<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
THE PATHWAYS GROUP, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 91-1617556
- ---------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14201 NE 200th Street, Woodinville, WA 98072
- ---------------------------------------- ------------------------------
(Address of Principal Executive Offices) (Zip Code)
(425) 483-3411
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Securities to be registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
None
Securities to be registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Pathways Group, Inc. and its subsidiaries ("Pathways" or the
"Company") designs, markets and services custom smart card applications. The
Company develops unique solutions for creating and processing data and ensuring
secure electronic transactions by utilizing proprietary hardware and application
software systems. Pathways' technology establishes electronic commerce in
closed system environments. A key element of the Company's business plan is
the processing of transactions associated with its current and prospective smart
card installations. The Company also manufactures and markets automated
ticketing kiosks that the Company anticipates will be integrated with its smart
card applications.
The Company was organized in 1993 as a Washington corporation whose
operations are the successor to Pathways International, Ltd., which was
incorporated in Washington in June 1988. In May 1997 the Company reincorporated
in Delaware. The Company's executive offices are located at 14201 NE 200th
Street, Woodinville, Washington 98072 and its telephone number is (425)
483-3411. A primary processing center opened in September 1997, located at 1221
North Dutton Avenue, Santa Rosa, California 95404, and its telephone number is
(707) 546-3010.
The Company offered its common stock to the public in July 1997
pursuant to Regulation A of the Securities Act of 1993 ("Securities Act'). The
Company offered 833,333 shares of common stock of the Company, par value $.01
per share, for a purchase price of $6.00 per share. The offering commenced on
July 15, 1997, and terminated on July 21, 1997. All shares offered were sold,
providing $5,000,000 in gross proceeds to the Company. The Company currently
has 12,904,487 shares outstanding.
BUSINESS
The Company believes that it is a leading developer and marketer of
integrated smart card software systems, and that it is positioned to provide
customers sophisticated smart card business solutions across a wide range of
applications. The Company's systems accommodate credit and debit payment
methods in addition to smart cards.
A smart card is credit card-sized plastic card in which an integrated
circuit, usually containing a microprocessor and reusable memory, has been
embedded. In their simplest form, smart cards provide memory storage
capabilities, such as cash cards, in which the card is discarded after the value
stored on the card is depleted, or "read only" cards, in which stored
information may be entered, accessed and modified by terminals and computers.
Most cards, including the Company's cards, are more sophisticated. Information
and software can be stored on such cards by reading and writing to the card's
microprocessor chip and can be easily, securely and accurately accessed and
manipulated by electronic data processing equipment. The versatile nature of
the smart card technology allows it to be adapted for use over diverse
applications, ranging from medical record storage to electronic money.
Smart cards first appeared in the 1970s in France, and at present
smart card technology is established and extensively used in Europe and Asia.
The research firm, Dataquest, estimates that approximately 156 million cards
were in circulation worldwide at the end of 1996, that the 1996 worldwide smart
card market exceeded $1.2 billion in sales and that the market will approach $3
billion in sales by the year 2000.
Smart card installations within Europe dominate the worldwide smart
card industry, with a 70% share. It is predicted by the year 2000 that the
United States and the Asia-Pacific region will account for 25% of the global
market. The French were the first to develop practical smart card technology
and applications. Roland Moreno, a Frenchman and the founder of Innovatron, is
considered by many to be the pioneer of smart card technology.
<PAGE>
Today, the majority of chip card manufacturers are licensees of Innovatron.
Initially installed only in pay telephones, smart cards are now being used
for transportation, car parking, arcade games and vending machines. Any
coin operated machine can be converted to a smart card format. Other
possible applications include ATM'S, point-of-sale terminals, personal
computers, electronic ticketing, and automatic fare collection.
The Company believes that smart card technology represents the next
step in the evolution of credit/debit financial services and related products
and services. Smart card systems differ from other payment mechanisms in their
ability to store securely large quantities of data on a credit-card sized medium
by means of a microprocessor chip. The sophisticated encryption algorithms and
other security mechanisms that the chip employs provide information protection.
The Company's products address the needs of the healthcare and affinity group
markets, among others, with multiple purse and banking products nearing
completion of development.
In addition, a major factor in the rapid growth of smart card usage is
the ability to process small transactions. Smart card technology eliminates the
need to carry cash and coins for most day to day transactions. By enabling an
individual to exchange information and payment through one portable platform,
the Company expects that this technology will open up new opportunities with
regard to the way people interact with financial institutions, healthcare
providers, retailers and others. All information-based industries are
candidates for smart card conversion.
The Company anticipates that while it will continue to realize revenue
from transaction processing, significant additional revenue growth opportunities
exist in the area of developing, marketing and when appropriate, providing
transaction processing services to a variety of markets, many of which the
Company does not at present serve. The Company believes that these
opportunities include the academic campus, retail, banking, travel and
traditional healthcare markets.
Through December 31, 1997, Pathways recorded total revenues of
approximately $353,000 related to its smart card operations, including the
delivery and installation of approximately 57,000 smart and affinity cards and
approximately 120 smart card terminals. The Company's core technology involves
the development of smart card application systems and solutions. This core
technology has been customized for prepaid alternative health care, the retail
affinity and the banking and educational institutions markets, but such
technology is capable of being customized for other markets. The Company is
encouraged by the results of these initial programs, and believes that such
pilot programs will lead to the national rollouts of such products.
While this and other smart card applications were being designed and
developed, the Company's revenues initially were derived largely from credit and
debit card transaction processing fees from its automated ticketing kiosk
software. As the Company's resources are being increasingly devoted to the
realization of the smart card application system component of the Company's
business plan, revenues from the automated kiosk business declined. The
Company considers the automated ticketing kiosk business integral to its plans
for becoming a full-service smart card designer, developer and provider. It
intends to continue to use those devices in the ski and amusement markets which
the Company has already penetrated, as well as to expand into other markets and
integrate its current capabilities to include the processing of smart card
transactions in addition to debit and credit card processing. It is anticipated
that the Company's kiosks will serve as smart card dispensing, "reloading" and
transaction processing points.
The following lists the Company's subsidiaries and their respective
businesses:
- SPRINTICKET ("SPRINTICKET") provides credit card transaction
processing for ski areas and amusement parks utilizing
SPRINTICKET's proprietary hardware and software. SPRINTICKET
marketed proprietary ticketing machines and software manufactured
under contract by Pathways International. In September 1996, the
Company acquired 21.29 percent of the outstanding common stock of
SPRINTICKET, which constituted substantially all of the remaining
minority interest in this subsidiary. Prior to such acquisition,
the Company owned 77.53 percent of Sprinticket. In early 1997
-2-
<PAGE>
the Company purchased the remaining approximately 1.18 percent of
SPRINTICKET for cash.
- THE PATHWAYS GROUP INC. (HAWAII) was organized to market the
Company's products in Hawaii and Asia.
- PATHWAYS INTERNATIONAL, LTD. retains the copyright for an
automated non-profit organization accounting system which is no
longer being marketed. Since its inception, Pathways
International was the corporation through which the Company first
conducted its software development and hardware manufacturing
under contract with companies which later became part of the
Company.
- PT LINK CORP. ("PT Link"), is currently not in operation.
Historically, PT Link marketed a medical office management and
patient outcomes software package that it purchased from Pathways
International, which it developed under contract.
SMART CARD TECHNOLOGY
Owning a smart card is similar to carrying a computer in a handbag or
wallet. Pathways expects that smart cards will eventually replace everything
people carry in their wallets, including drivers' licenses, other important
personal identification, credit cards and cash. Smart cards offer consumers the
ability to transmit payment and information data across a point-of-sale terminal
securely and conveniently.
Over the long term, the Company believes that "multifunctionality"
will become an increasingly important smart card feature. "Multifunctionality"
means that several applications will be combined on one card. A card may
contain many sections that may include personal information, health care data, a
prepaid area and credit line access. The Company is currently developing smart
card applications incorporating multifunctionality technology. As smart cards
are developed to store highly personal information, card security will be
required to be more elaborate in order to achieve consumer acceptance of the
technology.
A smart card is a plastic card, approximately the size of a credit
card, which comprises an integrated circuit that usually contains a
microprocessor and reusable memory. Smart cards range from simple single
application cards to sophisticated multi-application cards. A memory card is
the most simple type (also known as a "dumb" smart card). This type of card can
only store data and is discarded after the value stored on the card is depleted.
It is difficult to copy but offers no protection from loss nor does it contain
inherent processing power without the intervention of sophisticated terminal
level software. "Read only" cards store information that may be input, accessed
and modified by terminals and computers. They also do not contain inherent
processing power without the intervention of sophisticated terminal level
software. A more complex card may have one password to restrict its use to one
person or machine. Most cards, including the Company's smart cards, are more
sophisticated. Electronic data processing equipment can accurately and securely
store and manipulate information on such cards by reading and writing to the
card's microprocessor chip. The most sophisticated cards can manipulate several
passwords and can utilize authentication and ciphering techniques to provide
total security. The latest card types are now beginning to support the JAVA
language to allow for greater flexibility and compatibility across card
manufacturers, terminal manufacturers and many processing platforms.
Although many smart cards today incorporate both magnetic stripe
technology and chip technology, the Company believes that chip technology that
will increasingly become the preferred medium. Chip technology is more difficult
to counterfeit and can store up to 80 times more data than a magnetic stripe.
The majority of chip cards contain one to four kilobytes of memory; however, it
is the Company's understanding that a 16-kilobyte card will be introduced this
year by the card manufacturers and that a prototype 64-kilobyte card is
currently in prototype form. If and when such cards are introduced, the Company
will seek to utilize the latest technology in developing software for such
cards. The primary benefit of this computing power is that a single card
-3-
<PAGE>
performs numerous functions. For example, the card can be programmed to
effect payment for goods or to provide personal health information. In
addition, transactions conducted with a smart card can be authorized offline,
unlike magnetic stripe cards, which do not have the capability to interface
with remote processing systems. Cards can also be further defined as either
a contact or a contactless card. A contact card must be directly placed into
a reading terminal. Contactless technology utilizes radio frequencies and
requires no direct contact between the card and the reader. Advantages of a
contactless card are convenience and speed. The user simply passes the
contactless card within several inches of the reader, the transaction data is
downloaded to the reader and a return message is recorded in the card.
To produce each smart card application for a particular client, the
Company must develop customized software and integrate appropriate hardware
technology to adapt the card to the customer's needs. The Company believes that
its engineers have sufficient expertise in hardware technology and computer
programming languages necessary for such development efforts. The manufacturing
cost of a card varies from less than $1 to approximately $10 depending on the
amount of information it holds and the complexity of the microprocessor.
Similarly, the cost of a reader terminal can vary from $500 to $2,000, depending
on the complexity and functionality of the terminal.
CURRENT PRODUCTS AND PILOT PROGRAMS
PREPAID MEDICAL BENEFIT CARDS. My Choice LLC, a defined benefits
medical provider in the alternative medical care industry, utilizes a natural
medicine benefit card developed by the Company. Use of the Company's card
entitles the holder to a discount on natural medical services.
The Company, pursuant to a development agreement with My Choice,
designed a card holder issuance system, a medical provider acceptance and
reimbursement system and a statistical database that drives an ACH type
reimbursement (ACH, or automated clearinghouse, is a system of electronic funds
transfer to which most banks subscribe as an economic substitute for a wire
transfer using the Federal Reserve System). The development agreement contains
customary provisions regarding termination, intellectual property rights,
confidentiality, product warranties, indemnification and the like. Payment to
the Company under the development agreement has been made periodically in
connection with the attainment of defined milestones. In addition, under this
agreement My Choice, and its affiliates, is entitled to most favored customer
treatment and, for a specified period, to preferential pricing in the purchase
of the hardware equipment related to the implementation and functioning of the
product, which pricing may in no event exceed 118 percent of the actual cost of
the equipment. The non-competition provision of the development agreement
prohibits the Company, for a five year period, from engaging in business
related to smart card systems that provide for cash payment in connection with
naturopathic or homeopathic medial goods or services. Under the agreement, the
Company represents that its products and services are free from material defect
and do not infringe the intellectual property of third parties; the Company has
also provided indemnification against the breach of such representations.
AFFINITY GROUP PROGRAMS. The Company has developed applications which
address the current trend in retail environments of rewarding repeat customers.
In addition, the Company has developed an electronic scrip application for use
in fund-raising activities for non-profit organizations. This product allows
members of the non-profit organization to purchase electronic gift certificates
from intermediaries, and upon redemption of such electronic gift certificate at
a merchant, the merchant contributes a predetermined discount to the specific
non-profit organization. The Company believes that individuals utilize the
scrip because it enables them to make donations to charity by spending money on
everyday purchases of products and that member retailers find such programs an
attractive marketing strategy for their products. The Company is marketing these
products to several large paper-based scrip intermediaries in addition to large
non-profit and retail organizations.
SPRINTICKET, a subsidiary of the Company, manufactures and markets
automated ticketing dispensers and provides credit card processing services in
connection with those dispensers. Separate kiosks are provided for indoor and
outdoor use. Indoor models have touch screens, full motion video and stereo
-4-
<PAGE>
sound. Base prices for kiosks are $15,000 to $20,000 and do not include the
supporting hardware that varies according to client need. The market for this
equipment includes industries that issue some form of ticket that is required
for access into any facility or any service. Markets for the SPRINTICKET
products include travel, entertainment, leisure, government and health care.
Another Company subsidiary, PT Link, applies computer and electronic
technology to service the medical profession. PT Link's software products
include medical practice management, patient documentation and treatment
outcomes analysis as well as patient education and billing.
DEPARTMENT OF EDUCATION OF HAWAII. The Company has entered into
agreements to commence pilot programs in conjunction with the Department of
Education of Hawaii to provide a smart card system for handling both prepaid and
FDA-sponsored school lunch programs. The pilot programs are to be conducted at
six schools in the Mililani School Complex in Honolulu, Hawaii. The Company has
a similar pilot program with the Lanikila School also in Honolulu. These pilot
programs are expected to begin in May 1998 and to continue to the end of the
school year. Assuming satisfactory completion of the pilot program, the Company
expects that it will be in a position to negotiate a comprehensive agreement
with the Department of Education of Hawaii, which agreement will include
transaction processing and will enable the Company's system to be introduced
throughout the State. The Company's technology can be expanded to include
student identification, bus transportation and prepaid student activities.
FIRST HAWAIIAN BANK. The Company has entered into a pilot agreement
with First Hawaiian Bank pursuant to which the Company will provide a system to
allow the bank to offer a branded smart card program to its customers for use in
retail purchases through a retail merchant network to be established jointly by
the bank and the Company. The Company also has an agreement to place the
Company's smart card terminals and recharge stations in various branches of the
bank to accommodate card users in both the school lunch programs and First
Hawaiian Bank branded smart card program. The recharge terminals will be
utilized to check card balances and reestablish value on the cards.
ADVANTAGES OF THE COMPANY'S PRODUCTS
The Company's software products encompass a number of technological
breakthroughs, which are discussed below. The most important aspect of the
product is its seamless integration from card fulfillment, through claims
adjudication, through customized transactional reporting, without dependency on
third party commercial software products. Here are other advantages of the
Company's products due to its ownership of its trade secret assets:
- SMART CARD ISSUANCE (FULFILLMENT) WITH AUTOMATED DATABASE
CREATION. Unlike other systems under development, the Pathways
product utilizes the latest in database creation technology to
facilitate a detailed tracking mechanism for all smart card
transactions from issuance to payment and includes the facility
to replace lost or stolen cards in a timely fashion. The nearest
competitor continues to penalize the user with a "Lose it you
lose it" philosophy.
- FULLY FUNCTIONAL MULTIPLE PURSE MODULES. The Pathways product,
in its first release, possesses the ability to utilize multiple
"purses" on the same card. There has been no software on the
market to demonstrate such ability.
- MIXED TRANSACTION (CREDIT/DEBIT/ATM CARD/SMART CARD) PROCESSING
AT THE POINT OF SALE WITH ON-LINE AUTHORIZATION WHERE APPLICABLE.
The Pathways product can optionally configure itself for the
diverse communications and security protocols associated with
debit, ATM credit, as well as smart card transactions. A debit
card and ATM card transaction both require the introduction of a
personal identification number ("PIN") number for security
purposes, and require an on-line (telephone connection) for
purchase authorization. Credit cards normally require similar
communication arrangements although they rarely require a PIN
-5-
<PAGE>
number. Smart cards, in a secure application, always require a
PIN number but normally only require a telephone connection to
send end-of-day data for claim processing. Current competition
developers are focused on the smart card requirements and have
not addressed the other needs.
- PRODUCT SERVICE PROVIDER CLAIM PROCESSING. A standard feature of
the Company's product allows the consumer to use his or her smart
card for non-smart card transactions. The software directs the
transaction processing to the appropriate credit card processor.
System sponsors may avail themselves of the full suite of
backroom services offered by Pathways.
- AUTOMATED "E-BANK" CARD RECHARGE. A drawback facing smart card
developers, integrators, issuers and processors is the inability
of their smart cards to "recharge." The absence of sufficient
funds to cover a transaction requires that the transaction be
terminated and the card inserted into an ATM (not yet available)
or a special location for recharge. The Company has developed
technology that endows smart cards with recharging capabilities
at the point of purchase, as well as enabling it to connect to
electronic banking systems, thus creating an uninterrupted chain
of cashless commercial transactions. The Company believes that
its recharging capability is unique in the smart card industry.
- AUTOMATED CLAIM ADJUDICATION AND SETTLEMENT THROUGH ACH. The
Pathways system has the facility to automatically submit a claim
to the operator of the prepaid funds pool (normally the card
issuer), adjudicate the claim and trigger an ACH transfer of
funds to the provider/merchant.
- MANAGEMENT REPORTING (VIA AUTOMATED BACK ROOM). The Company
provides claims adjudication by means of a System Query Language
("SQL") complaint database that can service substantially all
management reporting needs. Every element of the database is
attached to data pointers which can be combined into reports on a
demand basis.
- ISO SMART CARD DEVELOPMENT TOOLKIT. The Company has developed a
set of proprietary software tools that are the building blocks
for all of its current and future applications. These tools are
used to develop applications using the Rapid Application
Development ("RAD") technique within the SQL paradigm.
All of the above modules are integrated seamlessly, to form a
"cradle to grave" process which, to the Company's knowledge, is unlike any
other system available at the current time.
STRATEGIC RELATIONSHIPS
The Company has entered into a strategic relationship with
Schlumberger, Ltd., a leading developer and producer of smart cards. The
relationship with Schlumberger is designed to enable the Company to establish
and maintain technological leadership, realize advantageous product pricing
structures and expand its marketing and distribution channels. Schlumberger is
an $8 billion worldwide conglomerate whose lines of business include oil field
services, electronics and technology. The Company programs blank stock smart
cards that are developed and manufactured by Schlumberger to meet specific
application needs. Schlumberger has named Pathways its first "Preferred
Associate" worldwide.
In November 1997, the Company entered into a letter of intent with
Racom Systems, Inc. to utilize and integrate Racom's contactless card technology
with the Company's products and backroom systems. The Company believes that
-6-
<PAGE>
such integrated technology will appeal to certain industries, including, but
not limited to, transit applications.
The Company has extensive informal relationships with a variety of
card and terminal manufacturers that the Company is currently evaluating for
inclusion in its product line. The Company expects that the formation of
strategic alliances, both formal and informal, with such entities will be an
integral element in expanding its product offerings.
COMPANY STRATEGY AND PRODUCT DEVELOPMENT
The Company's objective is to become a leading provider of smart card
solutions across a wide range of applications. The Company's marketing strategy
is to focus on product development and innovation in the area of smart card and
debit card technology with the goal of capturing the transaction processing
revenue segment of such business. Transaction processing includes a network of
"backroom" services that includes maintaining and updating appropriate databases
to reflect all information on user cards and transactional changes to such
information, effecting the movement of electronic money to and from a funds pool
holder and periodic reporting to all parties in the transaction.
The Company hopes to realize its strategy to increase transaction fee
revenue by focusing on smart card applications in consumer situations that
necessitate card usage on a weekly or more frequent basis. The Company believes
that it is currently the only full service hardware integrator, software
developer and backroom transaction processor.
The Company anticipates that while it will continue to realize revenue
from transaction processing, significant additional revenue growth opportunities
exist in the area of developing, marketing and, when appropriate, providing
transaction processing services to a variety of markets, many of which the
Company does not at present serve. The Company believes these opportunities
include the academic campus, retail, banking, travel and traditional healthcare
markets. The Company's product development efforts are focused on software and
systems for smart card applications. The Company has identified the following
industries as those best suited to benefit from smart card technology, and has
commenced research and development efforts aimed at meeting perceived needs:
- HEALTH CARE. The Company believes that the healthcare industry,
with its millions of participants and voluminous and
individualized information and payment requirements, can benefit
significantly from smart card technology. Smart cards can be
designed to provide patient identification and medical record
storage and retrieval, as well as electronic benefit transfers,
determination of eligibility and drug interaction information.
In an emergency situation, a quick assessment of vital
information such as allergies, prescriptions and immunizations is
critical for effective healthcare delivery. Additionally,
patient cards can be used to improve and streamline
administrative and billing procedures as well as insurance
reimbursement.
- RETAILING. All types of retailing can be embraced and enhanced
with smart card technology. The retail sector encompasses
everything from "Mom and Pop" stores to national department
stores. Retailers have been made acutely aware of the value of
their contact with the consumer. The key to repeat business is
to accurately identify, and then satisfy customer needs. Smart
cards would enable retailers to track customer behavior and base
marketing decisions gleaned from this valuable information. This
technology can also reduce the risk of fraud, improve inventory
management, and offer the customer convenience and better
service.
- TRAVEL AND ENTERTAINMENT. The travel and entertainment industry
also hold great promise with regard to smart card applications.
All categories that comprise this market, including air travel,
car rentals, movie theaters, sporting events, restaurants,
casinos, video stores, sports arenas, hotels and other venues
would benefit from a multifunctional card. This is an
-7-
<PAGE>
enormous global market with strong growth predicted for the near
future. Business travelers in particular are bogged down by
paper based expense reimbursement. Paper based reimbursement
systems are hampered with the potential for fraud in addition to
being costly to administer. Smart cards would enable businesses
to more effectively monitor travel and entertainment expenses.
Smart cards offer solutions in terms of their ability to collect
and disseminate data and conduct electronic commerce. Several
major airlines have initiated smart card pilot programs that
allow ticketless travel, store frequent flier miles and process
payments. In a resort setting, a multifunction card allows an
individual access to restaurants, shopping, sports and
entertainment activities, lodging while keeping track of loyalty
points.
- GOVERNMENT SERVICES. The government is becoming involved in
electronic commerce. The initial focus is centered on a national
Electronic Benefits Transfer (EBT) recently proposed by Vice
President Gore. One proposed and piloted application is to
replace paper food stamps with a smart card. Such a change would
eliminate the cumbersome printing, warehousing, transporting and
disposal of this paper medium. Other applications could include
the administration of welfare and Medicaid benefits and other
government payments.
- TRANSPORTATION. Opportunities exist to apply smart card
technology to public and private transit systems, including
bridge, tunnel and highway toll systems. Smart cards would
significantly reduce the time spent and costs associated with
collecting and processing fares and tolls. A multipurpose card
could be used for taxis, trains, tolls and parking meters in
addition to other small expenditures. Commercial vehicles could
utilize this technology to store data about the cargo, the
carrier, maintenance records and the driver.
- AFFINITY PROGRAMS. The trend in retail, fund raising (as
discussed above with respect to Scrip PLUS) and other repeat
customer businesses is the move toward customer rewards. This
application represents a tremendous opportunity and an explosive
growth area, which is virtually untapped.
By incorporating a smart card into a traditional point of sale
application, the retailer will realize complete tracking of all
aspects of the sales process including the ability to reward
repeat customers with premiums or discounts through the use of a
smart card without the traditional computerized infrastructure.
Retailers could use the data accumulated to target market areas
not being penetrated and focus marketing and advertising costs on
those areas.
MARKETING AND DISTRIBUTION
The Company intends to market its electronic purse technology to any
and all affinity groups where electronic cash is a viable medium. Distribution
of product will be handled directly by Company sales and marketing staff.
Service of smart card terminals and related equipment will be
performed on a "Depot Repair/Hot Swap" service basis. "Depot Repair/Hot Swap"
service is the process of replacing faulty equipment with functional equipment
via "Express" transportation methods. Faulty units are repaired if possible at
the depot.
-8-
<PAGE>
COMPETITION
Due to the extensive use of cash, the market for smart card
applications is enormous. Since this is a relatively new technology there is
room for many participants in this market. Some companies currently involved in
smart card development include but are not limited to: Bull, Card Europe,
Gemplus, Innovatron, Philips Electronics, Racom Systems, Aladdin Knowledge
Systems, MONDEX, MasterCard, Motorola, Schlumberger, Siemens, DigiCash, Cylink,
AT&T Universal Card and Visa. All of these vendors are actively involved in
producing smart card terminals. Some, like Schlumberger, also produce the
actual smart card media.
Although the Company is unaware of competitors providing its
combination of products and services to the Company's targeted markets, a few
competitors, or potential competitors (MONDEX, Diebold, VISA and Digicash, etc.)
actually develop software applications to deal with issuance, acceptance and
adjudication of smart card transactions. Pathways is presently the only full
service integrator, software developer and transaction processor of record to
date.
Smart card applications are the result of creating innovative
solutions to the needs of consumers. This requires significant experience in
software development and knowledge of a variety of business sectors.
RESEARCH AND DEVELOPMENT
The Company has expended substantial resources in the development of
its products. The Company has capitalized software development costs in the
aggregate amount of $3,516,928 from inception to December 31, 1997, and $439,707
and $236,946 for the years ended December 31, 1997 and 1996, respectively. In
addition, the Company expensed $102,000 as research and development costs for
the year ended December 31, 1997.
GOVERNMENT REGULATION
The Company can provide no assurance that a Federal, state or foreign
agency will not attempt to regulate its activities. The principal regulatory
issues presently before the Company are as follows:
Regulation E governs certain electronic funds transfers made by
regulated financial institutions and providers of access devices and electronic
fund transfer systems. Regulation E requires written receipt for transactions,
monthly statements, pretransaction disclosures and error resolution procedures.
Although certain aspects of the Company's services may be subject to Regulation
E, the Company believes that most of its services are not subject to Regulation
E. There can be no assurance that the Federal Reserve Board will not require all
of the Company's services to comply with Regulation E, or revise Regulation E,
or adopt new rules and regulations for electronic funds transfers that could
lead to increased operating costs for the Company, and could also reduce the
convenience and functionality of the Company's services, possibly resulting in
reduced market acceptance. In addition, if the Federal Reserve Board challenges
the Company's position, the costs of responding to such a challenge could result
in significant drains on the Company's financial and management resources, which
could result in significant drains on the company's business, financial
condition or operating results.
The management believes that current state and federal regulations
concerning electronic commerce do not apply to the current product line.
However, there is a move towards taxation of Internet use by several states
including the state of Washington. There are some strategic plans under
consideration to conduct commerce on the Internet using the Company's core
technology. This technology is being developed with a strict eye on these
legislative issues and the company management subscribes to industry watch
publications that address these issues. Planning for such eventualities assures
minimal interruption to the business of the Company should these laws be
enacted.
-9-
<PAGE>
COPYRIGHTS, TRADEMARKS, PATENTS, PROPRIETARY RIGHTS AND LICENSES
As of March 31, 1998, the Company held no patents or other registered
intellectual property rights with respect to its smart card products. The
Company may prepare applications for copyrights for intellectual property, to be
filed within the statutory time limits. Such applications would relate to
toolkits for smart card programming applications as well as certain commercial
application of the technology. However, the Company has historically viewed
these items as trade secrets and relied on protection under those rules. There
can be no assurances that such copyrights will be granted, or if granted, will
have any commercial value.
Although the Company does not believe that its products or services
infringe on the rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that any such assertion will not result in any costly litigation or require the
Company to cease using, or obtain a license to use, intellectual property rights
of such parties.
LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
EMPLOYEES
As of March 31, 1998, the Company had a total of 43 employees. Key
employees are employed under an employment contract, which includes a binding
non-compete and non-disclosure clause. The Company anticipates that it may
substantially increase the number of its employees in the near term. None of
the Company's employees is represented by a labor union. The Company considers
its relations with its employees to be very good.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION.
GENERAL
Since its inception, the Company has undertaken a program to develop
the hardware and software products and expand the transaction processing
services that it offers. The Company has invested heavily in designing and
developing its proprietary hardware and application software systems and in
establishing its sales and marketing capabilities. The Company plans to
continue these efforts in preparation for and anticipation of the growth in
smart card based electronic commerce that the company expects will create a
substantial market for its data and transaction processing services. The Company
has also made investments in computers, networking systems and unattended kiosk
equipment.
As a result of operating costs associated with these activities, the
Company has recorded significant operating losses since its inception. The
company's operating expenses were $2,762,117, $2,308,796, and $3,577,780 for the
years ending December 31, 1995, 1996 and 1997, respectively. The Company
recorded losses of $2,651,547, $2,832,877, and $3,586,521 for the years ending
December 31, 1995, 1996 and 1997, respectively.
The Company's business model is based upon the Company's contracting
large membership based businesses to be a turn key provider of smart card based
systems. The Company anticipates licensing its software to its clients and
entering into agreements whereas the company will perform all backroom
processing of the transactions that occur over the system in addition to selling
smart cards and smart card readers programmed by the Company. The Company
expects to receive transaction-processing fees for its backroom processing
services.
-10-
<PAGE>
RESULTS OF OPERATIONS
REVENUES. The Company had revenues of $512,250, $108,418, and
$61,785 for the years ending December 31, 1995, 1996 and 1997, respectively.
During 1995, the Company's revenues consisted principally of credit card
transaction processing fees from its unattended ticketing kiosk software.
Throughout late 1995 and early 1996, the Company focused its efforts on
developing and installing its first smart card application system. After the
successful implementation of this system, the Company's resources were
increasingly devoted to the expansion and realization of the smart card
application system component of the Company's business plan. As a result of this
refocusing, revenues from the automated kiosk business have declined throughout
1996 and 1997.
The Company has signed pilot agreements with the Department of
Education in the State of Hawaii for the implementation of an electronic
school lunch program and with First Hawaiian Bank for the use of smart cards
in a retail program. The Company believes it will continue to report minimal
revenues until additional significant contracts are signed or until the
existing contracts proceed through the pilot stage to a full rollout.
GROSS MARGIN. The Company's gross margin as a percentage of revenues
was 86.51%, 39.87%, and 68.45% for the years ending 1995, 1996 and 1997
respectively. The Company's gross margin percentage is primarily a result of
the sales mix between high margin transaction processing fees and lower margin
hardware and smart card sales. Accordingly, the gross margin declined in 1996
as compared to 1995 due to a higher volume of transaction processing fees as a
percentage of total revenues in 1995 as compared to 1996, and a higher
percentage of credit card chargeback expenses that occurred in 1996 than in
1995. Similarly, gross margins increased in 1997 as compared to 1996 due to a
lower percentage of credit card chargeback expenses in 1997 as compared to 1996
and a greater percentage of lower margin smart card sales that occurred in 1996
than in 1997.
The Company's future gross margin percentages will continue to be a
function of its sales mix between hardware sales and transaction processing
fees. Although this mix is difficult to predict, generally margins will be
lower at the beginning of a new client system roll out due to the intensity of
smart card readers and smart card sales. Once the initial rollout is completed,
gross margins are expected to increase due to a sharp increase in use of the
smart card by cardholders and the resulting transaction processing fees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $299,204 or 15.35% in 1996 as compared to
1995. The higher level of selling, general and administrative expenses in 1995
as compared to 1996 is primarily a result of a net receivable write off of
$486,755 as a result of the Company's acquisition of Sprinticket in 1995.
Selling, general and administrative costs increased $1,125,212 or 68.18% in 1997
as compared to 1996 primarily as a result of expanded payroll costs associated
with an increased number of full time and contract employees. The Company had
staff levels of between fifteen and thirty-five employees as of the end of 1997
as compared to eight to fifteen throughout 1996. The Company expects the level
of selling, general and administration costs to increase substantially as a
result of increased marketing activities and an increase in operating and
technical personnel to support its sales revenues and continued development of
new products and concepts. Additionally, the Company has leased a new 8,700
square foot building in Santa Rosa, California which has been refurbished into a
new state of the art transaction-processing center. Construction of the facility
buildout occurred in the second and third quarters of 1997 and was occupied in
September 1997. Additionally, the Company incorporated a wholly owned subsidiary
and opened a sales and marketing office in Honolulu, Hawaii during the third
quarter 1997.
The Company anticipates substantial investments in its sales and
marketing and product development activities in the foreseeable future as it
seeks to continue to develop products and secure contracts for its smart card
systems and transaction processing fees and resulting sales of smart cards and
smart card terminals and unattended kiosks.
-11-
<PAGE>
AMORTIZATION OF SOFTWARE. Amortization of software costs decreased
$200,413 or 27.17% in 1996 as compared to 1995. The higher level of amortization
of software costs in 1995 as compared to 1996 is a result of the write off in
1995 of software costs acquired in the purchase of PT Link in 1994. Amortization
of software costs increased $56,227 or 10.47% in 1997 as compared to 1996 due to
an increase in software costs capitalized in 1997. Software costs capitalized
increased in 1997 compared 1996 due to increases in technical staff and software
costs acquired in connection with the purchase of minority interests in
SPRINTICKET, Inc.
The Company notes that given prevailing standards for the accounting
for software development costs, the Company would, if it were determined that an
impairment of software costs existed, write down the value at which such
software development costs are carried in the Company's financial statements.
Any such write down, if made, would be reflected as a charge to operations in
the period any such impairment was determined and could have a material adverse
effect on the Company's financial position and the results of operations for
such period. The Company believes its capitalized software costs is not
impaired, and is stated at net realizable value.
DEPRECIATION. Depreciation increased $46,296 or 61.75% in 1996
compared to 1995 primarily due to an increase in capital expenditures in 1996
and a full year of depreciation on the unattended kiosk systems purchased in
1995. Depreciation increased $87,545 or 72.19% in 1997 as compared to 1996 due
to an increase in capital expenditures of $483,693 which resulted primarily from
the addition of computer equipment to support an increase in technical and
marketing activities and personnel, and the build-out of the Company's Santa
Rosa, California transaction processing center.
INTEREST. Interest expense increased $39,706, or 12.1%, in 1996
compared to 1995 due primarily to increases in the total debt outstanding. In
the third and fourth quarters of 1996, the Company received sufficient funds
from sales of its common stock to significantly pay down its long-term debt. In
addition, the Company successfully restructured its bank debt and converted
$1,470,331 of interest bearing debt to common stock. In 1997, the Company
reduced its long-term debt by $40,250 and received proceeds from its initial
public offering and the exercise of stock warrants and options totaling
$5,875,092. As a result of the decrease in long-term debt in 1997 and increased
interest income earned from investing the proceeds of stock sales, net interest
expense declined $316,271, or 86.1%, in 1997 as compared to 1996. The Company
anticipates that its future borrowings and interest expense will continue to
significantly decline.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $3,148,595 and $1,496,074 at
December 31, 1997 and 1996, respectively. The increase in working capital was
primarily the result of receipt of proceeds from the sale of 833,333 shares of
common stock in the Company's initial public offering and the exercise of stock
warrants and options in 1997. The net proceeds from the sale of the shares were
$4,857,956. The Company also received $1,017,136 in 1997 from the exercise of
stock warrants and options. In the third quarter 1997, the Company restructured
the payment terms of a $364,000 note payable to a bank previously due in July
1997 to be payable in equal quarterly installments through May 1999. In
addition, the Company entered into a master lease agreement with a bank, which
provides up to $400,000 of credit to the Company for the lease of certain
computer and office equipment and furniture for a period of three years. The
lease provisions require the company to maintain $200,000 in a certificate of
deposit at the bank provided as collateral for the lease and to deposit
additional funds if available cash and cash equivalents are not maintained above
$800,000; of the $200,000 collateral, $70,500 was classified as restricted cash
at December 31, 1997. Also, at December 31, 1997 the Company had drawn down
approximately $141,000 on the lease line of credit and has approximately
$259,000 available.
The Company has historically relied upon proceeds from the sale or
issuance of its common shares and from the issuance of notes payable to satisfy
its working capital requirements. The Company expects to continue to depend
upon equity financing to fund operations and satisfy its working capital needs
until they are able to generate significant sales or achieve profitability.
There can be no assurance that the Company will achieve sales of the magnitude
-12-
<PAGE>
to generate sufficient cash flow from operations to continue to execute its
business plans. However, the Company believes that the potential revenue to
be realized from the rollout of its current contracts, its current cash
resources and available trade and other credit facilities are sufficient to
meet its present anticipated working capital needs for 1998. The Company's
estimate of its cash requirements and its ability to meet them are forward
looking statements, and there can be no assurance that the Company's cash
requirements will be met without additional debt or equity financing. There
can be no assurance that, if needed, additional financing will be available
on acceptable terms to the Company if at all.
The Company has evaluated the integrity and reliability of its
financial and operational systems and believes that it has no material Year 2000
issues with such systems. All products currently provided by the Company are
Year 2000 compliant. The costs of achieving Year 2000 compliance are not
expected to have a material impact on the Company's business, financial
condition or results of operations. In addition, the Company is also
communicating with its principal customers, suppliers and service providers to
ensure Year 2000 issues will not have an adverse impact on the Company. Until
the Company's assessment of external Year 2000 issues is completed, the Company
will not know whether such issues may materially adversely affect the Company's
business, financial position or results of operations.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company leases its principal facilities totaling approximately
8000 square feet in Woodinville, Washington. The lease expires in 2000. The
Company believes that its existing space will be adequate through at least 2000.
The Company has also leased additional space for a transaction processing
office and marketing office in Santa Rosa, California, and a marketing office in
Honolulu, Hawaii.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 31, 1998, by (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; (ii) each of the Company's officers and
directors; and (iii) all officers and directors as a group.
As of March 31, 1998, there were 12,904,487 shares of Common Stock
outstanding. Each share of Common Stock is entitled to one vote per share.
-13-
<PAGE>
Name and Address of Shares of Common Percent of Common
Beneficial Owners and Stock Beneficially Stock Beneficially
Directors and Officers Owned Owned
- --------------------------------------------------------------------------------
5% Beneficial Owners:
- ---------------------
Allen & Company, Inc. 2,778,932 21.5%
711 Fifth Avenue
New York, New York 10022
Herman Sarkowski 638,426 4.9%
c/o Sarkowski Investment Corporation
700 Fifth Avenue, Suite 6100
Seattle, Washington 98104
Officers and Directors:
- -----------------------
Carey F. Daly, II 2,429,437(1) 18.7%
1221 North Dutton Ave.
Santa Rosa, California 95401
Mark T. Schuur 6,667(2) *
14201 NE 200th Street
Woodinville, WA 98072
Glenn A. Okun 511,303(3) 4.0%
1221 North Dutton Ave.
Santa Rosa, California 95401
Officers and Directors as a 3,011,540 23.3%
Group ( 5 persons)
* Less than 1%.
- --------------------------------------------------------------------------------
(1) Includes (a) 1,876,978 shares held in a deferred compensation trust for the
benefit of Mr. Daly and (b) options to acquire 66,667 shares, which options
are currently exercisable. Excludes (a) 203,000 shares owned by Mr. Daly's
wife, and (b)options to acquire 133,333 shares, which options are not
currently exercisable.
(2) Excludes options to acquire 28,333 shares, which options are not currently
exercisable.
(3) Includes 75,000 shares owned by Mr. Okun jointly with his wife.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS.
CAREY F. DALY, age 53, is the President and Chief Executive Officer of
the Company and the Chairman of the Board of Directors. Mr. Daly founded The
Pathways Group, Inc. in October 1993. Mr. Daly is also President of Pathways
International, Ltd. (1987) and SPRINTICKET, Inc. (1992). Mr. Daly has over 29
years of computer operating system, computer programming, and design experience.
From 1968 to 1969, Mr. Daly served as an internal auditor and Director of
Financial Planning for American Standard, Baltimore, MD. He also worked for
major computer companies as a systems engineer in Baltimore, Maryland from 1970
through 1973. He received an LLB degree in Business Law from LaSalle University
in 1974 and a BS degree in Accounting as well as an AA in Computer Science from
Baltimore Business College in 1968.
Mr. Daly is the software engineering designer of the SPRINTICKET
product line, the Pathways Medical smart card system, the Pathways E-Teller
Transaction Processing System, as well as, several other commercial software
systems.
-14-
<PAGE>
MARK SCHUUR, age 37, is Senior Vice President and Chief Financial
Officer and a Director of the Company and has been with the Company since
September 1996. From May 1992 through September 1996, Mr. Schuur served as
Chief Financial Officer, Treasurer and a Director of Pizza Blends Inc.,
Western Blending Inc. and Flavor Blends Inc., affiliated privately- held food
manufacturers based in Bellevue, Washington. Prior to that, Mr. Schuur was a
General Practice Manager at Coopers & Lybrand in Seattle, Washington. Mr.
Schuur received his B.A. degree in business administration (accounting
emphasis) from the University of Washington in 1983.
GLENN A. OKUN, age 35, has been a Director of the Company since the
fourth quarter of 1996. As of April 1998, Mr. Okun is the Chairman and Chief
Executive Officer of Mitchum, Jones & Templeton, Inc. an investment banking
firm. For more than five years prior to April 1998, Mr. Okun was a Director
and Vice President of Allen & Company Incorporated, an investment banking
firm. Allen & Company has acted as a financial advisor to the Company since
May 1995. Mr.Okun received a masters of business administration and a law
degree from Harvard University in 1989.
JOSEPH SCHULER, age 56, has been Senior Vice President, Business
Development, of the Company since December 1997. From June 1996 through October
1997, Mr. Schuler was the Director of Sales and Marketing for Schlumberger Smart
Cards and Systems, where he was responsible for the development of a sales and
marketing program for smart cards. Mr. Schuler was the Senior Vice President of
New Business Development and Marketing for Stored Value Systems, a National City
Company, from September 1995 through May 1996. Prior to September 1995, Mr.
Schuler acted as an independent consultant for companies in the smart card
business. Mr. Schuler is a graduate of the Carlson School of Management of the
University of Minnesota.
BOB HALLER, age 43, is the Senior Vice President of Marketing and
Sales of the Company. Mr. Haller joined SPRINTICKET, Inc. as the Sales Manager
in November 1992. Previously, he was Sales Manager of QT, Inc. His primary roles
of responsibility have been the direct sales and marketing efforts in the ski
and amusement park industries. Mr. Haller received a BS in Human Biology from
the University of Washington in 1977.
ITEM 6. EXECUTIVE COMPENSATION.
The following table shows compensation for services rendered to the
Company during the fiscal years ended December 31, 1997, 1996 and 1995,
respectively, by the Chief Executive Officer and the Senior Vice President,
and Chief Financial Officer. Each executive officer serves under the
authority of the Board of Directors. No other executive officer of the
Company received cash compensation that exceeded $100,000 during the fiscal
years ended December 31, 1997, 1996 and 1995. Therefore, pursuant to Item 402
of Regulation S-B, only compensation for each of the Chief Executive Officer
and the Senior Vice President, and Chief Financial Officer.
-15-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------------------------------------------------------------------------------
Awards Payouts
------------------------------------
Securities All Other
Other Annual Restricted Underlying LTIP Compen-
Name and Principal Compensation Stock Options/SARs(1) Payout sation
Position Year Salary($) Bonus ($) ($) Award(s)($) (#) s($) ($)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carey F. Daly, II, 1997 $200,000 $20,000 $ 8,333(a) 0 0 0 0
President and Chief 1996 200,000 0 12,500(a) 0 200,000/0 0 0
Executive Officer 1995 137,809 0 0 0 0 0
Mark F. Schuur, 1997 $112,916 0 0 0 15,000/0 0 0
Senior Vice President 1996 35,333(b) 0 0 0 20,000/0 0 0
and Chief Financial 1995 -- -- -- -- -- --
Officer
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents payment for accrued vacation benefits.
(b) Mr. Schuur's employment with the Company commenced in September 1996.
ITEM 7. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
Mr. Carey F. Daly, II, the President and Chief Executive Officer of
the Company, has previously personally guaranteed $1,292,500 principal amount of
indebtedness of the Company. In May 1995, April 1996 and September 1996, the
Company issued an aggregate of 646,250 shares of its Common Stock to Mr. Daly in
consideration for his entering into such guaranty.
In 1996, the Company issued to Allen & Company Incorporated, a
financial advisor to the Company, 300,000 shares of its Common Stock in payment
for $300,000 in fees owed by the Company to Allen & Company for financial
consulting services. Allen & Company purchased shares of Common Stock of the
Company (including the 1996 fee for services issuance) in connection with a
series of transactions at a weighted average price per share of $0.70. Mr.
Glenn Okun, a director of the Company, was, until April 1998, also a Director
and Vice President of Allen & Company.
ITEM 8. DESCRIPTION OF SECURITIES.
The following is a summary of the provisions of the Company's
Certificate of Incorporation and By-Laws, and is qualified in its entirety by
reference thereto.
The Company is authorized to issue up to 50,000,000 shares of Common
Stock, par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par
value $0.01 per share ("Preferred Stock"). There are currently 12,904,487
shares of Common Stock outstanding and no shares of Preferred Stock outstanding.
The Company's Certificate of Incorporation provides that the Board of
Directors, without stockholder approval, has the authority to issue Preferred
Stock from time to time in series and to fix the
-16-
<PAGE>
stockholder approval, has the authority to issue Preferred Stock from time to
time in series and to fix the designation, powers (including voting powers, if
any), preferences and relative, participating, optional, conversion and other
special rights and the qualifications, limitations and restrictions of each
series.
No holder of Common Stock has any pre-emptive right to subscribe for
any securities of the Company. All outstanding shares of capital of the Company
are fully paid and non-assessable. Holders of Common Stock are not entitled to
cumulative voting and are entitled to one vote per share with respect to all
matters that are required by law to be submitted to the stockholders, including
the election of directors.
The transfer agent for the Company's Common Stock is American Stock
Transfer Company, 40 Wall Street, New York, New York.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS.
The Company's Common Stock is traded in the NASDAQ over-the-counter
market under the symbol PTHW. As quoted in the Monthly Statistical Reports of
the National Association of Securities Dealers, Inc., the approximate high and
low closing prices for each fiscal quarter in the two fiscal years ended
December 31, 1996 and December 31, 1997 were as follows:
Common Stock Prices
-------------------
Fiscal Quarter: High Low
1st Qtr 97 -- --
2nd Qtr 97 -- --
3rd Qtr 97 $20.50 $6.00
4th Qtr 97 26.50 19.00
1st Qtr 98 25.00 23.50
2nd Qtr 98 25.00 24.75
During the second quarter of fiscal 1998 (through April 14, 1998), the
Company's Common Stock had a high price of $25.00 and a low of $24.75.
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
As of March 31, 1998, there were approximately 79 holders of record of
the Company's Common Stock. This number of holders of record does not include
beneficial owners of the Company's Common Stock, which shares are held in the
names of various security holders, dealers and clearing agencies. The Company
believes that the number of beneficial owners of its Common Stock held by others
or in nominee names exceeds 440 in number. The Company has not paid any cash
dividends, and does not anticipate doing so in the immediate future as it
intends to invest any earnings in the development of the Company's business.
-17-
<PAGE>
ITEM 2. LEGAL PROCEEDINGS.
Not applicable.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The Company offered its common stock to the public in July 1997
pursuant to Regulation A of the Securities Act of 1993, as amended ("Securities
Act"). The Company sold 833,333 shares of Common Stock for a purchase price of
$6.00 per share. The offering commenced on July 15, 1997, and terminated on
July 21, 1997. All shares offered were sold, providing $5,000,000 in gross
proceeds to the Company.
In June 1996, the Company sold 4,368,885 shares of Common Stock to
Allen & Company Incorporated for $3,250,000 and 10,000 shares of Common Stock to
other investors for $10,000. In December 1996, the Company, as consideration
for an investment of $2,000,000, issued to two accredited investors, 783,734
shares of its Common Stock and a warrant to purchase 335,886 shares of the
Company's Common Stock for an aggregate exercise price of $1,000,000. In June
1996, the Company issued to Allen & Company Incorporated, in consideration of
services provided, 300,000 shares of the Company's Common Stock. In July 1996,
Allen & Company Incorporated exercised 440,000 Common Stock warrants originally
issued in consideration of services provided. The Company issued, in September
1996, 225,000 shares of its Common Stock to acquire substantially all of the
remaining minority interest in a majority-owned subsidiary. In the third and
fourth quarters of 1996, the Company restructured its debt and converted
$1,470,331 of interest-bearing debt to 1,470,331 shares of Common Stock, and
issued 1,161,762 shares to Mr. Daly and others to satisfy accrued wages and
other expenses. In April and September 1996, the Company issued 542,292 shares
of Common Stock to Carey F. Daly, II, the President and Chief Executive Officer
and a Director of the Company, in consideration of Mr. Daly's personally
guaranteeing the debt of the Company. Based on the best information available
to the Company, all of the foregoing transactions were effected in compliance
with Section 4(2) of the Securities Act and the rules and regulations
thereunder.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company shall, to the fullest extent permitted by Section 145 of
the General Corporation Law of the State of Delaware, as the same may be amended
and supplemented, indemnify under said section from and against any and all
expenses, liabilities or other matters referred in or covered by said section,
and the indemnification provided for herein shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any By-Law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person. The Company will have the
power to purchase and maintain officers' and directors' liability insurance in
order to insure against the liabilities for which such officers and directors
are indemnified pursuant to its By-Laws.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS
CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING PROVISIONS, OR OTHERWISE, THE
COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE
COMMISSION SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT
AND IS THEREFORE UNENFORCEABLE. IN THE EVENT THAT A CLAIM FOR INDEMNIFICATION
AGAINST SUCH LIABILITIES (OTHER THAN THE PAYMENT BY THE COMPANY OF EXPENSES
INCURRED OR PAID
-18-
<PAGE>
BY A DIRECTOR, OFFICER OR CONTROLLING PERSON OF THE COMPANY IN THE SUCCESSFUL
DEFENSE OF ANY ACTION, SUIT OR PROCEEDING) IS ASSERTED BY SUCH DIRECTOR, OFFICER
OR CONTROLLING PERSON IN CONNECTION WITH THE SECURITIES BEING REGISTERED, THE
COMPANY WILL, UNLESS IN THE OPINION OF ITS COUNSEL THE MATTER HAS BEEN SETTLED
BY CONTROLLING PRECEDENT, SUBMIT TO A COURT OF APPROPRIATE JURISDICTION THE
QUESTION WHETHER SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN
THE ACT AND WILL BE GOVERNED BY THE FINAL ADJUDICATION OF SUCH ISSUE.
The Company carries directors' and officers' liability insurance
covering losses up to $3,000,000 (subject to certain deductible amounts).
-19-
<PAGE>
PART F/S
-20-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
The Pathways Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Pathways
Group, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the three years ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Pathways Group,
Inc. and Subsidiaries as of December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for the three years ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND
Seattle, Washington
February 24, 1998
F-1
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
Current assets:
Cash and cash equivalents $ 3,759,720 $ 2,390,127
Accounts receivable 66,493 102,511
Inventory 202,749 382,089
Prepaid expenses and deposits 101,407
------------ ------------
Total current assets 4,130,369 2,874,727
------------ ------------
Restricted cash 70,500
Software, net of accumulated amortization
of $1,911,830 and $1,318,371 1,605,098 1,758,850
Property and equipment, net of
accumulated depreciation 722,678 388,280
Other assets 188,195 50,282
------------ ------------
Total assets $ 6,716,840 $ 5,072,139
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks, current maturities $ 551,991 $ 370,250
Accounts payable 206,986 664,767
Accrued expenses 222,797 343,636
------------ ------------
Total current liabilities 981,774 1,378,653
Notes payable to banks, net of current
maturities 509,900 731,891
------------ ------------
Total liabilities 1,491,674 2,110,544
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, .01 par value; 1,000,000
shares authorized; no shares issued
and outstanding
Common stock, .01 par value; 50,000,000
shares authorized; 12,904,487 and
11,756,004 shares issued and
outstanding, respectively 129,045 117,560
Additional paid in capital 18,052,730 12,214,123
Accumulated deficit (12,956,609) (9,370,088)
------------ ------------
Total stockholders' equity 5,225,166 2,961,595
------------ ------------
Total liabilities and stockholders' equity $ 6,716,840 $ 5,072,139
------------ ------------
------------ ------------
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Sales, net $ 61,785 $ 108,418 $ 512,250
Cost of sales 19,492 65,194 69,081
----------- ----------- -----------
Gross margin 42,293 43,224 443,169
----------- ----------- -----------
Selling, general and
administrative expenses 2,775,507 1,650,295 1,949,499
Amortization and write-off of software 593,459 537,232 737,645
Depreciation 208,814 121,269 74,973
----------- ----------- -----------
Total operating expenses 3,577,780 2,308,796 2,762,117
----------- ----------- -----------
Loss from operations (3,535,487) (2,265,572) (2,318,948)
Other expenses:
Interest expense, net 51,034 367,305 327,599
Loan guarantee fees to stockholder 200,000 5,000
----------- ----------- -----------
Net loss $(3,586,521) $(2,832,877) $(2,651,547)
----------- ----------- -----------
----------- ----------- -----------
Basic and fully diluted net
loss per share $(0.30) $(0.57) $(1.49)
Shares used in per share
calculation
12,102,755 4,964,640 1,784,466
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
---------------------------
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Stockholders' deficit, January 1, 1995 417,500 $ 15,118 $ 1,974,972 $ (3,760,664) $ (1,770,574)
Issuance of common stock for cash 210,000 2,100 207,900 210,000
Issuance of common stock upon conversion of
note payable to stockholder 100,000 1,000 99,000 100,000
Issuance of common stock upon conversion of
notes payable to individuals 150,000 1,500 148,500 150,000
Issuance of common stock in connection with
the acquisition of Sprinticket, Inc. 819,500 8,195 811,305 819,500
Obligation to issue common stock for loan
guarantees by a stockholder 50 4,950 5,000
Issuance of common stock for loan guarantees
by a stockholder 757,000
Issuance of warrants to purchase common stock 4,356 431,244 435,600
Net loss (2,651,547) (2,651,547)
------------ ------------ ------------ ------------ ------------
Stockholders' deficit, December 31, 1995 2,454,000 32,319 3,677,871 (6,412,211) (2,702,021)
Issuance of common stock for cash 5,162,619 51,626 5,208,374 5,260,000
Issuance of common stock for investment banking
services to stockholder 300,000 3,000 297,000 300,000
Issuance of common stock for loan guarantees to
stockholder 200,000 2,000 198,000 200,000
Issuance of common stock for loan guarantees to
stockholder (earned and accrued prior to 1996) 342,292
Exercise of warrants to purchase common stock
by stockholder 440,000 44 4,356 4,400
Issuance of common stock upon conversion of notes
payable (including 1,303,672 shares to stockholders) 1,470,331 14,703 1,455,628 1,470,331
Issuance of common stock for wages, interest, consulting
and professional fees and conversion of accrued
expenses (including 862,899 shares to stockholders) 1,161,762 11,618 1,150,144 1,161,762
Issuance of common stock for acquisition of minority
interest in SPRINTICKET, Inc. 225,000 2,250 222,750 225,000
Exchange of land for common stock of Pathways
International, Ltd. (125,000) (125,000)
Net loss (2,832,877) (2,832,877)
------------ ------------ ------------ ------------ ------------
Stockholders' equity, December 31, 1996 11,756,004 117,560 12,214,123 (9,370,088) 2,961,595
Redemption of common stock for cash (33,737) (337) (27,663) (28,000)
Issuance of common stock for convertible debenture 3,000 30 2,970 3,000
Issuance of common stock upon exercise of stock
options and warrants 345,887 3,459 1,013,677 1,017,136
Net proceeds from initial public offering of common stock 833,333 8,333 4,849,623 4,857,956
Net loss (3,586,521) (3,586,521)
------------ ------------ ------------ ------------ ------------
Stockholders' equity, December 31, 1997 12,904,487 $ 129,045 $ 18,052,730 $(12,956,609) $ 5,225,166
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,586,521) $(2,832,877) $(2,651,547)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 208,354 121,269 74,973
Amortization and write-off of software 593,459 537,232 737,645
Investment banking services 300,000
Loan guarantee fees 200,000
Issuance of common stock for wages, interest,
consulting and professional fees 281,573
Issue of warrants to purchase common stock 435,600
Loan guarantee fees to stockholder 5,000
Write-off of net accounts receivable 486,755
Effects of changes in operating assets and
liabilities, net of effects from acquisition
of businesses:
Trade accounts receivable 36,018 (77,965) (16,870)
Inventory 56,963 (331,857)
Prepaid expenses and deposits (101,407) 29
Other assets (137,913) (38,838) 2,268
Accounts payable (335,404) 107,554 75,938
Accrued expenses (120,839) (206,571) 592,771
----------- ----------- -----------
Net cash used in operating activities (3,387,290) (1,940,480) (257,438)
----------- ----------- -----------
Cash flows from investing activities:
Restricted cash (70,500)
Capital expenditures (542,752) (59,059) (7,528)
Capitalized software development costs (439,707) (236,946) (301,165)
Cash acquired in acquisition of businesses 55,374
----------- ----------- -----------
Net cash used in investing activities (1,052,959) (296,005) (253,319)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on notes payable to banks (34,750) (517,532) (15,993)
Principal payments on notes payable to stockholders (2,500) (111,634) (2,385)
Principal payments on notes payable to others (517,161) (2,682)
Redemption of common stock (28,000)
Proceeds from notes payable to banks 4,361
Proceeds from notes payable to stockholders 35,670 130,568
Proceeds from notes payable to others 463,500 195,659
Proceeds from issuances of common stock,
net of offering costs of $142,044 5,875,092 5,264,400 210,000
----------- ----------- -----------
Net cash provided by financing activities 5,809,842 4,617,243 519,528
----------- ----------- -----------
Increase in cash and cash equivalents 1,369,593 2,380,758 8,771
Cash and cash equivalents, beginning of year 2,390,127 9,369 598
----------- ----------- -----------
Cash and cash equivalents, end of year $ 3,759,720 $ 2,390,127 $ 9,369
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
THE COMPANY
The accompanying consolidated financial statements include the accounts of
The Pathways Group, Inc. ("TPG") and its wholly-owned and majority-owned
subsidiaries as of December 31, 1997 and 1996 and for the three years ended
December 31, 1997. All intercompany balances and transactions have been
eliminated. TPG's subsidiaries include Pathways International, Ltd.
("PIL"), SPRINTICKET, Inc. ("ST"), PT Link, Inc. ("PT Link") and the
Pathways Group, a wholly-owned subsidiary incorporated in the state of
Hawaii in August 1997. TPG and its subsidiaries (the "Company") are
primarily engaged in providing specialized transaction processing services
through the development of proprietary software and hardware systems
including credit card and multiple application smart card technologies.
The Company derives its revenue principally from transaction processing
fees charged to the merchant and the sale of related terminals, hardware
systems and smart cards.
BUSINESS COMBINATIONS
In April 1995, TPG acquired 77.53% of the outstanding stock of ST through
the issuance of 819,500 shares of TPG's common stock. This transaction has
been accounted for as a purchase in accordance with generally accepted
accounting principles.
A summary of the allocation of the purchase price for this acquisition is
as follows:
Assets acquired:
Cash $ 55,374
Accounts receivable 8,522
Inventory 50,232
Property and equipment 475,319
Software 1,328,642
Other assets 1,508
-----------
Total assets acquired 1,919,597
Liabilities assumed (1,100,097)
-----------
$ 819,500
-----------
-----------
In 1996 and 1997, TPG acquired the remaining minority interest in ST. The
Company's acquisition of the remaining minority interest of ST was
accounted for as a purchase with the purchase price of $300,000 being
allocated to software and amortized in accordance with the Company's
amortization policy.
F-6
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:
REINCORPORATION
In May 1997, TPG reincorporated in the State of Delaware. At such time,
the number of authorized shares of common stock was reduced from
500,000,000 to 50,000,000. The par value was changed to $.01 per share and
1,000,000 shares of preferred stock were authorized. All prior periods
presented have been adjusted to reflect these changes in the capital stock
accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt securities purchased with an original
maturity of three months or less to be cash equivalents. As of December
31, 1997 and 1996, cash equivalents consisted of money market accounts and
U.S. Treasury Bills.
INVENTORY
Inventory is stated at the lower of cost (as determined by the first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is
provided by the straight-line method over the estimated useful lives of the
property and equipment which is estimated to be five years, with the
exception of computer equipment as to which the life is three years.
Expenditures for renewals and betterments are capitalized; expenditures for
maintenance and repairs are charged to expense as incurred. The cost and
accumulated depreciation of assets sold or otherwise disposed of are
removed from the accounts, and the related gains and losses are included in
the results of operations.
F-7
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
SOFTWARE
Software development costs incurred in conjunction with product development
are charged to expense until technological feasibility is established.
Thereafter, all software development costs are capitalized and reported at
the lower of unamortized cost or net realizable value of each product. In
1997, approximately $102,000 was charged to research and development. In
1996 and 1995, research and development expenses were not material. The
establishment of technological feasibility and the on-going assessment of
the recoverability of costs require considerable judgment by the Company
with respect to certain external factors, including, but not limited to,
anticipated future gross product revenues, estimated economic life and
changes in software and hardware technology. After consideration of the
above factors, the Company amortizes capitalized software costs by the
greater of (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated economic life
of the product including the period being reported on, generally five
years.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is recorded for the amount of income tax
payable or refundable for the period increased or decreased by the change
in deferred tax assets and liabilities during the period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents and accounts receivable
approximate fair value due to their short-term maturities. The carrying
value of debt approximates their estimated fair values because the rates of
interest on the debt approximates current interest rates for similar
obligations with like maturities.
F-8
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its cash with high quality financial
institutions. At times, such cash may exceed federally insured limits.
Approximately 55% and 63% of accounts receivable at December 31, 1997 and
1996 are concentrated with one customer.
REVENUE RECOGNITION AND REVENUE SHARING AGREEMENTS
Revenue from hardware and software sales are recognized when a product is
shipped. The Company has revenue sharing and transaction processing
agreements with merchants who process commercial transactions through the
Company's hardware and software systems provided on site to the merchants.
Transaction processing fee revenue is recognized at the time transactions
are processed and the related transaction fee has been collected.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates and assumptions.
It is reasonably possible that the estimates of anticipated future gross
revenues and the remaining estimated economic life of the Company's
products used to calculate amortization of software development costs may
be reduced significantly in the near term. As a result, the carrying
amount of the capitalized software costs may be reduced materially in the
near term.
F-9
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVENTORY:
Inventory at December 31, 1997 and 1996 consisted of the following:
1997 1996
--------- ---------
Smart cards and related packaging $ 149,204 $ 185,834
Smart card terminals and computer hardware 53,545 145,004
Materials and supplies 51,251
--------- ---------
$ 202,749 $ 382,089
--------- ---------
--------- ---------
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997 and 1996 consisted of the
following:
1997 1996
---------- ----------
Ticket dispensing systems $ 465,500 $ 465,500
Computer equipment and software 367,907 87,059
Furniture and fixtures 42,635 34,031
Leasehold improvements 258,239 4,939
---------- ----------
1,134,281 591,529
Less accumulated depreciation (411,603) (203,249)
---------- ----------
$ 722,678 $ 388,280
---------- ----------
---------- ----------
Computer equipment and software includes $56,384 for software purchased but
not placed in service in 1997.
5. OTHER ASSETS:
In 1992, the Company acquired land for $250,000 in exchange for a $125,000
note payable and the issuance of 10,000 shares of common stock. In August
1996, the Company entered into an agreement whereby the land was returned
to the seller in exchange for the note payable and the shares of common
stock. There was no gain or loss as a result of the settlement.
F-10
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
6. NOTES PAYABLE TO BANKS:
Notes payable to banks at December 31, 1997 and 1996 consisted of the
following:
1997 1996
--------- ---------
Note payable to bank, interest at bank's
prime rate (8.5% at December 31,1997) plus
2%, principal due in February 1998, interest
due monthly, guaranteed by certain stockholders
and collateralized by substantially all of
the assets of TPG $ 50,000 $ 50,000
Note payable to bank, interest at bank's prime
rate (8.5% at December 31, 1997) plus 1.5%,
principal due in various installments from
February 1988 through November 1998,
interest due monthly, guaranteed by certain
stockholders and collateralized by
substantially all of the assets of PIL 190,000 190,000
Note payable to bank, interest at bank's prime
rate (8.5% at December 31, 1997) plus 1.5%,
principal due in various installments from
May 1998 through February 1999, interest due
monthly, guaranteed by certain stockholders
and collateralized by substantially all of
the assets of PIL 150,000 150,000
Note payable to bank, interest at prime (8.5%
at December 31, 1997) plus 1.5%, principal due
in various installments from February 1998
through May 1, 1999 (however, the note payable
will be due in full upon the sale or transfer
of either a controlling ownership interest
in PT Link or substantially all of PT Link's
assets occurring prior to May 1, 1999),
interest due monthly and collateralized by
substantially all of the assets of PT Link 330,000 364,750
Note payable to bank, interest at prime
(8.5% at December 31, 1997) plus 2.75%,
principal due in various installments from
February 1998 through September 2001,
interest due monthly, guaranteed by certain
stockholders, and collateralized by
substantially all of the assets of PIL 341,891 341,891
Other 5,500
--------- ---------
1,061,891 1,102,141
Less current maturities (551,991) (370,250)
--------- ---------
$ 509,900 $ 731,891
========= =========
F-11
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. NOTES PAYABLE TO BANKS, CONTINUED:
The contractual principal maturities of notes payable to banks at December
31, 1997 are as follows:
1998 $ 551,991
1999 336,712
2000 107,901
2001 65,287
----------
$1,061,891
----------
----------
7. ACCRUED EXPENSES:
Accrued expenses at December 31, 1997 and 1996 consisted of the following:
1997 1996
Interest payable $ 20,403 $ 105,273
Accrued payroll and related taxes 4,800 70,433
Insurance premiums payable 48,798
Other accrued expenses 148,796 167,930
--------- ---------
$ 222,797 $ 343,636
--------- ---------
--------- ---------
F-12
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES:
At December 31, 1997, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $10,794,000 which expire
through 2012. As a result of acquisitions, the availability of these net
operating losses will be limited to a prescribed amount each year as
specified in the Internal Revenue Code. Net operating losses accumulated
through the dates of acquisition of PT Link and ST will be limited to
their separate taxable income.
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate of 34%:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal income tax benefit at statutory rate $(1,219,417) $ (963,178) $ (901,526)
Losses which provide no current tax benefit 1,215,851 949,604 899,884
Other, net 3,566 13,574 1,642
----------- ----------- -----------
Income tax benefit $ - $ - $ -
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Deferred income taxes under the liability method reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
F-13
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES, CONTINUED:
The significant components of the Company's deferred income tax assets and
liabilities at December 31, 1997 and 1996 are as follows:
1997 1996
Deferred income tax assets:
Tax loss carryforwards $ 3,670,117 $ 2,455,601
Debt guarantee fees to stockholder 439,466 439,466
Accrued compensation 203,809 202,990
Other 22,242 4,430
----------- -----------
Deferred income tax assets 4,335,634 3,102,487
----------- -----------
Deferred income tax liability:
Depreciation 53,741 36,715
----------- -----------
Deferred income tax liability 53,741 36,715
----------- -----------
Valuation allowance (4,281,893) (3,065,772)
----------- -----------
Net deferred income tax assets $ - $ -
----------- -----------
----------- -----------
A full valuation allowance has been recorded at December 31, 1997 based on
management's determination that the recognition criteria for realization
has not been met.
9. COMMITMENTS:
LEASE COMMITMENTS
The Company leases its facilities in Woodinville, Washington, Santa Rosa,
California and Honolulu, Hawaii and also leases certain vehicles and office
equipment under operating lease agreements expiring in the years 1998 to
2002. In 1997, the Company entered into a master lease agreement with a
bank which provides up to $400,000 of credit to the Company for the lease
of certain computer and office equipment and furniture. The lease is for a
period of 34 months and contains an option to acquire the equipment at the
end of the lease term for the fair market value of the equipment. The
lease provisions require the Company to maintain up to $200,000 in a
certificate of deposit at the bank as collateral for the lease, and to
deposit additional funds if the Company's cash and cash equivalents are not
maintained above $800,000. Of the $200,000, $70,500 has been classified as
restricted cash at December 31, 1997.
F-14
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. COMMITMENTS, CONTINUED:
LEASE COMMITMENTS, CONTINUED
This lease has been accounted for as an operating lease. As of December
31, 1997, the Company has drawn approximately $141,000 on the lease line
and has approximately $259,000 available. The approximate future minimum
rental commitments as of December 31, 1997 under these operating leases are
as follows:
1998 $ 295,000
1999 262,000
2000 252,000
2001 158,000
2002 96,000
----------
$1,063,000
----------
----------
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $147,000, $100,000 and $61,000, respectively.
PURCHASE COMMITMENTS AND DEPOSITS
As of December 31, 1997, the Company has made deposits of $118,087 towards
purchase commitments on furniture and computers totaling $223,112. The
deposits are included in other assets.
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS:
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain employees
and officers. The agreements provide for future salary, benefits and stock
option grants to the employee/officers during their terms of employment.
The agreements also contain non-compete restrictions on the
employee/officers and provide for certain severance obligations in the
event of termination without cause (as defined). In addition, one of the
officers receives one-half share of TPG common stock for each dollar of
debt personally guaranteed by the officer. In 1996 and 1995, the officer
earned 200,000 and 5,000 shares of TPG common stock under this provision.
F-15
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS, CONTINUED:
STOCK OPTIONS
In December 1997, the Company's Board of Directors adopted The Pathways
Group, Inc. 1996 Stock Incentive Plan (the "Plan"), which provides for the
issuance of incentive stock options ("ISOs") and non-qualified options to
key management and reserved a total of 2,000,000 shares of common stock
pursuant to the Plan.
ISOs may be issued only to employees of the Company and have a maximum term
of 10 years from the date of grant. The exercise price for ISOs may not be
less than 100% of the estimated fair market value of the common stock at
the time of the grant, and the aggregate fair market value (as determined
at the date of the grant) of shares issuable upon the exercise of ISOs for
the first time in any one calendar year may not exceed $100,000. In the
case of options granted to holders of more than 10% of the voting power of
the Company, the exercise price may not be less than 110% of the estimated
fair market value of the common stock at the time of grant, and the term of
the option may not exceed five years. Options become exercisable in whole
or in part from time to time as determined by the Board of Directors, which
will administer the Stock Incentive Plan. Generally, options vest over
periods ranging from one to three years.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock Based Compensation". The Company has elected to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair value of the
Company's stock at the date of grant over the exercise price to be paid to
acquire the stock.
F-16
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS, CONTINUED:
STOCK OPTIONS, CONTINUED
Option activity for the years ended December 31, 1997 and 1996 is as
follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
Balance, January 1, 1996 -
Granted 230,000 $ 2.83
Exercised -
Canceled -
------- --------
Balance, December 31, 1996 230,000 2.83
Granted 214,000 19.79
Exercised (10,001) 1.71
Canceled (6,666) 3.00
------- --------
Balance, December 31, 1997 427,333 $ 11.35
------- --------
------- --------
No compensation expense has been recorded for options granted in 1997 and
1996 because the exercise price of the options granted was equal to the
fair value of the related shares based upon the price of the Company's
common stock.
The following table summarizes information about options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ ----------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING WEIGHTED
AVERAGE NUMBER OF CONTRACTUAL LIFE NUMBER OF AVERAGE
EXERCISE PRICES SHARES (IN YEARS) SHARES EXERCISE PRICE
$ 2.88 213,333 9 66,667 $3.00
15.00 100,000 10
24.00 114,000 10
F-17
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS, CONTINUED:
STOCK OPTIONS, CONTINUED
Pro forma information regarding the net loss is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee
stock options granted after December 31, 1995 under the fair value method
of that statement. The fair value of options granted in 1997 was estimated
at the date of grant using the Black-Scholes option pricing model assuming
no expected dividends and the following weighted-average assumptions:
risk-free interest rates of 5.79% to 5.93%; volatility of 55%; and expected
lives of 3 to 5 years. The weighted average fair value of options granted
in 1997, as calculated using the Black-Scholes option pricing model, was
$9.85 per option.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
following table presents pro forma net loss and net loss per share for the
year ended December 31, 1997 as if the Company accounted for compensation
expense related to stock options under the fair value method prescribed by
SFAS 123:
December 31,
1997
Pro forma net loss $ 3,743,575
------------
------------
Pro forma net loss per share $ 0.31
------------
------------
The fair value of options granted in 1996 was estimated on the date of
grant using the minimum value method with the following weighted average
assumptions:
Risk free interest rate 5.76% to 6.16%
Expected lives 10 years
There was no difference in 1996 compensation expense between the intrinsic
value method as reported by the Company and the fair value method
prescribed by SFAS 123 because no options vested in 1996.
F-18
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. CAPITAL STOCK TRANSACTIONS:
COMMON STOCK
In May 1995, the Company entered into an agreement with an investment
banking firm, Allen & Company Incorporated ("Allen"), whereby Allen is to
assist the Company in developing an overall plan for its corporate and
financial development and advise the Company on a variety of transaction
proposals, including financing and acquisition alternatives. The duration
of the agreement is for two years, with a provision for an automatic
extension of one year, unless either party elects to terminate the
agreement. In connection with the agreement, the Company issued Allen
warrants to purchase 440,000 shares of TPG stock at $.01 per share for
services to be provided by Allen. In 1996, the warrants were exercised for
440,000 shares of common stock by Allen for consideration of $4,400.
In 1996, Allen purchased 39% of the outstanding common stock of TPG for
$3,250,000. Also in 1996, the Company incurred a liability of $300,000 for
services provided by Allen. The Company settled the obligation by issuing
300,000 shares of TPG stock to Allen.
In December 1996, the Company sold through a private placement 783,734
shares of common stock for $2,000,000. In connection with the sale, the
Company issued a warrant for the purchase of 335,886 shares of its common
stock at $2.9772 per share, for an aggregate purchase price of $1,000,000.
In December 1997, the warrant was exercised in full.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
1997 1996 1995
Cash paid during the year for interest $241,637 $ 283,993 $ 97,774
Non-cash transactions:
Notes payable converted to common stock 3,000 1,470,331 250,000
Accounts payable and accrued expenses
converted to common stock 880,189
Acquisition of minority interest
in subsidiary 225,000
Exchange of land and note payable for
common stock 250,000
In 1997, the Company changed suppliers of its smart card terminals and
readers. In connection with this supplier change, the Company returned
$122,377 of smart card terminals previously recorded as inventory and
accounts payable to its former supplier.
F-19
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Certificate of Incorporation of the Company
2.2 By-Laws of the Company
10.1 Joint Marketing and Servicing Agreement, dated as of February 19,
1998, between First Hawaiian Bank and The Pathways Group, Inc.
10.2 Development Agreement, dated as of June 5, 1995, between Stephen
A. Gregg and The Pathways Group, Inc.
10.3 Authorization and Loan Agreement (Guaranty Loans) , dated
February 13, 1992, among Towne Bank of Woodinville, U.S. Small
Business Administration and Pathways International Ltd.
10.4 Restructure and Extension Agreement, dated as of July 1, 1996,
between SeaFirst Bank and The Pathways Group, Inc. and Pathways
International Ltd.
10.5 Restructure and Extension Agreement, dated as of July 1, 1997,
between SeaFirst Bank and PT Link Corporation and The Pathways
Group, Inc.
27 Financial Data Schedule (Electronic Filing Only)
ITEM 2. DESCRIPTION OF EXHIBITS
The documents required to be filed and as listed on the immediately
preceding Index to Exhibits follow immediately after the signatures below.
F-20
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE PATHWAYS GROUP, INC.
(Registrant)
Date: April 29, 1998 By /s/ CAREY F. DALY, II
Carey F. Daly, II
Chairman, CEO and President
<PAGE>
EXHIBIT 2.1
CERTIFICATE OF INCORPORATION
OF
THE PATHWAYS GROUP, INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified, and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter referred to as the
"Corporation") is The Pathways Group, Inc.
SECOND: The address, including street, number, city and county of the
registered office of the Corporation in the State of Delaware is 9 East
Loockerman Street, City of Dover, County of Kent, 19901; and the name of the
registered agent of the Corporation in the State of Delaware at such address is
National Registered Agents, Inc.
THIRD: The nature of the business and the purpose to be conducted and
promoted by the Corporation shall be to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH: The aggregate number of shares of stock which the Corporation
shall have the authority to issue is Fifty One Million (51,000,000) shares,
which are divided into Fifty Million (50,000,000) shares of Common Stock, $0.01
par value per share (the "Common Stock"), and One Million (1,000,000) shares of
Preferred Stock, $0.01 par value per share (the "Preferred Stock").
PREFERRED STOCK. The Corporation may divide and issue Preferred Stock
in series. Preferred Stock of each series when issued shall be designated to
distinguish them from shares of other series of Preferred Stock. The Board of
Directors of the Corporation is hereby expressly vested with the authority to
divide the class of Preferred Stock into series and fix and determine the
relative rights and preferences of the shares of any such series so established
to the full extent permitted by the laws of the State of Delaware in respect of
the following:
1. The number of shares to constitute such series, and the distinctive
designations thereof;
<PAGE>
2. The rate and preference of dividends, if any, the time of payment of
dividends, whether dividends are cumulative and the date from which any
dividends shall accrue;
3. Whether shares may be redeemed and, if so, the redemption price and
the terms and conditions of redemption;
4. The amount payable upon shares in the event of voluntary and
involuntary liquidation;
5. Sinking fund or other provisions, if any, for the redemption or
purchase of shares;
6. The terms and conditions on which shares may be converted;
7. Voting rights, if any; and
8. Variations in the relative rights and preferences as between the
series, including, without limitation, any restriction on an increase in
the number of shares of any series theretofore authorized, any rights of
Preferred Stock shareholders to receive dividends in the form of Common
Stock or Preferred Stock, and any limitation or restriction of rights or
powers to which shares of any future series shall be subject.
FIFTH: The name and the mailing address of the incorporator is as
follows:
Debra L. Bouyer
Werbel & Carnelutti
711 Fifth Avenue
New York, New York 10022
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as
-2-
<PAGE>
the case may be, agree to any compromise or arrangement and to any
reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which said application has been made, be
binding on all the creditors or class of creditors, and/or on all of the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
EIGHTH: No director of the Corporation shall be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the General Corporation Law of the State of Delaware is amended
after May 1, 1997 to authorize corporate action further eliminating or limiting
the personal liability of directors, the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware.
NINTH: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said section from and against any and all of the expenses,
liabilities, judgments, fines, amounts paid in settlement, liabilities, or other
matters referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights to which
those seeking indemnification of expenses may be entitled under any by-laws,
agreements, vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
-3-
<PAGE>
ELEVENTH: In furtherance and not in limitation of the powers conferred by
statute, the by-laws of the Corporation may be made, altered, amended or
repealed by the stockholders of the Corporation or by a majority of the entire
Board of Directors of the Corporation.
Signed: May 1, 1997
/s/ DEBRA L. BOUYER
------------------------------
Debra L. Bouyer
Sole Incorporator
711 Fifth Avenue
New York, New York 10022
-4-
<PAGE>
EXHIBIT 2.2
BY-LAWS
OF
THE PATHWAYS GROUP, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office shall be
established and maintained at National Registered Agents, Inc., 9 East
Loockerman Street, Dover, Delaware. National Registered Agents, Inc. shall be
the registered agent of this corporation in charge thereof.
Section 2. OTHER OFFICES. The corporation may have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
Section 1. ANNUAL MEETINGS. Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the notice
of the meeting shall be held at such place, either within or without the State
of Delaware, and at such time and date as the Board of Directors, by resolution,
shall determine and as set forth in the notice of the meeting.
Section 2. OTHER MEETINGS. Meetings of stockholders for any purpose
other than the election of directors may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting.
Section 3. VOTING. Each stockholder entitled to vote in accordance
with the terms of the Certificate of Incorporation and in accordance with the
provisions of these By-Laws shall be entitled to one vote, in person or by
proxy, for each share of stock entitled to vote held by such stockholder, but
not proxy shall be voted after three years from its date unless such proxy
provides for a longer period. Upon the demand of any stockholder, the vote for
directors and the vote upon any question before the meeting, shall be by ballot.
All elections for directors shall be decided by plurality vote; all other
questions shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation or the laws of the State of Delaware.
<PAGE>
Section 4. LIST OF STOCKHOLDERS ENTITLED TO VOTE. A complete list of
the stockholders entitled to vote at the ensuing election, arranged in
alphabetical order, with the address of each, and the number of shares held by
each, shall be opened to the examination of any stockholder for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. QUORUM. Except as otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the presence, in person or by
proxy, of stockholders holding a majority of the stock of the corporation
entitled to vote shall constitute a quorum at all meetings of the stockholders.
In case a quorum shall not be present at any meeting, a majority in interest of
the stockholders entitled to vote thereat, present in person or by proxy, shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until the requisite amount of stock entitled
to vote shall be present. At such adjourned meeting at which the requisite
amount of stock entitled to vote shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed; but only those stockholders entitled to vote at the meeting as
originally notice shall be entitled to vote at any adjournment or adjournments
thereof.
Section 6. SPECIAL MEETINGS. Special meetings of the stockholders
for any purpose or purposes may be called by the President or Secretary, or by
resolution of the directors.
Section 7. NOTICE OF MEETINGS. Written notice, stating the place,
date and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat at his
address as it appears on the records of the corporation, not less than ten nor
more than sixty days before the date of the meeting. No business other than that
stated in the notice shall be transacted at any meeting without the unanimous
consent of all the stockholders entitled to vote thereat.
Section 8. ACTION WITHOUT MEETING. Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
-2-
<PAGE>
ARTICLE III
DIRECTORS
Section 1. NUMBER OF DIRECTORS, QUALIFICATIONS, CLASSES, AND TERMS.
(a) NUMBERS OF DIRECTORS AND QUALIFICATIONS. The number of directors
of the Corporation shall initially be three, but in no event shall the number of
directors be less than one nor more than fifteen. The directors shall be elected
at the annual meeting of the stockholders and each director shall be elected to
serve until his successor shall be elected and qualified. Directors need not be
stockholders. The directors shall have such other qualifications as the then
existing Board of Directors may determine from time to time by resolution to be
suitable for the best interests of the corporation.
(b) THREE CLASSES OF DIRECTOR POSITIONS.
(i) ALLOCATING DIRECTOR POSITIONS AMONG THE THREE CLASSES. The
Board of Directors shall be divided into three classes of Director
Positions of equal size, or if the number of Director Positions is not
divisible by three so as to produce an equal whole number of Director
Positions in each class, then the number of Director Positions in the
remainder produced by the division shall be allocated among the classes in
such a way that the number of Director Positions in any class shall in no
event differ by more than one from the number of Director Positions in any
other class.
(ii) DIVISION OF EXISTING DIRECTOR POSITIONS INTO CLASSES. The
Director Positions of the three members of the original Board of Directors
shall be separated into three classes by the then existing Board of
Directors prior to the next annual meeting of shareholders to be held in
1998; and directors elected to these newly classified Director Positions in
1998 shall serve the initial terms appropriate to the class of the
particular Director Position to which each is elected.
(iii) STAGGERED TERMS: INITIAL TERMS; SUBSEQUENT TERMS. The
only distinguishing characteristic between the classes of Director
Positions shall be the beginning of the term, and the initial term for a
newly created Director Position. At the next annual meeting of shareholders
to be held in 1998, directors shall be elected to staggered terms, as
follows: Class One directors shall be elected to an initial term of one
year, and upon any election thereafter for Class One directors, each such
director shall be elected for a three year term; Class two directors shall
be elected to an initial term of two years, and upon any election
thereafter such director shall be elected for a three year term; and Class
three directors shall be elected for an initial three year term, and upon
any election thereafter such director shall be elected for a three year
term.
-3-
<PAGE>
(iv) INCREASE OR DECREASE OF NUMBER OF DIRECTOR POSITIONS. In
the event that the number of Director Positions is increased at any time,
the new Director Positions shall be assigned to classes in such a way as to
equalize as nearly as possible the number of Director Positions in each
class by the procedure described in Section 1(b)(i) of this Article III. In
the event that the number of Director Positions shall be decreased at any
time, the decrease shall be made in such a way as to equalize as nearly as
possible the number of Director Positions remaining in each class by the
procedure described in Section 1.(b)(i) of this Article III.
(v) INITIAL TERMS OF DIRECTORS ELECTED TO NEWLY CREATED DIRECTOR
POSITIONS. In the event that the number of Director Positions is increased
pursuant to Section 1(b)(iv) of this Article M, the initial term for a
director elected to a newly created Director Position shall be adjusted so
as to end at the same time as the terms for other directors occupying
existing Director Positions of the same class.
Section 2. REMOVAL. Any director or directors may be removed either
for or without cause at any time by the affirmative vote of the holders of a
majority of all the shares of stock outstanding and entitled to vote, at a
special meeting of the stockholders called for the purpose, and the vacancies
thus created may be filled, at the meeting held for the purpose of removal, by
the affirmative vote of a majority in interest of the stockholders entitled to
vote.
Section 3. INCREASE OR DECREASE OF NUMBER. The number of Director
Positions may be increased or decreased by amendment of these by-laws by the
affirmative vote of a majority of the directors, though less than a quorum, or,
by the affirmative vote of a majority in interest of the stockholders, at the
annual meeting or at a special meeting called for that purpose, and by like vote
the additional directors may be chosen at such a meeting of stockholders to hold
office until the next annual election and until their successors shall have been
elected and qualified. In the event that the number of Director Positions is
decreased, the director(s) holding the position(s) deleted shall serve until the
term (s) for which they were elected expire, unless any such director previously
has been or is, or will be, removed by vote of shareholders at a meeting called
for that purpose.
Section 4. POWERS. The Board of Directors shall exercise all of the
powers of the corporation except such as are by law or by the Certificate of
Incorporation of the corporation or by these By-Laws conferred upon or reserved
to the stockholders.
-4-
<PAGE>
Section 5. COMMITTEES.
(a) DESIGNATION OF COMMITTEES AND COMMITTEE MEMBERS. The Board of
Directors may, by resolution or resolutions passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee or committees. The member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
(b) POWERS OF COMMITTEES. Any such committee, to the extent provided
in the resolution of the Board of Directors, or in these By-Laws, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority to amend the Certificate of
Incorporation, to adopt an agreement of merger or consolidation, to recommend to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, to recommend to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or to amend the
By-Laws of the corporation; and, unless the resolution, these By-Laws, or the
Certificate of Incorporation expressly so provides, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
Section 6. MEETINGS.
(a) FIRST MEETING. The newly elected directors shall hold their
first meeting for the purpose of organization and the transaction of business,
if a quorum be present, immediately after the annual meeting of the
stockholders; or the time and place of such meeting may be fixed by consent in
writing of all the directors.
(b) REGULAR MEETINGS. Regular meetings of the directors may be held
without notice at such places and times as shall be determined from time to time
by resolution of the directors.
(c) SPECIAL MEETINGS. Special meetings of the Board may be called by
the President or the Secretary on the written request of any two directors on at
least two days' notice to each director and shall be held at such place or
places as may be determined by the directors, or as shall be stated in the call
of the meeting.
Section 7. QUORUM. A majority of the total number of directors shall
constitute a quorum for the transaction of business. If at any meeting of the
Board of Directors there shall be less than a quorum present, a majority of
those present may
-5-
<PAGE>
adjourn the meeting from time to time until a quorum is obtained, and no further
notice thereof need be given other than by announcement at the meeting which
shall be so adjourned.
Section 8. COMPENSATION. Directors shall not receive any stated
salary for their services as directors or as members of committees, but by
resolution of the Board of Directors a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or "change of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 9. DIVIDENDS. Subject to the provisions of the Certificate
of Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the corporation available
for dividends, such sum or sums as the directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the corporation.
Section 10. SEAL. The corporate seat shall be circular in form and
shall contain the name of the corporation, the year of its creation and the
words "CORPORATE SEAL DELAWARE." Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or otherwise reproduced.
Section 11. FISCAL YEAR. The fiscal year of the corporation shall be
determined by resolution of the Board of Directors. In the absence of such
determination, the fiscal year shall be the calendar year.
Section 12. CHECKS. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer or officers, agent or agents of
the corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
-6-
<PAGE>
Section 13. NOTICE AND WAIVER OF NOTICE.
(a) NOTICE. Whenever any notice is required by these By-Laws to be
given, personal notice is not meant unless expressly so stated, and any notice
so required shall be deemed to be sufficient if given by depositing the same in
the United States mail, postage prepaid, addressed to the person entitled
thereto at his address as it appears on the records of the corporation, and such
notice shall be deemed to have been given on the day of such mailing.
Stockholders not entitled to vote shall not be entitled to receive notice of any
meetings except as otherwise provided by statute.
(b) WAIVER OF NOTICE. Whenever any notice whatever is required to be
given under the provisions of any law, or under the provisions of the
Certificate of Incorporation fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefor.
Section 14. ACTION WITHOUT MEETING. Any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof, may be taken without a meeting, if a written consent thereto is signed
by all members of the Board of Directors, or of such committee as the case may
be, and such written consent is filed with the minutes of proceedings of the
Board of Directors or committee.
Section 15. PARTICIPATION BY CONFERENCE TELEPHONE. Members of the
Board of Directors of the corporation, or any committee designated by such Board
may participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
shall constitute presence in person at such meeting.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be a
President, a Treasurer and a Secretary, all of whom shall be elected by the
Board of Directors and who shall hold office until their successors are elected
and qualified. In addition, the Board of Directors may elect a Chairman, one or
more Vice Presidents and such Assistant Secretaries and Assistant Treasurers as
they may deem proper. None of the officers of the corporation need be directors.
The officers shall be elected at the first meeting of the Board of Directors
after each annual meeting. More than two offices may be held by the same person.
Section 2. OTHER OFFICERS AND AGENTS. The Board of Directors may
appoint such other officers and agents as it may deem advisable, who shall hold
their
-7-
<PAGE>
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
Section 3. CHAIRMAN. The Chairman of the Board of Directors, if one
be elected, shall preside at all meetings of the Board of Directors and he shall
have and perform such other duties as from time to time may be assigned to him
by the Board of Directors.
Section 4. PRESIDENT. The President shall be the chief executive
officer of the corporation and shall have the general powers and duties of
supervision and management usually vested in the office of president of a
corporation. He shall preside at all meetings of the stockholders if present
thereat, and, in the absence or non-election of the Chairman of the Board of
Directors, at all meetings of the Board of Directors, and shall have general
supervision, direction and control of the business of the corporation. Except as
the Board of Directors shall authorize the execution thereof in some other
manner, he shall execute bonds, mortgages and other contracts on behalf of the
corporation, and shall cause the seal to be affixed to any instrument requiring
it and when so affixed the seal shall be attested by the signature of the
Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer.
Section 5. VICE-PRESIDENT. Each Vice-President shall have such
powers and shall perform such duties as shall be assigned to him by the
directors.
Section 6. TREASURER.
(a) DUTIES. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate account of receipts and
disbursements in books belonging to the corporation. He shall deposit all monies
and other valuables in the name and to the credit of the corporation in such
depositaries as may be designated by the Board of Directors.
(b) DISBURSEMENTS, ACCOUNTING, SURETY. The Treasurer shall disburse
the funds of the corporation as may be ordered by the Board of Directors, or the
President, taking proper vouchers for such disbursements. He shall render to the
President and Board of Directors at the regular meetings of the Board of
Directors, or whenever they may request it, an account of all his transactions
as Treasurer and of the financial condition of the corporation. If required by
the Board of Directors, he shall give the corporation a bond for the faithful
discharge of his duties in such amount and with such surety as the Board of
Directors shall prescribe.
Section 7. SECRETARY. The Secretary shall give, or cause to be
given, notice of all meetings of stockholders and directors, and all other
notices required by law or by these By-Laws, and in case of his absence or
refusal or neglect so to do, any such notice may be given by any person
thereunto directed by the President, or by the directors, or stockholders, upon
whose requisition the meeting is called as provided in
-8-
<PAGE>
these By-Laws. He shall record all the proceedings of the meetings of the
corporation and of the directors in a book to be kept for that purpose, and
shall perform such other duties as may be assigned to him by the directors or
the President. He shall have the custody of the seal of the corporation and
shall affix the same to all instruments requiring it, when authorized by the
directors or the President, and attest the same.
Section 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
ARTICLE V
MISCELLANEOUS
Section 1. RESIGNATIONS. Any director, member of a committee or
corporate officer may, provided the same would not result in a breach of any
contract to which said person is a party, resign at any time. Such resignation
shall be made in writing, and shall take effect at the time specified therein,
and if no time be specified, at the time of its receipt by the President or
Secretary. The acceptance of a resignation shall not be necessary to make it
effective.
Section 2. VACANCIES. If the office of any director, member of a
committee or corporate officer becomes vacant, by reason of death, disability or
otherwise, the remaining directors in office, though less than a quorum, by a
majority vote may appoint any qualified person to fill such vacancy, who shall
hold off ice for the unexpired term and until his successor shall be duly
chosen.
Section 3. CERTIFICATES OF STOCK. Certificates of stock, signed by
the Chairman of the Board of Directors, or the President or any Vice President,
and the Treasurer or an Assistant Treasurer, or Secretary or an Assistant
Secretary, shall be issued to each stockholder certifying the number of shares
owned by him in the corporation. When such certificates are countersigned (1) by
a transfer agent other than the corporation or its employee, or (2) by a
registrar other than the corporation or its employee, the signatures of such
officers may be facsimiles.
Section 4. LOST CERTIFICATES. A new certificate of stock may be
issued in the place of any certificate theretofore issued by the corporation,
alleged to have been lost or destroyed, and the directors may, in their
discretion, require the owner of the lost or destroyed certificate, or his legal
representatives, to give the corporation a bond, in such sum as they may direct,
not exceeding double the value of the stock represented by such certificate, to
indemnify the corporation against any claim that may be made against it on
account of the alleged loss of any such certificate, or the issuance of any such
new certificate.
-9-
<PAGE>
Section 5. TRANSFER OF SHARES. The shares of stock of the
corporation shall be transferable only upon its books by the holders thereof in
person or by their duly authorized attorneys or legal representatives, and upon
such transfer the old certificates shall be surrendered to the corporation by
the delivery thereof to the person in charge of the stock transfer books and
ledgers, or to such other person as the directors may designate, by whom they
shall be canceled, and new certificates shall thereupon be issued. A record
shall be made of each transfer and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer.
Section 6. STOCKHOLDERS RECORD DATE. In order that the corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a of the corporation or these By-Laws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE VI
INDEMNIFICATION
To the full extent permitted by law, the corporation may indemnify any
person or his heirs, distributees, next of kin, successors, appointees,
executors. administrators, legal representatives and assigns who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceedings, whether civil, criminal, administrative
or investigative by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, domestic or foreign,
against expenses, attorneys' fees, court costs, judgments, fines, amounts paid
in settlement and other losses actually and reasonably incurred by him in
connection with such action, suit or proceeding.
ARTICLE VII
AMENDMENTS
These By-laws may be altered or repealed and By-Laws may be made at
any annual meeting of the stockholders or at any special meeting thereof by the
affirmative vote of a majority of the stock issued and outstanding and entitled
to vote thereat, or by the affirmative vote of a majority of the Board of
Directors, at any regular meeting of the Board of Directors, or at any special
meeting of the Board of Directors.
-10-
<PAGE>
I HEREBY CERTIFY that the foregoing is a full, true and correct copy
of the By-Laws of The Pathways Group, Inc., a Delaware corporation, as in effect
on the date hereof.
WITNESS my hand and seal of the Corporation.
THE PATHWAYS GROUP, INC.
By: /s/ EDWARD L. MUELLER
---------------------------
Edward L. Mueller
Secretary
Dated: May 5, 1997
-11-
<PAGE>
EXHIBIT 10.1
JOINT MARKETING AND SERVICING AGREEMENT
BETWEEN
FIRST HAWAIIAN BANK AND THE PATHWAYS GROUP, INC.
FOR
KEIKI CARD FEASIBILITY DEMONSTRATION
WHEREAS, The Pathways Group, Inc. (hereinafter "Pathways"), a Delaware
Corporation located at 14201 NE 200th Street, Woodinville, WA 98072, has
developed certain proprietary methods of (1) programming smart cards and smart
card terminals for secure transactions and (2) processing smart card
transactions; and
WHEREAS, Pathways is the owner of a branded smart card, the Keiki Card; and
WHEREAS, First Hawaiian Bank (hereinafter "Bank"), a Hawaii Corporation located
at 999 Bishop Street, Honolulu, HI 96813 wishes to offer its customers a secure
smart card transaction system for retail purchases; and
WHEREAS, Pathways and Bank wish to cooperate in a feasibility demonstration in
which (1) Bank customers would receive Keiki Cards to which they could add cash
value; (2) selected retail merchants would receive Keiki Card Terminals
programmed to make sales transactions with Keiki Cards; (3) Pathways would
provide processing services; and (4) Bank would be the funds holders (which
feasibility demonstration shall hereinafter be referred to as the
"Demonstration");
NOW THEREFORE, Pathways and Bank agree as follows:
1. Pathways and Bank will select appropriate Bank branches for the
Demonstration.
2. Pathways and Bank will jointly solicit merchants to accept the Keiki Card.
3. Pathways will loan Bank for the duration of the Demonstration, at no cost,
appropriate hardware (including Keiki Card Terminals), software and
documentation to allow Bank employees in selected branches to issue and add
value to Keiki Cards.
4. Pathways will loan Keiki Card Terminals to participating merchants for the
duration of the Demonstration, at no cost.
5. Pathways will sell Keiki Cards to Bank at $4.25 per card; Bank will resell
to its customers at $5.00 per card.
6. Pathways will retain ownership of all hardware, software and documentation,
including the intellectual property embodied therein, but will license Bank
to use them in furtherance of the Demonstration.
7. Pathways will retain ownership of the intellectual property embodied in the
Keiki Cards, but will license Bank and card holders to use it in
furtherance of the Demonstration.
8. Card holder agreements will contain intellectual property ownership and
licensing provisions, including a prohibition of reverse engineering, the
substance of which shall be acceptable to both Pathways and Bank.
9. Bank will not reverse engineer or permit third parties to reverse engineer
the hardware or software.
<PAGE>
10. Pathways will process the Keiki Card transactions through the Pathways
Smart Card System at no cost to Bank.
11. Pathways will provide training for Bank personnel at no cost to Bank.
12. Bank will provide space for Pathways hardware, including Keiki Card
Terminals, at the selected Bank branches at no cost to Pathways.
13. Bank will provide personnel to operate the Keiki Card Terminals at no cost
to Pathways.
14. The Demonstration shall run for 90 days, beginning when Bank and Pathways
through their joint efforts have established a sufficient base of
participating merchants.
15. In the event of any losses or liabilities arising from the Demonstration,
Pathways and Bank shall apportion the costs or damages according to their
respective degree of responsibility for the losses or liabilities. If the
parties are unable to agree on apportionment, or if they have any other
disputes arising from the Demonstration, they shall submit their dispute to
binding arbitration in conformance with Hawaii Revised Statutes Chapter
658. If the parties are unable to agree on an arbitrator, they shall apply
to the appropriate Hawaii court to appoint an arbitrator. Judgment on the
award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
16. On successful completion of the Demonstration, the parties may negotiate a
mutually acceptable long-term agreement to provide: (1) for Bank to market
the Keiki Card to its customers; (2) for Bank and participating merchants
to buy or lease all hardware necessary for the operation of the Keiki Card
system including but not limited to equipment previously loaned by
Pathways; (3) for Bank and participating merchants to receive licenses to
use the software necessary for operation of the Keiki Card system; and
(4) for Pathways to provide the related processing services through the
Pathways Smart Card System.
17. This Agreement will be construed pursuant to and controlled by Hawaii law.
Dated this 19th day of February, 1998
THE PATHWAYS GROUP, INC. FIRST HAWAIIAN BANK
By: /s/ CAREY F. DALY, II By: /s/ DONALD G. HORNER
----------------------------- -----------------------------
Carey F. Daly II Donald G. Horner
President & CEO Vice Chairman of Retail Banking
Group
-2-
<PAGE>
EXHIBIT 10.2
DEVELOPMENT AGREEMENT
This Agreement, dated as of June 5, 1995 is made and entered into by and
between Stephen A. Gregg ("Gregg") and The Pathways Group, Inc. ("Pathways").
Gregg and Pathways agree as follows:
SECTION 1. DEFINITIONS
Whenever used in this Agreement, the following terms will have the
following specified meanings:
1.1. "BUSINESS DAY" means a Monday, Tuesday, Wednesday, Thursday or Friday,
except when such day is New Year's Day, President's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day or Christmas Day or the Monday
following the previous referenced holidays, should the holiday fall on a weekend
(Saturday or Sunday).
1.2. "CERTIFIED VERSION" means that version of the Deliverables which (i)
is fully functional and complies with the Specifications, (ii) has no known
Errors, and (iii) is suitable for commercial distribution.
1.3. "CERTIFIED VERSION ACCEPTANCE DATE" means the date upon which Gregg
delivers his written acceptance of the Certified Version pursuant to Section
2.4.2.
1.4. "CERTIFIED VERSION DELIVERY DATE" means the actual date upon which
Gregg receives from Pathways that version of the Deliverables which Pathways
reasonably purports to be the Certified Version.
1.5. "CONFIDENTIAL INFORMATION" means any confidential or proprietary
information of Gregg, MyChoice Health Services, L.L.C., The Alternare Group,
L.L.C., or any of their affiliates (collectively, the "Gregg Group"), whether of
a technical, business or other nature (including but not limited to: trade
secrets, know-how, technology, codes, logic, techniques, software tools,
formats, designs, concepts, methods, processes and ideas underlying the Product
and information relating to the customers, marketing plans, finances and
business affairs of the Gregg Group) and whether conveyed by written, graphic,
oral or other means other than information that was in the public domain at the
time it was disclosed to Pathways or was known to Pathways at the time of
disclosure as evidenced by documentation bearing a date prior to the disclosure
date.
1.6. "CREDIT CARD SOFTWARE" means the software resident in the Product
(including in the IQ20 10 and the servers) which permit the authentication and
use of credit cards as a method of payment.
1.7. "DELIVERABLES" means the Source Code and Object Code of the Product,
Product Documentation and the manuals for the terminal unit personal computers
and smart card reader/writers.
1.8. "DESIGN SPECIFICATIONS" means the detailed design specifications for
the Product describing, among other things, coding standards and format, design
standards, portability standards, revision control standards, documentation
standards, the structure of the Product file descriptions, formats and
structure, global data structures and types, diagrams detailing the
relationships between all inputs, outputs and processing steps, the modules, the
module requirement specification and the module interface specification for each
module.
1.9. "DEVELOPMENT SCHEDULE" means the Development Schedule set forth in
Exhibit A.
1.10. "EQUIPMENT WARRANTY PERIOD" shall mean a one year period
commencing on the installation of the item of Equipment in the field.
1.11. "FUNCTIONAL SPECIFICATIONS" means the functional specifications
for the Product describing, among other things, the operation of the Product the
responses to various user actions, certain performance
<PAGE>
constraints and criteria, file formats, menu bar descriptions, menu
descriptions, menu entry descriptions, screen images and dialogue box
descriptions.
1.12. "ERROR" means a bug, deficiency, error or nonconformity with the
Specifications in the Product version in question which causes data loss, data
corruption, system failure, a functional error or performance.
1.13. "OBJECT CODE" means the translation of the Source Code into a
machine-readable language recognized by the computer allowing the computer to
carry out the instructions set forth therein.
1.14. "OFF THE SHELF SOFTWARE" means Borland C, Visual Basic 4.0,
Crystal Report Writer 4.0, WB Tools and Microhelp Com Tools.
1.15. "PARTY" or "PARTIES" means either one or both of the parties to
this Agreement.
1.16. "PATHWAYS TOOLKIT" means the tools and utilities existing prior
to June 5, 1995 which Pathways used in conjunction with developing the Product.
A portion of the Pathways Toolkit has been incorporated into the Source Code and
is designated in the Source Code Printout by bold letters. The remaining
portions of the Pathways Toolkit are independent tools used in developing the
Product and whose output (but not the tool itself) is incorporated into the
Product. This output is part of the Source Code and Object Code being assigned
to Gregg pursuant to Section 4.2.
1.17. "Payment Schedule" means the Payment Schedule set forth in the
attached Exhibit B.
1.18. "PERSON" means any individual, corporation, partnership, trust,
estate, association, governmental authority or other entity.
1.19. "PROBLEM TEST REPORT" means the Problem Test Report form set
forth in Exhibit D.
1.20. "PRODUCT" means a system of computer software and Equipment which
will allow for the issuance, acceptance and payment of medical services and
goods, paid for and controlled on an IC card ("smart card") including
appropriate management reporting and as more fully set forth in the
Specifications.
1.21. "PRODUCT DOCUMENTATION" means the schematics, drawings,
specifications and other documentation describing in detail the operation and
use of the Product, including, without limitation, the Employer/Issuer Manual,
Administrator Manual, Holder Manual, Supplier Manual and, with respect to the
Source Code of the Product all source code listings, together with such comments
and explanatory materials to allow a programmer not familiar with the Source
Code to understand the flow of logic therein and to maintain and modify the
same.
1.22. "SCHLUMBERGER TOOLS" means the Delta Development Kit for the
IQ2010, the WindPractis SRC 60, the IAR System Compiler and the Schlumberger
Toolkit.
1.23. "SOURCE CODE" means the human- readable versions of the higher
level language in which the computer program for the Product was written.
1.24. "SPECIFICATIONS" means the Functional Specifications and the
Design Specifications.
1.25. "TERM" means the term of this Agreement as described in Section
7. 1.
Page 2
<PAGE>
SECTION 2. DEVELOPMENT OF PRODUCT; SALE OF HARDWARE
2.1. SCOPE
Pathways is developing the Product which will be a smart card medical
benefits system in accordance with the Specifications. Pathways and Gregg shall
jointly design, develop and prepare the Functional Specifications and Design
Software and Pathways shall be solely responsible for designing, developing and
preparing the Source Code, Object Code and Product Documentation.
2.2. FUNCTIONAL SPECIFICATIONS/DESIGN SPECIFICATIONS
The parties shall use their best efforts to design and develop Functional
Specifications and Design Specifications.
2.3. WORKING VERSIONS
From time to time during the development period, Gregg may request that
Pathways deliver the then most current version of the Source Code and Object
Code and Product Documentation. Gregg recognizes that such database may contain
bugs, deficiencies and errors that may cause system dysfunction or loss of data
or is otherwise incomplete.
2.4. CERTIFIED VERSION
2.4.1. DELIVERY. Pathways shall deliver the Source Code and Object
Code to the Certified Version, the Pathways Toolkit and the final Product
Documentation relating to the Certified Version and the Pathways Toolkit to
Gregg no later than May 31, 1996.
2.4.2. ACCEPTANCE. Upon delivery of the complete Certified
Version, Gregg shall have thirty (30) days thereafter in which to accept or
reject the Certified Version 'in writing. If Gregg rejects the Certified
Version, he shall specify his reasonable grounds for rejection in writing and
Pathways shall use best efforts within the following ten (10) Business Days to
revise the Certified Version so as to be acceptable to Gregg. If Gregg rejects
the revised Certified Version, he shall specify his reasonable grounds for
rejection in writing and Pathways shall use best efforts within the following
ten (10) Business Days to revise the Certified Version so as to be acceptable to
Gregg. If Gregg again rejects the Certified Version, Gregg shall thereafter have
the opportunity of repeating the procedure or terminating this Agreement upon
written notice to Pathways.
2.4.3. TERMINATION. Upon Gregg's termination of the Agreement
pursuant to Section 2.4.2, Pathways shall provide to Gregg the most recent
version of all Source Code, Object Code, Pathways Toolkit and documentation then
available and Pathways shall use its best efforts to assist Gregg in
transferring the technology to another software developer to complete the
Product. Gregg and Pathways shall determine what percentage of the Product was
completed by Pathways and was functional pursuant to the Specifications. Based
on this information, Pathways and Gregg shall then use Schedule B to determine
that portion of the Development Fee listed in Exhibit B which has been earned by
Pathways. Gregg shall then pay to Pathways the difference, if any, between the
amount paid to date to Pathways by Gregg and the amount owing under this
section. In the event that Pathways has been paid more than is owing under this
section, Pathways shall immediately remit the overpayment to Gregg.
2.4.4. CERTIFIED VERSION ACCEPTANCE DATE. The date upon which
Gregg accepts the Certified Version in writing shall be the Certified Version
Acceptance Date.
2.5. INSTALLATION/TRAINING
Pathways shall provide such training and technical assistance during the
Term as Gregg may reasonably request regarding the design and use of the Product
and the preparation of user documentation. As part of the terms of this
Agreement and without additional consideration except for a travel per diem to
be agreed to in writing by the Parties in advance of the travel, Pathways shall
install the Product and provide
Page 3
<PAGE>
on-site training for three sites. Such training shall include at each site a
minimum of two training days. Upon request, Pathways shall also provide
additional training to Gregg at a rate of $600 per day plus a travel per diem
for a senior trainer and $775 per day plus a travel per diem for Carey Daly.
2.6. HARDWARE
Gregg hereby agrees to buy, and Pathways hereby agrees to sell to Gregg,
the equipment described in Schedule A ("Equipment"). For a period of at least
two (2) years after the Certified Version Delivery Date or, if later in time,
the termination or expiration of Pathways providing goods or services to any
member of the Gregg Group, Pathways shall offer the Equipment to the Gregg Group
at preferential pricing but in no event shall the sale price of the Equipment to
Gregg be more than 118% of the actual cost of the Equipment paid by Pathways to
the independent supplier of the Equipment. Pathways shall deliver any Equipment
(together with all documentation supplied by the manufacturer and any addition
documentation regarding the Equipment prepared by Pathways) ordered by the Gregg
Group no later than sixty (60) days after the Gregg Group places the order with
Pathways. Pathways further covenants that in the event Pathways is unable to
sell to Gregg all Equipment that Gregg desires (including benefits cards,
polycards and terminals), Pathways shall use its best efforts to cause another
vendor to sell the Equipment to Gregg on terms substantially similar to the
terms which Gregg was previously able to buy the Equipment from Pathways.
Pathways shall immediately introduce Gregg to another vendor ("Second Source")
who will be available to sell Equipment to Gregg under the terms set forth
above. Pathways will continue at all times to have at least one "Second Source"
of Equipment available to Gregg under the terms set forth above.
SECTION 3. PROJECT MANAGEMENT
3.1. INDEPENDENT CONTRACTOR
Pathways shall be and act as an independent contractor (and not as the
agent or representative of Gregg) in the performance of this Agreement. Pathways
shall not be entitled to, and shall not attempt to, create or assume any
obligation, express or implied, on behalf of Gregg. This Agreement shall not be
interpreted or construed as creating or evidencing an association, joint venture
or partnership among the Parties or as imposing any partnership obligation or
liability on any Party.
3.2. QUALIFICATIONS
Pathways represents that it is, and that at all times during performance of
this Agreement it shall be, fully experienced and properly qualified, licensed,
equipped, organized and financed to perform this Agreement. Pathways shall
promptly give Gregg notice of any material adverse change in Pathways' business,
operations, properties, assets, prospects or conditions (financial or otherwise
and including any bankruptcy or insolvency), including the nature and period of
existence of any such condition or event and what action Pathways has taken, is
taking and proposes to take with respect thereto.
3.3. COMPLIANCE WITH LAWS
Pathways shall comply with all applicable laws, ordinances, rules,
regulations, orders, licenses and other requirements now or hereafter in effect
of any governmental authority (including, without limitation, such requirements
as may be imposed in connection with the use of smart cards or electronic
banking). All laws, ordinances, rules, regulations and orders required to be
incorporated in agreements of this character are incorporated herein by this
reference.
3.4. STAFFING
Pathways shall furnish all necessary labor, supervision, services, supplies
and materials necessary to complete the development of the Functional
Specifications, Design Specifications and the Deliverables in accordance with
the Development Schedule and the other terms of this Agreement. Pathways shall
ensure that only properly experienced and qualified persons work on developing
the Product.
Page 4
<PAGE>
3.5. PROJECT MANAGER
Gregg shall assign Stephen A. Gregg and Dale A. White as Project Managers
for the Project. All notices, requests, approvals, consents, orders,
instructions, directions and other communications given to either Project
Manager shall be deemed given to Gregg. Gregg may substitute a different
employee to act as a Project Manager upon ten (10) Business Days' prior written
notice to Pathways.
3.6. PROGRESS REPORTING
3.6.1. MONTHLY. Pathways agrees to provide to Gregg at least
monthly a written report of the progress of the work required under this
Agreement, any anticipated problems (resolved or unresolved) and any indication
of delay in fixed or tentative schedules.
3.6.2. QUARTERLY. Approximately once every three months, the
parties shall meet for a formal progress presentation of approximately two hours
duration, during which Pathways' management shall describe the status of the
work required under this Agreement. Such presentation shall provide projections
of the time of completion, and the status of Pathways' services and
Deliverables, and shall address any problems that have come to Pathways'
attention and Pathways' views as to how such problem may be resolved.
3.6.3. SITE VISITS. Pathways shall, from time to time and upon
reasonable notice, allow access to its premises by Gregg for purposes of design
review, "walkthroughs," and discussions between Gregg and Pathways' management
and personnel concerning the status and conduct of work being performed under
any this Agreement.
3.7. LIABILITY INSURANCE
Pathways shall carry appropriate workers' compensation insurance and
employers' and public liability insurance covering its personnel during the
term, regardless of whether such coverage or insurance is mandatory or merely
elective under the law. Pathways releases and shall defend, indemnify and hold
harmless Gregg from claims, suits, actions and liability asserted against Gregg
on account of any injury to or death of Pathways' personnel or any act or
omission of Pathways' personnel. Pathways' obligation hereunder shall not be
limited by any immunity or other provisions of any workers' compensation or
similar act. To the fullest extent permitted by applicable law, the foregoing
shall apply regardless of any fault, negligence, strict liability or product
liability of Gregg.
SECTION 4. Ownership
4.1. OWNERSHIP
Gregg will be the sole owner of the Functional Specifications, the Design
Specifications, the Source Code, Object Code, Product Documentation and related
documentation, together with any associated patent, copyright, trade secret or
other proprietary rights. All materials, property and other items accumulated or
developed in connection with the Product (including, but not limited to,
documents, plans, specifications, designs, algorithms, sketches, notes, reports,
data, estimates, models, samples, completed work and work in progress), together
with all rights associated with ownership of such items (such as copyright and
patent rights), other than Pathways Toolkit, shall become the property of Gregg
and title shall be vested in Gregg when so accumulated or developed, whether or
not delivered to Gregg. All original works of authorship shall constitute "work
made for hire" pursuant to Title 17 of the United States Code, and Gregg shall
be considered the author and owner of the copyright in such works. Pathways
shall include in the initial screen display of the Product the following
copyright notice:
-C-1995-96
Stephen A. Gregg
All Rights Reserved.
Page 5
<PAGE>
Pathways shall deliver such items, together with all materials, property and
other items furnished by Gregg (including, without limitation, program design
documents supplied by Gregg) or the cost of which is included in the
compensation payable under this Agreement to Gregg upon request and in any event
upon the completion, termination or cancellation of this Agreement.
4.2. ASSIGNMENT
Pathways irrevocably assigns, and will assign, to Gregg all of its right,
title and interest to the Product, together with any associated patent,
copyright, trade secret and other proprietary rights, including, without
limitation, any portion of the foregoing not constituting "work made for hire."
Such proprietary rights include all know-how, production rights, techniques,
designs, technical documents and reports that originated in the development of
the Design Specifications, the Deliverables or otherwise in connection with the
development of the Product.
4.3. LICENSE
4.3.1. Pathways hereby grants to Gregg a nonexclusive,
royalty-free, perpetual worldwide license to use the Source Code and Object Code
of the Pathways Toolkit to make, enhance, improve, modify or otherwise use the
Product. Gregg shall not sublicense, transfer, lend, sell or otherwise dispose
of the Source Code of the Pathways Toolkit without Pathways' prior written
consent except to the Gregg Group or the surviving entity in a merger or
consolidation with any member of the Gregg Group or a purchaser of all or
substantially all of the Product or any of the Gregg Group's assets.
4.3.2. Pathways hereby grants to Gregg a nonexclusive,
royalty-free, worldwide license to use the Source Code and Object Code of the
Pathways Toolkit to make, enhance, improve, modify or otherwise use products
incorporating Smart Card applications other than the Product. Gregg shall not
sublicense, transfer, lend, sell or otherwise dispose of the Source Code of the
Pathways Toolkit without Pathways' prior written consent except to the Gregg
Group or the surviving entity in a merger or consolidation with Gregg or a
purchaser of all or substantially all of the Product or the Gregg Group's
assets. This license shall continue for the period that Pathways is providing
products or services to the Gregg Group. This license shall become perpetual
upon the first to occur of the following:
(i) payments to Pathways from the Gregg Group for products and
services (including the fees associated with this Agreement) aggregating to
$500,000 or more; or
(ii) a lump sum payment of $12,000 to Pathways for the perpetual right
to use the Pathways Toolkit license.
4.3.3. Pathways hereby grants to Gregg a nonexclusive,
royalty-free, worldwide license to use the Source Code and Object Code of the
Credit Card Software in connection with the Product. Gregg shall not sublicense,
transfer, lend, sell or otherwise dispose of the Source Code of the Credit Card
Software without Pathways' prior written consent except to the Gregg Group or
the surviving entity in a merger or consolidation with Gregg or a purchaser of
all or substantially all of the Product or the Gregg Group's assets. This
license shall continue for the period that Pathways is providing products or
services to the Gregg Group.
4.4. IMPLEMENTATION
Pathways shall take such action during or after the term of this Agreement
(including, but not limited to, the execution, acknowledgment and delivery of
documents) as may reasonably be requested by Gregg for the implementation or
continuing performance of this Agreement. Without limiting the generality of the
foregoing, simultaneous with delivery of Source Code, Object Code and Product
Documentation to Gregg, Pathways shall, upon request, execute and deliver such
instruments evidencing Gregg's title to and ownership of the Source Code, Object
Code and Product Documentation, as Gregg may reasonably request. Pathways shall
enter into such agreements with their employees as necessary to ensure that
inventions pertaining to the Product can be assigned to Gregg without
compensation from Gregg other than that specifically described in this
Agreement. Without limiting the generality of the foregoing, Pathways shall
execute, acknowledge and
Page 6
<PAGE>
deliver to Gregg all such instruments of conveyance, assignment and further
assurance as Gregg may reasonably request to evidence, invest and confirm the
rights, title and interest transferred or granted to Gregg under this Agreement.
If and to the extent any work developed by Pathways pursuant to this Agreement
results in a patentable design or process or other protectable proprietary right
Pathways shall take all actions reasonably requested by Gregg to assist Gregg in
applying for and securing such patents or proprietary rights.
4.5. INVENTIONS
With regard to inventions, Pathways undertakes to draw up such agreements
with its employees as are necessary to ensure that ownership of any inventions
pertaining to the Deliverables can be assigned to Gregg without compensation
from Gregg other than that specifically stipulated in this Agreement or any
extension of the Agreement.
4.6. USE
At the conclusion of the Agreement, Gregg has the full right to modify and
alter any part of the Deliverables. Pathways shall not make use of any part of
the Deliverables other than the Pathways Toolkit and Credit Card Software
without written authorization from Gregg.
4.7. NONDISCLOSURE
In the performance of or otherwise in connection with this Agreement the
Gregg Group may disclose to Pathways certain Confidential Information of the
Gregg Group. Pathways shall treat such Confidential Information as confidential
and proprietary of the Gregg Group and shall use such Confidential Information
solely for the purposes for which it is provided by the Gregg Group; provided
that, prior to, upon or promptly after receipt by Pathways, such Confidential
Information is conspicuously marked or otherwise identified as Confidential
Information of the Gregg Group. Without limiting the generality of the
foregoing, Pathways shall take reasonable precautions to prevent any
unauthorized use or disclosure of such Confidential Information. The obligations
under this Section shall not apply to any:
(a) information that is now or later becomes part of the public
domain through no fault of Pathways;
(b) information that is obtained by Pathways from a third party
(other than in connection with this Agreement) without any obligation of
secrecy or confidentiality;
(c) information that is independently developed by Pathways (E.G.,
without reference to any Confidential Information);
(d) any disclosure required by applicable law (E.G., pursuant to
applicable securities' laws or legal process), provided that Pathways shall
use reasonable efforts to give advance notice to (and cooperate with) the
Gregg Group in connection with any such disclosure; and
(e) any disclosure with the consent of Gregg.
4.8. NONCOMPETE
During the Term and for a period of five (5) years after the termination or
expiration of this Agreement or, if later in time, the termination or expiration
of Pathways providing goods or services to any member of the Gregg Group,
Pathways shall not, directly or indirectly, participate in or otherwise be
connected with (as a developer or otherwise) a business involving any system
providing for the payment for medical and/or health-related goods and/or
services without Gregg's prior written consent. The parties, however, expressly
acknowledge and agree that the noncompete set forth above does not preclude
Pathways from developing a smart card which (i) contains patient identification,
patient eligibility, medical record or other administrative information
associated with a HMO, PPO or other medical benefit plan so long as the smart
card is not directly or indirectly used in connection with the payment for
medical and/or health-related goods and/or services or
Page 7
<PAGE>
(ii) contains a cash purse which can be used to purchase goods or services in
general, including without limitation, medical goods or services so long as the
smart card is not directly or indirectly used in connection with a HMO, PPO or
other medical benefit plan.
Pathways acknowledges that Gregg may develop additional applications for
the smart card beyond the Product. In such an event Gregg will provide notice of
his intent and Pathways agrees that the scope of the noncompete set forth above
will automatically be expanded to include the new field of use unless (i) the
expansion of the scope of the noncompete would violate an agreement which
Pathways had previously entered into and (ii) Pathways notifies Gregg of such
agreement within fifteen (15) days after Gregg sends the notice of intent.
SECTION 5. Warranties and Indemnification
5.1. WARRANTIES
Pathways represents and warrants to Gregg that:
(a) its execution and delivery of this Agreement and performance of
the transactions contemplated herein are duly authorized and do not
constitute a breach of, default under or other violation of any of the
articles of incorporation, bylaws, agreements, contracts or obligations of
Pathways;
(b) Pathways has the necessary skill, personnel and financial
capability to perform this Agreement in accordance with the Development
Schedule and the other terms of this Agreement;
(c) neither Pathways, in connection with developing of the
Deliverables or Pathways Toolkit, nor the Equipment, Deliverables, Pathways
Toolkit or related documentation will infringe any patent, copyright,
trademark, trade secret or other proprietary right of any person or entity;
(d) Pathways will not use any trade secret or other confidential
information owned by any third party in developing the Product, except for
the Schlumberger Tools and the Off-the-Shelf Tools;
(e) Pathways has the unencumbered legal right to assign to Gregg the
Deliverables, sell the Equipment and otherwise perform this Agreement;
(f) Gregg will own (i) the Deliverables and all associated patent,
copyright, trade secret and other associated proprietary rights and (ii)
the Equipment free from all claims, liens and encumbrances of any person or
entity;
(g) The use of the Deliverables, the Pathways Toolkit or the
Equipment by Gregg, his assigns and sublicensees, will not (i) create any
financial obligation to any third party, (ii) infringe any patent,
copyright trade secret or other proprietary right, or (iii) be interrupted
or otherwise disturbed by any person or entity asserting a claim through
Pathways;
(h) The Deliverables shall be prepared in a workmanlike manner, with
professional diligence and skill, will function on the machines and with
the operating systems for which they are designed, and will conform to the
Specifications;
(i) The use of the Pathways Toolkit is not necessary in order for the
Product to conform to the Specifications;
(j) This Agreement constitutes the legal, valid and binding
obligation of Pathways and is enforceable against Pathways in accordance
with its terms; and
(k) The Deliverables will be free from defects in design, materials
and workmanship and shall comply with the specifications;
Page 8
<PAGE>
(l) During the Equipment Warranty Period, the Equipment will be free
from defects in materials and workmanship that affect or may affect its
proper functioning and will function in accordance with any related
documentation and all specifications or other information published by
Pathways or the manufacturer;
(m) Pathways has the right to assign and does hereby assign to the
Gregg Group any Equipment manufacturers warranties;
(n) The Source Code, together with the Schlumberger Toolkit, the
Off-the-Shelf Toolkit and the Pathways Toolkit (i) comprises all of the
software tools and utilities used by Pathways in developing the Product and
(ii) comprises all of the software necessary for Gregg to modify the
Product;
(o) (card security); and
(p) (telephone multiple Iines).
5.2. INDEMNIFICATION
Pathways shall defend, indemnify and hold harmless Gregg from and against
any and all claims, losses, harm, costs, liabilities, damages and expenses
(including, but not limited to, reasonable attorneys' fees) arising out of or in
connection with any breach by Pathways of Section 5.1 or any other provision of
this Agreement; provided Gregg gives Pathways timely notice of any such claim or
the filing of any action or suit involving such claim. In the case that the
Deliverables or the Pathways Toolkit, the related documentation or any component
part or parts thereof, furnished under this Agreement is in any suit or
proceeding held to constitute infringement and his use is enjoined, Pathways
shall expeditiously, at its option and its own expense, either:
(a) procure for Gregg the right to continue using the Deliverables,
the Pathways Toolkit or part thereof, or
(b) replace the Deliverables, the Pathways Toolkit or part thereof
with a noninfringing system that satisfies the Specifications; or
(c) modify the Deliverables, the Pathways Toolkit or part thereof so
that it becomes noninfringing but still satisfies the Specifications.
During the Equipment Warranty Period, Pathways shall repair or replace (within
two (2) business days) any Equipment that fails to comply with the warranties
set forth in section 5. 1. If Pathways does not repair or replace such Equipment
within the two day time period, Gregg may in addition to his other rights return
any part of the Equipment for a full refund of the applicable portion of the
purchase price.
5.3. PERFORMANCE OF WARRANTY
Pathways represents and warrants that the Deliverables will operate in
accordance with and otherwise comply with the Specifications. If Gregg notifies
Pathways of any failure to comply with the foregoing warranty, or of error,
omission, defect, bug or deficiency in the Product within ninety (90) days after
the Certified Version Acceptance Date, then Pathways shall use its best efforts
to promptly furnish Gregg with the correction thereof
SECTION 6. COMPENSATION
6.1. FEE
Subject to the other terms and conditions of this Agreement, Gregg shall
pay Pathways for the timely and satisfactory performance of this Agreement the
amounts described in the Payment Schedule set forth in Exhibit B within ten (10)
Business Days after the end of the month or the event described therein.
Page 9
<PAGE>
6.2. MOST FAVORED CUSTOMER
Pathways agrees to treat the Gregg Group as its most favored customer. Pathways
represents and warrants that all of the prices, warranties, benefits and other
terms being provided hereunder are equivalent to or better than the terms being
offered by Pathways to its other customers. If Pathways enters into an agreement
with any other customer with more favorable terms, then this Agreement shall be
deemed appropriately amended to provide such terms to Gregg.
6.3. EXPENSES
Pathways shall bill Gregg monthly for all related reasonable and necessary
out-of-pocket expenses, such as, but not limited to, travel, telephone, fax,
copying, external computing services, and miscellaneous supply expenses,
provided that such expenses have been authorized in writing in advance by Gregg.
6.4. TAXES
The amounts payable to Pathways pursuant to this Agreement are inclusive of
all sales, use, excise, gross receipts or other similar taxes arising out of
Pathways' development of the Product. Pathways shall be responsible for, bear
the expense of and pay all such taxes when due.
6.5. TECHNOLOGY TRANSFER
In the event the Certified Version Acceptance Date does not occur within
the time specified in Section 2.4.1, Pathways acknowledges and agrees that Gregg
intends to seek an additional software developer to complete the Product. In
such event, Pathways will make available its most recent Source Code, Object
Code, Product Documentation and the Pathways Toolkit. Pathways shall use its
best efforts to assist Gregg in transferring the technology to another software
developer. Pathways, however, will continue to be obligated to complete and it
shall use best efforts to continue to revise the Certified Version so as to be
acceptable to Gregg.
In connection with making, and to the extent Pathways is required to make,
the Pathways Toolkit available under this Section, Pathways hereby grants to
Gregg, his successors, assigns and sublicensees an irrevocable, nonexclusive,
royalty-free, perpetual worldwide license to use the source code and object code
of Pathways Toolkit to make (with the rights to sublicense or assign), enhance,
improve, modify or otherwise use the Product or other products. Pathways
represents and warrants that it has a legal right to license Gregg to use the
Pathways Toolkit.
6.6. WITHHOLDING
Payments otherwise payable to Pathways under this Agreement may be withheld
in whole or in part, by Gregg on account of (i) Pathways' failure to comply with
the terms of this Agreement, (ii) Pathways' failure to deliver status reports of
updates of Deliverables as required under this Agreement, (iii) Pathways'
failure to satisfactorily accomplish or meet the Development Schedule or (iv)
Pathways' failure to pay, satisfy or discharge claims against Gregg for which
Pathways is responsible under this Agreement. If the foregoing causes are
removed to the satisfaction of Gregg, the withheld payments will be made.
6.7. FULL COMPENSATION
The compensation described in this Section 6 constitutes full compensation
for Pathways' performance of this Agreement. No additional compensation or
payment will be made for or on account of any of the requirements of this
Agreement or any travel, utility or other expenses incurred by Pathways, and the
cost thereof will be considered as included in the compensation amount described
in this Agreement. Without limiting the generality of the foregoing, Pathways
shall fund all cost overruns incurred by it to perform this Agreement.
SECTION 7. TERM AND TERMINATION
Page 10
<PAGE>
7.1. TERM
The Term shall commence on the date of this Agreement and, subject to
earlier termination as provided elsewhere in this Agreement, shall end on the
Certified Version Acceptance Date.
7.2. TERMINATION
Gregg may immediately terminate the term upon the occurrence of any of the
following events:
(a) Pathways fails to accomplish the Certified Version Acceptance
Date within thirty (30) Business Days of the date specified for such event
in the Delivery Schedule;
(b) Pathways fails to cure its default or breach of this Agreement
within ten (10) Business Days of its receipt of written notice from Gregg
regarding such default or breach;
(c) if there is a major change in the ownership of Pathways or the
occurrence of the death, disability or other unavailability of Carey F.
Daly II; or
(d) Pathways is declared bankrupt, or makes a general assignment of
substantially all its assets for the benefit of its creditors (other than
as security) or has a receiver appointed to substantially all of its
assets, or if Pathways' financial situation deteriorates to such an extent
that Gregg has reason to believe that this Agreement cannot be fulfilled
and Pathways cannot provide security adequate to Gregg in Gregg's sole
discretion regarding the fulfillment of this Agreement.
7.3. SURVIVAL
Sections 2.6, 3.7, 4 and 5 (together with all other provisions of this
Agreement which may reasonably be interpreted or construed as surviving
termination of the Term) shall survive termination of the Term.
SECTION 8. MISCELLANEOUS
8.1. ASSIGNMENT
Pathways shall not assign all or any part of this Agreement or any of its rights
hereunder or subcontract any of the Product development work without the prior
written consent of Gregg. No assignment or subcontracting by Pathways, with or
without Gregg's consent, shall relieve Pathways from any of its obligations
under this Agreement. Subject to the foregoing restriction on assignments by
Pathways, this Agreement shall be fully binding upon, inure to the benefit of
and be enforceable by the Parties hereto and their respective successors and
assigns.
8.2. ENTIRE AGREEMENT
This Agreement (including Exhibits A through F) constitutes the entire
agreement, and supersede any and all prior agreements, between Gregg and
Pathways with regard to the subject of this Agreement. No amendment,
modification or waiver of any of the provisions of this Agreement shall be valid
unless set forth in a written instrument signed by both Parties.
8.3. NONWAIVER
The failure of either Party to insist upon or enforce strict performance by
the other Party of any of the provisions of this Agreement, or to exercise any
right or remedy under this Agreement, shall not be construed as a waiver or
relinquishment to any extent of that Party's right to assert or rely upon any
such provisions, rights or remedies in that or any other instance; rather, the
same shall be and remain in full force and effect.
8.4. NOTICES
Page 11
<PAGE>
Any notice or other communication under this Agreement given by Gregg to
Pathways or vice versa shall be deemed to be properly made if given in writing
and delivered in person or mailed, properly addressed and stamped with the
required postage, to the intended recipient at its address listed below its
signature at the end of this Agreement, and to the attention of the person
signing this Agreement. Either Party may from time to time change such address
and recipient by giving the other Party notice of such change in accordance with
this Section.
8.5. APPLICABLE LAW
This Agreement shall be interpreted, construed and enforced in all respects
in accordance with the laws of the State of Oregon without reference to its
choice of law rules.
8.6. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement
including, without limitation, the making, performance, or interpretation of
this Agreement shall be settled by arbitration. Unless otherwise agreed, the
arbitration shall be conducted in Portland, Oregon, in accordance with the
then-current Commercial Arbitration Rules of the American Arbitration
Association. The arbitration shall be held before a single arbitrator (unless
otherwise agreed by the parties). The arbitrator shall be chosen from a panel of
attorneys knowledgeable in the field of business law in accordance with the
then-current Commercial Arbitration Rules of the American Arbitration
Association. If the arbitration is commenced, the parties agree to permit
discovery proceedings of the type provided by the Oregon Rules of Civil
Procedure both in advance of, and during recesses of, the arbitration hearings.
The parties agree that the arbitrator shall have no jurisdiction to consider
evidence with respect to or render an award or judgment for punitive damages (or
any other amount awarded for the purpose of imposing a penalty). The parties
agree that all facts and other information relating to any arbitration arising
under this Agreement shall be kept confidential to the fullest extent permitted
by law.
GREGG: PATHWAYS:
The Pathways Group, Inc.
/s/ STEPHEN A. GREGG By: /s/ CAREY F. DALY, II
- ------------------------------- ---------------------------
Stephen A. Gregg Carey F. Daly II, President
Address: 1519 NW 79th Circle Address: The Pathways Group, Inc.
Vancouver, WA 98665 14201 NE 200th Street
Woodinville, WA 98072
Page 12
<PAGE>
EXHIBIT A
DEVELOPMENT SCHEDULE
Page 1
<PAGE>
EXHIBIT B
PAYMENT SCHEDULE
Page 1
<PAGE>
EXHIBIT C
INCENTIVE PAYMENTS
Page 1
<PAGE>
EXHIBIT D
PROBLEM TEST REPORT
PER:_______________________________
PER Date: _________________________ Submitted by :_____________________________
Product: __________________________ Version: __________________________________
Problem Area: __________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Brief Description of Problem:___________________________________________________
________________________________________________________________________________
________________________________________________________________________________
PROBLEM CATEGORIES:
1. DATA LOSS: System crashes or leaves program. Data corruption.
2. FUNCTIONAL ERROR: No work around.
3. PERFORMANCE INCONSISTENCY: Work around possible.
Steps to Recreate Problem:______________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Screen Dump(s) Attached. See File(s)______________________________________
Comments:_______________________________________________________________________
________________________________________________________________________________
Page 1
<PAGE>
SCHEDULE A
EQUIPMENT
Page 1
<PAGE>
SCHEDULE B
PERCENTAGE OF COMPLETION
Page 1
<PAGE>
EXHIBIT 10.3
LOAN NUMBER GP-471769-30-02-SEA
-------------------
U.S. SMALL BUSINESS ADMINISTRATION
SEATTLE DISTRICT OFFICE
915 SECOND AVENUE
SEATTLE, WASHINGTON 98174-1088
AUTHORIZATION AND LOAN AGREEMENT
(GUARANTY LOANS)
TOWNE BANK OF WOODINVILLE
P.O. BOX 645
WOODINVILLE, WASHINGTON 98072
Your request dated JANUARY 23, 1992, for SBA to Guarantee 85% of a Loan in the
amount of $625,000.00, to be made by Lender to:
PATHWAYS INTERNATIONAL LTD.
17730 WOOD-SNO ROAD
WOODINVILLE, WASHINGTON 98072
is hereby approved pursuant to Section 7(a) of the Small Business Act as
amended.
1. The following forms are herewith enclosed:
(a) SBA Note to be executed by the Borrower. The original Note must be
retained by you and one conformed copy must be sent to SBA immediately
after first disbursement, together with a guaranty fee of 2% of the
amount guaranteed. This fee shall be paid by Lender within 90 days of
the date of this Authorization and may be charged to Borrower only
after Lender has paid the fee to SBA and an initial disbursement has
been made to Borrower. This fee may be deducted from loan proceeds.
(b) Copies of the SBA Settlement Sheet, Form 1050, are to be completed and
executed by Lender and Borrower to reflect each disbursement. Prompt
reporting of disbursements is necessary. Return the first two copies
("Denver FOD" copy and "Servicing Office" copy) to SBA.
(c) Compensation Agreements, Form 159, shall be executed by Borrower, its
representative and Lender and returned to SBA if Borrower has employed
an attorney, accountant or other representative, or if Borrower is
charged fees for services by Lender or an associate of Lender. If no
such fees have been charged, please write "None" and return the form,
executed by the Lender, to SBA.
<PAGE>
(d) The original copy of this Authorization and SBA forms as required by
this Authorization shall be executed prior to first disbursement and
retained in loan file by the Lender. When collateral is required that
is subject to a prior lien the Lender shall take action necessary to
preclude the possibility of its lien being junior to any future
advances made by the prior lien holder.
2. This Authorization is Subject to:
(a) Provisions of the Guaranty Agreement between Lender and SBA dated,
JUNE 14, 1991.
(b) First disbursement of the Loan being made not later than SIX months,
and no disbursement being made later than TWELVE months, from the date
of this Authorization, unless such time is extended pursuant to prior
written consent by SBA.
(c) Receipt by Lender of evidence that there has been no unremedied
adverse change since the date of the application, or since any of the
preceding disbursements, in the financial or any other condition of
Borrower, which would warrant withholding or not making any such
disbursement or any further disbursement.
(d) The representations made by Borrower in its loan application, the
requirements or conditions set forth in Lender's application form,
including the supporting documents thereto, the conditions set forth
herein and any future conditions imposed by Lender (with prior SBA
approval).
3. Terms of Loan:
(a) Repayment term, interest rate(s), and maturity.
Note payable with interest at the rate of (See below), and
installments, including principal and interest, each in the amount of
$10,135.00, payable monthly beginning ONE month from date of Note and
the balance of principal and interest payable SEVEN years from date of
Note.
The interest rate as of the date hereof is NINE AND ONE-QUARTER
percent (9.25%) per annum. This is a variable interest rate loan in
which the interest rate will fluctuate in accordance with the low
prime rate (hereinafter referred to as the "base rate") published in
the Wall Street Journal. The base rate published as of JANUARY 23,
1992 in that publication was 6.50%. The interest rate (spread) to be
added to the base rate on the beginning of each adjustment period will
be 2.75%. Each adjustment period will be for ONE month, beginning the
first business day of the first MONTH after first disbursement.
The interest rate on this Note shall increase or decrease by adding
the interest rate spread to the base rate as of the beginning of each
adjustment period, commencing with the adjustment period beginning the
first business day of the first month after first disbursement. If
the interest rate is increased or decreased, the monthly installment
of principal and interest shall be adjusted to reflect such change.
Holder should give written notice to the Borrower of each increase or
decrease in the interest rate and the reamortized installment payment
amount within thirty days after the effective date of each rate
adjustment; however, the fluctuation of the interest rate is not
contingent on whether the notice is given.
If the Borrower shall be in default in payment due on the indebtedness
herein and the Small Business Administration (SBA) purchases its
guaranteed portion of said indebtedness, the rate of interest on both
the guaranteed and unguaranteed portions herein shall become fixed at
the rate in effect as of the date of default. If the Borrower
-2-
<PAGE>
shall not be in default in payment when SBA purchases its guaranteed
portion, the rate of interest on both the guaranteed and unguaranteed
portion herein shall be fixed at the rate in effect as of the date of
purchase by SBA.
Borrower shall provide Lender with written notice of intent to prepay
part or all of the loan at least three (3) weeks prior to the
anticipated prepayment date. A prepayment is any payment made ahead
of schedule that exceeds twenty (20) percent of the then outstanding
principal balance. If Borrower makes a prepayment and fails to give
at least three weeks advance notice of intent to prepay, then
notwithstanding any other provision to the contrary in this Note or
other document, Borrower shall be required to pay lender three weeks
interest on the unpaid principal as of the date of such prepayment.
(b) Use of proceeds of loan as follows: (Show specific uses for which
loan is authorized.)
(1) Approximately $15,000.00 for payment in full for construction of
leasehold improvements.
(2) Approximately $83,150.00 for payment in full for purchase of
MACHINERY AND EQUIPMENT.
(3) Approximately $175,000.00 for payment in full for purchase of
INVENTORY.
(4) Balance, if any, to be used solely for operating expenses of
Borrower.
(c) Collateral:
(1) Deed of Trust (on SBA Form 930) on real estate located at 18226
NE 189TH STREET, WOODINVILLE, WASHINGTON 98072 subject only to
prior liens held by CONTINENTAL, INC. in the approximate amount
of $118,780.00. Mortgagee's Title Insurance Policy is required
insuring Lender's lien.
(2) Perfected FIRST security interest in all fixtures, and proceeds
thereof, now owned by Borrower, and hereafter acquired. U.C.C.
Financing Statement to be filed with County Auditor where
fixtures are located. Financing Statement to show legal
description of real property where fixtures are located. Record
search required showing Lender's lien.
(3) Perfected FIRST security interest in all equipment (INCLUDING
titled motor vehicles), and proceeds thereof, now owned by
Borrower, and hereafter acquired. U.C.C. Searches required after
Lender's Financing Statement(s) are filed.
(4) Perfected FIRST security interest covering all inventory,
accounts, general intangibles, and proceeds thereof, now owned
and hereafter acquired by Borrower. U.C.C. Searches required,
after Lender's Financing Statement(s) are filed.
(5) Guaranty on SBA Form 148 of CAREY F. DALY and JOAN L. DALY,
husband and wife, secured by collateral referenced in
subparagraph 3(c)(1) hereof.
4. To further induce Lender to make and SBA to guarantee this Loan, Lender and
SBA impose the following conditions:
(a) Execution of all documents required in Item 1 above.
(b) Reimbursable expenses - Borrower will, on demand, reimburse Lender for
any and all expenses incurred, or which may be hereafter incurred, by
Lender from time to time in
-3-
<PAGE>
connection with or by reason of Borrower's application for, and the
making and administration of the Loan.
(c) Books, Records and Reports - Borrower will at all times keep proper
books of account in a manner satisfactory to Lender and/or SBA.
Borrower hereby authorizes Lender or SBA to make or cause to be made,
at Borrower's expense and in such manner and at such times as Lender
or SBA may require, (a) inspections and audits of any books, records
and papers in the custody or control of Borrower or others, relating
to Borrower's financial or business conditions, including the making
of copies thereof and extracts therefrom, and (b) inspections and
appraisals of any of Borrower's assets. Borrower will furnish to
Lender for the period ending JUNE 31, 1992 and SEMI-ANNUALLY
thereafter (no later than 2 months following the expiration of any
such period) and at such other times and in such form as Lender may
prescribe, Borrower's financial and operating statements. Borrower
hereby authorizes all Federal, State and municipal authorities to
furnish reports of examinations, records, and other information
relating to the conditions and affairs of Borrower and any desired
information from reports, returns, files, and records of such
authorities upon request therefor by Lender or SBA.
(d) Borrower shall not execute any contracts for management consulting
services without prior approval of Lender and SBA.
(e) Distributions and Compensation - Borrower will not, without the prior
written consent of Lender or SBA (a) if Borrower is a corporation,
declare or pay any dividend or make any distribution upon its capital
stock, or purchase or retire any of its capital stock, or consolidate,
or merge with any other company, or give any preferential treatment,
make any advance, directly or indirectly, by way of loan, gift, bonus,
or otherwise, to any company directly or indirectly controlling or
affiliated with or controlled by Borrower, or any other company, or to
any officer, director or employee of Borrower, or of any such company,
(b) if Borrower is a partnership or individual, make any distribution
of assets of the business of Borrower, other than reasonable
compensation for services, or give any preferential treatment, make
any advance, directly or indirectly, by way of loan, gift, bonus, or
otherwise, to any partner or any of its employees, or to any company
directly or indirectly controlling or affiliated with or controlled by
Borrower, or any other company.
(f) Other Provisions:
(1) Interim funds advanced by participating bank in accordance with
this Authorization between loan approval date and loan closing
date, may be paid from the proceeds of this loan upon closing,
provided the amounts expended are documented and are in
accordance with the use of proceeds as detailed above.
(2) Borrower agrees to pay in full all outstanding or delinquent
local, state or federal taxes.
(3) Borrower and Guarantor(s) shall provide and maintain hazard
insurance (fire and extended coverage) for the full insurable
value on business personal property assets and real property
collateral. General Public Liability insurance in an amount
satisfactory to Lender is required. Lender shall be named loss
payee/mortgagee of the hazard insurance.
(4) Borrower agrees to post in his place of business SBA Form 722,
"Equal Opportunity Poster," where it will be clearly visible to
employees, applicants for employment, and the general public.
(5) Borrower covenants and warrants that:
-4-
<PAGE>
1. Borrower is in compliance with all applicable Federal and
State environmental laws and regulations and that they will
continue to comply with all such laws and regulations in the
future.
2. No proceedings alleging violations of environmental laws are
pending, on property owned or property to be purchased,
leased or rented by Borrower.
3. Borrower has no knowledge of hazardous waste contamination
on property owned or property to be purchased, leased or
rented by Borrower.
4. Borrower assumes all responsibility and all liability for
toxic substance cleanup resulting from any violations, past,
present, or future, and agrees to indemnify the Lender and
SBA for any and all resulting liabilities or costs.
(6) Resolution of Board of Directors, of Borrower corporation,
authorizing the corporation to obtain the loan and give
collateral to secure it.
(7) Prior to any disbursement, Lender must be in receipt of evidence
satisfactory to it that Borrower and/or Guarantor corporation is
a registered corporation listed in good standing with the Office
of the Washington Secretary of State. Loan documentation must
reflect correct spelling of corporate name.
(8) Prior to any disbursement, Lender must be in receipt of evidence
satisfactory to it that Borrower has installed and is maintaining
an adequate accounting system under the supervision of a
qualified public accountant, which system is satisfactory to
Lender.
(9) Prior to any disbursement, Lender shall be furnished with a copy
of a lease covering the premises at BUSINESS LOCATION, which
lease shall have an unexpired term, including options to renew,
of approximately SEVEN years. In addition, the Lessor of said
premises must consent to the security interest granted to the
Lender in the Collateral referenced in subparagraph 3(c)(1)
hereof and subordinate any lien or claim which the lessor may
have or hereafter acquire in said Collateral, whether arising by
statute, agreement or otherwise, to the lien of the Lender/SBA in
said Collateral. The Lessor must also agree that the Lender may,
at its option, enter upon the premises and remove said Collateral
at its sole cost and expense, and agree to provide Lender with at
least 30 days written notice of any action to retake possession
of the premises.
(g) Prior to commencement of construction and any disbursement pursuant to
paragraph 3(b)(1) above, Borrower must execute SBA Form 601 and must
have his contractor and each subcontractor with a subcontract in
excess of $10,000.00 execute SBA Form 601. These forms must be
returned to SBA.
5. Parties Affected - This Agreement shall be binding upon Borrower and
Borrower's successors and assigns. No provision stated herein shall be
waived without the prior written consent of SBA.
PATRICIA SAIKI
- --------------------------------------------------------------------------------
ADMINISTRATOR
/S/ ARTHUR S. BLANCO ADD/F&I FEBRUARY 13, 1992
- --------------------------------------------------------------------------------
By: Signature Title Date
-5-
<PAGE>
Borrower agrees to the conditions imposed herein; and further acknowledges that
this authorization and Loan Agreement does not create a commitment by lender to
disburse any funds pursuant hereto and oral agreements or oral commitments to
loan money, extend credit or to forebear enforcing repayment of a debt are not
enforceable.
Pathways International, Ltd.
By: /S/ CAREY F. DALY, II
------------------------------------------------
President Date
NOTE: Corporate borrowers must execute this Authorization, in corporate
names, by duly authorized officer, and seal must be affixed and duly
attested; partnership borrowers must execute in firm name, together
with signature of all general partners.
-6-
<PAGE>
EXHIBIT 10.4
RESTRUCTURE AND EXTENSION AGREEMENT
-----------------------------------
This Agreement dated as of July 1, 1996 is between Bank of America NW,
N.A., successor by name change to Seattle-First National Bank and doing business
as Seafirst Bank (hereafter "Seafirst") and The Pathways Group, Inc. and
Pathways International Ltd. (each a "Borrower" and hereafter jointly and
severally referred to as the "Company") and Carey F. Daly II and the marital
community of Carey F. Daly II and Joan L. Daly (Guarantor).
RECITALS
A. This Agreement concerns the following obligations owed by the
Borrowers to Seafirst (each a "Loan" and together the "Loans"):
Borrowing Agreement Unpaid Accrued Interest Per Diem
Dated Principal to 7/1/96 Thereafter
- ------------------- --------- ---------------- ----------
(1) July 26, 1994 $150,000.00 $11,230.04 $40.63
(2) February 4, 1994
as last amended
July 11, 1994 $190,000.00 $17,444.74 $51.46
(3) October 25, 1994 $250,000.00 $22,907.58 $71.18
B. Each of said Loans is in default in that, without limitation, each has
matured and remains unpaid in the amount set above as of the date of this
agreement.
C. Seafirst commenced suit to enforce the Loans in the Superior Court of
Washington for King County, SEATTLE-FIRST NATIONAL BANK V. PATHWAYS
INTERNATIONAL, LTD. ET AL., Cause #95-2-17990-8 (the "Lawsuit"), in which each
Borrower and the Guarantor were joined as defendants. Pursuant to a Settlement
Agreement dated December 15, 1995, each of the defendants executed a Confession
of Judgment, a true and correct copy of which is attached hereto as Exhibit A.
Although by the terms of the Settlement Agreement Seafirst is entitled to file
the Confession of Judgment and enter Judgment upon the Confession, the
Confession of Judgment has not been filed in the Lawsuit.
AGREEMENT
In consideration of the mutual covenants contained in this Restructure and
Extension Agreement the parties agree as follows:
1. The amounts of the Loans owing as set forth above are hereby
reaffirmed by each Borrower and Guarantor as the correct amount of the
Loans at the non-default interest rate. The amounts set forth in the
Confession of Judgment are hereby reaffirmed as the correct amount of the
Loans compounded at the Default rate of interest to October 14, 1995.
2. Subject to and expressly conditioned upon Seafirst's receipt not later
than July 15, 1996 of the sum of $200,000 together with the payment in full
of the accrued interest on all three Loans to July 1, 1996, Seafirst agrees
as follows:
(a) to dismiss the Lawsuit without prejudice and to reinstate the
terms and conditions of the original Borrowing Agreements as amended or
modified, which will thereupon be reconfirmed and remain unchanged except
as expressly modified in this Agreement;
<PAGE>
(b) to apply the $200,000 principal payment to reduction of the
principal balance of Loan #3;
(c) to extend the respective maturity dates of the Loans as follows:
Loan #3, February 1, 1998; Loan #2, February 1, 1999 and Loan #1, August 1,
1999; and
(d) to restructure payment of the balance of the Loans as provided in
section 3 below.
3. In consideration of the dismissal of the Lawsuit, each Borrower shall
be jointly and severally liable for, and Guarantor's guaranty shall extend
to, repayment when due of the balance of the Loans as follows:
(a) the principal balance of the Loans shall be repaid in 6 quarterly
principal payments in the amount of $65,000.00 commencing 2/1/98 and on
each 5/1, 8/1, 11/1 and 2/1 thereafter, to be applied to the Loans in the
following order: first, Loan #3; second, Loan #2 and lastly to Loan #1;
and,
(b) accrued interest on each of the three Loans shall be paid on
August 1, 1996 and on the first of each month thereafter at the same rate
set forth in the respective Borrowing Agreement evidencing that Loan.
4. Seafirst is authorized to automatically debit The Pathways Group,
Inc.'s checking account No. 67612515 with Seafirst for each payment of
interest and installment of principal.
5. The parties to this Agreement understand and agree that upon:
(a) payment of the $200,000.00 referenced in section 2, above, and
(b) execution by the Company and Guarantor of all documents necessary to
modify the Loans in accordance with the terms set forth in sections 2 and
3, above, all prior defaults under the Loans shall be deemed cured.
6. Time is of the essence. Seafirst shall retain the right to
immediately file the Confession of Judgment and obtain entry of the
Judgment in the Lawsuit upon failure to timely meet the express condition
to Seafirst's agreements set forth in section 2, above. If the condition
is met then upon any subsequent failure by Borrowers or Guarantor to pay or
otherwise strictly perform the provisions of this Agreement Seafirst may
without notification pursue any and all collection remedies available under
the Borrowing Agreements and Loan documents, as modified, including the
right to recommence litigation.
7. In consideration of this Agreement, Company hereby irrevocably and
unconditionally waives, relinquishes, releases and discharges Seafirst, and
its employees, agents, successors and assigns from any and all existing
claims, defenses, setoffs, liabilities, demands, actions and causes of
action, whether known or unknown, which arise from, or are in any way
related to, the making and collection of the Loan, the execution of this
Agreement, and any and all other loan and credit transactions existing
between the Company and Seafirst. Nothing in this section shall be deemed
to constitute an admission by Seafirst that any such claims exist.
8. Any and all changes to this Agreement must be in writing and signed by
all the parties.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO
FORBEAR FROM ENFORCING A PAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW. [RCW 19.36]
SEAFIRST BANK HAS PREPARED THIS INSTRUMENT WHICH MAY SUBSTANTIALLY AFFECT
YOUR LEGAL RIGHTS, BUT IS DOING SO FOR ITS OWN BENEFIT AND TO PROTECT ITS OWN
INTEREST IN THIS TRANSACTION. IF YOU HAVE ANY QUESTIONS REGARDING SUCH DOCUMENT
OR INSTRUMENTS, OR YOUR RIGHTS, YOU SHOULD CONSULT AN ATTORNEY OF YOUR CHOICE.
-2-
<PAGE>
SEAFIRST BANK GUARANTOR:
By /s/ BRIDGET CARR /s/ CAREY F. DALY, II
------------------------------ --------------------------------------
Bridget Carr Carey F. Daly, II for himself and the
Credit Officer marital community of Carey F. Daly, II
Seattle-First National Bank and Joan L. Daly
800 Fifth Avenue, Floor 29
Seattle, Washington 98124
Telephone: (206) 358-7632
Facsimile: (206) 358-7136
BORROWERS:
THE PATHWAYS GROUP, INC.
By /s/ CAREY F. DALY, II
------------------------------
Carey F. Daly, II
President
PATHWAYS INTERNATIONAL, LTD.
By /s/ CAREY F. DALY, II
------------------------------
Carey F. Daly, II
President
-3-
<PAGE>
EXHIBIT 10.5
RESTRUCTURE AND EXTENSION AGREEMENT
This Agreement dated as of July 1, 1997 Is between Bank of America NT&SA,
successor by name change to Seattle-First National Bank and doing business as
Seafirst Bank (hereafter "Seafirst"); PT Link Corporation (hereafter "Company");
and The Pathways Group, Inc. ("Pathways").
RECITALS
A. The subject of this Agreement is the following obligation (hereafter
"Loan") owed by the Company to Seafirst
Borrowing Agreement Unpaid Accrued Interest Per Diem
Dated Principal to 7/11/97 Thereafter
- ------------------- --------- ---------------- ----------
May 5, 1994 $364,750.00 $3,039.58 $101.32
B. Pathways has guaranteed payment of the Loan.
C. Seafirst, the Company, and Pathways desire to restructure and extend
the Loan on the terms set forth in this Agreement.
AGREEMENT
In consideration of the mutual covenants contained in this Restructure and
Extension Agreement, the parties agree as follows:
1. The amounts of ft Loan owing as set forth above (in Recital A) are
correct and the Company and Pathways hereby reaffirm their respective
obligations to repay the Loan to Seafirst. The Company and Pathways acknowledge
and agree that the Loan has matured and remains unpaid. The Company and Pathways
further acknowledge that they have no defenses to, or offsets against, their
respective obligations to repay the Loan. All terms of the Loan documents
evidencing and securing the original obligation, and renewals of same, are
expressly ratified, reconfirmed and remain unchanged except as modified in this
Agreement
2. Not later than July 1, 1997, the Company shall pay Seafirst a)
$34,750.00, to be applied to principal reduction of the Loan; and b) a loan fee
In the amount of $1,823.75, which amount equals one half of one percent of the
total unpaid Loan principal. The Company acknowledges and agrees that Seafirst's
obligations under this Agreement are wholly conditioned upon Seafirst's timely
receipt of said payments. If the Company falls to make timely payments of these
amounts, this Agreement shall be void and of no further effect
3. Commencing on the date of this Agreement, the unpaid Loan principal
shall accrue interest at the rate of Seafirst's Prime Rate + 1.5%. Company shall
pay interest accrued on the Loan monthly on the first day of each month,
commencing August 1, 1997 and continuing thereafter until the Loan is paid in
full. In addition to making monthly payments of all accrued Interest,Company
shall make principal reduction payments of $55,000.00 on each of the following
dates: February 1, 1998, May 1, 1998, August 1, 1998, November 1, 1998, and
February 1, 1999. Final payment of all unpaid principal and accrued interest
will be due and payable on May 1, 1999.
4. Subject to the Company's timely performance of this payment
obligations described in preceding paragraph 3, the maturity date of the Loan Is
hereby extended to the earlier of a) May 1, 1999; or b) the sale or transfer of
either: 1) a controlling ownership Interest In the Company; or ii) substantially
all of the Company's assets.
5. Commencing on July 1, 1997, on the first day of each month Seafirst is
hereby authorized: a) automatically to debit the Company's checking account No.
67612515 with Seafirst In an amount equal to the
<PAGE>
payment of interest and principal due at that time; and b) to apply the debited
amount to payment of said interest or principal.
6. Pathways shall provide Seafirst with copies of Pathways' financial
statements, as soon as possible after such financial statements become available
and In no event less frequently than on a quarterly basis.
7. Time Is of the essence and any failure by the Company to pay or
otherwise strictly perform the provisions of this Agreement will nullify this
Agreement and allow Seafirst, without notification and in Its sole discretion,
to pursue any and all collection remedies available to it under applicable law
and the Borrowing Agreement.
8. In partial consideration for this Agreement the Company and Pathways
hereby irrevocably and unconditionally waive, relinquish, release and discharge
Seafirst, and its employees, agents, successors and assigns from any and all
existing claims, known or unknown, which arise from or are In any way relate to
the making and collection of the Loan, the execution of this Agreement, and any
and all other loan and credit transactions existing between the Company,
Pathways, and Seafirst. Nothing In t1his section shah be deemed to constitute an
admission by Seafirst that any such claims exist.
9. Any and all changes to this Agreement must be in writing and signed by
all the parties.
10. This Agreement may be executed in counterparts. If so executed, each
of such counterparts is to be deemed an original for all purposes, and all such
counterparts shall collectively constitute one agreement.
11. This Agreement may be executed by facsimile, with copies bearing
original signatures sent by First Class U.S. Mail at the same time to the other
parties.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY. EXTEND CREDIT OR TO FORBEAR
FROM ENFORCING A PAYMENT OF DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW (RCW
19.36).
SEAFIRST BANK HAS PREPARED THIS INSTRUMENT WHICH MAY SUBSTANTIALLY AFFECT YOUR
LEGAL RIGHTS, BUT IS DOING SO FOR ITS OWN BENEFIT AND TO PROTECT ITS OWN
INTEREST IN THIS TRANSACTION. IF YOU HAVE ANY QUESTIONS REGARDING SUCH DOCUMENT
OR INSTRUMENTS, OR YOUR RIGHTS, YOU SHOULD CONSULT AN ATTORNEY OF YOUR CHOICE.
SEAFIRST BANK PT LINK CORPORATION
By: /s/ ROGER W. JOHNSON, V.P. By:
-------------------------------- --------------------------------
For: Sheila Kelly Carey F. Daly, II
Vice President President
THE PATHWAYS GROUP, INC.
By: /s/ MICHAEL LAZENBY
-------------------------------- By: /s/ MARK SCHUUR
Michael Lazenby --------------------------------
Credit Officer Mark Schuur
Chief Financial Officer
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND FOR THE YEAR THEN
ENDED AS INDICATED BELOW AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,759,720
<SECURITIES> 0
<RECEIVABLES> 66,493
<ALLOWANCES> 0
<INVENTORY> 202,749
<CURRENT-ASSETS> 4,130,369
<PP&E> 1,134,281
<DEPRECIATION> 411,603
<TOTAL-ASSETS> 6,716,840
<CURRENT-LIABILITIES> 981,774
<BONDS> 509,900
0
0
<COMMON> 129,045
<OTHER-SE> 5,096,121
<TOTAL-LIABILITY-AND-EQUITY> 6,716,840
<SALES> 61,785
<TOTAL-REVENUES> 61,785
<CGS> 19,492
<TOTAL-COSTS> 19,492
<OTHER-EXPENSES> 3,577,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167,220
<INCOME-PRETAX> (3,586,521)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,586,521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,586,521)
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
