U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended May 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
GK INTELLIGENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 0-22057
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DELAWARE 76-0513297
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
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5555 SAN FELIPE, SUITE 625 77056
(Address of Principal Executive Office) (Zip Code)
713-840-7722
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.
Yes X No __________
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer had no revenues for the 12 months ended May 31, 1998.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the last sales price on the American Stock Exchange on
September 10, 1998, was approximately $80,406,865. As of September 10, 1998, the
registrant had 29,223,652 shares of Common Stock outstanding.
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TABLE OF CONTENTS
ITEMS PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. DESCRIPTION OF PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Form 10-KSB contains certain forward-looking statements. Although
GK Intelligent Systems, Inc., a Delaware corporation ("Company" or "GKI"),
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
The Company is a development stage enterprise currently developing
"intelligent" computer software training and performance support products and
applications. Management anticipates that only one product, "Around the Web in
80 Minutes," with two versions will be introduced in fiscal 1999. The Company's
long term strategy is to develop products and applications that 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. These technologies, which management refers to as its
SMART SUPPORT family of technologies, consist of: (i) SMART PERFORM (using
intelligent agent technology and the heterogeneous access of information in
disparate databases and multimedia database authoring tools to present the
information), (ii) SMART ENTERPRISE (a strategic resource model manager using
intelligent agent technology and the heterogeneous access capability of SMART
PERFORM), and (iii) SMART ONE (TM) (a computer based training system utilizing
multimedia technology, artificial intelligence, an adaptive dynamic interface
and advanced training methodologies to deliver a training experience). In
October 1996, the SMART SUPPORT family of technologies, including all of its
expected corporate intranet applications, qualified for a designation as a
United Nations "Flagship Technology." The Company's efforts to date have
centered primarily on (i) the acquisition and development of its core software
technologies from which management's goal is to create future products and
applications, and (ii) securing the services of competent individuals capable of
carrying out the Company's strategy. During the period from inception (October
4, 1993) through May 31, 1998, the Company has realized no revenues and has an
accumulated deficit of $18,216,000.
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"). Pursuant to an agreement effective August 1994, GK Intelligent
Systems, Inc., a Texas corporation ("GK-Texas"), transferred all of its assets
and liabilities to LBM, a Delaware shell corporation with no significant assets
or liabilities, in exchange for 6,758,920 shares of LBM Common Stock. The
remaining 963,275 shares of LBM Common Stock out of a total of 7,722,195 shares
outstanding were retained by the former owners of LBM in a transaction treated
for accounting purposes as a purchase of the Company by GK-Texas, referred to as
a "reverse merger." Of the LBM 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. Mr. Kimmons had formed GK-Texas, a Texas corporation, in February
1994 to produce and market multimedia skill-oriented training and performance
support systems using artificial intelligence. Mr. Kimmons had formed I-Net
Intelligent Systems, Inc., a Delaware corporation ("I-NET (Delaware)"), prior to
forming GK-Texas. In October 1993, I-NET (Delaware) had contracted with AT&T to
develop the SMART ONETM 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 changed its name to GK Intelligent Systems,
Inc.
In November 1995, the Company acquired from Microelectronics and
Computer Technology Corporation ("MCC") the non-exclusive, worldwide, perpetual
right and license to use various computer software tools and languages (referred
to as CARNOT technology) through the issuance to MCC of 883,333 shares of the
Company's preferred stock, which was subsequently converted into 883,333 shares
of Company Common Stock. MCC is a
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consortium of 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. Management believes that the CARNOT tools and languages will allow the
development of customized software applications capable of, among other things,
heterogeneous access to disparate databases, conceptual querying, data mining,
adaptive dynamic interfaces, multimedia authoring, artificial intelligence, and
intelligent semantic agents. To date, no products have been developed using the
CARNOT technology, and there can be no assurance that any products will be
developed using the CARNOT technology.
On September 8, 1998, the Company entered into a memorandum of
understanding with Shelley Duvall, pursuant to which Ms. Duvall will serve as an
independent consultant to the Company for an initial term of three years. Ms.
Duvall will assist the Company in the creation, development, and distribution of
children's and family-oriented intelligent learning products. Additionally, Ms.
Duvall granted to the Company the non-exclusive right for the Company to use her
name for products which she helps to produce, and for mutually approved public
relations activities. In exchange for her services, the Company has agreed to
compensate Ms. Duvall as follows: (i) $500,000 for use of the name rights,
payable $150,000 on September 8, 1998, $50,000 no later than 30 days thereafter,
and $50,000 per month commencing January 1, 1999, (ii) 10% of sales revenues
(less distribution fees) from products produced by or bearing the Duvall name,
(iii) 5% of sales revenues (less distribution fees) from products produced by
third parties introduced by Ms. Duvall to the Company, (iv) a minimum of 8% of
the total production cost of each product, and (v) options to purchase 120,000
shares of Company Common Stock which vest on a schedule of 3,300 shares per
month at an exercise price of $2.50 per share (the closing market price on the
date of grant). Upon any termination of the agreement, the Company will retain
the right to use the name "Shelley Duvall" in connection with any then existing
product produced by or bearing the Duvall name until September 8, 2008, Ms.
Duvall will continue to receive the compensation based on sales revenues (but
not production costs) of such products until such time as those products are no
longer marketed under the Duvall name, and any stock options granted but not
exercised will be canceled upon the termination of the agreement. To date, the
Company has not developed any children or family-oriented products or
applications, and there can be no assurance that any children or family-oriented
products or applications will be developed by the Company.
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, after approval by the boards of directors and majority
stockholders of both companies, GK-Texas was merged into the Company. In May
1998, the stockholders of the Company amended the Certificate of Incorporation
to increase the number of shares of capital stock. In August 1998, the Company
adopted a calendar year end that will become effective December 31, 1998. 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.
SMART ONE (TM) TRAINER
DESCRIPTION OF TECHNOLOGY
The Company's SMART ONE (TM) trainer is an advanced technology based on
specifications determined by management and developed for the Company in
conjunction with AT&T Global Information Solutions ("AT&T GIS"). The goal of the
Company's SMART ONE (TM) trainer applications is to provide individual users
with interactive training and skills support for a wide variety of products and
services. The SMART ONE (TM) 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. The SMART
ONE (TM) trainer multimedia-based training selectively adjusts to the needs of
each individual being trained. As such, 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,
skill and knowledge deficiencies are resolved, 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.
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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 learns. 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 to allow users to learn at
their own pace and style. The SMART ONE (TM) 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. 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.
INITIAL PRODUCT: "AROUND THE WEB IN 80 MINUTES"
The Company is presently developing an Internet training application of
the SMART ONE (TM) trainer, with two versions for use with Netscape Navigator
and Microsoft Internet Explorer. Entitled "Around the Web in 80 Minutes," this
introductory Internet training course, designed for all computer levels, will
utilize the SMART ONE (TM) 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. To date, no revenues have been
derived from this product, and the product has not been introduced for sale.
POTENTIAL FUTURE PRODUCTS: TRAINING AND EDUCATION MARKET
Management's strategy is to develop future products for the training and
educational market. However, it is not expected that any products in these areas
will be developed in fiscal 1999. The Company believes that 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 that can provide each student with more
individualized instruction. Computer-based multimedia training is becoming more
popular as the benefits become more defined. 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.
Management believes that there is market demand for more cost effective and
efficient educational training systems that use advanced technologies. The
Company is involved in the design, development, and production of
computer-based, multimedia educational training and occupation-related
performance support software. The Company believes that many market segments
exist within select industries and governmental agencies that it believes would
benefit from the implementation of personnel training programs. These
governmental agencies include Department of Transportation, Department of
Defense and the General Services Agency.
MARKETING
The anticipated release date for the Netscape Navigator version of
"Around the Web in 80 Minutes" is late November 1998. The Company intends to
market "Around the Web in 80 Minutes" to the consumer market through the
Internet and retail outlets. To date, the Company has not entered into any
distribution agreements with any Internet companies or retail outlets.
COMPETITION
The Company's Internet training program is designed for the consumer
market. It is anticipated that future products could be developed for the
consumer, government, and commercial markets. There are many alternative
solutions for the consumer seeking information about the Internet, including CD
ROMs offering training on specific applications or books on the Internet that
include a CD with multimedia content. There are several large, well capitalized
companies that produce educational software, including The Learning Company,
Expert Software, Inc., Broderbund, and Scholastic, which have established brand
names and could introduce and widely distribute an Internet-oriented educational
CD. There are other software companies, many of which are substantially larger
and have far greater resources than the Company, that could devote substantially
greater resources to the development and marketing of competing products. The
market for Internet training programs is intensely competitive, and there
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is no assurance that these companies will not introduce products to compete with
the Company's products. The Company's plan is for its product to compete on a
basis of its content, ease of use, depth and adaptability to user skills, but
there is no assurance that the Company will be successful in achieving this
goal.
SMART PERFORM
SMART PERFORM AND INTELLIGENT, SEMANTIC AGENTS
As part of management's long term strategy, the Company desires to
develop its "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 often unable to communicate with each other. This means
that accessing and sharing information across different systems is often
difficult or 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. It is expected that with 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 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. It
is expected that the SMART PERFORM suite of programs will utilize the advanced
CARNOT technology licensed from MCC. SMART PERFORM is being designed as 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.
LACK OF PRODUCTS
To date, the Company is in the research and development stage of
exploring potential SMART PERFORM applications and products, no products have
been developed, it is not expected that any products will be developed in fiscal
1999, and there can be no assurance that any products utilizing this technology
will be developed.
MARKETING
To date, the Company has not developed a marketing plan for SMART
PERFORM nor identified potential markets.
COMPETITION
Management believes that most of the currently existing 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).
Other competitors provide more orientation toward 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). It
should be assumed that if any SMART PERFORM product is developed, the Company
will face intense competition in the marketplace.
SMART ENTERPRISE
An additional long term strategy of the Company is to create strategic
resource management products utilizing intelligent agent technology and the
heterogeneous access capability of SMART PERFORM. It is expected that the SMART
ENTERPRISE concept will offer a real-time window to any organization, from top
to bottom. The Company is developing a knowledge management tool which
summarizes and presents key management information on a user defined basis. The
SMART ENTERPRISE portal should afford the user capability of accessing a
corporation's vital information, including accounting data, inventory status,
sales information and product margins.
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 "megapatterns" to integrate
deductive database techniques, inductive data analysis tools, and human
intuition into a continuous discovery loop that is both interactive and
autonomous. Potential applications include discovering
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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. Management believes that this technology may
complement SMART ENTERPRISE.
LACK OF PRODUCTS
To date, the Company is in the research and development stage with SMART
ENTERPRISE, it has not developed any products utilizing SMART ENTERPRISE, it is
not expected that any products will be developed in fiscal 1999 utilizing SMART
ENTERPRISE, and there can be no assurance that any products will ever be
developed utilizing SMART ENTERPRISE.
MARKETING
Management believes that any anticipated market that may exist for SMART
ENTERPRISE will be with large sized enterprises experiencing the need to improve
the timeliness and quality of key enterprise data. Potential markets include SAP
customers, accounting firms, and the Fortune 1000. To date, the Company has not
developed a marketing plan for SMART ENTERPRISE.
COMPETITION
The Company is unaware of any direct competitor of SMART ENTERPRISE,
however it should be assumed that competition will exist. Indirect competitors
are work flow-enabled software products such as STAFFWARE, and FLOWMARK.
INTELLECTUAL PROPERTY
The Company has applied for trademarks on SMART ENTERPRISE, SMART
PERFORM, and "Around the Web in 80 Minutes." The Company has applied for
servicemarks on SMART SUPPORT, DOORWAYS, and GLOBAL INTELLIGENT NETWORK. There
can be no assurance that any trademarks and/or servicemarks will be issued. The
Company has been issued a trademark on SMART ONE (TM). The Company has not filed
for any patent protection with the United States Government, and relies upon
licensed intellectual property and trade secret protection.
In November 1995 the Company exchanged shares of its capital stock in
return for a non-exclusive, worldwide right and license to use the MCC CARNOT
technology. This license precludes the Company from granting a sub-license
without MCC's prior written approval. The terms for use are perpetual, provided
there is not a material breach by either party which remains uncured for a
period of thirty days after notice from the aggrieved party, or if one of the
parties (i) ceases to carry on its business, (ii) becomes insolvent, (iii) fails
to pay its debts as they become due, or (iv) files for bankruptcy.
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.
In October 1993, the Company entered into a sub-contract agreement with
AT&T GIS 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 the written specifications for
the original architecture for this working prototype and paid AT&T approximately
$445,000. This prototype combined features of the Company's proprietary SMART
ONE (TM) program with tools developed by AT&T. This prototype was the logical
precursor to the current SMART ONE (TM) training product, and initially served
as the basic 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 $6.0 million in development stage cash outlays
since inception, as well as the issuance of capital stock to MCC. For the fiscal
years ending May 31, 1997 and 1998, the Company incurred research and
development expense of approximately $1.4 million and $1.8 million,
respectively, which includes allocated professional services, employee
compensation, depreciation and amortization, and general administrative expenses
related to research and development. 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 September 14, 1998, the Company had twenty-four employees of which
twenty-two are full-time employees. Of the twenty-two full-time employees, one
is an executive officer, three are product managers, five are research and
development employees, and six are administrative employees. One of the
administrative employees is related to the executive officer, and two of the
part-time employees are related to directors. 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.
"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.
"Data mining" The process of extracting useful information
from large volumes of seemingly meaningless
data.
"Object-oriented programming" Software that treats data, hardware devices,
or even certain aspects of the software as
objects which can be manipulated or
addressed for further use.
"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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 24,875 square feet of office space in
Houston, Texas, under separate leases, expiring between November 1998 and
January 2002, at annual rates of approximately $18 per square foot. The Company
entered into a five-year agreement to lease approximately 9,629 square feet for
a research and development facility in Atlanta, Georgia. The lease commences
upon completion of the build out which is expected
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to be October 1998. The base rent is approximately $20 per square foot for the
first six months, $24.50 for months 7-12, and increases at approximately $0.50
per square foot, per year, thereafter.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in Cause No. H-98-004; U.S. QUEST, LTD. AND
JACODY FINANCIAL, INC. V. GARY KIMMONS AND GK INTELLIGENT SYSTEMS, INC. in the
Southern District Court of Texas, Houston Division. The lawsuit was filed in
January 1998 and alleges, among other things, that the Company is liable to the
plaintiffs for violation of state and federal securities laws, breach of
contract and quantum meruit. The case arises out of services allegedly furnished
by the plaintiffs to the Company, for which plaintiffs claim they did not
receive compensation. The case was mediated without settlement in June 1998. No
discovery has been propounded by any party and, accordingly, the amount of the
plaintiffs' demand is currently unknown except for a claim to 590,000 shares of
the Company's Common Stock or $590,000. Plaintiffs have filed a motion for leave
to amend their complaint that is still pending. If the motion is granted, the
plaintiffs intend to add a defamation claim to their suit and add Rodney L.
Norville as a party defendant. The Company denies any liability to the
plaintiffs, and intends to vigorously defend the lawsuit.
The Company is a defendant in Cause No. 98-35985; DAVID MICHAEL SIMS V.
GK INTELLIGENT SYSTEMS, INC. in the 189th Judicial District Court of Harris
County, Texas. The lawsuit was filed in July 1998, and alleges the Company is
liable to the plaintiff for breach of contract and fraudulent misrepresentation.
The case arises out services allegedly performed by the plaintiff for which he
did not receive compensation. No discovery has been propounded by any party, and
the precise amount of plaintiff's demand is currently unknown other than a claim
for a commission of approximately $500,000. The Company denies any liability to
the plaintiff, and intends to vigorously defend the lawsuit.
In September 1997, the Company entered into a consulting agreement
with Union Atlantic, LC ("Union Atlantic") for performance of services. The
Company issued Union Atlantic a one year warrant to purchase 200,000 shares of
Company Common Stock at an exercise price of $.9375 per share, and a one year
warrant to purchase 112,000 shares of Company Common Stock at an exercise price
of $1.25 per share as compensation for services to be rendered. Each of the
warrants contained demand registration rights. Union Atlantic resigned as a
consultant to the Company in November 1997. As no capital was raised by Union
Atlantic, the Company sent a notice to Union Atlantic in July 1998 canceling the
warrants. In August 1998, the Company received notice from Union Atlantic
demanding registration of the warrants. The Company has contacted Union Atlantic
and is in the process of determining Union Atlantic's legal rights, if any.
In connection with the Union Atlantic transaction, the Company issued
Catalyst Financial a one year warrant to purchase 66,667 shares of Company
Common Stock at an exercise price of $.9375 per share, and a one year warrant to
purchase 37,500 shares of Company Common Stock at an exercise price of $1.25 per
share as a finder's fee for introducing the Company to Union Atlantic. Each of
the warrants contained demand registration rights. Since Union Atlantic did not
raise capital for the Company, the Company contends that no consideration was
received in exchange for the warrants. In August 1998, the Company received a
notice from Catalyst Financial demanding registration of the warrants. The
Company has contacted Catalyst Financial and is in the process of determining
Catalyst Financial's legal rights, if any.
In February 1998, the Company entered into a memorandum of understanding
and confidentiality and non-disclosure agreement with Capella Computers, Ltd.
("Capella") for software interface. The parties never consummated a definitive
agreement, no work was performed under the memorandum of understanding, and the
Company sent Capella a notice of termination in July 1998. In August 1998, the
Company received a demand from Capella for $200,000 asserting that Capella had
invested considerable time and effort in evaluating the effort needed to fulfill
the Company's requirements and working out the details of the server-to-server
architecture. The Company has contacted Capella and is in the process of
determining Capella's legal rights, if any.
In May 1997, the Company entered into a sales purchase/asset recovery
agreement with SGD International Corp. ("SGD") pursuant to which the Company was
to sell SGD certain of the Company's products for marketing purposes. In
exchange for the products, SGD furnished the Company with merchandise, service
and media credits having a value of $2.5 million. The period of exclusivity of
the Agreement expired in May 1998. As the Company
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had not released any products, none were forwarded to SGD and the Company did
not utilize any of the SGD credits. In July 1998, the Company sent SGD a notice
of termination canceling the agreement. In August 1998, SGD sent a letter
threatening a lawsuit for the Company's alleged breach of contract. The Company
contacted SGD and is in the process of determining SGD's legal rights, if any.
In November 1997, the Company entered into a consulting agreement with
Roger Lund. In connection therewith, Mr. Lund was to be issued certain shares of
the Company's Common Stock as compensation for services rendered. A dispute
arose as to the number shares Mr. Lund was to be issued. In May 1998, the
Company and Mr. Lund settled this matter and the Company agreed to issue Mr.
Lund 100,000 shares of its Common Stock, and agreed to register the resale of
25,000 shares under the Securities Act of 1933 ("Act"). To date, the Company has
not filed a registration statement with the Securities and Exchange Commission
to register the resale of such shares.
In August 1998, the Company received a letter from J. David Cabello, the
former general counsel and secretary of the Company, in connection with Mr.
Cabello's separation from employment with the Company. The Company's contractual
obligations to Mr. Cabello turn on whether he resigned from his employment or
whether he was terminated. Mr. Cabello has demanded $150,000 in total
compensation and immediate vesting of options to purchase 300,000 shares of
Company Common Stock. The Company contends Mr. Cabello resigned from his
positions with the Company, and as such, Mr. Cabello is entitled to earned but
unpaid salary through the date of resignation and vested options to purchase
12,500 shares of Company Common Stock at $7.00 per share. In the event the
parties are unable to reach an agreement, it is possible Mr. Cabello will file
suit for breach of contract and/or wrongful termination.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the stockholders was held on May 27, 1998, in which
a proposal to increase the number of authorized shares of Company Common Stock
from 25,000,000 to 250,000,000 was adopted by the stockholders. The number of
affirmative votes for the proposal was 14,995,575, the number of negative votes
for the proposal was 133,076, and 3,320 votes were withheld.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has traded under the symbol "GKI" on the
American Stock Exchange since May 21, 1998. Prior thereto, the Common Stock
traded on the OTC Electronic Bulletin Board. The following table sets forth the
high and low sales prices of the Common Stock on the American Stock Exchange
since May 21, 1998 and the high and low bid price of the Common Stock on the OTC
Electronic Bulletin Board prior thereto. With respect to the quotes on the OTC
Electronic Bulletin Board, such prices reflect inter-dealer prices, without
retail mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions.
HIGH LOW
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
FISCAL 1998
8
<PAGE>
First Quarter $ 2 1/2 7/8
Second Quarter 1 7/16 7/16
Third Quarter 11/16 3/16
Fourth Quarter
(through May 20,1998) 9 1/16 9/32
Fourth Quarter
(from May 21, 1998) 10 1/8 6 1/4
On September 10, 1998, the last sales price of the Company's Common
Stock as reported by the American Stock Exchange was $4 3/8. As of September 10,
1998, there were 458 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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below for each of the
years ended May 31, 1998 and 1997 and for the period from inception (October 4,
1993) through May 31, 1998 have been derived from the Company's historical
financial statements. The Company is a development stage enterprise engaged in
the development of sophisticated intelligent software products. From inception
(October 4, 1993) to date, the Company has realized no revenues as its
activities have been limited to the acquisition of software assets used to
develop its planned line of intelligent products and to the development of its
first planned product, an Internet training course. Accordingly, management does
not consider the historical results of operations to be representative of future
results of operations of the Company. In August 1998, the Company adopted a
calendar year end that will become effective December 31, 1998.
<TABLE>
<CAPTION>
Inception
(October 4,
YEAR ENDED MAY 31, 1993) through
1998 1997 MAY 31, 1998
-------- -------- ------------
(In thousands, except per share data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................... $ -- $ -- $ --
Costs and Expenses:
Professional services ................... 2,749 4,964 8,570
Employee compensation ................... 1,273 890 2,162
Depreciation and amortization ........... 957 820 2,303
President's compensation ................ 240 2,523 3,548
Other general and administrative ........ 663 331 1,501
-------- -------- --------
Net loss ................................... (5,882) (9,528) (18,084)
Dividends on preferred stock ............... (132) -- (132)
-------- -------- --------
9
<PAGE>
Net Loss Applicable to Common Shareholders . $ (6,014) $ (9,528) $(18,216)
======== ======== ========
Basic Net Loss Per Share of Common Stock ... $ (.35) $ (.89) $ (1.76)
======== ======== ========
Weighted Average Number of Shares of
Common Stock Outstanding .............. 17,133 10,671 10,354
======== ======== ========
</TABLE>
BALANCE SHEET DATA:
Assets:
Current assets.................................. $ 5,340
Computer software costs, net.................... 2,155
Property and equipment, net..................... 326
-----------
Total Assets....................................... $ 7,821
===========
Liabilities and Stockholders' Equity:
Current liabilities............................. $ 257
Capital lease obligations, less current
maturities..................................... 87
Stockholders' equity............................ 7,477
-----------
Total Liabilities and Stockholders' Equity......... $ 7,821
===========
GENERAL
From inception (October 4, 1993) through May 31, 1998, the Company has
utilized funds obtained through private placements to purchase and develop
intelligent software technologies. As of September 11, 1998, the Company was in
the final stages of developing its first product, an Internet training course,
which is expected to be released in late November 1998. Accordingly, the Company
has recorded no revenues and has incurred net losses totaling $18,216,000 during
the period from inception through May 31, 1998.
Costs of purchased software used to develop planned software products
are capitalized when acquired and amortized on a straight-line basis over the
expected useful life of five years and reported at the lower of unamortized cost
or net realizable value. Costs incurred to commercially develop the Company's
intelligent software technologies and products are composed primarily of
professional fees, staff salaries and subcontract costs and are expensed when
incurred as research and development until technological feasibility has been
established for an individual product.
The operating losses incurred by the Company since its inception raise
substantial doubt about its ability to meet future expected expenditures
necessary to fully develop its software products and to continue as a going
concern. The current cash forecast indicates that there will be negative cash
flow from operations through the first three quarters of the 1999 calendar year.
Based on the Company's current plan of operations, it is anticipated that its
current cash balance will provide sufficient working capital through November
1998; however, this period may be extended or reduced depending upon actual
expenses incurred in marketing its initial product. The Company is currently
seeking short and long term debt or equity financing sufficient to fund
projected working capital and software product development and marketing needs.
To date, the Company has no commitment for any additional financing, there can
be no assurance that such financing will be available or, if it is available,
that it will be available on acceptable terms. Accordingly, no assurance can be
given that the Company will be successful in obtaining financing sufficient to
fund the Company's working capital, software development and marketing
expenditure requirements for the remainder of the 1999 fiscal year or
thereafter. Failure to obtain sufficient funding will adversely impact the
Company's financial position, and could cause the Company to curtail operations,
sell assets, or take other actions as necessary in order to meet cash flow
requirements.
10
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
Revenue Recognition - In October 1997, the American Institute of
Certified Public Accountants' ("AICPA") issued Statement of Position ("SOP")
97-2 "Software Revenue Recognition." This SOP supersedes SOP 91-1 "Software
Revenue Recognition" and provides more stringent guidelines for revenue
recognition. Adoption of this statement is not expected to have a material
effect on the Company's financial position, results of operations or cash flows.
Comprehensive Income - In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.
130, "Reporting Comprehensive Income". This statement is effective for financial
statements issued for periods beginning after December 15, 1997. Management will
adopt this statement and does not consider that it will have a material impact
on the Company's financial statement disclosures.
Segments of an Enterprise and Related Information - In June 1997, the
FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). This statement is effective for fiscal years
beginning after December 15, 1997. SFAS 131 requires the reporting of profit and
loss, specific revenue and expense items, and assets for reportable segments. It
also requires the reconciliation of total segment revenues, total segment profit
or loss, total segment assets, and other amounts disclosed for segments, in each
case to the corresponding amounts in the general purpose financial statements.
Adoption of SFAS 131 will not impact the Company's financial position, results
of operations or cash flows.
Pension and Other Postretirement Benefits - In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure
requirements for pensions and other post-retirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets. The statement is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Adoption of SFAS 132 is expected to have no effect
on the Company's financial statement disclosures.
Derivative and Hedging Activities - In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedge risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.
RECENT DEVELOPMENTS
For the year ended May 31, 1998, the Company incurred a net operating
loss of $5,882,000 related primarily to the continued development of its first
planned intelligent software product, its efforts to become listed on the
American Stock Exchange and the recording of non-cash compensation to key
professionals and employees for services rendered. Non-cash expenses for the
year ended May 31, 1998 included $2,561,000 of compensation expense to
professionals and employees and $957,000 of depreciation and amortization. At
May 31, 1998, current assets were $5,340,000, total assets were $7,821,000,
current liabilities were $257,000 and stockholders' equity was $7,477,000.
RESULTS OF OPERATIONS
11
<PAGE>
REVENUES. There were no revenues for the years ended May 31, 1998 and
1997. The Company anticipates that it will record revenues from the sale of its
first product, an Internet trainer course, expected to occur in the current
fiscal year, but there can be no assurance that any revenues will be realized.
EXPENSES. Expenses for the year ended May 31, 1998 decreased by
$3,647,000, or 38%, from 1997 levels primarily due to decreases in professional
services and president's compensation which were partially offset by increases
in employee compensation, general and administrative expenses and depreciation
and amortization as more fully described below.
Professional services for the year ended May 31, 1998 decreased by
$2,215,000, or 45%, from 1997 levels due primarily to a decrease in the value of
Common Stock, options and warrants awarded to professionals in 1998 for services
rendered. Common Stock and warrants valued at $4,731,000 were issued to
professionals in 1997 while the value of such issuances to professionals in 1998
amounted to $1,940,000. The offsetting increase of $576,000 in cash-based
professional fees in 1998 was due primarily to a general increase in the number
of legal and other professionals used by the Company to support an increased
level of business activity.
President's compensation for the year ended May 31, 1998 decreased by
$2,283,000 to $240,000 due primarily to the issuance in 1997 of 1,100,000 shares
of Common Stock to the president for services performed valued at $2,262,500.
Employee compensation for the year ended May 31, 1998 increased by
$383,000, or 43%, from 1997 due to an increase in the number of employees on
staff from four to fourteen offset by a decrease in the value of Common Stock
and warrants granted to employees from $800,000 in 1997 to $621,000 in 1998.
General and administrative expenses for the year ended May 31, 1998
increased by $331,000 due primarily to a general increase in the Company's
business activities, an increase in the level of employees and infrastructure
needed to support such activities, and the Company's decision to list its Common
Stock on the American Stock Exchange.
Depreciation and amortization for the year ended May 31, 1998 increased
by $137,000, or 17%, due in large part to the acquisition of additional
furniture and equipment to accommodate the increase in employees as well as the
accelerated amortization of $60,000 of capitalized software costs not expected
to benefit the Company in the near term.
As of May 31, 1998, for federal income tax purposes, the Company
reported an aggregate of $16,079,000 of available net operating loss ("NOL")
carry-forwards incurred during the period from inception (October 4, 1993)
through May 31, 1998. These NOL carry-forwards may be available to the Company
to offset future taxable income through the year 2013. However, the conversion
of some or all of the outstanding warrants or options, or other future issuances
of common or preferred stock could result in a change in control for federal
income tax purposes. Such an event 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, 1998 amounted to $2,478,000, an increase of $1,240,000 over the
cash used for 1997 fiscal year operations. The increase relates primarily to
general increases in business activity, number of employees, number of
consultants and general and administrative expenses in 1998 as well as the
retirement of $155,000 of prior year president's compensation in 1998.
12
<PAGE>
Investing Activities - During the year ended May 31, 1998, the Company
invested $260,000 for software costs and $177,000 for furniture and equipment,
an increase of $267,000 over combined 1997 fiscal year capital investments. The
increase relates to (i) refinements to the internet trainer course, which were
capitalized and will be amortized when revenues from product sales are
recognized, and (ii) furniture and equipment purchases required in order to
accommodate the increase in employees and consultants.
Financing Activities - The Company has financed its operating and
investing activities since inception (October 4, 1993) primarily from the
proceeds of private placements. During the year ended May 31, 1998, the Company
received approximately $7.8 million from a private placement, including $5.4
million from the issuance of 4.6 million shares in May 1998. Also during 1998,
the Company received and repaid $150,000 of bank loans.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through
private placements of its equity securities. From inception (October 4, 1993)
through May 31, 1998, the Company has raised a total of approximately $10.8
million in cash. Of this total, approximately $7.8 million, or 72%, was raised
in fiscal 1998 through the issuance of 8,294,790 shares of Common Stock while
approximately $1.8 million, or 17% was raised in fiscal 1997 through the
issuance of 2,371,653 shares of Common Stock.
At May 31, 1998, the Company had a cash balance of approximately $5.2
million primarily due to cash remaining from the $5.4 million private placement
received in May 1998. In addition, working capital at May 31, 1998 amounted to
approximately $5.1 million. As of May 31, 1998, future minimum lease payments
due under long-term operating leases are approximately: $343,000 for fiscal year
1999, $436,000 for fiscal year 2000, $424,000 for fiscal year 2001, $400,000 for
fiscal year 2002, and $339,000 for fiscal year 2003.
Based on the Company's current plan of operations, it is anticipated
that its current cash balance will provide sufficient working capital through
November 1998, however, this period may be extended or reduced depending upon
actual expenses incurred in marketing its initial product. 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,
1998 regarding the uncertainty concerning the Company's ability to continue as a
going concern. The Company will need additional financing to fund its working
capital requirements, software development, and marketing expenditure
requirements. In addition, the amount of such expenditures may be affected by
product sales during this period, anticipated or incurred marketing expenses,
research and development expenditures, service and customer support expenditures
or expenditures relating to other ventures in which the company may participate.
Such financing may be raised through equity or debt offerings, joint ventures or
other collaborative relationships, borrowings and other sources. To date, the
Company has no commitment for any such additional financing (with any equity
financing likely to be effected on a best-efforts basis), 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, sell assets, or take other
actions as necessary in order to meet cash flow requirements. 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.
YEAR 2000 COMPLIANCE ISSUES
The year 2000 poses certain issues for business and consumer computing,
particularly the functionality of software for two-digit storage of dates and
special meanings for certain dates such as 9/9/99. The year 2000 is also a leap
year, which may also lead to incorrect calculations, functions, or system
failure. The problem exists for many kinds of software, including software for
mainframes, PCs, and embedded systems. The Company intends to initiate the
process of gathering, testing, and producing information about the Company's
technologies impacted by Year 2000 transition. The Company's board of directors
is currently developing a Year 2000 strategy for its initial product and future
products. The Company believes its initial product is Year 2000 compliant.
However, variability of definitions of "compliance" with the Year 2000 and of
different combinations of software, firmware, and hardware may lead to lawsuits
against the Company. The outcomes of any such lawsuits and the impact on the
Company are not estimable at this time. The Year 2000 may affect the Company's
internal systems, however management believes the effect will be minimal as the
Company purchased the majority of its hardware systems
13
<PAGE>
within the last year and a half. The Company intends to assess the readiness of
its systems and those of its vendors for handling the Year 2000. Although the
assessment has not been initiated, management currently believes that resolving
these matters will not have a material adverse impact on the Company's financial
position or its results of operations.
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 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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Alonzo & Wells, LLP, the Company's former independent accountants,
resigned in August 1997 and did not audit fiscal 1997. Alonzo & Wells, LLP
audited the Company's financial statements for the fiscal years ended May 31,
1995 and 1996 and their reports did not contain an adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle except it was modified as to uncertainty as follows, "[t]he
Company has suffered recurring losses from operations, which raise substantial
doubt about its ability to continue as a going concern."
In August 1997, upon recommendation by the Board of Directors, 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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company's directors and executive officers are:
NAME AGE POSITION
----------------------------------------------------------------------
Gary F. Kimmons 47 Chairman of the Board of
Directors, Chief Executive
Officer, Secretary, and
President
Gerald Allen 54 Director
John Paul DeJoria 55 Director
GARY F. KIMMONS has served as chairman of the board of the Company since
August 1998, and from inception until April 1998. Mr. Kimmons has also served as
president and chief executive officer of the Company since inception and
secretary since September 1998. 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.
14
<PAGE>
GERALD ALLEN has served as a director of the Company since May 1998. Mr.
Allen has served as chairman of the board of International Industrial Services,
Inc., owners of Cooper Heat and MQS Inspection, for over five years. For the
past twenty years, Mr. Allen has been involved in all aspects of venture capital
financing in the energy sector.
JOHN PAUL DEJORIA has served as a director of the Company since August
1998. Mr DeJoria is the chairman of the board and chief executive officer of
John Paul Mitchell Systems, a privately held cosmetic company serving the United
States and twenty-three other countries. Mr. DeJoria also serves as a director
for MQS Inspection, Cooper Heat, Skidmore Energy, and N.R.G. Resources. Mr.
DeJoria is co-founder of Solar Utility Company and St. Marten Spirits.
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. In September 1998, the Company established an audit committee
which is comprised of Messrs. Allen and DeJoria, and a compensation committee
comprised of Messrs. Kimmons and Allen. The Company has not established and does
not maintain any executive or nominating committees. All officers serve at the
discretion of the board of directors.
RECENT RESIGNATIONS
On August 12, 1998, Joseph "Rod" Canion, the former chairman of the
board of the Company, and John Gribi, a former director of the Company gave
notice of their resignation from the board of directors. On August 12, 1998, the
following officers also severed their relationship with the Company: chief
financial officer Tim Harris, chief information officer Doyle Baker, corporate
counsel J. David Cabello, director of product marketing Lewis Shrock, and
marketing executive Kathleen Harrington Clark. On September 14, 1998, Rodney L.
Norville resigned as an officer and director of the Company.
The Company requested a filing extension for its Form 10-KSB because of
delays resulting from the unexpected resignations of several members of senior
management in August 1998 and to complete an investigation by outside counsel
which commenced promptly after allegations were made by certain former officers
of the Company regarding possible securities law violations. The Company
announced on September 9, 1998 that a special committee of the Company's Board
of Directors completed its investigation of alleged securities law violations
involving the Company and presented the report to the full Board of Directors.
The report stated that the special committee found no material violations of
securities law or trading violations by Company officers and no issues
sufficiently material to warrant further investigation or action by the Company.
The Board adopted the report and the conclusions of the special committee.
SECTION 16(A) COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934
("Exchange Act") requires the Company's directors and executive officers, and
persons who own beneficially more than ten percent of the Common Stock of the
Company, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission. Copies of all filed reports are required to
be furnished to the Company pursuant to Rule 16a-3 promulgated under the
Exchange Act. Based solely on the reports received by the Company and on written
representations from certain reporting persons, the Company believes that the
directors, executive officers, and greater than ten percent beneficial owners
complied with all applicable filing requirements during the fiscal year ended
May 31, 1998, except the following. Mr. Norville did not timely file a Form 3 in
March 1997, the date the Company became subject to the reporting obligations
under Section 12 of the Exchange Act, which Form 3 was subsequently filed in May
1998, and Mr. Norville did not timely file a Form 5 reporting an exempt grant
pursuant to Rule 16b-3 of the Exchange Act ("exempt grant") in March 1998 of
options to purchase 320,000 shares of Common Stock, a warrant to purchase
180,000 shares of Common Stock, and a warrant to purchase 1,200,000 shares of
Company Common Stock vesting over a period of four years, which Form 5 was
subsequently filed in September
15
<PAGE>
1998. Mr. Kimmons did not timely file a Form 3 in March 1997, the date the
Company became subject to the reporting obligations under Section 12 of the
Exchange Act, which Form 5 was subsequently filed in May 1998, and Mr. Kimmons
failed to timely file a Form 5 reporting an exempt grant of a warrant to
purchase 4,000,000 shares of Company Common Stock vesting over a period of four
years, which Form 5 was subsequently filed in September 1998. Mr. Allen did not
timely file a Form 3 reporting his election as a director in May 1998, which
Form 5 was subsequently filed in September 1998. Mr. Gribi did not timely file a
Form 3 in April 1998 upon becoming a director of the Company, nor did Mr. Gribi
timely file a Form 5 in May 1998 reporting an exempt grant in April 1998 of
options to purchase 300,000 shares of Common Stock. Mr. Canion did not file a
Form 3 in March 1998 upon becoming a director, which Form 3 was subsequently
filed in June 1998. Mr. Canion failed to timely file a Form 4 in April 1998
reporting the purchase of 3,000,000 shares of Company Common Stock. Mr. Canion
subsequently reported the purchase on the Form 3 filed in June 1998. Mr. Canion
disposed of 210,000 shares by gift in March 1998, but did not file his Form 4
until June 1998. Additionally, Mr. Canion purchased 75,000 shares and disposed
of 1,000 shares by gift in April 1998, but did not file his Form 4 until June
1998. Mr. Ben-Dak failed to file a Form 3 in March 1997, the date the Company
became subject to the reporting obligations under Section 12 of the Exchange
Act, nor did Mr. Ben-Dak file a Form 5 in July 1997 reporting the exempt grant
of 950,000 shares of Common Stock in April 1997.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Bonus/ Securities
Other Restricted Underlying All Other
Name and Fiscal Annual Stock Options/ LTIP Compen-
Principal Position Year Salary Compensation(1) Award(2) SARs Payouts Sation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gary F. Kimmons,
CEO ...................... 1998 $ 240,000 -- -- 4,000,000(3) -- --
1997 $ 240,000 -- $2,262,500(4) 2,000,000(5) -- --
1996 $ 240,000 -- $ 185,625(6) -- -- --
Rodney L
Norville, Former
Vice-President
and Director ............. 1998 $ 165,000 -- $ 343,750(7) 1,700,000(8) -- --
1997 $ 120,000 -- $1,975,000(9) -- -- --
1996 -- -- -- -- -- --
Rod Canion,
Former Chairman
of the Board ............. 1998 $ 25,000(10) -- -- -- $ 131,250(11) --
1997 -- -- -- -- -- --
1996 -- -- -- -- -- --
Gerald Allen,
Director ................. 1998 -- -- $4,250,000(12) -- -- --
1997 -- -- -- -- -- --
1996 -- -- -- -- -- --
Joseph D Ben-Dak, Former
Senior Vice-President
and Director ............. 1998 $ 160,000 -- -- -- -- --
1997 $ 45,000 -- $1,987,500(13) 200,000(14) -- --
1996 -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Does not include perquisites and other personal benefits in amounts less
than 10% of the total annual salary and other compensation.
(2) These issuances of Company Common Stock were awarded for services rendered,
valued at the closing market price as of date of grant.
16
<PAGE>
(3) Consists of a warrant granted in March 1998 to purchase 4,000,000 shares of
Company Common Stock at an exercise price of $0.3125 per share, vesting over
a period of four years at a rate of 1,000,000 shares per year, beginning in
March 1999.
(4) Consists of: (a) 1,000,000 shares of Company Common Stock granted April 18,
1997, (b) 50,000 shares of Company Common Stock granted January 31, 1997,
and (c) 50,000 shares of Company Common Stock granted May 27, 1997.
(5) In September 1996, Mr. Kimmons was granted a warrant to purchase 2,000,000
shares of Company Common Stock at a price of $1.00 per share. In March 1998,
the warrant was re-issued as a result of a decrease in the price of the
Company's Common Stock as follows: (a) options to purchase 290,909 shares of
Company Common Stock, exercisable immediately, at $0.34375 per share, and
(b) a warrant to purchase 1,709,091 shares of Company Common Stock,
exercisable immediately, at $0.3125 per share.
(6) Consists of: (a) 180,000 shares of Company Common Stock granted May 22,
1996, and (b) 60,000 shares of Company Common Stock granted May 30, 1996.
(7) Consists of 500,000 shares of Company Common Stock granted November 17,
1997.
(8) Consists of: (a) an option to purchase 320,000 shares of Company Common
Stock, exercisable immediately, at $0.3125 per share, (b) a warrant to
purchase 180,000 shares of Company Common Stock, exercisable immediately, at
$0.3125 per share, and (c) a warrant to purchase 1,200,000 shares of Company
Common Stock vesting over a period of four years at a rate of 300,000 shares
per year, beginning in March 1999, at an exercise price of $0.3125 per
share.
(9) Consists of: (a) 100,000 shares of Company Common Stock granted October 31,
1996, (b) 100,000 shares of Company Common Stock granted May 27, 1997, and
(c) 800,000 shares of Company Common Stock granted April 18, 1997.
(10)The value stated represents a portion of $150,000 that was paid to Mr.
Canion in April 1998 as part of his consulting agreement. See Item 10 :
"Executive Compensation Terminated Consulting Agreements."
(11)The value stated represents the issuance of 500,000 shares of restricted
Company Common Stock to Mr. Canion in fiscal 1998. See Item 10 : "Executive
Compensation Terminated Consulting Agreements."
(12) Consists of 1,000,000 shares of Company Common Stock granted March 31,
1998.
(13) Consists of: (a) 50,000 shares of Company Common Stock granted October 31,
1996, and (b) 950,000 shares of Company Common Stock granted April 18, 1997.
(14)See Item 12 : "Certain Relationships and Related Transactions," for a
discussion of the warrant to purchase 200,000 shares of Company Common
Stock.
EMPLOYMENT AND CONSULTING AGREEMENTS
In March 1998, the Company amended and restated its employment agreement
with Mr. Kimmons. The amended agreement provides for a three-year term that
automatically renews at the end of the term for consecutive one-year terms, and
which provides for an annual base compensation of $240,000 and a warrant to
purchase 4,000,000 shares of Company Common Stock exercisable at a purchase
price of $.3125 per share (closing market price on the date of grant) which vest
at the rate of one-quarter per year over four years. Upon Mr. Kimmon's death,
disability or involuntary termination (other than for cause), all unvested
warrants will become immediately vested and exercisable. The Company may
terminate the agreement upon the following: (i) disability for a period of more
than six months with 30 days notice to Mr. Kimmons; (ii) for cause which is
defined as a conviction of a felony or moral turpitude, deliberate and
intentional refusal to perform (notice and cure provisions exist), and fraud or
defalcation involving material funds or assets; and (iii) the death of Mr.
Kimmons. Mr. Kimmons may terminate the agreement for good reason, which is
defined as diminution of duties, failure by the Company to comply with the
agreement, a requirement by the Company for Mr. Kimmons to move locations, any
purported termination other than as permitted in the agreement, a change of
control, or failure to have a successor corporation assume the agreement. If the
agreement is terminated in connection with a change of control, (i) the Company
must pay Mr. Kimmons an amount equal to approximately three times the sum of his
annual base salary and the average of the last annual incentive bonuses actually
paid, (ii) all outstanding warrants immediately vest, (iii) welfare and fringe
benefits are provided for one year, (iv) the Company must pay the sum of any
earned salary not yet paid, deferred compensation and an amount equal to 150% of
the value of Mr. Kimmons accrued benefits in any Company long term incentive
plan times a fraction equal to the months worked in the performance period
before termination divided by the total performance period ("Accrued
Obligations"). On death or disability, the Company must only pay the Accrued
Obligations and other benefits accrued but not yet paid. If the agreement is
terminated for cause or Mr. Kimmons terminates for other than good reason, the
Company shall pay earned but unpaid salary and any vested benefits payable to
him under a plan or policy. In the event of a change of control, Mr. Kimmons
will remain with the Company until the later of: (i) 15 days after the one year
anniversary of the change of control, (ii) 15 days after the anniversary date of
any merger, or (iii) March 15, 2001. During the remaining term of the agreement
following a change of control, Mr. Kimmons will have materially the same duties
he had 120 days prior to the change of control, will perform those duties in the
same office or at a location less than 35 miles further away from his home, and
Mr. Kimmons salary will not be reduced during that period. The agreement defines
a change of
17
<PAGE>
control as: (1) any person acquiring 30% of the Company or Mr. Kimmons' voting
rights are reduced to less than 30% of the outstanding shares, (2) if during a
two year period, individuals who were on the board of directors (and any new
directors elected by two-thirds of directors in office at the beginning of the
period or whose election or nomination was so approved) cease to be a majority
of the board of directors, (3) if the shareholders approve a merger or
consolidation (other than a merger in which company shareholders own at least
50% of surviving entity), or (4) a complete liquidation. Mr. Kimmons holds
voting rights for 5.1 million shares of Company Common Stock held by other
individuals pursuant to voting rights agreements. The voting rights agreements
expire May 31, 2000; however, upon the sale of the shares by record holders
pursuant to Rule 144 of the Act after May 31, 1999, the voting rights terminate
as to the sold shares. Upon the expiration of the voting rights agreements or
the sale of a significant number of shares of Common Stock by the Company, it is
possible that Mr. Kimmons percentage of voting rights would fall below 30%
triggering the change of control provisions in his employment agreement.
In March 1998, the Company amended and restated its employment agreement
with Mr. Norville, which contains identical terms to Mr. Kimmons' employment
agreement except the annual base compensation is $180,000 and the warrant is to
purchase 1,200,000 shares of Company Common Stock at an exercise price of
$0.3125 per share (the closing market price on the date of grant) vesting
one-quarter per year over a four year period. Additionally, he received an
option to purchase 320,000 shares of Company Common Stock at $0.3125 per share
and a warrant to purchase 180,000 shares of Company Common Stock at $0.3125 per
share. In September 1998, by mutual agreement between the Company and Mr.
Norville, Mr. Norville resigned as a director and officer of the Company, his
employment agreement was terminated and concurrently therewith, Mr. Norville's
professional corporation entered into a one-year consulting agreement with the
Company. Mr. Norville's consulting agreement provides for monthly consulting
fees of $7,500 for a period of twelve months ending September 15, 1999. Mr.
Norville's severance agreement provides for severence compensation of $360,000
payable in installments of $7,500 for a period of (12) twelve months, and
thereafter $15,000 per month for a period of (18) eighteen months, and affirms
the warrant to purchase 1,200,000 shares of Company Common Stock which vest
one-quarter per year over a four year period beginning March 1999. Such
severence compensation will be recorded as an expense in the Company's
financial statements for the transitional reporting period ending December 31,
1998.
In August 1998, the Company entered into a one year consulting agreement
with John Paul DeJoria whereby, the Company agreed to compensate Mr. DeJoria in
the amount of $50,000, and Mr. DeJoria purchased 1,000,000 shares of Company
Common Stock at $.05 per share. The shares are subject to repurchase by the
Company at $.05 per share in the event of Mr. DeJoria's failure to perform or
early termination of the agreement. Under the agreement, the shares vest at a
rate of one-twefth per month, and the vested shares are no longer subject to
repurchase by the Company. The entire amount of the shares vests immediately and
automatically without notice from DeJoria upon material breach of the agreement
by the Company or breach of any of the representations or warranties. Mr.
DeJoria may terminate the agreement at any time upon thirty days notice. The
Company may terminate the agreement if the Board determines that DeJoria failed
to perform his duties under the agreement for a period of six months, and such
failure was not due to illness or disability.
TERMINATED CONSULTING AGREEMENTS
On August 12, 1998, Mr. Canion gave notice of his resignation from the
Board of Directors. Mr. Canion purchased 3,000,000 shares of Company Common
Stock pursuant to a one year consulting agreement dated March 17, 1998 at an
agreed price of $.05 per share. The shares were subject to a repurchase
provision allowing the Company to repurchase a portion of the shares at their
purchase price upon early termination of the consulting agreement by Mr. Canion.
The portion of the shares subject to the repurchase provision was to be
calculated by multiplying the number of months of the unexpired term of the
consulting agreement times 250,000 shares. The Company exercised its repurchase
right and sent a demand letter to Mr. Canion in September 1998 for the
repurchase of 2,000,000 shares. In addition, Mr. Canion was paid $150,000 which,
as per the consulting agreement, vested proportionately over a period of one
year. The consulting agreement provided that in the event of termination by Mr.
Canion, Mr. Canion would be required to return the unvested portion of the
compensation. Mr. Canion resigned in August 1998, and the Company sent a demand
letter to Mr. Canion in September 1998 for the re-payment of $94,931.51. To
date, Mr. Canion has not returned the unearned compensation and the Company has
not concluded the repurchase of the shares.
On August 12, 1998, Mr. Gribi gave notice of his resignation from the
Board of Directors. Mr. Gribi was issued an option to purchase 300,000 shares of
Company Common Stock at an exercise price of $2.3125 per share (the closing
market price on the date of grant), pursuant to a consulting agreement dated
April 14, 1998. The shares were to vest at a rate of 25,000 shares per month.
Pursuant to the consulting agreement, the Company has cancelled
18
<PAGE>
options to purchase 200,000 shares of Company Common Stock.
STOCK OPTIONS AND WARRANTS
During 1996 the Company adopted, and the board of directors approved,
the 1995 Incentive Stock Option Plan ("Plan"). Pursuant to the Plan, options to
purchase up to 5,000,000 shares of Common Stock may be granted to employees,
officers and directors of the Company. In June 1998, the board of directors
approved an increase in the number of authorized options from 1,000,000 shares
to 5,000,000 shares. The Company intends to seek stockholder approval of this
increase at the Company's next annual meeting. Options granted under the Plan
generally expire five to ten years after the date of grant. As of May 31, 1998,
options to purchase 635,909 shares were exercisable and 2,971,091 shares were
available for future grants under the Plan. The Company does not maintain any
long-term retirement or other benefit plan.
The following table provides information on the warrants and options
granted to the indicated officer and director during fiscal year 1998:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NAME SHARES UNDERLYING PERCENT OF EXERCISE PRICE EXPIRATION DATE
WARRANTS/OPTIONS GRANTED TOTAL OPTIONS
TO EMPLOYEES
<S> <C> <C> <C> <C> <C>
Gary Kimmons ............ 290,909(1) 12.5% $0.34375 03/13/03
1,709,091(2) (3) $ 0.3125 03/13/03
4,000,000(4) (3) $ 0.3125 03/13/03
Rodney L. Norville ...... 320,000(1) 13.7% $ 0.3125 03/13/03
180,000(2) (3) $ 0.3125 03/13/03
1,200,000(5) (3) $ 0.3125 03/13/03
Gerald Allen ............ -- -- -- --
Rod Canion .............. -- -- -- --
Joseph D. Ben-Dak ....... -- -- -- --
</TABLE>
- -----------------
(1) Consists of an immediately exercisable option.
(2) Consists of an immediately exercisable warrant.
(3) Messrs. Kimmons and Norville were the only employees issued warrants in
fiscal year 1998.
(4) Consist of a warrant vesting over four years at a rate of 1,000,000 per
year, beginning in March 1999.
(5) Consist of a warrant vesting over four years at a rate of 300,000 per
year, beginning in March 1999.
AGGREGATED WARRANT/OPTIONS EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END WARRANT/OPTIONS VALUES
<TABLE>
<CAPTION>
<S> <C> <C>
SHARES VALUE OF
ACQUIRED NUMBER OF SECURITIES UNEXERCISED
ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY
NAME EXERCISE REALIZED WARRANTS/OPTIONS WARRANTS/OPTIONS(1)
- ------------------------------------------------------------------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Gary Kimmons ................ -- -- 1,709,091 -- $10,468,182 --
-- -- 290,909 -- $ 1,772,727 --
-- -- -- 4,000,000 -- $24,500,000
Rodney L. Norville ........... -- -- 500,000 -- $ 3,062,500 --
-- 1,200,000 -- $ 7,350,000
Joseph D. Ben-Dak ............ -- -- 200,000 -- $ 1,139,500 --
Gerald Allen ................. -- -- -- -- -- --
Rod Canion ................... -- -- -- -- -- --
</TABLE>
(1) Computed based on the differences between the closing market price and
aggregate exercise prices as of Friday, May 29,1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 14, 1998, 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.
NAME AND ADDRESS OF BENEFICIAL NUMBER OF SHARES OF COMMON PERCENTAGE OF
OWNER (1) STOCK BENEFICIALLY OWNED OWNERSHIP
--------- ------------------------ ---------
Kimmons Family Partnership, Ltd.(2) 4,955,000 17.0%
Gary F. Kimmons 14,856,080(3) 47.6%
Gerald Allen 2,078,860(4) 7.5%
John Paul DeJoria 1,010,000(5) 3.5%
Rodney L. Norville 2,061,000(6) 6.9%
Rod Canion 2,864,000(7) 9.8%
Joseph D. Ben-Dak 200,000(8) .7%
All executive officers and
directors as a group (3 persons) 15,866,080(9) 50.9%
- -------------------------
(1) The business address of each principal stockholder is the same as the
address of the Company's principal executive offices, except for: (a) Mr.
Norville whose address is 13103 F.M. 1960, Houston, Texas 77065, (b) Mr.
Canion whose address is 5 Post Oak Park, Houston, Texas 77027, and (c) Mr.
Ben-Dak whose address is 20 Villa Street, Mt. Vernon, New York 10552.
(2) Mr. Kimmons is a general partner of a family limited partnership, and as
such has the sole voting, investment and disposition power over the
4,955,000 shares of Company Common Stock owned by the partnership.
(3) Includes the 4,955,000 shares owned of record by the Kimmons Family
Partnership, Ltd., a warrant to purchase 1,709,091 shares, and options to
purchase 290,909 shares of Company Common Stock. Includes 5,100,000 shares
of Company Common Stock held by other individuals that have granted Mr.
Kimmons voting rights with respect to these shares. The voting rights
agreements expire May 31, 2000; however, if the shares are sold by the
record holder pursuant to Rule 144 of the Act, after May 31, 1999, the
voting rights terminate as to the sold shares.
(4) Includes 28,860 shares owned by LK Resources, L.C., of which Mr. Allen is a
member and 900,000 shares owned by Mr. Allen as trustee.
(5) See Item 10: "Executive Compensation - Employment and Consulting
Agreements," for a discussion of the purchase terms of these shares of
Company Common Stock.
(6) Mr. Norville is an officer and director of Jedson Enterprises, Inc., which
is trustee of trusts which own 1,000 shares of Company Common Stock, and as
such has the voting, investment, and disposition power over these shares.
Jedson Enterprises, Inc. is a partner in Jedson Partners, Ltd. which owns
1,450,000 shares of Company Common Stock. In addition, Mr. Norville's
daughters own 110,000 shares of Company Common Stock. Includes a warrant to
purchase 180,000 shares of Company Common Stock and options to purchase
320,000 shares of Company Common Stock.
(7) See Item 10: "Executive Compensation -Terminated Consulting Agreements," for
a discussion of the Company's repurchase rights with respect to certain of
Mr. Canion's shares of Company Common Stock.
(8) Consists of a warrant to purchase 200,000 shares of Company Common Stock.
20
<PAGE>
(9) Includes options and warrants to purchase 2,000,000 shares of Company Common
Stock.
ITEM 12. 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. Mr. Kimmons had 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. 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 per share, which was re-issued in March 1998 as options to
purchase 290,909 shares of Common Stock at $0.34375 per share and a warrant to
purchase 1,709,091 shares of Common Stock at $0.3125 per share. Mr. Kimmons was
granted an additional 1,100,000 shares of Common Stock, of which 50,000 shares
were issued in January 1997, 50,000 shares were issued in May 1997, and
1,000,000 shares were granted in April 1997 and issued in August 1997. In March
1998, Mr. Kimmons received a warrant to purchase 4,000,000 shares of Common
Stock vesting over a period of four years at a rate of 1,000,000 shares per
year, beginning in March 1999. All grants were for services rendered and at
exercise prices of no less than the closing market price on the date of grant.
In September 1997, the board of directors voted to pay Kathryn Kimmons,
the wife of Mr. Kimmons, an annual salary of $60,000 for her services as
corporate secretary (a non-executive office) for the fiscal year 1998. Mrs.
Kimmons began serving as secretary in June 1997 and resigned as secretary in May
1998.
Jedson Enterprises, Inc. - Trustee ("Jedson Enterprises"), an entity
controlled by Mr. Norville, acquired 24,000 shares of Common Stock at a purchase
price of $.50 per share in May 1994, and 26,000 shares of Common Stock for
nominal consideration in January 1995. Jedson Enterprises was issued 100,000
shares of Common Stock for nominal consideration in October 1996, 100,000 shares
of Common Stock for nominal consideration in May 1997, and 800,000 shares for
nominal consideration were granted in April 1997 and were issued in August 1997.
In November 1997, the Company determined to issue Mr. Norville 500,000 shares of
Common Stock for nominal consideration, which shares were initially issued to
Lara Norville and Jenifer Norville, Mr. Norville's daughters, and subsequently
400,000 shares were transferred to Jedson Partners, Ltd., controlled by Mr.
Norville. In March 1998, Mr. Norville was issued vested options to purchase
320,000 shares of Common Stock at $0.3125 per share, a vested warrant to
purchase 180,000 shares of Common Stock at $0.3125 per share, and a warrant to
purchase 1,200,000 shares of Common Stock vesting over a period of four years at
a rate of 300,000 shares per year at $0.3125 per share. All grants were for
services rendered and at exercise prices equal to the closing market price on
the date of grant.
In October 1996, Mr. Ben-Dak was issued 50,000 shares of Common Stock
for nominal consideration. In April 1997, Mr. Ben-Dak was issued 950,000 shares
of Common Stock for nominal consideration. In September 1996, Mr. Ben-Dak was
issued a warrant to purchase 500,000 shares of Common Stock vesting over a
five-year period at a rate of 100,000 per year at 75% of the closing market
price averaged over the three month period prior to vesting of the shares. In
March 1998 Mr. Ben-Dak resigned from the board of directors. As part of his
separation from the Company, a portion of the warrant to purchase 300,000 shares
of Company Common Stock was cancelled, and the vesting of the remaining shares,
which had not already vested, were accelerated.
Between March and May 1998, Gerald Allen assisted the Company in
connection with a private placement of Company Common Stock for which Mr. Allen
was issued 1,000,000 shares of Common Stock. Mr. Allen, individually and as
trustee, purchased an aggregate of 1,050,000 shares of Company Common Stock in
May 1998 at a purchase price of $1.50 per share. This purchase was part of a
private placement offering subscribed to by additional unrelated third parties,
which offering price was at or about market.
See Item 10: "Executive Compensation - Employment and Consulting
Agreements" for a discussion of shares of Company Common Stock purchased by Mr.
DeJoria, and "Item 10: Executive Compensation - Terminated Consulting
Agreements" for a discussion of shares of Company Common Stock purchased by Mr.
Canion and the Company's repurchase rights.
21
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are to be filed as part of the Registration
Statement:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
2.1(1) Certificate of Merger
3.1(1) Certificate of Incorporation of the Company,
and Amendments thereto.
3.2(1) By-laws of the Company
3.3(2) Amendment to Certificate of Incorporation
4.1(1) Common Stock Certificate
4.2(1) Form of Warrant
9.1(2) Form of Voting Agreement granted to Mr. Kimmons
10.1(1) Agreement with Microelectronics Computer Corporation
10.2(1) Agreement with AT&T
10.3(a)(2) Gary Kimmons Amended and Restated Employment Agreement
10.3(b)(2) Gary Kimmons Addendum to the Amended and Restated
Employment Agreement
10.4(1) Rodney L. Norville Employment Agreement
10.5(1) Employee Stock Option Plan
10.6(1) Data Crystal Agreement
10.7(2) Rodney L. Norville Consulting Agreement
10.8(2) Rod Canion Consulting Agreement
10.9(2) John Gribi Consulting Agreement
10.10(2) David Cabello Employment Agreement
10.11(2) John Paul DeJoria Consulting Agreement
10.12(2) Shelley Duvall Memorandum of Understanding
10.13(2) Rodney L. Norville Severance Agreement and General Release
27.1(2) Financial Data Schedule
- -------------------
(1) Filed previously on registration statement Form 10-SB SEC File No.
000-22057.
(2) Filed herewith
(b) There have been no reports filed on Form 8-K.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report 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, Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer, and
Director
----------------------------
Pursuant to the requirements of the Securities Act of 1933, this Form
10-KSB has been signed below by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GARY F. KIMMONS President,Chief September 14, 1998
Gary F. Kimmons Executive Officer
and Director
/s/ GERALD C. ALLEN Director September 14, 1998
Gerald C. Allen
/s/ JOH PAUL DeJORIA Director September 14, 1998
Joh Paul DeJoria
23
<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, 1998........ F-3
Statements of Loss for the years ended
May 31, 1998 and 1997 and the period
from inception (October 4, 1993)
through May 31, 1998.................. F-4
Statements of Stockholders' Equity
(Capital Deficit) for the period from
inception (October 4, 1993) through
May 31, 1998.......................... F-5
Statements of Cash Flows for the years
ended May 31, 1998 and 1997 and the
period from inception (October 4,
1993) through May 31, 1998............ 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 state enterprise) as of May 31, 1998, and the related statements of
loss, stockholders' equity (capital deficit) and cash flows for the years ended
May 31, 1998 and 1997 and for the period from inception (October 4, 1993)
through May 31, 1998. 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.
(a development stage enterprise) as of May 31, 1998 and the results of its
operations and its cash flows for the years ended May 31, 1998 and 1997 and for
the period from inception (October 4, 1993) through May 31, 1998, 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
July 24, 1998, except as to Note 9,
which is as of September 2, 1998
F-2
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
MAY 31, 1998
ASSETS
Current:
Cash............................... $ 5,241,449
Other.............................. 98,080
---------------
Total Current Assets.................... 5,339,529
Computer software costs, net (Notes 4
and 8)................................ 2,154,669
Property and equipment, net (Note 5).... 326,360
---------------
Total Assets............................ $ 7,820,558
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................... $ 232,776
Capital lease obligations, current
maturities (Note 6)............... 24,139
---------------
Total Current Liabilities............... 256,915
---------------
Capital lease obligations, less current
maturities (Note 6)................... 86,741
Commitments and Contingencies (Notes 2,
6, 8 and 10)
Stockholders' Equity (Notes 1, 4, 8, 9,
10, 11 and 12):
Series A preferred stock;
redeemable and convertible
with liquidation preference of
$6.00 per share................... 3,521,932
Common stock....................... 28,179
Additional paid-in capital......... 22,142,468
Deficit accumulated during the
development stage................. (18,215,677)
---------------
Total Stockholders' Equity.............. 7,476,902
---------------
Total Liabilities and Stockholders'
Equity................................ $ 7,820,558
===============
See accompanying notes to financial statements.
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
1998 1997 MAY 31, 1998
-------------- --------------- ------------------
<S> <C> <C> <C>
Revenues............................. $ -- $ -- $ --
Costs and expenses:
Professional services.............. 2,748,628 4,963,686 8,569,670
Employee compensation.............. 1,272,876 889,527 2,162,403
Depreciation and amortization...... 957,475 820,497 2,303,024
President's compensation........... 240,000 2,523,443 3,548,457
Other general and administrative... 662,819 331,320 1,499,623
-------------- --------------- ------------------
Net loss............................. (5,881,798) (9,528,473) (18,083,177)
Dividends on preferred stock (Note
9)................................. (132,500) -- (132,500)
-------------- --------------- ------------------
Net Loss Applicable to Common
Shareholders....................... $ (6,014,298) $ (9,528,473) $(18,215,677)
============== =============== ==================
Basic Net Loss Per Share of Common
Stock................................ $ (.35) $ (.89) $ (1.76)
============== =============== ==================
Weighted Average Number of Shares of
Common Stock Outstanding........... 17,133,102 10,671,092 10,354,224
============== =============== ==================
</TABLE>
See accompanying notes to financial statements.
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 president..... -- $ -- 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 president 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 9).............. 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 president 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 president 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)
Shares issued in private placements at
$.40, $.47, $.48, $.50, $1.00, $1.36
and $1.50 per share................... -- -- 8,136,290 8,136 7,528,866 -- 7,537,002
Shares issued for exercise of warrants
at $1.00 per share.................... -- -- 158,500 159 158,341 -- 158,500
Shares issued to president and employees
for services.......................... -- -- 1,976,140 1,976 2,817,120 -- 2,819,096
Shares issued for professional
services.............................. -- -- 5,618,360 5,618 4,994,186 -- 4,999,804
Warrants and options issued to president
and employees for services............ -- -- -- -- 102,349 -- 102,349
Warrants and options issued for
professional services................. -- -- -- -- 576,313 -- 576,313
Net loss................................ -- -- -- -- -- (5,881,798 ) (5,881,798)
Dividends on Series A preferred stock... -- 132,500 -- -- -- (132,500 ) --
------- --------- --------- ------- ---------- ------------ ----------
BALANCE, MAY 31, 1998................... 883,333 $3,521,932 28,179,319 $28,179 $22,142,468 $(18,215,677) $7,476,902
======= ========= ========= ======= ========== ============ ==========
</TABLE>
NOTES:
(a) $.001 par; 10,000,000 shares authorized
(b) $.001 par; 250,000,000 shares authorized
See accompanying notes to financial statements.
F-5
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED INCEPTION
MAY 31, (OCTOBER 4, 1993)
------------------------------ THROUGH
1998 1997 MAY 31, 1998
-------------- -------------- -----------------
<S> <C> <C> <C>
Operating activities:
Net loss........................... $ (5,881,798) $ (9,528,473) $ (18,083,177)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization............... 957,475 820,497 2,303,024
Issuance of common stock and
warrants for various
expenses................... 2,560,853 7,681,831 10,930,214
Changes in assets and
liabilities:
Other current assets..... (39,557) (58,523) (98,080)
Accounts payable......... (74,789) (153,621) 232,777
-------------- -------------- -----------------
Net cash used in
operating
activities....... (2,477,816) (1,238,289) (4,715,242)
-------------- -------------- -----------------
Investing activities:
Purchased and developed software... (259,771) (131,143) (915,742)
Organization costs................. -- -- (78,745)
Other capital expenditures......... (177,520) (39,215) (241,170)
-------------- -------------- -----------------
Net cash used in
investing
activities....... (437,291) (170,358) (1,235,657)
-------------- -------------- -----------------
Financing activities:
Proceeds from private placements
and other share issuances........ 7,832,211 1,806,156 10,769,176
Proceeds from borrowings........... 150,000 -- 716,269
Repayment of borrowings............ (174,120) (68,327) (293,097)
-------------- -------------- -----------------
Net cash provided
by financing
activities....... 7,808,091 1,737,829 11,192,348
-------------- -------------- -----------------
Net increase in cash.................... 4,892,984 329,182 5,241,449
Cash and cash equivalents at beginning
of period............................. 348,465 19,283 --
-------------- -------------- -----------------
Cash and cash equivalents at end of
period................................ $ 5,241,449 $ 348,465 $ 5,241,449
============== ============== =================
</TABLE>
See accompanying notes to financial statements.
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"), is a development stage
enterprise incorporated in Delaware in 1988. The Company is principally engaged
in the development and marketing of software products capable of interaction
with, and adaptation to, the needs of software users (referred to as
"intelligent" software) and sophisticated real-time access to and
interpretation of data. 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 Company has adopted a
calendar year end to be effective December 31, 1998.
The Company's software technology is capable of evaluating a user's
competence level and adapting training programs to the user's specific learning
styles and abilities, and is referred to as SMART ONE technology. The Company is
using this technology to develop specific training software products (e.g.,
Internet training).
The Company's proprietary CARNOT technology 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 utilizing this
technology called SMART ENTERPRISE.
REVERSE MERGER
Pursuant to an agreement effective August 15, 1994, LBM-US, Inc. (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). 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 is deemed to be the acquirer
for accounting purposes, (i) its assets and liabilities are included in the
financial statements of the continuing entity at their carrying values, (ii) its
operations are presented for all periods prior to August 15, 1994 and (iii) 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 contemplating short
and long term debt or equity financing sufficient to fund projected working
capital and software product development needs. The Company expects to release
its first software product, the Netscape Navigator version of "Around the World
in 80 Minutes," by late November 1998. However, there can be no assurance that
the Company will be successful in raising funds, that the amount and terms of
such financing will be acceptable to the Company, or that the profits from the
sale of software products in fiscal year 1999 will be sufficient to fund the
Company's working capital and software development expenditure requirements.
Accordingly, the Company will continue to seek additional sources of financing
as may be necessary.
F-7
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES:
COMPUTER SOFTWARE COSTS
Costs of purchased software having alternative future uses in developing
other software products are (i) capitalized when acquired, (ii) amortized on a
straight-line basis over their expected useful life of five years and (iii)
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. During the years ended May 31, 1998 and 1997 and
from inception (October 4, 1993) through May 31, 1998 the Company incurred
$1,808,000, $1,409,000 and $3,812,000, respectively, in research and development
expenses.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of furniture, equipment and
leasehold improvements, and are carried at cost. Depreciation and amortization
is computed principally on a straight-line basis over the estimated useful lives
of the various assets ranging from 3 to 5 years or, in the case of certain
property under capital lease, over the lesser of the useful life or the lease
term. Leasehold improvements are amortized over the length of the related
leases. Expenditures for maintenance and repairs are expensed as incurred while
improvements and major replacements are capitalized.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under this method, 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 and are
measured using the enacted tax rate and laws that will be in effect when the
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance to amounts expected to be realized.
LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 is effective for the year ended May 31, 1998.
SFAS 128 simplifies the standards required under previously existing accounting
rules for computing earnings per share and replaces the presentation of primary
earnings per share and fully diluted earnings per share with a presentation of
basic earnings per share ("basic EPS") and diluted earnings per share
("diluted EPS"). Diluted EPS for the periods presented was not disclosed on
the Statements of Loss as the effect is anti-dilutive.
Basic 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, 1998, 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
F-8
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers cash
and cash equivalents to be cash on hand or deposited in demand deposit accounts
with financial institutions and highly liquid investments purchased with an
original maturity of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts payable, and accrued liabilities, approximate
fair value due to their short maturities.
STOCK-BASED COMPENSATION
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations and to elect the disclosure option of SFAS No. 123, "Accounting
for Stock-Based Compensation". Accordingly, compensation cost for stock options
issued to employees is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
NEW ACCOUNTING PRONOUNCEMENTS
REVENUE RECOGNITION -- In October 1997, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-2 "Software
Revenue Recognition." This SOP supersedes SOP 91-1 "Software Revenue
Recognition" and provides more stringent guidelines for revenue recognition.
This statement is effective for fiscal years beginning after December 15, 1997.
Adoption of this statement is not expected to have a material effect on the
Company's financial position, results of operations or cash flows.
COMPREHENSIVE INCOME -- In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income". This statement is effective for financial
statements issued for periods beginning after December 15, 1997. Management does
not consider that adoption of this statement will have a material impact on the
Company's financial statement disclosures.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION -- In June 1997, the FASB
issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement is effective for fiscal years
beginning after December 15, 1997. SFAS 131 requires the reporting of profit and
loss, specific revenue and expense items, and assets for reportable segments. It
also requires the reconciliation of total segment revenues, total segment profit
or loss, total segment assets, and other amounts disclosed for segments, in each
case to the corresponding amounts in the general purpose financial statements.
Adoption of SFAS 131 will not impact the Company's financial position, results
of operations or cash flows.
PENSION AND OTHER POSTRETIREMENT BENEFITS -- In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure
requirements for pensions and other post-retirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets. The statement is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Adoption of SFAS 132 is expected to have no effect
on the Company's financial statement disclosures.
F-9
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE AND HEDGING ACTIVITIES -- In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedge risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.
YEAR 2000 COMPLIANCE -- The year 2000 poses certain issues for business and
consumer computing, particularly the functionality of software for two-digit
storage of dates and special meanings for certain dates such as 9/9/99. The year
2000 is also a leap year, which may also lead to incorrect calculations,
functions, or system failure. The problem exists for many kinds of software,
including software for mainframes, PCs and embedded systems. The Company intends
to initiate the process of gathering, testing, and producing information about
the Company's technologies impacted by Year 2000 transition. The Company's board
of directors is currently developing a Year 2000 strategy for its initial
product and future products. The Company believes its initial product is Year
2000 compliant. However, variability of definitions of "compliance" with the
Year 2000 and of different combinations of software, firmware, and hardware may
lead to lawsuits against the Company. The outcomes of any such lawsuits and the
impact on the Company are not estimable at this time. The Year 2000 may affect
the Company's internal systems, however, management believes the effect will be
minimal as the Company purchased the majority of its hardware systems within the
last year and a half. The Company intends to assess the readiness of its systems
and those of its vendors for handling the Year 2000. Although the assessment has
not been initiated, management currently believes that resolving these matters
will not have a material adverse impact on the Company's financial position or
its results of operations.
4. COMPUTER SOFTWARE COSTS
Computer software costs consisted of the following as of May 31, 1998:
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........ 470,909
------------
4,305,174
Less accumulated amortization........ (2,150,505)
------------
$ 2,154,669
============
The CARNOT software tools and languages were acquired on November 2, 1995
in exchange for the issuance of 883,333 shares of the Company's Series A
preferred stock (see Note 9). 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, 1998 and 1997 amounted to $862,348 and $794,016, respectively. Amortization
of software costs from inception (October 4, 1993) through May 31, 1998 amounted
to $2,150,505.
F-10
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at May 31, 1998:
Furniture and equipment.............. $ 196,106
Furniture and equipment under capital
leases............................... 159,592
Leasehold improvements............... 32,912
----------
388,610
Less accumulated depreciation and
amortization......................... (62,250)
----------
$ 326,360
==========
6. 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, 1998, and future minimum rental payments required under the long-term
operating leases as of May 31, 1998 are as follows:
CAPITAL OPERATING
YEAR ENDING MAY 31, LEASES LEASES
- ---------------------------------------- -------- ----------
1999............................... $ 41,773 $ 343,228
2000............................... 41,773 435,538
2001............................... 36,720 424,149
2002............................... 30,437 399,621
2003............................... -- 338,812
-------- ----------
Total minimum lease payments............ 150,703 $1,941,348
==========
Less -- amount representing interest.... (39,823)
--------
Present value of net minimum lease
payments.............................. 110,880
Less -- current maturities.............. (24,139)
--------
Long-term portion....................... $ 86,741
========
Rent expense under operating leases was approximately $180,900 and $32,400,
respectively, in 1998 and 1997. Rent expense for the period from inception
(October 4, 1993) through May 31, 1998 was approximately $288,500.
F-11
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. 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, 1998:
Net operating loss carryforwards........ $ 5,467,000
Differences between the financial
reporting and income tax bases of
accrued compensation resulting from
the issuance of stock options and
warrants for services................. 349,000
--------------
Gross deferred tax assets............... 5,816,000
--------------
Difference between the financial
reporting and income tax bases of:
Computer software costs............ (533,000)
Property, equipment and other...... (6,000)
--------------
Gross deferred tax liability............ (539,000)
--------------
5,277,000
Valuation allowance..................... (5,277,000)
--------------
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.
The Company has generated approximately $16,079,000 of tax loss
carryforwards through May 31, 1998. The carryforwards expire in the following
years:
YEAR
- ----------------------------------------
2009.................................... $ 239,000
2010.................................... 660,000
2011.................................... 2,092,000
2012.................................... 7,269,000
2013.................................... 5,819,000
--------------
$ 16,079,000
==============
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,
if any, of outstanding Series A preferred stock, the exercise of outstanding
common stock warrants and options or other securities transaction, the
resulting limitation would not have a material impact on the Company's financial
position as a 100% valuation allowance has been established against the expected
future benefit of the Company's net operating loss carryforwards.
F-12
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
In March 1998, the Company amended and restated its employment agreement
with the president. The agreement provides for a three year term with automatic
one year renewals at the end of its initial term and for annual base
compensation of $240,000. Upon the president's death, disability or involuntary
termination (other than for cause), all unvested warrants or options will
become immediately vested and exercisable. If the Company has a change of
control, and subsequently the employment agreement is terminated by the Company,
other than for cause or disability, the agreement generally provides that 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.
In March 1998, the Company amended and restated an employment agreement
with a vice president of the Company. That agreement contains identical terms to
the employment agreement of the president except for an annual base compensation
of $180,000.
BUSINESS RISK
The Company has filed for trademark and servicemark protection for certain
proposed products and applications. However, not all trademarks or servicemarks
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.
9. 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 a perpetual non-exclusive
worldwide right and license to use and 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 along
with unpaid dividends are convertible into shares of the Company's common stock
beginning January 1, 1998 at the rate of $6.00 per common share as adjusted for
certain events. 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.
During the year ended May 31, 1998, the Company accrued cumulative
dividends on the Series A preferred stock totalling $132,500 which remain unpaid
and are included in the preferred stock account in the accompanying balance
sheet. No dividends were accrued during the year ended May 31, 1997. The
preferred shares have not been included in the calculation of net loss per share
for all periods presented as their effect, if converted, would be anti-dilutive.
On August 3, 1998, MCC converted this preferred stock, exclusive of accrued
dividends, into 883,333 shares of the Company's common stock.
F-13
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK WARRANTS AND OPTIONS
ISSUED FOR PROFESSIONAL SERVICES
The Company periodically grants common stock warrants or options to
consultants for services rendered or to be rendered. Certain of such grants may
be issued at prices less than fair market value and contain vesting terms
ranging from zero to five years. The following table summarizes activity
associated with such grants for the period from inception (October 4, 1993)
through May 31, 1998:
<TABLE>
<CAPTION>
PRICE PER SHARE
------------------------------------------
WEIGHTED
SHARES RANGE AVERAGE
---------- ------------------------------- --------
<S> <C> <C> <C> <C>
Inception through May 31, 1996.......... -- -- - -- --
Granted............................ 1,046,429 $ .875 - $ 2.00 $ .51
----------
Balance, May 31, 1997................... 1,046,429 .875 - 2.00 .51
Granted............................ 887,238 .219 - 5.00 1.35
Exercised.......................... (75,000) .219 - .219 .219
Cancelled or lapsed................ (1,183,500) .219 - 2.00 .70
----------
Balance, May 31, 1998................... 675,167 .40 - 5.00 1.57
==========
</TABLE>
Outstanding warrants and options issued for professional services consisted
of the following at May 31, 1998:
DATE EXERCISE EXPIRATION
GRANTED PRICE DATE OUTSTANDING VESTED
---------- -------- ---------- ----------- ---------
9/30/96 $ 1.08 9/30/98 100,000 100,000
9/30/96 .40 9/30/98 100,000 100,000
5/16/97 .875 5/16/07 65,000 65,000
9/22/97 1.25 9/22/02 104,167 104,167
4/14/98 2.3125 4/14/03 300,000 50,000
5/4/98 5.00 8/31/03 3,000 --
5/5/98 5.00 8/31/03 3,000 --
----------- ---------
675,167 419,167
=========== =========
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 and options is recognized
over the period of vesting. Compensation expense recognized during the years
ended May 31, 1998 and 1997 amounted to $456,713 and $290,596 and is included in
professional services in the accompanying financial statements.
The basic net loss per share of common stock for the years ended May 31,
1998 and 1997 does not reflect the weighted average number of shares that would
be outstanding assuming exercise of these warrants and options as the effect of
such exercise would be anti-dilutive.
F-14
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ISSUED TO PRESIDENT, OFFICERS AND EMPLOYEES
COMMON STOCK WARRANTS
From September 1996 through March 1998, the Company granted the president,
an officer and certain employees warrants to purchase shares of the Company's
common stock at exercise prices equal to or less than the fair market value at
the date of grant and containing vesting terms ranging from zero to four years.
The following table summarizes activity associated with such warrants for the
years ended May 31, 1998 and 1997:
PRICE
SHARES PER SHARE
------------ ---------
Balance, May 31, 1996................... -- --
Granted............................ 2,300,000 $ 1.00
------------
Balance, May 31, 1997................... 2,300,000 1.00
Granted............................ 7,089,091 .3125
Cancelled.......................... (2,300,000) 1.00
------------
Balance, May 31, 1998................... 7,089,091 .3125
============
Vested as of May 31, 1998............... 1,889,091 .3125
============
During March 1998, the Company cancelled warrants to purchase 2,000,000
shares exercisable at $1.00 per share held by the president and issued new
warrants to purchase 1,709,091 shares exercisable at $.3125 and common stock
options to purchase 290,909 shares exercisable at $.34375 per share pursuant to
the Company's 1995 Incentive Stock Option Plan.
COMMON STOCK OPTION PLAN
During 1996, the Company adopted, and the board of directors approved, the
1995 Incentive Stock Option Plan ("the Plan"). Pursuant to the Plan, as
amended on March 1, 1998, options to purchase up to 5,000,000 shares of common
stock may be granted to directors, officers and employees of the Company.
Options are granted at 100% to 110% of the fair market value of the common stock
at the date of grant and generally vest over three to four years. In certain
circumstances, options may vest immediately or within two years from the date of
grant. Options granted under the Plan generally expire five to ten years after
the date of grant. As of May 31, 1998, options to purchase 635,909 shares were
exercisable and 2,971,091 shares were available for future grants under the
Plan. The following table summarizes activity under the Plan for the year ended
May 31, 1998:
PRICE PER SHARE
------------------------------
WEIGHTED
SHARES RANGE AVERAGE
----------- ------------------ ---------
Balance, May 31, 1997.......... -- -- --
Granted...................... 2,328,909 $ 0 - $6.4375 $1.44
Cancelled.................... (300,000) 0 - 1.00 .50
-----------
Balance, May 31, 1998.......... 2,028,909 .3125 - 6.4375 1.58
===========
F-15
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Outstanding options under the Plan had the following characteristics at May
31, 1998:
REMAINING
DATE EXERCISE LIFE
GRANTED PRICE (YEARS) OUTSTANDING VESTED
------- -------- ---------- ----------- -------
3/13/98 $ .3125 4.8 811,000 345,000
3/13/98 .3125 9.8 192,000 --
3/13/98 .34375 4.8 290,909 290,909
3/13/98 .50 4.8 25,000 --
3/16/98 .50 9.8 300,000 --
5/1/98 5.00 9.9 10,000 --
5/29/98 6.4375 5.0 400,000 --
----------- -------
2,028,909 635,909
=========== =======
PRO FORMA INFORMATION
The Company follows Accounting Principles Board Opinion 25 "Accounting for
Stock Issued to Employees" ("APB Opinion 25") to account for warrants and
options issued to the president, officers and employees. Compensation cost is
recognized only when the option exercise price is less than the estimated market
value of the underlying stock on the date of the grant. Amortization of
compensation expense under APB Opinion 25 amounted to $102,349 and $56,040
during the years ended May 31, 1998 and 1997, respectively.
Effective for years ended May 31, 1998 and 1997, 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 and options had been determined in
accordance with certain fair value assumptions used for grants in 1998 and 1997,
as follows: no expected dividend yield for all years, expected volatility of 90%
and 110%; an average risk free interest rate of 5.5% and 5.9% and an average
expected life of 4.0 and 2.5 years, respectively.
Had compensation cost for the warrants and options issued during 1998 and
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:
<TABLE>
<CAPTION>
INCEPTION
YEAR ENDED MAY 31, (OCTOBER 4, 1993)
---------------------------- THROUGH
1998 1997 MAY 31, 1998
------------ -------------- -----------------
<S> <C> <C> <C>
Net loss applicable to common stock:
As reported........................ $ 6,014,298 $ 9,528,473 $18,215,677
------------ -------------- -----------------
Pro forma.......................... $ 6,127,976 $ 10,630,229 $19,431,111
------------ -------------- -----------------
Basic net loss per share of common
stock:
As reported........................ $ (.35) $ (.89) $ (1.76)
------------ -------------- -----------------
Pro forma.......................... $ (.36) $ (1.00) $ (1.88)
------------ -------------- -----------------
</TABLE>
F-16
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ISSUED IN PRIVATE PLACEMENTS
During the year ended May 31, 1996, the Company issued warrants to purchase
869,003 shares of common stock in connection with three separate private
placements. As no warrants were exercised during the year ended May 31, 1997,
the following table summarizes activity associated with these warrants for the
year ended May 31, 1998:
<TABLE>
<CAPTION>
EXERCISE PRICE
------------------------------------------
WEIGHTED
SHARES RANGE AVERAGE
-------- ------------------------------- --------
<S> <C> <C> <C> <C>
Balance, May 31, 1997................... 869,003 $ 1.00 - $ 2.00 $ 1.48
Exercised.......................... (158,500) 1.00 - 1.00 1.00
--------
Balance, May 31, 1998................... 710,503 1.00 - 2.00 1.58
========
</TABLE>
Outstanding warrants issued in private placements at May 31, 1998 were as
follows:
DATE EXERCISE EXPIRATION
GRANTED PRICE DATE OUTSTANDING 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
12/1/95 1.00 6/30/98 245,503 245,503
----------- -------
710,503 710,503
=========== =======
The basic net loss per share of common stock for the years ended May 31,
1998 and 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.
11. RELATED PARTIES
In March 1998, the Company granted warrants to the president to purchase
4,000,000 shares of the Company's common stock at $.3125 per share. The warrants
vest annually on a ratable basis over a four year period and expire in March
2003. At May 31, 1998, none of the warrants were vested or exercisable.
On September 1, 1996, the Company granted common stock warrants to the
president to purchase 2,000,000 shares of the Company's common stock. In March
1998, the Company cancelled these warrants and issued new warrants to purchase
1,709,091 shares and options to purchase 290,909 shares. All of the warrants and
options are immediately exercisable (see Note 10).
The Company incurred non-cash compensation expense via the issuance of
common stock to the president during the period from inception (October 4, 1993)
through May 31, 1998 as more fully described in Note 12.
The president provided working capital loans to the Company during 1996 and
1995 on an as needed basis. As of May 31, 1998, no loans were outstanding.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash compensation expense incurred during the period from inception
(October 4, 1993) through May 31, 1998 was determined using the estimated fair
market value of the Company's common stock, common stock warrants, or common
stock options on the date such instruments were granted.
On August 29, 1997, the Company issued 2,900,000 shares of common stock
valued at $5,800,000 to the president, a director, a consultant and certain
employees in payment for services performed in 1997 and accrued at May 31, 1997.
F-17
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended May 31, 1998, the Company incurred non-cash
compensation expense associated with the issuance of (i) 3,000,000 shares of
common stock to the chairman of the board valued at $787,500, (ii) 889,940
shares of common stock for professional services valued at $576,094, (iii)
826,140 shares of common stock to key employees valued at $518,596, (iv)
warrants and options for professional services valued at $576,313, and (v)
warrants to key employees valued at $102,349.
During the year ended May 31, 1997, the Company incurred non-cash
compensation expense associated with the issuance, or the accrual to issue (i)
1,100,000 shares of common stock to the president valued at $2,262,500, (ii)
2,258,652 shares of common stock for professional services and expenses valued
at $4,440,425, (iii) 346,110 shares of common stock to key employees valued at
$743,612, (iv) warrants for professional services valued at $290,596, and (v)
warrants to key employees valued at $56,040.
For the period from inception (October 4, 1993) through May 31, 1998, the
Company incurred non-cash compensation expense via the issuance of (i) 1,432,580
shares of common stock to the president valued at $2,499,415, (ii) 3,000,000
shares of common stock to the chairman of the board valued at $787,500, (iii)
3,432,548 shares of common stock for professional services and expenses valued
at $5,355,793, (iv) 1,172,250 shares of common stock to key employees valued at
$1,262,208, (v) warrants and options for professional services valued at
$866,909, and (vi) warrants to key employees valued at $158,389.
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 9).
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.
F-18
CERTIFICATE OF AMENDMENT
TO THE
EXHIBIT 3.3
CERTIFICATE OF INCORPORATION
OF
GK INTELLIGENT SYSTEMS, INC.
GK Intelligent Systems, Inc. ("Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State
of Delaware, DOES HEREBY CERTIFY:
FIRST: That a written consent signed by the Board of Directors and
approval by the majority stockholders at a special meeting of stockholders of
GK Intelligent Systems, Inc. adopted a proposed amendment to the Certificate
of Incorporation of said corporation, as follows:
RESOLVED, the Certificate of Incorporation of this corporation be amended
by changing Article IV thereof so that, as amended said Article shall be and
read as follows:
The total number of shares of stock which the Corporation shall have
authority to issue is two hundred fifty million (250,000,000) shares of
common stock, par value $.001 per share ("Common Stock"), and ten million
(10,000,000) shares of preferred stock par value $.001 per share
("Preferred Stock").
Shares of Preferred Stock of the Corporation may be issued from time
to time in one or more classes or series, each of which class or series
shall have such distinctive designation or title as shall be determined by
the Board of Directors of the Corporation ("Board of Directors") prior to
the issuance of any shares thereof. Each such class or series of Preferred
Stock shall have such voting powers, full or limited, or no voting powers,
and such preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions
thereof, and shall be stated in such resolution or resolutions providing
for the issue of such class or series of Preferred Stock as may be adopted
from time to time by the Board of Directors prior to the issuance of any
shares thereof pursuant to the authority hereby expressly vested in it,
all in accordance with the laws of the State of Delaware.
Subject to all of the rights of the Preferred Stock or any series
thereof described in appropriate certificates of designation, the holders
of the Common Stock shall be entitled to receive, when, as, and if
declared by the Board of Directors, out of funds legally available
therefore, the dividends payable in cash, common stock, or otherwise.
No stockholder of the Corporation shall have the right of cumulative
voting at any election of Directors of the Corporation.
<PAGE>
SECOND: That thereafter, pursuant to a consent executed by its Board of
Directors and approval by the majority stockholders at a special meeting in
accordance with Sections 141(f) and 228 of the General Corporation Law of the
State of Delaware, the necessary number of shares as required by the statute
were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation law of the State of
Delaware.
GK INTELLIGENT SYSTEMS, INC.:
By________________________________________
GARY F. KIMMONS, Chief Executive Officer
EXHIBIT B
EXHIBIT 9.1
VOTING AGREEMENT
This VOTING AGREEMENT ("Agreement") is made and entered into by and
between the undersigned shareholder whose name is set forth on page B-4
("Shareholder"), GK Intelligent Systems, Inc., a Delaware corporation (the
"Company"), and Gary F. Kimmons ("Kimmons").
W I T N E S S E T H:
WHEREAS, the Shareholder owns shares of Company common stock, par value
$.001 per share ("Common Stock"), purchased as described in the Subscription
Agreement to which this is an exhibit dated as of the date hereof; and
WHEREAS, the Shareholder desires to set forth in writing certain rights
and restrictions, including, without limitation, voting rights and transfer
restrictions, with respect to the Common Stock owned by the Shareholders.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. STOCK. The shares of Common Stock of the Company owned by the
Shareholder as set forth on the signature page hereof, shall be referred to
herein as the "Stock". Any additional shares of Common Stock or other voting
securities, or the voting rights relating thereto, of the Company that may be
owned, held or subsequently acquired in any manner, legally or beneficially,
directly or indirectly, of record or otherwise, by the Shareholder at any time
during the term of this Agreement as a result of the ownership of the Stock
whether issued incident to any stock split, stock dividend, increase in
capitalization, recapitalization, merger, consolidation, reorganization, or
other transaction, shall be included within the term "Stock" as used herein and
shall be subject to the terms of this Agreement.
2. TRANSFER RESTRICTIONS.
2.1 The Shareholder agrees not to sell, give, assign, pledge,
transfer or otherwise dispose of any shares of Stock of the Company,
now or hereafter owned by him, prior to May 31, 2000, unless such
Shareholder agrees to be bound by all the terms of this Agreement.
Any person or entity to whom shares of Stock are sold, transferred
or assigned shall be bound by and become subject to the terms and
conditions of this Agreement which entail granting Kimmons the
exclusive right to vote the Stock.
B-1
<PAGE>
Each person or entity to whom shares of Stock are sold, transferred
or assigned shall execute an agreement adopting this Agreement and
acknowledging his obligation hereunder.
2.2 Notwithstanding Section 2.1, in the event that Shareholder sells
his Stock (if only a portion of Stock is sold, the remaining shares
will remain subject to this Agreement) after May 31, 1999, pursuant
to Rule 144 promulgated under the Securities Act of 1933, as amended
(with the Company's counsel rendering an opinion with respect to
such transaction), such transferee will not be subject to this
Agreement.
2.3 Simultaneously with the execution of this Agreement, the
Shareholder's certificate(s) will be inscribed with a legend in
substantially the following form: "The shares represented by this
certificate are subject to the provisions of a Voting Agreement
executed in May 1998, and are subject to restrictions on
transferability and resale and may not be transferred or resold
except as permitted under this Agreement, a counterpart of which has
been deposited with GK Intelligent Systems, Inc. at 5555 San Felipe,
Suite 625, Houston, Texas 77056, its principal office."
3. VOTING RIGHTS. During the term of this Agreement, Kimmons shall be the
true and lawful agent and proxy of Shareholder with the full power of
substitution for and in the name of Shareholder, to vote all the shares of Stock
or Stock equivalents or give a written consent, in person or by proxy, at all
meetings of the shareholders of the Company, and in all proceedings in which the
vote or written consent of shareholders may be required or authorized by law.
All action to be taken on any question shall be determined by Kimmons, in his
sole discretion.
4. RESERVATION OF RIGHTS. All other rights and privileges of ownership of
the Stock shall be reserved to and retained by the Shareholder.
5. TERM. This Agreement shall remain in full force and effect as of the
date hereof until May 31, 2000, unless earlier terminated pursuant to Section
2.2.
6. SPECIFIC PERFORMANCE. The Shareholder acknowledges that a remedy at
law for any breach or attempted breach of terms and provisions of this Agreement
may be inadequate, and the Shareholder agrees that the non-breaching party shall
be entitled to specific performance and injunctive and other equitable relief in
the event of any such breach or attempted breach.
7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
parties hereto and their respective heirs, legal representatives, successors and
assigns.
8. WAIVER. The wavier by either party to this Agreement of a breach or
violation or any provision hereof shall not operate as or be construed to be a
waiver of any subsequent breach hereof.
B-2
<PAGE>
9. GOVERNING LAW. This Agreement shall be interpreted in accordance with
the laws of the State of Texas. In the event of a dispute concerning this
Agreement, the parties agree that venue lies in a court of competent
jurisdiction in Harris County, Texas.
10. HEADINGS; GENDER. The paragraph headings contained in this Agreement
are for convenience only, and shall in no manner be construed as part of this
Agreement. All references in this Agreement as to gender shall be interpreted in
the applicable gender of the parties.
11. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same agreement, with a counterpart being
delivered to each party hereto.
12. SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
13. AMENDMENT. No modification, amendment, addition to, or termination of
this Agreement, nor waiver of any of its provisions, shall be valid or
enforceable unless in writing and singed by all the parties hereto.
14. ENTIRE AGREEMENT. This Agreement constitutes the sole and only
agreement of the parties hereto and supersedes any prior understanding or
written or oral agreements between the parties respecting the subject matter
hereof.
B-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date set forth below.
SHAREHOLDER:
______________________________________ ________________ Shares
Signature
______________________________________
Name Printed
______________________________________
______________________________________
Address
Dated:_________________, 1998
COMPANY:
GK Intelligent Systems, Inc.
By:____________________________________
Gary F. Kimmons, President
Dated:_________________, 1998
GARY F. KIMMONS
______________________________________
Gary F. Kimmons
B-4
<PAGE>
Dated:_________________, 1998
EXHIBIT 10.3(a)
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement ("Agreement") is dated as
of March _, 1998 and is entered into by and between Gary F. Kimmons
("Executive") and GK Intelligent Systems, Inc., a Texas corporation ("GKIS")as
an amendment and restatement of the Employment Agreement executed by the same
parties on December, 1993.
RECITALS
GKIS considers it essential to the best interest of GKIS and its
shareholders that Executive be encouraged to remain with GKIS and continue to
devote full attention to GKIS's business notwithstanding the possibility, threat
or occurrence of a change in Control (as defined below) of GKIS. GKIS believes
that it is the best interest of GKIS and its shareholders to reinforce and
encourage the continued attention and dedication of Executive and to diminish
inevitable distractions arising from the possibility of a Change in Control of
GKIS. Accordingly, to assure GKIS that it will have Executive's undivided
attention and services notwithstanding the possibility, threat or occurrence of
a Change in Control of GKIS, and to induce Executive to remain in the employ of
GKIS, and for other good and valuable consideration, the Board of Directors of
GKIS has caused GKIS to enter into this Agreement.
TERMS AND CONDITIONS
Executive and GKIS hereby agree to the following terms and conditions:
1. TERM OF AGREEMENT. This Agreement shall be effective as of the date
first indicated above and shall expire on the third anniversary of such date;
provided however that on such third anniversary and on the anniversary of such
date in each year thereafter, such expiration date shall be extended for one
additional year, unless, at least 60 days prior to such expiration date, GKIS
shall have delivered to Executive or Executive shall have delivered to GKIS
written notice that such expiration date shall not be so extended.
2. EFFECTIVE DATE. The "Effective Date" shall mean the first date during
the term of this Agreement on which a Change of Control (as defined in Section
3) occurs; provided, however, that if a Change of Control occurs and if
Executive's employment with GKIS is terminated prior to the date on which the
Change of Control occurs, and if it is reasonably demonstrated by Executive that
such termination of employment (a) was at the request of a third party who has
taken steps reasonably calculated to effect a Change of Control or (b) otherwise
arose in connection with or anticipation of a Change of Control, then for all
purposes of this Agreement the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
<PAGE>
3. CHANGE OF CONTROL. For the purpose of this Agreement, a "Change of
Control" of GKIS shall mean and shall be deemed to have occurred if:
(a) any "person" as such term is used in Sections 13(d) and 14(d) of
the Exchange Act (other than the Company, its founder, Gary F. Kimmons, any
trustee or other fiduciary holding securities under any employee benefit plan of
the Company, or any company owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership of Stock
of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 30% of more of the combined voting power of the Company's then
outstanding securities, or the beneficial ownership, including voting rights of
non-owned shares, of the Company's founder, Gary F. Kimmons, is reduced to less
than 30% of the combined voting power of the Company's then outstanding
securities;
(b) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors, and any new
director (other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (a), (c)
or (d)of this Paragraph) whose election by the Board of Directors or nomination
for election by the Company's stockholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of the two year period or whose election or nomination for
election was previously so approved, cease for any reason to constitute at least
a majority of the Board of Directors;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation; provided, however, that a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
person acquires more than 30% of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control of the Company;
or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
4. EMPLOYMENT PERIOD. GKIS hereby agrees to continue Executive in its
employ, and Executive hereby agrees to remain in
<PAGE>
the employ of GKIS subject to the terms and conditions of this Agreement, for
the period commencing on the Effective Date and ending on the date which is the
latest of the following:
(a) The date which is 15 days after the first anniversary of a
Change in Control;
(b) The date which is 15 days after the first anniversary of the
effective date of any merger, the approval of which constituted a Change in
Control; and
(c) March 15, 2001;
Such period shall hereinafter be referred to as the "Employment
Period."
5. TERMS OF EMPLOYMENT.
(a) POSITION AND DUTIES. During the Employment Period, (i)
Executive's position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned at any time during the 120-day waiting period immediately
preceding the Effective Date; and (ii) Executive's services shall be performed
at the location where Executive was employed immediately preceding the Effective
Date or any office or location which is less than 35 miles further away from
Executive's place of residence.
(b) COMPENSATION AND BENEFITS. During the Employment Period, GKIS
shall pay Executive an annual base salary ("Annual Base Salary"), payable in
semi-monthly installments, which shall initially be at least equal to twelve
times the highest monthly base salary paid or payable, including any base salary
which has been earned but deferred, to Executive by GKIS during the twelve-month
period immediately preceding the month in which the Effective Date occurs. GKIS
may, in its discretion, periodically increase Executives base salary. The term
"Annual Base Salary" as used in this Agreement shall refer to Annual Base Salary
as so increased. GKIS may not, however, reduce Executive's base salary during
the Employment Period. Executive shall be provided with incentives (annual and
long-term), retirement benefits, welfare benefits and fringe benefits no less
favorable in the aggregate than those on effect for Executive at any time during
the 120-day waiting period immediately preceding the Effective Date, except for
any reductions in benefits which apply generally to all executives of GKIS.
6. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. Executive's employment shall
3
<PAGE>
terminate automatically upon Executive's death during the Employment Period. If
GKIS determines in good faith that the Disability of Executive has occurred
during the employment period (pursuant to the definition of Disability set forth
below), it may give to Executive written notice in accordance with Section 17 of
this Agreement of its intention to terminate Executive's employment with GKIS.
Executive's employment with GKIS shall terminate effective on the 30th day after
receipt of such notice by Executive (the "Disability Effective Date"), provided
that, within the 30 days after such receipt, Executive shall not have returned
to full-time performance of Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of Executive from Executive's duties with
GKIS on a full-time basis for 180 consecutive business days as a result of
incapacity due to mental or physical illness which is determined to be total and
permanent by a physician selected by GKIS or its insurers and acceptable to
Executive or Executive's legal representative.
(b) CAUSE. GKIS may terminate Executive's employment during the
Employment Period for cause. For purposes of this Agreement, "Cause" shall mean:
(i) Executive's conviction of a felony or any
other criminal act involving moral turpitude;
(ii) Executive's deliberate and intentional continuing refusal
to substantially perform his duties and obligations under this
agreement (except by reason of incapacity due to illness or
accident) if Executive (a) shall have either failed to remedy such
alleged breach within fifteen days from the date written notice is
given by the Chairman of the Company demanding that he remedy such
alleged breach, or (b) shall have failed to take reasonable steps in
good faith to that end during such fifteen day period, provided,
with respect to (b) that, after the end of such fifteen day period,
there shall have been delivered to Executive a certified copy of a
resolution of the Board of Directors of the Company, adopted by the
affirmative vote of not less than two-thirds of the members of the
Board of Directors who are not employees of the Company taken at a
meeting of the Board of Directors at which Executive is given an
opportunity to be heard (with counsel), finding that Executive was
guilty of conduct set forth in clause (2) and specifying the
particulars thereof in detail, and that Executive has failed to take
reasonable steps in good faith to remedy such alleged breach; or (3)
upon a finding by the affirmative vote of not less than two-thirds
of the members of the Board of Directors who are not employees of
the Company taken at a meeting of the Board of Directors at which
Executive is given an opportunity to
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be heard (with counsel) that Executive had engaged in willful fraud
or defalcation either of which involved material funds or other
assets of the Company.
(c) GOOD REASON. Executive's employment may be terminated by
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) The assignment to Executive of any duties inconsistent in
any respect with Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 5(a) of this Agreement,
or any other action by GKIS which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken
in bad faith and which is remedied by GKIS after receipt of notice
thereof given by Executive;
(ii) Any failure by GKIS to comply with any of the provisions
of Section 5(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by GKIS promptly after receipt of notice thereof
given by Executive;
(iii) GKIS's requiring Executive to be based at any office or
location other than as provided in Section 5(a) hereof;
(iv) Any purported termination by GKIS of Executive's
employment otherwise than as expressly permitted by this Agreement;
or
(v) Any failure by GKIS to comply with and satisfy Section
12(c) of this Agreement.
For purposes of this Section 6(c), any good faith determination of "Good Reason"
made by Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by Executive for any reason pursuant to
a Notice of Termination delivered during the 15-day period immediately following
the latest of (i) the first anniversary of a Change in Control, (ii) the first
anniversary of the effective date of any merger the approval of which
constituted a Change in Control, or (iii) March 31, 2001 shall be deemed to be a
termination for Good Reason for all purposes of this Agreement, provided that
Executive has given notice to GKIS pursuant to Section 17 hereof at least 30
days prior to such termination.
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(d) NOTICE OF TERMINATION. Any termination by GKIS for Cause, or by
Executive for Good Reason, shall be communicated by Notice of Termination to the
other party hereto given in accordance with Section 17 of this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) subject to Section 6(c)
(iii) and the last sentence of Section 6(c), if the Date of Termination (as
defined below) is other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than thirty days after the giving
of such notice). The failure by Executive or GKIS to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of Executive or GKIS, respectively,
hereunder or preclude Executive or GKIS, respectively, from asserting such fact
or circumstance in enforcing Executive's or GKIS's rights hereunder.
(e) DATE OF TERMINATION. "Date of Termination" means (i) if
Executive's employment is terminated by GKIS for Cause, or by Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if Executive's employment is
terminated by GKIS other than for Cause or Disability, the Date of Termination
shall be the date on which GKIS notifies Executive of such termination and (iii)
if Executive's employment is terminated by reason of death or Disability, the
Date of Termination shall be the date of death of Executive or the Disability
Effective Date, as the case may be.
7. OBLIGATIONS OF GKIS UPON TERMINATION.
(a) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY. If GKIS shall
terminate Executive's employment other than for Cause or Disability during the
Employment Period or Executive shall terminate employment for Good Reason
pursuant to a Notice of Termination delivered during the Employment Period, GKIS
agrees to make the payments and provide the benefits described below.
(i) GKIS shall pay to Executive in a lump sum in cash
within 10 days after the Date of Termination an amount equal
to the product of (1) and (2), where (1) is three and (2) is
the sum of Executive's Annual Base Salary and the average of
the last three annual incentive bonuses actually paid to
Executive by GKIS for any calendar year before the Date of
Termination (the "Average Annual Bonus"); and
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(ii) Upon Executive's Date of Termination, Executive
shall be 100% vested in the amounts credited to any Qualified
Plan in which he is a participant.
(iii) Upon Executive's Date of Termination, Executive's
awards under any stock-based plan under which the Executive
has been granted stock or options to purchase such shall be
accelerated as follows:
(A) Each option and each related stock
appreciation right shall become immediately exercisable
to the extent theretofore not exercisable;
(B) Restricted stock shall immediately vest free
of restrictions; and
(C) The number of shares covered by each
performance share award shall be issued to Executive;
provided, however, that acceleration of awards shall comply with applicable
regulatory requirements, including without limitation, Section 422 of the Code
and Rule 16b-3 promulgated by the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934.
(iv) For one year after Executive's Date of Termination,
or such longer period as may be provided by the terms of the
appropriate plan, program, practice or policy, GKIS shall
continue to provide welfare benefits and fringe benefits and
other perquisites to Executive and/or Executive's family at
least equal to those which would have been provided to them if
Executive's employment had not been terminated in accordance
with the most favorable plans, practices, programs or policies
of GKIS and its affiliated companies applicable generally to
other peer executives and their families immediately preceding
the Date of Termination; provided, however that if Executive
becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another
employer-provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under
such other plan during such applicable period of eligibility.
For purposes of determining eligibility (but not the time of
commencement of benefits) of Executive for retiree benefits
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pursuant to such plans, practices, programs and policies,
Executive shall be considered to have remained employed until
one year after the Date of Termination and to have retired on
the last day of such period.
(v) The sum of (A) the Executive's Annual Base Salary
through the Date of Termination to the extent due for services
rendered but not theretofore paid, (B) with respect to any
Performance Period under the GK Intelligent Systems, Inc.
Long-Term Incentive Plan which has not been completed as of
the Date of Termination, an amount equal to (1) multiplied by
(2), where (1) is 150% of the Value (as defined in such plan)
of the Participant's accrued benefits on the Participant's
Date of Termination, and (2) is a fraction, the numerator of
which is the number of full months between the beginning of
such Performance Period and the Participant's Date of
Termination and the denominator of which is the total number
of months in the Performance Period, and (C) any compensation
previously deferred by the Executive (together with any
accrued earnings or interest thereon) and any accrued vacation
pay, in each case to the extent not theretofore paid (the
amount referred to in clauses (A), (B) and (C) above being
referred to as "Accrued Obligations").
(vi) To the extent not theretofore paid or provided,
GKIS shall timely pay or provide Executive any other amounts
or benefits required to be paid or provided or which Executive
is eligible to receive under any plan, program, policy,
practice, contract or agreement of GKIS and its affiliated
companies (such other amounts and benefits being hereinafter
referred to as "Other Benefits") in accordance with the terms
of such plan, program, policy, practice, contract or
agreement.
(b) DEATH. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be paid
to the Executive's estate or beneficiary, as applicable, in a lump sum in cash
within 10 days of the Date of Termination.
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(c) DISABILITY. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for payment of Accrued Obligations and the timely payment or provision of
Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination.
(d) CAUSE; OTHER THAN FOR GOOD REASON. If Executive's employment
shall be terminated for Cause during the Employment Period or, if Executive
voluntarily terminates employment during the Employment Period, excluding a
termination for Good Reason, this Agreement shall terminate without further
obligations to Executive (other than the obligation to pay to Executive his
Annual Base Salary earned through the Date of Termination and any benefits
payable to Executive under a plan policy, practice, etc., referred to in Section
8 below).
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit Executive's continuing or future participation in any plan, program,
policy or practice provided by GKIS or any of its affiliated companies and for
which Executive may qualify, nor, subject to Section 21, shall anything herein
limit or otherwise affect such rights as Executive may have under any contract
or agreement with GKIS or any of its affiliated companies. Amounts which are
vested benefits or which Executive is otherwise entitled to receive under any
plan, policy, practice or program of or any contract or agreement with GKIS or
any of its affiliated companies at or subsequent to the Date of Termination
shall be payable in accordance with such plan, policy, practice or program or
contract or agreement except as explicitly modified by this Agreement.
9. FULL SETTLEMENT. GKIS's obligation to make the payments provided for in
this Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which GKIS may have against Executive or others. In no event shall
Executive be obligated to seek other employment or take any other action by way
of litigation of the amount payable to Executive under any of the provisions of
this Agreement and, except as provided in Section 7(a)(v), such amounts shall
not be reduced whether or not Executive obtains other employment. GKIS agrees to
pay, to the full extent permitted by law, all legal fees and expenses which
Executive may reasonably incur as a result of any contest (regardless of the
outcome thereof) by GKIS, Executive or others of the validity or enforceability
of, or liability under, any provision of this Agreement or any guarantee of
performance thereof (including as a result of any contest by Executive about the
amount of any payment pursuant to this Agreement), plus in each case interest on
any delayed payment at the applicable Federal rate provided for in Section
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7872 (f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code").
Notwithstanding the foregoing, GKIS shall not be obligated to pay any legal fees
or expenses of Executive in any contest by Executive about the amount of any
payment under this Agreement if it is determined that GKIS did not breach this
Agreement and Executive's claim was not made in good faith.
10. CERTAIN ADDITIONAL PAYMENTS BY GKIS.
(a) In the event that any payment or distribution by GKIS to or for
the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10(a)) ("Payment") is determined to be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties are incurred by Executive
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the "Excise
Tax"), then GKIS shall pay to Executive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes and Excise Tax (including any
interest and penalties imposed with respect thereto) imposed upon the Payments,
Executive shall be restored to his position prior to the imposition of the
Excise Tax.
(b) Subject to the provisions of Section 10(c), all determinations
required to be made under this Section 10, including whether and when a Gross-Up
payment is required and the amount of such Gross-Up payment and the assumptions
to be utilized in arriving at such determination, shall be made by GKIS's
Certified Public Accountant or such other certified public accounting firm as
may be designated by Executive and which is satisfactory to GKIS (the
"Accounting Firm"), which shall provide detailed supporting calculations both to
GKIS and Executive within 15 business days of the receipt of request from
Executive or GKIS. All fees and expenses of the Accounting Firm shall be borne
solely by GKIS. Any Gross-Up Payment, as determined pursuant to this Section
10(b), shall be paid by GKIS to Executive within five days of the receipt of the
Accounting Firm's determination. No such determination that a Gross-Up Payment
is required shall be made unless the Accounting Firm furnishes GKIS with a
written opinion that there is no reasonable basis for not paying the Excise Tax.
As a result of the uncertainty in the application of Section 4999 of the code at
the time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by GKIS should
have been made ("Underpayment"), consistent with the calculations required to be
made hereunder. In the event that GKIS exhausts its remedies pursuant to Section
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10(c) and Executive thereafter is required to make a payment of any Excise Tax,
the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by GKIS to or for the
benefit of Executive.
(c) Executive shall notify GKIS in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by GKIS
of the Gross-Up Payment. Such notification shall be given as soon as practicable
but no later than ten business days after Executive is informed in writing of
such claim and shall apprise GKIS of the nature of such claim and the date on
which such claim is requested to be paid. Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which it
gives such notice to GKIS (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If GKIS notifies Executive
in writing prior to the expiration of such period that it desires to contest
such claim, Executive shall:
(i) Give GKIS any information reasonably
requested by GKIS relating to such claim,
(ii) Take such action in connection with contesting such
claim as GKIS shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by GKIS,
(iii) Cooperate with GKIS in good faith in order to
contest such claim effectively, and
(iv) Permit GKIS to participate in any proceedings
relating to such claim;
provided, however, that GKIS shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this Section 10(c),
GKIS shall control all proceedings taken in connection with such contest and ,
at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
Executive agrees to prosecute such contest to a determination before any
administration tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as GKIS shall
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determine; provided, however, that if GKIS directs Executive to pay such claim
and sue for a refund, GKIS shall advance the amount of such payment to
Executive, on an interest-free basis and shall indemnify and hold Executive
harmless, on an after-tax basis, from any Excise Tax or income tax (including
interest or penalties with respect thereto) imposed with respect to such advance
or with respect to any imputed income with respect to such advance; and further
provided that any extension of the statute of limitations relating to payment of
taxes for the taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, GKIS's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and Executive
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by GKIS
pursuant to Section 10(c), Executive becomes entitled to receive any refund with
respect to such claim, Executive shall (subject to GKIS's complying with the
requirements of Section 10(c)) promptly pay to GKIS the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by GKIS
pursuant to Section 10(c), a determination is made that Executive shall not be
entitled to any refund with respect to such claim and GKIS does not notify
Executive in writing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid.
11. CONFIDENTIAL INFORMATION. Executive shall hold in fiduciary capacity
for the benefit of GKIS all secret or confidential information, knowledge or
data relating to GKIS or any of its affiliated companies, and their respective
businesses, which shall have been obtained by Executive during Executive's
employment by GKIS or any of its affiliated companies and which shall not be or
become public knowledge (other than by acts by Executive or representatives of
Executive in violation of this Agreement). After termination of Executive's
employment with GKIS, Executive shall not, without the prior written consent of
GKIS or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than GKIS and
those designated by it. In no event shall an asserted violation of the
provisions of this Section 11 constitute a basis for deferring or withholding
any amounts otherwise payable to Executive under this Agreement.
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12. SUCCESSORS.
(a) This Agreement is personal to Executive and without the prior
written consent of GKIS shall not be assignable by Executive otherwise than by
will or the laws of descent and distribution. This Agreement shall inure to the
benefit of and be enforceable by Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
GKIS and its successors and assigns.
(c) GKIS will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of GKIS to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that GKIS would be required
to perform it if no such succession had taken place. As used in this Agreement,
"GKIS" shall mean GKIS as hereinbefore defined and any successor to its business
and/or assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
13. ARBITRATION.
(a) The Executive Officers Compensation and Development Committee of
the Board of Directors of GKIS (the "Administrator") shall administer this
Agreement. The Administrator (either directly or through its designees) will
have power and authority to interpret, construe, and administer this Agreement;
provided that, the Administrator's authority to interpret this Agreement shall
not cause the Administrator's decisions in this regard to be entitled to a
deferential standard of review in the event that Executive seeks review of the
Administrator's decision as described below.
(b) Neither the Administrator nor its designee, shall be liable to
any person for any action taken or omitted in connection with the interpretation
and administration of this Agreement.
(c) Because it is agreed that time will be of the essence in
determining whether any payments are due to Executive under this Agreement,
Executive may, if he desires, submit any claim for payment under this Agreement
or dispute regarding the interpretation of this Agreement to arbitration. This
right to select arbitration shall be solely that of Executive, and Executive may
decide whether or not to arbitrate in his discretion. The "right to select
arbitration" is not mandatory on Executive, and Executive may choose in lieu
thereof to bring an action in an appropriate civil court. Once an arbitration is
commenced, however, it may not be discontinued without the mutual consent of
both parties to the arbitration procedure set forth in this section.
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(d) Any claim for arbitration may be submitted as follows: If
Executive disagrees with the Administrator regarding the interpretation of this
Agreement and the claim is finally denied by the Administrator in whole or in
part, such claim may be filed in writing with an arbitrator of Executive's
choice who is selected by the method described in the next three sentences. The
first step of the selection shall consist of Executive's submitting a list of
five potential arbitrators to the Administrator. Each of the five arbitrators
must be either (1) a member of the National Academy of Arbitrators located in
the State of Texas or (2) a retired Texas District Court or Appellate Court
judge. Within one week after receipt of the list, the Administrator shall select
one of the five arbitrators as the arbitrator for the dispute in question. If
the Administrator fails to select an arbitrator in a timely manner, Executive
shall then designate one of the five arbitrators as the arbitrator for the
dispute in question.
(e) The arbitration hearing shall be held within seven days (or as
soon thereafter as possible) after the picking of the arbitrator. No continuance
of said hearing shall be allowed without the mutual consent of Executive and
Administrator. Absence from or nonparticipation at the hearing by either party
shall not prevent the issuance of an award. Hearing procedures which will
expedite the hearing may be ordered at the arbitrator's discretion, and the
arbitrator may close the hearing in his or her sole discretion when he or she
decides he or she has heard sufficient evidence to satisfy issuance of an award.
(f) The arbitrator's award shall be rendered as expeditiously as
possible and in no event later than one week after the close of the hearing. In
the event the arbitrator finds that GKIS has breached this Agreement, he or she
shall order GKIS to immediately take the necessary steps to remedy the breach.
In addition, he or she shall order GKIS to pay Executive an additional amount
equal to 10% of the amount actually in dispute. This additional amount shall
constitute damages and not a penalty. The award of the arbitrator shall be final
and binding upon the parties. The award may be enforced in any appropriate court
as soon as possible after its rendition. If an action is brought to confirm the
award, both GKIS and Executive\e agree that no appeal shall be taken by either
party from any decision rendered in such action.
(g) The Administrator will be considered the prevailing party in a
dispute if the arbitrator determines (1) that GKIS has not breached this
Agreement and (2) the claim by Executive was not made in good faith. Otherwise,
Executive will be considered the prevailing party. In the event that GKIS is the
prevailing party, the fee of the arbitrator and all necessary expenses of the
hearing (excluding any attorney's fees incurred by GKIS) including stenographic
reporter, if employed, shall be
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paid by the Executive. In the event that Executive is the prevailing party, the
fee of the arbitrator and all necessary expenses of the hearing (INCLUDING all
attorneys' fees incurred by the Executive in pursuing his claim), including the
fees of a stenographic reporter if employed, shall be paid by GKIS.
14. GOVERNING LAW. The laws of Texas shall govern the validity and
interpretation of this Agreement, with regard to conflicts of laws.
15. CAPTIONS. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect.
16. AMENDMENT. This Agreement may not be amended or modified otherwise
than by a written agreement executed by the parties hereto or their respective
successors and legal representatives.
17. NOTICES. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to Executive:
Gary Kimmons
2345 Bering, #321
Houston, Texas 77057
If to GKIS:
GK Intelligent Systems, Inc.
5555 San Felipe, Suite 625
Houston, Texas 77056
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
18. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
19. WITHHOLDING TAXES. GKIS may withhold from any amounts payable under
this Agreement such Federal, state, local or foreign taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
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20. NO WAIVER. Executive's or GKIS's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right Executive or GKIS may have hereunder, including, without limitation, the
right of Executive to terminate employment for Good Reason pursuant to Section
6(c) of this Agreement, shall not be deemed to be a waiver of such provision or
right of this Agreement.
21. AT-WILL EMPLOYMENT. Executive and GKIS acknowledge that, except as may
otherwise be provided under any other written agreement between Executive and
GKIS prior to the Effective Date is "at will" and, prior to the Effective Date,
Executive's employment may be terminated by either Executive or GKIS at any
time, in which case Executive shall have no further rights under this Agreement.
From and after the Effective Date this Agreement shall supersede any other
agreement between the parties with respect to the subject matter hereof, unless
such other agreement contains provisions more favorable to Executive than this
agreement, in which event such favorable provisions, at Executive's sole option,
shall apply.
22. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same Agreement.
23. NO PROHIBITED PAYMENTS. Notwithstanding anything contained in this
Agreement to the contrary, GKIS shall not make any payment to Executive which,
according to the opinion of GKIS's outside counsel, would violate Section
2523(k) of the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer
Recovery Act of 1990 (codified at 12 U.S.C. 1828 (k)), or any rules or
regulations promulgated thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the day and year first written above in
Houston, Texas.
EXECUTED: ___________, 19__
GK INTELLIGENT SYSTEMS, INC.
By____________________________
EXECUTED: ___________, 19__
________________________________
Gary F. Kimmons
17
EXHIBIT 10.3(b)
ADDENDUM TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and executed by and between GK Intelligent Systems,
Inc., a Delaware Corporation, with its principal place of business in Houston,
Harris County, Texas (hereinafter called the "Corporation" or "GKIS"), and GARY
F. KIMMONS, of Houston, Texas (hereinafter called "Kimmons" or "Professional").
Collectively, the Corporation and Kimmons shall be referred to as "the parties."
W I T N E S S E T H:
WHEREAS, Kimmons desires to (i) reaffirm his existing contract of
employment, enumerating the following terms and conditions which are in effect
prior to the "Effective Date" set out in the "Amended and Restated Employment
Agreement" to which this Addendum is attached, and (ii) continue to perform
services on behalf of the Corporation as President and Chief Executive Officer
("CEO") and Chairman of the Corporation's Board of Directors, all as an employee
of the Corporation, including the performance personally of such services as he
and/or the Corporation's Board of Directors deem necessary; and
WHEREAS, the Board of Directors of the Corporation desires to (i) reaffirm
the existing contract of employment, enumerating the following terms and
conditions which are in effect prior to the "Effective Date" set out in the
"Amended and Restated Employment Agreement"to which this Addendum is attached,
and (ii) continue the employment of Kimmons in such capacities under the terms
of this Agreement;
THEREFORE, the parties mutually agree as follows:
ARTICLE I
EMPLOYMENT
1.1 CONDITIONS OF EMPLOYMENT: The Corporation hereby continues the
employment of Kimmons and Kimmons accepts such continued employment as President
and CEO and Chairman of the Board of Directors, continuing to render
professional services on behalf of the Corporation, subject to the supervision
and direction of the Corporation's Board of Directors, and subject to the law of
the Corporation as given in the Articles of Incorporation and the Bylaws. This
agreement does not supersede the terms of that agreement executed in December,
1993, extended in December, 1996 and amended and restated on March 13, 1998.
Other than any terms which may be more favorable to Professional than the
"Amended and Restated Employment Agreement" to which this Agreement is an
addendum, this Agreement is intended to augment and add to the original
agreement and not to supersede it. This addendum is intended to enumerate the
present terms of employment in effect prior to the "Effective Date" set out in
the "Amended and Restated Employment Agreement"to which this Addendum is
attached.
1.2 TERM OF EMPLOYMENT: The term of employment shall continue until
termination by either party as provided in Article IV, subject further to the
terms of the original agreement.
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ARTICLE II
DUTIES
2.1 DEVOTION OF EFFORT: Kimmons agrees to devote sufficient time,
attention, and skill to the performance of his duties as an employee of the
Corporation as set out and authorized by the Board of Directors. During the term
of this Agreement, he shall not render services on his own or on behalf of any
party other than the Corporation unless otherwise authorized by the Board of
Directors.
2.2 DESCRIPTION OF DUTIES. Kimmons shall act as CEO and President of the
Corporation.
ARTICLE III
COMPENSATION
3.1 COMPENSATION AND BENEFITS.
a. MONTHLY SALARY. As compensation for the services to be rendered
hereunder, GKIS will continue to pay to Kimmons a monthly salary in an
amount equal to Twenty Thousand Dollars ($20,000.00). The monthly salary,
shall be paid in semi-monthly payments of one-half the monthly amount each
on the first and fifteenth day of each month with respect to the
immediately preceding month, continuing at this or a greater amount as set
by the Board until this agreement is terminated.
b. BONUS WARRANTS FOR SHARES OF CORPORATION COMMON STOCK. In
addition to the monthly salary and any other benefits available to all
employees, including standard incentive qualified stock options, GKIS will
grant to Kimmons warrants for four million (4,000,000) shares of GKIS
restricted common stock (the "Bonus Warrants"), with one-fourth vesting
annually each year for four years. Contingent upon the Agreement remaining
in force, Bonus Warrants for one million (1,000,000) restricted shares
will vest and be exercisable on the thirtieth day following the close of
each of the first, second, third and fourth years following the month in
which this agreement is executed. Except as set out in this agreement,
this grant of Bonus Warrants shall be governed by and subject to the
separate Warrant Agreement contemporaneously executed by the parties. For
all purposes related to the Grant of these warrants, the Board of
Directors of GKIS has determined that the date of such grant is March 13,
1998 and the Fair Market Value per share as of the date of such grant is $
.3125. Except as set out in paragraph 4.2 below, termination of this
agreement will not cause the forfeiture of the Bonus Warrants for those
months prior to termination in which the vesting requirements were met. In
the event of Kimmons' death, termination upon disability as described in
paragraph 4.1 below or other involuntary termination other than as set out
in paragraph 4.2 below, all unvested warrants and options, however
acquired, shall immediately vest and be exercisable by Kimmons, his
representative or his executor, as applicable.
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c. EMPLOYEE BENEFIT PLANS. Kimmons shall be entitled to participate
in all employee benefit plans to be established by the Board of Directors
on the same terms and conditions as all other employees similarly
situated.
ARTICLE IV
TERMINATION OF AGREEMENT
4.1 ILLNESS OR OTHER INCAPACITY. If Kimmons, during the term of this
Agreement, shall fail to perform his duties hereunder as a result of
illness or other incapacity which shall continue for a period of more than
six months, the Corporation shall have the right to terminate this
Agreement and the employment hereunder as of a date to be specified in a
written notice of termination sent to Kimmons, such date to be not less
than thirty (30) days following receipt of said notice.
4.2 CONDUCT: If Kimmons shall be convicted of a felony or a crime
involving moral turpitude; embezzle or otherwise steal from the
Corporation; use liquor or drugs to an extent which has a visible
detrimental effect on his services; conduct himself publicly in a manner
which offends against decency or causes him to be held in public ridicule
or causes public scandal, the Corporation shall have the right to
terminate this contract and employment hereunder upon the affirmative vote
of not less than two-thirds of the members of the Board of Directors who
are not employees of the Company taken at a meeting of the Board of
Directors at which Kimmons is given an opportunity to be heard (with
counsel). In the event of termination under this Article 4.2, Kimmons
shall not be eligible to receive any remaining unvested stock option
compensation subsequent to the act for which termination occurs, nor shall
he be entitled to receive any deferred compensation credited to his
account but not yet paid, if any.
.
4.3 UNILATERAL TERMINATION: Either party hereto may terminate this
Agreement and employment hereunder effective as of a date to be specified
in a written notice of termination, such date to be not less than thirty
(30) days after delivery of the notice.
ARTICLE V
DEATH OF EMPLOYEE
5.1 DEATH. If Kimmons shall die during the term of this Agreement,
his legal representative shall be entitled to receive his compensation as
provided in Article III hereof.
ARTICLE VI
ILLNESS OR INCAPACITY
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6.1 INABILITY TO PERFORM DUTIES. If Kimmons is unable to perform his
duties hereunder by reason of illness or incapacity of any kind for a
period of more than six months, his salary payments may be reduced or
terminated by the Corporation at its absolute discretion. Kimmons's full
salary shall be reinstated upon his return to full-time employment and the
full discharge of his duties hereunder. This section shall in no way limit
the rights of the Corporation under Article IV hereof.
ARTICLE VII
LEAVES OF ABSENCE
7.1 PAID LEAVE. Leaves of absence with full payment of salary may be
granted to Kimmons for attendance at professional conventions, continuing
education institutes in his profession and other professional or business
activities, as approved by the Corporation, with full or partial payment
of expenses at its sole discretion.
7.2 UNPAID LEAVE. Unpaid leave of absence may be granted at the sole
discretion of the Corporation for any other reasons upon request by
Kimmons.
ARTICLE VIII
VACATIONS
8.1 PAID VACATION. Kimmons shall be entitled to a vacation, the
length of which as determined by the Board of Directors or the President
of the Corporation, during which time his salary shall be paid in full.
Kimmons shall take his vacation at such time or times as shall be approved
by the corporation.
ARTICLE IX
EXPENSES
9.1 EXPENSES REIMBURSED. During the period of his employment,
Kimmons will be reimbursed for his reasonable expenses in accordance with
general policy of the Corporation as adopted by the Board of Directors
from time to time. In addition to such reimbursement expenses, Kimmons
shall incur and pay in the course of his employment by the Corporation
certain other necessary expenses as Chief Executive Officer, for which he
will be required personally to pay but for which the Corporation shall
reimburse or otherwise compensate him, including, but not limited to the
following: automobile and transportation expenses; educational expenses
incurred for the purpose of maintaining or improving Kimmons's
professional skills, club dues, and the expenses of membership in civic
groups, professional societies, and fraternal organizations, and all other
items of reasonable and necessary professional expenses incurred by
Kimmons in the performance of the services in which Kimmons has been
engaged on behalf of the Corporation.
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ARTICLE X
SUCCESSION
10.1 ASSUMPTION BY SUCCESSOR TO CORPORATION. The Corporation will
not consolidate or merge into or with another corporation, or transfer all
or substantially all of its assets to another corporation, unless such
corporation (hereinafter referred to as "Successor Corporation") shall
assume this Agreement. Upon such assumption Kimmons and the Successor
Corporation shall become obligated to perform the terms and conditions
hereof, and the term "Corporation" as used in this Agreement shall be
deemed to refer to such Successor Corporation; provided, however,
Kimmons's duties shall be such as prescribed by the Board of Directors of
the Successor Corporation.
ARTICLE XI
PROPERTY RIGHTS OF PARTIES
11.1 TRADE SECRETS. During the term of employment, Kimmons will have
access to and become familiar with various trade secrets, consisting of
formulas, devices, secret inventions, processes, and compilation of
information, records, and specifications, owned by the Corporation and
regularly used in the operation of the business of the Corporation.
Kimmons shall not disclose any such trade secrets, directly or indirectly,
nor use them in any way, either during the term of this Agreement or at
any time thereafter, except as required in the course of his or her
employment. All files, records, documents, drawings, specifications,
equipment, and similar times relating to the business of the Corporation,
whether or not prepared by Kimmons shall remain the exclusive property of
the Corporation and shall not be removed from the premises of the
Corporation under any circumstances without the prior written consent of
the Corporation.
11.2 RETURN OF CORPORATION'S PROPERTY. On the termination of
employment or whenever requested by the Corporation, Kimmons shall
immediately deliver to the Corporation all property in Kimmons's
possession or under Kimmons's control belonging to the Corporation in good
condition, ordinary wear and tear excepted.
11.3 OWNERSHIP OF WORK PRODUCT. The parties agree as follows:
A. PROPERTY OF GKIS. Kimmons agrees that all intellectual
property including but not limited to all ideas and concepts
contained in computer programs and software, documentation or other
literature or illustrations that are conceived, developed, written,
or contributed by Kimmons pursuant to this Agreement, either
individually or in collaboration with others, shall belong to and be
the sole property of GKIS.
B. WORKS MADE FOR HIRE. Kimmons agrees that all rights in all
works prepared or performed by Kimmons pursuant to this Agreement,
including patent rights and copyrights applicable to any of the
intellectual property described in Subparagraph (a) above, shall
belong exclusively to GKIS and shall constitute "works made for
hire" for purposes of copyright law.
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C. PROPERTY OF KIMMONS. The provisions of this Paragraph XI
shall not be construed to assign to GKIS any of Kimmons's rights in
any invention for which no equipment, supplies, facilities, or trade
secret information of GKIS was used, or that was developed entirely
prior to this Agreement, or that does not result from any work
performed by Kimmons for GKIS.
ARTICLE XII
NO COMPETITION BY PROFESSIONAL
12.1 NO COMPETING ACTIVITIES. During the term of this Agreement and for a
period of three years (six months if following termination by GKIS for any cause
other than as set out in 4.2 above) following termination of same, Kimmons shall
not, directly or indirectly, either as an employee, employer, consultant, agent,
Principal, Partner, Stockholder, corporate officer, director, or in any other
individual or representative capacity, engage or participate in any business
whatsoever that is in direct competition in any manner whatsoever with the core
products and technologies (SMART ONE Trainer and its derivatives, SMART
ENTERPRISE, DOORWAYS, SMART SUPPORT, SMART PERFORM or other CARNOT derived
products, and their successors and any other subsequent core businesses) of this
Corporation within North America, unless a Court of competent Jurisdiction shall
determine that the scope and/or time of this agreement renders it unenforceable,
in which case the scope and/or time shall be reduced to that which the Court
deems reasonable and enforceable. This provision shall not be construed to
prevent Kimmons from accepting employment in the areas of industry standard
programming, operating systems or computer manufacturing and sales, standard
corporate training systems and administration or other information technology
functions considered generic to the computer or training industry, and which do
not utilize any of the Corporation's core technologies or products.
ARTICLE XIII
NOTICES
13.1 NOTICES: Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by mail to his residence,
in the case of Kimmons, or to its principal office, in the case of the
Corporation.
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ARTICLE XIV
WAIVER OF BREACH
14.1 NONWAIVER OF SUBSEQUENT BREACH. The waiver by any party hereto of a
breach of any provision of this agreement shall not operate or be construed as a
waiver of any subsequent breach by an party.
ARTICLE XV
AMENDMENT
15.1 WRITTEN AMENDMENT. No amendment or modification of this Agreement
shall be deemed effective unless or until executed in writing by the parties
hereto with the same formality attending execution of this Agreement.
ARTICLE XVI
CHOICE OF LAW
16.1 TEXAS LAW. This Agreement, having been executed and delivered in the
State of Texas, its validity, interpretation, performance and enforcement will
be governed by the laws of that state.
EXECUTED in counterparts, each of which shall be deemed an original,
effective the 13th day of March, 1998.
________________________________________
Gary F. Kimmons
GK INTELLIGENT SYSTEMS, INC.:
By:______________________________________
Rod Norville, V.P. and General Counsel
EXHIBIT 10.7
CONSULTING AGREEMENT
This Consulting Agreement is made and entered into by and between GK
Intelligent Systems, Inc., a Delaware corporation, with its principal place of
business located in Houston, Texas, and Rodney L. Norville, P.C., a Texas
Professional Corporation.
1. DEFINITIONS.
1.1 The following terms shall have the following meanings:
(a) "Agreement" means this Consulting Agreement.
(b) "Arbitration Program" means the terms and provisions of the
Arbitration Program attached hereto as Exhibit A and incorporated herein
for all purposes.
(c) "Company" means GK Intelligent Systems, Inc., a Delaware
corporation.
(d) "Confidential Information" or "Trade Secrets" means any and all
information or material proprietary to the Company or designated as
confidential by the Company and not generally known by persons who are not
consultants or employees of the Company, which Consultant develops or of
which Consultant may obtain knowledge or access through or as a result of
the Consultant's association with the Company, either in the future or
during previous employment by the Company (including information and
materials conceived, originated, discovered or developed in whole or in
part by the Consultant at the request or for the benefit of the Company or
while the Consultant was employed by the Company) and incudes, but is not
limited to, the designs, manufacture, makeup, configuration, contents,
applications, and programming of the Company's core products and
technologies (SMART ONE Trainer and its derivatives, SMART ENTERPRISE,
SMART SUPPORT, SMART PERFORM and/or CARNOT derived products and their
successors and any other subsequent core businesses) as well as the
following types of information and other information of a similar nature
whether or not reduced to writing and whether or not expressly identified
as confidential by the Company: applications and computer programs and
related documentation, Company manuals and other training and technical
materials; marketing concepts, techniques and plans; business plans and
concepts, research and development, financial information pertaining to
the Company; the Company's operating techniques and business practices and
procedures; and all information regarding any special projects.
"Confidential Information" also includes any information described above
which the Company obtains from another party and which the Company treats
as proprietary or designates as confidential or proprietary information,
whether or not owned or developed by the Company.
(e) "Covenant Not to Compete" refers to the agreement and covenant
of Consultant and Norville, individually not to engage in any of the
Restricted Activities within the Restricted Area during the Restricted
Period.
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(f) "Consultant" means Rodney L. Norville, P.C.
(g) "Effective Date" means September 15, 1998.
(h) "Expiration Date" means September 15, 1999.
(i) "Norville" means Rodney L. Norville, an individual, employed by
Consultant.
(j) "Parties" means GK Intelligent Systems, Inc. and Rodney L.
Norville, P.C.
(k) "Restricted Activities" refers to any act, effort or statement
by Consultant or Norville, individually, directly or indirectly (as an
employee, consultant, agent, principal, partner, stockholder, corporate
officer, director, or in any other individual or representative capacity)
that is in any manner whatsoever in competition with the core products and
technologies of the Company, including SMART ONE Trainer and its
derivatives, SMART ENTERPRISE, SMART SUPPORT, SMART PERFORM and/or CARNOT
derived products and their successors and any other subsequent core
businesses of the Company.
(l) "Restricted Area" means North America.
(m) "Restricted Period" means the Term of this Agreement and the
three-year period immediately following the expiration or earlier
termination of this Agreement.
(n) "Term" means the period commencing on September 15, 1998, and
ending on September 15, 1999.
(o) "Termination Date" means the date of the written notice of
termination of this Agreement or automatic termination, whichever occurs
first.
1.2 Singular and masculine forms of any nouns or pronouns shall embrace
and be applied as the plural or as the feminine or neuter, as appropriate to the
context, and vice versa.
2. RECITALS.
2.1 The Company desires to retain Consultant to perform certain services
and Consultant desires to perform such services for the Company in accordance
with the terms and conditions set forth herein.
2.2 Norville is employed as president of Consultant and the parties
contemplate that Norville, on behalf of Consultant, will perform all services
contemplated by this Agreement. Norville is joining in this Agreement for the
purposes of making and binding himself individually to the covenants regarding
work product, confidentiality and competition contained in Sections 6, 7 and 8
of this Agreement, and without which agreements of Norville, individually, the
Company would not enter into this Agreement. Norville acknowledges that the
Company's agreement to retain Consultant under this Agreement, together with the
sum of $10.00, the receipt of which is hereby acknowledged is good and
sufficient consideration for his agreement to be bound individually to Sections
6, 7 and 8 of this Agreement.
<PAGE>
3. AGREEMENT TO PROVIDE CONSULTING SERVICES.
3.1 SERVICES. The Company hereby retains Consultant to perform such
services as from time to time the Company may request, including but not limited
to the following:
(a) Advise and consult directly with employees of the Company
designated by the Company's Board of Directors on matters
concerning the Company's business and similar matters;
(b) Promotion of the Company's products and services;
(c) Preparation of such reports as may be required by the
Company; and
(d) Performance of such other and further services as required by
the Company, as may be assigned from time to time consistent
with this Agreement.
(e) All services performed by Consultant pursuant to this
Agreement shall be performed by Norville, on behalf of
Consultant.
3.2 DEVOTION OF EFFORT. The Consultant shall exercise its best efforts in
the performance of services and shall devote such time, attention, skill, and
energy to the business of the Company and to the promotion of the Company's
products and services as may be necessary to complete the tasks assigned by the
Company and to otherwise work toward fulfilling the Company's overall goals.
Consultant agrees to be available to provide consulting services upon the
Company's request up to a maximum of 100 hours per month during the Term. The
Consultant shall be free, during the Term to engage in other enterprises or
business activities, subject to the obligations of Consultant and Norville, as
set forth in Sections 7 and 8.
3.3 STATUS AS INDEPENDENT CONTRACTOR. Consultant shall be deemed for all
purposes to be an independent contractor. Norville is an employee of Consultant
and not an employee of Company. Therefore, the Company shall not withhold any
sums from the gross payment to be made to Consultant for social security or
other federal, state, or local tax liabilities or contributions, and all
withholdings, liabilities, and contributions shall be solely the responsibility
of Consultant. Neither Norville nor any other employee of Consultant shall
participate in any employee benefit program of the Company during the term of
this Agreement.
4. TERM.
4.1 TERM. It is the understanding and agreement of the Parties that the
retention of Consultant under this Agreement shall be for a period of one (1)
year, commencing on September 15, 1998, and running through September 15, 1999,
which period is defined in this Agreement as the Term. During the Term, the
Company may not terminate this Agreement except for cause, including any of the
following:
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(a) Consultant's failure to cause Norville to perform the services
contemplated under this Agreement;
(b) The engagement in fraud, embezzlement, or other theft or
conversion of property or money of the Company or other
defalcation in connection with or arising out of services
performed pursuant to this Agreement by any employee or agent
of Consultant;
(c) Attempts by Consultant to employ or solicit for employment any
employee or consultant of the Company or to terminate
employment or consulting services with the Company, or to
reduce or discontinue any such services to the Company,
without the written consent of the Company;
(d) Attempts by Consultant to induce or encourage any person or
entity with whom the Company does business or has a
contractual relationship to discontinue any such patronage or
services or to violate or breach any provision of a contract
between such person or entity and the Company;
(e) Engagement by Consultant or any employee or agent of
Consultant in any act or practice in connection with any
services provided under this Agreement that could constitute
violation of any law or regulation;
(f) Consultant's failure to comply with any court or
administrative order governing the conduct of the Company; and
(g) Violation of Sections 7 or 8 or any other material provision
of this Agreement or any other agreement with the Company by
Consultant or Norville;
5. COMPENSATION.
5.1 CONSULTING PAYMENTS. As compensation for the services to be rendered
hereunder, the Company shall pay Consultant the sum of $7,500 per month for
consulting services while this Agreement is in effect. This amount shall be paid
on the 15th day of each month commencing October 15, 1998 and continuing on the
15th day of each month until expiration or earlier termination of this
Agreement. If this Agreement is terminated for any of the reasons described in
Section 4.1, the Company shall have no further payment obligations to
Consultant.
5.2 EXPENSES REIMBURSED. During the Term of this Agreement, Consultant
shall be reimbursed for its reasonable expenses incurred in the performance of
the consulting services in accordance with general policy of the Company, as
adopted by the Board of Directors from time to time.
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5.3 INABILITY TO PERFORM SERVICES. If Norville is unable to perform the
duties contemplated under this Agreement on behalf of Consultant by reason of
illness or incapacity of any kind for a period of more than six (6) months, the
consulting payments to Consultant may be reduced or terminated by the Company at
its absolute discretion.
6. OWNERSHIP OF WORK PRODUCT.
6.1 PROPERTY OF THE COMPANY. All intellectual property, including, but not
limited to, all ideas and concepts contained in computer programs and software,
documentation or other literature or illustrations that are conceived,
developed, written, or contributed by Consultant or Norville pursuant to this
Agreement, either individually or in collaboration with others, shall belong to
and be the sole property of the Company.
6.2 WORKS MADE FOR HIRE. Consultant agrees that all rights in all works
prepared or performed by Consultant pursuant to this Agreement, including patent
rights and copyrights applicable to any of the intellectual property described
in subsection 6.1 shall belong exclusively to the Company and shall constitute
"works made for hire" for purposes of copyright law.
6.3 PROPERTY OF CONSULTANT. The provisions of subsection 6.2 shall not be
construed to assign to the Company any of Consultant's rights in any invention
for which no equipment, supplies, facilities, or trade secret information of the
Company was used or that does not result from any work performed by Consultant
for the Company.
7. CONFIDENTIAL INFORMATION AND TRADE SECRETS.
7.1 COMPANY'S DISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION TO
CONSULTANT. The Company and Consultant recognize and agree that by virtue of the
Consultant's association with the Company, Consultant and Norville will receive
some or all of the following: training and knowledge in the form of instruction
in the business, of the Company; contact with, knowledge of, and relationships
with, actual or potential clients, customers, purchasers, marketers and
distributors of the Company's products and services, or their consultants,
agents or representatives; contact with, and information about, the Company's
research and development, technology, products, services, procedures and
standards; and other information and data regarding existing or potential
products, services, projects, research and development and business plans of the
Company.
7.2 RETURN OF CONFIDENTIAL AND PROPRIETARY MATERIALS. The Parties
acknowledge that through Norville's prior employment with the Company and
ongoing association with the Company as an employee of Consultant, both Norville
and Consultant have become familiar with the Trade Secrets and other
confidential and proprietary information of the Company and, pursuant to this
Agreement, will continue to gain knowledge of and become more familiar with such
information as well as additional confidential data and information. Consultant
and Norville acknowledge that all notes, data, forms, reference and training
materials, memoranda, computer print-outs and other documentation and records in
any way incorporating or reflecting any Confidential Information or Trade
Secrets shall belong exclusively to the Company and Consultant and Norville
agree to promptly deliver such materials and all copies thereof to Company on
the termination of this Agreement howsoever occurring, or at an earlier time
upon request of the Company. Consultant further agrees to provide an inventory
of all such material upon termination of this Agreement and at such other times
as the Company may request.
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7.3 NON-DISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION. Consultant
and Norville agree during the Term of this Agreement and thereafter to hold in
confidence and not to use for their own benefit, directly or indirectly, or for
the benefit of any other person or entity (except the Company) any Confidential
Information or Trade Secrets or to reveal, report, publish, copy, duplicate,
disclose, convey or transfer any Confidential Information or Trade Secrets to
any other person or entity, or otherwise utilize any Confidential Information or
Trade Secrets for any purpose, except in the course of his work for and on
behalf of the Company. Consultant also agrees that during the Term of this
Agreement, it will cause its employees, agents and representatives to abide by
the rules, guidelines, policies and procedures relating to confidential and
proprietary information implemented and/or amended from time to time by the
Company and its management.
7.4 PROTECTION OF CONFIDENTIAL AND PROPRIETARY MATERIALS. Consultant
agrees to cause its employees, agents and representatives to take all
precautions necessary to preclude the dissemination and/or disclosure of the
Company's Trade Secrets and Confidential Information and to restrict use of it
so that such information will not be disclosed or made accessible to any person
or entity not employed by or affiliated with the Company. Consultant and
Norville agree that this obligation of strict confidentiality and non-disclosure
shall survive termination of this Agreement with the Company and shall continue
in full force and effect notwithstanding the termination of this Agreement.
7.5 INJUNCTIVE RELIEF FOR BREACH OF COVENANTS. Consultant and Norville
acknowledge that any breach of or threatened breach of the covenants contained
in this Section 7 would cause the Company irreparable harm and that money
damages would not provide an adequate remedy to the Company for any such breach.
Because of the unique nature of the Confidential Information and Trade Secrets
to which Consultant shall have access, and because of the inadequacy of monetary
awards for breaches of the obligations as set forth in this section, if
Consultant fails to comply with any such obligations, or in the event of breach
or threatened breach of any of the provisions herein, the Company, in addition
to any other remedies available to it at law or in equity, shall be entitled to
immediate injunctive relief against Consultant and Norville to enforce the
provisions of this section, and shall be entitled to recover from Consultant and
Norville the Company's reasonable attorney's fees and other expenses incurred in
connection with such proceedings.
8. NON-COMPETITION.
8.1 COMPANY'S INTEREST IN PROTECTING BUSINESS. Consultant acknowledges
that the Company has a vital business interest in protecting the Confidential
Information and Trade Secrets as well as its goodwill, business contacts and
relationships and the business it plans to develop with and through the
Consultant. Further, Consultant acknowledges that such business interests on the
part of the Company give rise to the Company's desire to restrain Consultant
from competing with the Company for a reasonable period of time and within
reasonable geographic limits after the Termination Date. Therefore, Consultant
hereby enters into this Covenant Not to Compete with the Company in
consideration of the Company's agreement to retain Consultant for the Term, and
its agreement to disclose its Confidential Information and Trade Secrets to
Consultant during the term of Consultant's association with the Company.
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8.2 CONSULTANT'S COVENANT NOT TO COMPETE.
(a) In consideration of the foregoing, Consultant and Norville agree that
during the Restricted Period, neither Consultant nor Norville will, directly
or indirectly, as an officer, director, shareholder, proprietor, agent, partner,
joint venturer, recruiter, consultant, employee, or in any other individual or
representative capacity engage in any of the Restricted Activities within the
Restricted Area. Consultant and Norville further covenant and agree that during
the Restricted Period they will not, either on their own behalf or for or on
behalf of another, contact for the purpose of competing with the Company, any
customer or client to whom the Company sold or offered for sale any products or
services during Norville's previous employment with the Company or at any time
during the term of this Agreement.
8.3 COVENANT NOT TO RECRUIT COMPANY'S EMPLOYEES.
(a) Consultant and Norville agree that during the Restricted Period, they
will not recruit or participate, directly or indirectly, in the recruitment of
any of the Company's employees on its own account or for or on behalf of any
competitor of the Company, nor seek to recruit any employee of the Company for
any purpose without the Company's knowledge and written consent.
8.4 INJUNCTIVE RELIEF FOR BREACH OF COVENANT NOT TO COMPETE.
(a) Consultant and Norville recognize and agree that the Company's
enforcement of the Covenant Not to Compete shall be necessary to prevent
irreparable harm and damage to the business of the Company and that the
limitations as to time, geographical area and scope of activity to be restrained
are reasonable and do not impose a greater restraint on Consultant or Norville
than is necessary to protect the goodwill and other business interests of the
Company.
(b) Because of the unique nature of the special training and knowledge
received by the Consultant and Norville from the Company and because of the
inadequacy of monetary awards for breach of the obligations contained in this
Section 8, if Consultant or Norville fails to comply with any such obligations
or in the event of a breach or threatened breach of any of the provisions
herein, the Company in addition to any other remedies available to it at law or
in equity, shall be entitled to immediate injunctive relief to enforce the
provisions of this Section 8 and shall be entitled to recover from Consultant
and Norville reasonable attorney's fees and other expenses incurred by the
Company in connection with such proceedings.
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8.5 MODIFICATION OF COVENANT NOT TO COMPETE. In the event any of the
provisions of this Agreement should ever be deemed or adjudged by a court of
competent jurisdiction to exceed the applicable legal limitations, then such
provisions shall be reformed to the maximum time, geographic or other
limitations permitted by applicable law, it being the Parties' intention to
permit the reviewing court to modify this Agreement to the extent necessary to
cure any such invalidity or unenforceability.
8.6 AGREEMENT ANCILLARY TO OTHER AGREEMENTS. The Covenant Not to Compete
set forth in this Section 8 is ancillary to and part of other agreements between
the Company and the Consultant, including (i) the agreement set forth in Section
4 for the Company to engage Consultant for at least the Initial Term; and (ii)
the agreement set forth in Section 7 pursuant to which the Company agrees to
disclose certain confidential and proprietary information to Consultant during
the term of this Agreement. Furthermore, the Parties acknowledge that the
Company's agreement to retain Consultant for a set term, and to disclose to
Consultant its Confidential Information and Trade Secrets, gives rise to the
Company's interest in restraining Consultant from competing with the Company
after termination of this Agreement.
9. NO INDEPENDENT OBLIGATION CREATED.
Consultant specifically recognizes and agrees that this Agreement shall
not be construed as creating or evidencing any separate or independent
obligation of the Company to train Consultant for any specified period of time
or to assign to Consultant any particular duties or responsibilities. Nothing in
this Agreement limits the Company's right to terminate this Agreement for cause
during the Initial Term.
10. TERMINATION.
10.1 TERMINATION WITHOUT CAUSE.
(a) During the Term, the Company may not terminate this Agreement
without cause.
(b) Consultant may terminate this Agreement at any time by giving ten (10)
days written notice to the Company at the address indicated in this Agreement or
at such other address as the Company may hereafter provide to Consultant. Upon
termination of this Agreement, the Company shall have no further obligations to
Consultant.
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10.2 TERMINATION FOR CAUSE.
(a) At any time, with or without advance notice, the Company may terminate
this Agreement for cause, including but not limited to any of the reasons listed
in Section 4.1.
(b) In the event of termination of this Agreement for cause, the Company
shall not be required to make, and Consultant shall not be entitled to receive,
any consulting payments, as set forth in Section 5.1, subsequent to the act for
which termination occurs.
10.3 NOTICE OF TERMINATION
Notice of termination by either party shall be effective upon delivery.
11. SPECIAL AGREEMENTS OF CONSULTANT.
11.1 Consultant represents and warrants that it is a valid professional
corporation, formed and existing under the laws of the State of Texas.
11.2 Consultant agrees to shall perform all services contemplated by this
Agreement in accordance with all applicable laws, rules, regulations and
professional codes of ethics.
11.3 Consultant shall take all steps necessary for the reporting,
withholding, and payment of any income or other taxes of Consultant arising out
of this Agreement, if required by law and for the reporting, withholding and
payment as an employer of any income taxes attributable to the employees of
Consultant (including Norville), if any, which arise out of this Agreement.
Consultant shall be responsible for any and all compensation which is paid to
the employees of Consultant (including Norville) and for all expenses incurred
by the Consultant in connection with services performed by Consultant on behalf
of Company that are not reimbursable pursuant to Section 5.2 of this Agreement.
12. BINDING ARBITRATION.
The Parties agree to be bound by the terms and provisions of the
Arbitration Program pursuant to which any and all disputes shall be resolved by
mandatory binding arbitration upon the request of either party, subject only to
the specific exceptions set forth in the Arbitration Program.
13. INVALIDITY.
Whenever possible, each provision of this Agreement shall be interpreted
in such a manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be invalid, illegal, or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality, or unenforceability shall not affect any other
provision; rather, this Agreement shall be reformed, construed, and enforced in
any such jurisdiction as if such invalid, illegal, or unenforceable provisions
had never been contained herein, and a new, enforceable provision shall be
substituted which accomplishes the intent of the invalid, illegal, or
unenforceable provision as nearly as practicable.
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14. ASSIGNABILITY.
Neither this Agreement nor any of the duties or obligations hereunder
shall be assignable by Consultant without the prior written consent of the
Company. The rights and obligations of the Company shall inure to the benefit of
and shall be binding upon any successors and assigns of the Company.
15. SURVIVAL OF CERTAIN CLAUSES.
Consultant specifically recognizes and agrees that the agreements and
covenants set out in Section 7 which relate to Confidential Information and
Trade Secrets, and in Section 8 which relate to the Consultant's Covenant Not To
Compete are continuing and ongoing obligations which extend beyond the
Expiration Date. Consultant acknowledges that all such agreements shall survive
the termination of his Agreement for any reason whatsoever and shall be binding
on Consultant and Consultant's successors and assigns and shall continue in full
force and effect notwithstanding termination of this Agreement.
16. SEVERABILITY OF AGREEMENT.
The provisions of this Agreement shall be severable. If any provision of
this Agreement is adjudicated unenforceable, the remaining provisions shall
nevertheless remain in full force and effect.
17. NOTICES.
Written notices required or permitted by the provisions of this Agreement
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, certified mail, return receipt requested, addressed as follows:
IF TO CONSULTANT:
Rodney L. Norville, P.C.
5135 Longmont Drive
Houston, Texas 77056
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IF TO THE COMPANY:
GK Intelligent Systems, Inc.
5555 San Felipe, Suite 625
Houston, Texas 77056
Attention: General Counsel
or to such other address as either party may hereafter furnish to the other
in writing.
18. NONWAIVER OF SUBSEQUENT BREACH.
The waiver by any party hereto of a breach of any provision of this
agreement shall not operate or be construed as a waiver of any subsequent breach
by any party.
19. WRITTEN AMENDMENT.
No amendment, modification, extension or renewal of this Agreement shall
be deemed effective unless or until executed in writing by the Parties with the
same formality attending execution of this Agreement.
20. CHOICE OF LAW.
THIS CONSULTING AGREEMENT SHALL GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS. THIS AGREEMENT HAS BEEN ENTERED INTO IN
WHOLE OR IN PART IN HARRIS COUNTY, TEXAS, AND SHALL BE PERFORMABLE FOR ALL
PURPOSES IN HARRIS COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS SHALL HAVE
JURISDICTION OVER ANY AND ALL DISPUTES ARISING UNDER OR PERTAINING TO THIS
AGREEMENT (AND NOT SUBJECT TO ARBITRATION), AND VENUE IN ANY SUCH DISPUTE SHALL
BE IN HARRIS COUNTY, TEXAS. IN THE EVENT THE PERSONAL SERVICE CANNOT BE
OTHERWISE OBTAINED WITH RESPECT TO SUCH LITIGATION, CONSULTANT AND THE COMPANY
EACH HEREBY APPOINTS THE SECRETARY OF STATE FOR THE STATE OF TEXAS AS ITS AGENT
FOR SERVICE OF PROCESS.
21. ENTIRE AGREEMENT.
THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO
WITH RESPECT TO THE SUBJECT MATTER HEREOF. THIS AGREEMENT MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THIS AGREEMENT MAY BE AMENDED ONLY BY AN INSTRUMENT
IN WRITING EXECUTED BY THE PARTIES HERETO.
22. MULTIPLE COUNTERPARTS.
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This Agreement may be executed in multiple counterparts, each of which
shall serve as an original for all purposes, but all copies shall constitute but
one and the same Agreement.
EXECUTED ON THE DATE(S) SET FORTH BELOW:
GK INTELLIGENT SYSTEMS, INC.
______________________________________
Gary F. Kimmons
President and Chief Executive Officer
RODNEY L. NORVILLE, P.C.
______________________________________
Rodney L. Norville
President
______________________________________
Rodney L. Norville,
Individually
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
This instrument was acknowledged before me this ______ day of
September, 1998, by Gary F. Kimmons, as President and Chief Executive Officer of
GK Intelligent Systems, Inc., on behalf of said corporation.
______________________________________
Notary Public
My commission expires ________________
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STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
This instrument was acknowledged before me this ______ day of
September, 1998, by Rodney L. Norville, as President of Rodney L. Norville,
P.C., on behalf of said corporation.
______________________________________
Notary Public
My commission expires ________________
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
This instrument was acknowledged before me this ______ day of
September, 1998, by Rodney L. Norville, as his individual act and deed.
______________________________________
Notary Public
My commission expires ________________
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EXHIBIT A
ARBITRATION PROGRAM
1. BINDING ARBITRATION. Upon the demand of either party, whether made
before or after the institution of any judicial proceeding, any Dispute (as
defined below) shall be resolved by binding arbitration in accordance with the
terms of this Arbitration Program. A "Dispute" shall include any action,
dispute, claim, or controversy of any kind (E.G., whether in contract or in
tort, statutory or common law, legal or equitable, or otherwise), now existing
or hereafter arising between the Parties in any way arising out of, pertaining
to or in connection with (1) any agreement, document or instrument to which this
Arbitration Program is attached or in which it is referred to or any related
agreements, documents, or instruments (the "Documents"), (2) any past, present
or future incidents, omissions, acts, errors, practices, or occurrences causing
injury to either party whereby the other party or its agents, consultants or
representatives may be liable, in whole or in part, or (3) any other aspect of
the past, present, or future relationships of the Parties including any agency,
independent contractor or employment relationship but excluding claims for
workers' compensation and unemployment benefits ("Relationship"). Any party to
this Arbitration Program may, by summary proceedings (E.G., a plea in abatement
or motion to stay further proceedings), bring any action in court to compel
arbitration of any Disputes. Any party who fails or refuses to submit to binding
arbitration following a lawful demand by the opposing party shall bear all costs
and expenses incurred by the opposing party in compelling arbitration of any
Dispute. The Parties agree that by engaging in activities with or involving each
other as described above, they are participating in transactions involving
interstate commerce.
2 GOVERNING RULES. All Disputes between the Parties submitted to
arbitration shall be resolved by binding arbitration administered by the
American Arbitration Association (the "AAA") in accordance with, and in the
following order of priority: (1) the terms of this Arbitration Program, (2) the
Commercial Arbitration Rules of the AAA, (3) the Federal Arbitration Act (Title
9 of the United States Code) and (4) to the extent the foregoing are
inapplicable, unenforceable or invalid, the laws of the State of Texas. The
validity and enforceability of this Arbitration Program shall be determined in
accordance with this same order of priority. In the event of any inconsistency
between this Arbitration Program and such rules and statutes, this Arbitration
Program shall control. Judgment upon any award rendered hereunder may be entered
in any court having jurisdiction.
3 NO WAIVER; PRESERVATION OF REMEDIES: MULTIPLE PARTIES. No provision of,
nor the exercise of any rights under, this Arbitration Program shall limit the
right of the Company, during any Dispute, to seek, use, or employ ancillary or
preliminary judicial remedies, including the institution of activities for
temporary restraining orders or temporary or permanent injunctions or other
equitable relief for the purpose of enforcing the non-competition covenant, the
confidentiality agreements or to protect itself from other irreparable harm and
any such action shall not be deemed an election of remedies. Such rights can be
exercised at any time except to the extent such action is contrary to a final
award or decision in any arbitration proceeding. The institution and maintenance
of an action for judicial relief or pursuit of provisional or ancillary remedies
shall not constitute a waiver of the right of either party to submit the Dispute
to arbitration, nor render inapplicable the compulsory arbitration provisions
hereof.
<PAGE>
4 STATUTE OF LIMITATIONS. All statutes of limitation applicable to any
Dispute shall apply to any proceeding in accordance with this Arbitration
Program.
5 ARBITRATOR POWERS AND QUALIFICATIONS: AWARDS; MODIFICATION OR VACATION
OF AWARD. Arbitrators are empowered to resolve Disputes by summary rulings
substantially similar to summary judgments and motions to dismiss. Arbitrators
shall resolve all Disputes in accordance with the applicable substantive law.
Any arbitrator selected shall be required to be a practicing attorney licensed
to practice law in the State of Texas and shall be required to be experienced
and knowledgeable in the substantive laws applicable to the subject matter of
the Dispute. With respect to a Dispute in which the claims or amounts in
controversy do not exceed $500,000.00, a single arbitrator shall be chosen and
shall resolve the Dispute. In such case, the arbitrator shall be required to
make specific, written findings of fact, and shall have authority to render an
award up to but not to exceed $500,000.00, including costs, fees, expenses and
all other damages of any kind. A Dispute involving claims or amounts in
controversy exceeding $500,000.00, shall be decided by a majority vote of a
panel of three arbitrators (an "Arbitration Panel"), the determination of any
two of the three arbitrators constituting the determination of the Arbitration
Panel, provided, however, that all three Arbitrators on the Arbitration Panel
must actively participate in all hearings and deliberations. Arbitrators,
including any Arbitration Panel, may grant any remedy or relief deemed just and
equitable and within the scope of this Arbitration Program and may also grant
such ancillary relief as is necessary to make effective any award. Arbitration
Panels shall be required to make specific, written findings of fact and
conclusions of law, and in such proceedings before an Arbitration Panel only,
the Parties shall have the additional right to seek vacation or modification of
any award of an Arbitration Panel that is based in whole, or in part, on an
incorrect or erroneous ruling of law by appeal to a federal or state court of
appeals, following the entry of judgment on the award in federal or state
district court, as appropriate. For these purposes, the award and judgment
entered by the federal or state district court shall be considered to be the
same as the award and judgment of the Arbitration Panel. All requirements
applicable to appeals from any federal or state district court judgment shall be
applicable to appeals from judgments entered on decisions rendered by
Arbitration Panels. The appellate courts shall have the power and authority to
vacate or modify an award based upon a determination that there has been an
incorrect or erroneous ruling of law. The appellate court shall also have the
power to reverse and/or remand the decision of an Arbitration Panel. Subject to
the foregoing, the determination of an Arbitrator or Arbitration Panel shall be
binding on all parties and shall not be subject to further review or appeal
except as otherwise allowed by applicable law.
6 DISCOVERY AND PRETRIAL MATTERS. Discovery and pretrial motions shall be
governed by the Texas Rules of Civil Procedure. Arbitrators shall rule on all
discovery disputes and other pretrial matters within twenty (20) days of
submission unless otherwise agreed by the Parties.
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7 COSTS, ATTORNEYS' FEES AND OTHER EXPENSES. To the extent permitted by
applicable law, Arbitrators, including any Arbitration Panel, shall have the
power to award recovery of all costs and fees (including attorneys' fees,
administrative fees, and arbitrators' fees) to the prevailing party.
8 CONFIDENTIALITY. Each party agrees to keep all Disputes and arbitration
proceedings strictly confidential, except for disclosures of information
required in the ordinary course of business of the Parties or by applicable law
or regulation.
9 OTHER MATTERS AND MISCELLANEOUS. To the maximum extent practicable, the
AAA, the Arbitrator (or the Arbitration Panel, as appropriate) and the Parties
shall take any action necessary to require that an arbitration proceeding
hereunder shall be concluded within 180 days of the filing of the Dispute with
the AAA. Arbitration proceedings hereunder shall be conducted in Houston, Texas,
unless otherwise agreed by the Parties. Arbitrators shall be empowered to impose
sanctions and to take such other actions as they deem necessary to the same
extent a court could pursuant to the Texas Rules of Civil Procedure and
applicable law. This Arbitration Program, together with the Consulting Agreement
to which it is appended, constitutes the entire agreement of the Parties with
respect to its subject matter and supersedes all prior discussions,
arrangements, negotiations, and other communications on dispute resolution. The
provisions of this Arbitration Program shall survive any termination, amendment,
or expiration of the Consulting Agreement, unless the Parties otherwise
expressly agree in writing. This Arbitration Program may be amended, changed, or
modified only by the express provisions of a writing which specifically refers
to this Arbitration Program and which is signed by both Parties. If any term,
covenant, condition or provision of this Arbitration Program is found to be
unlawful, invalid or unenforceable, such illegality, or invalidity or
unenforceability shall not affect the legality, validity or enforceability of
the remaining parts of this Arbitration Program, and all such remaining parts
hereof shall be valid and enforceable and have full force and effect as if the
illegal, invalid or unenforceable part had not been included.
3
EXHIBIT 10.8
CONSULTING AGREEMENT
THIS AGREEMENT is entered into effective the 17th day of March, 1998, at
Houston, Texas, between GK INTELLIGENT SYSTEMS, INC., a Delaware corporation
("Corporation" or "GKIS") and JOSEPH RODNEY CANION ("CANION").
WHEREAS, GKIS is in the business of providing artificial intelligence
based education, training and performance support and is based in Houston,
Texas; and
WHEREAS, GKIS desires that CANION consult with GKIS on the establishment
of retail distribution for the Company's products in the domestic and
international marketplace and/or introduce GKIS to parties who may be interested
in GKIS's products and, when appropriate and time permits, make himself
reasonably available to mentor and advise the directors, officers and management
of GKIS; and
WHEREAS, GKIS desires that CANION become an advisor and mentor to the
management of GKIS in all phases of retail product development and distribution
as well as technological developments which could effect GKIS's business; and
WHEREAS, CANION desires to acquire an equity interest in the
Corporation's common stock; and
WHEREAS, GKIS considers it to be in its best interest that CANION assume a
position as Chairman of the GKIS Board of Directors;
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. AGREEMENT TO PROVIDE CONSULTING SERVICES. Upon election by consent of
the holders of a majority the shares of GKIS, CANION agrees to assume a position
on the GKIS Board of Directors as its Chairman for the term of this agreement.
In this capacity, CANION agrees to act as an adviser to GKIS and mentor to its
management, and subject to any confidentiality obligations incumbent upon him,
to apprise GKIS of technological developments as CANION in his sole discretion
shall deem appropriate. In addition, CANION agrees to help GKIS establish market
opportunities and retail distribution for its products/services in the domestic
and international marketplace, making himself reasonably available to mentor and
advise GKIS directors, officers and management periodically during the term of
this agreement, all on a part-time, half-day per week basis as the parties
mutually agree.
2. POSITION ON GKIS BOARD OF DIRECTORS. The Corporation, acting through
its existing Board of Directors, will appoint CANION as Chairman of the Board of
Directors for the
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term of this agreement.
3. COMPENSATION. As compensation for the services to be rendered
hereunder, GKIS will pay CANION One Hundred Fifty Thousand Dollars ($150,000)on
or before April 1,1998. In the event of early termination of this Agreement
except for breach by GKIS, CANION agrees to repay to GKIS that portion of the
Compensation attributable to the period from date of termination to the date of
normal termination. The compensation shall immediately and automatically vest
upon material breach by GKIS of this agreement or any of its warranties and
representations, without notice or action by CANION.
4. PURCHASE OF RESTRICTED SHARES.
a. INITIAL PURCHASE OF SHARES. As a condition of his employment,
CANION has previously agreed to purchase Three Million (3,000,000) shares
of GKIS common restricted stock (the "Initial Shares"), to be issued
immediately upon receipt of funds or as soon thereafter as is practicable.
The effective date of this purchase will be March 17, 1998, the date of
the subscription agreement between the parties. The agreed purchase price
of the Initial Shares was $.05 per share, and the market value was .31250,
which was the closing price for the previous day. As soon as practicable
after receipt of payment from CANION, GKIS shall tender the Initial Shares
to CANION, provided that if any law or regulation requires the Corporation
to take any action with respect to the Initial Shares before the issuance
thereof, then the date of delivery for such shares shall be extended for
the period necessary to take such action.
b. AGREEMENT TO SELL AND REPURCHASE. In the event of CANION's
failure of performance or early termination of this agreement as set out
herein, CANION agrees to sell and GKIS agrees to repurchase unvested
Initial Shares as defined herein. Each month during the term of this
agreement, one-twelfth of the Initial Shares shall no longer be subject to
such required repurchase by GKIS, or in other words, such shares shall
vest. The shares remaining after the previous months' fractions of shares
have vested shall be considered unvested. The Initial Shares shall
immediately and automatically vest upon material breach by GKIS of this
agreement or any of its warranties and representations, without notice or
action by CANION, and shall no longer be subject to repurchase.
5. RIGHTS PRIOR TO ISSUE. CANION shall have no rights as a stockholder
with respect to the Initial Shares until such shares are issued.
6. PRIOR AGREEMENTS. Except as set out herein, this Agreement supersedes
and is in lieu of any and all prior or contemporaneous agreements,
communications or understandings, whether written or unwritten, verbal or tacit,
or implied by prior dealings, between and among any of the parties, their
predecessors or affiliates with respect to the matters set out herein and
therein, respectively.
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7. AMENDMENT IN WRITING. No amendment, modification or change to this
agreement shall be binding unless in writing, signed by all the parties hereto.
8. AGREEMENT BINDING. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, legatees,
administrators, executors, legal representatives, successors, and assigns
(including remote, as well as immediate, successors to and assignees of said
parties).
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF CANION. CANION
represents, warrants and agrees as follows:
a. NO REGISTRATION. CANION is aware that the Shares have not been
registered nor is registration contemplated under the Securities Act of
1933, and accordingly, that the Shares must be held indefinitely unless
they are subsequently registered under said Act or unless, in the opinion
of counsel for the Corporation, a sale or transfer may be made without
registration thereunder. CANION agrees that any certificates evidencing
the Shares may bear a legend restricting the transfer thereof consistent
with the foregoing and that a notation may be made in the records of the
Corporation restricting the transfer of the Shares in a manner consistent
with the foregoing.
b. NO PREEMPTIVE RIGHTS. CANION acknowledges and agrees
that he has no preemptive rights with respect to the Shares to be
conveyed hereunder.
10. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF GKIS. GKIS represents,
warrants and agrees as follows:
a. AUTHORITY. GKIS is a corporation duly organized, validly
existing, and in good standing under the laws of Delaware, with full
corporate power and authority to carry on its business as it is now being
conducted, to own or hold under lease the properties and assets it now
owns or holds under lease, and to enter into and perform its obligations
under this Agreement. The execution and delivery of this Agreement and the
consummation of all the transactions contemplated thereby have been duly
authorized by all necessary corporate action on behalf of GKIS. The
persons signing on behalf of GKIS are duly authorized to do so and this
Agreement will be binding upon GKIS. GKIS is not subject to any lien or
encumbrance of any kind nor subject to any agreement, instrument, order,
or decree of any court or government body which would prevent consummation
of the transaction contemplated by this agreement.
b. TAX OBLIGATIONS. GKIS has filed all tax returns required to be
filed and paid all taxes and assessments due, including interest and
penalties (the "Taxes"). There are no unpaid Taxes that are or could
become a lien on the property or assets of GKIS, except for current Taxes
not yet due and payable or accrued
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payroll taxes which will be paid not later than April 30, 1998.
c. NO SUITS PENDING. There are no actions, suits, or proceedings
pending, outstanding or threatened, against or affecting GKIS or any of
the assets, properties or business of GKIS at law or in equity, or before
or by any governmental authority, except as set out in its filings with
the SEC or otherwise disclosed to CANION.
d. NO VIOLATIONS OF LAWS. To the best of its knowledge, GKIS is not
in default or violation under any law, ordinance or regulation, or with
respect to any order, writ, injunction, decree, or demand of any court or
any governmental authority, or in the payment of any indebtedness for
borrowed money or under the terms or provisions of any agreement or
instrument evidencing or security any such indebtedness.
e. GOVERNMENTAL AGENCIES. GKIS will comply with the
requirements of all applicable laws, regulations, and
requirements pertaining to GKIS.
f. INFORMATION PROVIDED. To the best of its knowledge, all
information provided by GKIS to CANION was and is accurate in all material
respects and did not or does not, to the best of GKIS's knowledge, omit
any information necessary to make such information and documentation not
misleading.
g. FINANCIAL STATEMENTS. GKIS has delivered to CANION its audited
annual report for the fiscal year ended May 31, 1997, as set out in its
Form 10K-SB, and its latest unaudited quarterly financial statements, as
set out in its Form 10Q-SB. The financial statements present fairly the
financial position and results of operations of GKIS.
h. LICENSES AND PERMITS. GKIS has all licenses, permits, approvals,
consents, orders, rights and other authorizations which are necessary in
order to enable it to conduct its business as currently conducted.
i. NO UNDISCLOSED LIABILITIES. Except as set out in its audited
annual report or quarterly unaudited financial statements, GKIS has no
liabilities or obligations other than those incurred since November 30,
1997, in the ordinary course of business, consistent with prior practice
and not in the aggregate materially adverse.
j. NO CONFLICT WITH OTHER DOCUMENTS. Neither the execution and
delivery of this agreement nor the carrying out of this transaction will
result in any violation, termination or modification of, or be in conflict
with GKIS's charter documents or bylaws, any contract or agreement to
which GKIS is a party or is bound, or result in the creation of any lien
or encumbrance upon any of the properties or assets of GKIS.
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k. ACKNOWLEDGMENT OF CANION'S FIDUCIARY OBLIGATIONS TO THIRD
PARTIES. GKIS understands, acknowledges and agrees that CANION was a high
level employee of COMPAQ COMPUTER CORPORATION and is an officer or
director of other corporations, and thus may have a fiduciary relationship
towards one or more third parties, including his former employer and that,
in such capacity, CANION is subject to certain ethical and business
constraints with respect to certain materials or information of third
parties which may be confidential, trade secret, proprietary or otherwise
subject to restrictions on its use or dissemination by CANION. GKIS
acknowledges and agrees that it will not constitute a breach of this
agreement for CANION to comply with these obligations to their full legal,
moral and ethical limitations in CANION's sole discretion. GKIS further
understands and agrees that nothing contained in this Agreement shall
require CANION to take any action in violation of any of the obligations
described above.
l. STATUS OF SHARES TO BE ISSUED. All issued shares of capital stock
of GKIS are, and upon issuance to CANION in accordance with the terms of
this Agreement, the Shares will also be, duly authorized, validly issued
and fully-paid and non-assessable. The Shares to be issued by GKIS
hereunder are, and will be when issued, free and clear of all
encumbrances, except as set out in this agreement.
m. DIRECTORS' AND OFFICERS' LIABILITY (DOL) INSURANCE. GKIS shall
immediately procure DOL insurance coverage in the minimum amount of
$1,000,000.00, specifically covering all acts of CANION to be performed
under this agreement and all liabilities for which coverage is normally
obtained by a corporation for its directors.
11. TERM OF AGREEMENT. This agreement shall be for one (1) year from April
1, 1998, unless terminated by either party pursuant to the provisions contained
herein.
12. TERMINATION OF AGREEMENT. This agreement may be terminated as follows:
a. ILLNESS OR OTHER INCAPACITY. If CANION, during the term of this
Agreement, shall fail to perform his duties hereunder as a result of
illness or other incapacity which shall continue for a period of more than
twelve weeks, the Corporation shall have the right to terminate this
Agreement and the employment hereunder as of a date to be specified in a
written notice of termination sent to CANION, such date to be not less
than thirty (30) days following receipt of said notice. The Initial Shares
shall be fully vested as of the date of termination and not be subject to
repurchase by GKIS.
b. CONDUCT. If CANION shall willfully violate any law; embezzle or
otherwise steal from the Corporation; use liquor or drugs to an extent
which has a
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visible detrimental effect on his services; conduct himself publicly or
privately in a manner which offends against decency or causes him to be
held in public ridicule or causes public scandal, the Corporation shall
have the right to terminate this contract and employment hereunder upon
notice given in the manner specified in 12.a. In the event of termination
under this Subparagraph 12.b., vesting of the Initial Shares shall cease,
GKIS shall have no further obligation to CANION under this agreement, and
CANION shall sell to GKIS and GKIS shall repurchase all unvested Initial
Shares at their issue price.
c. UNILATERAL TERMINATION, IF ANY, BY CANION. CANION may terminate
this Agreement and employment hereunder effective as of a date to be
specified in a written notice of termination, such date to be not less
than thirty (30) days after delivery of the notice, and all vesting of the
Initial Shares shall cease as of the end of the month during which
termination is effective, GKIS shall have no further obligation to CANION
under this agreement, and CANION shall sell to GKIS and GKIS shall
repurchase all unvested Initial Shares at their issue price, unless
termination is the result of material breach by GKIS of the provisions of
this Agreement.
d. VESTING OF INITIAL SHARES AFTER TERMINATION FOR DEATH OR
DISABILITY. If CANION shall die during the term of this Agreement, his
legal representative or executor shall be entitled to receive any
compensation which is unpaid and accrued from the date of his last payment
until the date of his death, and this agreement shall terminate. All
unvested Initial Shares shall immediately vest and not be subject to
repurchase by GKIS.
e. TERMINATION FOR CAUSE OTHER THAN CONDUCT. GKIS may terminate this
agreement during the initial term if the Board of Directors determines
that CANION has failed to perform his duties hereunder for a period of at
least six months, and such failure is not due to illness or disability.
Such termination shall be effective as of a date to be specified in a
written notice of termination, such date to be the end of a month not less
than thirty (30) days after delivery of the notice, provided that during
such 30-day (or greater) period CANION shall have opportunity to contest
such termination to a meeting of the entire Board of Directors and the
Board shall agree by a majority vote of its members that CANION shall be
terminated for cause, and all vesting of Initial Shares shall cease as of
such date and CANION shall sell to GKIS and GKIS shall repurchase all
unvested Initial Shares at their issue price.
13. NOTICES. All notices required hereunder shall be sent via certified
mail, postage prepaid, if to GKIS, in care of Rod Norville, Esq., 5555 San
Felipe, Suite 625, Houston, Texas, 77056, and if to CANION, in care of Rod
Canion, 5 Post Oak Park, Suite 1655, Houston, Texas 77027.
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14. CHOICE OF LAW. The parties agree that this agreement shall be governed
by and interpreted in accordance with the laws of the State of Texas, excluding
any principle or provision thereof that would require application of the laws of
any other jurisdiction.
15. ARBITRATION. If the parties have any disagreement or dispute arising
in connection with this agreement or the subject matter of this agreement that
cannot be resolved amicably among the parties, such dispute shall, on the
written request of either party, be submitted to arbitration, which will comply
with and be governed by the provisions of the Texas Civil Practice and Remedies
Code, Section 171.000, ET SEQ., and the American Arbitration Association.
Pursuant to Section 171.026(a) of the Texas Civil Practice and Remedies Code,
arbitration shall be conducted under the Commercial Arbitration Rules of the
American Arbitration Association in existence at the time of arbitration. The
cost and expenses, including attorney's fees and the fees of the arbitrators,
shall be borne by the losing party or in such proportions as the arbitrators
shall determine.
16. CONFIDENTIAL INFORMATION. CANION shall hold in fiduciary capacity for
the benefit of GKIS all secret or confidential information, knowledge or data
relating to GKIS or any of its affiliated companies, and their respective
businesses, which shall have been obtained by CANION during CANION's employment
by GKIS or any of its affiliated companies and which shall not be or become
public knowledge (other than by acts by CANION or representatives of CANION in
violation of this Agreement). After termination of CANION's employment with
GKIS, CANION shall not, without the prior written consent of GKIS or as may
otherwise be required by law or legal process, communicate or divulge any such
information, knowledge or data to anyone other than GKIS and those designated by
it.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year set forth above.
GK INTELLIGENT SYSTEMS, INC
By:_____________________________
GARY KIMMONS, C.E.O.
--------------------------------
JOSEPH RODNEY CANION
7
EXHIBIT 10.9
CONSULTING AGREEMENT
THIS AGREEMENT is entered into on this 14th day of April, 1998, at
Houston, Texas, between GK INTELLIGENT SYSTEMS, INC., a Delaware corporation
("Corporation" or "GKIS") and JOHN F. GRIBI ("GRIBI").
WHEREAS, GKIS is in the business of providing artificial intelligence
based education, training and performance support and is based in Houston,
Texas; and
WHEREAS, GKIS desires that GRIBI consult with GKIS on the establishment of
retail distribution for the Company's products in the domestic and international
marketplace, including all aspects of the accounting and managerial systems and
requirements related thereto and and, when appropriate and time permits, make
himself reasonably available to mentor and advise the directors, officers and
management of GKIS and assist in the screening for and recruiting of a person to
fill the CFO and any other requested managerial positions; and
WHEREAS, GKIS desires that GRIBI become an advisor and mentor to the
management of GKIS in the management, accounting and financing of all phases of
retail product development, sourcing, scheduling and distribution; and
WHEREAS, GRIBI desires to acquire an equity interest in the
Corporation's common stock; and
WHEREAS, GKIS considers it to be in its best interest that GRIBI assume a
position on the GKIS Board of Directors;
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. AGREEMENT TO PROVIDE CONSULTING SERVICES. Upon election by consent of a
majority the shareholders of GKIS, GRIBI agrees to assume a position on the GKIS
Board of Directors for the term of this agreement. In this capacity, GRIBI
agrees to act as an adviser to GKIS and mentor to its management, and subject to
any confidentiality obligations incumbent upon him, to apprise GKIS of financial
and management developments as GRIBI in his sole discretion shall deem
appropriate. In addition, GRIBI agrees to help GKIS establish financial,
accounting and managerial systems for the anticipated growth of the Corporation,
making himself reasonably available to mentor and advise GKIS directors,
officers and management periodically during the term of this agreement, all on a
part-time, consulting basis as the parties mutually agree.
2. POSITION ON GKIS BOARD OF DIRECTORS. The Corporation, acting through
its
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existing Board of Directors, will appoint GRIBI to the Board of Directors
for the term of this agreement.
3. COMPENSATION.
a. INITIAL GRANT OF OPTIONS. As compensation for the services to be
rendered hereunder and upon execution of this agreement, GKIS will grant
to GRIBI options (the "Options") to purchase Three Hundred Thousand
(300,000) shares of GKIS common restricted stock (the "Shares") for a
strike price $2.3125 per share. The effective date of this grant will be
the date of this agreement. The agreed fair market value of the Options
shall be $ 2.3125 per share, the closing price for freely trading shares
as of that date.
b. VESTING AND EXERCISE. One-twelfth of the Options, that is,
options for twenty-five thousand (25,000) shares, shall vest each month
during the term of this agreement, beginning with the month in which this
agreement is executed. Unvested Options may be subject to forfeiture or
cancellation for non-performance of this Agreement, as set out herein.
Vested Options will be exercisable on the sixtieth day following the close
of the month in which they vest. The options expire five years after the
end of the month in which they vest.
c. CONSULTING FEES. In addition to the Options, GKIS will pay GRIBI
One Thousand Five Hundred Dollars ($1,500.00) per day for specific
consulting services at such times and places as he and the Board agree
should be rendered to the Corporation. GKIS will also pay GRIBI's
necessary and ordinary expenses incurred in providing services under this
agreement. GKIS will pay these consulting fees and expenses upon
presentation of invoices together with usual and customary documentation.
The parties may execute additional written agreements as to such
consulting services and/or expenses as GRIBI or the Board may require.
4. ADJUSTMENTS TO OPTIONS.
a. ADJUSTMENTS IN GENERAL. The aggregate number or type of shares of
Common Stock with respect to which Options are granted hereunder, the
number or type of shares of Common Stock subject to each outstanding
Option, and the Option price per share for each such Option may all be
appropriately adjusted, as the Board may determine, for any increase or
decrease in the number of shares of issued Common Stock resulting from a
subdivision or consolidation of shares whether through reorganization,
recapitalization, consolidation, payment of a share dividend, or other
similar increase or decrease.
b. SALE, MERGER OR CONSOLIDATION. Subject to any required action by
the stockholders, if the Company shall be a party to a transaction
involving a sale of substantially all its assets, a merger, or a
consolidation, any Option granted hereunder shall pertain to and apply to
the securities to which a holder of Common Stock would be
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entitled to receive as a result of such transaction; provided, however,
that all unexercised Options may be canceled by the Company as of the
effective date of any such transaction by giving notice to the holders of
such Options of its intention to do so, and by permitting the exercise of
such Options during the 30-day period immediately after the date such
notice is given.
c. DISSOLUTION. In the case of dissolution of the Company, every
Option outstanding hereunder shall terminate; provided, however, that each
Option holder shall have 30 days' prior written notice of such event,
during which time each shall have a right to exercise his or her partly or
wholly unexercised Options.
d. DETERMINATION BY BOARD. On the basis of information known to the
Company, the Board shall make all determinations under this Section 4,
including whether a transaction involves a sale of substantially all the
Company's assets; and all such determinations shall be conclusive and
binding on the Company and all other persons.
5. ISSUANCE OF SHARES UNDER OPTIONS. The obligation of the Company to sell
and deliver Common Stock under Options (the "Shares") shall be subject to all
applicable laws, regulations, rules and approvals, including, but not by way of
limitation, the effectiveness of a registration statement under the Securities
Act of 1933, if deemed necessary or appropriate by the Board, of the Common
Stock reserved for issuance upon exercise of Options. In the case of officers or
other persons subject to Section 16(b) of the Securities Exchange Act of 1934,
the Board may at any time impose any limitations upon the exercise, delivery and
payment of any Option which, in the Board's discretion, are necessary in order
to comply with Section 16(b) and the rules and regulations thereunder. The
Option holder shall have no rights as a stockholder with respect to any Shares
covered by an Option, or exercised by the holder, until the date of delivery of
a stock certificate to the holder for such shares. No adjustment other than
pursuant to Section 4 hereof shall be made for dividends or other rights for
which the record date is prior to the date such stock certificate is delivered.
6. PRIOR AGREEMENTS. Except as set out herein, this Agreement supersedes
and is in lieu of any and all prior or contemporaneous agreements,
communications or understandings, whether written or unwritten, verbal or tacit,
or implied by prior dealings, between and among any of the parties, their
predecessors or affiliates with respect to the matters set out herein and
therein, respectively.
7. AMENDMENT IN WRITING. No amendment, modification or change to this
agreement shall be binding unless in writing, signed by all the parties hereto.
8. AGREEMENT BINDING. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, legatees,
administrators, executors, legal representatives, successors, and assigns
(including remote, as well as immediate, successors to
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and assignees of said parties).
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF GRIBI. GRIBI represents,
warrants and agrees as follows:
a. NO REGISTRATION. GRIBI is aware that the Shares have not been
registered nor is registration contemplated under the Securities Act of
1933, and accordingly, that the Shares must be held indefinitely unless
they are subsequently registered under said Act or unless, in the opinion
of counsel for the Corporation, a sale or transfer may be made without
registration thereunder. GRIBI agrees that any certificates evidencing the
Shares may bear a legend restricting the transfer thereof consistent with
the foregoing and that a notation may be made in the records of the
Corporation restricting the transfer of the Shares in a manner consistent
with the foregoing.
b. NO PREEMPTIVE RIGHTS. GRIBI acknowledges and agrees
that he has no preemptive rights with respect to the Shares to be
conveyed hereunder.
10. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF GKIS. GKIS represents,
warrants and agrees as follows:
a. AUTHORITY. GKIS is a corporation duly organized, validly
existing, and in good standing under the laws of Delaware, with full
corporate power and authority to carry on its business as it is now being
conducted, to own or hold under lease the properties and assets it now
owns or holds under lease, and to enter into and perform its obligations
under this Agreement. The execution and delivery of this Agreement and the
consummation of all the transactions contemplated thereby have been duly
authorized by all necessary corporate action on behalf of GKIS. The
persons signing on behalf of GKIS are duly authorized to do so and this
Agreement will be binding upon GKIS. GKIS is not subject to any lien or
encumbrance of any kind nor subject to any agreement, instrument, order,
or decree of any court or government body which would prevent consummation
of the transaction contemplated by this agreement.
b. TAX OBLIGATIONS. GKIS has filed all tax returns required to be
filed and paid all taxes and assessments due, including interest and
penalties (the "Taxes"). There are no unpaid Taxes that are or could
become a lien on the property or assets of GKIS, except for current Taxes
not yet due and payable or accrued payroll taxes which will be paid not
later than April 30, 1998.
c. NO SUITS PENDING. There are no actions, suits, or proceedings
pending, outstanding or threatened, against or affecting GKIS or any of
the assets, properties or business of GKIS at law or in equity, or before
or by any
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governmental authority, except as set out in its filings with the SEC or
otherwise disclosed to GRIBI.
d. NO VIOLATIONS OF LAWS. To the best of its knowledge, GKIS is not
in default or violation under any law, ordinance or regulation, or with
respect to any order, writ, injunction, decree, or demand of any court or
any governmental authority, or in the payment of any indebtedness for
borrowed money or under the terms or provisions of any agreement or
instrument evidencing or security any such indebtedness.
e. GOVERNMENTAL AGENCIES. GKIS will comply with the
requirements of all applicable laws, regulations, and
requirements pertaining to GKIS.
f. INFORMATION PROVIDED. To the best of its knowledge, all
information provided by GKIS to GRIBI was and is accurate in all material
respects and did not or does not, to the best of GKIS's knowledge, omit
any information necessary to make such information and documentation not
misleading.
g. FINANCIAL STATEMENTS. GKIS has delivered to GRIBI its audited
annual report for the fiscal year ended May 31, 1997, as set out in its
Form 10K-SB, and its latest unaudited quarterly financial statements, as
set out in its Form 10Q-SB. The financial statements present fairly the
financial position and results of operations of GKIS.
h. LICENSES AND PERMITS. GKIS has all licenses, permits, approvals,
consents, orders, rights and other authorizations which are necessary in
order to enable it to conduct its business as currently conducted.
i. NO UNDISCLOSED LIABILITIES. Except as set out in its audited
annual report or quarterly unaudited financial statements, GKIS has no
liabilities or obligations other than those incurred since November 30,
1997, in the ordinary course of business, consistent with prior practice
and not in the aggregate materially adverse.
j. NO CONFLICT WITH OTHER DOCUMENTS. Neither the execution and
delivery of this agreement nor the carrying out of this transaction will
result in any violation, termination or modification of, or be in conflict
with GKIS's charter documents or bylaws, any contract or agreement to
which GKIS is a party or is bound, or result in the creation of any lien
or encumbrance upon any of the properties or assets of GKIS.
k. ACKNOWLEDGMENT OF GRIBI'S FIDUCIARY OBLIGATIONS TO THIRD PARTIES.
GKIS understands, acknowledges and agrees that GRIBI was a high level
employee of COMPAQ COMPUTER CORPORATION and is an officer or director of
other corporations, and thus may have a fiduciary relationship towards one
or more third parties, including his former employer and that, in such
capacity,
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GRIBI is subject to certain ethical and business constraints with respect
to certain materials of third parties which may be confidential, trade
secret, proprietary or otherwise subject to restrictions on its use or
dissemination by GRIBI. GKIS acknowledges and agrees that it will not
constitute a breach of this agreement for GRIBI to comply with these
obligations to their full legal, moral and ethical limitations in GRIBI's
sole discretion. GKIS further understands and agrees that nothing
contained in this Agreement shall require GRIBI to take any action in
violation of any of the obligations described above.
l. STATUS OF SHARES TO BE ISSUED. All issued shares of capital stock
of GKIS are, and upon issuance to GRIBI in accordance with the terms of
this Agreement, the Shares will also be, duly authorized, validly issued
and fully-paid and non-assessable. The Shares to be issued by GKIS
hereunder are, and will be when issued, free and clear of all
encumbrances, except as set out in this agreement.
11. TERM OF AGREEMENT. This agreement shall be for one (1) year unless
terminated by either party pursuant to the provisions contained herein.
12. TERMINATION OF AGREEMENT. This agreement may be terminated as follows:
a. ILLNESS OR OTHER INCAPACITY. If GRIBI, during the term of this
Agreement, shall fail to perform his duties hereunder as a result of
illness or other incapacity which shall continue for a period of more than
twelve weeks, the Corporation shall have the right to terminate this
Agreement and the employment hereunder as of a date to be specified in a
written notice of termination sent to GRIBI, such date to be not less than
thirty (30) days following receipt of said notice. Any remaining unvested
Options shall fully vest as of the date of termination.
b. CONDUCT. If GRIBI shall willfully violate any law; embezzle or
otherwise steal from the Corporation; use liquor or drugs to an extent
which has a visible detrimental effect on his services; conduct himself
publicly or privately in a manner which offends against decency or causes
him to be held in public ridicule or causes public scandal, the
Corporation shall have the right to terminate this contract and employment
hereunder upon notice given in the manner specified in 12.a. In the event
of termination under this Subparagraph 12.b., vesting of the Options shall
cease, GKIS shall have no further obligation to GRIBI under this
agreement, and unvested Options shall be canceled.
c. UNILATERAL TERMINATION, IF ANY, BY GRIBI. GRIBI may terminate
this Agreement and employment hereunder effective as of a date to be
specified in a written notice of termination, such date to be not less
than thirty (30) days after delivery of the notice. All vesting of the
Options shall cease as of the end of the
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month during which termination is effective, and unvested Options shall be
canceled. Upon the effective date of such termination, other than the
exercise of vested Options pursuant to the terms of this agreement, GKIS
shall have no further obligation to GRIBI under this agreement.
d. VESTING OF OPTIONS AFTER TERMINATION FOR DEATH OR DISABILITY. If
GRIBI shall die during the term of this Agreement, his legal
representative or executor shall be entitled to receive any compensation,
including Options, which is unpaid and accrued from the date of his last
payment until the date of his death, and this agreement shall terminate.
All unvested Options shall immediately vest upon GRIBI's death or
disability, as defined in subparagraph a. above. GRIBI or his legal
representative or executor, as appropriate, shall be entitled to exercise
vested options.
e. TERMINATION FOR CAUSE OTHER THAN CONDUCT. GKIS may terminate this
agreement during the initial term if the Board of Directors determines
that GRIBI has failed to perform his duties hereunder for a period of at
least six months, and such failure is not due to illness or disability.
Such termination shall be effective as of a date to be specified in a
written notice of termination, such date to be the end of a month not less
than thirty (30) days after delivery of the notice, provided that during
such 30-day (or greater) period GRIBI shall have opportunity to contest
such termination to a meeting of the entire Board of Directors and the
Board shall agree by a majority vote of its members that GRIBI shall be
terminated for cause, and all vesting of Options shall cease as of such
date. Unvested Options shall be canceled as of such date.
13. NOTICES. All notices required hereunder shall be sent via certified
mail, postage prepaid, if to GKIS, in care of Rod Norville, Esq., 5555 San
Felipe, Suite 625, Houston, Texas, 77056, and if to GRIBI, in care of John F.
Gribi, P.O. Box 956, Wolfsboro, NewHampshire 03894-0956.
14. CHOICE OF LAW. The parties agree that this agreement shall be governed
by and interpreted in accordance with the laws of the State of Texas, excluding
any principle or provision thereof that would require application of the laws of
any other jurisdiction.
15. ARBITRATION. If the parties have any disagreement or dispute arising
in connection with this agreement or the subject matter of this agreement that
cannot be resolved amicably among the parties, such dispute shall be resolved in
the City of Houston, State of Texas, United States of America, in the English
language under the Rules of Civil Procedure of the State of Texas by one or more
arbitrators appointed in accordance with said rules.
16. CONFIDENTIAL INFORMATION. GRIBI shall hold in fiduciary capacity for
the benefit of GKIS all secret or confidential information, knowledge or data
relating to GKIS or any of its
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affiliated companies, and their respective businesses, which shall have been
obtained by GRIBI during GRIBI's employment by GKIS or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by GRIBI or representatives of GRIBI in violation of this Agreement). After
termination of GRIBI's employment with GKIS, GRIBI shall not, without the prior
written consent of GKIS or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than GKIS and those designated by it.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year set forth above.
GK INTELLIGENT SYSTEMS, INC
By:_____________________________
GARY KIMMONS, C.E.O.
--------------------------------
JOHN F. GRIBI
8
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and executed by and between GK Intelligent Systems,
Inc., a Delaware Corporation, with its principal place of business in Houston,
Harris County, Texas (hereinafter called the "Corporation" or "GKIS"), and J.
David Cabello, of Houston, Texas (hereinafter called "Cabello" or
"Professional"). Collectively, the Corporation and Cabello shall be referred to
as "the parties."
W I T N E S S E T H:
WHEREAS, Cabello desires to perform legal and managerial services on
behalf of the Corporation and act as its General Counsel and Vice President as
an employee of the Corporation, including the performance personally of such
services as he and/or the Corporation's Board of Directors deem necessary; and
WHEREAS, the Board of Directors of the Corporation desires to employ
Cabello in such capacities under the terms of this Agreement;
THEREFORE, the parties mutually agree as follows:
ARTICLE I
EMPLOYMENT
1.1 CONDITIONS OF EMPLOYMENT: The Corporation hereby employs Cabello and
Cabello accepts such employment as General Counsel and Vice President, to render
professional services on behalf of the Corporation, subject to the supervision
and direction of the Corporation's CEO and Board of Directors and subject to the
law of the Corporation as given in the Articles of Incorporation and the Bylaws.
1.2 TERM OF EMPLOYMENT: The term of employment shall commence on or after
the execution of this Agreement but not later than July 6, 1998, to be set out
in Cabello's notice to the Board. This agreement shall continue until
termination by either party as provided in Article IV.
ARTICLE II
DUTIES
2.1 DEVOTION OF EFFORT: Cabello agrees to devote sufficient time,
attention, and skill to the performance of his duties as an employee of the
Corporation as set out and authorized by the Board of Directors. During the term
of this Agreement, he shall not render services on his own or
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on behalf of any party other than the Corporation (save and except for Jim Epps
("MCE") and Jaralaubos Fotopoulos) unless otherwise authorized by the Board of
Directors.
2.2 DESCRIPTION OF DUTIES. Cabello will provide legal, administrative and
managerial services as General Counsel and Vice President, all as directed by
the management of GKIS.
ARTICLE III
COMPENSATION
3.1 COMPENSATION AND BENEFITS.
a. MONTHLY SALARY. As compensation for the services to be rendered
hereunder, GKIS will pay to Cabello a monthly salary in an amount equal
to Twenty Thousand Eight Hundred Thirty-Three and 33/100 ($20,833.33).
The monthly salary shall be paid in semi-monthly payments of one-half the
monthly amount each on the first and fifteenth day of each month with
respect to the immediately preceding month, commencing on the fifteenth
day of, or the first day of the first month after, the month in which
employment commences hereunder, whichever comes first after the
employment date.
b. BONUS OPTIONS FOR SHARES OF CORPORATION COMMON STOCK. In addition
to the monthly salary and any other benefits available to all employees,
including standard incentive qualified stock options, GKIS will grant to
Cabello incentive stock options (or non-qualified stock options or
warrants, as appropriate) for a total of six hundred thousand (600,000)
shares of GKIS restricted common stock (the "Bonus Options"), with
one-forty-eighth (or options for 12,500 shares) of such grant vesting
monthly for four years so long as Cabello remains an employee of the
Corporation, an affiliate or subsidiary. Contingent upon the Agreement
remaining in force as a result of such continued employment, Bonus Options
for twelve thousand five hundred (12,500) restricted shares will vest and
be exercisable on the thirtieth day following the close of each of the
forty-eight months following the month in which this agreement is
executed. Except for the delayed vesting of their exercisability, this
grant of stock options shall be governed by and subject to the GK
INTELLIGENT SYSTEMS, INC. 1995 INCENTIVE STOCK OPTION PLAN, as set out in
a separate incentive stock option agreement executed concurrently with
this agreement by the parties . The number of shares shall also be
adjusted as provided in Section 7.1 of such Plan. For all purposes related
to the Grant of these options, the Board of Directors of GKIS has
determined that the date of such grant is date of execution of this
agreement and the Fair Market Value per share as of the date of such grant
is the closing price on the day this agreement is executed. If the market
is not open on the execution date, then the Fair Market Value shall be the
closing price for the first day the market is open after the execution of
this agreement. Except as set out in paragraph 4.2 below, termination of
this agreement will not cause the forfeiture of the Bonus Options for
those months prior to termination in
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which the vesting requirements were met.
c. CONTINGENT IMMEDIATE VESTING OF BONUS OPTIONS. The Corporation
agrees that Cabello will be entitled to receive immediate accelerated
vesting of his outstanding unvested Bonus Options if his employment with
the Corporation is terminated prior to termination of this agreement due
to any one or more of the following events:
(i) Cabello's employment is terminated by the Corporation
without Cause;
(ii) Cabello resigns within ninety days after his job responsibilities,
duties, and/or status within the Corporation have been materially
changed;
(iii) Cabello resigns or his employment is terminated within 180 days
after there is a Change in Control of the Corporation;
(iv) Cabello resigns his employment after becoming Disabled or his
employment is terminated after he becomes Disabled;
(v) Cabello resigns his employment because of a decision of the Board
of Directors to establish his Compensation at an amount less than 75%
of the greater of (a) his annual salary in effect on the Effective Date
or (b) his annual salary in effect during the preceding calendar year,
and such resignation is tendered within ninety days after he is
notified of such decision; or
(vi) Cabello dies during the term of this Agreement.
d. EMPLOYEE BENEFIT PLANS. Cabello shall be entitled to participate in
all employee benefit plans to be established by the Board of Directors on
the same terms and conditions as all other employees similarly situated,
including reimbursement of reasonable moving expenses as approved by GKIS
management.
3.2 GUARANTEED BONUS. In addition to the compensation set out in 3.1
above, the Corporation will pay Cabello a cash bonus of not less than one
hundred thousand dollars ($100,000.00) at the end of his first year of
continuous employment under this agreement.
ARTICLE IV
TERMINATION OF AGREEMENT
4.1 TERMINATION FOR DISABILITY. If Cabello, during the term of this
Agreement, shall fail to perform his duties hereunder as a result of DISABILITY,
as defined in 4.4 below, the Corporation shall have the right to terminate this
Agreement and the employment hereunder as of a date to be specified in a written
notice of termination sent to Cabello, such date to be not less than thirty
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(30) days following receipt of said notice.
4.2 TERMINATION FOR CAUSE: If Cabello shall (1) be convicted of a felony
or (2) engage in conduct as defined under CAUSE, all as set out in 4.4 below,
the Corporation shall have the right to terminate this contract and employment
hereunder in the manner as set out in 4.4 and upon notice given in the manner
specified in 4.1. In the event of termination under this Article 4.2, Cabello
shall not be eligible to receive unexercised stock option compensation for the
year in which termination occurs, nor shall he be entitled to receive any
deferred compensation credited to his account but not yet paid.
4.3 UNILATERAL TERMINATION: Either party hereto may terminate this
Agreement and employment hereunder effective as of a date to be specified in a
written notice of termination, such date to be not less than thirty (30) days
after delivery of the notice.
4.4 DEFINITIONS: For purposes of this agreement, the following definitions
shall apply:
"TERMINATION DATE" shall mean the date on which Professional ceases to be
an employee of the Corporation irrespective of the cause or manner in
which employment ends.
"EFFECTIVE DATE" shall mean June 23, 1998.
"DISABLED" OR "DISABILITY" shall mean a determination by independent
competent medical authority that Professional is unable to perform his
duties and that in all reasonable medical likelihood such inability will
continue for a period in excess of 180 days. Unless otherwise agreed by
Cabello and the Board of Directors, the independent medical authority
shall be selected by Cabello and the Corporation each selecting a board
certified licensed physician and the two physicians selected shall
designate an independent medical authority, whose determination of
Disability shall be binding upon the Corporation and Cabello.
"CAUSE" shall mean: (1) Professional's conviction of a felony or any other
criminal act involving moral turpitude; (2) deliberate and intentional
continuing refusal by Professional to substantially perform his duties and
obligations under this agreement (except by reason of incapacity due to
illness or accident) if Professional (a) shall have either failed to
remedy such alleged breach within fifteen days from the date written
notice is given by the Chairman of the Corporation demanding that
Professional remedy such alleged breach, or (b) shall have failed to take
reasonable steps in good faith to that end during such fifteen day period,
provided, with respect to (b) that, after the end of such fifteen day
period, there shall have been delivered to Professional a certified copy
of a resolution of the Board of Directors of the Corporation, adopted by a
Supermajority Vote, finding that Professional was guilty of conduct set
forth in clause (2) and specifying the particulars thereof in detail, and
that Professional has failed to take reasonable steps in good faith to
remedy such alleged breach; or (3) upon a finding by a Supermajority Vote
that Professional had engaged in willful fraud or defalcation either of
which involved material
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funds or other assets of the Corporation.
"SUPERMAJORITY VOTE" shall mean the affirmative vote of not less than
two-thirds of the members of the Board of Directors who are not employees
of the Corporation taken at a meeting of the Board of Directors at which
Professional is given an opportunity to be heard (with counsel).
"CHANGE IN CONTROL" shall mean and shall be deemed to have occurred if:
(a) any "person" as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Corporation, any trustee or other fiduciary
holding securities under any employee benefit plan of the Corporation, or
any Corporation owned, directly or indirectly, by the stockholders of the
Corporation in substantially the same proportions as their ownership of
Stock of the Corporation), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing 30% of more of the combined
voting power of the Corporation's then outstanding securities; (b) during
any period of two consecutive years (not including any period prior to the
adoption of the Plan), individuals who at the beginning of such period
constitute the Board of Directors, and any new director (other than a
director designated by a person who has entered into an agreement with the
Corporation to effect a transaction described in clause (a), (c), or (d)
of this Paragraph) whose election by the Board of Directors or nomination
for election by the Corporation's stockholders was approved by a vote of
at least two-thirds of the directors then still in office who either were
directors at the beginning of the two year period or whose election or
nomination for election was previously so approved, cease for any reason
to constitute at least a majority of the Board of Directors; (c) the
stockholders of the Corporation approve a merger or consolidation of the
Corporation with any other corporation, other than a merger or
consolidation which would result in voting securities of the Corporation
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Corporation or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that a
merger or consolidation effected to implement a recapitalization of the
Corporation (or similar transaction) in which no person acquires more than
30% of the combined voting power of the Corporation's then outstanding
securities shall not constitute a Change in Control of the Corporation; or
(d) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition
by the Corporation of all or substantially all of the Corporation's
assets.
ARTICLE V
DEATH OF EMPLOYEE
5.1 DEATH. If Cabello shall die during the term of this Agreement, his
legal representative shall be entitled to receive his compensation as provided
in Article III hereof.
ARTICLE VI
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ILLNESS OR INCAPACITY
6.1 INABILITY TO PERFORM DUTIES. If Cabello becomes disabled, his salary
payments may be reduced or terminated by the Corporation at its absolute
discretion. Cabello's full salary shall be reinstated upon his return to
full-time employment and the full discharge of his duties hereunder. This
section shall in no way limit the rights or obligations of the Corporation under
Articles III and IV hereof.
ARTICLE VII
LEAVES OF ABSENCE
7.1 PAID LEAVE. Leaves of absence with full payment of salary may be
granted to Cabello for attendance at professional conventions, continuing
education institutes in his profession and other professional or business
activities, as approved by the Corporation, with full or partial payment of
expenses at its sole discretion.
7.2 UNPAID LEAVE. Unpaid leave of absence may be granted at the sole
discretion of the Corporation for any other reasons upon request by Cabello.
ARTICLE VIII
VACATIONS
8.1 PAID VACATION. Cabello shall be entitled to a vacation, the length of
which as determined by the Board of Directors or the President of the
Corporation, during which time his salary shall be paid in full. Cabello shall
take his vacation at such time or times as shall be approved by the corporation.
ARTICLE IX
EXPENSES
9.1 EXPENSES REIMBURSED. During the period of his employment, Cabello will
be reimbursed for his reasonable expenses in accordance with general policy of
the Corporation as adopted by the Board of Directors from time to time. In
addition to such reimbursement expenses, Cabello shall incur and pay in the
course of his employment by the Corporation certain other necessary expenses as
a Vice President and General Counsel, for which he will be required personally
to pay but for which the Corporation shall reimburse or otherwise compensate
him, including, but not limited to the following: automobile and transportation
expenses; educational expenses incurred for the purpose of maintaining or
improving Cabello's professional skills, club dues, and the expenses of
membership in civic groups, professional societies, and fraternal organizations,
and all other items of reasonable and necessary professional expenses incurred
by Cabello in the performance of the services in which Cabello has been engaged
on behalf of the Corporation.
ARTICLE X
SUCCESSION
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10.1 ASSUMPTION BY SUCCESSOR TO CORPORATION. The Corporation will not
consolidate or merge into or with another corporation, or transfer all or
substantially all of its assets to another corporation, unless such corporation
(hereinafter referred to as "Successor Corporation") shall assume this
Agreement. Upon such assumption Cabello and the Successor Corporation shall
become obligated to perform the terms and conditions hereof, and the term
"Corporation" as used in this Agreement shall be deemed to refer to such
Successor Corporation; provided, however, Cabello's duties shall be such as
prescribed by the Board of Directors of the Successor Corporation.
ARTICLE XI
PROPERTY RIGHTS OF PARTIES
11.1 TRADE SECRETS. During the term of employment, Cabello will have
access to and become familiar with various trade secrets, consisting of
formulas, devices, secret inventions, processes, and compilation of information,
records, and specifications, owned by the Corporation and regularly used in the
operation of the business of the Corporation. Cabello shall not disclose any
such trade secrets, directly or indirectly, nor use them in any way, either
during the term of this Agreement or at any time thereafter, except as required
in the course of his or her employment. All files, records, documents, drawings,
specifications, equipment, and similar times relating to the business of the
Corporation, whether or not prepared by Cabello shall remain the exclusive
property of the Corporation and shall not be removed from the premises of the
Corporation under any circumstances without the prior written consent of the
Corporation.
11.2 RETURN OF CORPORATION'S PROPERTY. On the termination of employment or
whenever requested by the Corporation, Cabello shall immediately deliver to the
Corporation all property in Cabello's possession or under Cabello's control
belonging to the Corporation in good condition, ordinary wear and tear excepted.
11.3 OWNERSHIP OF WORK PRODUCT. The parties agree as follows:
A. PROPERTY OF GKIS. Cabello agrees that all intellectual property
including but not limited to all ideas and concepts contained in computer
programs and software, documentation or other literature or illustrations
that are conceived, developed, written, or contributed by Cabello pursuant
to this Agreement, either individually or in collaboration with others,
shall belong to and be the sole property of GKIS.
B. WORKS MADE FOR HIRE. Cabello agrees that all rights in all works
prepared or performed by Cabello pursuant to this Agreement, including
patent rights and copyrights applicable to any of the intellectual
property described in Subparagraph (a) above, shall belong exclusively to
GKIS and shall constitute "works made for hire" for purposes of copyright
law.
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C. PROPERTY OF CABELLO. The provisions of this Paragraph XI shall not
be construed to assign to GKIS any of Cabello's rights in any invention
for which no equipment, supplies, facilities, or trade secret information
of GKIS was used, or that was developed entirely prior to this Agreement,
or that does not result from any work performed by Cabello for GKIS.
ARTICLE XII
NO COMPETITION BY PROFESSIONAL
12.1 NO COMPETING ACTIVITIES. During the term of this Agreement and for a
period of three years (six months if following termination by GKIS for any cause
other than as set out in 4.2 above) following termination of same, Cabello shall
not, directly or indirectly, either as an employee, employer, consultant, agent,
Principal, Partner, Stockholder, corporate officer, director, or in any other
individual or representative capacity, engage or participate in any business
whatsoever that is in direct competition in any manner whatsoever with the core
products and technologies (SMART ONE Trainer and its derivatives, SMART
ENTERPRISE, DOORWAYS, SMART SUPPORT, SMART PERFORM or other CARNOT derived
products, and their successors and any other subsequent core businesses) of this
Corporation within North America, unless a Court of competent Jurisdiction shall
determine that the scope and/or time of this agreement renders it unenforceable,
in which case the scope and/or time shall be reduced to that which the Court
deems reasonable and enforceable. This provision shall not be construed to
prevent Cabello from accepting employment in the areas of the private practice
of law, or the performance of legal, administrative or management functions
which do not utilize any of the Corporation's core technologies or products,
either directly or for other entities so long as they do not compete directly
with such core technologies or products.
ARTICLE XIII
NOTICES
13.1 NOTICES: Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by mail to his residence,
in the case of Cabello, or to its principal office, in the case of the
Corporation.
ARTICLE XIV
WAIVER OF BREACH
14.1 NONWAIVER OF SUBSEQUENT BREACH. The waiver by any party hereto of a
breach of any provision of this agreement shall not operate or be construed as a
waiver of any subsequent breach by an party.
ARTICLE XV
AMENDMENT
15.1 WRITTEN AMENDMENT. No amendment or modification of this Agreement
shall be
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deemed effective unless or until executed in writing by the parties hereto with
the same formality attending execution of this Agreement.
ARTICLE XVI
CHOICE OF LAW
16.1 TEXAS LAW. This Agreement, having been executed and delivered in the
State of Texas, its validity, interpretation, performance and enforcement will
be governed by the laws of that state.
EXECUTED in counterparts, each of which shall be deemed an original,
effective the __ day of June, 1998.
-----------------------------------
J. David Cabello
`GK INTELLIGENT SYSTEMS, INC.:
By:________________________________
Gary F. Kimmons, CEO and Chairman
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EXHIBIT 10.11
CONSULTING AGREEMENT
THIS AGREEMENT is entered into effective the 20th day of August, 1998, at
Houston, Texas, between GK INTELLIGENT SYSTEMS, INC., a Delaware corporation
("Corporation" or "GKIS") and JOHN PAUL DEJORIA ("DeJoria").
WHEREAS, GKIS is in the business of providing artificial intelligence
based education, training and performance support and is based in Houston,
Texas; and
WHEREAS, GKIS desires that DeJoria consult with GKIS on the establishment
of retail distribution for the Company's products in the global marketplace
and/or introduce GKIS to parties who may be interested in GKIS's products and,
when appropriate and time permits, make himself reasonably available to mentor
and advise the directors, officers and management of GKIS; and
WHEREAS, GKIS desires that DeJoria become an advisor and mentor to the
management of GKIS in all phases of retail product distribution as well as
global marketing developments which could effect GKIS's business; and
WHEREAS, DeJoria desires to acquire an equity interest in the
Corporation's common stock; and
WHEREAS, GKIS considers it to be in its best interest that DeJoria assume
a position as a member of the GKIS Board of Directors;
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. AGREEMENT TO PROVIDE CONSULTING SERVICES. Upon election by the Board of
Directors of GKIS, DeJoria agrees to assume a position on the GKIS Board of
Directors as a member for the term of this agreement. In this capacity, DeJoria
agrees to act as an adviser to GKIS and mentor to its management, and subject to
any confidentiality obligations incumbent upon him, to apprise GKIS of
technological and global marketing developments as DeJoria in his sole
discretion shall deem appropriate. In addition, DeJoria agrees to help GKIS
establish market opportunities and retail distribution for its products/services
in the domestic and international marketplace, making himself reasonably
available to mentor and advise GKIS directors, officers and management
periodically during the term of this agreement, all on a part-time basis as the
parties mutually agree.
2. POSITION ON GKIS BOARD OF DIRECTORS. The Corporation, acting through
its existing Board of Directors, will appoint DeJoria as a member of the Board
of Directors for the
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term of this agreement.
3. COMPENSATION. As compensation for the services to be rendered
hereunder, GKIS will pay DeJoria Fifty Thousand Dollars ($50,000) on or before
September 1,1998. In the event of early termination of this Agreement except for
breach by GKIS, DeJoria agrees to repay to GKIS that portion of the Compensation
attributable to the period from date of termination to the date of normal
termination. The compensation shall immediately and automatically vest upon
material breach by GKIS of this agreement or any of its warranties and
representations, without notice or action by DeJoria.
4. PURCHASE OF RESTRICTED SHARES.
a. INITIAL PURCHASE OF SHARES. As a condition of his employment,
DeJoria has agreed to purchase One Million (1,000,000) shares of GKIS
common restricted stock (the "Initial Shares"), to be issued immediately
upon receipt of funds or as soon thereafter as is practicable. The
effective date of this purchase will be the date of this agreement, August
20, 1998. The agreed purchase price of the Initial Shares is $.05 per
share. As soon as practicable after receipt of payment from DeJoria, GKIS
shall tender the Initial Shares to DeJoria, provided that if any law or
regulation requires the Corporation to take any action with respect to the
Initial Shares before the issuance thereof, then the date of delivery for
such shares shall be extended for the period necessary to take such
action.
b. AGREEMENT TO SELL AND REPURCHASE. In the event of DeJoria's
failure of performance or early termination of this agreement as set out
herein, DeJoria agrees to sell and GKIS agrees to repurchase unvested
Initial Shares as defined herein at the original purchase price of $.05
per share. Each month during the term of this agreement, one-twelfth of
the Initial Shares shall no longer be subject to such required repurchase
by GKIS, or in other words, such shares shall vest. The shares remaining
after the previous months' fractions of shares have vested shall be
considered unvested. The Initial Shares shall immediately and
automatically vest upon material breach by GKIS of this agreement or any
of its warranties and representations, without notice or action by
DeJoria, and shall no longer be subject to repurchase.
5. RIGHTS PRIOR TO ISSUE. DeJoria shall have no rights as a stockholder
with respect to the Initial Shares until such shares are issued.
6. PRIOR AGREEMENTS. Except as set out herein, this Agreement supersedes
and is in lieu of any and all prior or contemporaneous agreements,
communications or understandings, whether written or unwritten, verbal or tacit,
or implied by prior dealings, between and among any of the parties, their
predecessors or affiliates with respect to the matters set out herein and
therein, respectively.
7. AMENDMENT IN WRITING. No amendment, modification or change to this
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agreement shall be binding unless in writing, signed by all the parties hereto.
8. AGREEMENT BINDING. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, legatees,
administrators, executors, legal representatives, successors, and assigns
(including remote, as well as immediate, successors to and assignees of said
parties).
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF DEJORIA. DeJoria
represents, warrants and agrees as follows:
a. NO REGISTRATION. DeJoria is aware that the Shares have not been
registered nor is registration contemplated under the Securities Act of
1933, and accordingly, that the Shares must be held indefinitely unless
they are subsequently registered under said Act or unless, in the opinion
of counsel for the Corporation, a sale or transfer may be made without
registration thereunder. DeJoria agrees that any certificates evidencing
the Shares may bear a legend restricting the transfer thereof consistent
with the foregoing and that a notation may be made in the records of the
Corporation restricting the transfer of the Shares in a manner consistent
with the foregoing.
b. NO PREEMPTIVE RIGHTS. DeJoria acknowledges and agrees
that he has no preemptive rights with respect to the Shares to be
conveyed hereunder.
10. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF GKIS. GKIS represents,
warrants and agrees as follows:
a. AUTHORITY. GKIS is a corporation duly organized, validly
existing, and in good standing under the laws of Delaware, with full
corporate power and authority to carry on its business as it is now being
conducted, to own or hold under lease the properties and assets it now
owns or holds under lease, and to enter into and perform its obligations
under this Agreement. The execution and delivery of this Agreement and the
consummation of all the transactions contemplated thereby have been duly
authorized by all necessary corporate action on behalf of GKIS. The
persons signing on behalf of GKIS are duly authorized to do so and this
Agreement will be binding upon GKIS. GKIS is not subject to any lien or
encumbrance of any kind nor subject to any agreement, instrument, order,
or decree of any court or government body which would prevent consummation
of the transaction contemplated by this agreement.
b. TAX OBLIGATIONS. There are no unfiled tax returns required to be
filed or taxes and assessments due, including interest and penalties (the
"Taxes") or that could become a lien on the property or assets of GKIS,
except as otherwiase disclosed to DeJoria.
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c. NO SUITS PENDING. There are no actions, suits, or proceedings
pending, outstanding or threatened, against or affecting GKIS or any of
the assets, properties or business of GKIS at law or in equity, or before
or by any governmental authority, except as set out in its filings with
the SEC or otherwise disclosed to DeJoria.
d. NO VIOLATIONS OF LAWS. To the best of its knowledge, GKIS is not
in default or violation under any law, ordinance or regulation, or with
respect to any order, writ, injunction, decree, or demand of any court or
any governmental authority, or in the payment of any indebtedness for
borrowed money or under the terms or provisions of any agreement or
instrument evidencing or security any such indebtedness.
e. GOVERNMENTAL AGENCIES. GKIS will comply with the
requirements of all applicable laws, regulations, and
requirements pertaining to GKIS.
f. INFORMATION PROVIDED. To the best of its knowledge, all
information provided by GKIS to DeJoria was and is accurate in all
material respects and did not or does not, to the best of GKIS's
knowledge, omit any information necessary to make such information and
documentation not misleading.
g. FINANCIAL STATEMENTS. GKIS has delivered to DeJoria its audited
annual report for the fiscal year ended May 31, 1997, as set out in its
Form 10K-SB, and its latest unaudited quarterly financial statements, as
set out in its Form 10Q-SB. The financial statements present fairly the
financial position and results of operations of GKIS.
h. LICENSES AND PERMITS. GKIS has all licenses, permits, approvals,
consents, orders, rights and other authorizations which are necessary in
order to enable it to conduct its business as currently conducted.
i. NO UNDISCLOSED LIABILITIES. Except as set out in its audited
annual report or quarterly unaudited financial statements, GKIS has no
liabilities or obligations other than those incurred since February 28,
1998, in the ordinary course of business, consistent with prior practice
and not in the aggregate materially adverse.
j. NO CONFLICT WITH OTHER DOCUMENTS. Neither the execution and
delivery of this agreement nor the carrying out of this transaction will
result in any violation, termination or modification of, or be in conflict
with GKIS's charter documents or bylaws, any contract or agreement to
which GKIS is a party or is bound, or result in the creation of any lien
or encumbrance upon any of the properties or assets of GKIS.
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k. ACKNOWLEDGMENT OF DEJORIA'S FIDUCIARY OBLIGATIONS TO THIRD
PARTIES. GKIS understands, acknowledges and agrees that DeJoria is an
officer or director of other corporations, and thus may have a fiduciary
relationship towards one or more third parties, including his own
businesses and that, in such capacity, DeJoria is subject to certain
ethical and business constraints with respect to certain materials or
information of third parties which may be confidential, trade secret,
proprietary or otherwise subject to restrictions on its use or
dissemination by DeJoria. GKIS acknowledges and agrees that it will not
constitute a breach of this agreement for DeJoria to comply with these
obligations to their full legal, moral and ethical limitations in
DeJoria's sole discretion. GKIS further understands and agrees that
nothing contained in this Agreement shall require DeJoria to take any
action in violation of any of the obligations described above.
l. STATUS OF SHARES TO BE ISSUED. All issued shares of capital stock
of GKIS are, and upon issuance to DeJoria in accordance with the terms of
this Agreement, the Shares will also be, duly authorized, validly issued
and fully-paid and non-assessable. The Shares to be issued by GKIS
hereunder are, and will be when issued, free and clear of all
encumbrances, except as set out in this agreement.
m. DIRECTORS' AND OFFICERS' LIABILITY (DOL) INSURANCE. GKIS shall
maintain DOL insurance coverage in the minimum amount of $5,000,000.00,
specifically covering all acts of DeJoria to be performed under this
agreement and all liabilities for which coverage is normally obtained by a
corporation for its directors.
11. TERM OF AGREEMENT. This agreement shall be for one (1) year from
August __, 1998, unless terminated by either party pursuant to the provisions
contained herein.
12. TERMINATION OF AGREEMENT. This agreement may be terminated as follows:
a. ILLNESS OR OTHER INCAPACITY. If DeJoria, during the term of this
Agreement, shall fail to perform his duties hereunder as a result of
illness or other incapacity which shall continue for a period of more than
twelve weeks, the Corporation shall have the right to terminate this
Agreement and the employment hereunder as of a date to be specified in a
written notice of termination sent to DeJoria, such date to be not less
than thirty (30) days following receipt of said notice. The Initial Shares
shall be fully vested as of the date of termination and not be subject to
repurchase by GKIS.
b. CONDUCT. If DeJoria shall willfully violate any law; embezzle or
otherwise steal from the Corporation; use liquor or drugs to an extent
which has a visible detrimental effect on his services; conduct himself
publicly or privately in a manner which offends against decency or causes
him to be held in public ridicule or causes public scandal, the
Corporation shall have the right to terminate this
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contract and employment hereunder upon notice given in the manner
specified in 12.a. In the event of termination under this Subparagraph
12.b., vesting of the Initial Shares shall cease, GKIS shall have no
further obligation to DeJoria under this agreement, and DeJoria shall sell
to GKIS and GKIS shall repurchase all unvested Initial Shares at their
issue price.
c. UNILATERAL TERMINATION, IF ANY, BY DEJORIA. DeJoria may terminate
this Agreement and employment hereunder effective as of a date to be
specified in a written notice of termination, such date to be not less
than thirty (30) days after delivery of the notice, and all vesting of the
Initial Shares shall cease as of the end of the month during which
termination is effective, GKIS shall have no further obligation to DeJoria
under this agreement, and DeJoria shall sell to GKIS and GKIS shall
repurchase all unvested Initial Shares at their issue price, unless
termination is the result of material breach by GKIS of the provisions of
this Agreement.
d. VESTING OF INITIAL SHARES AFTER TERMINATION FOR DEATH OR
DISABILITY. If DeJoria shall die during the term of this Agreement, his
legal representative or executor shall be entitled to receive any
compensation which is unpaid and accrued from the date of his last payment
until the date of his death, and this agreement shall terminate. All
unvested Initial Shares shall immediately vest and not be subject to
repurchase by GKIS.
e. TERMINATION FOR CAUSE OTHER THAN CONDUCT. GKIS may terminate this
agreement during the initial term if the Board of Directors determines
that DeJoria has failed to perform his duties hereunder for a period of at
least two months, and such failure is not due to illness or disability.
Such termination shall be effective as of a date to be specified in a
written notice of termination, such date to be the end of a month not less
than thirty (30) days after delivery of the notice, provided that during
such 30-day (or greater) period DeJoria shall have opportunity to contest
such termination to a meeting of the entire Board of Directors and the
Board shall agree by a majority vote of its members that DeJoria shall be
terminated for cause, and all vesting of Initial Shares shall cease as of
such date and DeJoria shall sell to GKIS and GKIS shall repurchase all
unvested Initial Shares at their issue price.
13. NOTICES. All notices required hereunder shall be sent via certified
mail, postage prepaid, if to GKIS, in care of Rod Norville, Esq., 5555 San
Felipe, Suite 625, Houston, Texas, 77056, and if to DeJoria, in care of John
Paul DeJoria, 9701 Wilshire Blvd., #1205, Beverly Hills, CA 90212.
14. CHOICE OF LAW. The parties agree that this agreement shall be governed
by and interpreted in accordance with the laws of the State of Texas, excluding
any principle or provision thereof that would require application of the laws of
any other jurisdiction.
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15. ARBITRATION. If the parties have any disagreement or dispute arising
in connection with this agreement or the subject matter of this agreement that
cannot be resolved amicably among the parties, such dispute shall, on the
written request of either party, be submitted to arbitration, which will comply
with and be governed by the provisions of the Texas Civil Practice and Remedies
Code, Section 171.000, ET SEQ., and the American Arbitration Association.
Pursuant to Section 171.026(a) of the Texas Civil Practice and Remedies Code,
arbitration shall be conducted under the Commercial Arbitration Rules of the
American Arbitration Association in existence at the time of arbitration. The
cost and expenses, including attorney's fees and the fees of the arbitrators,
shall be borne by the losing party or in such proportions as the arbitrators
shall determine.
16. CONFIDENTIAL INFORMATION. DeJoria shall hold in fiduciary capacity for
the benefit of GKIS all secret or confidential information, knowledge or data
relating to GKIS or any of its affiliated companies, and their respective
businesses, which shall have been obtained by DeJoria during DeJoria's
employment by GKIS or any of its affiliated companies and which shall not be or
become public knowledge (other than by acts by DeJoria or representatives of
DeJoria in violation of this Agreement). After termination of DeJoria's
employment with GKIS, DeJoria shall not, without the prior written consent of
GKIS or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than GKIS and
those designated by it, unless such information is already in the public domain.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year set forth above.
GK INTELLIGENT SYSTEMS, INC
By:_____________________________
GARY KIMMONS, C.E.O.
--------------------------------
JOHN PAUL DEJORIA
7
EXHIBIT 10.12
MEMORANDUM OF UNDERSTANDING
SEPTEMBER 8, 1998
OBJECTIVE
Establish a mutually acceptable definitive Agreement (Agreement) in which Ms.
Shelley Duvall (Duvall) will serve as an independent consultant to GK
Intelligent Systems, Inc. (GKIS) in the creation, development, and distribution
of children's and family-oriented intelligent learning products.
DESCRIPTION OF DUTIES
Duvall will use her best effort to assist GKIS in establishing a new Children's
Learning Division. Duvall and/or a person under her direction and control will
help:
o Create marketable product themes addressing the Children's and family
education markets
o Submit project proposals
o Write project plans
o Develop budgets
o Assemble multimedia production teams
o Cast and select acting talent
o Produce the multimedia components of approved GKIS intelligent learning
products
o Assist in product distribution and branding. Duvall will, whenever possible,
use her contacts and knowledge of appropriate distribution channels to help
facilitate distribution of the products she helps produce. Duvall will also
assist and lend the "Shelley Duvall" name to the products she produces to
facilitate branding of GKIS SMART ONE(TM) and other relevant GKIS brands.
o Assist in public relations related to GKIS and its children/family products.
Duvall will, within reason and subject to her advance approval and general
availability, make personal appearances and provide personal interviews to
the press, television, and public media to assist in creating a favorable
image for GKIS and its children/family products.
o Assist in the establishment of a Children's/family learning division within
GKIS.
o Assist GKIS in establishing outside entities such as advisory boards and
foundations in the areas of human and Children's learning.
o Introduce GKIS to key business contacts.
DESCRIPTION OF PROJECTS
o Children's preschool education and development
o Children's elementary education
o Family learning
COMPENSATION AND PAYMENT TERMS
o $500,000 for use of name rights, payable as follows: $150,000 paid upon
execution of this Memorandum; $50,000 no later than 30 days thereafter and
$50,000 per month to term starting January 1st, 1999.
o 10% of sales revenues (less only distribution fees) from products produced
by or bearing the Duvall name. The method of distribution and all associated
distribution costs shall be subject to the mutual consent of Duvall and
GKIS.
<PAGE>
o 5% of sales revenues (less only distribution fees) of products produced by
3rd parties introduced by Duvall to GKIS, but not bearing the production
influence or name of Duvall.
o A minimum of 8% of the total production cost (including but not limited to
the cost of scripting, talent, shooting, editing, animation, graphics and
software coding) of each product. A production committee at GKIS will
approve the expenditure for each product in advance. If Duvall completes a
product at or below budget, GKIS agrees to consider and approve performance
bonuses for Duvall (at its discretion). If, during multimedia production, a
project appears to be over budget, Duvall agrees to notify GKIS of the
situation on a timely basis to seek reasonable alternatives and to minimize
the overage.
o 120,000 stock options (qualified to the extent possible) vesting over a 3
year period. The stock will vest monthly on a schedule of 1/36th per month
(3,300 shares). The option price will be the closing price at the close of
trading on the date of execution (i.e., $2.50). The stock will be subject to
SEC Rule 144 provisions.
RIGHTS TO THE USE OF THE NAME "SHELLEY DUVALL"
o Duvall grants to GKIS the non-exclusive right to use the name "Shelley
Duvall" only for those products produced in conjunction with Duvall and in
connection with related mutually approved public relations activities. All
press releases bearing the name "Shelley Duvall" must be approved prior to
release by Duvall. The grant is for the term of the Agreement.
RIGHTS TO INTELLECTUAL PROPERTY
o Each time a product is submitted by Duvall to GKIS for approval, and that
product is approved by GKIS to move forward into development and production,
upon payment to Duvall of a license fee (to be determined and mutually
agreed upon by GKIS and Duvall in each instance a product is submitted and
approved), the CD-ROM, Internet, multimedia and electronic games rights (The
Markets) will be deemed licensed by Duvall to GKIS, and GKIS will be
automatically granted the exclusive right to develop, produce and distribute
such approved product in The Markets for a license period of ten (10)
consecutive years from the date of payment of such license fee to Duvall.
Duvall retains sole ownership of all other rights, including but not limited
to, the copyright to the intellectual property encompassed in the product,
including but not limited to the characters, ideas, artwork, story, concept
and information, in all media and markets throughout the universe (Other
Rights) whether then known or thereafter invented, in perpetuity, unless and
until Duvall, at her sole discretion, may elect to sell or license those
rights to a third party. GKIS shall be granted a right of first refusal or
negotiation to purchase or license such Other Rights in the intellectual
property encompassed within such product to other markets and/or media. If a
product has been submitted to GKIS for approval and such approval is
withheld, all rights with respect to such product will remain with Duvall,
and GKIS will have no claim to the intellectual property or the product.
o When a Third Party Property (TPP) is submitted by Duvall to GKIS, and GKIS
approves the production and development of such TPP, Duvall shall use her
best efforts to assist GKIS in obtaining the necessary rights and/or license
to such TPP. If negotiation with the TPP is concluded and the necessary
rights are obtained, Duvall and GKIS will begin research and development
with respect to such TPP.
TERM OF AGREEMENT
The Agreement will be for a period of 3 years and will self-renew thereafter on
an annual basis unless terminated under one of the conditions defined under
"Termination" below.
<PAGE>
EXPENSE REIMBURSEMENT
o All reasonable business expenses incurred by Duvall will be reimbursed
within 10 working days. Expenses exceeding $500 must be pre-approved by
GKIS. GKIS agrees that Duvall can travel first class by air; executive
suites at hotels. Whenever possible, GKIS will prepay Duvall's expenses to
minimize out-of-pocket expenditures.
FINDER'S FEE
o GKIS will pay Duvall's business representative, Bobbie Crawford, $10,000
upon execution of this Memorandum. After the Agreement is executed, GKIS
will grant her options for 500 shares of its restricted common stock at the
closing market price of GKIS stock upon execution (approximately $2.50). The
stock will vest immediately but will be subject to SEC Rule 144 provisions.
NON-DISCLOSURE
o Duvall agrees not to disclose any of the intellectual property of a
confidential or trade secret nature during the term of the Agreement, and
GKIS warrants that it will keep Duvall apprised of what is or is not of a
confidential or trade secret nature.
PERFORMANCE WARRANTS
o GKIS warrants that it will perform to its best effort in the following
areas:
* The timing, funding and approval of projects. GKIS will fund all
production costs.
* Timely payment of compensation to Duvall.
* Provision of professional quality logistical support such as
staffing, equipment, and facilities.
* The offering of reasonable approval in the selection of acting
talent and production personnel for the Children's Learning
Division.
o Duvall warrants that she will perform to her best effort in the following
areas:
* The completion of a minimum of at least one project.
* The provision of promotional support.
* Cost minimization on projects.
* The provision of professional product quality.
* Interfacing professionally and effectively with GKIS personnel.
* Offering reasonable personal availability.
* Timeliness in production.
TERMINATION
o Duvall shall have the right to terminate the Agreement upon thirty (30) days
prior written notice to GKIS
* if GKIS is adjudicated insolvent, declares bankruptcy or fails to
continue the business of selling the products produced or created
pursuant to the Agreement, provided, however that GKIS shall not be
obligated to sell any specific quantities of products during the
term of the Agreement
* GKIS fails to make payment to Duvall of any amounts due pursuant to
the Agreement within thirty (30) days after such payment is due.
-3-
<PAGE>
o GKIS shall have the right to terminate the Agreement upon thirty (30) days
prior written notice to Duvall in the event Duvall
* engages in illegal conduct resulting in a felony arrest or
indictment
* misrepresents or conceals anything in her background that could be
detrimental to the value of the endorsement being made
* dies or becomes permanently disabled
* engages in conduct that could bring Duvall into public disrepute.
o Either party may terminate the Agreement at any time upon thirty (30) days
prior written notice to the other party in the event of a breach of any
provision of the Agreement by the other party, provided that, during such
thirty (30) day period the breaching party fails to cure such breach.
o Upon termination of the Agreement, GKIS will retain the right to use the
name "Shelley Duvall" in connection with any then existing product produced
by or bearing the Duvall name for a ten (10) year period beginning on the
date of payment of the license fee referred to above. Duvall shall continue
to receive the compensation based on sales revenues (but not production
costs) of such products until such time as those products are no longer
marketed under the Duvall name. Any stock options granted but not exercised
will be canceled upon the termination of the Agreement. The non-disclosure
obligations of Duvall will survive the termination of the Agreement.
ARBITRATION
Any disputes arising under the Agreement will be settled by arbitration in
accordance with the commercial rules then in effect of the American Arbitration
Association.
This Memorandum of Understanding shall serve as a binding agreement until such
time as it is superseded by the Agreement. All material, terms and conditions
incorporated in this Memorandum of Understanding shall serve as the basis for
the Agreement. The Agreement will contain such other terms, conditions,
representations and warranties as are customary in a transaction of this nature.
If the Agreement is not completed within 30 days of the execution of this
Memorandum of Understanding, this Memorandum shall be binding.
Executed this 8th day of September, 1998 by and between the parties as
designated below:
Shelley Duvall GK Intelligent Systems, Inc.
_________________________________ by _____________________________
Gary Kimmons, President
-4-
EXHIBIT 10.13
SEVERANCE AGREEMENT AND GENERAL RELEASE
This Severance Agreement and General Release ("Agreement") is made and
entered into by and between Rodney L. Norville ("Employee") and GK
Intelligent Systems, Inc. ("the Company").
WHEREAS, Employee was employed by the Company in the capacity of Vice
President of Administrative Affairs and General Counsel pursuant to an
Employment Agreement executed in December 1993, extended in December 1996, and
amended and restated on March 13, 1998, and an Addendum to the Amended and
Restated Employment Agreement, executed on March 13, 1998 (collectively referred
to as the "Employment Agreement");
WHEREAS, Employee desires to terminate the employment relationship
pursuant to Article 4.3 of the Addendum to the Amended and Restated Employment
Agreement, and the Company desires to accept Employee's resignation and waive
the notice required therein;
NOW THEREFORE, Employee and the Company (collectively referred to as the
"Parties") do hereby agree as follows:
1. TERMINATION OF EMPLOYMENT. The employment of Employee with the Company,
is terminated as of September 14, 1998 (the "termination date"). This Agreement
supersedes the terms of the Employment Agreement. By executing this Agreement,
the Parties hereby terminate the Employment Agreement, SAVE AND EXCEPT (i)
Employee's ongoing and continuing obligations of confidentiality and
non-disclosure; (ii) Employee's covenant not to compete; and (iii) all other
provisions which by their terms survive termination of the Employment Agreement.
2. CONSIDERATION. In consideration of the release of all claims, disputes
and causes of action which Employee, Employee's heirs, executors, administrators
or assigns have or may have against the Company, as well as the other agreements
contained in this Agreement, the Company shall pay Employee compensation and
benefits (collectively referred to as the "Severance Payment") as follows:
(i) MONTHLY INSTALLMENT PAYMENTS. The Company shall pay Employee,
subject to the provisions hereof, the gross amount of $360,000, less
applicable withholding taxes, to be paid to Employee at the gross
rate of (a) $7,500 per month for a period of twelve (12) months,
commencing on October 15, 1998, and continuing through September 15,
1999, and (b) $15,000 per month for a period of eighteen (18) months
commencing on September 15, 1999 and continuing through March 15,
2001.
(ii) BONUS WARRANTS. The Company agrees that Employee is entitled to
retain warrants for 1,200,000 shares of the Company's restricted
common stock (the "Bonus Warrants"), in accordance with the terms of
the Warrant Agreement, dated March 13, 1998, a copy of which is
attached hereto as "Exhibit A."
<PAGE>
(iii) GROUP HEALTH INSURANCE. The Company shall pay the Employee's premium
payment to continue the group health insurance benefits for Employee
and his dependents under the Consolidated Omnibus Budget
Reconciliation Act ("COBRA") through March 15, 2001.
The Company further acknowledges that incentive stock options to purchase
320,000 shares of the Company's restricted stock and warrants to purchase
180,000 shares of the Company's restricted stock, both at $0.3125 per share,
have already vested, pursuant to paragraph 3.1(b) of the Addendum to the Amended
and Restated Employment Agreement.
3. RELEASE OF THE COMPANY . In consideration of receipt by Employee of the
Severance Payment set forth in paragraph 2 above, Employee, on behalf of
Employee's heirs, executors, successors, administrators, and assigns does hereby
IRREVOCABLY AND UNCONDITIONALLY RELEASE, ACQUIT AND FOREVER DISCHARGE the
Company, its parents, subsidiaries, and affiliates as well as all of their
respective present and former directors, officers, affiliates, agents,
representatives, employees, successors, and assigns from any and all
liabilities, damages, actions, causes of action and claims of any nature, kind
or description whatsoever, whether accrued or to accrue, which Employee ever
had, now has or hereafter may have against any of them through the date of this
Agreement arising out of any act, omission, transaction, agreement or
occurrence, including, but not limited to, all acts, omissions, transactions,
occurrences, and claims related to or arising out of Employee's relationship and
dealings with the Company, its parents, subsidiaries and/or affiliates and/or
Employee's employment or the termination thereof, which may be the basis of any
claims of any kind, whether sounding in contract or tort or arising out of
statute or common law as well as any, complaint, charge, or proceeding in any
federal, state or local court or administrative proceeding of any kind, or any
other statute or regulation or independent tort claim, including claims under
the AGE DISCRIMINATION IN EMPLOYMENT ACT, 29 U.S.C. SS. 621 ET SEQ., as amended
by the Older Workers' Benefit Protection Act. Employee further covenants not to
sue the Company, or any of its parents, subsidiaries, affiliates, former or
present officers, agents, representatives, employees, successors, or assigns in
their individual capacities on any such claim, action, or cause of action.
4. ASSIGNMENT OF CLAIMS. Any claims, actions, and/or causes of action
which Employee may have against the Company that are not released in paragraph 3
above, are hereby ASSIGNED, SOLD, TRANSFERRED AND CONVEYED to the Company.
5. BREACH OF AGREEMENT. In the event Employee breaches Sections 6, 7, or 8
of this Agreement or any of the provisions of the Employment Agreement that
survive termination (including any of the foregoing provisions of Section 11 of
the Amended and Restated Employment Agreement and Articles XI and XII of the
Addendum to Amended and Restated Employment Agreement, dated March 13, 1998),
the Company shall have no further obligation to make monthly installment
payments to Employee under Section 2(i) of this Agreement. Employee agrees that
violation of any of the foregoing provisions shall constitute a material breach
of this Agreement.
-2-
<PAGE>
6. REAFFIRMATION OF NON-COMPETE AND NON-DISCLOSURE COVENANTS AND THE
COMPANY'S OWNERSHIP OF WORK PRODUCT. Employee acknowledges and reaffirms the
non-compete and non-disclosure covenants contained in the Employment Agreement.
Employee also acknowledges the Company's ownership of intellectual property
conceived, developed, written or contributed by Employee pursuant to his
Employment Agreement, and all rights in works prepared or performed by Employee
pursuant to his Employment Agreement. Employee recognizes and agrees that such
provisions (contained in Section 11 of the Amended and Restated Employment
Agreement and Articles XI and XII of the Addendum to Amended and Restated
Employment Agreement, dated March 13, 1998) continue in full force and effect
beyond the date of termination of employment with the Company and the
termination of the Employment Agreement. In view of the nature of Employee's
employment and the proprietary and other information and trade secrets that
Employee has received during the course of Employee's employment with the
Company, Employee agrees that the Company would be irreparably harmed by any
violation or threatened violation of the foregoing provisions of the Employment
Agreement or this Agreement, and that the Company shall be entitled to
injunctive relief prohibiting Employee from any such violation or threatened
violation.
7. NON-DISCLOSURE OF PRIVILEGED INFORMATION AND OTHER INFORMATION HELD IN
FIDUCIARY CAPACITY. Inasmuch as Employee has been employed as an officer of the
Company and as General Counsel for the Company, he holds attorney-client
privileged information as well as other confidential information of the Company
in a fiduciary capacity. Employee acknowledges and affirms his ongoing fiduciary
and ethical obligations to maintain all such information absolutely confidential
and secret. Employee further acknowledges and agrees that he shall not, without
the prior written consent of the Company, divulge or disclose, directly or
indirectly, any such information, knowledge or data to anyone other than the
Company and counsel designated by the Company.
8. COOPERATION IN LITIGATION AND INVESTIGATIONS. Employee agrees to
cooperate in any investigations conducted by the Company for which the Company
believes Employee to be a holder of information or to have knowledge of relevant
facts. Employee agrees to participate in interviews and cooperate in the
Company's efforts to gather information concerning any allegations of improper
or unlawful conduct or occurrences or other matters investigated by the Company.
Employee also agrees to cooperate with the Company and its counsel in any
litigation or anticipated litigation involving the Company, by making himself
available for interviews, fact gathering, and questioning, and for appearing at
depositions and/or trial without the necessity of being served with a subpoena.
Employee shall not assist or facilitate in the prosecution of any civil claims
or litigation against the Company, and if requested to do so, shall promptly
notify the Company.
9. ASSIGNABILITY. Except as expressly indicated herein, this Agreement is
intended to bind and inure to the benefit of, and be enforceable by the Company
and Employee and their respective heirs, legal representatives, successors, and
assigns.
10. ACKNOWLEDGMENTS. Employee represents and acknowledges that in
executing this Agreement, he does not rely, and has not relied, upon any
representation or statement made by the Company, or its agents, representatives,
or attorneys with regard to the subject matter, basis or effect of this
Agreement or otherwise.
-3-
<PAGE>
11. GOVERNING LAW AND ARBITRATION PROVISION. This Agreement and General
Release is made and entered into in the State of Texas and shall in all respects
be interpreted, enforced, and governed under the laws of the State of Texas. The
parties agree that any disputes arising under this Agreement shall be submitted
to resolution in accordance with the applicable rules of the American
Arbitration Association ("AAA"). The parties agree that mediation and/or
arbitration will take place in Harris County, Texas.
12. CONSTRUCTION. The language of all parts of this Agreement shall in all
cases be construed as a whole according to its fair meaning, and not strictly
for or against either of the Parties. The Parties further agree that there will
be no presumption that any ambiguity in the Agreement shall be construed against
the drafter of the Agreement.
13. SAVINGS CLAUSE. Should any provision of this Agreement be declared to
be determined by any court to be illegal or invalid, the validity of the
remaining parts, terms, or provisions shall not be affected thereby and said
illegal or invalid part, term, or provision shall be deemed not to be a part of
this Agreement.
14. SURVIVABILITY. The Parties acknowledge and agree that all provisions
of the Employment Agreement that contemplate continuing performance by Employee
after termination of Employee's employment with the Company shall survive such
termination, including Employee's obligations pursuant to Section 11 of the
Amended and Restated Employment Agreement and Articles XI and XII of the
Addendum to Amended and Restated Employment Agreement, dated March 13, 1998.
15. ENTIRETY OF AGREEMENT. This Agreement sets forth the entire Agreement
between the Parties respecting termination of Employee's employment
relationship, and fully supersedes any and all prior agreements or
understandings between the Parties pertaining to the subject matter hereof.
16. TIME PERIOD FOR ENFORCEABILITY/REVOCATION OF AGREEMENT. Payment of the
above-described Severance Payment is contingent upon the Employee executing and
returning this Severance Agreement and General Release to the Company.
Furthermore, Employee has a seven (7) day period after executing this Agreement
during which time Employee may revoke Employee's consent to the Agreement by
returning any Severance Payments received with written notification of the
decision to revoke the release to the Company, no later than seven (7) days
after signing the Agreement below. This Agreement will not become effective or
enforceable until such revocation period has expired.
-4-
<PAGE>
This Severance Agreement and General Release may not be revoked, but shall
became valid, in effect, and enforceable unless the Company, physically receives
such written notification of revocation of this Severance Agreement and General
Release and refund of the consideration paid herein no later than seven (7) days
after the date signed below. The Employee's acceptance and any revocation and
refund are to be delivered to Gary Kimmons, President and Chief Executive
Officer, GK Intelligent Systems, Inc., Marathon Oil Tower, 5555 San Felipe,
Suite 625, Houston, Texas 77056.
PLEASE READ CAREFULLY. THIS SEVERANCE AGREEMENT AND GENERAL RELEASE
INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS ARISING PRIOR TO ITS
EXECUTION. YOU MAY CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT.
GK INTELLIGENT SYSTEMS, INC.
By:___________________________________
Gary F. Kimmons
President
Date:___________________________
________________________________
Rodney L. Norville
Date:___________________________
-5-
<PAGE>
THE STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
On this day, before me, a notary public in and for said state, personally
appeared Gary F. Kimmons, President of GK Intelligent Systems, Inc., known to me
to be the person who executed the within Severance Agreement and General Release
and acknowledged to me that he executed the same for the purposes therein stated
on behalf of said corporation.
________________________________________
Notary Public, State of Texas
________________________________________
Printed Name of Notary
My Commission Expires:__________________
-6-
<PAGE>
THE STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
On this day, before me, a notary public in and for said state, personally
appeared Rodney L. Norville, known to me to be the person who executed the
within Severance Agreement and General Release and acknowledged to me that he
executed the same for the purposes therein stated.
_________________________________________
Notary Public, State of Texas
_________________________________________
Printed Name of Notary
My Commission Expires:___________________
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The financial data schedule contains summary financial information extracted
from the Company's annual report for the year ended May 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 5,241
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,340
<PP&E> 4,694
<DEPRECIATION> 2,213
<TOTAL-ASSETS> 7,821
<CURRENT-LIABILITIES> 257
<BONDS> 0
0
3,522
<COMMON> 28
<OTHER-SE> 3,927
<TOTAL-LIABILITY-AND-EQUITY> 7,821
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 5,855
<OTHER-EXPENSES> 132
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (6,014)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,014)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,014)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
