Software Development Agreement

Exhibit 10.5*





SOFTWARE DEVELOPMENT AGREEMENT



This Software Development Agreement ("Agreement") having an Effective Date of March 9, 1994 is made between Canon Computer Systems, Inc., a California corporation, with offices at 2995 Red Hill Avenue, Costa Mesa, California 92626 (hereinafter called "CCSI") and Pencom Systems Incorporated, a New York corporation, with offices at 150 Broadway, New York, New York 10038 (hereinafter called "PENCOM").



WHEREAS, PENCOM possesses certain technical information and know how relating to the development of software systems based on object oriented technology;



WHEREAS, CCSI desires to retain PENCOM to use its technical information and know how to develop a wholesale distribution system for tracking CCSI's imports and exports, monitoring inventory, processing customer orders, tracking distribution of CCSI products, and generating sales and marketing reports.



WHEREAS, PENCOM desires to perform such services and develop the Deliverables in accordance with the terms and conditions of this Agreement;



NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties agree as follows:



1. DEFINITIONS.



1.1. "Software Project" shall mean the efforts undertaken by PENCOM to develop new software and related Deliverables under the terms and conditions of this Agreement and in accordance with the schedule and at prices set forth in Section 4 of this Agreement.



1.2. "Software Package" shall mean the design, development and implementation of the NeXTSTEP software to be developed for CCSI pursuant to the efforts undertaken by PENCOM as set forth in Section 2 and shall include all Pre-Existing Software used therein.



1.3. "Specifications" shall mean the technical criteria for the Software Package set forth in Attachment A to this Agreement.



1.4. "Intellectual Property Rights" shall mean all inventions, trade secrets, know-how, developments, improvements, results, data, designs, computer programs/software and other information in any form, patentable or unpatentable, patented or unpatented, copyrighted or uncopyrighted, copyrightable or not, which





* Confidential treatment is requested for certain portions of Exhibit 10.5

pursuant to Rule 406 under the Securities Act of 1933.







are conceived, created, written, developed, reduced to practice, acquired, owned or controlled by PENCOM pursuant to this Agreement.



1.5. "Deliverables" shall mean any and all tangible products developed by PENCOM for CCSI under this Agreement, including all object diagrams, functional specifications, prototypes, class libraries, the "source" code and object code for the Software Package, and all necessary documentation. The Deliverables shall be provided in three phases. A list of all Phase One and Phase Two Deliverables is set forth in Attachment A to this Agreement. A list of Phase Three Deliverables shall be provided by PENCOM on or before the date given in Section 4.1 of the Agreement as the conclusion of Phase Two of the Software Project.



1.6. "Phase Three Amendment" shall mean the amendment to this Agreement between the parties stating the schedule, fees, and certain other terms of Phase Three of the Software Project.



1.7. "Pre-Existing Software" shall mean any of PENCOM's proprietary software products existing as of the date of this Agreement necessary for the development, implementation and use of the Software Package, including any third party software licensed to PENCOM for use in its products and any software in the public domain, and listed as an attachment to the Phase Three Amendment.



1.8. "Alpha-Test Version" shall mean the Phase Three Deliverables for each module of the Software Package except for the user's manual that will implement all features and functions of the module but may contain minor errors in the execution of the functions.



2. SCOPE OF SERVICES.



PENCOM will perform the Software Project and develop the Software Package. As set forth in Section 6 of this Agreement, CCSI will own all Deliverables.



2.1. Phase One of the Software Project. On or before the date given in Section 4.1 of the Agreement as the conclusion of Phase One of the Software Project, PENCOM shall provide CCSI with all Phase One Deliverables.



2.2. Phase Two of the Software Project. On or before the date given in Section 4.1 of the Agreement as the conclusion of Phase Two of the Software Project, PENCOM shall provide CCSI with all Phase Two Deliverables.



2.3. Phase Three of the Software Project. Subject to CCSI's acceptance of the Phase One and Two Deliverables and the parties' executing the Phase Three Amendment, PENCOM will develop the agreed-upon Phase Three Deliverables using generally accepted programming techniques. To the extent that some specific





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requirements for the Software Package may not be known at this time, PENCOM will endeavor to provide flexibility in the Phase Three Deliverables to be able to meet these requirements. PENCOM will deliver each Alpha-Test Version and the final Phase Three Deliverables, including the object code, the source code, system and user documentation, by the dates specified in the Phase Three Amendment. System documentation, including source code documentation, will be completed to a level sufficient for a skilled programmer to adequately support the Deliverables. User documentation shall describe screens, menus, and functions of the Software Package and shall be adequately indexed to serve as a reference manual.



2.4. Support, Training, Maintenance, Upgrades, and Special Projects. For a period of one (1) year after CCSI's final acceptance of all the Phase Three Deliverables pursuant to Section 3.4 of the Agreement ("the Warranty Period"), PENCOM will provide CCSI with corrections to reproducible defects for the Software Package at no charge. Specific support, training and maintenance requirements and fees will be addressed in the Phase Three Amendment or in subsequent amendments to this Agreement. At CCSI's request, PENCOM also agrees to assist in developing upgrade plans and to use commercially reasonable efforts to cause the Software Package to remain compatible with the NeXTSTEP platform and the Oracle interface, including new versions of, or new models replacing, the NeXTSTEP platform and the Oracle interface, and to provide CCSI with testing assistance to certify such compatibility. Such upgrades and special projects requested by CCSI will be performed at the development rates specified in Section 4.5.



2.5. Progress. During this Agreement, PENCOM shall keep CCSI informed of its progress on the Software Project and shall promptly notify CCSI in the event of any anticipated delay in the Schedule as set forth in Section 4 or the Phase Three Amendment.



3. ACCEPTANCE.



3.1. Phase One Deliverables. CCSI will have thirty (30) days from its receipt of the Phase One Deliverables to evaluate them and specify any changes or modifications needed prior to the commencement of Phase Two. In the event that CCSI determines that the Phase One Deliverables are inadequate, CCSI may elect in writing to terminate this Agreement as set forth in Section 12.2 of the Agreement and shall specify in writing the grounds why such Phase One Deliverables are inadequate, except that PENCOM shall be limited to ten (10) days to cure any breach of the Agreement under this section. CCSI's acceptance shall not be unreasonably withheld and shall be based on the completeness, quality, and timeliness of the Phase One Deliverables.





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3.2. Phase Two Deliverables. CCSI will have thirty (30) days from the receipt of the Phase Two Deliverables to evaluate them and specify changes or modifications to the Specifications that PENCOM will incorporate in the design of the Phase Three Deliverables. In the event that CCSI determines that the Phase Two Deliverables are inadequate, CCSI may elect in writing to terminate this Agreement as set forth in Section 12.2 of the Agreement and shall specify in writing the grounds why such Phase Two Deliverables are inadequate, except that PENCOM shall be limited to ten (10) days to cure any breach of the Agreement under this section. CCSI's acceptance shall not be unreasonably withheld and shall be based on the completeness, quality, and timeliness of the Phase Two Deliverables.



3.3. Alpha-Test Version Acceptance. PENCOM shall deliver to CCSI two (2) copies of the Alpha-Test Version for each Software Package module by the dates specified in the Phase Three Amendment. CCSI shall have thirty (30) days thereafter in which to evaluate each Alpha-Test Version and accept or reject it in writing. In the event CCSI rejects an Alpha-Test Version, CCSI shall specify in writing the grounds for the rejection and PENCOM shall use its best efforts to make it Alpha-Test Version conform with the applicable Specifications set forth in Attachment A as soon as possible. PENCOM shall continue to use its best efforts to make the Alpha-Test Version conform to the applicable Specifications set forth in Attachment A and acceptable to CCSI until CCSI accepts the Alpha-Test Version or elects in writing to terminate this Agreement as set forth in Section 12.2 of the Agreement. CCSI's acceptance of each Alpha-Test Version shall not be unreasonably withheld.



3.4. Final Acceptance. PENCOM shall deliver to CCSI two (2) copies of the Phase Three Deliverables by the date specified in the Phase Three Amendment. CCSI shall have ninety (90) days thereafter in which to evaluate them and accept or reject them in writing. In the event that CCSI rejects them, CCSI shall specify in writing the grounds for the rejection and PENCOM shall use its best efforts to make them conform with the Specifications as soon as possible. PENCOM shall continue to use its best efforts to make the Phase Three Deliverables conform to the Specifications and acceptable to CCSI until CCSI accepts the Phase Three Deliverables or terminates this Agreement as set forth in Section 12.2 of the Agreement. CCSI's acceptance shall not be unreasonably withheld.



4. SCHEDULE AND FEES.



4.1. Schedule. Performance of the services will conform to the following schedule:



PENCOM will commence Phase One of the Software Project no later than

March 15, 1994;





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The Phase One Deliverables shall be submitted to CCSI for approval

under Section 3.1 no later than April 26, 1994;



PENCOM will commence Phase Two of the Software Project no later than

May 2, 1994;



The Phase Two Deliverables shall be submitted to CCSI for approval

under Section 3.2 no later than June 20, 1994; and



PENCOM will commence Phase Three of the Software Project no later

than June 27, 1994.



The dates set forth above are subject to adjustment based on the application of Section 4.7 of this Agreement. The Phase One and Two Deliverables will be completed according to the schedules provided in Attachment B to this Agreement.



4.2. Payment of Fees for Phase One of the Software Project. CCSI will pay to PENCOM the sum of $95,000 for the Phase One Deliverables based on the following schedule:



$47,500 upon the execution of this Agreement; and



$47,500 upon CCSI's acceptance of the Phase One Deliverables.



4.3. Payment of Fees for Phase Two of the Software Project. CCSI will pay to PENCOM the sum of $115,000 for the Phase Two Deliverables based on the following schedule:



$57,500 upon PENCOM's commencement of Phase Two of the Software

Project; and



$57,500 upon CCSI's acceptance of the Phase Two Deliverables.



4.4. Payment of Fees for Phase Three Deliverables. The fees for Phase Three of the Software Project and the payment schedule for such fees will be set by the Phase Three Amendment.



4.5. Payment of Fees for Upgrades and Special Projects. For all upgrades and special projects not otherwise provided free of charge under this Agreement, such upgrades and projects shall be performed at PENCOM's discounted rates as listed in Attachment C to this Agreement.





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4.6. Payment of Fees for Expenses. CCSI shall be billed separately for all reasonable and necessary travel, meal and lodging expenses directly associated with PENCOM's provision of on-site development and training services to CCSI. CCSI shall not be responsible for any expenses incurred in violation of PENCOM's travel and entertainment policy, attached as Attachment D to this Agreement.



4.7. Phase and Payment Overlap. Upon completion of each phase of the Software Project and upon CCSI's receipt of the Deliverables for that phase, PENCOM is authorized to begin the next phase of the Software Project unless:



(1) CCSI has notified PENCOM to delay startup of the next phase;



(2) PENCOM has not received the startup payment for the next



If either (1) or (2) above occur and CCSI notifies PENCOM that there will be a delay between phases of more than one (1) week, then PENCOM shall have the right to reassign its employees and independent contractors on a short-term project for up to two (2) weeks between the applicable phases, and the schedule specified in Section 4.1 of this Agreement will be adjusted accordingly.



5. CONFIDENTIALITY AND EXCLUSIVITY.



5.1. CCSI Information. In connection with this Agreement, CCSI has provided and shall provide PENCOM with certain information that is proprietary and confidential to CCSI and necessary or useful for PENCOM to perform its services.



5.2. Confidentiality. The term "Confidential Information" as used herein shall mean any information disclosed by CCSI to PENCOM pursuant to Section 5.1 above in a written or other tangible form clearly identified as being confidential. Oral or visual information shall not be considered as Confidential Information unless it is designated confidential at the time of oral or visual disclosure and reduced to a writing clearly marked as being confidential that is sent to PENCOM by CCSI within thirty (30) days after such oral or visual disclosure. For the purpose of this Agreement, any Deliverable shall be deemed Confidential Information.



5.3. Treatment of Confidential Information. During this Agreement and thereafter, PENCOM shall keep the Confidential Information in strict confidence and shall not disclose it to any person, firm or corporation outside PENCOM, nor use the same for any purpose other than performing the Agreement. In addition, PENCOM agrees to safeguard the Confidential Information by restricting its internal dissemination to only those employees within PENCOM having a need to know the Confidential Information for purposes of this Agreement. PENCOM has full





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responsibility to ensure that all employees who are given access to the Confidential Information maintain the confidentiality of the Confidential Information, whether or not such employees continue to be employees of PENCOM. Notwithstanding the limitations of Section 5.3, PENCOM may disclose Confidential Information to such independent contractors that PENCOM hires for the specific purpose of working on the Software Project, provided such persons have signed the Independent Contractor Agreement attached as Attachment E. PENCOM has full responsibility to ensure that all independent contractors who are given access to the Confidential Information maintain the confidentiality of the Confidential Information, whether or not such independent contractors continue to be engaged by PENCOM.



5.4. Exceptions to Treatment of Confidential Information. Notwithstanding Section 5.3 above, PENCOM shall have no confidential obligation and no use restriction hereunder with respect to any Confidential Information that:



(1) is already known to PENCOM at the time of disclosure thereof

as evidenced by written records;



(2) is or becomes publicly known through no wrongful act of PENCOM

at or subsequent to the time of disclosure thereof; or



(3) is permitted for release by prior written consent of CCSI.



5.5. Tangible Embodiments. Any and all written or tangible embodiments of information disclosed to PENCOM by CCSI hereunder shall be and remain the property of CCSI, and PENCOM agrees promptly to return such tangible embodiments, including any copy thereof, to CCSI upon completion of this Agreement.



5.6. PENCOM Information. It is understood that CCSI does not desire to receive any confidential information from PENCOM and accordingly, with respect to any information provided by PENCOM, including all Deliverables, CCSI shall have no confidential obligation and no use restriction and CCSI may freely use such information for any purpose without restriction, including taking the information and/or Deliverables to a third party for completion or modification of a software object technology-based system based on the information contained in the Deliverables.



5.7. Intellectual Property. Except to the extent necessary to perform PENCOM's obligations hereunder, no license or right, expressed or implied, is hereby conveyed or granted to PENCOM for any invention, patent application, patent, copyright, know how, trade secret or other intellectual property of CCSI.





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5.8. Trademarks. No license or right, expressed or implied, is hereby conveyed or granted to PENCOM to use any trademark of CCSI in any advertising, marketing, or distribution of the Deliverables by PENCOM, without the prior express written consent of CCSI.



5.9. Enforcement. PENCOM understands and agrees that the obligations and restrictions provided herein are necessary and reasonable in order to protect the business of CCSI, and CCSI would be irreparably harmed by any breach or threatened breach hereof. In addition to any other remedies available for breach thereof, CCSI shall be entitled to obtain injunctive relief against a threatened breach or continuation of any such breach, without the necessity of providing actual damages.



6. OWNERSHIP.



6.1. Works Made for Hire. All Intellectual Property Rights embodied in the Deliverables are hereby assigned to and shall be the property of CCSI. All copyrightable subject matter included in the Deliverables shall be owned exclusively by CCSI and shall be deemed works made for hire for purposes of the U.S. Copyright Act. PENCOM also agrees to cooperate with CCSI in preparing and/or executing any necessary documents required for the filing of applications covering the foregoing Intellectual Property Rights.



6.2. Assignment of Ownership. If any copyrightable subject matter in the Deliverables shall be determined not to be a work made for hire or if ownership of all right, title, and interest of copyrights therein shall not otherwise be deemed to vest exclusively in CCSI, PENCOM without additional compensation shall forthwith assign to CCSI the ownership of all such subject matter together with all rights arising from such copyright ownership, including works created by independent contractors hired for the Software Project, and CCSI shall have the right to register in its own name all copyrights therein. PENCOM further agrees to deliver to CCSI assignments of any and all Intellectual Property Rights in a form satisfactory to CCSI and its legal counsel.



6.3. Inventions. Any new or improved idea, design, concept, or other invention made or developed solely by PENCOM, its employees, and its independent contractors or jointly with CCSI in the course of creation of the Deliverables shall be promptly disclosed to CCSI by PENCOM in a complete disclosure. At CCSI's option, a complete written disclosure on any such idea, design, concept or other invention will be provided to it by PENCOM at an agreed upon hourly or daily rate after an estimate and approval of such expense is obtained. PENCOM assigns to CCSI all right, title and interest in and to any such invention, together with the right to file patent applications with respect thereto in any country. PENCOM shall, upon the request of CCSI, execute all such other





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instruments and documents as CCSI may reasonably request in connection therewith.



6.4. License of Pre-Existing Software. PENCOM will grant to CCSI a royalty-free, irrevocable, worldwide right and license to use, maintain, execute, reproduce, display, perform, modify, and sublicense all Pre-Existing Software not already in the public domain necessary for the implementation and use of the Software Package.



6.5. Limited License of Software Package. Based on terms and conditions to be negotiated in the Phase Three Amendment to this Agreement (including but not limited to the payment of royalties) and subject to the parties executing the Phase Three Amendment and CCSI's acceptance of the Phase Three Deliverables, CCSI will grant to PENCOM the worldwide right and license to use a functionality, structure, sequence, or organization similar to that contained in the Software Package in developing software for third parties where PENCOM performs such development without reference to the Software Package. Notwithstanding the foregoing grant, PENCOM shall not use a functionality, structure, sequence, or organization similar to that contained in the Software Package to perform any consulting services or develop any software for third parties engaged in, or about to become engaged in, research and development, production, marketing, distribution, selling, or leasing of products or services in the fields of computers and computer peripherals. This restriction shall commence on the Effective Date of this Agreement and shall expire (a) at the end of Phase Two if the parties do not execute a Phase Three Amendment; (b) on the third year anniversary of CCSI's final acceptance of the Phase Three Deliverables; or (c) on the first anniversary of CCSI's termination of this Agreement under Section 12.2 due to Pencom's failure to deliver conforming and acceptable Phase Three Deliverables.



7. WARRANTIES.



7.1. Warranties and Representations of CCSI. CCSI represents and warrants to PENCOM that it has the authority to authorize PENCOM to perform the Software Project and develop the Deliverables.



7.2. Warranties and Representations of PENCOM. PENCOM represents and warrants (a) that it has the right to disclose and make available to CCSI all Pre-Existing Software; (b) that it has the right to grant all rights granted to CCSI herein; (c) that the Deliverables and the Software Package will not infringe any patent, copyright, trademark or trade secret or other proprietary right of any person; (d) that it will not use any trade secrets or confidential or proprietary information owned by any third party in developing the Deliverables and Software Package; and that neither PENCOM nor any company or individual developing the Deliverables and Software Package pursuant to this Agreement is under any obligation to assign or give any work done under this Agreement to any third party. PENCOM warrants (a) that all people working on the Software Project will be (i) employees whose





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normal duties include the functions they will perform on the Software Project or (ii) independent contractors who have signed the Independent Contractor Agreement attached hereto as Attachment E, and (b) that it will perform its obligations under this Agreement in accordance with all applicable laws.



7.3. Warranties of Performance of the Software Package. During the Warranty Period, PENCOM warrants that the Software Package will conform to and perform according to the Specifications, operate within the system performance parameters (to be provided by PENCOM as a Phase Two Deliverable) and to operate in the technical environment specified in Attachment F to this Agreement. PENCOM will correct any nonconformities, errors or discrepancies in the Software Package that are identified by CCSI or by PENCOM during this warranty period as soon as possible after CCSI informs PENCOM of any breach of this warranty.



7.4. Limitation of Warranties. OTHER THAN THE WARRANTIES GIVEN IN SECTIONS 7.2 AND 7.3 OF THIS AGREEMENT, PENCOM MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, AND ALL OTHER WARRANTIES, INCLUDING WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED. IN NO EVENT SHALL EITHER PARTY, OR ITS DIRECTORS, OFFICERS, EMPLOYEES AND/OR CONSULTANTS BE LIABLE TO THE OTHER PARTY FOR ANY INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION ANY CLAIMS FOR LOST PROFITS OR LOST SAVINGS, EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.



8. RECRUITING SERVICES.



During Phase Two of the Software Project, CCSI, at its sole option, may engage PENCOM to recruit NeXTSTEP developers for employment by CCSI beginning with the start of Phase Three. If CCSI engages PENCOM to recruit on its behalf, PENCOM shall use its best efforts to perform such recruiting services on the following terms and conditions:



8.1. PENCOM's sole fee for its recruiting services shall be in the amount equal to twenty-five percent (25%) of any hired candidate's first year salary, exclusive of any bonuses.



8.2. PENCOM shall not solicit or recruit from CCSI.



8.3. No candidate shall be referred to CCSI until he or she has been personally interviewed by PENCOM, thoroughly screened and determined appropriate as a referral to CCSI. To be an appropriate referral, the candidates must meet the requirements set by CCSI and provided to PENCOM at a later date.





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8.4. PENCOM shall not withhold candidate information which CCSI would reasonably consider essential to its hiring decision.



8.5. Candidates shall be referred only with the candidates' express prior consent.



8.6. Neither PENCOM nor any of its employees shall ever discriminate in the provision of PENCOM's recruiting services on the basis of race, creed, color, national origin, religion, sex, marital status, affectional preference, handicap, age or any other legally proscribed criteria.



8.7. Fees will be due and payable as follows: fifty percent (50%) within thirty (30) business days of the hired candidate's start date and fifty percent (50%) within thirty (30) business days of the four (4) month anniversary of the hired candidate's start date. Notwithstanding the payment schedule of this section, no payments for recruiting services shall be due from CCSI to PENCOM until CCSI has received a written invoice from PENCOM for such services.



8.8. Should the hired candidate leave voluntarily or be dismissed by CCSI for any reason within four (4) months of the start date, PENCOM shall be given thirty (30) days to refill the position at no additional cost to CCSI. Should PENCOM be successful in providing an acceptable replacement within the thirty (30) day period, PENCOM may retain the full fee. Should PENCOM be unsuccessful in providing an acceptable replacement, PENCOM shall refund the fee.



8.9. Should the hired candidate leave voluntarily or be dismissed by CCSI for any reason after four (4) months of employment but prior to completing eight (8) months of employment, PENCOM shall ...