MEMORANDUM OF UNDERSTANDING
A Memorandum of Understanding by and between Innovative Software
Technologies, Inc., a California corporation ("IST"), Energy Professional
Marketing Group, a Utah corporation ("EPMG") and Xxxxx X. Xxxx and Xxxxx X.
Xxxxxx, individuals residing in Utah County, Utah ("Xxxx and Xxxxxx"),
(collectively the "Parties"), made as of the 2nd day of January 2003.
RECITALS
WHEREAS IST, EPMG and Xxxx and Xxxxxx have certain disputes arising from
the acquisition of EPMG by IST pursuant to a Stock Purchase Agreement dated as
of December 31, 2001 and thereafter; and
WHEREAS EPMG, Xxxx and Xxxxxx have asserted claims against IST, Xxxxx
Xxxxxxx, and others arising from the Stock Purchase Agreement dated December 31,
2001 between Xxxx and Xxxxxx on the one hand and IST and EPMG on the other; and
WHEREAS IST and Xxxxxxx deny that Xxxx and Xxxxxx have meritorious claims;
and
WHEREAS Xxxx and Xxxxxx have withdrawn from participation on the board of
directors of IST and demanded rescission of the Stock Purchase Agreement; and
WHEREAS the parties believe that a timely resolution of the disputes among
the parties, rather than a costly and time consuming litigation of the claims,
will be in the best interests of all Parties; and
WHEREAS the parties desire to resolve and settle their disputes and provide
for a mutually profitable ongoing business relationship among IST, EPMG and Xxxx
and Xxxxxx following the settlement; and
WHEREAS the parties hereto desire to set forth their understanding of the
general terms and conditions of the contemplated transactions and their future
relationship;
THEREFORE, in consideration of the mutual promises contained herein, the
parties agree as follows:
1. Settlement. The parties agree to an adjustment of the business of EPMG
and the establishment of an ongoing business relationship as described herein as
a complete settlement of the disputed claims among them. IST will cause EPMG to
transfer certain assets to IST and IST will assume certain liabilities from
EPMG. At Closing, IST will transfer 100% of the EPMG stock to Xxxx and Xxxxxx in
exchange for all of the capital stock of IST owned by Xxxx and Xxxxxx. Xxxx and
Xxxxxx' and IST's tax counsel will cooperate with one another to minimize the
adverse tax consequences to EPMG, Xxxx and Xxxxxx.
2. Assets and Liabilities of EPMG. At Closing, EPMG will transfer to IST
those assets set forth in Exhibit A. Simultaneously, IST will assume from EPMG
those liabilities set forth on Exhibit A. Assets shall be divided in accordance
with Exhibit E hereto, which is based upon figures set forth on the September
30, 2003 report on Form 10QSB of IST and the
1
supporting consolidation work-papers. Assets transferred and liabilities assumed
shall be adjusted as of December 31, 2003 in the approximate ratios established
in Exhibit E. In addition, EPMG will transfer certain contracts and other
intangible assets and business relationships to IST as set forth on Exhibit B.
3. Commitments of the Parties. In conjunction with Closing the Parties will
agree to those items listed in Exhibit C.
4. Facilities. EPMG (or Xxxx and Xxxxxx) anticipate that it or they will
continue to occupy the current facilities in Utah and will lease its facilities
in Utah County directly from the owner of those facilities. EPMG will retain all
machinery, equipment, office furniture and fixtures currently located in Utah.
5. Employees of EPMG. IST will assign to EPMG all of IST's employment
contracts with Utah based employees, including the employee contracts of Xxxx
and Xxxxxx. IST shall have no further rights with respect to non-compete
agreements with Utah based employees.
6. Other Conditions. Other conditions for settlement are set forth in
Exhibit D.
7. Final Agreement. A final Settlement and Reorganization Agreement will be
prepared to implement this Memorandum of Understanding.
8. Closing. The parties will work in good faith to complete Closing within
30 days of the issuance of a Fairness Opinion (see Exhibit D). In the absence of
a Closing on or before March 15, 2004, Xxxx and Xxxxxx may terminate their
obligations under this Agreement.
EXECUTED AS OF THE DATE FIRST ABOVE WRITTEN:
/s/ Xxxxx X. Xxxxxx
-------------------------------------------
XXXXX X. XXXXXX, individually
/s/ Xxxxx X. Xxxx
-------------------------------------------
XXXXX X. XXXX, individually
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
/s/ Xxxxxxx X. Xxxxxxx
-------------------------------------------
Xxxxxxx X. Xxxxxxx, its President
ENERGY PROFESSIONAL MARKETING GROUP, INC.
/s/ Xxxxx Xxxxxx
-------------------------------------------
Xxxxx Xxxxxx, its President
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Exhibit A
Assets to be transferred from EPMG to IST
Liabilities of EPMG to be assumed by IST
Note: Assets and Liabilities presented as of 09/30/2003. All adjustments as of
the close of business December 31, 2003, per audited financial statements as if
the closing occurred on such date. However, not withstanding any provision of
this agreement, in no case will the amount of cash transferred from EPMG to IST
exceed $2,100,000 excluding payments made in satisfaction of the Note Receivable
below.
Assets Transferred from EPMG to IST
-----------------------------------
Cash $1,636,911
EPMG will cancel the account receivable in the amount of $442,039 currently owed
by IST to EPMG.
Note Receivable EPMG shall create a promissory note on behalf of IST in the
maximum amount of $675,000. Details of the promissory note
shall be as set forth in Exhibit A.1
Fixed Assets* All machinery, equipment, office furniture and fixtures
currently located in Kansas City
Deposits Right to the return of all deposits arising from leases for
fixed assets and real property located in Kansas City
ASSETS TRANSFER RANGE ESTIMATE $2,378,950 to $3,142,039
------------------------
Liabilities Assumed by IST from EPMG
------------------------------------
Accounts payable and Accrued expenses $300,000
LIABILITIES ASSUMED ESTIMATE $300,000
--------
*Fixed Assets: The ownership of all EPMG software will be transferred to IST
and EPMG jointly. Each party will maintain the right to make any changes and
to sublicense software. EPMG will retain a separate and complete copy of all
current software codes and after the division of the companies, all changes
going forward to the codes will be proprietary and owned by the company that
makes the changes.
3
Exhibit A.1
IST Promissory Note Receivable from EPMG
EPMG shall pay IST up to the principal sum of $675,000 in equal monthly payments
of at least $50,000.
1. Principal $675,000
2. Term monthly principal payments of at least $50,000
until paid, beginning one month following Closing
3. Interest Rate 7.5% per annum, interest payable monthly on the
unpaid principal balance
4. Early repayment discount If the principal balance is repaid in total on or
before the end of month 6 following Closing, then
a credit of $50,000 will be applied against the
then remaining principal. Alternatively, the Note
may be paid in full with a one-time payment of
$400,000 within 20 calendar days of Closing.
4
Exhibit B
Intangible Assets to be Transferred from EPMG to IST
EPMG's contracts for in-process discussions for contracts for leads, products,
services or content relating to Xxxxxxxxxxxxxx.xxx, Foreclosure World, Real
Estate Toolkit and Fast Cash. EPMG is not required to assign any contract or any
right to work with Xxxxx Xxxxx, as Xxxxx Xxxxx has expressed his intention to
continue to work with EPMG and an unwillingness to work with IST.
NOTE: All hosting contracts to remain the property of EPMG. All of the reserved
Financed Accounts Receivable to remain the property of EPMG, and EPMG will
continue to serve these customers.
5
Exhibit C
Commitments of the Parties
1. The Parties will execute and deliver mutual general releases.
2. Xxxx and Xxxxxx will cause ESI, Inc. to continue to process refund
requests and pay chargebacks coming through IST and IST affiliate merchant
accounts and reimburse IST for hours spent on accounts. Provided that
before any chargebacks or reimbursements are paid by ESI, Inc. pursuant to
this paragraph, IST shall draw down on the reserves created for that
purpose which as of September 30, 2003 approximated $70,000, said reserves
to be placed into an escrow account within seven days following the
execution of this agreement. 180 days from the date of closing, any such
reserves left in the reserve account shall be refunded to ESI, Inc. ESI,
Inc. shall have the right to examine the books and records of IST to
determine the basis for such refunds and chargebacks.
3. Xxxx and Xxxxxx on one hand, and IST on the other, will cause the other
party to process all refunds for sales and promptly reimburse the other
party for all chargebacks for sales made prior to closing that are
processed on the other parties' merchant accounts.
4. Each party will pay its expenses related to the preparation of the
Settlement and Reorganization Agreement and all related documents.
6
Exhibit D
Other Conditions for Settlement
1. Liability for Accrued Officer Bonus for Xxxxxxx for Q2, Q3 and Q4 will
be allocated to IST. Liability for Accrued Officer Bonus for Xxxx, Xxxxxx
and Xxxxx Xxxx for Q2, Q3 and Q4 will remain with EPMG.
2. The parties agree that, effective January 1, 2004, they will implement
appropriate procedures so that EPMG and IST will function as separate
entities to the greatest extent possible until Closing, including, without
limitation, separating accounting and operational functions, and the
retention by EPMG of their revenues and profits on the one hand and the
retention by IST of its revenues and profits on the other.
3. IST shall engage a qualified investment bank satisfactory to Xxxx and
Xxxxxx to render a Fairness Opinion on this agreement. IST shall be solely
responsible for all fees associated with the Fairness Opinion.
4.
All Parties recognize the importance of the current SEC investigation of
Innovative Software Technologies Inc. and pledge to cooperate with the SEC.
Furthermore EPMG and IST shall each transfer $75,000 to the independent
directors' bank account within 10 calendar days of the execution of this
agreement. Funds not used shall be returned to EPMG and IST pro rata. In
addition, funds contributed by EPMG shall reduce in equal amount the
principal amount of the IST Note Receivable (see Exhibit A.1). And the
$75,000 that is contributed by IST will be deducted from the Cash to be
transferred by EPMG to IST pursuant to exhibit A.
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Exhibit E
(Subject to check and adjustments)
Innovative Software Technologies, Inc
Consolidated Balance Sheet as of September 30 2003
Xxxxxxx IST EPMG Elim& INIV
Media, Inc. Inc. Inc Adjust. Consol
----------- ---- --- ------- ------
ASSETS
CURRENT ASSETS
Cash $ 16,467 $ 75,616 $ 3,765,904 $ - $ 3,857,987
Accounts Receivable - 616 153,886 - 154,501
Due From Affiliate - 1,071,175 442,039 (1,513,215) -
Investment in Subsidiary - 25,068 - (25,068) -
Marketable Securities - - - - -
Prepaid Expenses - 20,000 3,586 - 23,586
Other Receivables - - 114,868 - 114,868
Other Current Assets 6,878 25,544 1,108,452 - 1,140,874
Deferred Income taxes - - - - -
------------ ------------ ------------ ------------ ------------
Total current assets 23,344 1,218,019 5,588,734 (1,538,283) 5,291,815
------------ ------------ ------------ ------------ ------------
PROPERTY, PLANT & EQUIP.
Machinery and equipment 14,923 83,202 243,118 - 341,243
Office furniture and fixtures 3,475 21,669 40,119 - 65,263
Computer Software - 41,151 265,634 - 306,785
Leasehold improvements - 2,877 33,141 - 36,018
------------ ------------ ------------ ------------ ------------
18,398 148,899 582,012 - 749,309
Less accum. Dep. and Amort. (17,594) (56,093) (220,455) - (294,142)
------------ ------------ ------------ ------------ ------------
804 92,806 361,557 - 455,167
------------ ------------ ------------ ------------ ------------
Goodwill, net of amortization - 1,088,686 - - 1,088,686
Other Assets - - - - -
Deposits - 19,173 23,791 - 42,965
------------ ------------ ------------ ------------ ------------
Total Assets $ 24,148 $ 2,418,684 $ 5,974,083 $(1,538,283) $ 6,878,632
============ ============ ============ =========== =============
100.0%
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Note payable $ - $ 23,649 $ 54,131 $ - $ 77,780
Line of credit - - 3,740 3,740
Accounts pay. & Accr. Expenses - (15,104) 1,223,638 - 1,208,534
Other Liability - 79,686 990,110 1,069,796
Deferred revenue - 512,455 512,455
Income taxes payable - 471,890 - 471,890
Reserve-returns and allowances - - 588,686 588,686
Due To Affiliate 396,175 442,039 675,000 (1,513,215) -
------------ ------------ ------------ ------------ ------------
Total current liabilities 396,175 1,002,161 4,047,760 (1,513,215) 3,932,881
Note Payable - Long-term - - - - -
------------ ------------ ------------ ------------ ------------
Total liabilities 396,175 1,002,161 4,047,760 (1,513,215) 3,932,881
------------ ------------ ------------ ------------ ------------
100.0%
STOCKHOLDERS' EQUITY
Preferred stock - Series A 1,650,500 - 1,650,500
Preferred stock- Series B 408,491 408,491
Common stock 1 52,896 20,000 (20,000) 52,897
Additional paid in capital 30,999 13,105,971 5,068 (5,068) 13,136,970
RE (Accum. Deficit) (403,027) (13,801,335) 1,901,255 - (12,303,107)
------------ ------------ ------------ ------------ ------------
Total Equity (372,027) 1,416,523 1,926,323 (25,068) 2,945,751
------------ ------------ ------------ ------------ ------------
100.0%
Total Liabilities & Equity $ 24,148 $ 2,418,684 $ 5,974,083 $(1,538,283) $ 6,878,632
============ ============ ============ =========== ============
Checksum - - - - -
(table continued)
Adjusted EPMG Post Sale
INIV Xfer to EPMG1 INIV
Consol IST Inc. Consol
------ --- ---- ------
ASSETS
CURRENT ASSETS
Cash $ 3,857,987 $ 1,636,911 $ 2,128,993 $ 1,728,993
Accounts Receivable 154,501 - 153,886 616
Due From Affiliate - 442,039 - 675,000
Investment in Subsidiary - - - -
Marketable Securities - - - -
Prepaid Expenses 23,586 - 3,586 20,000
Other Receivables 114,868 - 114,868 -
Other Current Assets 1,140,874 - 1,108,452 32,422
Deferred Income taxes - - - -
------------ ------------ ------------ ------------
Total current assets 5,291,815 2,078,950 3,509,784 2,457,031
------------ ------------ ------------ ------------
PROPERTY, PLANT & EQUIP.
Machinery and equipment 341,243 2,669 240,449 100,795
Office furniture and fixtures 65,263 1,926 38,193 27,070
Computer Software 306,785 265,634 - 306,785
Leasehold improvements 36,018 2,347 30,794 5,224
------------ ------------ ------------ ------------
749,309 272,576 309,436 439,874
Less accum. Dep. and Amort. (294,142) (93,816) (126,639) (167,503)
------------ ------------ ------------ ------------
455,167 178,760 182,797 272,370
------------ ------------ ------------ ------------
Goodwill, net of amortization - - - -
Other Assets - - - -
Deposits 42,965 - 23,791 19,173
------------ ------------ ------------ ------------
Total Assets $ 5,789,946 $ 2,257,711 $ 3,716,372 $ 2,748,574
============ ============ ============ ============
100.0% 57.5% 42.5%
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Note payable $ 77,780 $ - $ 54,131 $ 23,649
Line of credit 3,740 - 3,740 -
Accounts pay. & Accr. Expenses 1,208,534 300,000 923,638 284,896
Other Liability 1,069,796 - 990,110 79,686
Deferred revenue 512,455 - 512,455 -
Income taxes payable 471,890 - - 471,890
Reserve-returns and allowances 588,686 - 588,686 -
Due To Affiliate - - 675,000 -
------------ ------------ ------------ ------------
Total current liabilities 3,932,881 300,000 3,747,760 860,121
Note Payable - Long-term - - - -
------------ ------------ ------------ ------------
Total liabilities 3,932,881 300,000 3,747,760 860,121
------------ ------------ ------------ ------------
100.0% 81.3% 18.7%
STOCKHOLDERS' EQUITY
Preferred stock - Series A 1,650,500 - - 1,650,500
Preferred stock- Series B 408,491 - 408,491
Common stock 52,897 - 20,000 32,897
Additional paid in capital 13,136,970 - 5,068 13,131,902
RE (Accum. Deficit) (13,391,793) 1,957,711 (56,456) (13,335,337)
------------ ------------ ------------ ------------
Total Equity 1,857,065 1,957,711 (31,388) 1,888,453
------------ ------------ ------------ ------------
100.0% -1.7% 101.7%
Total Liabilities & Equity $ 5,789,946 $ 2,257,711 $ 3,716,372 $ 2,748,574
============ ============ ============ ============
Checksum - - - -
8
Exhibit F
Supplemental Information
(Subject to change based on market price of common)
Series A Common
--------- -------
Date Preferred Stock
---- --------- -------
1 Shares issued for acquisition of EPMG 1,500,000 3,529,412
2 E&R sale of preferred A shares (200,000)
3 Conversion of preferred A shares to common (199,500) 3,000,000
4 Common stock dividend on preferred A 558,356
----------- -----------
Total 1,100,500 7,087,768
=========== ===========
Fully diluted calculation
Market privce $ 0.21
95% of market price $ 0.20
Equivalent common shares 5,516,291 7,087,768
----------- -----------
Total common shares 12,604,059
===========
Market value calculation
Market price $ 0.21
Market value $ 2,646,852
Illiquidity discount - TO BE DETERMINED 0%
Discounted market value $ 2,646,852
9
