<PAGE>
As filed with the Securities and Exchange Commission on September 24, 1998.
Registration No. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE PATHWAYS GROUP, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 7371 91-1617556
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(State or Jurisdiction of (Primary Standard (IRS Employer
Incorporation or Organization) Industrial Classification Identification No.)
Code Number)
14201 N.E. 200th Street 1221 North Dutton Avenue
Woodinville, Washington 98072 Santa Rosa, California 95401
(425) 483-3411 (707) 546-3010
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(Address and Telephone Number of (Address of Principal Place of Business or
Principal Executive Offices) Intended Principal Place of Business)
Carey F. Daly, II
President and Chief Executive Officer
The Pathways Group, Inc.
1221 North Dutton Avenue
Santa Rosa, California 95401
(707) 546-3010
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(Name, Address and Telephone
Number of Agent for Service)
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Copies to:
Steven R. Berger, Esq.
Christy & Viener
620 Fifth Avenue
New York, New York 10020
(212) 632-5500
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ___________________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / _______________________________
If the Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______________________________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / / _______________________________________
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class Of Amount Proposed Maximum Proposed Maximum
Securities To Be To Be Offering Price Aggregate Offering Amount of
Registered Registered Per Unit(1) Price Registration Fee
- ------------------------------- ---------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 654,508 $14.00 $9,163,112 $2,703
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the last reported trade as published by the NASD
OTC Bulletin Board on September 21, 1998.
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The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
THE PATHWAYS GROUP, INC.
Cross Reference Sheet
<TABLE>
<CAPTION>
Item Number and Caption Location or Heading in Prospectus
- -------------------------------------------- --------------------------------------------
<S> <C> <C>
1. Front of Registration Statement Front of Registration Statement
and Outside Front Cover of Prospectus and Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Pages of Prospectus
3. Summary Information and Risk Factors Summary Information and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price *
6. Dilution *
7. Selling Securityholders The Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Business
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Security Ownership of Certain
Beneficial Owners and Management Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel *
14. Disclosure of Commission Indemnification
Position on Indemnification for
Securities Act Liabilities
15. Organization Within Last Five Certain Relationships and
Years Related Transactions
16. Description of Business Business
17. Management's Discussion and Management's Discussion and
Analysis or Plan of Operation Analysis or Plan of Operation
18. Description of Property Business
19. Certain Relationships and Certain Relationships and
Related Transactions Related Transactions
20. Market for Common Equity and Market Price of and Dividends on the
Related Security Holder Matters Company's Common Equity
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
</TABLE>
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* Omitted from Prospectus because item is inapplicable or answer is in the
negative.
<PAGE>
Registration No. 333-
PROSPECTUS
THE PATHWAYS GROUP, INC.
654,508 Shares of Common Stock
This Prospectus relates to up to 654,508 shares (the "Shares") of the
Common Stock, par value $.01 per share (the "Common Stock"), of The Pathways
Group, Inc. (together with its subsidiaries, unless the context otherwise
requires, the "Company" or "Pathways") to be sold from time to time by the
holders thereof (the "Selling Stockholders") on the NASDAQ over-the-counter
Bulletin Board (or if the Common Stock is accepted for listing on the NASDAQ
SmallCap Market, on the SmallCap Market ("NASDAQ")) or otherwise at prices then
attainable, less ordinary brokers' commissions and dealers' discounts, as
applicable. The Shares were offered and sold to the Selling Stockholders
pursuant to private offerings in which the Shares were not registered with the
Securities and Exchange Commission. The Shares are being offered solely for the
account of the Selling Stockholders and the Company will receive no part of the
proceeds of this Offering. See "The Selling Stockholders", "Use of Proceeds" and
"Plan of Distribution".
The Company's Common Stock is traded in the over-the-counter market
under the symbol PTHW. On September 21, 1998 the last reported bid price per
share for the Common Stock as reported on NASDAQ Bulletin Board was $14.00.
THE COMPANY'S SECURITIES ARE SPECULATIVE IN THAT THEY INVOLVE A HIGH
DEGREE OF RISK AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE
THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" FOR A DISCUSSION OF MATTERS WHICH
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THESE SECURITIES.
<TABLE>
<CAPTION>
Underwriting
discounts and Proceeds to issuer
Price to Public commissions or other persons(3)
--------------- ------------- -------------------
<S> <C> <C> <C>
Per Share $ (1) 0 $ (1,2)
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Total $ (1) 0 $ (1,2)
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</TABLE>
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1 Estimated, based upon the last reported sale price of the Company's Common
Stock on September , 1998.
2 The Company will receive no part of the proceeds of this Offering. All
proceeds will go to the Selling Stockholders, and the amount set forth
above assumes that all Shares registered pursuant to this Registration
Statement are sold.
3 The estimated expenses of the Company in connection with this Registration
Statement, of which this Prospectus constitutes a part, are $_________.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECRETARY OF STATE
OF ILLINOIS OR THE STATE OF ILLINOIS, NOR HAS THE SECRETARY OF STATE OF ILLINOIS
OR THE STATE OF ILLINOIS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The date of this Prospectus is , 1998.
<PAGE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OR SOLICITATION WITH
RESPECT TO THESE SECURITIES BY THE COMPANY TO ANY PERSON WHO MAY BE CONSIDERED
TO BE AN UNDERWRITER OR TO ANY PERSON IN ANY STATE IN WHICH SAID OFFERING OR
SOLICITATION IS NOT AUTHORIZED BY THE LAWS THEREOF OR IN WHICH THE PERSON MAKING
SAID OFFERING OR SOLICITATION IS NOT QUALIFIED TO ACT AS DEALER OR BROKER OR
OTHERWISE TO MAKE SUCH OFFERING OR SOLICITATION.
THE COMPANY HAS UNDERTAKEN TO FILE POST-EFFECTIVE AMENDMENTS TO THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART AND TO REFLECT THEREIN
ANY FACTS OR EVENTS ARISING AFTER THE DATE HEREOF WHICH REPRESENT A FUNDAMENTAL
OR MATERIAL CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN SAID REGISTRATION
STATEMENT. SEE "UNDERTAKINGS". ANY SUCH AMENDMENTS WHICH RELATE TO THIS
PROSPECTUS WILL BE DISSEMINATED TO SELLING STOCKHOLDERS OF THE COMPANY AFTER THE
REQUIRED FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION HAVE BEEN MADE AND
BECOME EFFECTIVE.
ii
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the Commission's regional office at
Suite 500 East, 5757 Wilshire Boulevard, Los Angeles, California 90036. Copies
of such material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site (located at http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The Company
maintains a website at http://www.pathwaysgroup.com.
The Company will provide without charge to each person who receives
this Prospectus, upon written or oral request of such person, a copy of any of
the information that is incorporated by reference in the Prospectus (not
including exhibits to the information that is incorporated by reference unless
the exhibits are themselves specifically incorporated by reference). Such
requests should be sent to Edward L. Mueller, General Counsel and Secretary to
the Company, at 1221 North Dutton Avenue, Santa Rosa, California 95401.
IN CONNECTION WITH THIS OFFERING, CERTAIN SELLING STOCKHOLDERS MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "PLAN OF
DISTRIBUTION".
Until , 1998, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
iii
<PAGE>
SUMMARY INFORMATION
The following summary is qualified in its entirety by the detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus.
The Company
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 Selling Stockholders
This Prospectus relates to the registration of the resale of 654,508
shares of the Company's Common Stock, beneficially owned by certain of the
Company's stockholders. These shares were issued in private placement
transactions and had not previously been registered with the Securities and
Exchange Commission. See "The Selling Stockholders" and "Plan of Distribution".
RISK FACTORS
The Shares offered hereby are speculative and involve a high degree of
risk. An investment in the Shares is suitable only for persons who can afford to
sustain the loss of their entire investment. Prospective investors should
carefully consider the following factors in addition to those described
elsewhere in this Prospectus before making an investment decision.
Limited Operating History. The Company was organized under the laws of
the State of Washington in November 1993, reincorporated in Delaware in May
1997, and has only had a limited operating history. It is the successor to
Pathways International, Ltd., incorporated in June 1988. Since inception, the
Company has been engaged principally in research and development of its products
and in organizational activities, including developing a business plan, hiring
personnel and developing and enhancing its proprietary smart card technology and
software and developing pilot programs for its products. Therefore, the Company
has a limited operating history upon which an evaluation of its prospects can be
made. The Company's prospects must be considered in light of the risks,
uncertainties, expenses, delays and difficulties associated with the
establishment of a new business in the rapidly evolving smart card industry, as
well as those risks encountered in the shift from development to
commercialization of new products based on innovative technologies. See
"Business".
Limited Revenues; Significant and Continuing Losses; Accumulated
Deficit. Through June 30, 1998, Pathways recorded cumulative 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 has generated limited
revenues to date and any material increase in its revenues is dependent upon
commercial acceptance of its products. The Company
<PAGE>
has incurred significant losses in each period since its inception resulting in
an accumulated deficit at June 30, 1998, of $(15,894,352). Inasmuch as the
Company will continue to have a high level of operating expenses and will be
required to make significant up-front expenditures in connection with both the
development of its business and the commercialization of its smart card systems
(including, without limitation, salaries of executive, technical, marketing and
other personnel), the Company anticipates that it will continue to incur
significant and increasing losses for the foreseeable future until such time, if
ever, as the Company is able to generate sufficient revenues to finance its
operations. There can be no assurance that the Company's smart card systems will
gain market acceptance, or that the Company will be able to successfully
implement its business strategy, generate meaningful revenues or achieve
profitable operations. See "Business" and the Company's financial statements
included herein.
Developing Marketplace; Uncertainty of Market Acceptance. The smart
card industry in the United States is an emerging business. The success of the
smart card industry depends, in large part, on the ability of market
participants, including the Company, to convince governmental authorities,
commercial enterprises and other potential system sponsors to adopt a smart card
system in lieu of existing or alternative systems such as magnetic stripe card
and paper-based systems, thereby changing the way certain transaction and
information processing tasks are accomplished. In addition, due to the large
capital and infrastructure investment made by debit and credit card issuers and
significantly lower costs associated with the use of magnetic stripe cards,
there can be no assurance that the Company's smart card technology will prove to
be economically viable for a sufficient number of sponsors, and many potential
system sponsors may be reluctant to convert to smart card technology in the near
future. Accordingly, there can be no assurance that there will be significant
market opportunities for smart card systems in the United States or that the
acceptance of smart card-based systems in other countries will be sustained. As
such, demand for and market acceptance of the Company's smart card systems are
subject to a high level of uncertainty.
Competition. The smart card industry in the United States is an
emerging business characterized by an increasing and substantial number of new
market entrants that have introduced or are developing an array of new products
and services relating to electronic transactions and information processing.
Each of these entrants is or may be seeking to position its products and
services as the preferred method of effectuating highly individualized,
easy-to-use electronic transaction and information processing. This market is
therefore characterized by intense competition. Specifically, the Company
competes with numerous well-established companies, including Bull, Card Europe,
GemPlus, Innovatron, Philips Electronics, Aladdin Systems, MONDEX, MasterCard,
Motorola, Schlumberger, Siemens, DigiCash, AT&T Card and Visa, which design,
manufacture and/or market smart card systems. While the Company believes that
its products are able to compete on the basis of enhanced security, flexibility,
salability, cost-effectiveness and quality, the Company's smart card systems
incorporate new concepts and may be unsuccessful even if they are superior to
those of its competitors. In addition, certain companies may be developing
technologies or products of which the Company is unaware which may be
functionally similar or superior to those developed by the Company. Most of the
Company's competitors and potential competitors possess substantially greater
financial, marketing, personnel and other resources than the Company and have
established reputations relating to the design, development, manufacture,
marketing and service of smart card systems. As the market for smart card
systems grows, new competitors are likely to emerge. Additional competition
could adversely affect the Company's operations. There can be no assurance that
the Company will be able to compete successfully, that competitors will not
develop technologies or products that render the Company's systems obsolete or
less marketable or that the Company will be able to successfully enhance its
products or develop new products when necessary. See "Business Competition".
Uncertainty of Business Plan. The success of the Company's business
plan will be largely dependent upon market acceptance of smart cards generally,
as well as on the Company's ability to successfully market its smart card
systems by persuading potential system sponsors of the perceived benefits of its
products and to develop and commercialize further applications of its
proprietary technology. In addition, the Company's business plan and prospects
will be dependent upon, among other things, the Company's ability to enter into
strategic marketing and licensing or other arrangements on a timely basis
2
<PAGE>
and on favorable terms; establish satisfactory arrangements with sales
representatives and marketing consultants; hire and retain skilled management as
well as financial, technical, marketing and other personnel; successfully manage
growth (including monitoring operations, controlling costs and maintaining
effective quality, inventory and service controls); and obtain adequate
financing when and as needed. The Company has limited experience in developing
new products based on innovative technology, and there is limited information
available concerning the performance of the Company's technologies or market
acceptance of the Company's products. There can be no assurance that the Company
will be successful in implementing its business plan or that unanticipated
expenses or problems or technical difficulties will not occur which would result
in material delays in its implementation. Moreover, there can be no assurance
that the Company will have sufficient capacity to satisfy any increased demand
for its smart card products and technologies resulting from the Company's
implementation of its plan of operation. See "Business".
Limited Marketing Experience. The Company has limited marketing
experience and limited financial, personnel and other resources to undertake
extensive marketing activities. Potential system sponsors of the Company's smart
card systems, as well as the Company's potential strategic partners, must be
persuaded that the costs of adopting and implementing smart card systems, in
general, and, in particular, of adopting and implementing the Company's smart
card systems, are justified by the benefits to be derived therefrom. Achieving
market acceptance for the Company's products and services will require
significant efforts and expenditures by the Company to create awareness, demand
and interest by potential system sponsors, strategic partners and others
regarding the perceived benefits of the Company's technologies. There can be no
assurance that the Company will be able to meet its current objectives, succeed
in positioning its cards and services as a preferred method of delivering
electronic transaction and information processing or achieve significant market
acceptance of its products. See "Business".
Dependence on Third-Party Marketing Arrangements. The Company has
limited marketing capabilities, experience and resources. To date, the Company
has conducted only limited marketing activities and has relied primarily on the
efforts of its executive officers in connection with such activities. Although
the Company expects to continue to market smart card systems directly through
the Company's management and employees, the Company intends to establish
strategic marketing alliances and licensing or other arrangements with systems
integrators, value-added resellers and other smart card vendors and may also
retain the services of sales representatives and marketing and other
consultants. The Company's success will depend in part on its ability to enter
into agreements with such third parties, and on the ability and efforts of such
third parties to successfully market the Company's smart card systems. Moreover,
marketing arrangements with third parties may require financial or other
commitments by the Company. There can be no assurance that the Company will be
able, for financial or other reasons, to enter into third-party marketing
arrangements on commercially acceptable terms, if at all. The failure of the
Company to complete its third-party marketing strategy or the failure of any
such party to develop and sustain a market for the Company's smart cards could
have a material adverse effect on the Company. Although the Company views
third-party marketing arrangements as a major factor in the commercialization of
its smart card systems, there can be no assurance that any strategic partners,
licensees or others would view an arrangement with the Company as significant to
their businesses. See "Business".
Significant Capital Requirements. The Company's capital requirements
have been and will continue to be significant. The Company has been dependent on
the sales of its securities to private investors, as well as on capital
contributions and loans from affiliates and certain financial institutions
guaranteed by certain stockholders of the Company. The Company anticipates,
based on currently proposed business plans and assumptions relating to its
operations (including assumptions regarding the Company's ability to meet its
current marketing objectives and the timing and costs associated therewith),
that the net proceeds of its private placement of Common Stock that was
commenced in July 1998 and completed in August 1998 (the "Private Placement"),
together with projected cash flow from operations, will be sufficient to fund
the Company's operations and capital requirements for at least twelve months
following the Private Placement. In the event that the Company's plans change,
its assumptions change or prove to be inaccurate or if the proceeds of the
Private Placement prove to be insufficient to fund operations (due
3
<PAGE>
to unanticipated expenses, technical difficulties or other problems), the
Company will be required to seek additional financing sooner than currently
anticipated. In addition, any implementation of the Company's business plans
subsequent to the twelve-month period following the Private Placement may
require proceeds greater than the proceeds of the Private Placement or otherwise
currently available to the Company. The Company has no current arrangements with
respect to, or sources of, additional financing and there can be no assurance
that any such financing will be available to the Company on commercially
reasonable terms, if at all. It is not anticipated that any of the officers,
directors or stockholders of the Company will provide any portion of the
Company's future financing requirements. Any inability to obtain additional
financing when needed will have a material adverse effect on the Company,
including requiring the Company to curtail its activities and possibly causing
the Company to cease its operations. To the extent that the Company finances its
operations through the issuance of additional equity securities, any such
issuance may involve substantial dilution to the Company's then-existing
stockholders. Additionally, to the extent that the Company incurs additional
indebtedness or issues debt securities, the Company will be subject to all of
the risks associated with incurring substantial indebtedness, including the
risks that interest rates may fluctuate and cash flow may be insufficient to pay
principal and interest on any such indebtedness. See "Use of Proceeds" and
"Business".
Technological Factors. The Company's research and development efforts
are subject to all of the risks inherent in the development of new products and
technology (including unanticipated delays, expenses and difficulties). There
can be no assurance that the Company's products will satisfactorily perform the
functions for which they are designed, that they will meet applicable price or
performance objectives or that unanticipated technical or other problems will
not occur which would result in increased costs or material delays in the
development thereof. Furthermore, software products as complex as those
developed by the Company and incorporated into its smart card products may
contain errors or failures when installed, updated or enhanced. There can be no
assurance that, despite testing by the Company and by current and potential end
users, errors will not be found in new products after the delivery by the
Company, resulting in loss of or delay in market acceptance. See "Business".
Proprietary Rights. The Company's success will depend on its ability
to protect trade secrets and operate without infringing on the proprietary
rights of others. The Company may apply for United States patent, trademark and
copyright protection with respect to its toolkits for smart card programming as
well as its commercial applications. The Company may file similar applications
in selected foreign jurisdictions where such filings would, in the Company's
opinion, provide it with a competitive advantage.
The Company is not aware of any infringement by its technology on the
proprietary rights of others and has not received any notice of claimed
infringement. However, the Company has not conducted any investigation as to
possible infringement and there can be no assurance that third parties will not
assert infringement claims against the Company in connection with its products,
that any such assertion of infringement will not result in litigation or that
the Company would prevail in such litigation.
Moreover, in the event that the Company's technology or proposed
products were deemed to infringe upon the rights of others, the Company would be
required to obtain licenses to utilize such technology. There can be no
assurance that the Company would be able to obtain such licenses in a timely
manner on acceptable terms and conditions, and the failure to do so could have a
material adverse effect on the Company. If the Company were unable to obtain
such licenses, it could encounter significant delays in product market
introductions while it attempted to design around the infringed-upon patents or
rights, or could find the development, manufacture or sale of products requiring
such license to be foreclosed. In addition, patent disputes are common in the
smart card and computer industries and there can be no assurance that the
Company will have the financial resources to enforce or defend a patent
infringement or proprietary rights action. The Company's use of its software,
name and trademark may be subject to challenge by others, which, if successful,
could have a material adverse effect on the Company.
4
<PAGE>
The Company also relies on trade secrets and proprietary know-how and
employs various methods to protect the concepts, ideas and documentation
relating to its proprietary technology. However, such methods may not afford the
Company complete protection and there can be no assurance that others will not
independently obtain access to the Company's trade secrets and know-how or
independently develop products or technologies similar to those of the Company.
Furthermore, although the Company has and expects to have confidentiality and
non-competition agreements with its employees and appropriate suppliers and
manufacturers, there can be no assurance that such arrangements will adequately
protect the Company's trade secrets. See "Business Copyrights, Trademarks,
Patents, Proprietary Rights and Licenses".
Year 2000 Risk. During recent years, there has been significant global
awareness raised regarding the potential disruption to business operations
worldwide resulting from the inability of current technology to process properly
the change in the year 1999 to 2000. Based on a review of its data processing,
operating systems, software and other technology already in place, the Company
does not currently believe that it will experience any significant adverse
effects or material unbudgeted costs resulting therefrom. Nevertheless, the
Company cannot provide any assurance in this regard, and any such costs or
effect could materially and adversely affect the operations and financial
condition of the Company.
Lengthy Sales Cycle; Possible Fluctuations in Operating Results. The
Company's sales cycle is expected to commence at the time a prospective customer
demonstrates an interest in purchasing a smart card system from the Company or
issues a request for a proposal or information or takes similar action, and ends
upon the installation and acceptance of a smart card system for the customer.
The sales cycle will vary by customer and industry and could extend for periods
of up to twelve months or more, depending upon, among other things, the time
required by the customer to complete a pilot test of the Company's smart card
system, make a determination regarding an acquisition thereof and negotiate
payment terms with the Company. The Company's operating results could vary from
period to period as a result of this fluctuation in the length of the Company's
sales cycle and as a result of fluctuations in the purchasing patterns of
potential system sponsors, technological factors, variations in marketing
strategies for different target markets and non-recurring smart card system
sales.
Possible Dependence on Government Contracts. As part of its strategy,
the Company intends to market its smart card systems to government agencies in
the United States, Canada and abroad. If successful, the Company will become
subject to the special risks involving government contracts, including delays in
funding, lengthy review processes for awarding contracts, non-renewal, delay,
termination at the convenience of the government, reduction or modification of
contracts in the event of changes in the government's policies or as a result of
budgetary constraints and increased or unexpected costs resulting in losses, any
or all of which could have a material adverse effect on the Company.
The Company will also be required to obtain any potential government
contracts through the competitive bidding process. There can be no assurance
that the Company will be successful in having its bids accepted or, if accepted,
that awarded contracts will generate sufficient revenues to result in profitable
operations. The competitive bidding process is typically lengthy and often
results in the expenditure of financial and other resources in connection with
bids that are not accepted. Additionally, inherent in the competitive bidding
process is the risk that actual performance costs may exceed projected costs
upon which a submitted bid or contract price is based. To the extent that actual
costs exceed projected costs, the Company would incur losses, which would
adversely affect the Company's operating margins and results of operations.
Moreover, in most instances, the Company would be required to post bid and/or
performance bonds in connection with contracts with government agencies. Any
inability by the Company to obtain bonding coverage in sufficient amounts could
have a material adverse effect on the Company. See "Business".
Broad Discretion in Application of Proceeds. The Company intends to
use the net proceeds from the Private Placement for general working capital
purposes for the expansion of its business, including marketing, research and
development, and salaries for new personnel. The Company has not
5
<PAGE>
developed more specific allocations for the use of such net proceeds, and the
Company's management has broad discretion to use such net proceeds for the
expansion of the Company's business in accordance with its business judgment.
Dependence on Management and Key Personnel. The success of the Company
is highly dependent on the personal efforts of Carey F. Daly, II, its Chief
Executive Officer and its President. The Company has entered into an employment
agreement with Mr. Daly; the loss of his services would have a material adverse
effect on the Company's business and prospects. In order to successfully
implement and manage its proposed expansion, the Company will be dependent upon,
among other things, its ability to attract and retain qualified managerial,
technical and marketing personnel with experience in business activities such as
those contemplated by the Company. Competition for qualified personnel is
intense and there can be no assurance that the Company will be able to hire or
retain such personnel. Any inability to attract and retain qualified personnel
would have a material adverse effect on the Company. The Company has assembled a
core team of financial, marketing and research and technical personnel, who have
been significant contributors to the Company's development to date. The loss of
any of such personnel could have a significant adverse impact on the Company.
The Company currently does not have any "key man" insurance on any of its
personnel. See "Management".
Determination of Offering Prices; Possible Volatility of Market Price
of Common Stock. Since the Company offered its shares of Common Stock in July
1997, there has only been a limited public trading market for the Common Stock.
Consequently, the offering price of the Common Stock is not necessarily related
to the Company's asset value, net worth or other criteria of value. There can be
no assurance that a regular trading market for the Common Stock will develop
after this offering or that, if developed, it will be sustained. The market
price for the Company's securities following this offering, if a market
develops, may be highly volatile, as has been the case with the securities of
other small capitalization companies. Additionally, in recent years, the stock
market in general, and the market for securities of small capitalization stocks
in particular, have experienced wide price fluctuations which have often been
unrelated to operating performance of such companies.
Limited Liquidity; Shares Eligible for Future Sale. The Company's
Common Stock is currently traded in the NASDAQ over-the-counter market Bulletin
Board. The Company has applied for listing on the NASDAQ SmallCap Market.
Although the Company believes that its application for such listing will be
accepted, there can be no assurance that the Company will meet the criteria
necessary for such application to be granted, or that if granted, the Company
will meet the criteria for continued listing on the NASDAQ SmallCap Market. To
the extent that the Company does not secure or maintain such listing, the
Company's stockholders could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock. In addition,
failure to list or maintain a listing for the Common Stock may make the Common
Stock ineligible for use as, or make the Common Stock substantially less
attractive as, collateral for margin and purpose loans, for investment by
financial institutions under their internal policies or state legal investment
laws, as consideration in the financing of future acquisitions of businesses or
assets by the Company, and for issuance by the Company in future capital raising
transactions.
As a result of the limited trading market for the Common Stock
described above and the large number (relative to such trading markets) of
shares of Common Stock available for sale in the public market pursuant to Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"), the
sales by stockholders of the Company of Common Stock in the public market could
materially adversely affect the prevailing market price for the Common Stock and
could impair the Company's ability to raise capital through offerings of its
equity securities. In addition to the 654,508 Shares sold in the Private
Placement, approximately 11,000,000 shares of Common Stock held by the Company's
existing stockholders are currently available for sale in the public market,
subject to the provisions of Rule 144 under the Securities Act. In connection
with the Private Placement, the Company entered into agreements with Allen &
Company Incorporated, persons affiliated with Allen & Company Incorporated,
Carey F. Daly, II, Glenn A. Okun and Lawrence Okun (who collectively hold a
total of approximately 7,400,000 shares of Common Stock purchased at prices
significantly lower than the Shares being offered hereunder), pursuant to which
such
6
<PAGE>
stockholders agreed not to offer for sale any shares of Common Stock until the
Registration Statement, of which this Prospectus constitutes a part, has become
effective. There can be no assurance, however, that such holders will not offer
substantial amounts of Common Stock for sale after this Registration Statement
has become effective or that other stockholders of the Company will not offer
substantial amounts of Common Stock for sale either before or after such
effectiveness. Any such sales could materially adversely affect the
then-prevailing market price for the Common Stock or the ability of holders of
Shares to sell such Shares.
No Dividends. The Company has never paid any cash or other dividends
on its Common Stock. For the foreseeable future, the Board of Directors intends
to retain future earnings, if any, to finance its business operations and does
not anticipate paying any cash dividends with respect to the Common Stock. In
addition, the payment of cash dividends may be limited or prohibited by the
terms of any future loan agreements or any Preferred Stock that may be issued by
the Company.
Limitations on Liability of Directors and Officers. Pursuant to its
Certificate of Incorporation and By-laws, the Company indemnifies its officers
and directors to the maximum extent permitted by law.
Adoption of Certain Charter and By-law Provisions Having Anti-Takeover
Effects. The Company's Certificate of Incorporation permits the Company, without
further stockholder action, to issue up to 1,000,000 shares of preferred stock,
having such rights and preferences as the Company's board may determine. See
"Description of Securities".
The Certificate and By-laws contain various provisions which, under
certain circumstances, could make it more difficult for a third party to gain
control of the Company (e.g., by means of a tender offer), prevent or
substantially delay such a change of control, discourage bids for the Common
Stock at a premium, or otherwise adversely affect the market price of the Common
Stock. See "Description of Securities".
Options Outstanding. As of the date of this Offering Circular, the
Company had outstanding options to purchase an aggregate of 410,833 shares of
Common Stock at a weighted average exercise price of $10.84 per share. Exercise
of any of the foregoing options will have a dilutive effect on the Company's
stockholders. Furthermore, the terms upon which the Company may be able to
obtain additional equity financing may be adversely affected, since holders of
the options can be expected to exercise them, if at all, at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in the options.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of any of the
Shares by the Selling Stockholders.
7
<PAGE>
CAPITALIZATION
The Company's capitalization, at June 30, 1998, was as follows:
<TABLE>
<CAPTION>
After Giving Effect to
Actual Private Placement*
------------ ----------------------
<S> <C> <C>
Long-term liabilities, net of current portion $ 220,344 $ 220,344
Common stock, par value $0.01
Stated capital ......................... 129,045 135,590
Additional paid-in capital ............. 18,052,730 26,457,678
Preferred stock, par value $0.01 ............ -- --
Accumulated deficit ......................... (15,894,352) (15,894,352)
Total stockholders' equity .................. $ 2,287,423 $ 10,698,916
</TABLE>
* See "Management's Discussion and Analysis or Plan of Operation" for the
Quarters Ended June 30, 1998 and 1997.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table contains selected financial information derived
from the financial statements set forth elsewhere in this Prospectus, and should
be read in conjunction with such financial statements and notes thereto. The
following tables summarize certain financial data derived from audited
consolidated financial statements of the Company for the fiscal years ended
December 31, 1997, 1996, and 1995, respectively, and financial data derived from
unaudited consolidated financial statements of the Company for the six month
periods ended June 30, 1998 and 1997. The unaudited financial statements of the
Company as of June 30, 1998 and 1997 and for the six month periods then ended
have been prepared on the same basis as the audited financial statements of the
Company and, in the opinion of management, include all adjustments necessary
(consisting of only normal recurring adjustments and accruals) to present fairly
the financial position and the results of operations of the Company.
8
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
(Audited) (Unaudited)
-------------------------------------------
1997 1996 1995 1998
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Income Statement Data:
Operating revenues ........... $ 61,785 $ 108,418 $ 512,250 $ 13,880
Gross profit ................. 42,293 43,224 443,169 10,379
(Loss) from operations ....... (3,535,487) (2,265,572) (2,318,948) (2,942,809)
Other Income (Expense) ....... (51,034) (567,305) (332,599) (5,076)
Net (Loss) before taxes ...... (3,586,521) (2,832,877) (2,651,547) (2,937,733)
----------- ----------- ----------- -----------
Net (Loss) ................... $ 3,586,521) $(2,832,877) $(2,651,547) $(2,937,733)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(Loss) per share basic
and diluted ................ $ (0.30) $ (0.57) $ (1.49) $ (0.23)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Balance Sheet Data:
Current assets ............... $ 4,130,369 $ 2,874,727 $ 92,827 $ 741,956
Total assets ................. 6,716,840 5,072,139 2,630,217 3,498,451
Long-term obligations
under capital lease ........ 0 0 0 0
Total liabilities ............ 1,491,674 2,110,544 5,332,238 1,211,028
Working capital .............. 3,148,595 1,496,074 (2,647,394) (248,728)
Stockholders equity (deficit) 5,225,166 2,961,595 (2,702,021) 2,287,423
</TABLE>
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.
9
<PAGE>
The Company's business model is based upon the Company's contracting
large membership based businesses to be a turnkey provider of smart card-based
systems. The Company anticipates licensing its software to its clients and
entering into agreements whereby 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.
Except for historical information, the material contained in this
Management's Discussion and Analysis or Plan of Operation is forward-looking.
This discussion includes, in addition to historical information, forward looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward looking
statements. Factors that could cause or contribute to such differences are
discussed below and in "Risk Factors" in this Prospectus. These risks and
uncertainties include the rate of market development and acceptance of smart
card technology, the unpredictability of the Company's sales cycle, the limited
revenues and significant operating losses generated to date, and the possibility
of significant ongoing capital requirements. For the purposes of the safe harbor
protection for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995, readers are urged to review the list of certain
important factors set forth in "Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation Reform Act of 1995".
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 overall gross margin percentage varies primarily as
a result of the "mix" of sales 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 expects future gross margin percentages will be heavily
influenced by potential competition as well as the "mix of sales" 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 of a client system is
10
<PAGE>
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 administrative 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.
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.
In accordance with generally accepted accounting principles 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 are not
impaired.
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.
11
<PAGE>
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 Stock 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 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.
QUARTERS ENDED JUNE 30, 1998 AND 1997
Results of Operations
Revenues. The Company generated limited revenues from operations for
these periods as it has continued to develop and market its smart card systems.
Revenues generated in the three months and six months ended June 30, 1998 and
1997 relate to credit card processing fees from its unattended ticketing kiosks
installed in several ski area and amusement park venues and, in 1997, sales of
smart cards and affinity cards. Revenues decreased $8,493 and $21,212 for the
three months and six months ended June 30, 1998, as compared to the
corresponding periods in 1997 due to a decrease in sales of smart and affinity
cards in 1998, and lower credit card transaction fees in 1998 vs. 1997. Credit
card transaction fees were lower for 1998 as compared to 1997 due to a decrease
in the number of kiosks in operation as a result of the Company's focus on its
smart card systems marketing efforts.
The Company's business model is based upon the Company's contracting
with large membership-based businesses to be a turnkey provider of smart card
based systems. The Company anticipates licensing its software for use by its
clients and entering into agreements whereby the Company
12
<PAGE>
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. The Company anticipates that revenue generation
from contracts will be dominated initially by the sales of smart card terminals
and readers and smart cards in order to develop an appropriate concentration of
merchants and smart card users in a market area. After this initial phase, the
sales mix for a contract is expected to consist of a relatively high
concentration of transaction processing fees.
The Company has initiated a pilot program pursuant to a signed pilot
agreement with the Department of Education in the State of Hawaii for the
implementation of an electronic payment program for school lunches. The Company
expects completion of the pilot in the fourth quarter. After completion of the
pilot, if deemed successful by the Department of Education, the Company
anticipates it will negotiate a rollout schedule for the remaining schools in
the state of Hawaii. The Company has a signed pilot agreement with First
Hawaiian Bank for the use of smart cards in a retail program and expects to
begin this program in the fourth quarter of 1998 or the first quarter of 1999.
In June of 1998, the Company signed a contract with Scrip Advantage of
Fresno, California to provide its proprietary Smart Script electronic scrip and
gift certificate product to Scrip Advantage and its members. The system being
installed was originally slated to be used in a pilot program for a company
called "SCRIP Plus", which was owned by the Signature Group, a wholly owned
subsidiary of Montgomery Ward, and one of the largest scrip resellers in the
country. When Montgomery Ward filed for bankruptcy, SCRIP Plus was unable to
support the signed pilot agreement with Pathways. Accordingly, Pathways delayed
installation and has now negotiated a new contract with Scrip Advantage, which
was started by the previous Chief Executive Officer of SCRIP Plus, Inc.
The agreement with Scrip Advantage calls for the Company to sell
terminals to participating merchants and smart cards to non-profit organizations
and their members. In addition, the Company will receive a fee for each smart
card, debit or credit card transaction processed. The agreement is for a term of
three years with annual renewals and includes early termination provisions for
both parties under certain conditions, including the failure of Pathways to
provide Scrip Advantage with competitive pricing. In connection with the
agreement with Scrip Advantage, the Company has advanced $50,000 to Scrip
Advantage in exchange for a demand note receivable. The note receivable is
convertible into common stock of Scrip Advantage at the Company's sole option,
and provides the Company, through Carey F. Daly, II, Chief Executive Officer and
President of the Company, to be represented on the Board of Directors of Scrip
Advantage. 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 overall gross margin as a percentage of
revenues varies primarily as a result of the "mix" of sales between high margin
transaction processing fees and lower margin smart card and terminal sales.
Gross margins decreased to 77% from 80% for the three months ended June 30, 1998
and 1997 respectively as a result of an increase in credit card charge back
expense in 1998. Gross margin increased to 75% from 72% for the six months ended
June 30, 1998 and 1997 respectively as a result of a larger proportion of sales
of hardware and smart cards in 1997, which carry a lower gross margin than
transaction processing fees.
The Company expects future gross margin percentages will be heavily
influenced by potential competition as well as the "mix" of sales between
hardware sales and transaction processing fees. Although this mix is difficult
to predict, margins generally will be lower at the beginning of a new client
system rollout due to the concentration of smart card readers and smart card
sales. Once the initial rollout is completed, gross margins are expected to
increase due to increases in use of the smart card by cardholders and the
resulting transaction processing fees.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $702,238 or 130% and $1,338,953 or 121% during
the three months and six months
13
<PAGE>
ended June 30, 1998, as compared to the corresponding periods in 1997. This
increase is primarily the result of expanded payroll and employee support costs
associated with an increased number of full-time and contract employees. The
Company had approximately forty-eight full-time employees at June 30, 1998, as
compared to twenty-two as of June 30, 1997. In addition, the Company has
incurred increases in administrative costs associated with becoming a publicly
traded company, including professional services and investor relations
expenditures. The Company expects the level of selling, general and
administrative costs to continue to increase, although more modestly than the
past four quarters, as a result of continued marketing and customer support
activities and an increase in the number of operating and technical personnel
necessary to support its expected sales efforts, product development and
customer support activity. The Company has leased an 8,700 square foot facility
in Santa Rosa, California, which has been refurbished into a new
state-of-the-art transaction-processing center. Construction of the facility
build-out occurred in the second and third quarters of 1997, and the Company
occupied this new facility in September 1997. Additionally, the Company opened a
sales and marketing office in Honolulu, Hawaii, during the third quarter 1997 as
a wholly-owned subsidiary. Consequently, the selling, general, and
administrative expenses for the three months and six months ended June 30, 1998
reflect the costs of operating the Company's three offices whereas the
corresponding periods in 1997 reflect the operating expenses of only one office.
The Company anticipates substantial investments in its sales, marketing and
product development activities in the foreseeable future as it seeks to expand
sales of its smart card systems and transaction processing fees.
Amortization of Software Costs. Amortization of software costs
increased $17,822 and $37,651 for the three months and six months ended June 30,
1998 compared to the corresponding periods in 1997. This increase is due to
continued capitalization of software costs as a result of the Company's product
development efforts.
In accordance with generally accepted accounting principles for
software development costs, the Company would, if it were determined that an
impairment of software development 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 results of
operations for such period. The Company believes its capitalized software are
not impaired.
Depreciation. Depreciation increased $64,171 and $102,539 for the
three months and six months ended June 30, 1998, as compared to the
corresponding periods in 1997 primarily due to an increase in capital
expenditures. Capital expenditures increased during 1998 as compared to 1997 due
to the addition of computer equipment to support an increase in marketing and
technical activities and personnel, the build-out of the Company's Santa Rosa,
California transaction processing center, and the opening of its Hawaii office.
Interest Expense (Net). For the six months ended June 30, 1998, the
Company had net interest income as compared to interest expense for the six
months ended June 30, 1997. For the three months ended June 30, 1998, the
Company had net interest expense of $10,089 as compared with net interest
expense of $18,038 for the corresponding period in 1997. The decrease in net
interest expense was due to reductions in the total debt outstanding and
increased interest income from the investment of available funds from common
stock sales.
Liquidity And Capital Resources
The Company's working capital was $(248,728) and $3,148,595 at June
30, 1998 and December 31, 1997, respectively. The higher working capital at
December 31, 1997, as compared to June 30, 1998, was primarily the result of the
receipt of proceeds from the Company's initial public offering of Common Stock
and the exercise of Common Stock warrants in 1997. Working capital was used to
fund the Company's net losses for the first half of 1998. In July 1997, the
Company issued and sold 833,333 shares of Common Stock pursuant to the filing of
Form 1-A (No. 24-3750) with the Securities and Exchange
14
<PAGE>
Commission. The net proceeds from the sale of the shares were $4,857,956. On
July 23, 1998, the Company commenced a private offering of its Common Stock (the
"Private Placement"). With respect to the Company's Private Placement, which was
conducted pursuant to Rule 506 of Regulation D under the Securities Act, the
Company sold 654,508 shares at $13.75 per share to six accredited investors. The
Company engaged Allen & Company Incorporated to act as placement agent for the
offering. Each placement agent who placed shares received a placement fee of 5%
of the purchase price per share. The estimated net proceeds from the sales and
subscriptions are approximately $8,411,493. Pro forma working capital and cash
and cash equivalents at June 30, 1998, after giving effect to the receipt of the
net proceeds from the offering is $8,162,765 and $8,794,302.
In 1997, the Company entered into a master lease agreement with a bank
which provided 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 and
contains an option to acquire the equipment at the end of the lease term. This
lease has been accounted for as an operating lease. The lease provisions require
the Company to maintain $200,000 in a certificate of deposit at the bank as
collateral for the lease and to deposit additional funds if the Company's
available cash and cash equivalents are not maintained above $850,000. In June
1998, the Company determined that it was in breach of one of the financial
covenants contained in its $400,000 lease financing arrangement. The Company
received a waiver from the bank in August 1998.
The Company incurred increased capital expenditures in 1998 as
compared to 1997 primarily due to the purchase of computer equipment required to
support increased marketing and technical activities and personnel and the
operation of three facilities in 1998 as compared to one facility in 1997.
Beginning in September 1997, the Company spent $556,527 through June 30, 1998 in
leasehold improvements, furniture and computer equipment costs to build out its
new transaction processing facility in Santa Rosa, California. To date the
Company has spent $19,065 on equipment for its Hawaii office, and expects to
incur additional cost for computer equipment to complete the facility. The
Company anticipates leasing additional office space for a Research and
Development facility in Santa Rosa, as well as moving to a larger leased
facility in Hawaii. Both of these events will require additional expenditures
for leasehold improvements, furniture and computer equipment, which are expected
to be incurred by the end of 1998.
The Company has historically relied upon proceeds from the sale or
issuance of its Common Stock and from the issuance of notes payable and lease
financing 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 it is able to generate significant sales and achieve
adequate levels of profitability. There can be no assurance that the Company
will achieve sales of the magnitude 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, including proceeds from the
Private Placement, and available trade and other credit facilities are
sufficient to meet its present anticipated working capital needs for the next
twelve months. In the event that the Company is unable to generate significant
revenues from the rollout of its current contracts or any additional contracts
that the Company may negotiate, the Company will be required to seek alternative
sources of financing to fund its operations. 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.
BUSINESS
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 designs, markets and services custom smart card
applications. The Company develops unique solutions for creating and processing
data and ensuring secure electronic
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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 believes that it is unique in the smart card industry in
that it provides "cradle to grave" solutions as a full service hardware
integrator, software developer and backroom transaction processor. By adopting
this market strategy, the Company believes that it can become 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 a 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. (Source: Don Cunningham, Global Journal of
Advanced Card Technology, Smart Card Industry Association, 1997.)
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.
(Source: Don Cunningham, Global Journal of Advanced Card Technology, Smart Card
Industry Association, 1997.) 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. 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
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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 June 30, 1998, 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 the Company's initial programs 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 that 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 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.
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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 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 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
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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 are 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 signed a contract in June 1998 with Scrip Advantage of
Fresno, California to provide its proprietary Smart Scrip (TM), Electronic Scrip
and Gift Certificate product to Scrip Advantage and its members. The system
being installed was originally intended to be used in a pilot program for a
company called "SCRIP Plus," which was owned by the Signature Group, a wholly
owned subsidiary of Montgomery Ward and one of the largest Scrip resellers in
the country. When Montgomery Ward filed for bankruptcy, SCRIP Plus was unable to
support the signed pilot agreement with Pathways. Accordingly, Pathways delayed
installation and has now negotiated a new contract with Scrip Advantage, which
was started by the previous chief executive officer of SCRIP Plus.
The agreement with Scrip Advantage calls for the Company to sell
terminals to participating merchants and smart cards to non-profit organizations
and their members. In addition, the Company will receive a fee for each smart,
debit or credit card transaction processed. The term of the agreement is for
three years, with annual renewals, and the agreement includes early termination
provisions for both parties under certain conditions, including the failure of
Pathways to provide Scrip Advantage with competitive pricing.
In connection with the agreement with Scrip Advantage, the Company has
advanced $50,000 to Scrip Advantage in exchange for a demand promissory note.
The note is convertible into equity
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of Scrip Advantage at the Company's sole option. In addition, Scrip Advantage
has agreed to elect a Company designee to its Board of Directors. Initially,
Carey F. Daly II, the President and Chief Executive Officer of the Company, will
be elected to such Board.
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
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 September 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 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", or
functions, on the same card. This capability, for example, would allow
a medical or insurance application
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to reside on the same card with a merchant loyalty program. 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 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
competing 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, such as credit or debit 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")
compliant database that can service substantially all management
reporting needs. Every element of the database is positioned using
"data pointers," which allows such information to be extracted for
customized client reports.
-- 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. This technique allows the Company to combine
its software modules to create a product satisfying its customer's
needs in a shorter time period than would be possible in the absence
of these toolkits
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.
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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.
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
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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 holds
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 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 and 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 Advantage) 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.
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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. Although the
Company expects to continue to market smart card systems directly through the
Company's management and employees, the Company intends to establish strategic
marketing alliances and licensing or other arrangements with systems
integrators, value-added resellers and other smart card vendors and may also
retain the services of sales representatives and marketing and other
consultants. 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.
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 in the United States.
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
24
<PAGE>
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.
Copyrights, Trademarks, Patents, Proprietary Rights and Licenses
As of September 15, 1998, the Company held no patents or other
registered intellectual property rights with respect to its smart card products.
The Company presently has filed applications to register the following marks
with the U.S. Patent and Trademark Office: C.H.I.P. SMART CARD, COMPASS DESIGN
(Company logo), C-TELLER, E-TELLER (U.S. and Canada), FUND MASTER, ISLAND ACCESS
CARD, KEIKI CARD, KOKUA CARD, KOKUA KARD, MENEHUNE CARD, QUEST SMART CARD,
RENAISSANCE, SMART GIFT CARD, SMART SCRIP (U.S. and Canada), SMART STUDENT CARD,
THE BUS CARD, THE PATHWAYS GROUP & COMPASS DESIGN (Company logo), THE PATHWAYS
GROUP & COMPASS DESIGN (Company logo), THE PATHWAYS GROUP INC., TIKITBOX,
TSUNAMI CARD, V-TELLER and WIC SMART CARD
The Company seeks to register these marks generally on software,
hardware, terminals, kiosks and other machines used in connection with
transaction and database processing or electronic access cards or integrated
chip cards.
The Company may prepare applications for patents, trademarks and
copyrights for intellectual property, to be filed within the statutory time
limits that may apply. 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 rights 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 June 30, 1998, the Company had a total of 47 full-time
employees. Key employees are employed under an employment contract, which
includes a binding non-compete and non-disclosure clause. Each of Carey F. Daly,
II, the Company's President and Chief Executive Officer, Mark T. Schuur, Senior
Vice President and Chief Financial Officer and Joseph Schuler, Senior Vice
President, Business
25
<PAGE>
Development have employment contracts with the Company. 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.
Property
The Company leases its principal facilities totaling approximately
8000 square feet in Woodinville, Washington. The lease expires in the year 2000.
The Company has also leased additional space for transaction processing,
marketing and research and development operations in Santa Rosa, California, and
a marketing office in Honolulu, Hawaii. The Company has executed a lease
agreement in Honolulu, which allows the Company to accommodate a satellite
transaction processing center. The Company anticipates that additional facility
leases will be required to accommodate its growth plans.
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY
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 fiscal year ended December 31,
1997, and in 1998 to the date of this registration statement were as follows:
Common Stock Prices
<TABLE>
<CAPTION>
Fiscal Quarter: High Low
--------------- ---- ---
<S> <C> <C>
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 17.00
</TABLE>
During the third quarter of fiscal 1998 (through September 21, 1998),
the Company's Common Stock had a high price of $20.375 and a low of $14.00.
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
As of September 11, 1998, there were approximately 75 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 400 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.
26
<PAGE>
MANAGEMENT
The directors and executive officers of the Company, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Carey F. Daly, II 54 Chairman of the Board of Directors;
President; Chief Executive Officer
Mark T. Schuur 37 Director; Senior Vice President
and Chief Financial Officer
Joseph Schuler 56 Senior Vice President, Business
Development
Robert Haller 44 Senior Vice President, Marketing
and Sales
Glenn Okun 36 Director
Monte P. Strohl 46 Director
Linda Wing 53 Director
</TABLE>
Each director shall hold office until the next annual meeting of the
Company's stockholders and until a successor is selected and qualified.
Carey F. Daly, II, age 54, 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, Maryland. 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.
Mark T. 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 36, 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
27
<PAGE>
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.
Linda Wing, age 53, has been a Director of the Company since June
1998. Since 1993, she has served as President and Chief Executive Officer of
Human Systems Design, an organizational development firm that assists
management of companies in developing their strategic planning. Ms. Wing
currently teaches a course in strategic management at Metro State University
in Minneapolis, Minnesota. She is also an editor of the journal "Empowerment
in Organization," which is published by MCB University Press. She holds a
masters of business administration from the University of St. Thomas and
several undergraduate degrees from Mankato State University in finance and
industrial relations. Ms. Wing is presently working on obtaining her
doctorate in organizational theory from the Fielding Institute in Santa
Barbara, California.
Monte P. Strohl, age 46, has been a Director of the Company since June
1998. Mr. Strohl is currently the president of MS Digital, which he founded in
1994 and has acted as President and Chief Executive Officer since that time. MS
Digital is a company specializing primarily in corporate communication and cable
broadcasting. MS Digital provides hardware and software solutions to companies
wishing to communicate over cable television (public or internal), or intranets.
MS Digital's clients include universities, municipalities and Fortune 500
companies. Before founding MS Digital, Mr. Strohl worked as Vice President of
sales for OMNI International, which sold video production solutions
internationally. Mr. Strohl is one of the original founders of Pathways
International, Ltd., the predecessor corporation of the Company.
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 44, 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.
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 President and 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 $100,000 during the fiscal years ended
December 31, 1997, 1996 and 1995. Therefore, pursuant to Item 402 of Regulation
S-B, only compensation for each of the Chief Executive Officer and the Senior
Vice President and Chief Financial Officer is shown.
28
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------------------------------------------
Awards Payouts
----------------------------------------
Securities All Other
Other Annual Restricted Underlying LTIP Compen-
Name and Principal Bonus Compensation Stock Options/SARs Payouts sation
Position Year Salary ($) ($)(c) ($) Award(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 1996 200,000 0 12,500(a) 0 200,000/0 0 0
Chief Executive Officer 1995 137,809 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
Mark T. Schuur, Senior 1997 $112,916 0 0 0 15,000/0 0 0
Vice President and Chief 1996 35,333(b) 0 0 0 20,000/0 0 0
Financial Officer 1995 -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(a) Represents payment for accrued vacation benefits.
(b) Mr. Schuur's employment with the Company commenced in September 1996.
(c) The Company has no set bonus policy. Bonuses are awarded by the independent
directors of the Board.
Stock Option Plan
The Board of Directors of the Company adopted an Amended and Restated
Stock Incentive Plan (the "Option Plan") on December 16, 1997 in order to
attract and retain qualified personnel. Under the Option Plan, options to
purchase up to 2,000,000 shares of Common Stock may be granted to officers and
key employees of the Company and directors who are also officers or key
employees of the Company. Options granted under the Option Plan are intended to
qualify as incentive stock options within the meaning of the Internal Revenue
Code of 1986, as amended.
Subject to the terms of the Option Plan, the Board of Directors is
authorized to select optionees and determine the number of shares covered by
each option, its exercise price and certain of its other terms. The exercise
price of incentive stock options granted under the Option Plan may not be less
than the fair market value of the Company's Common Stock on the date of the
grant and may not be less than 110% of such fair market value with respect to
any incentive stock option granted to a participant who owns 10% or more of the
Company's outstanding Common Stock. In general, options become exercisable in
equal annual installments. The period within which any incentive stock option
may be exercised cannot exceed ten years from the date of grant. Unless
otherwise provided in an award agreement with a participant, all options expire
immediately upon the termination of the participant's employment. If the
participant's employment terminates due to retirement or resignation, the Board
of Directors may permit options to continue until the expiration date set forth
in the applicable award agreement. If the participant's employment terminates
due to death or disability, the options will continue until the expiration date
set forth in the applicable award agreement. To the extent required by law for
an option to qualify as an incentive stock option, no option intended to qualify
as an incentive stock option may be exercised while any options previously
granted to that optionee are outstanding. As of the date of this Prospectus,
410,833 options are outstanding.
29
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- ----------------------------------------------------------------------------------------
Percent of
Number of Total
Securities Options/
Underlying SARS(a)
Options/ Granted to
SARS(a) Employees Exercise or
Granted in Fiscal Base Price Expiration
Name (#) Year ($/Sh) Date
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carey F. Daly, II,
President and Chief
Executive Officer 0 N/A N/A N/A
- ----------------------------------------------------------------------------------------
Mark T. Schuur, Senior
Vice President and
Chief Executive Officer 15,000 7.01% 23.00 12/23/07
- ----------------------------------------------------------------------------------------
</TABLE>
- ----------
a To date, the Company has issued no SARS.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs(a) Options/SARs(a)
at Fiscal Year- at Fiscal Year-
End (#) End ($)
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise(#) ($) Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carey F. Daly, II, President
and Chief Executive Officer N/A N/A 66,667/133,333 $1,400,007/
$2,799,993
Mark T. Schuur, Senior Vice
President and Chief
Financial Officer 6,667 $96,204 0/28,333 $0/$305,726
</TABLE>
- ----------
a To date, the Company has issued no SARs.
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 September 21, 1998, by
(i) each person who is known by the Company to
30
<PAGE>
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 September 21, 1998, there were 13,558,995 shares of Common
Stock outstanding. Each share of Common Stock is entitled to one vote per
share.
<TABLE>
<CAPTION>
Name and Address of Shares of Percent of Common
Beneficial Owners and Common Stock Stock Beneficially
Directors and Officers Beneficially Owned Owned
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
5% Beneficial Owners:
Allen & Company Incorporated(1) 2,780,932(2) 20.5%
711 Fifth Avenue
New York, New York 10022
- -------------------------------------------------------------------------------------------------------------------------
Deferred Compensation Trust for Carey F. Daly, II(3) 1,876,978 13.8%
1221 North Dutton Ave.
Santa Rosa, California 95401
- -------------------------------------------------------------------------------------------------------------------------
Officers and Directors:
Carey F. Daly, II 619,126(4) 4.6%
1221 North Dutton Ave.
Santa Rosa, California 95401
- -------------------------------------------------------------------------------------------------------------------------
Mark T. Schuur 13,334(5) *
14201 NE 200th Street
Woodinville, Washington 98072
- -------------------------------------------------------------------------------------------------------------------------
Glenn A. Okun 511,303(6) 3.8%
1221 North Dutton Ave.
Santa Rosa, California 95401
- -------------------------------------------------------------------------------------------------------------------------
Monte P. Strohl 67,000 *
13720 68th Avenue West
Edmonds, Washington 98026
- -------------------------------------------------------------------------------------------------------------------------
Linda Wing None N/A
6117 Wilryan Avenue
Minneapolis, Minnesota 55436
- -------------------------------------------------------------------------------------------------------------------------
Officers and Directors as a Group (7 persons) 1,201,562 9.2%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Less than 1%.
(1) Allen & Company Incorporated, a New York corporation, is wholly-owned by
Allen Holding Inc., a Delaware corporation of which members of the Allen
family are beneficial owners of a majority of the shares. The remaining
shares of Allen Holding Inc. are owned by officers of Allen actively
involved in its business.
(2) Excludes approximately 1,578,000 additional shares owed by persons
affiliated with Allen & Company Incorporated.
(3) Mr. Daly has no voting power over or power to dispose of the 1,876,978
shares held in the trust. Mr. Edward L. Mueller, General Counsel to the
Company, is the trustee.
(4) Includes options to acquire 133,334 shares, which options are currently
exercisable. Excludes (a) 203,000 shares owned by Mr. Daly's wife, (b)
options to acquire 66,666 shares, which options are not currently
exercisable and (c) 1,876,978 shares held in the Deferred Compensation
Trust for Carey F. Daly, II, over which Mr. Daly has no power to vote or
dispose.
31
<PAGE>
(5) Excludes options to acquire 21,666 shares, which options are not currently
exercisable.
(6) Includes 75,000 shares owned by Mr. Okun jointly with his wife. Excludes
145,455 shares held in an account of a client of Mr. Okun, shares over
which Mr. Okun has the power to vote and discretion to dispose. Mr. Okun
disclaims beneficial ownership of the 145,455 shares.
CERTAIN RELATIONSHIPS 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.
As part of the Company's private offering of Common Stock pursuant to
Rule 506 of Regulation D of the Securities Act, the Company entered into a
Placement Agency Agreement with Allen & Company Incorporated, whereby the
Company agreed to pay Allen & Company Incorporated a placement fee of 5% of the
aggregate amount of Common Stock purchased by a subscriber. The Company paid
Allen & Company Incorporated an aggregate amount of $349,974 as its placement
fee. In addition, Mitchum, Jones & Templeton, Inc. ("Mitchum Jones"), an
investment banking firm for whom Mr. Okun is now a principal, received a 5%
placement fee in connection with a subscription for Common Stock by one of his
firm's clients. Mitchum Jones received $100,000 as its placement fee for that
purchase. Allen & Company Incorporated did not receive a placement fee in
connection with the subscription by Mitchum Jones' client.
In connection with the agreement with Scrip Advantage, Scrip Advantage
has agreed to elect a Company designee to its Board of Directors. Initially,
Carey F. Daly II, the President and Chief Executive Officer of the Company, will
be elected to such Board. The Company has advanced $50,000 to Scrip Advantage in
exchange for a demand promissory note. The note is convertible into equity of
Scrip Advantage at the Company's sole option.
The Company believes that the terms of the transactions with affiliates
of the Company are fair and reasonable in light of prevailing market conditions
at the time when such arrangements were implemented and in light of the
circumstances under which such arrangements were made. The disinterested members
of the Board of Directors will continue to review any ongoing relationships with
such affiliates to assure that such transactions are consistent with the
fiduciary duties of the directors to the stockholders of the Company.
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 13,558,995 shares
of Common Stock outstanding and no shares of Preferred Stock outstanding.
32
<PAGE>
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 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.
THE SELLING STOCKHOLDERS
The persons listed below comprise the Selling Stockholders when shares
are being offered pursuant to the Prospectus. The Company is obligated to update
this Prospectus periodically until the shares offered hereby are sold.
<TABLE>
<CAPTION>
Name of Selling Securityholder Amount Of Amount Of Amount of Common
Common Stock Common Stock Stock To Be Held
Owned To Be After Offering Is
Registered Complete
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
General Electric Pension Trust 290,909 290,909 0*
- ---------------------------------------------------------------------------------------------------
Mercantile Equity Partners I, L.P. 72,727 72,727 0*
- ---------------------------------------------------------------------------------------------------
Oscar Investment Fund, L.P. 54,545 54,545 0*
- ---------------------------------------------------------------------------------------------------
Twinstar International, Ltd. 153,455 145,455 8,000*
- ---------------------------------------------------------------------------------------------------
Whittier Opportunity Fund 188,545 54,545 134,000*
- ---------------------------------------------------------------------------------------------------
Whittier Ventures LLC 36,327 36,327 0*
- ---------------------------------------------------------------------------------------------------
Total 654,508
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Assumes all shares registered pursuant to this Registration Statement are
sold.
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds of the sale of the
Common Stock offered hereby. The Common Stock may be sold from time to time to
purchasers directly by the Selling Stockholders. Alternatively, the Selling
Stockholders may from time to time offer the Common Stock through brokers,
dealers or agents who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of the Common Stock for whom they may act as agent. The Selling Stockholders and
any such brokers, dealers or agents who participate in the distribution of the
Common Stock may be deemed to be "underwriters", and any profits on the sale of
the Common Stock by them and any discounts, commissions or concessions received
by any such brokers, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act. To the extent the Selling
Stockholders may be deemed to be underwriters, the Selling Stockholders may be
subject to certain statutory
33
<PAGE>
liabilities of the Securities Act, including, but not limited to, Sections 11,
12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.
The Common Stock offered hereby may be sold from time to time in one or
more transactions at fixed prices, at prevailing market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
The Common Stock may be sold by one or more of the following methods, without
limitation: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the Common Stock as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; (d) an exchange
distribution in accordance with the rules of such exchange; (e) face-to-face
transactions between sellers and purchasers without a broker-dealer; (f) through
the writing of options; and (g) other. At any time a particular offer of the
Common Stock is made, a revised Prospectus or Prospectus Supplement, if
required, will be distributed which will set forth the aggregate amount and type
of Common Stock being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, any discounts, commissions and
other items constituting compensation from the Selling Stockholders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
Such Prospectus Supplement and, if necessary, a post-effective amendment to the
Registration Statement of which this Prospectus is a part, will be filed with
the Commission to reflect the disclosure of additional information with respect
to the distribution of the Common Stock. In addition, the Common Stock covered
by this Prospectus may be sold in private transactions or under Rule 144 rather
than pursuant to this Prospectus.
To the best knowledge of the Company, there are currently no plans,
arrangements or understandings between any Selling Stockholders and any broker,
dealer, agent or underwriter regarding the sale of the Common Stock by the
Selling Stockholders. There is no assurance that any Selling Stockholder will
sell any or all of the Common Stock offered by it hereunder or that any such
Selling Stockholder will not transfer, devise or gift such Common Stock by other
means not described herein.
The Selling Stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M, which may limit the timing of purchases and sales of any of the Common Stock
by the Selling Stockholders and any other such person. All of the foregoing may
affect the marketability of the Common Stock and the ability of any person or
entity to engage in market-making activities with respect to the Common Stock.
Pursuant to the registration rights set forth in the various
Subscription Agreements between the Company and the Selling Stockholders, each
of the Company and the Selling Stockholders will be indemnified by the other
against certain liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith. The Company
has agreed to pay substantially all of the expenses incidental to the
registration, offering and sale of the Common Stock to the public other than
commissions, fees and discounts of underwriters, brokers, dealers and agents,
transfer taxes and fees and expenses of Selling Stockholders' counsels.
INDEMNIFICATION
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
34
<PAGE>
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 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).
LEGAL OPINIONS
The law firm of Christy & Viener, special counsel to the Company, 620
Fifth Avenue, New York, New York 10020, has rendered an opinion regarding the
validity of the Shares offered hereby.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996 and
the consolidated statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1997,
included in this Prospectus, have been included herein in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in auditing and accounting.
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Financial Statements:
Year Ended December 31, 1997 (Audited)
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1996 and 1995 F-7
Quarter Ended June 30, 1998 (Unaudited)
Unaudited Consolidated Balance Sheets for the Fiscal Quarter
Ended June 30, 1998 F-21
Unaudited Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1998 and June 30, 1997 F-22
Unaudited Consolidated Statements of Cash Flows for the Three
and Six Months Ended June 30, 1998 and June 30, 1997 F-23
Unaudited Notes to Consolidated Financial Statements for the
Fiscal Quarter Ended June 30, 1998 F-24
</TABLE>
F-1
<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/ PricewaterhouseCoopers LLP
- ------------------------------
Seattle, Washington
February 24, 1998
F-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<PAGE>
QUARTER ENDED JUNE 30, 1998 (UNAUDITED)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 382,809 $ 3,759,720
Accounts receivable .............................. 81,670 66,493
Inventory ........................................ 207,570 202,749
Prepaid expenses and deposits .................... 69,907 101,407
------------ ------------
Total current assets ............................ 741,956 4,130,369
Restricted cash ................................... 200,000 70,500
Software, net ..................................... 1,424,359 1,605,098
Property and equipment, net ....................... 1,027,312 722,678
Other assets ...................................... 104,824 188,195
------------ ------------
Total assets .................................... $ 3,498,451 $ 6,716,840
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks, current maturities ....... $ 571,839 $ 551,991
Accounts payable ................................. 258,966 206,986
Accrued expenses ................................. 159,879 222,797
------------ ------------
Total current liabilities ....................... 990,684 981,774
Notes payable to banks, net of current maturities . 220,344 509,900
------------ ------------
Total liabilities ............................... $ 1,211,028 $ 1,491,674
------------ ------------
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding
Common stock, $0.01 par value; 50,000,000 shares
authorized; 12,904,487 issued and outstanding at
June 30, 1998 and December 31, 1997 ............. $ 129,045 $ 129,045
Additional paid in capital ........................ 18,052,730 18,052,730
Accumulated deficit ............................... (15,894,352) (12,956,609)
------------ ------------
Total stockholders equity ...................... 2,287,423 5,225,166
------------ ------------
Total liabilities and stockholders equity ..... $ 3,498,451 $ 6,716,840
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-21
<PAGE>
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the
three months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Sales, net ................................. $ 12,237 $ 20,730
Cost of sales .............................. 2,842 4,074
------------ ------------
Gross margin ............................. 9,395 16,656
------------ ------------
Selling, general and administrative expenses 1,241,424 539,186
Amortization of software ................... 165,966 148,144
Depreciation ............................... 104,120 39,949
------------ ------------
Total operating expenses ................. 1,511,510 727,279
------------ ------------
Loss from operations ....................... (1,502,115) (710,623)
Net interest income (expense) .............. (10,089) (18,038)
------------ ------------
Net loss ................................. $ (1,512,204) $ (728,661)
------------ ------------
------------ ------------
Net loss per share (basic and diluted) ... $ (0.12) $ (0.06)
Weighted average shares outstanding
(basic and diluted) ..................... 12,904,487 11,725,267
</TABLE>
<TABLE>
<CAPTION>
For the six months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Sales, net ................................. $ 13,880 $ 35,092
Cost of sales .............................. 3,501 9,740
------------ ------------
Gross margin ............................. 10,379 25,352
------------ ------------
Selling, general and administrative expenses 2,447,403 1,108,450
Amortization of software ................... 327,205 289,554
Depreciation ............................... 178,580 76,041
------------ ------------
Total operating expenses ................. 2,953,188 1,474,045
------------ ------------
Loss from operations ....................... (2,942,809) (1,448,693)
Net interest income (expense) .............. 5,076 (80,525)
------------ ------------
Net loss ................................. $ (2,937,733) $ (1,529,218)
------------ ------------
------------ ------------
Net loss per share (basic and diluted) ... $ (0.23) $ (0.13)
Weighted average shares outstanding
(basic and diluted) ....................... 12,904,487 11,732,752
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-22
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the
six months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................ $(2,937,733) $(1,529,218)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ...................................... 178,580 76,041
Amortization of software .......................... 327,205 289,554
Effects of changes in operating assets and
liabilities:
Accounts receivable ............................ (15,177) 43,435
Prepaid expenses and deposits .................. 31,500 (166,113)
Inventory ...................................... (4,821) 68,865
Other assets ................................... 15,283 (3,481)
Accounts payable ............................... 51,980 (219,903)
Accrued expenses ............................... (62,928) (29,479)
----------- -----------
Net cash used in operating
activities .................................. (2,416,111) (1,470,299)
----------- -----------
Cash flows from investing activities:
Capital expenditures ................................ (365,126) (209,314)
Capitalized software development costs .............. (146,466) (287,734)
Increase in restricted cash ......................... (129,500) --
Advance of funds to Scrip Advantage ................. (50,000) --
----------- -----------
Net cash used in investing
activities........................................ (691,092) (497,048)
----------- -----------
Cash flows from financing activities:
Principal payments on notes payable to banks ........ (269,708) (2,500)
Repurchase of common stock .......................... -- (28,000)
----------- -----------
Net cash used in financing
activities ....................................... (269,708) (30,500)
----------- -----------
Decrease in cash and cash equivalents ................. (3,376,911) (1,997,847)
Cash and cash equivalents, beginning of period ........ 3,759,720 2,390,127
----------- -----------
Cash and cash equivalents, end of period .............. $ 382,809 $ 392,280
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
1. Unaudited Interim Financial Information
The accompanying consolidated financial statements are unaudited, but
include all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position at such dates and the operations and cash flows for the
periods then ended. The financial information is presented in a condensed
format, and it does not include all of the footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles. Operating results for the periods ended June 30, 1998 and
1997 are not necessarily indicative of results that may be expected for the
entire year. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and reported
amounts of revenue and expenses during the reporting period. Actual results
could differ materially from such assumptions and estimates. The accompanying
financial statements and related footnotes should be read in conjunction with
the Company's audited financial statements, included in its Form 1-A (No.
24-3750) and Form 10-SB (File No. 000-24119) filed with the Securities and
Exchange Commission.
2. The Company
The accompanying consolidated financial statements include the
accounts of The Pathways Group, Inc. ("TPG") and its wholly-owned subsidiaries.
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, Inc., a wholly-owned
subsidiary incorporated in the State of Hawaii. 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. The Company has invested heavily in designing and developing its
proprietary hardware and application software systems and in establishing and
expanding its sales and marketing capabilities. The Company plans to continue
these efforts in preparation for, and in anticipation of, the growth in smart
card-based electronic commerce that the Company anticipates will create a
substantial market for its data and transaction processing services.
3. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Smart cards and related packaging $153,267 $149,204
Smart card terminals and computer hardware 54,303 53,545
-------- --------
$207,570 $202,749
-------- --------
-------- --------
</TABLE>
4. Capital Stock Transactions/Initial Public Offering
Purchase of Minority Interest
In March, 1997, TPG acquired all of the remaining minority interest in
its majority-owned subsidiary, ST, through a payment of $75,000. This
transaction was accounted for as a purchase in accordance
F-24
<PAGE>
with generally accepted accounting principles. The purchase price of $75,000
was allocated to software and is being amortized in accordance with the
Company's amortization policy.
Reincorporation
In May, 1997, The Pathways Group, Inc. reincorporated in the State of
Delaware. At such time, the number of authorized shares of common stock was
reduced to 50,000,000, the par value of common shares was changed to $0.01, 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.
Agreements with and loan to Scrip Advantage
In June of 1998, the Company signed a contract with Scrip Advantage
of Fresno, California to provide its proprietary Smart Script-TM- electronic
scrip and gift certificate product to Scrip Advantage and its members. The
agreement with Scrip Advantage calls for the Company to sell terminals to
participating merchants and smart cards to non-profit organizations and their
members. In addition, the Company will receive a fee for each smart card,
debit or credit card transaction processed. The agreement is for a term of
three years with annual renewals and includes early termination provisions
for both parties under certain conditions, including the failure of Pathways
to provide Scrip Advantage with competitive pricing.
In connection with the agreement with Scrip Advantage, the Company has
advanced $50,000 to Scrip Advantage in exchange for a demand promissory note.
The note is convertible into equity of Scrip Advantage at the Company's sole
option. In addition, Scrip Advantage has agreed to elect a Company designee to
its Board of Directors. Initially, Carey F. Daly II, the President and Chief
Executive Officer of the Company, will be elected to such Board.
Initial Public Offering
In July 1997, the Company received net proceeds of $4,857,958 from
the sale of 833,333 shares of common stock. These shares were sold pursuant to
Regulation A under the Securities Exchange Act of 1933. The Company's common
stock is traded in the over-the-counter market (Bulletin Board) under the
trading symbol PTHW.
5. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
For the For the
six months ending six months ending
June 30, 1998 June 30, 1997
----------------- -----------------
<S> <C> <C>
Cash paid for interest $48,952 $143,810
Non-cash transactions:
Notes payable converted to common stock -- $ 3,000
</TABLE>
In April 1997, the Company changed suppliers of its smart card
terminals and readers. In connection with this supplier change, the Company
returned $122,370 of smart card terminals previously recorded as inventory and
accounts payable to its former supplier. In 1998, the Company recorded as other
assets $118,088 for deposits on property and equipment placed in service in
1998.
F-25
<PAGE>
6. Subsequent Events
The Company commenced a private offering of its Common Stock on
July 23, 1998. The offering was completed on August 21, 1998. The Company
sold 654,508 shares at $13.75 per share to six accredited investors. The
estimated net proceeds from the above stock sales and subscriptions are
approximately $8,411,493. The Company engaged Allen & Company Incorporated to
act as placement agent for the offering. Each placement agent who placed
shares received a placement fee of 5% of the purchase price per share. Pro
forma working capital and cash and cash equivalents at June 30, 1998, after
giving effect to the receipt of the net proceeds from the offering, is
$8,162,765 and $8,794,302.
In 1997, the Company entered into a master lease agreement with a bank
which provided 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 and
contains an option to acquire the equipment at the end of the lease term. This
lease has been accounted for as an operating lease. The lease provisions require
the Company to maintain $200,000 in a certificate of deposit at the bank as
collateral for the lease and to deposit additional funds if the Company's
available cash and cash equivalents are not maintained above $850,000. In June
1998, the Company determined that it was in breach of one of the financial
covenants contained in its $400,000 lease financing arrangements. The Company
received a waiver from the bank in August 1998.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representations on behalf of the Company not contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer of any securities other than those to which it relates
or an offer to sell, or the solicitation of an offer to buy, any securities in
any jurisdiction where, or to any person to whom, it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof.
--------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
Page
<S> <C>
AVAILABLE INFORMATION .................................................... iii
SUMMARY INFORMATION ...................................................... 1
RISK FACTORS ............................................................. 1
USE OF PROCEEDS .......................................................... 7
CAPITALIZATION ........................................................... 8
SELECTED CONSOLIDATED FINANCIAL INFORMATION .............................. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ................ 9
BUSINESS ................................................................. 15
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY ............. 26
MANAGEMENT ............................................................... 27
EXECUTIVE COMPENSATION ................................................... 28
SUMMARY COMPENSATION TABLE ............................................... 29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........... 30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................... 32
DESCRIPTION OF SECURITIES ................................................ 32
THE SELLING STOCKHOLDERS ................................................. 33
PLAN OF DISTRIBUTION ..................................................... 33
INDEMNIFICATION .......................................................... 34
LEGAL OPINIONS ........................................................... 35
EXPERTS .................................................................. 35
INDEX TO FINANCIAL STATEMENTS ............................................ F-1
</TABLE>
654,508 Shares
of
Common Stock
The Pathways Group, Inc.
Common Stock
----------------------------------
Prospectus
----------------------------------
September __, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
Item 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
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 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).
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fees $2,703
Taxes
Transfer Agent Fees
Blue Sky Filing Fees
Printing and Mailing
Professional Fees
----------
$
----------
----------
</TABLE>
Item 26. 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 Charles Reeves for $10,000. Mr. Reeves was a sophisticated investor. In
December 1996, the Company, as consideration for an investment of $2,000,000,
issued to Somers Nominees (Far East) Ltd. and FX Holdings, Limited, both
accredited investors that are non-U.S.
II-1
<PAGE>
persons as defined under Regulation S, 783,734 shares of its Common Stock and
issued a warrant to Roderick Thompson, also a non-U.S. person under
Regulation S, 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. The debt that was converted
into the Company's equity was owed to Carey F. Daly, II, Herman Sarkowski, an
accredited investor, and the following persons, who are at a minimum
sophisticated investors: Loren Johnson; Thomas Keys; The Diocese of Santa Rosa,
California; Donald Duskin; Murry Fleming; Edward Gustamante; Patrick Haney,
M.D.; Margaret M. Bernard-Howe; Van and Janice Nowlin; Harold Stewart, M.D.;
Bruce Switzer; Monroe Whitman; Blair Bush; and Daniel Webster. The shares issued
in lieu of accrued wages and other expenses, in addition to Mr. Daly, were
issued to Edward L. Mueller, Richard Burkhart, Herman Sarkowski and Robert
Haller, all of whom are accredited investors, and the following persons, who are
at a minimum sophisticated investors: Loren Johnson, Blair Bush, Edward
Gustamante and Daniel Webster. All persons who are listed as sophisticated
investors had access to company information through Mr. Daly, either directly or
through another sophisticated investor. In addition, Mr. Gustamante's son is an
investment advisor, and Mr. Bush was a former Vice President of the Company at
the time of conversion.
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.
The Company commenced a private offering of its Common Stock
on July 23, 1998 and terminated the offering on August 21, 1998. The offering
was conducted pursuant to Rule 506 of Regulation D under the Securities Act. The
Company sold an aggregate of 654,508 shares at $13.75 per share to six
accredited investors. The Company engaged Allen & Company Incorporated to act as
placement agent for the offering; each placement agent that placed shares
received a placement fee of 5% of the purchase price per share.
II-2
<PAGE>
Item 27. EXHIBITS
(a) The following Exhibits are filed as part of this Registration Statement:
3.1* Certificate of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1 Form of Subscription Agreement for the shares of Common Stock being
registered by the Registration Statement
5.1 Opinion of Christy & Viener
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.
10.6** Schlumberger Associate Program Agreement, dated June 16, 1997, between
Schlumberger Technologies, Inc. and The Pathways Group, Inc., together
with Addendum No. 1 thereto
10.7** Corporate Officer Employment Agreement, dated as of November 1, 1996,
between The Pathways Group, Inc. and Carey F. Daly, II
10.8** Corporate Officer Employment Agreement, dated as of November 1, 1996,
between The Pathways Group, Inc. and Mark Schuur
10.9** Executive Employment Agreement, dated as of November 16, 1997, between
The Pathways Group, Inc. and Joseph Schuler
10.10** Letter of Intent, dated December 12, 1997, from The Pathways Group,
Inc. and The Department of Education, State of Hawaii
10.11** Equipment Lease Agreement, dated August 25, 1997, between Union Bank
of California, N.A., and The Pathways Group, Inc., together with
Addendums A and B dated September 16, 1997, Conditional Sales Lease
dated September 8, 1997 and Covenant Agreement, dated February 25,
1998
10.12** Master Project Agreement, dated June 19, 1998, between Scrip
Advantage, Inc. and The Pathways Group, Inc., together with a
Promissory Note, dated June 19, 1998, given by Scrip Advantage, Inc.
to The Pathways Group, Inc.
10.13 Covenant Agreement, dated August 13, 1998, between Union Bank of
California and The Pathways Group, Inc.
10.14 Placement Agency Agreement, dated July 22, 1998 between The Pathways
Group, Inc. and Allen & Company Incorporated
10.15 Amended and Restated Stock Incentive Plan
21 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
23.2 Consent of Independent Counsel (included in opinion filed as Exhibit
5.1)
* Incorporated herein by reference to the exhibit contained in the
Company's Registration Statement on Form 10SB under the Securities
Exchange Act of 1934, as amended, filed with the Securities and
Exchange Commission on April 29, 1998.
II-3
<PAGE>
** Incorporated herein by reference to the exhibit contained in the
Company's Registration Statement on Form 10SB/A-1 under the Securities
Exchange Act of 1934, as amended, filed with the Securities and
Exchange Commission on August 7, 1998.
(b) Reports on Form 8-K
None.
II-4
<PAGE>
UNDERTAKINGS
The undersigned registrant will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this
registration statement to:
(i) Reflect any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) Include in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; and
(iii) Include any additional or changed material on the
plan of distribution.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new
registration statement of the securities offered, and
the offering of the securities at that time to be the
initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold
at the end of the offering.
Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised 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 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 by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly, authorized, in the City of Woodinville, State of Washington, on
September 24, 1998.
THE PATHWAYS GROUP, INC.
September 24, 1998 By: /s/ CAREY F. DALY, II
----------------------------------
Carey F. Daly, II
President and Chief Executive Officer
(principal executive officer)
In accordance with the requirements of the Securities Act of
1933, this Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ CAREY F. DALY, II Director, President, Chief September 24, 1998
- ----------------------------- Executive Officer and
Carey F. Daly, II Chairman of the Board
(principal executive officer)
/s/ MARK T. SCHUUR Director, Senior Vice President September 24, 1998
- ----------------------------- and Chief Financial Officer
Mark T. Schuur
/s/ GLENN OKUN Director September 24, 1998
- -----------------------------
Glenn Okun
/s/ MONTE P. STROHL Director September 24, 1998
- -----------------------------
Monte P. Strohl
/s/ LINDA WING Director September 24, 1998
- -----------------------------
Linda Wing
</TABLE>
II-6
<PAGE>
CONSENT OF COUNSEL
The consent of Christy & Viener is contained in their opinion filed herewith.
II-7
<PAGE>
(a) The following Exhibits are filed as part of this Registration Statement:
<TABLE>
<S> <C>
3.1* Certificate of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1 Form of Subscription Agreement for the shares of Common Stock being
registered by the Registration Statement, of which this Prospectus is a
part
5.1 Opinion of Christy & Viener
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.
10.6** Schlumberger Associate Program Agreement, dated June 16, 1997, between
Schlumberger Technologies, Inc. and The Pathways Group, Inc., together with
Addendum No. 1 thereto
10.7** Corporate Officer Employment Agreement, dated as of November 1, 1996,
between The Pathways Group, Inc. and Carey F. Daly, II
10.8** Corporate Officer Employment Agreement, dated as of November 1, 1996,
between The Pathways Group, Inc. and Mark Schuur
10.9** Executive Employment Agreement, dated as of November 16, 1997, between
The Pathways Group, Inc. and Joseph Schuler
10.10** Letter of Intent, dated December 12, 1997, from The Pathways Group, Inc.
and The Department of Education, State of Hawaii
10.11** Equipment Lease Agreement, dated August 25, 1997, between Union Bank of
California, N.A., and The Pathways Group, Inc., together with Addendums A
and B dated September 16, 1997, Conditional Sales Lease dated September 8,
1997 and Covenant Agreement, dated February 25, 1998
10.12** Master Project Agreement, dated June 19, 1998, between Scrip Advantage,
Inc. and The Pathways Group, Inc., together with a Promissory Note, dated
June 19, 1998, given by Scrip Advantage, Inc. to The Pathways Group, Inc.
10.13 Covenant Agreement, dated August 13, 1998, between Union Bank of
California and The Pathways Group, Inc.
10.14 Placement Agency Agreement, dated July 22, 1998 between The Pathways
Group, Inc. and Allen & Company Incorporated
10.15 Amended and Restated Stock Incentive Plan
21 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
</TABLE>
<PAGE>
<TABLE>
<S> <C>
23.2 Consent of Independent Counsel (included in opinion filed as Exhibit 5.1)
</TABLE>
* Incorporated herein by reference to the exhibit contained in the Company's
Registration Statement on Form 10SB under the Securities Exchange Act
of 1934, as amended, filed with the Securities and Exchange Commission
on April 29, 1998.
** Incorporated herein by reference to the exhibit contained in the Company's
Registration Statement on Form 10SB/A-1 under the Securities Exchange
Act of 1934, as amended, filed with the Securities and Exchange
Commission on August 7, 1998.
<PAGE>
Exhibit 4.1
SUBSCRIPTION AGREEMENT
____________, 1998
The Pathways Group, Inc.
14201 NE 200th Street
Woodinville, Washington 98072
Ladies/ Gentlemen:
1. Subscription, Purchase and Closing; Purchase Price Adjustment.
1.1 The undersigned ("Subscriber"), intending to be legally bound,
hereby subscribes for and agrees to purchase the number of shares (the "Shares")
of the Common Stock, par value $.01 per share (the "Common Stock"), of The
Pathways Group, Inc., a Delaware corporation (the "Company"), indicated on the
signature page hereto, at a price of $15.00 per Share (the "Purchase Price") and
upon the terms and conditions set forth in this subscription agreement (this
"Agreement").
1.2 The Shares subscribed for hereby shall not be deemed owned by
Subscriber, nor shall Subscriber be deemed a holder of securities of the Company
until this subscription has been accepted by the Company and the Purchase Price
for the Shares subscribed for has been paid. Subscriber understands and agrees
that the Company reserves the right to reject this subscription for the Shares
in whole or in part, in its sole discretion, at any time through the Closing
Date (as that term is defined in Section 1.5). This subscription is subject to
allotment. If subscription for the Shares is oversubscribed, the Company will
determine which subscriptions shall be accepted, in whole or in part.
1.3 In the event of rejection of this subscription, or in the event the
sale of the Shares is not consummated for any reason (in which event this
Agreement shall be deemed to be rejected), this Agreement shall have no force or
effect.
1.4 Subscriber hereby agrees to deliver the Purchase Price required to
purchase the number of Shares subscribed for hereunder, as that amount may be
reduced pursuant to Section 1.2 hereof, on the Closing Date set by the Company
pursuant to Section 1.5 hereof.
1.5 At such time as the Company and Allen & Company Incorporated, as
placement agent (the "Placement Agent"), shall determine, the Placement Agent
shall establish and inform Subscriber of the closing date for such subscription
(the "Closing Date") and the date upon which the Purchase Price shall be
delivered to the Company.
1.6 Payment of the full Purchase Price for the Shares to be purchased
shall be made by 1:00 p.m. on the day prior to the applicable Closing Date by
wire transfer of immediately available funds or at such other time and by such
other means as the Company shall approve. The Company or the Placement Agent
will notify Subscriber as to payment instructions. Promptly after the Closing
Date, certificates representing the Shares purchased by Subscriber will be
delivered by the Company to Subscriber.
1.7 Pursuant to the Offering Memorandum dated July 23, 1998, the
Company is offering (the "Offering") up to an aggregate of 700,000 shares of
Common Stock (including the Shares being purchased by Subscriber, the "Total
Offering Size"), which may be sold to subscribers at one or more closings. The
Company expects to hold the initial closing (the "Initial Closing") once the
Company has received subscriptions for at least 100,000 shares (the "Initial
Shares"). The Company reserves the right, in its sole discretion, to increase
the Total Offering Size, depending upon the interest of potential investors. The
subscription price for shares sold at any closing after the Initial Closing may
vary from the
<PAGE>
Purchase Price, as agreed by the Company and the subscribers at such subsequent
closings. If the subscription price for Shares at any subsequent closing is less
than $15.00, then the Company will, at such subsequent closing, issue to the
purchasers of Initial Shares such number of additional Shares equal to (a)(i)
the difference between $15.00 and the subsequent subscription price, multiplied
by (ii) the number of Initial Shares purchased, and divided by (b) the
subsequent subscription price. To the extent such additional shares include a
fractional interest, such fractional interest shall be paid in cash to the
purchasers of Initial Shares.
2. Representations, Warranties and Agreements of Subscriber. Subscriber
hereby represents and warrants to the Company, and hereby covenants and agrees
with the Company as follows:
(a) Subscriber has carefully read this Agreement and, to the extent
Subscriber believes necessary, has discussed with Subscriber's counsel and
other professional advisor(s) the representations, warranties, covenants
and agreements which Subscriber makes by signing it, and any applicable
limitations upon Subscriber's transfer of the Shares issuable thereunder.
Subscriber acknowledges that Subscriber has not relied upon the legal
counsel or accountants for the Company regarding the transactions
contemplated by this Agreement, and Subscriber has been advised to engage
separate legal counsel and accountants to represent Subscriber's individual
interest and advise Subscriber regarding the structure of, and risks
associated with, such transactions.
(b) Subscriber understands that as a publicly traded company, the
Company files with the Securities and Exchange Commission (the "SEC")
various reports, including quarterly and annual financial statements,
annual reports to shareholders, and proxy statements, and that all of such
reports, statements and information are available to the public, including
Subscriber, from the SEC and directly from the Company. Subscriber
acknowledges that the Company has delivered to Subscriber within a
reasonable time prior to the execution of this Subscription Agreement a
copy of the following: (i) a Confidential Offering Memorandum prepared by
the Company containing, among other things, brief descriptions of the
securities being offered and use of the proceeds from the offering and
certain risk factors associated with an investment in the Shares; (ii) the
Company's Form 10SB filed on April 29, 1998; (iii) the Company's Form 10-Q
for the fiscal quarter ended March 31, 1998; (iv) the Company's press
releases since December 31, 1997; and (v) such other documents as
Subscriber (and Subscriber's attorney, accountant and/or other advisors)
deemed pertinent in order for Subscriber to make an informed investment
decision (the documents identified in clauses (i) through (v) herein are
collectively referred to herein as the "Documents").
Subscriber further acknowledges that Subscriber is entering into this
Agreement solely on the basis of information contained in the Documents and
not on the basis of any information, representations or agreements made by
any other person, and that no representations or warranties of any nature
have been made to Subscriber with respect to the ultimate economic
consequences or tax consequences of Subscriber's investment in the Company.
Subscriber acknowledges that any forecasted financial data which may have
been given to Subscriber is for illustration purposes only and no assurance
is given that actual results will correspond with the results contemplated
in any such data.
(c) Subscriber acknowledges that Subscriber has had the opportunity to
ask questions of, and receive answers from, or obtain additional
information from, the executive officers of the Company concerning the
financial and other affairs of the Company, and, to the extent deemed
necessary in light of Subscriber's personal knowledge of the Company's
affairs, Subscriber has asked such questions and received satisfactory
answers and desires to invest in the Company. Subscriber has been advised
and acknowledges that no federal or state agency has made any finding or
determination as to the fairness or merits of an investment in the Company
and that no such agency has made any recommendation or endorsement
whatsoever with respect to such an investment.
2
<PAGE>
(d) Subscriber is an "accredited investor" as that term is defined in
Rule 501 of Regulation D promulgated by the SEC under the Securities Act of
1933, as amended (the "Securities Act"). For this purpose, Subscriber
understands that an "accredited investor" includes:
(i) any individual who: (A) has a net worth (with spouse) in
excess of $1 million; or (B) has had an individual income in excess of
$200,000 (or joint income with spouse in excess of $300,000) in each
of the two most recent years and who reasonably expects the same
income level for the current year; or (C) who is an executive officer
or director of the Company;
(ii) any entity in which all of the equity owners or partners are
"accredited investors": or
(iii) any corporation or partnership with total assets in excess
of $5,000,000 that was not formed for the specific purpose of
purchasing the securities subscribed hereunder.
(e) Subscriber considers himself/herself/itself to be a sophisticated
investor in companies similarly situated to the Company, and Subscriber has
substantial knowledge and experience in financial and business matters
(including knowledge of finance, securities and investments, generally, and
experience and skill in investments based on actual participation) such
that Subscriber is capable of evaluating the merits and risks of the
prospective investment in the Company.
(f) Subscriber's current address and, if Subscriber is an entity,
Subscriber's state of incorporation or organization, are as set forth on
the signature page hereof. If Subscriber is an entity which does not meet
the classification set forth under Section 1(d)(iii) above, each of
Subscriber's equity owners and/or partners has the same state of residence
as the Subscriber's state of organization and none of Subscriber's equity
owners and/or partners has any present intention of moving from such state
of residency.
(g) Subscriber has been advised and acknowledges that the issuance of
the Shares will not be registered under the Securities Act, in reliance
upon the exemption(s) from registration promulgated thereunder, and,
therefore, are "restricted securities." Subscriber also acknowledges that
the issuance of the Shares will not be registered under the securities laws
of any state. Consequently, Subscriber agrees that the Shares cannot be
resold unless they are registered under the Securities Act and applicable
state securities laws, or unless an exemption from such registration
requirements is available. Subscriber has been advised and acknowledges
that the Company is under no obligation to take any action necessary in
order to make available any exemption for the transfer of the Shares
without registration.
(h) Subscriber is purchasing the Shares solely for Subscriber's own
account and not as nominee for, representative of, or otherwise on behalf
of, any other person. Subscriber is purchasing the Shares with the
intention of holding the Shares for investment, with no present intention
of participating directly or indirectly in a subsequent public distribution
of the Shares unless registered under the Securities Act and applicable
state securities laws, or unless an exemption from such registration
requirements is available. Subscriber shall not make any sale, transfer or
other disposition of the Shares in violation of state or federal law.
(i) Subscriber has been advised that there is no assurance than an
active market for the Shares will continue in the future. Subscriber is
aware that Subscriber's investment in the Company is speculative and
involves a high degree of risk of loss arising from, among other things,
substantial market, operational, competitive and other risks, and, having
made Subscriber's own evaluation of the risks associated with this
investment, Subscriber is aware and Subscriber has been advised that
Subscriber must bear the economic risks of a purchase of the Shares
indefinitely.
3
<PAGE>
(j) Subscriber acknowledges that the Shares were not offered to
Subscriber by means of any form of general or public solicitation or
general advertising, or publicly disseminated advertisements or sales
literature, including (i) any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media, or
broadcast over television or radio, or (ii) any seminar or meeting to which
Subscriber was invited by any of the foregoing means of communication.
(k) Subscriber understands and agrees that the Company, and all
current and further stockholders of the Company, are relying on the
agreements and representations contained herein. (l) In connection with the
purchase of the Shares by Subscriber, Subscriber has not and will not pay,
and has no knowledge of the payment of, any commission or other direct or
indirect renumeration to any person or entity for soliciting or otherwise
coordinating the purchase of the Shares, except to such persons or entities
as are duly licensed and/or registered to engage in securities offering and
selling activities (or are exempt from such licensing and/or registration
requirements) in the state(s) in which such activities have taken place in
connection with the transaction contemplated by this Agreement.
(m) Subscriber has been advised and agrees that there will be placed
on any certificates representing the Shares, or any substitution(s)
thereof, a legend stating in substance the following (and including any
restrictions or conditions that may be required by any applicable state
law), and Subscriber has been advised and further agrees that the Company
will refuse to permit the transfer of the Shares out of Subscriber's name
in the absence of compliance with the terms of such legend:
"The securities represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, or under any state securities laws and may not be
sold, pledged, transferred, assigned or otherwise disposed
of except in accordance with such Act and the rules and
regulations thereunder and in accordance with applicable
state securities laws. The Company will transfer such
securities only upon receipt of evidence satisfactory to the
Company, which may include an opinion of counsel, that the
registration provisions of such Act have been compiled with
or that such registration is not required and that such
transfer will not violate any applicable state securities
laws."
(n) Subscriber is aware that the Company may offer and sell additional
shares of common stock in the future, thereby diluting Subscriber's
percentage equity ownership of the Company.
3. Representations of the Company. As used in this Section 3, the
following capitalized terms shall have the meanings set forth below:
"Contract" means any agreement, indenture, lease, sublease, license,
sublicense, promissory note, evidence of indebtedness, insurance policy,
annuity, mortgage, restriction, commitment, obligation or other contract,
agreement or instrument (whether written or oral).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor federal statute, and the rules and regulations promulgated
thereunder, all as the same shall be in effect from time to time.
"GAAP" means generally accepted accounting principles in effect in the
United States of America from time to time.
"Material Adverse Change" or "Material Adverse Effect" means, with
respect to any Person, any change or effect that is or is reasonably likely to
be materially adverse to the financial condition, business, prospects or results
of operations of such Person.
4
<PAGE>
"Person(s)" means any individual, sole proprietorship, partnership,
joint venture, trust, limited liability company, incorporated organization,
association, corporation, institution, public benefit corporation, entity or
government (whether federal, state, county, city, municipal or otherwise,
including, without limitation, any instrumentality, division, agency, body or
department thereof).
"Requirement of Law" means, as to any Person, the certificate of
incorporation, bylaws or other organizational or governing documents of such
Person, and any domestic or foreign and federal, state or local law, rule,
regulation, statute or ordinance or determination of any arbitrator or a court
or other governmental authority, in each case applicable to or binding upon such
Person or any of its properties or to which such person or any of its property
is subject.
Subscriber is subscribing for the Shares based upon the following
representations and warranties of the Company, which the Company hereby confirms
by accepting this subscription:
(a) Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
has the corporate power to own and/or lease its properties and to conduct
its business in the places where such properties are now owned, leased or
operated or such business is presently conducted. The Company is duly
qualified and licensed as a foreign corporation in the States of
Washington, California [and Hawaii] and in each additional jurisdiction in
which it owns or leases real property or in which its operations or
activities would otherwise require such qualification, except where the
failure to so qualify would not have a Material Adverse Effect on the
Company and its sub idiaries taken as a whole.
(b) Authorization. The execution, delivery and performance of this
Agreement by the Company has been duly and validly authorized and approved
by its Board of Directors, and this Agreement, when executed by a duly
authorized officer of this Company, will be a valid and binding agreement
of the Company, enforceable in accordance with its terms, except as such
enforceability may be limited by (i) bankruptcy, insolvency, reorganization
or other similar laws and legal and equitable principles limiting or
affecting the rights of creditors generally and/or (ii) general principles
of equity, regardless of whether considered in a proceeding in equity or at
law, and except as rights to indemnification hereunder may be limited by
Federal or state securities laws.
(c) Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock, $.01 par value per share,
and 1,000,000 shares of Preferred Stock, par value $0.01 per share. All
issued and outstanding shares of capital stock of the Company have been,
and as of the Closing Date will be, duly authorized and validly issued and
are fully paid and non-assessable. As of June 30, 1998, (i) 12,904,487
shares of Com.mon Stock are issued and outstanding; and (ii) no shares of
Preferred Stock have been issued by the Company. The Company has a Stock
Option Incentive Plan, pursuant to which the Company may issue options to
acquire up to an aggregate of 2,000,000 shares of Common Stock to its key
employees. As of June 30, 1998, 410,000 options were outstanding under this
plan.
(d) No Violations; Defaults. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not (i) violate, result (with the lapse of time or giving of
notice, or both) in a violation of, conflict with, or constitute a default
under, or permit the termination or acceleration of the maturity of, any
material indebtedness or material obligation of the Company; (ii) violate,
result (with the lapse of time or giving of notice, or both) in a violation
of, conflict with or constitute a default under, any material term of, or
permit the termination of, any material note, mortgage, indenture, license,
agreement, contract, arrangement, understanding or other instrument to
which the Company is a party, or by which it is bound or the Certificate of
Incorporation or By Laws of the Company; (iii) except as contemplated by
this Agreement or where the absence would not have a material adverse
effect on the Company or its subsidiaries, taken as a whole, require
consent, approval, waiver or authorization from or registration or filing
with any party, including but not limited to any party to any material
agreement to which the Company is a party or by which it is bound or by any
regulatory or governmental agency, body or entity; or (iv) violate any
statute, law, rule, regulation
5
<PAGE>
or ordinance, or any judgment, decree, order, regulation or rule of any
court, tribunal, administrative or governmental agency, body or entity to
which the Company or its properties are subject.
(e) Validity of Securities. The Shares when issued in accordance with
the terms and conditions hereof will be validly authorized, legally issued,
fully paid and nonassessable and the delivery to Subscriber of the Shares
delivered pursuant to this Agreement shall vest in it good and marketable
title thereto, free of any and all liens, options, encumbrances, charges,
third-party rights or claims of any nature whatsoever except for
restrictions on transfers set forth herein or imposed by law.
(f) Disclosure. The Company is aware of no facts which lead it to
believe that the Documents contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(g) Consents/Approvals. No consent, approval, waiver or other
action by any Person under any Contract to which the Company is a party,
or, by which any of its properties or assets are bound, is required or
necessary for the execution, delivery or performance by the Company of this
Agreement and the consummation of the transactions contemplated hereby,
except where the failure to obtain such consents, filings, authorizations,
approvals or waivers or make such filings would not have a Material Adverse
Effect on the Company.
(h) SEC Reports and Nasdaq Compliance. Since January 1, 1997, the
Company has made all filings (the "SEC Reports") required to be made by it
under the Exchange Act. The SEC Reports, when filed, complied in all
material respects with all applicable requirements of the Securities Act
and the Exchange Act and the securities laws, rules and regulations of any
state and pursuant to any Requirements of Law. The SEC Reports, when filed,
did not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they
were made, not misleading. The Company will use its best efforts to ensure
its continued inclusion in, and the continued eligibility of the Common
Stock for trading on, the Nasdaq over-the-counter market (Bulletin Board)
under all currently effective and currently proposed inclusion requirements
prior to and after the Closing and will use its reasonable efforts to cause
its application to be quoted on the Nasdaq SmallCap Market to be declared
effective as promptly as practicable.
(i) Financial Statements. Each of the balance sheets included in the
Documents (including any related notes and schedules) fairly presents in
all material respects the financial position of the Company as of its date,
and each of the other financial statements included in the Documents
(including any related notes and schedules) fairly presents in all material
respects the results of operations or other information therein of the
Company for the periods or as of the dates therein set forth in accordance
with GAAP consistently applied during the periods involved (except that the
interim reports are subject to normal recording adjustments which might be
required as a result of year-end audit and except as otherwise stated
therein).
(j) Material Changes. Except as set forth in the SEC Reports, or as
otherwise contemplated herein, since December 31, 1997, there has been no
Material Adverse Change in the Company. Except as set forth in the SEC
Reports, since December 31, 1997, there has not been (i) any direct or
indirect redemption, purchase or other acquisition by the Company of any
shares of the Common Stock or (ii) declaration, setting aside or payment of
any dividend or other distribution by the Company with respect of the
Common Stock.
(k) No Commissions. In connection with the purchase of the Shares
hereunder, the Company has agreed to pay the Placement Agent a placement
fee and certain expenses relating to the transactions contemplated
hereunder. Except for such placement fee and expenses, the Company has not
incurred any other obligation for any finder's or broker's or agent's fees
or commissions in connection with the sale of the Shares.
6
<PAGE>
The Company represents that the foregoing representations and
warranties are true and correct as of the date hereof and, unless the Company
otherwise notifies Subscriber prior to the Closing Date, shall be true and
correct as of the Closing Date. The foregoing representations and warranties
shall survive the Closing Date.
4. Registration Rights.
4.1 Registration of Shares. As soon as practicable, but in any event no
later than 45 days after the final Closing Date on which all of the Shares to be
offered pursuant to the Offering Materials are sold, the Company will file a
registration statement (the "Registration Statement") under the Securities Act
of 1933, as amended, with respect to all of the Shares (collectively, the
"Subject Stock"), and the Company shall use its best efforts to cause such
Registration Statement to become effective as soon as practicable after filing.
In connection therewith, each holder of Shares (each, a "Holder") will provide
in a timely manner all such information and materials pertaining to it as may be
required in order to permit the Company to comply with all applicable
requirements of the Commission and to obtain the acceleration of the effective
date of the Registration Statement. In connection with such registration, the
Company shall:
(a) keep the Registration Statement effective until the earliest of
(i) when each Holder has sold its Subject Stock, (ii) one year following
the effective date of the Registration Statement, or (iii) the date the
Shares may be sold under Rule 144 under the Securities Act of 1933;
(b) as expeditiously as possible furnish to each Holder such
reasonable numbers of copies of the prospectus as such Holder may
reasonably request in order to facilitate the public sale or other
disposition of the Subject Stock;
(c) as expeditiously as possible use its best efforts to register or
qualify the Subject Stock under the securities or Blue Sky laws of such
states as Subscriber shall reasonably request, provided, however, that the
Company shall not be required in connection with this paragraph (c) to
qualify as a foreign corporation or execute a general consent to service of
process in any jurisdiction;
(d) pay all costs and expenses incident to registration hereunder,
except as set forth in Section 4.2.
4.2 Holder's Fees. Each Holder shall pay any and all underwriters'
discounts, brokerage fees and transfer taxes incident to the sale of the Subject
Stock sold by such Holder pursuant to this Section and the fees and expenses of
its counsel.
4.3 Indemnification.
(a) In connection with any registration effected pursuant hereto, the
Company will indemnify each Holder, each of such Holder's officers and
directors, and each person controlling such Holder within the meaning of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereto) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus (including any
related registration statement, notification or the like) incident to any such
registration, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, and will reimburse each Holder, such Holder's officers and
directors, and each person controlling such Holder, for any legal and any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action,
7
<PAGE>
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage or liability arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Company by an instrument duly executed by such Holder specifically for use
therein.
(b) In connection with any registration effected pursuant hereto, each
Holder will indemnify the Company, each of the Company's directors and officers
and each person controlling the Company within the meaning of the Securities
Act, against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement or
prospectus, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or any violation by such Holder of any rule or regulation
promulgated under the Securities Act applicable to such Holder and relating to
action or inaction required of such Holder in connection with such registration,
and will reimburse the Company, such directors, officers and persons for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement or prospectus in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder specifically for use therein.
4.4 Further Actions. In connection with any registration effected
pursuant hereto each Holder shall execute, deliver, furnish or file with the
Company, the underwriter(s), or the appropriate regulatory body, any
information, representations, undertakings and agreements necessary to carry out
the registration covenant or to otherwise effect the registration of the Share .
5. Miscellaneous.
5.1 Neither this Agreement nor any provisions hereof shall be modified,
discharged or terminated except by an instrument in writing signed by the party
against whom any such waiver, change, discharge or termination is sought to be
enforced.
5.2 Any notice, demand or other communication which any party hereby
may be required or may elect, to give to anyone interested hereunder shall be
sufficiently given if (a) deposited, postage prepaid, in a United States mail
letter box, registered or certified mail, return receipt requested, addressed to
such address as may be given herein three business days after such deposit, or
(b) delivered personally at such address. The Company's address for notices is
set forth on the first page hereof.
5.3 This Agreement may be executed through the use of separate
signature pages or in any number of counterparts, and each of such counterparts
shall, for all purposes, constitute one agreement binding on all the parties,
notwithstanding that all parties are not signatories to the same counterpart.
5.4 Except as otherwise provided herein, the agreement shall be binding
upon and inure to the benefit of the parties and their successors, legal
representatives and assigns.
5.5 This instrument contains the entire agreement of the parties, and
there are no representations, covenants or other agreements except as stated or
referred to herein.
5.6 This Agreement is not transferable or assignable by Subscriber
except as may be provided herein.
5.7 This Agreement shall be governed by and construed in accordance
with the law of the State of New York applicable to agreements made and to be
performed in that State.
8
<PAGE>
IN WITNESS WHEREOF, Subscriber has caused to be executed this Agreement
as of the date indicated and agrees to be bound by this Agreement.
SUBSCRIBER:
---------------------------------------
By:
---------------------------------------
Name:
Title:
---------------------------------------
[Principal Address]
---------------------------------------
[Tax Identification Number]
Number of Shares to be
Purchased:
-----------
Price per Share: $15.00
-----------
Total Purchase Price:
-----------
Accepted By:
THE PATHWAYS GROUP, INC.
By:
-------------------------
Name:
Title:
9
<PAGE>
Exhibit 5.1
CHRISTY & VIENER
620 Fifth Avenue
New York, New York 10020
September 24, 1998
The Pathways Group, Inc.
14201 NE 200th St.
Woodinville, Washington 98072
Ladies and Gentlemen:
We have acted as counsel to The Pathways Group, Inc., a Delaware
corporation (the "Company"), in connection with its Registration Statement on
Form SB-2 (the "Registration Statement"), filed pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), relating to (i) the offering from
time to time by certain holders (the "Selling Stockholders") of 654,508 shares
(the "Common Shares") of common stock, $0.01 par value per share, of the Company
(the "Common Stock"). The Common Shares were originally issued by the Company in
a private placement commenced on July 23, 1998, and completed on August 21, 1998
pursuant to certain subscription agreements (the "Subscription Agreements")
between the Company and the Selling Stockholders. The Company issued the Common
Shares pursuant to Rule 506 of Regulation D of the Securities Act.
As such counsel, we have examined and are familiar with the following:
(a) the Certificate of Incorporation of the Company; (b) the By-Laws of the
Company, as amended; (c) the minutes of the meetings of the Board of Directors
of the Company; (d) the Subscription Agreements (e) the Registration Statement
and (f) such other documents and instruments as we have deemed appropriate. In
such review, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted as originals and the conformity to the original
documents of all documents submitted to us as copies.
Based upon the foregoing, and assuming that applicable provisions of
the Securities Act and the securities or "blue sky" laws of various states shall
have been complied with, we are of the opinion that the Common Shares to be
offered by the Selling Stockholders are duly authorized and duly and validly
issued, fully paid and nonassessable.
We hereby consent to the use of our name under the caption "Legal
Matters" in the prospectus included in the Registration Statement and to the use
of this opinion as an Exhibit to the Registration Statement.
Very truly yours,
/s/ CHRISTY & VIENER
<PAGE>
Exhibit 10.13
Union Bank of California
August 13, 1998
Mark T. Schuur, CFO
The Pathways Group Inc.
14201 NE 200th Street
Woodinville, WA 98072-84444
Dear Mr. Schuur:
This Covenant Agreement (this "Agreement") is entered into as of the date set
forth below between Union Bank of California, N.A. ("Bank") and the undersigned
("Borrower") with respect to each and every extension of credit (whether one or
more and to include extensions of credit under Conditional Sales Leases,
collectively referred to as the "Loan") from Bank to Borrower.
The Loan is evidenced by one or more Loan or Conditional Sales Lease agreements
or other evidences of indebtedness, including each amendment, extension, renewal
or replacement thereof, which are incorporated herein by this reference (whether
one or more, collectively referred to as the "Loan"). Any financial statement
required by this Agreement must be prepared in accordance with generally
accepted accounting principles and in a form satisfactory to the Bank. In
consideration of the Loan, Bank and Borrower agree to the following terms and
conditions:
Liquidity Requirement
Borrower will maintain at all times unencumbered and unrestricted liquid assets
in an aggregate amount equal to at least $850,000.00, with the exception of the
period ending 6/30/98 in which the aggregate amount will be equal to at least
$550,000.00. Liquid assets shall mean immediately available: cash, bank deposits
or accounts, obligations of or guaranteed by the U.S. Government or an agency
thereof; stocks, bonds and other debt instruments regularly traded on the New
York or American stock exchanges or NASDAQ with a price per share not less than
$7.50 and which can be readily converted into cash. In the event of violation of
this liquidity maintenance provision, Borrower shall have fifteen days from the
event of default to provide additional cash collateral sufficient to fully
secure all outstanding obligations to the Bank.
Financial Statements and Tax Returns
Borrower to provide Bank with a copy of Borrower's self-prepared financial
statement, including balance sheet and income statement, within 30 days of each
quarter end. Borrower to provide Bank with a copy of Borrower's CPA audited
financial statement within 120 days after each fiscal year end.
This requirement does not express or imply any obligation on Bank's part to
extend any credit to any party of any duration whatsoever.
This Covenant Agreement supersedes and replaces in its entirety that certain
letter from Bank to Borrower dated September 8, 1997.
Sincerely,
/s/ Tod Sundquist
- --------------------
T.D. (Tod) Sundquist
Vice President
<PAGE>
Exhibit 10.14
THE PATHWAYS GROUP, INC.
PLACEMENT AGENCY AGREEMENT
July 22, 1998
Allen & Company Incorporated
711 Fifth Avenue
New York, New York 10022
Gentlemen:
The Pathways Group, Inc., a Delaware corporation (the "Company") hereby
confirms its agreement with you as follows:
1. The Offering. The Company is offering to persons who qualify as
"accredited investors," as that term is defined in Regulation D under the
Securities Act of 1933 as amended (the "Act"), up to 700,000 shares of the
Company's Common Stock (the "Shares") at an initial subscription price of $15.00
per share. The foregoing offer and sale of the Shares is hereinafter referred to
as the "Offering." The Company has the right, in its sole discretion, to reject
any subscription or any offer to purchase shares at a price to which the Company
has not agreed.
2. Appointment of Placement Agent. You are hereby appointed the
exclusive placement agent of the Company (the "Placement Agent") during the
Offering Period (as defined herein) for the purpose of assisting the Company in
identifying qualified subscribers to purchase Shares (the "Subscribers"). The
"Offering Period" shall commence on the date the Offering Materials (as defined
herein) are first made available to you by the Company for delivery in
connection with the Offering and shall terminate on or before the close of
business on the earliest to occur of the closing of the sale of the final
installment of Shares or the termination of this Agreement. You hereby accept
such agency and agree to assist the Company in identifying qualified,
Subscribers on a "best efforts" basis. Your agency hereunder may not be
terminated by the Company, except upon termination of the Offering, upon the
Placement Agent's failure to perform its obligations hereunder in all material
respects, upon the Placement Agent's material breach of any of its
representations and warranties contained in Section 7 hereof or upon gross
negligence or willful misconduct on the part of the Placement Agent. It is
understood that the offering and sale of the Shares is intended by all parties
to be exempt from the registration requirements of the Act pursuant to Sections
4(l) and 4(2) thereof and the rules and regulations of the Securities and
Exchange Commission thereunder, including Rule 506 of Regulation D (the "Rules
and Regulations").
3. Offering Materials. The Company has prepared and delivered to the
Placement Agent a reasonable number of copies of disclosure documents, which
consist of the "Documents" (as defined in the Subscription Agreement between the
Company and each Subscriber set forth therein (the "Subscription Agreement")).
Such documents and the Subscription Agreement are referred to herein as the
"Offering Materials," except that if the Offering Materials shall be amended,
the term "Offering Materials" shall refer to the Offering Materials as so
amended from and after the time of delivery to you of such amendment. The
Placement Agent shall deliver the Offering Materials to each Subscriber prior to
investment.
4. Closing; Delivery; Placement Fees.
(a) It is anticipated that the closing of the purchase and sale of the
Shares to Investors may be effected at one closing or in a series of closings
(each, a "Closing") shall take place at
<PAGE>
the offices of Allen & Company Incorporated, 711 Fifth Avenue, New York, New
York 10022 at 10:00 a.m. on three business days' notice or such other time, date
or place as shall be agreed upon by you and the Company (each such date, a
"Closing Date").
(b) At each Closing, there shall be delivered to the Company on behalf
of each applicable Subscriber two executed copies of the Subscription Agreement
to be entered into by the Company and each such Subscriber (the "Purchasers") as
of such Closing Date, and there shall also be delivered to the Company on behalf
of each applicable Purchaser the proportionate share of the purchase price of
the Shares which such Purchaser is to purchase. As soon as possible after each
Closing, the Company will deliver, or caused to be delivered, to the Purchasers
certificates representing the Shares purchased by them.
(c) Simultaneous with each Closing, as provided in paragraph (b) above,
the Company shall pay or cause to be paid to the Placement Agent a placement fee
equal to 5% of the gross proceeds of the Offering paid by the Purchasers for the
Shares purchased under the Subscription Agreement and shall reimburse the
Placement Agent for its out-of-pocket expenses as provided in Section 6(c)
hereof, against the presentation of bills therefor. The placement fee shall be
paid by the Company simultaneously with the Company's receipt of proceeds from
the sale of Shares and shall be payable in installments as the Shares are sold.
If such bills are not available for presentation at the time of the Closing,
then the Company shall reimburse the amount of the Placement Agent's reasonable
estimate of such out-of-pocket expenses; in such event, the Placement Agent
shall promptly provide the Company with an accounting of actual expenses when
known, and the parties shall reconcile any amounts still owing among them. The
Company shall not be liable for any placement fee with respect to any
subscription rejected by the Company in its sole discretion.
5. Representations and Warranties of the Company. The Company hereby
confirms for the benefit of the Placement Agent the representations and
warranties made by it to the Subscribers in the Subscription Agreement, to the
extent applicable, and hereby further represents and warrants that this
Agreement has been duly authorized, executed and delivered on behalf of the
Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, subject to the
effect of any applicable bankruptcy, insolvency, reorganization, moratorium or
similar law affecting creditors' rights generally and to general principles of
equity and except as rights to indemnity or contribution hereunder may be
limited by Federal or state securities laws.
6. Covenants of the Company. The Company covenants and agrees with the
Placement Agent that:
(a) During the Offering Period, the Company will notify the Placement
Agent of any event of which it is aware as a result of which any of the
Offering Materials would include an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein in
light of the circumstances under which they were made not misleading; and
it will provide you with any amendment or supplement to the Offering
Materials during the Offering Period. The Company will conduct the Offering
in compliance with Section 4(2) of the Act and the Rules and Regulations
and all applicable state securities laws and regulations.
(b) If required by law, the Company will use its best efforts to
qualify the Shares for offer and sale under the Blue Sky or securities laws
of such jurisdictions as you may designate and to continue such
qualifications in effect for so long as may be required for purposes of the
private placement of the Shares, except that the Company shall not be
required in connection therewith or as a condition thereof to qualify as a
foreign corporation or to execute a general consent to service of process
in any state or to subject itself to taxation in any jurisdiction where it
is not already subject to such taxation.
2
<PAGE>
(c) The Company covenants and agrees with you that it will pay up to
$50,000 of the reasonable and documented expenses and fees (including the
fees and expenses of Werbel & Carnelutti, special counsel to the Placement
Agent) incurred by you in connection with (i) the preparation and delivery
of the Offering Materials delivered to prospective Subscribers, (ii) the
furnishing of closing documents and (iii) the qualification of the Shares
for offer or sale under the securities laws of such jurisdictions as you
may reasonably designate.
(d) The Company agrees to cooperate with the Placement Agent and its
special counsel with respect to their due diligence investigation.
(e) On or prior to the first closing date, the Company shall obtain an
agreement from each of Carey F. Daley II, Mark Schuur, Allen & Company
Incorporated and certain of its affiliates, Glenn A. Okun and members of
their immediate families holding shares of Common Stock whereby each of
them shall agree not to transfer any of their shares of the Company's
Common Stock until such a time as the registration statement registering
the Shares and all other shares of Common Stock to be sold pursuant to the
Placement Agency Agreement of even date herewith has been declared
effective by the Securities and Exchange Commission.
7. Representations, Warranties and Covenants of the Placement Agent.
The Placement Agent represents, warrants and covenants as follows:
(a) This Agreement has been duly executed and delivered by the
Placement Agent and constitutes a valid and binding obligation of the
Placement Agent, enforceable against it in accordance with its terms,
subject to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar law affecting creditors' rights
generally and to general principles of equity and except as rights to
indemnity or contribution hereunder may be limited by Federal or state
securities laws.
(b) The Placement Agent will not make an offer of Shares by any form
of general solicitation or general advertising in violation of Rule 502(c)
of Regulation D under the Act, and the Placement Agent will conduct the
Offering in accordance with all federal and state securities laws
applicable to the offering of the Shares. The Placement Agent will not
offer the Shares to any person which the Placement Agent does not have
reasonable grounds to believe is (a) an "accredited investor" as that term
is defined in Regulation D under the Act and (b) is capable of evaluating
the merits and risks of the prospective investment in the Company.
(c) The Placement Agent shall not deliver to any offeree without the
consent of the Company any information concerning the Offering other than
the Offering Materials. The Placement Agent shall deliver, or cause to be
delivered, the Offering Materials to each offeree prior to the sale of any
Shares to such offeree.
(d) The Placement Agent is a registered broker dealer in good standing
in every state in which offers and sales of the Shares will be made.
(e) The Placement Agent acknowledges that the Company has the right,
in its sole discretion, to reject any Subscriber.
8. Conditions of the Company's Performance. The sale by the Company of
the Shares and the obligations of the Company as provided herein shall be
subject to the following conditions:
(a) The Company shall not have terminated the Offering, which shall be
the decision of the Company in its sole discretion;
3
<PAGE>
(b) The representations and warranties of the Placement Agent
contained in Section 7 hereof are true and correct in all material respects
as of the date hereof and as of each Closing Date (as if made on and as of
such Closing Date); and
(c) The Placement Agent shall have performed its obligations hereunder
in all material respects.
9. Conditions of Placement Agent's Performance. The purchase and sale
of the Shares and the obligations of the Placement Agent as provided herein
shall be subject to the accuracy in all material respects, as of the date hereof
and each Closing Date (as if made on and as of such Closing Date), of the
representations and warranties of the Company herein, to the performance in all
material respects by the Company of its obligations hereunder, and to the
following additional conditions:
(a) You shall have received the opinion of Christy & Viener, counsel
to the Company, in form and substance acceptable to your counsel.
(b) You shall have received a certificate, dated as of each Closing
Date, of an authorized executive officer of the Company to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects as if made on
and as of such Closing Date; and the Company has complied with all the
agreements and satisfied all the conditions in all material respects
on its part required by this Agreement to be performed or satisfied at
or prior to such Closing Date; and
(ii) Except as set forth in the Offering Materials or in the
Subscription Agreement and subsequent to the date of the most recent
financial statements included with the Offering Materials, there has
not been any material adverse change in the condition (financial or
otherwise), business or results of operations of the Company and its
subsidiaries taken as a whole.
(c) The Company shall have furnished to you such certificates, in
addition to those specifically mentioned herein, as you or your counsel may
have reasonably requested, as to the accuracy and completeness at such
Closing Date of any statement in the Offering Materials (other than
statements provided by the Placement Agent for the Offering Materials) and
as to such other matters as you or your counsel may reasonably request.
10. Indemnification.
(a) The Company will indemnify and hold harmless the Placement Agent,
the directors and officers of the Placement Agent and each person, if any, who
controls the Placement Agent within the meaning of the Act against any losses,
claims, damages or liabilities, joint or several, to which the Placement Agent
or any such directors, officers or controlling persons may become subject, under
the Act or otherwise, to the extent that such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Offering Materials, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made, not misleading; or (ii) the Company's engagement of Allen
& Company Incorporated as Placement Agent or any service the Placement Agent
performs for the Company or on its behalf pursuant to this Agreement, except to
the extent that any such loss, claim, damage or liability is found by a court of
competent jurisdiction in a judgment that has become final (in that it is no
longer subject to appeal or review) to have resulted directly and primarily from
such indemnified person's negligence or willful misconduct. Subject to
subsection (c) below, the Company will reimburse the Placement Agent or any such
directors, officers or controlling persons for any legal or other expenses
reasonably incurred by the Placement Agent or any
4
<PAGE>
such directors, officers or controlling persons in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable (for indemnification and
reimbursement of expenses) in any case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the Offering
Materials in reliance upon and in conformity with written information furnished
by (or on behalf of) and with respect to the Placement Agent specifically for
use in the preparation thereof or arises out of the Placement Agent's negligence
or willful misconduct. The Company shall not be required to indemnify the
Placement Agent or any such directors, officers or controlling persons for any
payment made to any claimant in settlement of any suit or claim unless such
payment is approved by the Company, which approval shall not be unreasonably
withheld or delayed. This indemnity agreement will be in addition to any
liability which the Company may otherwise have, but in no event shall an
indemnified party receive more than the amount of his claim.
(b) The Placement Agent will indemnify and hold harmless the Company,
its officers and directors and each person, if any, who controls the Company
within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several, to which the Company, or any such directors,
officers or controlling persons may be or become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) any untrue statement or
alleged untrue statement of any material fact contained in the Offering
Materials or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein in light of the circumstances under which they were made,
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in the Offering Materials in reliance upon and in conformity with written
information furnished by and with respect to the Placement Agent specifically
for use in the preparation thereof or (ii) the negligence or willful misconduct
of the Placement Agent; and (subject to subsection (c) below) will reimburse the
Company or any such directors, officers or controlling persons for any legal or
other expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability or actions. The Placement Agent shall not be
required to indemnify the Company or any such directors, officers or controlling
persons for any payment made to any claimant in settlement of any suit or claim
unless payment is approved by the Placement Agent, which approval shall not be
unreasonably withheld or delayed. This indemnity agreement will be in addition
to any liability the Placement Agent may otherwise have, but in no event shall
an indemnified party receive more than the amount of his claim.
(c) Promptly after receipt by an indemnified party under Sections 10(a)
or 10(b) of notice of the commencement of any action or other proceeding
(including governmental investigations) in respect of which indemnity may be
sought, such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under such Sections, promptly notify the
indemnifying party in writing of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party under such Sections, except to the extent it
has been materially prejudiced by such omission. In case any such action shall
be brought against any indemnified party, and such indemnified party shall have
notified the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
assume and control the defense thereof with counsel chosen by it and after
notice from the indemnifying party to such indemnified party of its election so
to assume and control such defense with counsel chosen by it, it shall bear all
expenses of such defense, except that the indemnifying party shall not be
required to bear expenses of the indemnified party with respect to matters for
which the indemnifying party has no liability under Sections 10(a) or 10(b). Any
such indemnified party shall have the right to employ separate counsel in any
such action and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless:
(i) the indemnifying party has agreed to pay such fees and expenses;
or
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(ii) the indemnifying party shall have failed to assume the defense of
such action or proceeding; or
(iii) the named parties to any such action or proceeding (including
any impleaded parties) include both such indemnified party and the
indemnifying party, and such indemnified party shall have been advised by
counsel that there may be one or more legal defenses available to such
party which are different from or additional to those available to the
indemnifying party (in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at
the expense of the indemnifying party, the indemnifying party shall not
have the right to assume the defense of such action or proceeding on behalf
of such indemnified party); provided, however, that the indemnifying party
shall not be obligated to bear the expenses of counsel for the indemnified
party with respect to such legal defenses as are different from those of
the indemnifying party.
The indemnifying party shall not, in connection with any one such
action or proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys at any time for the indemnified party for which
the indemnifying party is responsible as set forth herein, which firm shall be
designated in writing by the indemnified party.
(d) No settlement of any claim against an indemnified party may be made
without the prior written consent of the indemnifying party, which consent shall
not unreasonably be withheld.
11. Contribution. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 10(a) or 10(b) hereof is
for any reason held to be unavailable to any party entitled to such
indemnification, each of the Company and the Placement Agent shall contribute to
the amount paid or payable by such indemnified party as a result of losses,
claims, damages and liabilities of the nature contemplated by such
indemnification provisions (including any investigation, legal and other
expenses incurred in connection with, and amounts paid in settlement of, any
action, suit or proceeding or any claims asserted), in such proportions so that
the Placement Agent is responsible for that portion in each case based on the
relative fault of the Company and the Placement Agent; provided, however, that
no person guilty of fraudulent misrepresentation shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purpose of this Section 11, each person, if any, who
controls the Placement Agent within the meaning of Section 15 of the Act shall
have the same rights to contribution as the Placement Agent, and each person, if
any, who controls the Company within the meaning of Section 15 of the Act, each
officer of the Company and each director of the Company shall have the same
right to contribution as the Company, subject in each case to the prior
sentence. Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect of which claim for contribution may be sought, promptly notify the other
party or parties in writing of the commencement thereof, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have
hereunder or otherwise than under this Section 11. No party shall be liable for
contribution with respect to any action or claim settled without its consent.
12. Representations and Agreements to Survive Delivery . All
representations, warranties or agreements of the Company or of the Placement
Agent herein or in certificates delivered pursuant hereto shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of the Placement Agent or any controlling person, the Company, or any of
its officers, directors or controlling persons, and shall survive delivery of
the Shares.
13. Termination. Each of the Company's and the Placement Agent's
obligation to proceed hereunder is conditioned upon its continuing judgment that
market conditions in general, and as they relate to the Company's securities in
particular, are such as to continue to make appropriate the offering and sale of
the Shares in the manner provided for herein. Notwithstanding the foregoing,
this
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Agreement shall terminate if the sale of all of the Shares is not completed on
or before August 15, 1998, unless extended by the Company and the Placement
Agent. Upon any termination of this Agreement whether by the Company or the
Placement Agent, the obligations of the parties set forth in Sections 6(c), 10
and 11 shall survive termination of this Agreement.
14. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and, if sent to you shall
be mailed, delivered or telegraphed and confirmed to you c/o Allen & Company
Incorporated, 711 Fifth Avenue, New York, NY 10022, Attention: James W. Quinn,
with a copy to Werbel & Carnelutti, 711 Fifth Avenue, New York, NY 10022, Attn:
Guy N. Molinari, Esq., or, if sent to the Company, at 14201 NE 200th Street,
Woodinville, Washington 98072, Attn: Chief Financial Officer, with a copy to
Christy & Viener, 620 Fifth Avenue, New York, New York 10020-2457, Attn: Steven
R. Berger, Esq.
15. Benefits of the Agreement. This Agreement shall inure to the
benefit of and be binding upon the Company and the Placement Agent and their
respective successors and permitted assigns. This Agreement may not be assigned
by any party without the consent of the other party.
16. Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of New York.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
Very truly yours,
THE PATHWAYS GROUP, INC.
By: /s/ Carey F. Daly, II
-------------------------
Name:
Title:
ALLEN & COMPANY INCORPORATED
By: /s/ James W. Quinn
------------------------
Name:
Title:
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Exhibit 10.15
Amended and Restated as of
December 16, 1997
THE PATHWAYS GROUP, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Amended and Restated Stock Incentive
Plan (the "Plan") is to aid the Company in attracting, retaining and motivating
officers, consultants, key employees and directors of the Company by providing
them with incentives for making significant contributions to the growth and
profitability of the Company. The Plan is designed to accomplish this goal by
offering stock options and other incentive awards, thereby providing
Participants with a proprietary interest in the growth, profitability and
success of the Company.
2. Definitions.
(a) Award. Any form of stock option, stock appreciation right, stock or
cash award granted under the Plan, whether granted singly, in combination or in
tandem, pursuant to such terms, conditions and limitations as the Board or the
Committee may establish in order to fulfill the objectives, and in accordance
with the terms and conditions, of the Plan.
(b) Award Agreement. An agreement between the Company and a Participant
setting forth the terms, conditions and limitations applicable to an Award.
(c) Board. The Board of Directors of The Pathways Group, Inc.
(d) Code. The Internal Revenue Code of 1986, as amended from time to
time.
(e) Committee. Such committee of the Board as may be designated from
time to time by the Board to administer the Plan or any subplan under the Plan.
Any such committee shall consist of not less than two members of the Board who
are not officers or employees of the Company, provided that, unless the Board
otherwise determines, each such non-employee director member of such committee
shall meet the requirements of Section 16(a) of the Securities Exchange Act of
1934, as amended, and Section 162(m) of the Code.
(f) Company. The Pathways Group, Inc. and its direct and indirect
subsidiaries.
(g) Fair Market Value. If the Stock is listed on the New York Stock
Exchange (or other national exchange), the closing price of the Stock as
reported on the such exchange for the date on which Fair Market Value is to be
determined or, if the Stock is not listed on a national exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices for a share of the Stock in the over-the-counter market, as
reported by the National Association of Securities Dealers through its Automated
Quotation System or otherwise, in either case for the date in question; provided
that if no transactions in the Stock are reported for that date, the average of
the high and low sale prices or last quoted sale price or, if not so quoted, the
average of the high bid and low asked prices as so reported for the preceding
day on which transactions in the Stock were effected, and provided, further,
that if no transactions in the Stock were effected within 10 business days
preceding such relevant date, or if otherwise deemed appropriate by the Board or
the Committee, the fair market value of the Stock shall be as determined by the
Board or the Committee.
(h) Governing Law. The laws of the Sate of incorporation of Pathways.
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(i) Participant. An officer, consultant, key employee or director of
the Company to whom an Award has been granted.
(j) Pathways. The Pathways Group, Inc.
(k) Stock. Authorized and issued or unissued shares of Common Stock,
par value $.01 per share, of Pathways or any security issued in exchange or
substitution therefor.
3. Eligibility. Only officers, key employees, and directors who are
also officers or employees of the Company or who have been designated by the
Board as eligible to receive Awards and consultants who have been so designated
by the Board or the Committee are eligible to receive Awards under the Plan. Key
employees are those employees who hold positions of responsibility or whose
performance, in the judgment of the Board or the Committee, can have a
significant effect on the growth and profitability of the Company.
4. Stock Available for Awards. Subject to Section 14 hereof, a total of
2,000,000 shares of Stock shall be available for issuance pursuant to Awards
granted under the Plan; provided, however, that the aggregate number of shares
of Stock subject to options and upon which stock appreciation rights are based
pursuant to Awards hereunder shall not exceed 200,000 shares for any Participant
during any fiscal year; and, provided, further, that the Board or the Committee
shall have the power to grant Awards to a Participant exceeding such annual
maximum amount, but such Awards shall not qualify as "performance based" for
purposes of Section 162(m) of the Code to the extent of such excess. From time
to time, the Board and appropriate officers of Pathways shall file such
documents with governmental authorities and, if the Stock is listed on the New
York Stock Exchange (or other national exchange), with such stock exchange, as
are required to make shares of Stock available for issuance pursuant to Awards
and publicly tradeable. Shares of Stock related to Awards, or portions of
Awards, that are forfeited, canceled or terminated, expire unexercised, are
surrendered in exchange for other Awards, or are settled in cash in lieu of
Stock or in such manner that all or some of the shares of Stock covered by an
Award are not and will not be issued to a Participant, shall be restored to the
total number of shares of Stock available for issuance pursuant to Awards.
5. Administration.
(a) General. The Plan shall be administered by the Board or, to the
extent determined by the Board, by the Committee, which shall have full and
exclusive power to (i) authorize and grant Awards to persons eligible to receive
Awards under the Plan; (ii) establish the terms, conditions and limitations of
each Award or class of Awards, including terms, conditions and limitations
governing the extent (if any) to which the Award may be assigned or transferred,
provided that awards shall not be assignable or transferable to any person who
is not at the time of transfer a member of the Participant's immediate family or
to any entity that is not established for the benefit of, or wholly-owned by,
the Participant or a member or members of the Participant's immediate family;
(iii) construe and interpret the Plan and all Award Agreements; (iv) grant
waivers of Plan restrictions; (v) adopt and amend such rules, procedures,
regulations and guidelines for carrying out the Plan as it may deem necessary or
desirable; and (vi) take any other action necessary for the proper operation and
administration of the Plan, all of which powers shall be exercised in a manner
consistent with the objectives, and in accordance with the terms and conditions,
of the Plan. The powers of the Board or the Committee, as applicable, shall
include, but shall not be limited to, the authority to (A) adopt such subplans
as may be necessary or appropriate (1) to provide for the authorization and
granting of Awards to promote specific goals or for the benefit of specific
classes of Participants, (2) to provide for grants of Awards by means of
formulae, standardized criteria or otherwise, or (3) for any other purposes as
are consistent with the objectives of the Plan, and to segregate shares of Stock
available for issuance under the Plan generally as being available specifically
for the purposes of one or more subplans, and (B) subject to Section 11 hereof,
adopt
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modifications, amendments, rules, procedures, regulations, subplans and the like
as may be necessary or appropriate (1) to comply with provisions of the laws of
other countries in which the Company may operate in order to assure the
effectiveness of Awards granted under the Plan and to enable Participants
employed in such other countries to receive advantages and benefits under the
Plan and such laws, (2) to effect the continuation, acceleration or modification
of Awards under certain circumstances, including events which might constitute a
Change in Control (as set forth in Section 7 hereof) of Pathways, or (3) for any
other purposes as are consistent with the objectives of the Plan. All such
modifications, amendments, rules, procedures, regulations and subplans shall be
deemed to be a part of the Plan as if stated herein.
(b) Committee Actions. All actions of the Committee with respect to the
Plan shall require the vote of a majority of its members or, if there are only
two members, by the vote of both. Any action of the Committee may be taken by a
written instrument signed by a majority (or both members) of the Committee, and
any action so taken shall be as effective as if it had been taken by a vote at a
meeting. All determinations and acts of the Committee as to any matters
concerning the Plan, including interpretations or constructions of the Plan and
any Award Agreement, shall be conclusive and binding on all Participants and on
any parties validly claiming through any Participants.
6. Delegation of Authority. The Board or the Committee may delegate to
the Chief Executive Officer of Pathways and to other executive officers of the
Company certain of its administrative duties under the Plan, pursuant to such
conditions or limitations as the Board or the Committee may establish, except
that neither the Board nor the Committee may delegate its authority with respect
to (a) the selection of eligible persons as Participants in the Plan, (b) the
granting or timing of Awards, (c) establishing the amount, terms and conditions
of any such Award, (d) interpreting the Plan, any subplan or any Award Agreement
or (e) amending or otherwise modifying the terms or provisions of the Plan, any
subplan or any Award Agreement.
7. Awards. Subject to Sections 4 and 19 hereof, the Board or the
Committee shall determine the types and timing of Awards to be made to each
Participant and shall set forth in the related Award Agreement the terms,
conditions and limitations applicable to each Award. Awards may include, but are
not limited to, those listed below in this Section 7. Awards may be granted
singly, in combination or in tandem, or in substitution for Awards previously
granted under the Plan. Awards may also be made in combination or in tandem
with, in substitution for, or as alternatives to, grants or rights under any
other benefit plan of the Company, including any such plan of any entity
acquired by, or merged with or into, the Company. Any such Awards made in
substitution for, or as alternatives to, grants or rights under a benefit plan
of an entity acquired by, or merged with or into, the Company in order to give
effect to the transaction shall be deemed to be issued in accordance with the
terms and conditions of the Plan. Awards shall be effected through Award
Agreements executed by the Company in such forms as are approved by the Board or
the Committee from time to time.
All or part of any Award may be subject to conditions established by
the Board or the Committee and set forth in the Award Agreement, which
conditions may include, without limitation, achievement of specific business
objectives, increases in specified indices, attainment of growth rates and other
measurements of Company performance.
The Board or the Committee may determine to make any or all of the
following Awards:
(a) Stock Options. A grant of a right to purchase a specified number
of shares of Stock, at an exercise price not less than 100% of the Fair
Market Value of the Stock on the date of grant, during a specified period,
all as determined by the Board or the Committee. Without limitation, a
stock option may be in the form of (i) an incentive stock option which, in
addition to
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being subject to such terms, conditions and limitations as are established
by the Board or the Committee, complies with Section 422 of the Code or
(ii) a non-qualified stock option subject to such terms, conditions and
limitations as are established by the Board or the Committee.
(b) Stock Appreciation Rights. A right to receive a payment, in cash
or Stock, equal to the excess of the Fair Market Value (or other specified
valuation) of a specified number of shares of Stock on the date the stock
appreciation right ("SAR") is exercised over the Fair Market Value (or
other specified valuation) on the date of grant of the SAR, except that if
an SAR is granted in tandem with a stock option, valuations on the grant
and exercise dates shall be no less than as determined on the basis of Fair
Market Value. The eventual amount, vesting or issuance of an SAR may be
subject to future service, performance standards and such other
restrictions and conditions as may be established by the Board or the
Committee.
(c) Stock Awards. An Award made in Stock or denominated in units of
Stock. The eventual amount, vesting or issuance of a Stock Award may be
subject to future service, performance standards and such other
restrictions and conditions as may be established by the Board or the
Committee. Stock Awards may be based on Fair Market Value or another
specified valuation.
(d) Cash Awards. An Award made or denominated in cash. The eventual
amount of a cash Award may be subject to future service, performance
standards and such other restrictions and conditions as may be established
by the Board or the Committee.
Dividend equivalency rights, on a current or deferred basis, may be
extended to and be made part of any Award denominated in whole or in part in
Stock or units of Stock, subject to such terms, conditions and restrictions as
the Board or the Committee may establish.
Notwithstanding the provisions of the paragraphs of this Section 7,
Awards may be subject to acceleration of exercisability or vesting in the event
of a Change in Control of Pathways (i) as set forth in agreements between
Pathways and certain of its officers, directors and key employees which provide
for certain protections and benefits in the event of a change in control (as
defined in such agreements) or (ii) as may otherwise be determined by the Board
or the Committee under and in accordance with the terms and conditions of the
Plan. "Change in Control" for purposes of the Plan shall mean a change in
control of Pathways under such circumstances as shall be specified by (x) the
Board or the Committee or (y) where applicable to any Awards granted under the
Plan, by such agreements between Pathways and a Participant as (1) may have been
entered into prior to the effective date of the Plan or (2) shall be entered
into after the effective date of the Plan with, to the extent such an agreement
is applicable to an Award, the approval of the Board or the Committee. A "Change
in Control" may, without limitation, be deemed to have occurred if (A) any
"person" or "group" of persons (as the terms "person" and "group" are used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and
the rules thereunder) is or becomes the beneficial owner, directly or
indirectly, of securities of Pathways representing 50.1% or more of the combined
voting power of the then outstanding securities of Pathways, or (B) a change of
more than 25% in the composition of the Board occurs within a two-year period,
unless such change in composition was approved in advance by at least two-thirds
of the previous directors.
8. Payment under Awards. Payment by the Company pursuant to Awards may
be made in the form of cash, Stock or combinations thereof and may be subject to
such restrictions as the Board or the Committee determines, including, in the
case of Stock, restrictions on transfer and forfeiture provisions. Stock subject
to transfer restrictions or forfeiture provisions is referred to herein as
"Restricted Stock". The Board or the Committee, in its discretion, may, but is
not obligated to, provide for payments to be deferred, such future payments to
be made in installments or by lump-sum payment. The Board or the Committee may
permit selected Participants to elect to defer
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payments of some or all types of Awards in accordance with procedures
established by the Board or the Committee to assure that such deferrals comply
with applicable requirements of the Code.
The Board or the Committee may also establish rules and procedures for
the crediting of interest on deferred cash payments and of dividend
equivalencies on deferred payments to be made in Stock or units of Stock.
At the discretion of the Board or the Committee, a Participant may be
offered an election to substitute an Award for another Award or Awards, or for
awards made under any other benefit plan of the Company, of the same or
different type.
9. Stock Option Exercise. The price at which shares of Stock may be
purchased upon exercise of a stock option shall be paid in full at the time of
the exercise, in cash or, if permitted by the Board or the Committee, by (a)
tendering Stock or surrendering such option or another Award, including
Restricted Stock, or an option or other award granted under another benefit plan
of the Company, in each case valued at, or on the basis of, Fair Market Value on
the date of exercise, (b) delivery of a promissory note issued by a Participant
to the Company in a form determined by the Board or the Committee, or (c) any
other means acceptable to the Board or the Committee. The Board or the Committee
shall determine acceptable methods for tendering Stock or surrendering options
or other Awards or grants and may impose such conditions on the use of Stock or
other Awards or grants to exercise a stock option as it deems appropriate. If
shares of Restricted Stock are tendered as consideration for the exercise of a
stock option, the Board or the Committee may require that the number of shares
issued upon exercise of the stock option equal to the number of shares of
Restricted Stock used as consideration therefor be subject to the same
restrictions as the Restricted Stock so tendered and any other restrictions as
may be imposed by the Board or the Committee. The Board or the Committee may
also permit Participants to exercise stock options and simultaneously sell some
or all of the shares of Stock so acquired pursuant to a brokerage or similar
arrangement which provides for the payment of the exercise price substantially
concurrently with the delivery of such shares.
10. Tax Withholding. Unless otherwise expressly provided under the
terms of any Award Agreement, the Company shall have the right to deduct
applicable taxes from any Award payment or shares of Stock receivable under an
Award and to withhold an appropriate number of shares of Stock for payment of
taxes required by law or to take such other action as may be necessary in the
opinion of the Company to satisfy all tax withholding obligations. In addition,
the Board or the Committee may permit Participants to elect to (a) have the
Company deduct applicable taxes resulting from any Award payment to, or exercise
of an Award by, such Participant by withholding an appropriate number of shares
of Stock for payment of tax obligations or (b) tender to the Company for the
purpose of satisfying tax payment obligations other Stock held by the
Participant. If the Company withholds shares of Stock to satisfy tax payment
obligations, the value of such Stock in general shall be its Fair Market Value
on the date of the Award payment or the date of exercise of an Award, as the
case may be. If a Participant tenders shares of Stock pursuant to clause (b)
above to satisfy tax payment obligations, the value of such Stock shall be the
Fair Market Value on the date the Participant tenders such Stock to the Company.
11. Amendment, Modification, Suspension or Termination of the Plan. The
Board may amend, modify, suspend or terminate the Plan, or adopt subplans under
the Plan, (a) for the purpose of meeting or addressing any changes in any
applicable tax, securities or other laws, rules or regulations or (b) for any
other purpose permitted by law. Except as otherwise required by applicable law,
no amendment to this Plan or any subplan established hereunder will require
stockholder approval; provided, however, that the Plan may not be amended in a
manner that would alter, impair, amend, modify, suspend or terminate any rights
of a Participant or obligation of the Company under any Awards theretofore
granted, in any manner adverse to any such affected Participant, without the
consent of such affected Participant.
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12. Termination of Employment. Except as otherwise set forth in an
applicable Award Agreement or determined by the Board or the Committee, or as
otherwise provided in paragraph (a) or (b) of this Section 12, if a
Participant's employment or association with the Company terminates, all
unexercised, deferred and unpaid Awards (or portions of Awards) shall be
canceled immediately.
(a) Retirement, Resignation or Other Termination. If a Participant's
employment or association with the Company terminates by reason of the
Participant's retirement or resignation, or for any other reason (other than the
Participant's death or disability), the Board or the Committee may, under
circumstances in which it deems an exception from the provisions of the first
sentence of this Section 12 to be appropriate to carry out the objectives of the
Plan and to be consistent with the best interests of the Company, permit Awards
to continue in effect and be exercisable or payable beyond the date of such
termination, up until the expiration date specified in the applicable Award
Agreement and otherwise in accordance with the terms of the applicable Award
Agreement, and may accelerate the exercisability or vesting of any Award, in
either case, in whole or in part.
(b) Death or Disability.
(i) In the event of a Participant's death, the Participant's estate or
beneficiaries shall have a period, not extending beyond the expiration date
specified in the applicable Award Agreement (except as otherwise provided
in such Award Agreement), within which to exercise any outstanding Award
held by the Participant, as may be specified in the Award Agreement or as
may otherwise be determined by the Board or the Committee. All rights in
respect of any such outstanding Awards shall pass in the following order:
(A) to beneficiaries so designated in writing by the Participant; or if
none, then (B) to the legal representative of the Participant; or if none,
then (C) to the persons entitled thereto as determined by a court of
competent jurisdiction. Awards so passing shall be exercised or paid at
such times and in such manner as if the Participant were living, except as
otherwise provided in the applicable Award Agreement or as determined by
the Board or the Committee.
(ii) If a Participant ceases to be employed by or associated with the
Company because the Participant is deemed by the Company to be disabled,
outstanding Awards held by the Participant may be paid to or exercised by
the Participant, if legally competent, or by a committee or other legally
designated guardian or representative if the Participant is legally
incompetent, for a period, not extending beyond the expiration date
specified in the applicable Award Agreement (except as otherwise provided
in such Award Agreement), following the termination of his employment or
association with the Company, as may be specified in the Award Agreement or
as may otherwise be determined by the Board or the Committee.
(iii) After the death or disability of a Participant, the Board or the
Committee may at any time (A) terminate restrictions with respect to Awards
held by the Participant, (B) accelerate the vesting or exercisability of
any or all installments and rights of the Participant in respect of Awards
held by the Participant and (C) instruct the Company to pay the total of
any accelerated payments under the Awards in a lump sum to the Participant
or to the Participant's estate, beneficiaries or representatives,
notwithstanding that, in the absence of such termination of restrictions or
acceleration of payments, any or all of the payments due under the Awards
might ultimately have become payable to other beneficiaries.
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(iv) In the event of uncertainty as to the interpretation of, or
controversies concerning, paragraph (b) of this Section 12, the Board's or
the Committee's determinations shall be binding and conclusive on all
Participants and any parties validly claiming through them.
13. Nonassignability.
(a) Except as provided for in paragraphs (a) and (b) of Section 12
hereof and paragraph (b) of this Section 13, and except as may otherwise be
determined by the Board or the Committee (subject to paragraph (a)(ii) of
Section 5 hereof and set forth in the applicable Award Agreement), no Award or
any other benefit under the Plan, or any right with respect thereto, shall be
assignable or transferable, or payable to or exercisable by, anyone other than
the Participant to whom it is granted.
(b) If a Participant's employment or association with the Company
terminates in order for such Participant to assume a position with a
governmental, charitable or educational agency or institution, and the
Participant retains Awards pursuant to paragraph (a) of Section 12 hereof, the
Board or the Committee, in its discretion and to the extent permitted by law,
may authorize a third party (including, without limitation, the trustee of a
"blind" trust), acceptable to the applicable authorities, the Participant and
the Board or the Committee, to act on behalf of the Participant with respect to
such Awards.
14. Adjustments. In the event of any change in the outstanding Stock by
reason of a stock split, stock dividend, combination or reclassification of
shares, recapitalization, merger or similar event, the Board or the Committee
shall adjust proportionally (a) the number of shares of Stock (i) reserved under
the Plan, (ii) available for options or other Awards and available for issuance
pursuant to options, or upon which SARs may be based, for individual
Participants and (iii) covered by outstanding Awards denominated in Stock or
units of Stock; (b) the prices related to outstanding Awards; and (c) the
appropriate Fair Market Value and other price determinations for such Awards. In
the event of any other change affecting the Stock or any distribution (other
than normal cash dividends) to holders of Stock, such adjustments as may be
deemed equitable by the Board or the Committee, including adjustments to avoid
fractional shares, shall be made to give proper effect to such event. In the
event of a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Board or the Committee shall be
authorized to issue or assume stock options or other awards, whether or not in a
transaction to which Section 424(a) of the Code applies, by means of
substitution of new stock options or Awards for previously issued options or
awards or an assumption of previously issued stock options or awards.
15. Notice. Any written notice to Pathways required by any of the
provisions of the Plan shall be addressed to the Board, c/o the Secretary of
Pathways, and shall become effective when received by the Secretary.
16. Unfunded Plan. Insofar as the Plan provides for Awards of cash or
Stock, the Plan shall be unfunded unless and until the Board or the Committee
otherwise determines. Although bookkeeping accounts may be established with
respect to Participants who are entitled to cash, Stock or rights thereto under
the Plan, any such accounts shall be used merely as a bookkeeping convenience.
Unless the Board otherwise determines, (a) the Company shall not be required to
segregate any assets that may at any time be represented by cash, Stock or
rights thereto, nor shall the Plan be construed as providing for such
segregation, nor shall the Company, the Board or the Committee be deemed to be a
trustee of any cash, Stock or rights thereto to be granted under the Plan; (b)
any liability of the Company to any Participant with respect to a grant of cash,
Stock or rights thereto under the Plan shall be based solely upon any
contractual obligations that may be created by the Plan and an Award Agreement;
(c) no such obligation of the Company shall be deemed to be secured by any
pledge or other encumbrance on any property of the
7
<PAGE>
Company; and (d) neither the Company, the Board nor the Committee shall be
required to give any security or bond for the performance of any obligation that
may be created by or pursuant to the Plan.
17. Payments to Trust. Notwithstanding the provisions of Section 16
hereof, the Board or the Committee may cause to be established one or more trust
agreements pursuant to which the Board or the Committee may make payments of
cash, or deposit shares of Stock, due or to become due under the Plan to
Participants.
18. No Right to Employment. Neither the adoption of the Plan nor the
granting of any Award shall confer on any Participant any right to continued
employment or association with the Company or in any way interfere with the
Company's right to terminate the employment or association of any Participant at
any time, with or without cause, and without liability therefor. Awards,
payments and other benefits received by a Participant under the Plan shall not
be deemed a part of the Participant's regular, recurring compensation for any
purpose, including, without limitation, for the purposes of any termination
indemnity or severance pay law of any jurisdiction.
19. Governing Law. The Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by the Code or the
securities laws of the United States, shall be governed by and construed under
the Governing Law. No Award shall be made under the Plan which is other than in
conformity with the Governing Law and, in the event of a conflict between any
for of Award Agreement and any provision of the Governing Law, the Award
Agreement shall be deemed modified to the extent necessary to comply with the
Governing Law.
20. Effective and Termination Dates. This Plan, and any amendment
hereof requiring stockholder approval, shall become effective as of the date of
its approval by the stockholders of Pathways by the affirmative vote of the
number of shares required by the Governing Law at a stockholders' meeting at
which the approval of the Plan (or any such amendment) is considered. The Plan
shall terminate on December 31, 2007, subject to earlier termination by the
Board pursuant to Section 11 hereof, except as to Awards then outstanding.
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Exhibit 21
SUBSIDIARIES OF THE PATHWAYS GROUP, INC.
<TABLE>
<CAPTION>
Name Under Which Subsidiary
Subsidiary State of Incorporation Does Business
- ---------- ---------------------- ---------------------------
<S> <C> <C>
Pathways International, Ltd. Washington The Pathways Group
Sprinticket, Inc. Washington Sprinticket
PT Link, Inc. Washington PT Link
The Pathways Group, Inc. Hawaii The Pathways Group
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of The Pathways
Group, Inc. on Form SB-2 (File No. ___) of our report dated February 24, 1998 on
our audits of the consolidated financial statements of The Pathways Group, Inc.
and Subsidiaries as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997. We also consent to the reference
to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
- ------------------------------------
Seattle, Washington
September 24, 1998
