Company's board of directors approved the issuance of a
total of 2,900,000 shares of the Company's common stock to (a) the president and
majority stockholder, (b) a director, (c) a consultant and (d) certain key
employees for services performed valued at $2.00 per share, or $5,800,000. The
accompanying financial statements as of and for the year ended May 31, 1997
reflect an accrual for the issuance of such shares.
On August 29, 1997, the Company formally issued the shares described above.
Accordingly, the accompanying financial statements include a proforma balance
sheet presentation as of May 31, 1997 presenting the effect of the common stock
issuance as if it had occurred on or before May 31, 1997.
F-16
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
GK INTELLIGENT SYSTEMS, INC.
By /s/ GARY F. KIMMONS
GARY F. KIMMONS, President
Dated: October 2, 1997
S-1
EXHIBIT TO COME
EXHIBIT 10.6
EXCLUSIVE SOFTWARE LICENSE AGREEMENT
THIS AGREEMENT is between the UNIVERSITY OF SOUTHERN CALIFORNIA,
(hereinafter University) a California nonprofit corporation with its principal
place of business at University Park, Los Angeles, California 90089, and GK
INTELLIGENT SYSTEMS, INC., a corporation organized under the laws of Delaware,
with its principal place of business at 2345 Bering Drive, Suite 123, Houston,
Texas, 77057 (hereinafter Licensee).
WHEREAS, University is the owner of certain computer programs and supporting
documentation arising from research funded in part by the U.S. Government; and
WHEREAS, Licensee has represented to University that it believes that it has the
necessary product development capabilities, manufacturing know-how and marketing
resources to introduce products based upon such intellectual property rights
through its own channels of distribution, and Licensee believes that products
based on University intellectual property and the aforesaid product development
efforts will prove to be technically and commercially feasible;
WHEREAS, Licensee desires to license the intellectual property and supporting
documentation.
NOW, THEREFORE, in view of the above premises and in consideration of the terms
and conditions set forth below, University and Licensee agree as follows:
I DEFINITIONS
1.1 "Author" shall collectively mean Dr. Wei-Min Shen.
1.2 "Object Code" means machine-readable, executable code of a computer
program.
1.3 "Derivative Work" means a work which is based upon one or more
pre-existing copyrightable or copyrighted material, such as a revision,
modification, translation, abridgement, condensation, expansion, collection,
compilation, or any other in which such pre-existing works may be recast,
transformed, or adapted such that, in the absence of this Agreement, the
preparation, copying, use, distribution, and/or display thereof would constitute
an infringement of the pro-existing material.
1.4 "Distributor" means any party who Licensee sublicenses the rights
granted in Paragraphs 2.1.1, 2.1.2, and 2.1.3 herein.
1.5 "Effective Date" means the date as of which this Agreement is duly
executed by both parties.
1.6 "End User" means the party licensed to use the Licensed Program and/or
Licensee Derivative Works under an End User License Agreement with Licensee.
1.7 "End User License Agreement" means an end use license agreement
between an End User and Licensee.
1
<PAGE>
1.8 "Licensed Program" means a computer program which embodies "DATA
CRYSTAL" which is software designed for data mining and discovering relational
patterns from databases as defined in USC File No.367 and the USC Record of
Software therein contained but excludes any changes, modifications, additions or
enhancements thereto which may be made by University from time to time during
the term hereof.
1.9 "Licensee Derivative Work" means a Derivative Work made by Licensee.
1.10 "Net Revenues" means the gross billing revenues on the entire package
received by Licensee for leasing, licensing or otherwise providing Licensed
Programs or User Documentation to End Users, less the amounts actually paid by
Licensee for:
1.10.1 any direct or indirect credits and allowances and adjustments
granted to End Users on account of the rejection or return of
Licensed Program previously leased or licensed;
1.10.2 packing and transportation packing material costs (not
including product containers or product packing containers as
manufactured by Licensee);
1.10.3 customs and duties levied on the Licensed Programs; and
1.10.4 sales, transfer and other excise taxes or other governmental
charges levied on or measured by sales of Licensed Programs,
but no franchise or income tax of any kind whatsoever.
1.11 "Principal Investigator" shall mean Dr. Wel-Min Shen.
1.12 "Source Code" means code of a computer program that is not
executable, by a computer system directly but must be converted into machine
language by compilers, assemblers, and/or interpreters, as well as
documentation, release notes, or other specifications which describe the
content, organization, and structure of the Source Code included therein to the
extent that such documentation is available.
1.13 "University Derivative Work" means a Derivative Work made by
University.
1.14 "User Documentation" means any human-readable program listings, flow
charts, logic diagrams, Input and output forms, manuals, specifications,
instructions, and other materials, and any copies of any of the foregoing, in
any medium, related to the Licensed Programs and delivered to the Licensee under
this license.
2 LICENSE GRANT
2.1 Subject to the terms and conditions, as set forth in this Agreement
University hereby grants to Licensee a nontransferable, exclusive, worldwide
license to:
2.1.1 use, modify and copy the Licensed Program in Source Code form
and the User Documentation solely to develop or have developed
Licensee Derivative Works;
2
<PAGE>
2.1.2 compile the Source Code of the Licensed Program and Licensee
Derivative Works into Object Code;
2.1.3 use, copy, license, market and distribute the User
Documentation, Licensed Program, and Licensee Derivative Works
in Object Code form only to End Users; and
2.l.4 sublicense the rights granted in Paragraphs 2.1.l, 2.1.2 and
2.1.3 herein to Distributor subject to the conditions and
obligations of Paragraphs 2.3, 2.4 and Paragraph 10.
2.2 Prior to Licensee furnishing the Licensed Program, or any Licensee
Derivative Work to an End User, Licensee shall obtain a signed agreement from
the End User, the terms and conditions of which shall be consistent with the
relevant term's and conditions of this Agreement. Upon termination of this
Agreement under Paragraph 5, the rights and licenses granted to Licensee shall
immediately terminate except that Licensee may continue to use the Licensed
Program solely in connection with maintenance and support of the Licensee
Derivative Works licensed to existing End Users, but only for so long as
Licensee is contractually bound to provide such support and maintenance.
Licenses previously granted to End Users shall terminate in accordance with the
terms and conditions of the written agreement with the End Users.
2.3 Prior to Licensee furnishing the Licensed Program, or any Licensee
Derivative Work to a Distributor, Licensee shall obtain a signed agreement from
the Distributor, the terms and conditions of which shall be consistent with the
relevant terms and conditions of this Agreement Upon termination of this
Agreement under Paragraph 5, the rights and licenses granted to Licensee and
Distributor shall immediately terminate except that Licensee and Distributor may
continue to use the Licensed Program solely in connection with maintenance and
support of the Licensee Derivative Works licensed to existing End Users, but
only for so long as Licensee and Distributor are contractually bound to provide
such support and maintenance. Licenses previously granted to End Users shall
terminate in accordance with the terms and conditions of the written agreement
with the End Users.
2.4 The rights granted in Paragraph 2.1 4 shall not allow the Licensee to
grant the same right to its Distributors.
2.5 The License grunted in Paragraph 2.1 shall not include University
Derivative Works unless University, at it sole option, agrees in writing to a
license to such University Derivative Works.
2.6 The parties expressly acknowledge that, notwithstanding the rights
granted to Licensee herein, University retains the right to furnish copies to
the U.S. Government of that version of the Licensed Program which was developed
pursuant to a U.S. Government grant. The U.S. Government has certain rights in
the software, technical data and other intellectual property developed by the
University under contract with the U.S. Government, including but not limited to
the rights defined in 48 CFR Part 52 and 48 CFR Part 227, and the license
granted to Licensee hereunder is subject to such rights of the U.S. Government.
University reserves the right to use, distribute, promote, advertise and/or
license for educational and research purposes the Licensed Programs, User
Documentation and University Derivative Work.
3
<PAGE>
2.7 Licensee shall reproduce any copyright notice, trademark notice or
other proprietary legend which appears on or in the Licensed Programs.
University Derivative Works and User Documentation on or in all copies or
duplications made by Licensee. In addition, Licensee agrees to use on or in the
Licensed Programs, University Derivative Works and User Documentation any
copyright notice, trademark notice of other proprietary legend that the
University may designate from time to time. Except foregoing specified use of
trademark notices, Licensee is not authorized to, and shall not, use any
trademark, service mark, trade name, symbol or logo of the University or the
Principal Investigator (collectively, "Trademarks"), including without
limitation the "DATA CRYSTAL" mark. Should Licensee desire to obtain the right
to use any of the Trademarks, Licensee may apply for a separate trademark
license through the University's Trademarks and Licensing Services.
3 LICENSE FEE AND ROYALTIES
3.1 For the rights and privileges granted under this Agreement and subject
to the terms and conditions of this Agreement, Licensee will pay to University
an initial nonrefundable license fee of Twenty-five Thousand Dollars ($ 25,000)
within ten (10) days of the Effective Date.
3.2 Earned Royalties: Licensee agrees to pay to University Earned
royalties of Five percent (5%) of Net Revenues of the sale of Smart Access when
the Licensed Programs are used as part of the Smart Access System. The Earned
Royalty Rate for stand-alone use of the Licensed Programs stall be a forty
percent (40%) of Net Revenues from the sale of the Licensed Programs. The
agreed-upon royalty rates which correspond to Smart Access with the Licensed
Programs and the Licensed Programs stand-alone shall also apply to any
applicable Net Revenues earned from any corresponding use or sales or rendering
services which use the Smart Access with Licensed Programs or stand-alone the
Licensed Programs software. Earned Royalties shall not be collected on
consulting services for maintenance or configuration of the system. Earned
Royalties will be due and payable within thirty (30) days after the end of each
calendar quarter (March 31, June 30, September 30 and December 31).
3.3 Annual Minimum Royalties: Annual Minimum Royalties shall be
Twenty-five Thousand Dollars ($25 ,OOO) per year calendar year until this
Agreement is terminated. Annual Minimum Royalties shall be due within thirty
(30) days of each December 31st following the Effective Date for the duration of
the Agreement. The Annual Minimum Royalty for the first and last year of this
Agreement shall be prorated based on the number of days the Agreement is
effective for the given year. In the event that Earned Royalties in any Contract
Year shall be less than the Annual Minimum Royalties, Licensee shall pay the
difference between Earned Royalties and Annual Minimum Royalties with the
payment for the fourth quarter of the Contract Year. The Maximum Annual Royalty
shall be Two Hundred Thousand Dollars ($200,000) per calendar year until this
Agreement is terminated.
3.4 With each quarterly payment, Licensee shall deliver to University a
full and accurate written accounting statement to include at least the following
information:
3.4.1 Total number of Licensed Programs leased or licensed (by
country);
3.4.2 Net Revenues received during the quarter, together with
complete detail necessary to compute such Net Revenues; and
4
<PAGE>
3.4.3 Royalty due to University.
3.5 The Licensee Fee, Earned Royalties and Annual Minimum Royalties as
stated in United States dollars and shall be paid in United States dollars in
Los Angeles, California, or at such other place as University may reasonably
designate; provided, however, that if the laws and regulations controlling in
any foreign country prevent a royalty payment to be made in Los Angeles,
California, or at University's designated place or prevent a royalty payment in
United States dollars, University agrees to accept such royalty in the form and
place as permitted, including deposits by Licensee in the applicable foreign
currency in a local bank or banks designated by University.
3.6 The Earned Royalty and Annual Minimum Royalty payments due under this
Agreement shall, if overdue, shall be subject to a late payment charge equal to
one and a half percent (1.5%) above the prime rate in effect at Bank of America
on the due date, or the maximum permitted by law, whichever is less . The
payments of such late payment charges shall not preclude University from
exercising any other rights it may have as a consequence of the lateness of any
royalty payment.
3.7 Licensee shall keep complete, true and accurate books of account and
records for the purpose of showing the derivation of all amounts payable to
University under this Agreement. Said books and records shall be kept at
Licensee's principal place of business for at least four (4) years following the
end of the calendar year to which they pertain and shall be open at all
reasonable times for inspection by a representative of University for the
purpose of verifying Licensee's royalties statement or Licensee's compliance in
other respects with this Agreement. The representative may disclose to
University the aggregate amount of royalties due to University during each year,
as determined in such audit. Should an audit by University show an underpayment
of royalties by more than ten percent (10%), Licensee shall immediately pay such
underpayment and all interest, as well as for University's reasonable audit
expenses and any late payment charges.
4 DELIVERY AND INSTALLATION
4.1 The Principal Investigator shall deliver one (1) copy of the Licensed
Program in both Source and Object Code forms and User Documentation to Licensee
within two (2) days after receipt of license fee set forth in Paragraph 3.1
above.
4.2 Licensee shall be solely responsible for installation of the Licensed
Program and/or Licensee Derivatives Works on its equipment.
5 TERM AND TERMINATION
5.1 The term of this Agreement shall commence on the Effective Date and
shall continue until terminated in accordance with the provisions of this
Paragraph.
5.2 Upon any breach or default by Licensee, University shall have the
right to terminate this Agreement and the rights and license granted hereunder
by sixty (60) days notice by certified mail to Licensee. Such termination shall
become effective unless Licensee has cured any such breach or default prior to
the expiration of the sixty (60) day period.
5.3 Licensee may terminate this Agreement upon ninety (90) days written
notice by certified mail to University.
5
<PAGE>
5.4 No fees shall be returnable upon the termination of this Agreement.
5.5 Upon termination of this Agreement for any reason, nothing herein
shall be construed to release either party of any obligation which matured prior
to the date of such termination. Licensee may, after the date of such
termination, perform under customer warranties with respect to any Licensed
Products leased, licensed, or otherwise disposed of under the terms of this
Agreement, but may not solicit, sell, lease or license Licensed Products to any
new End Users or Distributors. Annual Minimum Royalties due upon termination
shall be pro rated for the amount of the Contract Year that has passed prior to
termination.
5.6 Surviving any termination are:
5.6.1 Any cause of action or claim of Licensee or University,
accrued or to accrue because of any breach or default by the
other party.
5.6.2 The provisions of Paragraphs 3.2, 3.3, 3.7, 5.8, 6, 7 ,8, 9
and 11.
5.7 If Licensee shall become bankrupt or admits in writing its inability
to pay debts as they mature or files a petition in bankruptcy, or if the
business of Licensee shall be placed in the hands of a receiver, assignee or
trustee for the benefit of creditors, whether by the voluntary act of Licensee
or otherwise, or if Licensee fails to secure or maintain the Insurance required
in Paragraph 9 herein, University may, at its election, terminate this Agreement
immediately upon written notice to Licensee.
5.8 Upon termination Licensee shall:
5.8.1 delete the Licensed Programs from all other software into
which it had been merged;
5.8.2 immediately deliver to University or destroy all copies of the
licensed programs and support materials; provided that, upon
licensor's written consent, licensee way retain one copy of
the Licensed Programs and User Documentation for archive
purposes only;
5.8.3 erase all Licensed Programs from any storage media before
discarding the storage media;
5.8.4 within one (1) month after the termination of the license,
certify in writing to University that, to the best of the
Licensee's knowledge, all copies of the Licensed Programs and
User Documentation have been returned or destroyed; and
5.8.5 Forever cease from any use or distribution of the Licensed
Programs, User Documentation, Licensee Derivative Works and
University Derivative Works.
5.9 Licensee acknowledges and agrees that any violation of this Agreement
by Licensee would result in irreparable harm to the University. Accordingly,
Licensee consents and
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agrees that, if Licensee violates any of the provisions of this Agreement, the
University shall be entitled, in addition to other remedies available to it, to
an injunction to be issued by any court of competent jurisdiction restraining
Licensee from committing or continuing any violation of this Agreement, without
the need for posting any bond or any other undertaking.
6 CONFIDENTIALITY
6.1 All confidential scientific and technical information communicated by
University to Licensee under this Agreement and identified as "Confidential" at
the time of disclosure to Licensee or within a reasonable period of time
thereafter, including information contained in patent applications, shall be
kept confidential by Licensee. Licensee will exercise reasonable care, including
but not limited to the restricted activities identified in Paragraph 6.2, to not
disclose any confidential information to any third party. Source Code for the
Licensed Product shall be considered confidential. Notwithstanding the
foregoing, Licensee shall be relieved of the confidentiality obligations herein
and not be prevented by this Agreement from utilizing any information received
by it from University if:
6.1.1 the information was previously known to Licensee as evidenced
by written records;
6.1.2 the information is or becomes generally available to the
public through no fault of Licensee, Distributors or End Users
including publication and/or laying open to inspection of any
patent applications or patent that University may file
corresponding to such United States patent applications;
6.13 the information is disclosed in response to an order or demand
of any court or governmental body having jurisdiction
thereover; provided that Licensee provide University with
prompt written notice of any demand or order of disclosure.
6.2 Licensee shall take all reasonable steps to maintain the
confidentiality of the confidential information. The Licensee shall not, without
University's prior written consent disclose, provide, or make available any of
the confidential information in any form to any person, except to employees or
consultants of licensee whose access is necessary to enable the Licensee to
exercise Its rights under this license. The Licensee shall require any employee
or consultant having such access to agree to maintain the confidentiality of the
confidential information.
7 WARRANTIES
7.1 University warrants that the Licensed Programs and User Documentation
are original works of authorship.
7.2 THE LICENSED PROGRAM IS FURNISHED TO LICENSEE AS-IS. UNIVERSITY MAKES
NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED. BY WAY OF EXAMPLE, BUT NOT
LIMITATION, UNIVERSITY MAKES NO REPRESENTATIONS OR WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR ANY PARTICULAR PURPOSE, OR THAT THE USE OF THE LICENSED PROGRAM,
OR
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COMPONENTS THEREOF, OR USER DOCUMENTATION WILL NOT INFRINGE ANY PATENTS,
COPYRIGHTS, TRADEMARKS OR OTHER RIGHTS. UNIVERSITY SHALL NOT BE HELD LIABLE FOR
ANY LIABILITY NOR FOR ANY DIRECT, INDIRECT OR CONSEQUENTIAL DAMAGES WITH RESPECT
TO ANY CLAIM BY LICENSEE OR ANY THIRD PARTY ON ACCOUNT OF OR ARISING FROM THIS
AGREEMENT OR USE OF THE LICENSED PROGRAM OR USER DOCUMENTATION. USC'S AGGREGATE
LIABILITY UNDER THIS AGREEMENT TO LICENSEE SHALL NOT EXCEED THE LICENSE FEE AND
ROYALTY PAID HEREUNDER BY LICENSEE.
7.3 Nothing in this Agreement shall be construed as;
7.3.1 a warranty or representation that anything made, used, sold or
otherwise disposed of under any license granted in this
Agreement is or will be free from infringement of patents,
copyrights and trademarks of third parties;
7.3.2 conferring rights to either party to use in advertising
publicity or otherwise, the name of the other party or of its
employees, subsidiaries or sublicensees except in accordance
with the terms of this Agreement.
8 INDEMNIFICATION
8.1 Licensee shall defend, indemnity and bold harmless University and its
trustees, officers, professional staff, employees and agents and their
respective successors, heirs and assigns (the "Indemnitees"), against all
liability, demand, damage, loss, cost or expense incurred by or imposed upon the
Indemnitees or any one of them in connection with any claims, suits, actions,
demands or judgments, including without limitation those arising out of any
theory of product liability (including but not limited to, actions in the form
of tort, warrantee, or strict liability) for death, personal injury, illness, or
property damage, arising from Licensee's manufacture, design, advertisement,
promotion, use, sale or other disposition of the Licensed Programs, Licensee
Derivative Works, University Derivative Works and/or Documentation.
8.2 Licensee agrees, at its own expense, to provide attorneys reasonably
acceptable to University to defend against any actions brought or filed against
any party indemnified hereunder with respect to the subject of indemnity
contained herein, whether or not such actions are rightfully brought.
9 INSURANCE
9.1 Upon the execution of this Agreement, Licensee shall at its sole cost
and expense, procure and maintain in effect a comprehensive general liability
policy of insurance in single limit coverage of not less than One Million
Dollars ($1,000,000) per incident and One Million Dollars ($1,000,000) annual
aggregate for death, bodily injury or illness and Two Hundred Thousand Dollars
($200,000) annual aggregate in property damage. Such comprehensive general
liability insurance shall provide (i) product liability coverage and (ii) broad
form contractual liability coverage for Licensee's indemnification. If Licensee
elects to self-insure all or part of the limits described above (including
deductibles or retention which are in excess of $50,000 annual aggregate) such
self-insurance program must be acceptable to University. Each such policy of
insurance shall name University as an additional insured and shall provide for
not less than thirty (30) days prior written notice to University before any
cancellation or material change in coverage shall be effective. A
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Certificate evidencing the comprehensive general liability policy herein defined
shall be delivered to University within ten (10) days of the Effective Date of
this agreement. Licensee shall maintain such comprehensive general liability
insurance for fifteen (15) years after the term of this Agreement.
9.2 Alternatively, Licensee and University may obtain an independent
opinion from legal counsel mutually agreeable to the parties in each country in
which Licensee intends to market, advertise, license, manufacture and/or
distribute Licensee Derivative Works, University Derivative Works, Licensed
Programs and User Documentation, such opinion to assist in determining the
amount of general and products liability insurance required to be carried by
Licensee in such country. Where independent legal counsel determines that little
or no liability risk to University exists under the present and reasonably
anticipated future legal trends in that country, Licensee will be required to
maintain liability insurance on University's behalf which is determined by
University to be reasonably adequate to pay litigation defense costs. Where
independent legal counsel determines that the risk of liability on the part of
University is more than minimal in that country, University and Licensee will
evaluate such risk and negotiate in good faith to determine the amounts of
liability insurance necessary to reasonably insure University's interests. If
University and Licensee cannot agree on the amounts and types of insurance
reasonably necessary to protect University's interest in a particular country,
Licensee will not manufacture, or market, advertise, license or distribute the
Licensee Derivative Works, University Derivative Works, Licensed Programs or
User Documentation in that country.
9.3 The minimum amounts of insurance coverage required under this
Paragraph (subparts 9.1 and/or 9.2) shall not be construed to create a limit of
Licensee's liability with respect to its indemnification in Paragraph 8 of this
Agreement.
10 ADDITIONAL CONDITIONS ON GRANTING RIGHTS TO DISTRIBUTORS
10.1 Licensee shall include in the terms of any agreement granting rights
to a Distributor a provision obligating the Distributor to defend, indemnity and
hold harmless University and its trustees, officers, professional staff,
employees and agents and their respective successors, heirs and assigns (the
"Indemnitees"), against all liability, demand, damage, loss, or expense incurred
by or imposed upon the Indemnitees or any one of them in connection with any
claims, suits, actions, demands or judgments, including without limitation those
arising out of any theory of product liability (including but not limited to,
actions in the form of tort, warrantee, or strict liability) for death, personal
injury. illness, or property damage, arising from Distributor's manufacture,
design, advertisement, promotion, license, use, sale, or other disposition of
the Licensed Programs, Licensee Derivative Works, University Derivative Works,
and/or User Documentation.
10.2 Licensee shall include in the terms of any agreement granting rights
to a Distributor a provision obligating the Distributor to procure and maintain
in effect, at Its sole cost and expense, a comprehensive general liability
policy of insurance in single limit coverage of not less than One Million
Dollars ($1,000,OOO) per incident and One Million Dollars ($1,000,000) annual
aggregate for death, bodily injury or illness and Two Hundred Thousand Dollars
($200,000) annual aggregate in property damage. Such comprehensive general
liability insurance shall provide (I) product liability coverage and (II) broad
form contractual liability coverage for Distributor's indemnification. If
Distributor elects to self-insure all or part of the limits described above
(including deductibles or retention which are in excess of $50,000 annual
aggregate) such self-insurance program must be acceptable to university. Each
such policy of Insurance shall name University as an additional insured and
shall provide for not less than thirty (30) days prior written notice to
University before
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any cancellation or material change in coverage shall be effective. A
Certificate evidencing the comprehensive general liability policy herein defined
shall be delivered to University within ten (10) days of the effective date of
the agreement between Licensee and Distributor. Distributor shall maintain such
comprehensive general liability insurance for fifteen (15) years after the term
of this Agreement.
11 MISCELLANEOUS
11.1 RELATIONSHIP OF THE PARTIES. In rendering performances under this
Agreement, Licensee will function solely as an independent contractor and not as
agent, partner, employee or joint venturer, with University. Nothing in this
Agreement shall be deemed or construed to create the relationship of principal
and agent, or of partnership or joint venture, and neither party shall hold
itself out as an agent, legal representative, partner, subsidiary, joint
venturer, servant or employee of the other. Neither party nor any officer,
employee, agent of representative thereof shall, in any event, have any right,
collectively or individually, to bind the other party, to make any
representations or warranties, to accept service of process, to receive notice
or to perform any act or thing on behalf of the other party, except as expressly
authorized under this Agreement or in writing by such other party in its sole
discretion.
11.2 HEADINGS. The headings used herein are intended solely for ease of
reference, and are not intended to describes construe or interpret this
Agreement.
11.3 NON WAIVER. A waiver of any breach of any provision of this Agreement
shall not be construed as a continuing waiver of said breach or a waiver of any
other breaches of the same or other provisions of this Agreement.
11.4 EXPORT. It is understood and agreed that University is subject to
United States laws and regulations controlling the export of technical data,
computer software, laboratory prototypes and other commodities (such laws
include the Arms Export Control Act, as amended and the Export Administration
Act), and that its obligations hereunder are contingent on compliance with
applicable United States export laws and regulations. The transfer of certain
technical data and commodities by the Licensee may require a license from the
cognizant agency of the United States Government and/or written assurances by
Licensee that Licensee shall not export data or commodities to certain foreign
countries without prior approval of such agency. University neither represents
that a license shall not be required nor that, if required, it shall be issued.
Licensee shall not engage in any activity in connection with this Agreement that
is in violation of any applicable U.S. law.
11.5 ASSIGNMENT. Licensee may not assign or transfer this Agreement in
whole or part to any third party without the prior written permission of
University, which permission shall not be unreasonably withheld. Notwithstanding
the foregoing, Licensee may only assign the entire Agreement to successors of
the entire business of the Licensee if the successor agrees in writing to be
bound by this Agreement and prior written notice is provided to University.
11.6 ATTORNEY FEES. If any action in law or in equity is brought to
enforce or interpret the provisions of this Agreement, the prevailing party is
entitled to all costs, expenses and reasonable attorney's fees, costs, and
expenses, in addition to any other relief to which the prevailing party may be
entitled.
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11.7 NOTICE. Any payment, notice or other communication pursuant to this
Agreement shall be sufficiently made or given on the date of mailing if sent to
such party by certified first class mail, postage prepaid, at the respective
addresses given below. The parties shall promptly notify each other in writing
of any changes in address.
In the case of University:
Director
Office of Patent and Copyright Administration
University of Southern California
3716 S. Hope Street
Los Angeles, CA 90007-4344
In the case of Licensee:
President
OK Intelligent Systems, Inc,
2345 Bering Drive, Suite 123
Houston, TX 77057
11.8 PUBLICATIONS. Nothing in this Agreement shall limit or prevent
University or Principal Investigator from publishing any information about the
Licensed Program or User Documentation.
11.9 SEVERABILITY. If any provision of this Agreement is determined to be
invalid or unenforceable under any controlling body of law, such invalidity or
unenforceability shall not in any way affect the validity of enforceability of
the remaining provisions hereof.
11.10 USE OF NAMES. Neither party shall use the name, trade name,
trademark or other designation of the other party in connection with any
products. promotion or advertising without the prior written permission of the
other party.
11.11 GOVERNING LAW. This Agreement shall be deemed to be executed and to
be performed in the State of California, and shall be construed in accordance
with the laws of the State of California as to all matters, including but not
limited to matters of validity, construction, effect and performance.
11.12 VENUE. In the event of any controversy, claim or dispute between the
parties arising out of or relating to this Agreement, such controversy, claim or
dispute may be tried solely in the courts of the State of California for the
County of Los Angeles or in the United States Federal District Court for the
Central District of California, as either party may elect, and both parties
hereto irrevocably consent to the exclusive jurisdiction and venue of such
courts. Both parties irrevocably waive any objection to such jurisdiction and
irrevocably waive the right to seek dismissal or transfer on the grounds lack of
in personam jurisdiction, improper venue, forum non conveniens or similar
grounds. Both parties acknowledge and agree that, in addition to any other
manner permitted by law, service of process of any such court may be by
certified mail to the parties' respective addresses set forth in Section 11.7
hereof. Both parties irrevocably waive any objection to such service of process
and irrevocably waive the right to seek dismissal on the grounds improper or
lack of service or similar grounds.
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11.13 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof. No amendment of this
Agreement shall be binding on the parties unless mutually agreed to and executed
in writing by each of the parties.
UNIVERSITY OF SOUTHERN CALIFORNIA GK INTELLIGENT SYSTEMS, INC.
/s/ DENNIS F. DOUGHERTY GARY F. KIMMONS
(Signature) (Signature)
Dennis F. Dougherty Gary F. Kimmons
(Print or Type Name) (Print or Type Name)
Sr. Vice President, Administration President & CEO
(Official Title) (Official Title)
5/8/97 4/29/97
(Date) (Date)
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GK Intelligent Systems, Inc.
Houston, Texas
We hereby consent to the use in this Registration Statement of our
report dated August 29, 1997, relating to the financial statements of GK
Intelligent Systems, Inc. which is contained herein. Our report contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern.
We also consent to the reference to us under the capition "Experts" in
the Registration Statement.
BDO SEIDMAN, LLP
Houston, Texas
October 2, 1997
