-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IxCB2G1AKWavIfyhNp1Ym4B9K6/f5l3E9I51vr1zBsmk67qFSQlvJ22COMPtgGIE de88l+zytYXDtHRQhOoV0A== 0001144204-04-012983.txt : 20040823 0001144204-04-012983.hdr.sgml : 20040823 20040823165249 ACCESSION NUMBER: 0001144204-04-012983 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040823 DATE AS OF CHANGE: 20040823 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE SOFTWARE TECHNOLOGIES INC CENTRAL INDEX KEY: 0001084047 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 954691878 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-27465 FILM NUMBER: 04992354 BUSINESS ADDRESS: STREET 1: 5072 NORTH 300 WEST CITY: PROVO STATE: UT ZIP: 84604 BUSINESS PHONE: 801-371-0755 MAIL ADDRESS: STREET 1: 5072 NORTH 300 WEST CITY: PROVO STATE: UT ZIP: 84604 10QSB 1 v06120_10-qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT Commission File Number: 000-1084047 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter) California 95-4691878 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 204 NW Platte Valley Drive, Riverside, MO 64150 (Address of Principal Executive Offices) (Zip Code) (816) 584-8030 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ There were 53,112,424 shares of common stock, $0.001 par value, outstanding as of August 23, 2004. INNOVATIVE SOFTWARE TECHNOLOGIES, INC. FORM 10-QSB QUARTER ENDED JUNE 30, 2004 TABLE OF CONTENTS PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003........................................3 Condensed Consolidated Statements of Operation (Unaudited) for the Three and Six Months Ended June 30, 2004 and 2003................4 Condensed Consolidated Statements of Cash Flow (Unaudited) for the Six Months Ended June 30, 2004 and 2003..........................5 Notes to the Condensed Consolidated Financial Statements (Unaudited)..............................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................13 Item 3. Controls and Procedures.............................................18 PART II - OTHER INFORMATION Item 1. Legal Proceedings...................................................19 Item 3. Defaults upon Senior Securities.....................................20 Item 6. Exhibits and Reports on Form 8-K....................................20 Signatures ...............................................................21 Index to Exhibits............................................................22 PART I - FINANCIAL INFORMATION Item 1. Financial Statements INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) JUNE 30, DECEMBER 31, 2004 2003 ------------ ------------ ASSETS CURRENT ASSETS Cash $ 4,959,208 $ 3,890,929 Accounts receivable: Merchant accounts receivable 1,159,882 1,104,051 Other receivables 15,215 101,590 Notes receivable, net of allowance for doubtful accounts of $359,018 and $454,529 respectively 1,315,964 949,891 Inventory 48,602 48,291 Prepaid expenses and other current assets 463,832 15,986 Deferred income taxes 457,890 457,890 ------------ ------------ TOTAL CURRENT ASSETS 8,420,593 6,568,628 ------------ ------------ PROPERTY AND EQUIPMENT, NET 597,934 574,291 GOODWILL 1,088,686 1,088,686 DEFERRED INCOME TAXES 17,688 17,688 DEPOSITS 53,965 43,965 ------------ ------------ TOTAL ASSETS $ 10,178,866 $ 8,293,258 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 5,129,534 $ 3,342,084 Deferred revenue 1,305,437 1,857,247 Accrued income taxes 1,088,795 822,533 Current maturities of capital lease obligations 58,689 67,049 ------------ ------------ TOTAL CURRENT LIABILITIES 7,582,455 6,088,913 CAPITAL LEASE OBLIGATIONS 110,585 126,336 ------------ ------------ TOTAL LIABILITIES 7,693,040 6,215,249 ------------ ------------ COMMITMENTS AND CONTINGENCIES (NOTE 5) -- -- STOCKHOLDERS' EQUITY Series A preferred stock; issued and outstanding, 1,650,500 shares 1,650,500 1,650,500 Series B preferred stock; issued and outstanding, 428,491 shares 448,491 448,491 Common stock - authorized, 100,000,000 shares of $.001 par value; issued and outstanding, 52,897,186 52,897 52,897 Additional paid-in capital 13,163,749 13,163,749 Accumulated deficit (12,829,811) (13,237,628) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 2,485,826 2,078,009 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,178,866 $ 8,293,258 ============ ============
See accompanying notes. 3 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- ---------------------------- (RESTATED) (RESTATED) 2004 2003 2004 2003 ------------ ------------ ------------ ------------ REVENUE Services revenue $ 4,063,888 $ 7,565,830 Product sales 3,200,204 8,953,324 Other revenue 354,001 748,329 ------------ ------------ TOTAL REVENUE 7,618,093 $ 6,992,995 17,267,483 $ 12,572,203 COST OF REVENUE Cost of services revenue 1,995,586 3,492,050 Cost of product sales and other revenue 1,594,430 4,609,625 ------------ ------------ TOTAL COST OF REVENUE 3,590,016 3,515,533 8,101,675 6,062,425 ------------ ------------ ------------ ------------ GROSS PROFIT 4,028,077 3,477,462 9,165,808 6,509,778 ------------ ------------ ------------ ------------ OPERATING EXPENSES General and administrative 1,601,454 1,763,167 4,525,179 3,504,324 Commissions and other selling expenses 2,193,531 1,611,699 4,078,989 3,066,817 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 3,794,985 3,374,866 8,604,168 6,571,141 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 233,092 102,596 561,640 (61,363) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSES) Interest and penalties on late tax payments (23,340) (73,000) (45,088) (73,000) Other income 34,053 30,760 87,567 74,872 Interest income, deposits 5,485 18,444 10,969 35,831 Interest income, financing arrangements 31,879 -- 64,070 -- Interest expense (1,548) (13,668) (5,075) (13,668) ------------ ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) 46,529 (37,464) 112,443 24,035 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 279,620 65,132 674,083 (37,328) INCOME TAXES (110,449) (55,000) (266,262) 70,000 ------------ ------------ ------------ ------------ NET INCOME 169,171 10,132 407,821 32,672 UNDECLARED PREFERRED STOCK DIVIDENDS (20,790) -- (41,580) -- ------------ ------------ ------------ ------------ INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 148,381 $ 10,132 $ 366,241 $ 32,672 ============ ============ ============ ============ BASIC INCOME PER COMMON SHARE $ 0.00 $ 0.00 $ 0.01 $ 0.00 ============ ============ ============ ============ DILUTED INCOME PER COMMON SHARE $ 0.00 $ 0.00 $ 0.01 $ 0.00 ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN BASIC PER SHARE CALCULATION 52,897,186 52,870,136 52,897,186 52,821,170 ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN DILUTED PER SHARE CALCULATION 57,188,189 52,870,136 57,188,189 52,821,170 ============ ============ ============ ============
See accompanying notes. 4 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, -------------------------- (RESTATED) 2004 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 407,820 $ 32,672 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 166,123 45,093 Prepaid non-cash compensation and expenses -- 62,250 Non-cash expenses -- 30,667 Net change in operating assets and liabilities Merchant account receivables (55,832) -- Other receivables 86,373 (28,308) Inventory (311) -- Prepaid expenses and other current assets (457,845) (225,103) Accounts payable and accrued expenses 1,787,449 221,684 Deferred revenue (551,810) 97,392 Accrued income taxes 266,262 -- ----------- ----------- NET CASH FLOWS FROM OPERATING ACTIVITIES 1,648,229 236,347 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Change in notes receivable from financed sales (366,073) -- Capital expenditures (174,574) (104,181) ----------- ----------- NET CASH FLOWS FROM INVESTING ACTIVITIES (540,647) (104,181) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowing under note payable -- 8,085 Repayments under line of credit agreement -- (36,142) Payments on capital lease obligations (39,303) (46,859) ----------- ----------- NET CASH FLOWS FROM FINANCING ACTIVITIES (39,303) (74,916) ----------- ----------- NET INCREASE IN CASH 1,068,279 57,251 CASH AT BEGINNING OF PERIOD 3,890,929 1,338,345 ----------- ----------- CASH AT END OF PERIOD $ 4,959,208 $ 1,395,596 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Issuance of Series B Preferred Stock as Compensation $ -- $ 20,000 =========== =========== Property and equipment acquired under capital leases $ 15,192 $ -- =========== ===========
See accompanying notes. 5 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION, BASIS OF PRESENTATION, AND CERTAIN INTERIM ACCOUNTING POLICIES (a) Organization and Description of Business: Innovative Software Technologies, Inc. (the "Company") was incorporated in the State of California in May 1998. The Company together with its wholly-owned subsidiaries is engaged in the development, marketing and delivery of business-type educational programs, generally to individuals, throughout the United States of America. The Company's educational programs combine both self-training and coaching by Company employees. During the quarterly period ended June 30, 2004, the Company's educational programs were concentrated in two product lines, Real Estate and Internet Marketing, which together comprised approximately 94% of second quarter 2004 revenues. (b) Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company's financial condition as of June 30, 2004, and the results of their operations for the three and six months ended June 30, 2004 and June 30, 2003, and the cash flows for the six months ended June 30, 2004 and 2003. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited 2003 consolidated financial statements, including the notes thereto, and the other information set forth therein, included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003. Operating results for the three and six month periods ended June 30, 2004 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2004. (c) Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, EPMG, Inc. and Hackett Media, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. (d) Income Taxes in Interim Periods: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. For purposes of interim financial reporting, the Company projects its effective income tax rate for the entire fiscal year, taking into account all taxing jurisdictions, and applies such rate to interim pre-tax income. Changes in the projected effective tax rate in future quarters, if any, are accounted for prospectively in the period of change. 6 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (e) Earnings Per Common Share: Basic net income per common share is computed by dividing (i) the net income (loss), as adjusted for the effects of cumulative dividends on the Series A and B Preferred Stock by (ii) the weighted average common shares outstanding during the period. Diluted net income (loss) per share is computed similarly but includes the effects of dilutive securities in the denominator. The diluted income per common share for the quarterly period ended June 30, 2004 includes the effects of 6,712,919 common shares into which the Company's Series A and Series B Convertible Preferred Stock is convertible on an if-converted basis. The following table reflects the components of the basic and diluted income per common share for the quarterly and six month periods ended June 30, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Basic: Income applicable to common stockholders $ 148,381 $ 10,132 $ 366,241 $ 32,672 =========== =========== =========== =========== Weighted average common shares outstanding 52,897,186 52,870,136 52,897,186 52,821,170 =========== =========== =========== =========== Basic income per common share $ 0.00 $ 0.00 $ 0.01 $ 0.00 =========== =========== =========== =========== Diluted: Income applicable to common stockholders $ 148,381 $ 10,132 $ 366,241 $ 32,672 Plus: Undeclared preferred stock dividends 20,790 0 41,580 0 ----------- ----------- ----------- ----------- Adjusted numerator $ 169,169 $ 10,132 $ 407,820 $ 32,672 =========== =========== =========== =========== Weighted average number of shares 52,897,186 52,870,136 52,897,186 52,821,170 Shares convertible from preferred stock 6,712,919 17,478,701 6,712,919 17,478,701 ----------- ----------- ----------- ----------- Adjusted denominator 59,610,105 70,348,837 59,610,105 70,299,871 =========== =========== =========== =========== Diluted income per common share $ 0.00 $ 0.00 $ 0.01 $ 0.00 =========== =========== =========== ===========
7 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (2) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: JUNE 30, DECEMBER 31, 2004 2004 ----------- ----------- Accrued sales splits to lead providers $ 900,595 $ 1,255,770 Accrued wages and other 1,846,298 773,707 Reserves for returns and refunds 943,002 742,568 Accounts payable 1,177,194 351,089 Interest and penalties on late tax payments 262,446 218,950 Credit facility (a) -- 3,440 ----------- ----------- $ 5,129,534 $ 3,345,524 =========== =========== (a) The Company has a credit facility that provides for borrowings up to $50,000, with interest at Prime Rate, plus 2%. (3) STOCKHOLDERS' EQUITY (a) Convertible Preferred Stock: As of June 30, 2004, the Company had 25,000,000 shares of preferred stock authorized and has 1,650,500 shares of Series A Preferred issued and outstanding and 428,491 shares of Series B Preferred issued and outstanding. The Series A and Series B Preferred Stock (collectively "Preferred Stock") have the same terms and conditions. The Preferred Stock is (i) entitled to cumulative dividends at a rate of 4.0% of the liquidation value ($1.00 per share), (ii) convertible at any time into common stock at a rate of 95% of the average closing market price of the common stock for five days preceding conversion (6,712,919 and 8,105,228 common shares as of June 30, 2004 and December 31, 2003, respectively), (iii) redeemable at any time by the Company for $1.00 per share, and (iv) entitled to one vote per share. As of June 30, 2004 and December 31, 2003, the Company had cumulative, undeclared dividends in arrears on the Preferred Stock of $103,500 and $82,510, respectively. (4) RELATED PARTY TRANSACTIONS During the periods shown, the Company purchased sales leads from Education Success Institute, Inc. (ESI), which is owned by two individuals who were employees of the Company during such periods. The cost of sales leads purchased during the six months ended June 30, 2004, which is based upon a percentage of revenue, amounted to $3,927,171. In addition, during the periods shown, ESI subleases office space from the Company. Sub-rental receipts amounted to $700 each month during such periods. See Note 5. 8 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (5) COMMITMENTS AND CONTINGENCIES (a) Leases: Future minimum lease payments under noncancelable operating leases (with initial terms in excess of one year) and future minimum capital lease payments as of June 30, 2004 are as follows: CAPITAL OPERATING Year ending December 31: LEASES LEASES ----------- ----------- Six months ending December 31, 2004 43,268 152,931 2005 70,717 174,426 2006 48,066 37,467 2007 28,772 0 ----------- ----------- Total noncancelable lease payments 190,823 364,823 =========== Less amount representing interest 21,549 ----------- 169,274 =========== Principal amount due in one year 58,689 Principal amount due after one year 110,585 ----------- $ 169,274 =========== Rent expense under all operating leases for the quarter ended June 30, 2004 was $152,931. This amount was exclusive of $4,200 of sub-lease payments received from a related party. See Note 4. (b) Lead Arrangements: The Company is a party to several lead agreements with Education Success, Inc. and certain other lead generators. The continuous generation of sales leads is a critical element to the Company's continuing viability. The agreements provide for the transfer of sales leads to EPMG, Inc. for commissions of, generally, 34% of gross revenue, subject to certain adjustments. (c) Content Providers: The Company is a party to several agreements that provide for the educational content and multimedia materials used in the educational offerings. Generally, these agreements provide for a commission, generally 8% to 10% of actual sales. The maintenance of content agreements is a critical element to the Company's continuing viability. 9 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (d) Servicing Arrangements: The Company is a party to a servicing agreement with a third party financial institution for the servicing of the Company's financed sales. The agreement provides for the collection, servicing and remittance of notes receivable as an agent to the Company. The counterparty receives certain fees for this servicing arrangement, which is included as a reduction of the interest income on the notes receivable. (e) SEC Investigation: On June 24, 2003, the Securities and Exchange Commission issued a formal order of investigation authorizing subpoenas for documents and testimony in connection with the investigation of certain securities matters. The Company has and intends to continue to fully cooperate with the SEC in its investigation. (f) Litigation: None. (g) Income Tax Returns: The Company has not filed its 2003 and 2002 Federal and State of Utah income tax returns. Combined current income taxes payable for these periods are currently estimated to be $224,306 and $513,936, respectively. Interest and penalties through June 30, 2004 have been recorded in the amount of approximately $262,446. The Company has engaged an accountant who is in the process of preparing its past due returns. (6) UNAUDITED QUARTERLY RESTATEMENTS. The following table reflects the quarterly net income of the Company as previously reported by the Company in its quarterly report on Form 10-QSB for the quarter ended June 30, 2003 and as restated for the matters discussed below: JUNE 30, 2003 ------------------------- THREE MONTHS SIX MONTHS ENDED ENDED ----------- ----------- Net income (loss) before adjustments $ 252,711 $ 352,608 Reserve for notes receivable (a) (78,000) (308,000) Deferred revenue (b) (5,000) 81,000 Stock compensation (c) (31,579) (89,936) Penalties and interest (d) (73,000) (73,000) Income taxes (e) (55,000) 70,000 ----------- ----------- Net income (loss), adjusted $ 10,132 $ 32,672 =========== =========== 10 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (a) The Company changed its estimate of reserve for bad debts in the fourth quarter based upon historical performance. This adjustment gives effect to the estimate change for each quarter using that annual rate applied in the fourth quarter. (b) This adjustment adjusts the quarterly deferred revenue calculation for the following matter: Prior to February 2003, the Company outsourced coaching to a third party contractor who was responsible for delivery of the services and who provided the Company with records for accounting purposes. Since February 2003, the Company has employed its internal coaching staff and has developed internal operations databases to track coach-student encounters. During the fourth fiscal quarter of 2003, the Company began utilizing the populated operations databases to calculate the number of future coaching sessions for purposes of deferred revenue. Other estimates of future coaching sessions were used during the prior quarters. (c) This adjustment allocates certain stock based compensation that was recorded in the fourth fiscal quarter of 2003 to the quarters to which such compensation was earned. (d) There was no adjustment to reflect the allocation of the penalties and interest for non-payment of the Company's 2002 Federal and state income taxes. Amounts that were recorded in the fourth quarter were allocated to the second and third quarters of 2003. (e) This adjustment includes the tax effects for the aforementioned adjustments, plus the allocation of income taxes to the quarterly periods based upon the effective tax rate applicable to the year ended December 31, 2003. The Company intends to amend its previous filing on Form 10-QSB for the quarterly period ended June 30, 2003 for these matters. (7) SUBSEQUENT EVENTS. On July 2, 2004, Innovative Software Technologies, Inc. (the "Company") entered into a Settlement Agreement with James R. Garn, Ethan W. Willis, and Ethan and Randy, LC (the "Settlement Agreement") pursuant to which the parties agreed to settle all disputes between them, including all disputes relating to the Company's 2001 acquisition from Garn and Willis of the outstanding stock of Energy Professional Marketing Group, Inc. ("EPMG"). Under the terms of the Settlement Agreement, Garn and Willis (the "Principals") have surrendered to the Company all of their shares of capital stock of the Company, comprising 6,784,762 shares of common stock, 1,200,500 shares of Series A Preferred Stock, and 80,000 shares of Series B Preferred Stock, in exchange for certain assets of EPMG. These assets include EPMG's rights under certain credit card processing contracts (including receivables relating to reserves under those contracts in the amount of approximately $1,000,000), substantially all of the tangible fixed assets of EPMG's Utah facility, and certain intangible assets of EPMG, such as specified website domain names, software, and customer lead data. The Settlement Agreement also sets forth certain agreements and covenants relating to the relationship between the parties on a going-forward basis and the parties' respective businesses activities, including the following: o The Company and an entity controlled by the Principals have entered into agreements providing for the reciprocal supply of products and customer leads to each other on a going-forward basis. 11 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) o A company controlled by the Principals has agreed to assume all of EPMG's outstanding service obligations to EPMG's coaching customers in consideration of the payment of service fees by the Company totaling $425,000. o A newly created company controlled and owned by the Principals has assumed the lease of EPMG's facility in Provo, Utah, and substantially all employees at such facility have transferred their employment to such newly created company. Pursuant to the Settlement Agreement, the Company has released all such employees from their non-compete obligations to the Company. o The Company has agreed to refrain from soliciting the services of certain lead providers for a six-month period of time and from marketing to current active coaching customers for 120 days following the Settlement Agreement. Pursuant to the Settlement Agreement, the Company, the Principals, and their respective affiliates have entered into mutual waivers and releases relating to any and all claims that they may have had against one another other at any time through the date of the Settlement Agreement. Subsequent to the settlement, EPMG will remain a wholly owned subsidiary of the Company and, together with the Company, will focus on growing its business through its traditional coaching and mentoring products, new software products relating to improving the efficiency of small businesses, and future planned software products targeting the IT departments of medium and large businesses. The Company recorded the settlement on the effective date of the settlement. No gain or loss arose from the settlement pursuant to generally accepted accounting principles which requires a company's receipt of its own securities in such transactions to be treated as transactions affecting only stockholders' equity. In addition, the Company has concluded that the transaction does not meet the conditions for treatment of EPMG as a discontinued operation due to the fact that continuing agreements between the Company and EPMG for cross selling of each others products and services rise to the level of the Company's significant continuing involvement in the operations of the disposed component. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes statements that are forward looking in nature. The accuracy of such statements depends on a variety of factors that may affect the business and operations of the Company. When used in this discussion, the words "expect(s)", "feel(s)", "believe(s)", "will", "may", "anticipate(s)" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, and actual results could differ materially from those projected. These risks and uncertainties include, but are not limited to, the matters discussed under the caption "Factors Affecting Future Results" in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003 and other risks and uncertainties discussed in filings made with the Securities and Exchange Commission (including risks described in subsequent reports on Form 10-QSB, Form 10-KSB, Form 8-K and other filings). Readers are cautioned not to place undue reliance on these forward-looking statements, and are urged to carefully review and consider the various disclosures elsewhere in this Form 10-QSB. OVERVIEW The following discussion summarizes information about our accounting policies and practices and information about our operations in a comparative manner for the three and six months ended June 30, 2004 and 2003. Our management's discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere herein. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company's financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes that its critical accounting policies include those described below. Allowances for Doubtful Accounts Our net notes receivable amounted to $1,315,964 as of June 30, 2004 and relate to product financing arrangements entered into with our clients. These notes are unsecured, bear interest at 15% and have terms ranging between one and two years. The Company has not and does not intend to sell or otherwise transfer these receivables. The allowance for doubtful accounts is based upon our best estimate of the amount of probable credit losses in the existing notes based upon our historical loss rates experienced on such financing arrangements. A note is considered impaired pursuant to Financial Accounting Standards Board Statement 114, Accounting by Creditors for Impairment of a Loan. Pursuant to Statement 114, a note is impaired if it is probable that the Company will not collect all principal and interest contractually due. The impairment is measured based on the present value of expected future cash flows discounted at the note's 13 effective interest rate. The Company does not accrue interest when a note is considered impaired. When ultimate collectibility of the principal balance of the impaired note is in doubt, all cash receipts on impaired notes are applied to reduce the principal amount of such notes until the principal has been recovered and are recognized as interest income thereafter. Impairment losses are charged against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote. Revenue Recognition and Returns and Allowances We have evaluated our product offerings in the context SAB 101 Revenue Recognition and EITF 00-21 Revenue Arrangements with Multiple Deliverables and have determined that revenues associated with the multimedia educational materials (product sales) require accounting separate from the educational and coaching services (services revenue). The fair value of these offerings is established through separate third party sales of each of these products and services. Product Sales: We recognize product sales upon delivery to our students, as evidenced by third party shipping providers, which is the point where the student assumes ownership and risk of loss. Shipping costs are billed to students and are included as a component of revenue and cost of product sales. Returns are provided for based upon the Company's historical return experience. Services Revenues: The Company's educational offering includes multiple sessions with a Company employed coach. We recognize services revenue pro rata as coaching/training sessions are rendered. Deferred revenue represents the price of future coaching sessions that students have paid for ($3,150,600), less the applicable commissions to lead generators and content providers ($1,228,739) and sales commissions ($616,424). Our obligation to provide coaching and training ceases one year following the sale. Refunds for unused courses are not provided for in the sales arrangement with the student. However, the Company offers refunds in certain circumstances for which a history has been developed to estimate and reserve such amounts. RESULTS OF OPERATIONS Three and six month periods ended June 30, 2004 and June 30, 2003. Revenues Revenues for the three months ended June 30, 2004 and 2003 were $7,618,093 and $6,992,995, respectively, which represents a 9% increase. Revenues for the six months ended June 30, 2004 were $17,267,483, and $12,572,203, respectively, which represents a 37% increase. The Company's principal source of revenue for the three months ended June 30, 2004 and 2003 consisted of business education and coaching services. Revenues increased substantially in the first quarter 2004 (73% over the first quarter of 2003) as a result of increasing the sales staff and focusing on the offerings that, based upon our accumulated experience, have the higher sales rate among our targeted customer base. The slow down in sales during the second quarter 2004 resulted from operations being hampered by the continued negotiations between the former principals of EPMG and the Company and the efforts to split the Utah operations of our EPMG subsidiary. We record revenues for multimedia education materials (product sales) upon delivery of the material to our students. We record revenues for coaching sessions rendered and we defer revenue for coaching sessions that are paid for but have not yet been rendered. Our total services revenue deferral as of June 14 30, 2004 was $3,150,600 compared to $4,461,883 as of December 31, 2003. These deferred revenues are partially offset by lead splits and sales commissions paid when funds are received. Our deferral as of June 30, 2004 was less than the amount deferred as of December 31, 2003 as the number of open coaching sessions decreased. Substantially all of our revenues through June 30, 2004 were derived from our EPMG subsidiary. On September 26, 2003, legal counsel representing the former principals of EPMG, who are currently employees of our EPMG subsidiary, notified us with an allegation that they were entitled to rescind the 2001 acquisition of EPMG. The notification alleged that the former principals were defrauded in connection with our acquisition of EPMG, Inc. and that they would seek litigation to effect a rescission of the 2001 purchase. On July 2, 2004, the Company entered into a Settlement Agreement with the former principals of EPMG pursuant to which the parties agreed to settle all disputes between them. Under the terms of the Settlement Agreement, the former principals have surrendered to the Company all of their shares of capital stock of the Company, comprising 6,784,762 shares of common stock, 1,200,500 shares of Series A Preferred Stock, and 80,000 shares of Series B Preferred Stock, in exchange for certain assets of EPMG. These assets include EPMG's rights under certain credit card processing contracts (including receivables relating to reserves under those contracts in the amount of approximately $1,000,000), substantially all of the tangible fixed assets of EPMG's Utah facility, and certain intangible assets of EPMG, such as specified website domain names, software, and customer lead data. (See Form 8-K report filed on July 19, 2004.) Cost of Sales and Margins Cost of sales for the three months ended June 30, 2004 and 2003 were $3,590,016 and $3,515,533, respectively, representing gross margins of 52.9% and 49.7%, respectively. For the six months ended June 30, 2004 and 2003, cost of sales were $8,101,675 and $6,062,425 respectively, representing gross margins of 53.1% and 51.8%, respectively. Cost of sales include (i) the cost of the multimedia educational materials that we ship to our students, (ii) the wages paid to our coaches and (iii) the commissions that we pay to lead sources. Our increased gross profit margins reflect slight decreases in our lead split and fulfillment costs. Selling Expenses Selling expenses for the three months ended June 30, 2004 and 2003 were $2,193,531 (28.8% of revenue) and $1,611,699 (23.0% of revenue), respectively. Selling expenses for the six months ended June 30, 2004 and 2003 were $4,078,989 (23.6% of revenue) and $3,066,817 (24.4% of revenue), respectively. Selling expenses consisted primarily of commissions paid to sales associates as well as marketing and advertising expenses associated with key products and services. The overall increase in selling expenses is attributed to the increase in sales of products and services. General and Administrative Expenses General and administrative expenses for the three months ended June 30, 2004 and 2003 were $1,601,454 (21.0% of revenue) and $1,763,167 (25.2% of revenue), respectively. General and administrative expenses for the six months ended June 30, 2004 and 2003 were $4,525,179 (26.2% of revenue) and $3,504,324 (27.9% of revenue), respectively. General and administration expenses consisted primarily of salaries and wages, professional fees, rent, travel expenses, payroll taxes, 15 telephone expenses and other general and administrative expenses necessary to support the operations of the Company. The decrease in general and administrative expenses was attributable to lower legal fees. Other Income (Expense) Other income, net of other expenses for the three months ended June 30, 2004 and 2003 was $46,529 and $(37,464), respectively. For the six months ended June 30, 2004 and 2003, other income, net of other expenses was $112,443 and $24,035, respectively. The increase is principally attributable to the increase in interest on our financing notes receivable of $64,070 offset by the recognition of $45,088 in interest and penalties on late tax payments, for the six months ended June 30, 2004. Income Taxes Our income tax provision amounted to $266,262 for the period ended June 30, 2004 and a benefit of $70,000 for the period ended June 30, 2003. For purposes of interim financial reporting, the Company projects its effective income tax rate for the entire fiscal year (39.5% for the six month period ended June 30, 2004), taking into account all taxing jurisdictions, and applies such rate to interim pre-tax income. Changes in the projected effective tax rate in future quarters, if any, are accounted for prospectively in the period of change. Our income tax for the quarterly period ended June 30, 2003 was different than the statutory rates applicable to our taxing jurisdictions because of valuation allowances and non-deductible permanent differences (primarily income tax penalties). Net Income Our net income for the three and six months ended June 30, 2004 amounted to $169,171 and $407,821, respectively, compared to $10,132 and $32,672 for the three and six months ended June 30, 2003. These increases were attributable to the matters discussed above. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2004 we had current assets of $8,420,593, which represents an increase of $1,851,964 over current assets as of December 31, 2003. Much of the increase is attributable to an increase in cash. At June 30, 2004 we had cash on hand of $4,959,208, which represents an increase of $1,068,279 over the balances as of December 31, 2003. Other material increases in current assets resulted from notes receivable and deferred income taxes. Notes receivable of $1,315,964, as of June 30, 2004 is net of our estimated reserve of $359,018 for bad debts. Gross notes receivable were $1,602,982 as of June 30, 2004 compared to $1,507,358 as of June 30, 2003. At June 30, 2004 we had current liabilities of $7,582,455, which represents an increase of $1,493,542 over current liabilities as of December 31, 2003. Our current liabilities include significant amounts associated with deferred revenue, commissions and reserves for returns. These accounts require complex subjective estimates. Our net deferred revenue of $1,305,437, which will not require cash outlays, decreased $551,810 from the balance as of December 31, 2003. This decrease is attributable to our increase in our number of coaches and associated coaching sessions completed. We are liable for commissions to our sales force and to lead providers. These commissions payable, included as a component of accounts payable and accrued liabilities, are $1,746,892 as of June 30, 2004. As June 30, 2004 our working capital increased to $838,139 from $479,176 as of December 31, 2003. We believe that our operating activities in 2004 will be sufficient to fulfill our obligations as they become due in the normal course of business. 16 We have no material commitments for capital expenditures. Capital expenditures in the quarter and six months ended June 30, 2004 were $119,934 and $189,766, respectively. We may require additional facilities and support equipment if our growth rate continues at the current rate. We have not filed our 2003 and 2002 Federal and State of Utah income tax returns. Combined current income taxes payable for these periods are currently estimated to be $224,306 and $513,936, respectively. Interest and penalties have been recorded in the amount of approximately $262,446. The Company has engaged an accountant who is in the process of preparing its past due returns. We currently do not have a stock option or stock purchase plan. We also currently do not have any employee benefit plans that would require the use of our securities. EPMG TRANSACTION AND POSSIBLE FUTURE EFFECTS On September 26, 2003, counsel representing the former principals of EPMG, Inc., who were then employees of EPMG, Inc., notified the Company that they were allegedly entitled to rescind the Company's 2001 acquisition of EPMG, Inc., which was accomplished in a stock-for-stock exchange, accounted for as a purchase business combination. The notification alleged that the former principals were defrauded in connection with the Company's acquisition of EPMG, Inc. and that they would seek litigation to effect a rescission of the 2001 purchase. On July 2, 2004, the Company entered into a Settlement Agreement with the former principals pursuant to which the parties agreed to settle all disputes between them. Under the terms of the Settlement Agreement, the former principals have surrendered to the Company all of their shares of capital stock of the Company, comprising 6,784,762 shares of common stock, 1,200,500 shares of Series A Preferred Stock, and 80,000 shares of Series B Preferred Stock, in exchange for certain assets of EPMG. These assets include EPMG's rights under certain credit card processing contracts (including receivables relating to reserves under those contracts in the amount of approximately $1,000,000), substantially all of the tangible fixed assets of EPMG's Utah facility, and certain intangible assets of EPMG, such as specified website domain names, software, and customer lead data. (See Form 8-K report filed on July 19, 2004.) OFF BALANCE-SHEET ARRANGEMENTS The Company has no material off-balance sheet arrangements as of June 30, 2004. 17 ITEM 3. CONTROLS AND PROCEDURES (a) As of June 30, 2004, the Chief Executive Officer and Chief Financial Officer of the Company, with the participation of the Company's management, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the date of the evaluation, the Company's disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report. (b) There were no changes in the Company's internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, subsequent to the date of the evaluation. 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS SEC Investigation On June 24, 2003 the Securities and Exchange Commission ("SEC") issued a formal order of investigation with respect to the Company, authorizing the investigation of certain securities matters relating to the Company. The SEC staff has taken the testimony of certain officers of the Company and has informed the Company that it intends to take additional testimony. The SEC staff has also issued additional requests for the voluntary production of documents. Prior to the issuance of the order, the Company had voluntarily provided documents and information to the SEC staff in response to informal, non-public inquiries by the staff. The Company intends to fully cooperate with the SEC in its investigation. Garn & Willis Settlement On September 26, 2003, counsel representing the former principals of EPMG, Inc., who were then employees of EPMG, Inc., notified the Company that they were allegedly entitled to rescind the Company's 2001 acquisition of EPMG, Inc., which was accomplished in a stock-for-stock exchange. The notification alleged that the former principals were defrauded in connection with the Company's acquisition of EPMG, Inc. and that they would seek litigation to effect a rescission of the 2001 purchase. On July 2, 2004, the Company entered into a Settlement Agreement with the former principals pursuant to which the parties agreed to settle all disputes between them. Under the terms of the Settlement Agreement, the former principals have surrendered to the Company all of their shares of capital stock of the Company, comprising 6,784,762 shares of common stock, 1,200,500 shares of Series A Preferred Stock, and 80,000 shares of Series B Preferred Stock, in exchange for certain assets of EPMG. These assets include EPMG's rights under certain credit card processing contracts (including receivables relating to reserves under those contracts in the amount of approximately $1,000,000), substantially all of the tangible fixed assets of EPMG's Utah facility, and certain intangible assets of EPMG, such as specified website domain names, software, and customer lead data. (See Form 8-K report filed on July 19, 2004.) 19 ITEM 3. DEFAULTS UPON SENIOR SECURITIES (b) There has not been any material arrearage in the payment of dividends on any preferred stock. The Company has withheld a dividend payment of 137,942 shares of common stock payable on Series A Preferred Stock to two stockholders in connection with a dispute with such stockholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits The exhibits required by this item are listed in the Index to Exhibits set forth at the end of this Form 10-QSB. b. Reports on Form 8-K During the period covered by this report, the Company did not file any reports on Form 8-K. 20 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INNOVATIVE SOFTWARE TECHNOLOGIES, INC. Date: August 23, 2004 /s/ Peter M. Peterson -------------------------------------- Peter M. Peterson Chief Executive Officer /s/ Christopher J. Floyd -------------------------------------- Christopher J. Floyd Chief Financial Officer 21 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------- 10.1 Employment Contract for Peter M. Peterson, Chief Executive Officer of Innovative Software Technologies, Inc. 10.2 Employment Contract for Christopher J. Floyd, Chief Financial Officer, Vice President Finance, and Corporate Secretary of Innovative Software Technologies, Inc. 31.1 Certification of Chief Executive Officer of Innovative Software Technologies, Inc. pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer of Innovative Software Technologies, Inc. pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer of Innovative Software Technologies, Inc. pursuant to 18 U.S.C. 1350. 32.2 Certification of Chief Financial Officer of Innovative Software Technologies, Inc. pursuant to 18 U.S.C. 1350. 22 EX-10.1 2 v06120_ex10-1.txt EXHIBIT 10.1 Exhibit 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into effective as of August 1, 2004 (the "Effective Date"), by and between Innovative Software Technologies, Inc., a California corporation (the "Employer"), and Peter M. Peterson, an individual resident in Florida (the "Executive"). BACKGROUND: The Company desires to employ the Executive as the Company's Chief Executive Officer, and the Executive desires to accept such employment, on the terms and subject to the conditions set forth in this Agreement. AGREEMENT The parties, intending to be legally bound, agree as follows: 1. EMPLOYMENT TERMS AND DUTIES 1.1 EMPLOYMENT. The Employer hereby employs the Executive, and the Executive hereby accepts employment by the Employer, upon the terms and conditions set forth in this Agreement. 1.2 TERM. Subject to the provisions of Section 5, the term of the Executive's employment under this Agreement will be three years, beginning on the Effective Date and ending on the third anniversary of the Effective Date. Beginning on the Termination Date, the term of employment shall automatically renew on a year-to-year basis (each such year being referred to as a "Renewal Period") unless and until terminated earlier pursuant to Section 6 hereof or until terminated by the Employer or the Executive by written notice at least 90 days before the commencement of such Renewal Period. 1.3 DUTIES. The Executive will have such duties as are assigned or delegated to the Executive by the Board of Directors, and will initially serve as Chief Executive Officer of the Employer. The Executive will devote his time, attention, skill, and energy to the business of the Employer on a full-time basis, will use his reasonable best efforts to promote the success of the Employer's business, and will cooperate fully with the Board of Directors in the advancement of the best interests of the Employer. Nothing in this Section 1.3, however, will prevent the Executive from engaging in additional business activities, personal investments and community affairs that are not inconsistent with the Executive's duties under this Agreement. If the Executive is elected as a director of the Employer or as a director or officer of any of its affiliates, the Executive will fulfill his duties as such director or officer without additional compensation. 2. COMPENSATION 2.1 BASIC COMPENSATION. (a) Salary. The Executive will be paid an annual salary of $180,000, subject to adjustment as provided below (the "Salary"), which will be payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. The Salary will be reviewed by the Board of Directors not less frequently than annually, and may be adjusted upward or downward in the sole discretion of the Board of Directors, but in no event will the Salary be less than $150,000 per year. (b) Signing Bonus. The Executive will be paid a Signing Bonus of $50,000 in cash within ten days of the execution of this Agreement. 1 Initials _________ _________ Executive Employer (c) Equity Grant. In consideration of Executive entering into this Agreement, the Company shall issue to Employee 3,500,000 shares of its common stock. Such shares will be issued in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended, and such shares shall be, upon issuance, validly issued, fully paid, and non-assessable. The certificates representing said shares shall bear the Company's standard restrictive legend. (d) Benefits. The Executive will, during the Employment Period, be permitted to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical or health plan, and other employee benefit plans of the Employer that may be in effect from time to time, to the extent the Executive is eligible under the terms of those plans (collectively, the "Benefits"). 2.2 INCENTIVE COMPENSATION. As additional compensation (the "Incentive Compensation") for the services to be rendered by the Executive pursuant to this Agreement, the Employer will pay the Executive with respect to each Fiscal Year during the Employment Period according to the Company's Executive Performance Plan to be approved by the Board of Directors as amended from time to time. 2.3 WITHHOLDING. All compensation and amounts payable to Executive pursuant to this Agreement other than the Signing Bonus shall be subject to all applicable taxes and payroll deductions. 3. FACILITIES AND EXPENSES 3.1 GENERAL. The Employer will furnish the Executive office space, equipment, supplies, and such other facilities and personnel as the Employer deems necessary or appropriate for the performance of the Executive's duties under this Agreement. The Employer will pay the Executive's dues in such professional societies and organizations as the Chief Executive Officer deems appropriate, and will pay on behalf of the Executive (or reimburse the Executive for) reasonable expenses incurred by the Executive at the request of, or on behalf of, the Employer in the performance of the Executive's duties pursuant to this Agreement, and in accordance with the Employer's employment policies, including reasonable expenses incurred by the Executive in attending conventions, seminars, and other business meetings, in appropriate business entertainment activities, and for promotional expenses. The Executive must file expense reports with respect to such expenses in accordance with the Employer's policies. 3.2 AUTOMOBILE. The Employer will provide the Executive $800 per month as an automobile allowance. The Executive will own or lease his automobile directly and will maintain and insure it at his own expense, for his business use in connection with his employment under this Agreement 4. VACATIONS AND HOLIDAYS The Executive will be entitled to four weeks of paid vacation each Fiscal Year in accordance with the vacation policies of the Employer in effect for its executive officers as modified from time to time. Vacation must be taken by the Executive at such time or times as approved by the Chairman of the Board or Chief Executive Officer. The Executive will also be entitled to the paid holidays and other paid leave set forth in the Employer's policies. Vacation days and holidays during any Fiscal Year that are not used by the Executive during such Fiscal Year may not be used in any subsequent Fiscal Year. 2 Initials _________ _________ Executive Employer 5. TERMINATION 5.1 EVENTS OF TERMINATION. The Employment Period, the Executive's Basic Compensation and Incentive Compensation, and any and all other rights of the Executive under this Agreement or otherwise as an employee of the Employer will terminate (except as otherwise provided in this Section 5): (a) upon the death of the Executive; (b) upon the disability of the Executive (as defined in Section 5.2) immediately upon notice from either party to the other; (c) for cause (as defined in Section 5.3), immediately upon notice from the Employer to the Executive, or at such later time as such notice may specify; or (d) for good reason (as defined in Section 5.4) upon not less than thirty days' prior notice from the Executive to the Employer. In addition to the other termination provisions of this Agreement Employer may terminate the Employee's employment without Cause at any time. 5.2 DEFINITION OF DISABILITY. For purposes of Section 5.1, the Executive will be deemed to have a "disability" if, for physical or mental reasons, the Executive is unable to perform the Executive's duties under this Agreement for 120 consecutive days, or 180 days during any twelve-month period, as determined in accordance with this Section 5.2. The disability of the Executive will be determined by a medical doctor selected by written agreement of the Employer and the Executive upon the request of either party by notice to the other. If the Employer and the Executive cannot agree on the selection of a medical doctor, each of them will select a medical doctor and the two medical doctors will select a third medical doctor who will determine whether the Executive has a disability. The determination of the medical doctor selected under this Section 5.2 will be binding on both parties. The Executive must submit to a reasonable number of examinations by the medical doctor making the determination of disability under this Section 5.2, and the Executive hereby authorizes the disclosure and release to the Employer of such determination and all supporting medical records. If the Executive is not legally competent, the Executive's legal guardian or duly authorized attorney-in-fact will act in the Executive's stead, under this Section 5.2, for the purposes of submitting the Executive to the examinations, and providing the authorization of disclosure, required under this Section 5.2. 5.3 DEFINITION OF "FOR CAUSE." For purposes of Section 5.1, the phrase "for cause" means: (a) the Executive's material breach of this Agreement if Executive has been given a reasonable opportunity to comply with such policy or cure his failure to comply (which reasonable opportunity must be granted during the thirty-day period preceding termination of this Agreement; (b) the Executive's failure to adhere to any written Employer policy if the Executive has been given a reasonable opportunity to comply with such policy or cure his failure to comply (which reasonable opportunity must be granted during the fifteen-day period preceding termination of this Agreement); (c) the appropriation (or attempted appropriation) of a material business opportunity of the Employer, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Employer; (d) the misappropriation (or attempted misappropriation) of any of the Employer's funds or property; or (e) the conviction of, (or its procedural equivalent), or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment. Termination for cause shall be effected only through a vote of the majority of the board of directors. 5.4 DEFINITION OF "FOR GOOD REASON." For purposes of Section 5.1, the phrase "for good reason" means any of the following: (a) The Employer's material breach of this Agreement; (b) the assignment of the Executive without his consent to a position, responsibilities, or duties of a materially lesser status or degree of responsibility than his position, responsibilities, or duties at the Effective Date; or (c) the relocation of the Employer's principal executive 3 Initials _________ _________ Executive Employer offices outside the metropolitan Tampa Bay, Florida area; (d) the requirement by the Employer that the Executive be based anywhere other than the Employer's principal executive offices, in either case without the Executive's consent, or (e) a Change in Control of the Employer. 5.5 TERMINATION PAY. Effective upon the termination of this Agreement, the Employer will be obligated to pay the Executive (or, in the event of his death, his designated beneficiary as defined below) only such compensation as is provided in this Section 5.5. For purposes of this Section 5.5, the Executive's designated beneficiary will be such individual beneficiary or trust, located at such address, as the Executive may designate by notice to the Employer from time to time or, if the Executive fails to give notice to the Employer of such a beneficiary, the Executive's estate. Notwithstanding the preceding sentence, the Employer will have no duty, in any circumstances, to attempt to open an estate on behalf of the Executive, to determine whether any beneficiary designated by the Executive is alive or to ascertain the address of any such beneficiary, to determine the existence of any trust, to determine whether any person or entity purporting to act as the Executive's personal representative (or the trustee of a trust established by the Executive) is duly authorized to act in that capacity, or to locate or attempt to locate any beneficiary, personal representative, or trustee. (a) Termination by the Executive for Good Reason or by the Employer without Cause. If the Executive terminates this Agreement for good reason, or if the Employer terminates the Employee without Cause, the Employer will pay the Executive (i) the Executive's Salary for the remainder, if any, of the calendar month in which such termination is effective and for twelve consecutive calendar months thereafter, and (ii) that portion of the Executive's Incentive Compensation, if any, for the Fiscal Year during which the termination is effective, prorated through the date of termination. (b) Termination by the Employer for Cause. If the Employer terminates this Agreement for cause, the Executive will be entitled to receive his Salary only through the date such termination is effective, but will not be entitled to any Incentive Compensation for the Fiscal Year during which such termination occurs or any subsequent Fiscal Year. (c) Termination upon Disability. If this Agreement is terminated by either party as a result of the Executive's disability, as determined under Section 5.2, the Employer will pay the Executive his Salary through the remainder of the calendar month during which such termination is effective and for the lesser of (i) six consecutive months thereafter, or (ii) the period until disability insurance benefits commence under the disability insurance coverage furnished by the Employer to the Executive. (d) Termination upon Death. If this Agreement is terminated because of the Executive's death, the Executive will be entitled to receive his Salary through the end of the calendar month in which his death occurs, and that part of the Executive's Incentive Compensation, if any, for the Fiscal Year during which his death occurs, prorated through the end of the calendar month during which his death occurs. (e) Benefits. The Executive's accrual of, or participation in plans providing for, the Benefits will cease at the effective date of the termination of this Agreement, and the Executive will be entitled to accrued Benefits pursuant to such plans only as provided in such plans. The Executive will not receive, as part of his termination pay pursuant to this Section 5, any payment or other compensation for any vacation, holiday, sick leave, or other leave unused on the date the notice of termination is given under this Agreement. 6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS 6.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that (a) during the Employment Period and as a part of his employment, the Executive will be afforded access to Confidential Information; (b) public disclosure of such Confidential Information could have an adverse effect on the Employer and its business; (c) because 4 Initials _________ _________ Executive Employer the Executive possesses substantial technical expertise and skill with respect to the Employer's business, the Employer desires to obtain exclusive ownership of each Employee Invention, and the Employer will be at a substantial competitive disadvantage if it fails to acquire exclusive ownership of each Employee Invention; (d) the Employer has required that the Executive make the covenants in this Section 6 as a condition to employment; and (e) the provisions of this Section 6 are reasonable and necessary to prevent the improper use or disclosure of Confidential Information and to provide the Employer with exclusive ownership of all Employee Inventions. 6.2 AGREEMENTS OF THE EXECUTIVE. In consideration of the compensation and benefits to be paid or provided to the Executive by the Employer under this Agreement, the Executive covenants as follows: (a) Confidentiality. (i) During and at all times following the Employment Period, the Executive will hold in confidence the Confidential Information and will not disclose it to any person except with the specific prior written consent of the Employer or except as otherwise expressly permitted by the terms of this Agreement. (ii) Any trade secrets of the Employer will be entitled to all of the protections and benefits under applicable state or federal law including trade secret law. If any information that the Employer deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered Confidential Information for purposes of this Agreement. The Executive hereby waives any requirement that the Employer submit proof of the economic value of any trade secret or post a bond or other security. (iii) None of the foregoing obligations and restrictions applies to any part of the Confidential Information that the Executive demonstrates was or became generally available to the public other than as a result of a disclosure by the Executive. (iv) The Executive will not remove from the Employer's premises (except to the extent such removal is for purposes of the performance of the Executive's duties at home or while traveling, or except as otherwise specifically authorized by the Employer) any document, record, notebook, plan, model, component, device, data, or computer software or code, whether embodied in a disk or in any other form (collectively, the "Proprietary Items"). The Executive recognizes that, as between the Employer and the Executive, all of the Proprietary Items, whether or not developed by the Executive, are the exclusive property of the Employer. Upon termination of this Agreement by either party, or upon the request of the Employer during the Employment Period, the Executive will return to the Employer all of the Proprietary Items in the Executive's possession or subject to the Executive's control, and the Executive shall not retain any copies, abstracts, sketches, or other physical or electronic embodiment of any of the Proprietary Items. (b) Employee Inventions. Each Employee Invention will belong exclusively to the Employer. The Executive acknowledges that all of the Executive's writing, works of authorship, and other Employee Inventions are works made for hire and the property of the Employer, including any copyrights, patents, semiconductor mask protection, or other intellectual property rights pertaining thereto. If it is determined that any such works are not works made for hire, the Executive hereby assigns to the Employer all of the Executive's right, title, and interest, including all rights of copyright, patent, semiconductor mask protection, and other intellectual property rights, to or in such Employee Inventions. The Executive covenants that he will promptly: (i) disclose to the Employer in writing any Employee Invention; 5 Initials _________ _________ Executive Employer (ii) assign to the Employer or to a party designated by the Employer, at the Employer's request and without additional compensation, all of the Executive's right to the Employee Invention for the United States and all foreign jurisdictions; (iii) execute and deliver to the Employer such applications, assignments, and other documents as the Employer may request in order to apply for and obtain patents or other registrations with respect to any Employee Invention in the United States and any foreign jurisdictions; (iv) sign all other papers necessary to carry out the above obligations; and (v) give testimony and render any other assistance but without expense to the Executive in support of the Employer's rights to any Employee Invention. 6.3 DISPUTES OR CONTROVERSIES. The Executive recognizes that should a dispute or controversy arising from or relating to this Agreement be submitted for adjudication to any court, arbitration panel, or other third party, the preservation of the secrecy of Confidential Information may be jeopardized. All pleadings, documents, testimony, and records relating to any such adjudication will be maintained in secrecy and will be available for inspection by the Employer, the Executive, and their respective attorneys and experts, who will agree, in advance and in writing, to receive and maintain all such information in secrecy, except as may be limited by them in writing. 7. NON-COMPETITION AND NON-INTERFERENCE 7.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that: (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character; (b) the Employer's business is national in scope and its products are marketed throughout the United States and Canada; (c) the Employer competes with other businesses that are or could be located in any part of the United States or Canada; (d) the Employer has required that the Executive make the covenants set forth in this Section 7 as a condition to employment by Employer; and (e) the provisions of this Section 7 are reasonable and necessary to protect the Employer's business. 7.2 COVENANTS OF THE EXECUTIVE. In consideration of the acknowledgments by the Executive, and in consideration of the compensation and benefits to be paid or provided to the Executive by the Employer, the Executive covenants that he will not, directly or indirectly: (a) during the Employment Period, except in the course of his employment hereunder, and during the Post-Employment Period, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend the Executive's name or any similar name to, lend Executive's credit to or render services or advice to, any business whose products or activities compete in whole or in part with the products or activities of the Employer (b) whether for the Executive's own account or for the account of any other person, at any time during the Employment Period and the Post-Employment Period, solicit business of the same or similar type being carried on by the Employer, from any person known by the Executive to be a customer of the Employer, whether or not the Executive had personal contact with such person during and by reason of the Executive's employment with the Employer; (c) whether for the Executive's own account or the account of any other person (i) at any time during the Employment Period and the Post-Employment Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is or was an employee of the Employer at any time during the Employment Period or in any manner induce or attempt to induce any 6 Initials _________ _________ Executive Employer employee of the Employer to terminate his employment with the Employer; or (ii) at any time during the Employment Period and for three years thereafter, interfere with the Employer's relationship with any person, including any person who at any time during the Employment Period was an employee, contractor, supplier, or customer of the Employer; or (d) at any time during or after the Employment Period, disparage the Employer or any of its shareholders, directors, officers, employees, or agents. For purposes of this Section 7.2, the term "Post-Employment Period" means the one year period beginning on the date of termination of the Executive's employment with the Employer. If any covenant in this Section 7.2 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against the Executive. The period of time applicable to any covenant in this Section 7.2 will be extended by the duration of any violation by the Executive of such covenant. The Executive will, while the covenant under this Section 7.2 is in effect, give notice to the Employer, within ten days after accepting any other employment, of the identity of the Executive's employer. The Employer may notify such employer that the Executive is bound by this Agreement and, at the Employer's election, furnish such employer with a copy of this Agreement or relevant portions thereof. 8. GENERAL PROVISIONS 8.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. The Executive acknowledges that the injury that would be suffered by the Employer as a result of a breach of the provisions of this Agreement (including any provision of Sections 6 and 7) would be irreparable and that an award of monetary damages to the Employer for such a breach would be an inadequate remedy. Consequently, the Employer will have the right, in addition to any other rights it may have, to obtain injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this Agreement, and the Employer will not be obligated to post bond or other security in seeking such relief. Without limiting the Employer's rights under this Section 8 or any other remedies of the Employer, if the Executive breaches any of the provisions of Section 6 or 7, the Employer will have the right to cease making any payments otherwise due to the Executive under this Agreement. 8.2 COVENANTS OF SECTIONS 6 AND 7 ARE ESSENTIAL AND INDEPENDENT COVENANTS. The covenants by the Executive in Sections 6 and 7 are essential elements of this Agreement, and without the Executive's agreement to comply with such covenants, Employer would not have entered into this Agreement or employed or continued the employment of the Executive. The Employer and the Executive have independently consulted their respective counsel and have been advised in all respects concerning the reasonableness and propriety of such covenants, with specific regard to the nature of the business conducted by the Employer. The Executive's covenants in Sections 6 and 7 are independent covenants and the existence of any claim by the Executive against the Employer under this Agreement or otherwise, or against the Buyer, will not excuse the Executive's breach of any covenant in Section 6 or 7. If the Executive's employment hereunder expires or is terminated, this Agreement will continue in full force and effect as is necessary or appropriate to enforce the covenants and agreements of the Executive in Sections 6 and 7. 8.3 REPRESENTATIONS AND WARRANTIES BY THE EXECUTIVE. The Executive represents and warrants to the Employer that the execution and delivery by the Executive of this Agreement does not, and the performance by the 7 Initials _________ _________ Executive Employer Executive of the Executive's obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (a) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Executive; or (b) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Executive is a party or by which the Executive is or may be bound. 8.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of the Employer hereunder, including its obligation to pay the compensation provided for herein, are contingent upon the Executive's performance of the Executive's obligations hereunder. 8.5 WAIVER. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by either party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 8.6 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which the Employer may merge or consolidate or to which all or substantially all of its assets may be transferred. The duties and covenants of the Executive under this Agreement, being personal, may not be delegated. 8.7 NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nation-ally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Employer: Innovative Software Technologies, Inc. 204 NW Platte Valley Drive Riverside, MO 64152 Attention: D. Shane Hackett, President and CEO Facsimile No.: (816) 587-0683 With a copy to: Foley & Lardner LLP 100 North Tampa Street, Suite 2700 Tampa, FL 33602 Attention: Curt P. Creely, Esq. Facsimile No.: 813.221.4210 If to the Executive: Peter M. Peterson 2402 South Ardson Place Tampa, FL 33629 Facsimile No.: (813) 254-8406 8.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, between 8 Initials _________ _________ Executive Employer the parties hereto with respect to the subject matter hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto. 8.9 GOVERNING LAW. This Agreement will be governed by the laws of the State of Florida without regard to conflicts of laws principles. 8.10 JURISDICTION. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of Florida County of Hillsborough, or, if it has or can acquire jurisdiction, in the United States District Court for the Middle District of Florida, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on either party anywhere in the world. 8.11 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 8.12 SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 8.13 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 8.14 WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above. EMPLOYER: EXECUTIVE: By: /s/ D. Shane Hackett /s/ Peter M. Peterson ---------------------------------- ------------------------------------- D. Shane Hackett, President & CEO Peter M. Peterson 9 Initials _________ _________ Executive Employer EXHIBIT A DEFINITIONS "AGREEMENT"--this Employment Agreement, including this Exhibit A hereto, as amended from time to time. "BASIC COMPENSATION"--Salary and Benefits. "BENEFITS"--as defined in Section 2.1(d). "BOARD OF DIRECTORS"--the board of directors of the Employer. "CHANGE IN CONTROL"--shall be deemed to have occurred upon the happening of any one of the following events: a. any person, entity, or group thereof acting in concert (a "Person") (other than (A) the Employee, or any "affiliate" (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) of any of the foregoing, (B) the Company or any of its subsidiaries, (C) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (D) an underwriter temporarily holding securities pursuant to an offering of such securities or (E) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company) being or becoming the "beneficial owner" (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of securities of the Company which, together with securities previously owned, confer upon such Person the combined voting power, on any matters brought to a vote of shareholders, of 50% or more of the then outstanding shares of voting securities of the Company; or b. the sale, assignment or transfer of assets of the Company or any subsidiary or subsidiaries, in a transaction or series of transactions, if the aggregate consideration received or to be received by the Company or any such subsidiary in connection with such sale, assignment or transfer is greater than fifty percent (50%) of the book value, determined by the Company in accordance with generally accepted accounting principles, of the Company's assets determined on a consolidated basis immediately before such transaction or the first of such transactions; or c. the merger, consolidation, share exchange or reorganization of the Company (or one or more direct or indirect subsidiaries of the Company) as a result of which the holders of all of the shares of capital stock of the Company as a group would receive fifty percent (50%) or less of the combined voting power of the voting securities of the Company or such surviving or resulting entity or any parent thereof immediately after such merger, consolidation, share exchange or reorganization; or d. the adoption of a plan of complete liquidation or the approval of the dissolution of the Company; or e. the commencement (within the meaning of Rule 13e-4 under the Securities Exchange Act of 1934) of a tender or exchange offer which, if successful, would result in a Change of Control of the Company; or f. a determination by the Board of Directors of the Company, in view of the then current circumstances or impending events, that a Change of Control of the Company has occurred or is imminent, which determination shall be made for the specific purpose of triggering the operative provisions of this Agreement. "CONFIDENTIAL INFORMATION"--any and all: a. trade secrets concerning the business and affairs of the Employer, product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market A-1 Initials _________ _________ Executive Employer studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, databases, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information), and any other information, however documented, that is a trade secret within the meaning of the Florida Uniform Trade Secrets Act; and b. information concerning the business and affairs of the Employer (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented except as disclosed by Employer to the public; and c. notes, analysis, compilations, studies, summaries, and other material prepared by or for the Employer containing or based, in whole or in part, on any information included in the foregoing. "DISABILITY"--as defined in Section 5.2. "EFFECTIVE DATE"--the date stated in the first paragraph of the Agreement. "EMPLOYEE INVENTION"--any idea, invention, technique, modification, process, or improvement (whether patentable or not), any industrial design (whether registerable or not), any mask work, however fixed or encoded, that is suitable to be fixed, embedded or programmed in a semiconductor product (whether recordable or not), and any work of authorship (whether or not copyright protection may be obtained for it) created, conceived, or developed by the Executive, either solely or in conjunction with others, during the Employment Period, or a period that includes a portion of the Employment Period, that relates directly to the business then being conducted or proposed to be conducted by the Employer, and any such item created by the Executive, either solely or in conjunction with others, following termination of the Executive's employment with the Employer, that is based upon or uses Confidential Information. "EMPLOYMENT PERIOD"--the term of the Executive's employment under this Agreement. "FISCAL YEAR"--the Employer's fiscal year, as it exists on the Effective Date or as changed from time to time. "FOR CAUSE"--as defined in Section 5.3. "FOR GOOD REASON"--as defined in Section 5.4. "INCENTIVE COMPENSATION"--as defined in Section 2.2. "NONCOMPETITION AGREEMENT"--as defined in Section 7. "PERSON"--any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, or governmental body. "POST-EMPLOYMENT PERIOD"--as defined in Section 7.2. "PROPRIETARY ITEMS"--as defined in Section 6.2(a)(iv). "SALARY"--as defined in Section 2.1(a). A-2 Initials _________ _________ Executive Employer EX-10.2 3 v06120_ex10-2.txt EXHIBIT 10.2 Exhibit 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into effective as of August 1, 2004 (the "Effective Date"), by and between Innovative Software Technologies, Inc., a California corporation (the "Employer"), and Christopher J. Floyd, an individual resident in Florida (the "Executive"). BACKGROUND: The Company desires to employ the Executive as the Company's Chief Financial Officer, Vice President of Finance, and Corporate Secretary, and the Executive desires to accept such employment, on the terms and subject to the conditions set forth in this Agreement. AGREEMENT The parties, intending to be legally bound, agree as follows: 1. EMPLOYMENT TERMS AND DUTIES 1.1 EMPLOYMENT. The Employer hereby employs the Executive, and the Executive hereby accepts employment by the Employer, upon the terms and conditions set forth in this Agreement. 1.2 TERM. Subject to the provisions of Section 5, the term of the Executive's employment under this Agreement will be three years, beginning on the Effective Date and ending on the third anniversary of the Effective Date. Beginning on the Termination Date, the term of employment shall automatically renew on a year-to-year basis (each such year being referred to as a "Renewal Period") unless and until terminated earlier pursuant to Section 6 hereof or until terminated by the Employer or the Executive by written notice at least 90 days before the commencement of such Renewal Period. 1.3 DUTIES. The Executive will have such duties as are assigned or delegated to the Executive by the Board of Directors or Chief Executive Officer, and will initially serve as Chief Financial Officer, Vice President of Finance, and Corporate Secretary of the Employer. The Executive will devote his time, attention, skill, and energy to the business of the Employer on a full-time basis, will use his reasonable best efforts to promote the success of the Employer's business, and will cooperate fully with the Board of Directors in the advancement of the best interests of the Employer. Nothing in this Section 1.3, however, will prevent the Executive from engaging in additional business activities, personal investments and community affairs that are not inconsistent with the Executive's duties under this Agreement. If the Executive is elected as a director of the Employer or as a director or officer of any of its affiliates, the Executive will fulfill his duties as such director or officer without additional compensation. 2. COMPENSATION 2.1 BASIC COMPENSATION. (a) Salary. The Executive will be paid an annual salary of $180,000, subject to adjustment as provided below (the "Salary"), which will be payable in equal periodic installments according to the Employer's customary payroll practices, but no less frequently than monthly. The Salary will be reviewed by the Board of Directors not less frequently than annually, and may be adjusted upward or downward in the sole discretion of the Board of Directors, but in no event will the Salary be less than $150,000 per year. 1 Initials _________ _________ Executive Employer (b) Signing Bonus. The Executive will be paid a Signing Bonus of $50,000 in cash within ten days of the execution of this Agreement. (c) Equity Grant. In consideration of Executive entering into this Agreement, the Company shall issue to Employee 3,500,000 shares of its common stock. Such shares will be issued in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended, and such shares shall be, upon issuance, validly issued, fully paid, and non-assessable. The certificates representing said shares shall bear the Company's standard restrictive legend. (d) Benefits. The Executive will, during the Employment Period, be permitted to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical or health plan, and other employee benefit plans of the Employer that may be in effect from time to time, to the extent the Executive is eligible under the terms of those plans (collectively, the "Benefits"). 2.2 INCENTIVE COMPENSATION. As additional compensation (the "Incentive Compensation") for the services to be rendered by the Executive pursuant to this Agreement, the Employer will pay the Executive with respect to each Fiscal Year during the Employment Period according to the Company's Executive Performance Plan to be approved by the Board of Directors as amended from time to time. 2.3 WITHHOLDING. All compensation and amounts payable to Executive pursuant to this Agreement other than the Signing Bonus shall be subject to all applicable taxes and payroll deductions. 3. FACILITIES AND EXPENSES 3.1 GENERAL. The Employer will furnish the Executive office space, equipment, supplies, and such other facilities and personnel as the Employer deems necessary or appropriate for the performance of the Executive's duties under this Agreement. The Employer will pay the Executive's dues in such professional societies and organizations as the Chief Executive Officer deems appropriate, and will pay on behalf of the Executive (or reimburse the Executive for) reasonable expenses incurred by the Executive at the request of, or on behalf of, the Employer in the performance of the Executive's duties pursuant to this Agreement, and in accordance with the Employer's employment policies, including reasonable expenses incurred by the Executive in attending conventions, seminars, and other business meetings, in appropriate business entertainment activities, and for promotional expenses. The Executive must file expense reports with respect to such expenses in accordance with the Employer's policies. 3.2 AUTOMOBILE. The Employer will provide the Executive $800 per month as an automobile allowance. The Executive will own or lease his automobile directly and will maintain and insure it at his own expense, for his business use in connection with his employment under this Agreement 4. VACATIONS AND HOLIDAYS The Executive will be entitled to four weeks of paid vacation each Fiscal Year in accordance with the vacation policies of the Employer in effect for its executive officers as modified from time to time. Vacation must be taken by the Executive at such time or times as approved by the Chairman of the Board or Chief Executive Officer. The Executive will also be entitled to the paid holidays and other paid leave set forth in the Employer's policies. Vacation days and holidays during any Fiscal Year that are not used by the Executive during such Fiscal Year may not be used in any subsequent Fiscal Year. 2 Initials _________ _________ Executive Employer 5. TERMINATION 5.1 EVENTS OF TERMINATION. The Employment Period, the Executive's Basic Compensation and Incentive Compensation, and any and all other rights of the Executive under this Agreement or otherwise as an employee of the Employer will terminate (except as otherwise provided in this Section 5): (a) upon the death of the Executive; (b) upon the disability of the Executive (as defined in Section 5.2) immediately upon notice from either party to the other; (c) for cause (as defined in Section 5.3), immediately upon notice from the Employer to the Executive, or at such later time as such notice may specify; or (d) for good reason (as defined in Section 5.4) upon not less than thirty days' prior notice from the Executive to the Employer. In addition to the other termination provisions of this Agreement Employer may terminate the Employee's employment without Cause at any time. 5.2 DEFINITION OF DISABILITY. For purposes of Section 5.1, the Executive will be deemed to have a "disability" if, for physical or mental reasons, the Executive is unable to perform the Executive's duties under this Agreement for 120 consecutive days, or 180 days during any twelve-month period, as determined in accordance with this Section 5.2. The disability of the Executive will be determined by a medical doctor selected by written agreement of the Employer and the Executive upon the request of either party by notice to the other. If the Employer and the Executive cannot agree on the selection of a medical doctor, each of them will select a medical doctor and the two medical doctors will select a third medical doctor who will determine whether the Executive has a disability. The determination of the medical doctor selected under this Section 5.2 will be binding on both parties. The Executive must submit to a reasonable number of examinations by the medical doctor making the determination of disability under this Section 5.2, and the Executive hereby authorizes the disclosure and release to the Employer of such determination and all supporting medical records. If the Executive is not legally competent, the Executive's legal guardian or duly authorized attorney-in-fact will act in the Executive's stead, under this Section 5.2, for the purposes of submitting the Executive to the examinations, and providing the authorization of disclosure, required under this Section 5.2. 5.3 DEFINITION OF "FOR CAUSE." For purposes of Section 5.1, the phrase "for cause" means: (a) the Executive's material breach of this Agreement if Executive has been given a reasonable opportunity to comply with such policy or cure his failure to comply (which reasonable opportunity must be granted during the thirty-day period preceding termination of this Agreement; (b) the Executive's failure to adhere to any written Employer policy if the Executive has been given a reasonable opportunity to comply with such policy or cure his failure to comply (which reasonable opportunity must be granted during the fifteen-day period preceding termination of this Agreement); (c) the appropriation (or attempted appropriation) of a material business opportunity of the Employer, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Employer; (d) the misappropriation (or attempted misappropriation) of any of the Employer's funds or property; or (e) the conviction of, (or its procedural equivalent), or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment. Termination for cause shall be effected only through a vote of the majority of the board of directors. 5.4 DEFINITION OF "FOR GOOD REASON." For purposes of Section 5.1, the phrase "for good reason" means any of the following: (a) The Employer's material breach of this Agreement; (b) the assignment of the Executive without his consent to a position, responsibilities, or duties of a materially lesser status or degree of responsibility than his position, responsibilities, or duties at the Effective Date; or (c) the relocation of the Employer's principal executive 3 Initials _________ _________ Executive Employer offices outside the metropolitan Tampa Bay, Florida area; (d) the requirement by the Employer that the Executive be based anywhere other than the Employer's principal executive offices, in either case without the Executive's consent, or (e) a Change in Control of the Employer. 5.5 TERMINATION PAY. Effective upon the termination of this Agreement, the Employer will be obligated to pay the Executive (or, in the event of his death, his designated beneficiary as defined below) only such compensation as is provided in this Section 5.5. For purposes of this Section 5.5, the Executive's designated beneficiary will be such individual beneficiary or trust, located at such address, as the Executive may designate by notice to the Employer from time to time or, if the Executive fails to give notice to the Employer of such a beneficiary, the Executive's estate. Notwithstanding the preceding sentence, the Employer will have no duty, in any circumstances, to attempt to open an estate on behalf of the Executive, to determine whether any beneficiary designated by the Executive is alive or to ascertain the address of any such beneficiary, to determine the existence of any trust, to determine whether any person or entity purporting to act as the Executive's personal representative (or the trustee of a trust established by the Executive) is duly authorized to act in that capacity, or to locate or attempt to locate any beneficiary, personal representative, or trustee. (a) Termination by the Executive for Good Reason or by the Employer without Cause. If the Executive terminates this Agreement for good reason, or if the Employer terminates the Employee without Cause, the Employer will pay the Executive (i) the Executive's Salary for the remainder, if any, of the calendar month in which such termination is effective and for twelve consecutive calendar months thereafter, and (ii) that portion of the Executive's Incentive Compensation, if any, for the Fiscal Year during which the termination is effective, prorated through the date of termination. (b) Termination by the Employer for Cause. If the Employer terminates this Agreement for cause, the Executive will be entitled to receive his Salary only through the date such termination is effective, but will not be entitled to any Incentive Compensation for the Fiscal Year during which such termination occurs or any subsequent Fiscal Year. (c) Termination upon Disability. If this Agreement is terminated by either party as a result of the Executive's disability, as determined under Section 5.2, the Employer will pay the Executive his Salary through the remainder of the calendar month during which such termination is effective and for the lesser of (i) six consecutive months thereafter, or (ii) the period until disability insurance benefits commence under the disability insurance coverage furnished by the Employer to the Executive. (d) Termination upon Death. If this Agreement is terminated because of the Executive's death, the Executive will be entitled to receive his Salary through the end of the calendar month in which his death occurs, and that part of the Executive's Incentive Compensation, if any, for the Fiscal Year during which his death occurs, prorated through the end of the calendar month during which his death occurs. (e) Benefits. The Executive's accrual of, or participation in plans providing for, the Benefits will cease at the effective date of the termination of this Agreement, and the Executive will be entitled to accrued Benefits pursuant to such plans only as provided in such plans. The Executive will not receive, as part of his termination pay pursuant to this Section 5, any payment or other compensation for any vacation, holiday, sick leave, or other leave unused on the date the notice of termination is given under this Agreement. 6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS 6.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that (a) during the Employment Period and as a part of his employment, the Executive will be afforded access to Confidential Information; (b) public disclosure of such Confidential Information could have an adverse effect on the Employer and its business; (c) because 4 Initials _________ _________ Executive Employer the Executive possesses substantial technical expertise and skill with respect to the Employer's business, the Employer desires to obtain exclusive ownership of each Employee Invention, and the Employer will be at a substantial competitive disadvantage if it fails to acquire exclusive ownership of each Employee Invention; (d) the Employer has required that the Executive make the covenants in this Section 6 as a condition to employment; and (e) the provisions of this Section 6 are reasonable and necessary to prevent the improper use or disclosure of Confidential Information and to provide the Employer with exclusive ownership of all Employee Inventions. 6.2 AGREEMENTS OF THE EXECUTIVE. In consideration of the compensation and benefits to be paid or provided to the Executive by the Employer under this Agreement, the Executive covenants as follows: (a) Confidentiality. (i) During and at all times following the Employment Period, the Executive will hold in confidence the Confidential Information and will not disclose it to any person except with the specific prior written consent of the Employer or except as otherwise expressly permitted by the terms of this Agreement. (ii) Any trade secrets of the Employer will be entitled to all of the protections and benefits under applicable state or federal law including trade secret law. If any information that the Employer deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Agreement, such information will, nevertheless, be considered Confidential Information for purposes of this Agreement. The Executive hereby waives any requirement that the Employer submit proof of the economic value of any trade secret or post a bond or other security. (iii) None of the foregoing obligations and restrictions applies to any part of the Confidential Information that the Executive demonstrates was or became generally available to the public other than as a result of a disclosure by the Executive. (iv) The Executive will not remove from the Employer's premises (except to the extent such removal is for purposes of the performance of the Executive's duties at home or while traveling, or except as otherwise specifically authorized by the Employer) any document, record, notebook, plan, model, component, device, data, or computer software or code, whether embodied in a disk or in any other form (collectively, the "Proprietary Items"). The Executive recognizes that, as between the Employer and the Executive, all of the Proprietary Items, whether or not developed by the Executive, are the exclusive property of the Employer. Upon termination of this Agreement by either party, or upon the request of the Employer during the Employment Period, the Executive will return to the Employer all of the Proprietary Items in the Executive's possession or subject to the Executive's control, and the Executive shall not retain any copies, abstracts, sketches, or other physical or electronic embodiment of any of the Proprietary Items. (b) Employee Inventions. Each Employee Invention will belong exclusively to the Employer. The Executive acknowledges that all of the Executive's writing, works of authorship, and other Employee Inventions are works made for hire and the property of the Employer, including any copyrights, patents, semiconductor mask protection, or other intellectual property rights pertaining thereto. If it is determined that any such works are not works made for hire, the Executive hereby assigns to the Employer all of the Executive's right, title, and interest, including all rights of copyright, patent, semiconductor mask protection, and other intellectual property rights, to or in such Employee Inventions. The Executive covenants that he will promptly: (i) disclose to the Employer in writing any Employee Invention; 5 Initials _________ _________ Executive Employer (ii) assign to the Employer or to a party designated by the Employer, at the Employer's request and without additional compensation, all of the Executive's right to the Employee Invention for the United States and all foreign jurisdictions; (iii) execute and deliver to the Employer such applications, assignments, and other documents as the Employer may request in order to apply for and obtain patents or other registrations with respect to any Employee Invention in the United States and any foreign jurisdictions; (iv) sign all other papers necessary to carry out the above obligations; and (v) give testimony and render any other assistance but without expense to the Executive in support of the Employer's rights to any Employee Invention. 6.3 DISPUTES OR CONTROVERSIES. The Executive recognizes that should a dispute or controversy arising from or relating to this Agreement be submitted for adjudication to any court, arbitration panel, or other third party, the preservation of the secrecy of Confidential Information may be jeopardized. All pleadings, documents, testimony, and records relating to any such adjudication will be maintained in secrecy and will be available for inspection by the Employer, the Executive, and their respective attorneys and experts, who will agree, in advance and in writing, to receive and maintain all such information in secrecy, except as may be limited by them in writing. 7. NON-COMPETITION AND NON-INTERFERENCE 7.1 ACKNOWLEDGMENTS BY THE EXECUTIVE. The Executive acknowledges that: (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary, and intellectual character; (b) the Employer's business is national in scope and its products are marketed throughout the United States and Canada; (c) the Employer competes with other businesses that are or could be located in any part of the United States or Canada; (d) the Employer has required that the Executive make the covenants set forth in this Section 7 as a condition to employment by Employer; and (e) the provisions of this Section 7 are reasonable and necessary to protect the Employer's business. 7.2 COVENANTS OF THE EXECUTIVE. In consideration of the acknowledgments by the Executive, and in consideration of the compensation and benefits to be paid or provided to the Executive by the Employer, the Executive covenants that he will not, directly or indirectly: (a) during the Employment Period, except in the course of his employment hereunder, and during the Post-Employment Period, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend the Executive's name or any similar name to, lend Executive's credit to or render services or advice to, any business whose products or activities compete in whole or in part with the products or activities of the Employer (b) whether for the Executive's own account or for the account of any other person, at any time during the Employment Period and the Post-Employment Period, solicit business of the same or similar type being carried on by the Employer, from any person known by the Executive to be a customer of the Employer, whether or not the Executive had personal contact with such person during and by reason of the Executive's employment with the Employer; (c) whether for the Executive's own account or the account of any other person (i) at any time during the Employment Period and the Post-Employment Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any person who is or was an employee of the Employer at any time during the Employment Period or in any manner induce or attempt to induce any 6 Initials _________ _________ Executive Employer employee of the Employer to terminate his employment with the Employer; or (ii) at any time during the Employment Period and for three years thereafter, interfere with the Employer's relationship with any person, including any person who at any time during the Employment Period was an employee, contractor, supplier, or customer of the Employer; or (d) at any time during or after the Employment Period, disparage the Employer or any of its shareholders, directors, officers, employees, or agents. For purposes of this Section 7.2, the term "Post-Employment Period" means the one year period beginning on the date of termination of the Executive's employment with the Employer. If any covenant in this Section 7.2 is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against the Executive. The period of time applicable to any covenant in this Section 7.2 will be extended by the duration of any violation by the Executive of such covenant. The Executive will, while the covenant under this Section 7.2 is in effect, give notice to the Employer, within ten days after accepting any other employment, of the identity of the Executive's employer. The Employer may notify such employer that the Executive is bound by this Agreement and, at the Employer's election, furnish such employer with a copy of this Agreement or relevant portions thereof. 8. GENERAL PROVISIONS 8.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. The Executive acknowledges that the injury that would be suffered by the Employer as a result of a breach of the provisions of this Agreement (including any provision of Sections 6 and 7) would be irreparable and that an award of monetary damages to the Employer for such a breach would be an inadequate remedy. Consequently, the Employer will have the right, in addition to any other rights it may have, to obtain injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this Agreement, and the Employer will not be obligated to post bond or other security in seeking such relief. Without limiting the Employer's rights under this Section 8 or any other remedies of the Employer, if the Executive breaches any of the provisions of Section 6 or 7, the Employer will have the right to cease making any payments otherwise due to the Executive under this Agreement. 8.2 COVENANTS OF SECTIONS 6 AND 7 ARE ESSENTIAL AND INDEPENDENT COVENANTS. The covenants by the Executive in Sections 6 and 7 are essential elements of this Agreement, and without the Executive's agreement to comply with such covenants, Employer would not have entered into this Agreement or employed or continued the employment of the Executive. The Employer and the Executive have independently consulted their respective counsel and have been advised in all respects concerning the reasonableness and propriety of such covenants, with specific regard to the nature of the business conducted by the Employer. The Executive's covenants in Sections 6 and 7 are independent covenants and the existence of any claim by the Executive against the Employer under this Agreement or otherwise, or against the Buyer, will not excuse the Executive's breach of any covenant in Section 6 or 7. If the Executive's employment hereunder expires or is terminated, this Agreement will continue in full force and effect as is necessary or appropriate to enforce the covenants and agreements of the Executive in Sections 6 and 7. 8.3 REPRESENTATIONS AND WARRANTIES BY THE EXECUTIVE. The Executive represents and warrants to the Employer that the execution and delivery by the Executive of this Agreement does not, and the performance by the 7 Initials _________ _________ Executive Employer Executive of the Executive's obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (a) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to the Executive; or (b) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which the Executive is a party or by which the Executive is or may be bound. 8.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of the Employer hereunder, including its obligation to pay the compensation provided for herein, are contingent upon the Executive's performance of the Executive's obligations hereunder. 8.5 WAIVER. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by either party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 8.6 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which the Employer may merge or consolidate or to which all or substantially all of its assets may be transferred. The duties and covenants of the Executive under this Agreement, being personal, may not be delegated. 8.7 NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nation-ally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Employer: Innovative Software Technologies, Inc. 204 NW Platte Valley Drive Riverside, MO 64152 Attention: D. Shane Hackett, President and CEO Facsimile No.: (816) 587-0683 With a copy to: Foley & Lardner LLP 100 North Tampa Street, Suite 2700 Tampa, FL 33602 Attention: Curt P. Creely, Esq. Facsimile No.: 813.221.4210 If to the Executive: Christopher J. Floyd 6516 Windjammer Place Bradenton, FL 34202 Facsimile No.: (207) 470-5736 8.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, between 8 Initials _________ _________ Executive Employer the parties hereto with respect to the subject matter hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties hereto. 8.9 GOVERNING LAW. This Agreement will be governed by the laws of the State of Florida without regard to conflicts of laws principles. 8.10 JURISDICTION. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of Florida County of Hillsborough, or, if it has or can acquire jurisdiction, in the United States District Court for the Middle District of Florida, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on either party anywhere in the world. 8.11 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 8.12 SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 8.13 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 8.14 WAIVER OF JURY TRIAL. THE PARTIES HERETO HEREBY WAIVE A JURY TRIAL IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date above first written above. EMPLOYER: EXECUTIVE: By: /s/ D. Shane Hackett /s/ Christopher J. Floyd --------------------------------- ----------------------------------- D. Shane Hackett, President & CEO Christopher J. Floyd 9 Initials _________ _________ Executive Employer EXHIBIT A DEFINITIONS "AGREEMENT"--this Employment Agreement, including this Exhibit A hereto, as amended from time to time. "BASIC COMPENSATION"--Salary and Benefits. "BENEFITS"--as defined in Section 2.1(d). "BOARD OF DIRECTORS"--the board of directors of the Employer. "CHANGE IN CONTROL"--shall be deemed to have occurred upon the happening of any one of the following events: a. any person, entity, or group thereof acting in concert (a "Person") (other than (A) the Employee, or any "affiliate" (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) of any of the foregoing, (B) the Company or any of its subsidiaries, (C) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (D) an underwriter temporarily holding securities pursuant to an offering of such securities or (E) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock in the Company) being or becoming the "beneficial owner" (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of securities of the Company which, together with securities previously owned, confer upon such Person the combined voting power, on any matters brought to a vote of shareholders, of 50% or more of the then outstanding shares of voting securities of the Company; or b. the sale, assignment or transfer of assets of the Company or any subsidiary or subsidiaries, in a transaction or series of transactions, if the aggregate consideration received or to be received by the Company or any such subsidiary in connection with such sale, assignment or transfer is greater than fifty percent (50%) of the book value, determined by the Company in accordance with generally accepted accounting principles, of the Company's assets determined on a consolidated basis immediately before such transaction or the first of such transactions; or c. the merger, consolidation, share exchange or reorganization of the Company (or one or more direct or indirect subsidiaries of the Company) as a result of which the holders of all of the shares of capital stock of the Company as a group would receive fifty percent (50%) or less of the combined voting power of the voting securities of the Company or such surviving or resulting entity or any parent thereof immediately after such merger, consolidation, share exchange or reorganization; or d. the adoption of a plan of complete liquidation or the approval of the dissolution of the Company; or e. the commencement (within the meaning of Rule 13e-4 under the Securities Exchange Act of 1934) of a tender or exchange offer which, if successful, would result in a Change of Control of the Company; or f. a determination by the Board of Directors of the Company, in view of the then current circumstances or impending events, that a Change of Control of the Company has occurred or is imminent, which determination shall be made for the specific purpose of triggering the operative provisions of this Agreement. "CONFIDENTIAL INFORMATION"--any and all: a. trade secrets concerning the business and affairs of the Employer, product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current, and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market A-1 Initials _________ _________ Executive Employer studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, databases, systems, structures, and architectures (and related formulae, compositions, processes, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information), and any other information, however documented, that is a trade secret within the meaning of the Florida Uniform Trade Secrets Act; and b. information concerning the business and affairs of the Employer (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials), however documented except as disclosed by Employer to the public; and c. notes, analysis, compilations, studies, summaries, and other material prepared by or for the Employer containing or based, in whole or in part, on any information included in the foregoing. "DISABILITY"--as defined in Section 5.2. "EFFECTIVE DATE"--the date stated in the first paragraph of the Agreement. "EMPLOYEE INVENTION"--any idea, invention, technique, modification, process, or improvement (whether patentable or not), any industrial design (whether registerable or not), any mask work, however fixed or encoded, that is suitable to be fixed, embedded or programmed in a semiconductor product (whether recordable or not), and any work of authorship (whether or not copyright protection may be obtained for it) created, conceived, or developed by the Executive, either solely or in conjunction with others, during the Employment Period, or a period that includes a portion of the Employment Period, that relates directly to the business then being conducted or proposed to be conducted by the Employer, and any such item created by the Executive, either solely or in conjunction with others, following termination of the Executive's employment with the Employer, that is based upon or uses Confidential Information. "EMPLOYMENT PERIOD"--the term of the Executive's employment under this Agreement. "FISCAL YEAR"--the Employer's fiscal year, as it exists on the Effective Date or as changed from time to time. "FOR CAUSE"--as defined in Section 5.3. - ----------- "FOR GOOD REASON"--as defined in Section 5.4. - ----------------- "INCENTIVE COMPENSATION"--as defined in Section 2.2. "NONCOMPETITION AGREEMENT"--as defined in Section 7. "PERSON"--any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, or governmental body. "POST-EMPLOYMENT PERIOD"--as defined in Section 7.2. "PROPRIETARY ITEMS"--as defined in Section 6.2(a)(iv). "SALARY"--as defined in Section 2.1(a). A-2 Initials _________ _________ Executive Employer EX-31.1 4 v06120_ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Peter M. Peterson, Chief Executive Officer and Director of Innovative Software Technologies, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Innovative Software Technologies, Inc. (the "Registrant"); 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 23, 2004 /s/ Peter M. Peterson ----------------------------------------------- Peter M. Peterson Chief Executive Officer and Director (Principal Executive Officer) EX-31.2 5 v06120_ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION I, Christopher J. Floyd, Chief Financial Officer of Innovative Software Technologies, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Innovative Software Technologies, Inc. (the "Registrant"); 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 23, 2004 /s/ Christopher J Floyd -------------------------------------------- Christopher J. Floyd Chief Financial Officer (Principal Financial and Accounting Officer) EX-32.1 6 v06120_ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SS. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Innovative Software Technologies, Inc (the "Company") on Form 10-QSB for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter M. Peterson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Peter M. Peterson - ----------------------- Peter M. Peterson Chief Executive Officer August 23, 2004 EX-32.2 7 v06120_ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SS. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Innovative Software Technologies, Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher J. Floyd, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Christopher J. Floyd - ------------------------ Christopher J. Floyd Chief Financial Officer August 23, 2004 -----END PRIVACY-ENHANCED MESSAGE-----