<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/ X / Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
/ / Transition report pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission file number 000-24119
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THE PATHWAYS GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 91-1617556
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14201 N.E. 200th Street, Woodinville, WA 98072
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(Address of principal executive offices)
(425) 483-3411
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes / X / No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court.
Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of August 14, 1998:
13,004,487 shares of Common Stock, par value $0.01 per share.
Transitional Small Business Disclosure Format (check one):
Yes / / No / X /
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements for the Company's fiscal quarter ended June 30,
1998 are attached to this Report, commencing at page F-1.
Item 2. Management's Discussion and Analysis or Plan of Operation
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 the Company's Registration Statement on Form 10-SB filed
with the Securities and Exchange Commission. 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".
General
The Pathways Group, Inc. and its subsidiaries ("Pathways" or the "Company")
designs, markets and services custom smart card applications. The Company
develops unique solutions for creating and processing data and ensuring secure
electronic transactions by utilizing proprietary hardware and application
software systems. Pathways' technology establishes electronic commerce in closed
system environments. A key element of the Company's business plan is the
processing of transactions associated with its current and prospective smart
card installations. The Company also manufactures and markets automated
ticketing kiosks that the Company anticipates will be integrated with its smart
card applications.
The Company was organized in 1993 as a Washington corporation whose
operations are the successor to Pathways International, Ltd., which was
incorporated in Washington in June 1988. In May 1997 the Company reincorporated
in Delaware. The Company's executive offices are located at 14201 NE 200th
Street, Woodinville, Washington 98072 and its telephone number is (425)
483-3411. A primary processing center opened in September 1997, located at 1221
North Dutton Avenue, Santa Rosa, California 95404, and its telephone number is
(707) 546-3010. A sales and marketing office opened in November 1997, with an
address at 745 Fort Street, Suite 333, Honolulu, Hawaii 96813.
The Company offered its common stock to the public in July 1997 pursuant to
Regulation A of the Securities Act of 1993 ("Securities Act'). The Company
offered 833,333 shares of common stock of the Company, par value $.01 per share,
for a purchase price of $6.00 per share. The offering commenced on July 15,
1997, and terminated on July 21, 1997. All shares offered were sold, providing
$5,000,000 in gross proceeds to the Company.
The Company commenced a private offering of its Common Stock on July
23, 1998. The offering is being conducted pursuant to Rule 506 of Regulation
D under the Securities Act. As of August 14, 1998, the Company has sold
100,000 shares at $15.00 per share to two accredited investors and accepted
subscriptions from three accredited investors for an aggregate of 233,301
shares. The terms of the offering provide that the Company may sell up to
700,000 shares of Common Stock at an initial offering price of $15 per share
and permits the Company to issue additional shares. The Company has engaged
Allen & Company Incorporated to act as placement agent for the offering.
Each placement agent who places shares will receive a placement fee of 5% of
the purchase price per share.
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<PAGE>
Results of Operations
Revenues. The Company has generated limited revenues from operations to
date 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 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 is in progress with 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 school lunch program. 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 with First Hawaiian Bank for the use of
smart cards in a retail program and expects to begin this pilot 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(TM) 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 its Chief Executive Officer and President, 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 gross margin as a percentage of revenues is
primarily a function of the sales mix 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
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<PAGE>
proportion of sales of hardware and smart cards in 1997, which carry a lower
gross margin than transaction processing fees.
The Company's future gross margin percentages are expected to fluctuate
depending on the sales mix 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 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.
The Company notes that in accordance with prevailing standards for the
accounting 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 is
not impaired, and is stated at net realizable value.
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
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<PAGE>
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, and a larger net
loss incurred in the first and second quarters of 1998 as compared with 1997.
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 Commission. The net proceeds from the sale of the shares were
$4,857,958. On July 23, 1998, the Company commenced a private offering of its
Common Stock. The offering is being conducted pursuant to Rule 506 of
Regulation D under the Securities Act. As of August 14, 1998, the Company has
sold 100,000 shares at $15.00 per share to two accredited investors and
accepted subscriptions from three acredited investors for an aggregate of
233,301 shares. The terms of the offering provide that the Company may sell
up to 700,000 shares of Common Stock at an initial offering price of $15 per
share and permits the Company to issue additional shares. The Company has
engaged Allen & Company Incorporated to act as placement agent for the
offering. Each placement agent who places shares will receive a placement
fee of 5% of the purchase price per share. The estimated net proceeds from the
sales and subscriptions are approximately $4,650,000. Pro forma working
capital and cash and cash equivalents at June 30, 1998, after giving effect to
the receipt of net proceeds from the offering is $4,401,272 and $5,032,809,
respectively.
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, CA. 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 shares 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 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,
including proceeds from its current 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
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<PAGE>
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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10.1* 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
Exhibit 10.2** 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.
Exhibit 27 Financial Data Schedule
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* Incorporated by reference to Exhibit 10.11 to the Company's
Form 10SB/A-1, filed on August 7, 1998.
** Incorporated by reference to Exhibit 10.12 to the Company's
Form 10SB/A-1, filed on August 7, 1998.
b. Reports on Form 8-K
None.
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<PAGE>
THE PATHWAYS GROUP, INC.
Index to Consolidated Financial Statements (Unaudited)
for the Fiscal Quarter Ended June 30, 1998
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-5
</TABLE>
F-1
<PAGE>
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, 1998 December 31, 1997
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<S> <C> <C>
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
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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
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Total assets $ 3,498,451 $ 6,716,840
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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
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Total current liabilities 990,684 981,774
Notes payable to banks, net of current maturities 220,344 509,900
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Total liabilities $ 1,211,028 $ 1,491,674
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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 $ 129,045 $ 129,045
authorized; 12,904,487 issued and outstanding at
June 30, 1998 and December 31, 1997
Additional paid in capital 18,052,730 18,052,730
Accumulated deficit (15,894,352) (12,956,609)
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Total stockholders' equity 2,287,423 5,225,166
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Total liabilities and stockholders' equity $ 3,498,451 $ 6,716,840
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the
three months ended
June 30, 1998 June 30, 1997
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<S> <C> <C>
Sales, net $ 12,237 $ 20,730
Cost of sales 2,842 4,074
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Gross margin 9,395 16,656
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Selling, general and administrative expenses 1,241,424 539,186
Amortization of software 165,966 148,144
Depreciation 104,120 39,949
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Total operating expenses 1,511,510 727,279
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Loss from operations (1,502,115) (710,623)
Net interest income (expense) (10,089) (18,038)
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Net loss $ (1,512,204) $ (728,661)
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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
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<S> <C> <C>
Sales, net $ 13,880 $ 35,092
Cost of sales 3,501 9,740
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Gross margin 10,379 25,352
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Selling, general and administrative expenses 2,447,403 1,108,450
Amortization of software 327,205 289,554
Depreciation 178,580 76,041
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Total operating expenses 2,953,188 1,474,045
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Loss from operations (2,942,809) (1,448,693)
Net interest income (expense) 5,076 (80,525)
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Net loss $ (2,937,733) $ (1,529,218)
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------------ ------------
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-3
<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)
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Net cash used in operating activities (2,416,111) (1,470,299)
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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-4
<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 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.
F-5
<PAGE>
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 six months
ending 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.
6. Subsequent Events
The Company commenced a private offering of its Common Stock on
July 23, 1998. The offering is being conducted pursuant to Rule 506 of
Regulation D under the Securities Act. As of August 14, 1998, the Company has
sold 100,000 shares at $15.00 per share to two accredited investors and
accepted subscriptions from three accredited investors for an aggregate of
233,301 shares. The estimated net proceeds from the above stock sales and
subscriptions are $4,650,000. The terms of the offering provide that the
Company may sell up to 700,000 shares of Common Stock at an initial offering
price of $15 per share and permits the Company to issue additional shares.
The Company has engaged Allen & Company Incorporated to act as placement agent
for the offering. Each placement agent who places shares will receive a
placement fee of 5% of the purchase price per share.
F-6
<PAGE>
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-7
<PAGE>
SIGNATURE
----------
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE PATHWAYS GROUP, INC.
By /s/ MARK T. SCHUUR
Mark T. Schuur
Vice President and Chief Financial Officer
Date: August 14, 1998
-7-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INDICATED BELOW AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 382,809
<SECURITIES> 0
<RECEIVABLES> 81,670
<ALLOWANCES> 0
<INVENTORY> 207,570
<CURRENT-ASSETS> 741,956
<PP&E> 1,617,494
<DEPRECIATION> 590,182
<TOTAL-ASSETS> 3,498,451
<CURRENT-LIABILITIES> 990,684
<BONDS> 220,344
0
0
<COMMON> 129,045
<OTHER-SE> 2,158,378
<TOTAL-LIABILITY-AND-EQUITY> 3,498,451
<SALES> 13,880
<TOTAL-REVENUES> 13,880
<CGS> 3,501
<TOTAL-COSTS> 3,501
<OTHER-EXPENSES> 2,953,188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,502
<INCOME-PRETAX> (2,937,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,937,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,937,733)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
