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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB/A-1
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
THE PATHWAYS GROUP, INC.
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(Name of small business issuer in its charter)
Delaware 91-1617556
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14201 NE 200th St., Woodinville, WA 98072
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(Address of principal executive offices) (Zip Code)
(425) 483-3411
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(Issuer's telephone number, including area code)
Securities to be registered under Section 12(b) of the Exchange Act: None.
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Securities to be registered under Section 12(g) of the Exchange Act:
Title of Each Class Name Of Each Exchange On Which
To Be So Registered Class Is To Be Registered
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Common Stock, $.01 par value NASDAQ
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PART I
Item 1. DESCRIPTION OF BUSINESS
General
The Pathways Group, Inc. and its subsidiaries ("Pathways" or
the "Company") designs, markets and services custom smart card applications. The
Company develops unique solutions for creating and processing data and ensuring
secure electronic transactions by utilizing proprietary hardware and application
software systems. Pathways' technology establishes electronic commerce in closed
system environments. A key element of the Company's business plan is the
processing of transactions associated with its current and prospective smart
card installations. The Company also manufactures and markets automated
ticketing kiosks that the Company anticipates will be integrated with its smart
card applications.
The Company was organized in 1993 as a Washington corporation
whose operations are the successor to Pathways International, Ltd., which was
incorporated in Washington in June 1988. In May 1997 the Company reincorporated
in Delaware. The Company's executive offices are located at 14201 NE 200th
Street, Woodinville, Washington 98072 and its telephone number is (425)
483-3411. A primary processing center opened in September 1997, located at 1221
North Dutton Avenue, Santa Rosa, California 95404, and its telephone number is
(707) 546-3010.
The Company offered its common stock to the public in July
1997 pursuant to Regulation A of the Securities Act of 1993 ("Securities
Act"). The Company offered 833,333 shares of common stock of the Company, par
value $.01 per share, for a purchase price of $6.00 per share. The offering
commenced on July 15, 1997, and terminated on July 21, 1997. All shares offered
were sold, providing $5,000,000 in gross proceeds to the Company.
The Company 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 July 31, 1998, the Company has sold
100,000 shares at $15.00 per share to two accredited investors. 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; Allen & Company Incorporated is receiving a
placement fee of 5% of the purchase price per share.
The Company currently has 13,004,487 shares outstanding.
Business
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 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.
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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 interact with financial
institutions, healthcare providers, retailers and others. All information-based
industries are candidates for smart card conversion.
The Company anticipates that while it will continue to realize
revenue from transaction processing, significant additional revenue growth
opportunities exist in the area of developing, marketing and, when appropriate,
providing transaction processing services to a variety of markets, many of which
the Company does not at present serve. The Company believes that these
opportunities include the academic campus, retail, banking, travel and
traditional healthcare markets.
Through December 31, 1997, Pathways recorded total revenues of
approximately $353,000 related to its smart card operations, including the
delivery and installation of approximately 57,000 smart and affinity cards and
approximately 120 smart card terminals. The Company's core technology involves
the development of smart card application systems and solutions. This core
technology has been customized for prepaid alternative health care, the retail
affinity and the banking and educational institutions markets, but such
technology is capable of being customized for other markets. The Company is
encouraged by the results of these initial programs, and believes that such
pilot programs will lead to the national rollouts of such products.
While 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 which
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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:
o 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.
o The Pathways Group Inc. (Hawaii) was organized to
market the Company's products in Hawaii and Asia.
o 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.
o PT Link Corp. ("PT Link"), is currently not in
operation. Historically, PT Link marketed a medical
office management and patient outcomes software package
that it purchased from Pathways International, which it
developed under contract.
Smart Card Technolgy
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
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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 card varies from less than $1 to approximately $10
depending on the amount of information it holds and the complexity of the
microprocessor. Similarly, the cost of a reader terminal can vary from $500 to
$2,000, depending on the complexity and functionality of the terminal.
Current Products and Pilot Programs
Prepaid Medical Benefit Cards. My Choice LLC, a defined
benefits medical provider in the alternative medical care industry, utilizes a
natural medicine benefit card developed by the Company. Use of the Company's
card entitles the holder to a discount on natural medical services.
The Company, pursuant to a development agreement with My
Choice, designed a card holder issuance system, a medical provider acceptance
and reimbursement system and a statistical database that drives an ACH type
reimbursement (ACH, or automated clearinghouse, is a system of electronic funds
transfer to which most banks subscribe as an economic substitute for a wire
transfer using the Federal Reserve System). The development agreement contains
customary provisions regarding termination, intellectual property rights,
confidentiality, product warranties, indemnification and the like. Payment to
the Company under the development agreement has been made periodically in
connection with the attainment of defined milestones. In addition, under this
agreement My Choice, and its affiliates, is entitled to most favored customer
treatment and, for a specified period, to preferential pricing in the purchase
of the hardware equipment related to the implementation and functioning of the
product, which pricing may in no event exceed 118 percent of the actual cost of
the equipment. The non-competition provision of the development agreement
prohibits the Company, for a five year period, from engaging in business related
to smart card systems that provide for cash payment in connection with
naturopathic or homeopathic medial goods or services. Under the agreement, the
Company represents that its products and services are free from material defect
and do not infringe the intellectual property of third parties; the Company has
also provided indemnification against the breach of such representations.
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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 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 May 1998 and to continue to the end of the
school year. Assuming satisfactory completion of the pilot program, the Company
expects that it will be in a position to negotiate a comprehensive agreement
with the Department of Education of Hawaii, which agreement will include
transaction processing and will enable the Company's system to be introduced
throughout the State. The Company's technology can be expanded to include
student identification, bus transportation and prepaid student activities.
First Hawaiian Bank. The Company has entered into a pilot
agreement with First Hawaiian Bank pursuant to which the Company will provide a
system to allow the bank to offer a branded smart card
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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:
o 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.
o 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 to reside on the
same card with a merchant loyalty program. There has
been no software on the market to demonstrate such
ability.
o 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 competition developers are
focused on the smart card requirements and have not
addressed the other needs.
o 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.
o 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
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cashless commercial transactions. The Company
believes that its recharging capability is unique in
the smart card industry.
o 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.
o 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.
o 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 he Company's knowledge, is unlike any other
system available at the current time.
Strategic Relationships
The Company has entered into a strategic relationship with
Schlumberger, Ltd., a leading developer and producer of smart cards. The
relationship with Schlumberger is designed to enable the Company to establish
and maintain technological leadership, realize advantageous product pricing
structures and expand its marketing and distribution channels. Schlumberger
is an $8 billion worldwide conglomerate whose lines of business include oil
field services, electronics and technology. The Company programs blank stock
smart cards that are developed and manufactured by Schlumberger to meet
specific application needs. Schlumberger has named Pathways its first
"Preferred Associate" worldwide.
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
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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:
o 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.
o Retailing. All types of retailing can be embraced
and enhanced with smart card technology. The retail
sector encompasses everything from "Mom and Pop"
stores to national department stores. Retailers have
been made acutely aware of the value of their contact
with the consumer. The key to repeat business is to
accurately identify, and then satisfy, customer
needs. Smart cards would enable retailers to
track customer behavior and base marketing decisions
gleaned from this valuable information. This
technology can also reduce the risk of fraud, improve
inventory management, and offer the customer
convenience and better service.
o Travel and Entertainment. The travel and
entertainment industry also hold great promise with
regard to smart card applications. All categories
that comprise this market, including air travel, car
rentals, movie theaters, sporting events,
restaurants, casinos, video stores, sports arenas,
hotels and other venues would benefit from a
multifunctional card. This is an enormous global
market with strong growth predicted for the near
future. Business travelers in particular are bogged
down by paper based expense reimbursement. Paper
based reimbursement systems are hampered with the
potential for fraud in addition to being costly to
administer. Smart cards would enable businesses to
more effectively monitor travel and entertainment
expenses.
Smart cards offer solutions in terms of their ability
to collect and disseminate data and conduct
electronic commerce. Several major airlines have
initiated smart card pilot programs that allow
ticketless travel, store frequent flier miles and
process payments. In a resort setting, a
multifunction card allows an individual access to
restaurants, shopping, sports and entertainment
activities, lodging while keeping track of loyalty
points.
o 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
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paper medium. Other applications could include the
administration of welfare and Medicaid benefits and
other government payments.
o 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.
o 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.
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.
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<PAGE>
Smart card applications are the result of creating innovative
solutions to the needs of consumers. This requires significant experience in
software development and knowledge of a variety of business sectors.
Research and Development
The Company has expended substantial resources in the
development of its products. The Company has capitalized software development
costs in the aggregate amount of $3,516,928 from inception to December 31, 1997,
and $439,707 and $236,946 for the years ended December 31, 1997 and 1996,
respectively. In addition, the Company expensed $102,000 as research and
development costs for the year ended December 31, 1997.
Government Regulation
The Company can provide no assurance that a Federal, state or
foreign agency will not attempt to regulate its activities. The principal
regulatory issues presently before the Company are as follows:
Regulation E governs certain electronic funds transfers made
by regulated financial institutions and providers of access devices and
electronic fund transfer systems. Regulation E requires written receipt for
transactions, monthly statements, pretransaction disclosures and error
resolution procedures. Although certain aspects of the Company's services may be
subject to Regulation E, the Company believes that most of its services are not
subject to Regulation E. There can be no assurance that the Federal Reserve
Board will not require all of the Company's services to comply with Regulation
E, or revise Regulation E, or adopt new rules and regulations for electronic
funds transfers that could lead to increased operating costs for the Company,
and could also reduce the convenience and functionality of the Company's
services, possibly resulting in reduced market acceptance. In addition, if the
Federal Reserve Board challenges the Company's position, the costs of responding
to such a challenge could result in significant drains on the Company's
financial and management resources, which could result in significant drains on
the Company's business, financial condition or operating results.
The management believes that current state and federal
regulations concerning electronic commerce do not apply to the current product
line. However, there is a move towards taxation of Internet use by several
states including the state of Washington. There are some strategic plans under
consideration to conduct commerce on the Internet using the Company's core
technology. This technology is being developed with a strict eye on these
legislative issues and the company management subscribes to industry watch
publications that address these issues. Planning for such eventualities assures
minimal interruption to the business of the Company should these laws be
enacted.
Copyrights, Trademarks, Patents, Proprietary Rights and Licenses
As of June 30, 1998, the Company held no patents or other
registered intellectual property rights with respect to its smart card products.
The Company may prepare applications for copyrights for intellectual property,
to be filed within the statutory time limits. Such applications would relate to
toolkits for smart card programming applications as well as certain commercial
application of the technology. However, the Company has historically viewed
these items as trade secrets and relied on protection under those rules. There
can be no assurances that such copyrights will be granted, or if granted, will
have any commercial value.
Although the Company does not believe that its products or
services infringe on the rights of third parties, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that any such assertion will not result in any costly litigation or
require the Company to cease using, or obtain a license to use, intellectual
property rights of such parties.
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<PAGE>
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 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION.
General
Since its inception, the Company has undertaken a program to
develop the hardware and software products and expand the transaction processing
services that it offers. The Company has invested heavily in designing and
developing its proprietary hardware and application software systems and in
establishing its sales and marketing capabilities. The Company plans to continue
these efforts in preparation for and anticipation of the growth in smart card
based electronic commerce that the company expects will create a substantial
market for its data and transaction processing services. The Company has also
made investments in computers, networking systems and unattended kiosk
equipment.
As a result of operating costs associated with these
activities, the Company has recorded significant operating losses since its
inception. The Company's operating expenses were $2,762,117, $2,308,796, and
$3,577,780 for the years ending December 31, 1995, 1996 and 1997, respectively.
The Company recorded losses of $2,651,547, $2,832,877, and $3,586,521 for the
years ending December 31, 1995, 1996 and 1997, respectively.
The Company's business model is based upon the Company's
contracting large membership based businesses to be a 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.
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 this Registration Statement on Form
10-SB. 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
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<PAGE>
Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995".
FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
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 declined throughout
1996 and 1997.
The Company has signed pilot agreements with the Department of
Education in the State of Hawaii for the implementation of an electronic school
lunch program and with First Hawaiian Bank for the use of smart cards in a
retail program. The Company believes it will continue to report minimal revenues
until additional significant contracts are signed or until the existing
contracts proceed through the pilot stage to a full rollout.
Gross Margin. The Company's gross margin as a percentage of
revenues was 86.51%, 39.87%, and 68.45% for the years ending 1995, 1996 and 1997
respectively. The Company's gross margin percentage is primarily a result of the
sales mix between high margin transaction processing fees and lower margin
hardware and smart card sales. Accordingly, the gross margin declined in 1996 as
compared to 1995 due to a higher volume of transaction processing fees as a
percentage of total revenues in 1995 as compared to 1996, and a higher
percentage of credit card chargeback expenses that occurred in 1996 than in
1995. Similarly, gross margins increased in 1997 as compared to 1996 due to a
lower percentage of credit card chargeback expenses in 1997 as compared to 1996
and a greater percentage of lower margin smart card sales that occurred in 1996
than in 1997.
The Company's future gross margin percentages will continue to
be a function of its sales mix between hardware sales and transaction processing
fees. Although this mix is difficult to predict, generally margins will be lower
at the beginning of a new client system roll out due to the intensity of smart
card readers and smart card sales. Once the initial rollout is completed, gross
margins are expected to increase due to a sharp increase in use of the smart
card by cardholders and the resulting transaction processing fees.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses decreased $299,204 or 15.35% in 1996 as compared to
1995. The higher level of selling, general and administrative expenses in 1995
as compared to 1996 is primarily a result of a net receivable write off of
$486,755 as a result of the Company's acquisition of Sprinticket in 1995.
Selling, general and administrative costs increased $1,125,212 or 68.18% in 1997
as compared to 1996 primarily as a result of expanded payroll costs associated
with an increased number of full time and contract employees. The Company had
staff levels of between fifteen and thirty-five employees as of the end of 1997
as compared to eight to fifteen throughout 1996. The Company expects the level
of selling, general and administration costs to increase substantially as a
result of increased marketing activities and an increase in operating and
technical personnel to support its sales revenues and continued development of
new products and concepts. Additionally, the Company has leased a new 8,700
square foot building in Santa Rosa, California which has been refurbished into a
new state of the art transaction-processing center. Construction of the facility
buildout occurred in the second and third quarters of 1997 and was occupied in
September 1997. Additionally, the Company incorporated a wholly owned subsidiary
and opened a sales and marketing office in Honolulu, Hawaii during the third
quarter 1997.
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<PAGE>
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 Costs. 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 to 1996 due to increases in technical
staff and software costs acquired in connection with the purchase of minority
interests in SPRINTICKET, Inc.
The Company notes that given prevailing standards for the
accounting for software development costs, the Company would, if it were
determined that an impairment of software costs existed, write down the value at
which such software development costs are carried in the Company's financial
statements. Any such write down, if made, would be reflected as a charge to
operations in the period any such impairment was determined and could have a
material adverse effect on the Company's financial position and the results of
operations for such period. The Company believes its capitalized software costs
is not impaired, and is stated at net realizable value.
Depreciation. Depreciation increased $46,296 or 61.75% in 1996
compared to 1995 primarily due to an increase in capital expenditures in 1996
and a full year of depreciation on the unattended kiosk systems purchased in
1995. Depreciation increased $87,545 or 72.19% in 1997 as compared to 1996 due
to an increase in capital expenditures of $483,693 which resulted primarily from
the addition of computer equipment to support an increase in technical and
marketing activities and personnel, and the build-out of the Company's Santa
Rosa, California transaction processing center.
Interest. Interest expense increased $39,706, or 12.1%, in
1996 compared to 1995 due primarily to increases in the total debt outstanding.
In the third and fourth quarters of 1996, the Company received sufficient funds
from sales of its common stock to significantly pay down its long-term debt. In
addition, the Company successfully restructured its bank debt and converted
$1,470,331 of interest bearing debt to common stock. In 1997, the Company
reduced its long-term debt by $40,250 and received proceeds from its initial
public offering and the exercise of stock warrants and options totaling
$5,875,092. As a result of the decrease in long-term debt in 1997 and increased
interest income earned from investing the proceeds of stock sales, net interest
expense declined $316,271, or 86.1%, in 1997 as compared to 1996. The Company
anticipates that its future borrowings and interest expense will continue to
significantly decline.
Liquidity and Capital Resources
The Company's working capital was $3,148,595 and $1,496,074 at
December 31, 1997 and 1996, respectively. The increase in working capital was
primarily the result of receipt of proceeds from the sale of 833,333 shares of
common stock in the Company's initial public offering and the exercise of stock
warrants and options in 1997. The net proceeds from the sale of the shares were
$4,857,956. The Company also received $1,017,136 in 1997 from the exercise of
stock warrants and options. In the third quarter 1997, the Company restructured
the payment terms of a $364,000 note payable to a bank previously due in July
1997 to be payable in equal quarterly installments through May 1999. In
addition, the Company entered into a master lease agreement with a bank, which
provides up to $400,000 of credit to the Company for the lease of certain
computer and office equipment and furniture for a period of three years. The
lease provisions require the Company to maintain $200,000 in a certificate of
deposit at the bank provided as collateral for the lease and to deposit
additional funds if available cash and cash equivalents are not maintained above
$800,000; of the $200,000 collateral, $70,500 was classified as restricted cash
at December 31, 1997. Also, at December 31, 1997 the Company had drawn down
approximately $141,000 on the lease line of credit and has approximately
$259,000 available.
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<PAGE>
The Company has historically relied upon proceeds from the
sale or issuance of its common shares and from the issuance of notes payable to
satisfy its working capital requirements. The Company expects to continue to
depend upon equity financing to fund operations and satisfy its working capital
needs until they are able to generate significant sales or achieve
profitability. There can be no assurance that the Company will achieve sales of
the magnitude 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.
FISCAL QUARTERS ENDED MARCH 31, 1998 AND 1997
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 ended March 31, 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 $12,718 for the three months
ended March 31, 1998, as compared to the corresponding period in 1997 due to a
decrease in sales of smart and affinity cards in 1997, 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 concentration on its smart card systems marketing
efforts.
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 margin percentage was 61% and 60% for the three months ended March 31,
1998 and 1997, respectively.
The Company's future gross margin percentages is 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 $636,705 or 112% during the three months
March 31, 1998, as compared to the corresponding period 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-three full-time employees at March 31, 1998, as
compared to eighteen in 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 administration costs to increase
substantially as a result of increased
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<PAGE>
marketing activities and an increase in the number of operating and technical
personnel necessary to support its expected sales efforts and continued
development of new products and concepts. 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
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, 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 $19,829 or 14% for the three months ended March 31, 1998 compared to
the corresponding period in 1997. This increase is due to continued
capitalization of software costs as a result of the Company's product
development efforts. Software costs capitalized were higher in 1997, as compared
to 1998, due to software costs acquired in connection with the purchase of
minority interest in SPRINTICKET, Inc. (see Note 4 under Notes to Consolidated
Financial Statements).
The Company notes that given prevailing standards for the
accounting for software development costs, the Company would, if it were
determined that an impairment of software 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 $38,368 for the three
months ended March 31, 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 three months ended March 31,
1998, the Company had net interest income as compared to interest expense for
the three months ended March 31, 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 $1,385,390 and $3,148,595 at
March 31, 1998 and December 31, 1997, respectively. The higher working capital
at December 31, 1997, as compared to March 31, 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 the net loss
incurred in the first quarter of 1998. In May 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. Also 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. 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.
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. In addition,
the Company has spent $394,436 in leasehold improvement and
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<PAGE>
computer equipment costs to build out its new transaction processing facility in
Santa Rosa, CA. The Company expects to continue to incur substantial costs to
complete this facility and its new office in Honolulu, Hawaii, including amounts
for office furniture and computer equipment.
The Company has historically relied upon proceeds from the
sale or issuance of its common shares and from the issuance of notes payable to
satisfy its working capital requirements. The Company expects to continue to
depend upon equity financing to fund operations and satisfy its working capital
needs until they are able to generate significant sales or achieve
profitability. There can be no assurance that the Company will achieve sales of
the magnitude 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.
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 July 31, 1998, the Company has sold
100,000 shares at $15.00 per share to two accredited investors. 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; Allen & Company Incorporated is receiving a
placement fee of 5% of the purchase price per share.
As of the date of this filing, the Company has determined that
it is in breach of one of the financial covenants contained in its $400,000
lease financing arrangements. The Company may cure such breach by posting
approximately $200,000 in additional collateral or by repaying the
uncollateralized balance of the lease of approximately $200,000. The Company
intends to use a portion of the proceeds from the sale of the Shares to effect
such cure. Alternatively, the Company may seek to renegotiate its lease
financing arrangements with the lender, although there can be no assurance that
the Company will be able to do so on reasonable terms acceptable to the Company.
Item 3. DESCRIPTION OF PROPERTY.
The Company leases its principal facilities totaling
approximately 8000 square feet in Woodinville, Washington. The lease expires in
2000. The Company believes that its existing space will be adequate through at
least 2000. The Company has also leased additional space for a transaction
processing office and marketing office in Santa Rosa, California, and a
marketing office in Honolulu, Hawaii.
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth certain information regarding
the beneficial ownership of the Company's Common Stock as of June 30, 1998, by
(i) each person who is known by the Company to own beneficially more than 5% of
the Company's outstanding Common Stock; (ii) each of the Company's officers and
directors; and (iii) all officers and directors as a group.
As of July 31, 1998, there were 13,004,487 shares of
Common Stock outstanding. Each share of Common Stock is entitled to one vote per
share.
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<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) 21.4%
711 Fifth Avenue
New York, New York 10022
- --------------------------------------------------------------------------- -------------------- ------------------------
Deferred Compensation Trust for Carey F. Daly, II(3) 1,876,978 14.4%
1221 North Dutton Ave.
Santa Rosa, California 95401
- --------------------------------------------------------------------------- -------------------- ------------------------
Officers and Directors:
Carey F. Daly, II 552,459(4) 4.2%
1221 North Dutton Ave.
Santa Rosa, California 95401
- --------------------------------------------------------------------------- -------------------- ------------------------
Mark T. Schuur 6,667(5) *
14201 NE 200th Street
Woodinville, WA 98072
- --------------------------------------------------------------------------- -------------------- ------------------------
Glenn A. Okun 511,303(6) 3.9%
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
- --------------------------------------------------------------------------- -------------------- ------------------------
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 66,667 shares, which options are
currently exercisable. Excludes (a) 203,000 shares owned by
Mr. Daly's wife, (b)options to acquire 133,333 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.
(5) Excludes options to acquire 28,333 shares, which options are
not currently exercisable.
(6) Includes 75,000 shares owned by Mr. Okun jointly with his
wife.
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Item 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS.
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, MD. He also
worked for major computer companies as a systems engineer in Baltimore, Maryland
from 1970 through 1973. He received an LLB degree in Business Law from LaSalle
University in 1974 and a BS degree in Accounting as well as an AA in Computer
Science from Baltimore Business College in 1968.
Mr. Daly is the software engineering designer of the
SPRINTICKET product line, the Pathways Medical smart card system, the Pathways
E-Teller Transaction Processing System, as well as, several other commercial
software systems.
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 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
-18-
<PAGE>
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.
Item 6. EXECUTIVE COMPENSATION.
The following table shows compensation for services rendered
to the Company during the fiscal years ended December 31, 1997, 1996 and 1995,
respectively, by the Chief Executive Officer, the Vice President, and the 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 $100,000 during the fiscal years ended December 31,
1997, 1996 and 1995. Therefore, pursuant to Item 402 of Regulation S-B, only
compensation for each of the Chief Executive Officer, the Vice President, and
the Chief Financial Officer.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------------------- -------------------------------------------
Awards Payout
s
--------------------------------- ---------
Other Annual Securities All Other
Compen Restricted Underlying LTIP Compen-
Name and Principal sation Stock Options/SARs(1) Payout sation
Position Year Salary ($) Bonus ($)(c) ($) Award(s) ($) (#) s ($) ($)
- --------------------------- ------ ------------- ------------- --------------- --------------- ----------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carey F. Daly, II, 1997 $200,000 $20,000 $ 8,333(a) 0 0 0 0
President and Chief 1996 200,000 0 12,500(a) 0 200,000/0 0 0
Executive Officer 1995 137,809 0 0 0 0 0
- --------------------------- ------ ------------- ------------- --------------- --------------- ----------------- ----------- -------
Mark F. Schuur, 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.
Item 7. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.
Mr. Carey F. Daly, II, the President and Chief Executive
Officer of the Company, has previously personally guaranteed $1,292,500
principal amount of indebtedness of the Company. In May 1995, April 1996 and
September 1996, the Company issued an aggregate of 646,250 shares of its Common
Stock to Mr. Daly in consideration for his entering into such guaranty.
-19-
<PAGE>
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.
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.
Item 8. DESCRIPTION OF SECURITIES.
The following is a summary of the provisions of the Company's
Certificate of Incorporation and By-Laws, and is qualified in its entirety by
reference thereto.
The Company is authorized to issue up to 50,000,000 shares of
Common Stock, par value $0.01 per share, and 1,000,000 shares of Preferred
Stock, par value $0.01 per share ("Preferred Stock"). There are currently
13,004,487 shares of Common Stock outstanding and no shares of Preferred Stock
outstanding.
The Company's Certificate of Incorporation provides that the
Board of Directors, without stockholder approval, has the authority to issue
Preferred Stock from time to time in series and to fix the stockholder approval,
has the authority to issue Preferred Stock from time to time in series and to
fix the designation, powers (including voting powers, if any), preferences and
relative, participating, optional, conversion and other special rights and the
qualifications, limitations and restrictions of each series.
No holder of Common Stock has any pre-emptive right to
subscribe for any securities of the Company. All outstanding shares of capital
of the Company are fully paid and non-assessable. Holders of Common Stock are
not entitled to cumulative voting and are entitled to one vote per share with
respect to all matters that are required by law to be submitted to the
stockholders, including the election of directors.
The transfer agent for the Company's Common Stock is American
Stock Transfer Company, 40 Wall Street, New York, New York.
PART II
Item 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS.
The Company's Common Stock is traded in the NASDAQ over-the-
counter market under the symbol PTHW. As quoted in the Monthly Statistical
Reports of the National Association of Securities
-20-
<PAGE>
Dealers, Inc., the approximate high and low closing prices for each fiscal
quarter in the two fiscal years ended December 31, 1996 and December 31, 1997
were as follows:
Common Stock Prices
-------------------
<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 August 3,
1998), the Company's Common Stock had a high price of $20.38 and a low of
$19.00.
These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
As of June 30, 1998, there were approximately 74 holders
of record of the Company's Common Stock. This number of holders of record does
not include beneficial owners of the Company's Common Stock, which shares are
held in the names of various security holders, dealers and clearing agencies.
The Company believes that the number of beneficial owners of its Common Stock
held by others or in nominee names exceeds 440 in number. The Company has not
paid any cash dividends, and does not anticipate doing so in the immediate
future as it intends to invest any earnings in the development of the Company's
business.
Item 2. LEGAL PROCEEDINGS.
Not applicable.
Item 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
Item 4. RECENT SALES OF UNREGISTERED SECURITIES.
The Company offered its common stock to the public in July
1997 pursuant to Regulation A of the Securities Act of 1993, as amended
("Securities Act"). The Company sold 833,333 shares of Common Stock for a
purchase price of $6.00 per share. The offering commenced on July 15, 1997, and
terminated on July 21, 1997. All shares offered were sold, providing $5,000,000
in gross proceeds to the Company.
In June 1996, the Company sold 4,368,885 shares of Common
Stock to Allen & Company Incorporated for $3,250,000 and 10,000 shares of Common
Stock to 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. 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
-21-
<PAGE>
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. Blair 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. The offering is being conducted pursuant to Rule 506 of
Regulation D under the Securities Act. As of July 31, 1998, the Company has sold
100,000 shares at $15.00 per share to two accredited investors. The terms of the
offering provide that the Company may sell up to 700,000 shares of Common Stock
at an initial purchase price of $15.00 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; Allen & Company Incorporated is
receiving a placement fee of 5% of the purchase price per share.
Item 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify under said section from and against any and
all expenses, liabilities or other matters referred in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-Law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person. The
Company will have the power to purchase and maintain officers' and directors'
liability insurance in order to insure against the liabilities for which such
officers and directors are indemnified pursuant to its By-Laws.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS
CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING PROVISIONS, OR OTHERWISE, THE
COMPANY HAS BEEN INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE
COMMISSION SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT
AND IS THEREFORE
-22-
<PAGE>
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).
-23-
<PAGE>
PART F/S
-24-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
The Pathways Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Pathways
Group, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the three years ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Pathways Group,
Inc. and Subsidiaries as of December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for the three years ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND
Seattle, Washington
February 24, 1998
F-1
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------ ------------
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
F-3
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
---------------------------
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Stockholders' deficit, January 1, 1995 417,500 $ 15,118 $ 1,974,972 $ (3,760,664) $ (1,770,574)
Issuance of common stock for cash 210,000 2,100 207,900 210,000
Issuance of common stock upon conversion of
note payable to stockholder 100,000 1,000 99,000 100,000
Issuance of common stock upon conversion of
notes payable to individuals 150,000 1,500 148,500 150,000
Issuance of common stock in connection with
the acquisition of Sprinticket, Inc. 819,500 8,195 811,305 819,500
Obligation to issue common stock for loan
guarantees by a stockholder 50 4,950 5,000
Issuance of common stock for loan guarantees
by a stockholder 757,000
Issuance of warrants to purchase common stock 4,356 431,244 435,600
Net loss (2,651,547) (2,651,547)
------------ ------------ ------------ ------------ ------------
Stockholders' deficit, December 31, 1995 2,454,000 32,319 3,677,871 (6,412,211) (2,702,021)
Issuance of common stock for cash 5,162,619 51,626 5,208,374 5,260,000
Issuance of common stock for investment banking
services to stockholder 300,000 3,000 297,000 300,000
Issuance of common stock for loan guarantees to
stockholder 200,000 2,000 198,000 200,000
Issuance of common stock for loan guarantees to
stockholder (earned and accrued prior to 1996) 342,292
Exercise of warrants to purchase common stock
by stockholder 440,000 44 4,356 4,400
Issuance of common stock upon conversion of notes
payable (including 1,303,672 shares to stockholders) 1,470,331 14,703 1,455,628 1,470,331
Issuance of common stock for wages, interest, consulting
and professional fees and conversion of accrued
expenses (including 862,899 shares to stockholders) 1,161,762 11,618 1,150,144 1,161,762
Issuance of common stock for acquisition of minority
interest in SPRINTICKET, Inc. 225,000 2,250 222,750 225,000
Exchange of land for common stock of Pathways
International, Ltd. (125,000) (125,000)
Net loss (2,832,877) (2,832,877)
------------ ------------ ------------ ------------ ------------
Stockholders' equity, December 31, 1996 11,756,004 117,560 12,214,123 (9,370,088) 2,961,595
Redemption of common stock for cash (33,737) (337) (27,663) (28,000)
Issuance of common stock for convertible debenture 3,000 30 2,970 3,000
Issuance of common stock upon exercise of stock
options and warrants 345,887 3,459 1,013,677 1,017,136
Net proceeds from initial public offering of common stock 833,333 8,333 4,849,623 4,857,956
Net loss (3,586,521) (3,586,521)
------------ ------------ ------------ ------------ ------------
Stockholders' equity, December 31, 1997 12,904,487 $ 129,045 $ 18,052,730 $(12,956,609) $ 5,225,166
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,586,521) $(2,832,877) $(2,651,547)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 208,354 121,269 74,973
Amortization and write-off of software 593,459 537,232 737,645
Investment banking services 300,000
Loan guarantee fees 200,000
Issuance of common stock for wages, interest,
consulting and professional fees 281,573
Issue of warrants to purchase common stock 435,600
Loan guarantee fees to stockholder 5,000
Write-off of net accounts receivable 486,755
Effects of changes in operating assets and
liabilities, net of effects from acquisition
of businesses:
Trade accounts receivable 36,018 (77,965) (16,870)
Inventory 56,963 (331,857)
Prepaid expenses and deposits (101,407) 29
Other assets (137,913) (38,838) 2,268
Accounts payable (335,404) 107,554 75,938
Accrued expenses (120,839) (206,571) 592,771
----------- ----------- -----------
Net cash used in operating activities (3,387,290) (1,940,480) (257,438)
----------- ----------- -----------
Cash flows from investing activities:
Restricted cash (70,500)
Capital expenditures (542,752) (59,059) (7,528)
Capitalized software development costs (439,707) (236,946) (301,165)
Cash acquired in acquisition of businesses 55,374
----------- ----------- -----------
Net cash used in investing activities (1,052,959) (296,005) (253,319)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on notes payable to banks (34,750) (517,532) (15,993)
Principal payments on notes payable to stockholders (2,500) (111,634) (2,385)
Principal payments on notes payable to others (517,161) (2,682)
Redemption of common stock (28,000)
Proceeds from notes payable to banks 4,361
Proceeds from notes payable to stockholders 35,670 130,568
Proceeds from notes payable to others 463,500 195,659
Proceeds from issuances of common stock,
net of offering costs of $142,044 5,875,092 5,264,400 210,000
----------- ----------- -----------
Net cash provided by financing activities 5,809,842 4,617,243 519,528
----------- ----------- -----------
Increase in cash and cash equivalents 1,369,593 2,380,758 8,771
Cash and cash equivalents, beginning of year 2,390,127 9,369 598
----------- ----------- -----------
Cash and cash equivalents, end of year $ 3,759,720 $ 2,390,127 $ 9,369
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
THE COMPANY
The accompanying consolidated financial statements include the accounts of
The Pathways Group, Inc. ("TPG") and its wholly-owned and majority-owned
subsidiaries as of December 31, 1997 and 1996 and for the three years ended
December 31, 1997. All intercompany balances and transactions have been
eliminated. TPG's subsidiaries include Pathways International, Ltd.
("PIL"), SPRINTICKET, Inc. ("ST"), PT Link, Inc. ("PT Link") and the
Pathways Group, a wholly-owned subsidiary incorporated in the state of
Hawaii in August 1997. TPG and its subsidiaries (the "Company") are
primarily engaged in providing specialized transaction processing services
through the development of proprietary software and hardware systems
including credit card and multiple application smart card technologies.
The Company derives its revenue principally from transaction processing
fees charged to the merchant and the sale of related terminals, hardware
systems and smart cards.
BUSINESS COMBINATIONS
In April 1995, TPG acquired 77.53% of the outstanding stock of ST through
the issuance of 819,500 shares of TPG's common stock. This transaction has
been accounted for as a purchase in accordance with generally accepted
accounting principles.
A summary of the allocation of the purchase price for this acquisition is
as follows:
<TABLE>
<S> <C>
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
-----------
-----------
</TABLE>
In 1996 and 1997, TPG acquired the remaining minority interest in ST. The
Company's acquisition of the remaining minority interest of ST was
accounted for as a purchase with the purchase price of $300,000 being
allocated to software and amortized in accordance with the Company's
amortization policy.
F-6
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:
REINCORPORATION
In May 1997, TPG reincorporated in the State of Delaware. At such time,
the number of authorized shares of common stock was reduced from
500,000,000 to 50,000,000. The par value was changed to $.01 per share and
1,000,000 shares of preferred stock were authorized. All prior periods
presented have been adjusted to reflect these changes in the capital stock
accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt securities purchased with an original
maturity of three months or less to be cash equivalents. As of December
31, 1997 and 1996, cash equivalents consisted of money market accounts and
U.S. Treasury Bills.
INVENTORY
Inventory is stated at the lower of cost (as determined by the first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is
provided by the straight-line method over the estimated useful lives of the
property and equipment which is estimated to be five years, with the
exception of computer equipment as to which the life is three years.
Expenditures for renewals and betterments are capitalized; expenditures for
maintenance and repairs are charged to expense as incurred. The cost and
accumulated depreciation of assets sold or otherwise disposed of are
removed from the accounts, and the related gains and losses are included in
the results of operations.
F-7
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
SOFTWARE
Software development costs incurred in conjunction with product development
are charged to expense until technological feasibility is established.
Thereafter, all software development costs are capitalized and reported at
the lower of unamortized cost or net realizable value of each product. In
1997, approximately $102,000 was charged to research and development. In
1996 and 1995, research and development expenses were not material. The
establishment of technological feasibility and the on-going assessment of
the recoverability of costs require considerable judgment by the Company
with respect to certain external factors, including, but not limited to,
anticipated future gross product revenues, estimated economic life and
changes in software and hardware technology. After consideration of the
above factors, the Company amortizes capitalized software costs by the
greater of (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated economic life
of the product including the period being reported on, generally five
years.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is recorded for the amount of income tax
payable or refundable for the period increased or decreased by the change
in deferred tax assets and liabilities during the period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents and accounts receivable
approximate fair value due to their short-term maturities. The carrying
value of debt approximates their estimated fair values because the rates of
interest on the debt approximates current interest rates for similar
obligations with like maturities.
F-8
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its cash with high quality financial
institutions. At times, such cash may exceed federally insured limits.
Approximately 55% and 63% of accounts receivable at December 31, 1997 and
1996 are concentrated with one customer.
REVENUE RECOGNITION AND REVENUE SHARING AGREEMENTS
Revenue from hardware and software sales are recognized when a product is
shipped. The Company has revenue sharing and transaction processing
agreements with merchants who process commercial transactions through the
Company's hardware and software systems provided on site to the merchants.
Transaction processing fee revenue is recognized at the time transactions
are processed and the related transaction fee has been collected.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates and assumptions.
It is reasonably possible that the estimates of anticipated future gross
revenues and the remaining estimated economic life of the Company's
products used to calculate amortization of software development costs may
be reduced significantly in the near term. As a result, the carrying
amount of the capitalized software costs may be reduced materially in the
near term.
F-9
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVENTORY:
Inventory at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
Computer equipment and software includes $56,384 for software purchased but
not placed in service in 1997.
5. OTHER ASSETS:
In 1992, the Company acquired land for $250,000 in exchange for a $125,000
note payable and the issuance of 10,000 shares of common stock. In August
1996, the Company entered into an agreement whereby the land was returned
to the seller in exchange for the note payable and the shares of common
stock. There was no gain or loss as a result of the settlement.
F-10
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
6. NOTES PAYABLE TO BANKS:
Notes payable to banks at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
F-11
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. NOTES PAYABLE TO BANKS, CONTINUED:
The contractual principal maturities of notes payable to banks at December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 551,991
1999 336,712
2000 107,901
2001 65,287
----------
$1,061,891
----------
----------
</TABLE>
7. ACCRUED EXPENSES:
Accrued expenses at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES:
At December 31, 1997, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $10,794,000 which expire
through 2012. As a result of acquisitions, the availability of these net
operating losses will be limited to a prescribed amount each year as
specified in the Internal Revenue Code. Net operating losses accumulated
through the dates of acquisition of PT Link and ST will be limited to
their separate taxable income.
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate of 34%:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal income tax benefit at statutory rate $(1,219,417) $ (963,178) $ (901,526)
Losses which provide no current tax benefit 1,215,851 949,604 899,884
Other, net 3,566 13,574 1,642
----------- ----------- -----------
Income tax benefit $ - $ - $ -
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Deferred income taxes under the liability method reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
F-13
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES, CONTINUED:
The significant components of the Company's deferred income tax assets and
liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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 $ - $ -
----------- -----------
----------- -----------
</TABLE>
A full valuation allowance has been recorded at December 31, 1997 based on
management's determination that the recognition criteria for realization
has not been met.
9. COMMITMENTS:
LEASE COMMITMENTS
The Company leases its facilities in Woodinville, Washington, Santa Rosa,
California and Honolulu, Hawaii and also leases certain vehicles and office
equipment under operating lease agreements expiring in the years 1998 to
2002. In 1997, the Company entered into a master lease agreement with a
bank which provides up to $400,000 of credit to the Company for the lease
of certain computer and office equipment and furniture. The lease is for a
period of 34 months and contains an option to acquire the equipment at the
end of the lease term for the fair market value of the equipment. The
lease provisions require the Company to maintain up to $200,000 in a
certificate of deposit at the bank as collateral for the lease, and to
deposit additional funds if the Company's cash and cash equivalents are not
maintained above $800,000. Of the $200,000, $70,500 has been classified as
restricted cash at December 31, 1997.
F-14
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. COMMITMENTS, CONTINUED:
LEASE COMMITMENTS, CONTINUED
This lease has been accounted for as an operating lease. As of December
31, 1997, the Company has drawn approximately $141,000 on the lease line
and has approximately $259,000 available. The approximate future minimum
rental commitments as of December 31, 1997 under these operating leases are
as follows:
<TABLE>
<S> <C>
1998 $ 295,000
1999 262,000
2000 252,000
2001 158,000
2002 96,000
----------
$1,063,000
----------
----------
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $147,000, $100,000 and $61,000, respectively.
PURCHASE COMMITMENTS AND DEPOSITS
As of December 31, 1997, the Company has made deposits of $118,087 towards
purchase commitments on furniture and computers totaling $223,112. The
deposits are included in other assets.
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS:
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain employees
and officers. The agreements provide for future salary, benefits and stock
option grants to the employee/officers during their terms of employment.
The agreements also contain non-compete restrictions on the
employee/officers and provide for certain severance obligations in the
event of termination without cause (as defined). In addition, one of the
officers receives one-half share of TPG common stock for each dollar of
debt personally guaranteed by the officer. In 1996 and 1995, the officer
earned 200,000 and 5,000 shares of TPG common stock under this provision.
F-15
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS, CONTINUED:
STOCK OPTIONS
In December 1997, the Company's Board of Directors adopted The Pathways
Group, Inc. 1996 Stock Incentive Plan (the "Plan"), which provides for the
issuance of incentive stock options ("ISOs") and non-qualified options to
key management and reserved a total of 2,000,000 shares of common stock
pursuant to the Plan.
ISOs may be issued only to employees of the Company and have a maximum term
of 10 years from the date of grant. The exercise price for ISOs may not be
less than 100% of the estimated fair market value of the common stock at
the time of the grant, and the aggregate fair market value (as determined
at the date of the grant) of shares issuable upon the exercise of ISOs for
the first time in any one calendar year may not exceed $100,000. In the
case of options granted to holders of more than 10% of the voting power of
the Company, the exercise price may not be less than 110% of the estimated
fair market value of the common stock at the time of grant, and the term of
the option may not exceed five years. Options become exercisable in whole
or in part from time to time as determined by the Board of Directors, which
will administer the Stock Incentive Plan. Generally, options vest over
periods ranging from one to three years.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock Based Compensation". The Company has elected to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair value of the
Company's stock at the date of grant over the exercise price to be paid to
acquire the stock.
F-16
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS, CONTINUED:
STOCK OPTIONS, CONTINUED
Option activity for the years ended December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
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
------- --------
------- --------
</TABLE>
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
$ 2.88 213,333 9 66,667 $3.00
15.00 100,000 10
24.00 114,000 10
</TABLE>
F-17
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS, CONTINUED:
STOCK OPTIONS, CONTINUED
Pro forma information regarding the net loss is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee
stock options granted after December 31, 1995 under the fair value method
of that statement. The fair value of options granted in 1997 was estimated
at the date of grant using the Black-Scholes option pricing model assuming
no expected dividends and the following weighted-average assumptions:
risk-free interest rates of 5.79% to 5.93%; volatility of 55%; and expected
lives of 3 to 5 years. The weighted average fair value of options granted
in 1997, as calculated using the Black-Scholes option pricing model, was
$9.85 per option.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
following table presents pro forma net loss and net loss per share for the
year ended December 31, 1997 as if the Company accounted for compensation
expense related to stock options under the fair value method prescribed by
SFAS 123:
<TABLE>
<CAPTION>
December 31,
1997
<S> <C>
Pro forma net loss $ 3,743,575
------------
------------
Pro forma net loss per share $ 0.31
------------
------------
</TABLE>
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:
<TABLE>
<S> <C>
Risk free interest rate 5.76% to 6.16%
Expected lives 10 years
</TABLE>
There was no difference in 1996 compensation expense between the intrinsic
value method as reported by the Company and the fair value method
prescribed by SFAS 123 because no options vested in 1996.
F-18
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. CAPITAL STOCK TRANSACTIONS:
COMMON STOCK
In May 1995, the Company entered into an agreement with an investment
banking firm, Allen & Company Incorporated ("Allen"), whereby Allen is to
assist the Company in developing an overall plan for its corporate and
financial development and advise the Company on a variety of transaction
proposals, including financing and acquisition alternatives. The duration
of the agreement is for two years, with a provision for an automatic
extension of one year, unless either party elects to terminate the
agreement. In connection with the agreement, the Company issued Allen
warrants to purchase 440,000 shares of TPG stock at $.01 per share for
services to be provided by Allen. In 1996, the warrants were exercised for
440,000 shares of common stock by Allen for consideration of $4,400.
In 1996, Allen purchased 39% of the outstanding common stock of TPG for
$3,250,000. Also in 1996, the Company incurred a liability of $300,000 for
services provided by Allen. The Company settled the obligation by issuing
300,000 shares of TPG stock to Allen.
In December 1996, the Company sold through a private placement 783,734
shares of common stock for $2,000,000. In connection with the sale, the
Company issued a warrant for the purchase of 335,886 shares of its common
stock at $2.9772 per share, for an aggregate purchase price of $1,000,000.
In December 1997, the warrant was exercised in full.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
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
</TABLE>
In 1997, the Company changed suppliers of its smart card terminals and
readers. In connection with this supplier change, the Company returned
$122,377 of smart card terminals previously recorded as inventory and
accounts payable to its former supplier.
F-19
<PAGE>
THE PATHWAYS GROUP, INC.
Consolidated Financial Statements (Unaudited)
for the Fiscal Quarter Ended March 31, 1998
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-20
<PAGE>
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,140,041 $3,759,720
Accounts receivable 76,438 66,493
Inventory 214,531 202,749
Prepaid expenses and deposits 92,599 101,407
---------- ----------
Total current assets 2,523,609 4,130,369
Restricted cash 200,000 70,500
Software, net 1,519,102 1,605,098
Property and equipment, net 980,177 722,678
Other assets 79,028 188,195
---------- ----------
Total assets $5,301,916 $6,716,840
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks, current maturities $569,359 $551,991
Accounts payable 375,524 206,986
Accrued expenses 193,336 222,797
---------- ----------
Total current liabilities 1,138,219 981,774
Notes payable to banks, net of current maturities 364,069 509,900
---------- ----------
Total liabilities $1,502,288 $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 $129,045 $129,045
authorized; 12,904,487 issued and outstanding at
March 31, 1998 and December 31, 1997
Additional paid in capital 18,052,730 18,052,730
Accumulated deficit (14,382,147) (12,956,609)
----------- -----------
Total stockholders' equity 3,799,628 5,225,166
----------- -----------
Total liabilities and stockholders' equity $5,301,916 $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
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Sales, net $ 1,644 $ 14,362
Cost of sales 659 5,666
--- -----
Gross margin 985 8,696
--- -----
Selling, general and administrative expenses 1,205,969 569,264
Amortization of software 161,239 141,410
Depreciation 74,460 36,092
------ ------
Total operating expenses 1,441,668 746,766
--------- -------
Loss from operations (1,440,683) (738,070)
Net interest income (expense) 15,154 (62,487)
------ -------
Net loss $(1,425,529) $(800,557)
============ ==========
Net loss per share $ (0.11) $ (0.07)
Weighted average shares outstanding 12,904,487 11,740,320
</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
three months ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,425,529) $(800,557)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 74,460 36,092
Amortization of software 161,239 141,410
Effects of changes in operating assets and liabilities:
Accounts receivable (9,945) 10,997
Prepaid expenses and deposits 8,808 (67,082)
Inventory (11,782) 23,821
Other assets 109,168
Accounts payable 168,538 (226,417)
Accrued expenses (29,471) (51,054)
-------- --------
Net cash used in operating activities (954,514) (932,790)
--------- ---------
Cash flows from investing activities:
Capital expenditures (331,959) (78,190)
Capitalized software development costs (75,243) (161,501)
Restricted cash (129,500) --
--------- ---------
Net cash used in investing activities (536,702) (239,691)
--------- ---------
Cash flows from financing activities:
Principal payments on notes payable to banks (128,463) (2,500)
Repurchase of common stock -- (28,000)
------------
Net cash used in financing activities (128,463) (30,500)
--------- --------
Decrease in cash and cash equivalents (1,619,679) (1,202,981)
Cash and cash equivalents, beginning of period 3,759,720 2,390,127
--------- ---------
Cash and cash equivalents, end of period $2,140,041 $1,187,146
========== ==========
</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 March 31, 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>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Smart cards and related packaging $160,229 $149,204
Smart card terminals and computer hardware 54,302 53,545
---------- ----------
$214,531 $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-24
<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.
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 under
the trading symbol PTHW.
5. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
For the For the
three months ending three months ending
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash paid for interest $34,652 $90,934
Non-cash transactions:
Notes payable converted to common stock -- $3,000
</TABLE>
F-25
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
2.1* Certificate of Incorporation of the Company
2.2* By-Laws of the Company
10.1* Joint Marketing and Servicing Agreement, dated as of February 19,
1998, between First Hawaiian Bank and The Pathways Group, Inc.
10.2* Development Agreement, dated as of June 5, 1995, between Stephen
A. Gregg and The Pathways Group, Inc.
10.3* Authorization and Loan Agreement (Guaranty Loans) , dated
February 13, 1992, among Towne Bank of Woodinville, U.S. Small
Business Administration and Pathways International Ltd.
10.4* Restructure and Extension Agreement, dated as of July 1, 1996,
between SeaFirst Bank and The Pathways Group, Inc. and Pathways
International Ltd.
10.5* Restructure and Extension Agreement, dated as of July 1, 1997,
between SeaFirst Bank and PT Link Corporation and The Pathways
Group, Inc.
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.
27* Financial Data Schedule (Electronic Filing Only)
</TABLE>
25
<PAGE>
* Incorporated by reference from the Company's Form 10SB filed on April 29,
1998.
** Filed herewith
ITEM 2. DESCRIPTION OF EXHIBITS
The documents required to be filed and as listed on the immediately
preceding Index to Exhibits follow immediately after the signatures below.
26
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE PATHWAYS GROUP, INC.
(Registrant)
Date: August 7, 1998 By /s/ CAREY F. DALY, II
Carey F. Daly, II
Chairman, CEO and President
27
<PAGE>
EXHIBIT 10.6
SCHLUMBERGER ASSOCIATE PROGRAM AGREEMENT
This Associate Program Agreement including the exhibits and
addendum attached hereto ("the Agreement") is made this 16th day of June, 1997,
between the Smart Cards and Systems Division of Schlumberger Technologies, Inc.
("SCHLUMBERGER"), with offices in Moorestown, New Jersey, and The Pathways
Group, Inc., with offices located in Woodinville, Washington, together with all
subsidiary and affiliated companies which it now or hereafter controls
(hereinafter designated "ASSOCIATE").
WHEREAS, SCHLUMBERGER is engaged in the business of designing,
manufacturing, selling and licensing certain Products as defined below;
WHEREAS, ASSOCIATE is engaged in the business of designing,
developing, selling/licensing and supporting Systems which use Products;
WHEREAS, SCHLUMBERGER and ASSOCIATE desire a mutually
beneficial relationship for the sale and/or licensing of Systems and Products to
Customers in the Market as defined below.
In consideration of the foregoing and the mutual promises of
the parties made herein, SCHLUMBERGER and ASSOCIATE agree as follows:
1 DEFINITIONS
The following terms will have the meanings set forth herein:
1.1 "Systems" means computer software programs and hardware
designed, developed, licensed, supported or otherwise provided
to Customers by ASSOCIATE which use Products and/or Licensed
Programs.
1.2 "Products" means the SCHLUMBERGER products listed or described
on Exhibit A attached hereto and which may contain or utilize
Licensed Programs.
1.3 "Licensed Programs" means computer software or firmware
developed by or licensed to SCHLUMBERGER for use with
Products.
1.4 "Customers" means the entities listed on Exhibit B attached
hereto to which ASSOCIATE provides Systems that use Products
or Licensed Programs. SCHLUMBERGER will notify ASSOCIATE in
the event Customers contact SCHLUMBERGER directly for the
purpose of purchasing Products or Licensed Programs.
<PAGE>
1.5 "Market" means the industry segment(s), application type(s)
and/or geographical area described on Exhibit B, attached
hereto.
1.6 "Strategic Associate", "Preferred Associate" and "Business
Associate" are the three Associate classifications contained
in the Associate Program. Each classification is expected to
purchase or cause the purchase of Products from SCHLUMBERGER
annually and/or holds a position in the Market or within the
smart card industry at large as described on Exhibit F
attached hereto.
1.7 "Confidential Information" means the valuable confidential and
proprietary information of SCHLUMBERGER or ASSOCIATE.
1.8 "Disclosing Party" is used to identify SCHLUMBERGER or
ASSOCIATE when either provides Confidential Information to the
other.
1.9 "Receiving Party" is used to identify either SCHLUMBERGER or
ASSOCIATE when either receives Confidential Information from
the other.
2 REPRESENTATIONS AND AGREEMENTS
2.1 ASSOCIATE's beginning classification is Preferred Associate
which will be reevaluated at least once each year by
SCHLUMBERGER and modified if deemed appropriate at the sole
discretion of SCHLUMBERGER.
2.2 ASSOCIATE represents that it has the personnel, knowledge, and
needed to develop smart card applications for the Market,
including but not limited to integrating Products into
Systems, and/or selling, distributing and supporting Products
and Systems.
2.3 During the term of this Agreement, in consideration of
SCHLUMBERGER's sale/license of Products at discounted prices
and at its sole expense, ASSOCIATE will:
2.3.1 Use reasonable efforts to promote, advertise, market
and solicit the sales/licenses of Products which are
appropriate to the Market;
2.3.2 Use reasonable efforts to sell/sublicense Products to
Customers and provide appropriate levels of support;
2.3.3 Select and cause its appropriate employees to attend
and participate in one or more of the training
sessions which are offered from time to time by
SCHLUMBERGER. Training sessions are for the purpose
of instructing ASSOCIATE's employees in the
-2-
<PAGE>
technical data and operation of Products plus
information important to the marketing and sale of
Products. ASSOCIATE will pay all transportation,
lodging, meals and other similar miscellaneous
expenses of its employees who attend training
sessions, at no cost or expense to Schlumberger.
Schlumberger will provide ASSOCIATE with advanced
notification including a brief description of the
subject(s) covered and the time and location of
training sessions. SCHLUMBERGER will pay all expenses
for instructors, materials and equipment needed for
the training sessions at SCHLUMBERGER's facility.
2.3.3.1 SCHLUMBERGER will provide Associates with
training coupons which can be used to enroll
its employees in SCHLUMBERGER's training
sessions free of charge. A fee of $850 will
be charged for each additional attendee.
2.3.3.2 Strategic Associates will receive seven (7)
training coupons annually, Preferred
Associates receive five (5) annually and
Business Associates receive three (3)
annually.
2.3.4 Provide an up-to-date forecast to SCHLUMBERGER on
Products which it expects to purchase or sublicense
from SCHLUMBERGER during the subsequent 12-month
period of time. Reports will be provided to
SCHLUMBERGER during the first full week of January,
April, July and October each year during the term of
this Agreement. Data provided by ASSOCIATE to meet
this requirement will be considered Confidential
Information by SCHLUMBERGER;
2.3.5 Meet all mutually agreed upon sales goals in the
Market;
2.3.6 Comply with all rules, regulations and laws
applicable to ASSOCIATE and its performance under
this Agreement;
2.3.7 Use reasonable efforts necessary to comply with the
terms of this Agreement.
2.4 During the term of this Agreement, SCHLUMBERGER will:
2.4.1 Provide ASSOCIATE with training sessions from time to
time on Products designed and intended to help
ASSOCIATE sell Products to Customers and to develop
or use Products in Systems;
-3-
<PAGE>
2.4.2 Provide ASSOCIATE with advanced notification on
selected new product releases planned by SCHLUMBERGER
in the Market;
2.4.3 Provide ASSOCIATE with appropriate levels of sales and
marketing support;
2.4.4 Provide Products to ASSOCIATE under the discounting
policy defined in Exhibit C;
2.4.5 Grant ASSOCIATE the right to use SCHLUMBERGER
Trademarks as defined herein and subject to the
provisions of Section 4, below;
2.4.6 Use reasonable efforts necessary to meet the terms of
this Agreement.
2.5 This Agreement is non-exclusive, however:
2.5.1 ASSOCIATE will sell and/or license Products to its
Customers on an exclusive basis in each case where
Products meet the specifications, price, time and
delivery requirements of ASSOCIATE and Customer;
2.5.2 SCHLUMBERGER will refer, without prejudice, potential
Customers to ASSOCIATES in good standing serving
their Market.
2.6 ASSOCIATE and SCHLUMBERGER will meet at least once annually
during the term of this Agreement to review and modify the
exhibits attached hereto.
3 SALES OF PRODUCTS
Two types of sales are covered by this Agreement: Sales of Products to
ASSOCIATE for Resale to Customers (VAR or Value Added Reseller Sales)
and Sales of Products Directly to Customer (Direct Sales) on behalf of
ASSOCIATE.
3.1 VAR SALES
3.1.1 In a VAR sales transaction (i) Associate purchases
Products at a discounted price from SCHLUMBERGER
according to the terms and conditions contained
herein and resells them to Customers (ii) Associate's
full and total compensation from SCHLUMBERGER is
contained in the discounted price (iii) Associate
assumes liability for any Customer receivable and is
financially responsible to SCHLUMBERGER regardless of
Customer's payment status.
-4-
<PAGE>
3.1.2 The sale of Products to ASSOCIATE for subsequent
resale to Customers will be made according to the
terms and conditions contained in this Agreement and
will take precedence over any other terms and
conditions which may appear on ASSOCIATE's purchase
order or any other document unless previously
accepted in writing by SCHLUMBERGER. Purchase orders
that were submitted to and accepted by SCHLUMBERGER
prior to this Agreement are excepted.
3.1.3 ASSOCIATE will submit purchase orders for the
purchase of Products to SCHLUMBERGER and SCHLUMBERGER
will not to unreasonably withhold it's acceptance of
said purchase orders.
3.1.4 SCHLUMBERGER will invoice ASSOCIATE for Products when
they ship provided that ASSOCIATE's creditworthiness
was established by SCHLUMBERGER in advance. If not so
established, payment will be made prior to shipment
or COD as determined by SCHLUMBERGER at the time
ASSOCIATE's purchase order is accepted.
3.1.5 Unless otherwise agreed to in advance, all ASSOCIATE
invoices are due and payable within thirty (30) days
from the date of invoice. For any amounts that are
unpaid after the due date, SCHLUMBERGER may without
prejudice to any other rights, either suspend
delivery to ASSOCIATE, ship Products on future
purchase orders COD, or terminate the contract,
and/or charge ASSOCIATE a finance charge of 1.5% per
month on the unpaid balance.
3.1.6 No payment due to SCHLUMBERGER will in any
circumstances be offset against any sum owed by
SCHLUMBERGER to ASSOCIATE whether in respect of the
present transaction or otherwise. No discount for
early payment is authorized. In the event any
proceeding is brought by or against ASSOCIATE under
any bankruptcy or insolvency laws, SCHLUMBERGER will
be entitled to cancel any purchase order then
outstanding and will receive reimbursement for
reasonable cancellation charges.
3.1.7 All prices are inclusive of United States of America
import duty (including brokerage fees) but exclusive
of any present or future sales, revenue, or excise
taxes, or other tax applicable to the Products or
services covered by ASSOCIATE's purchase order or the
manufacture or sale thereof. Such taxes, when
applicable, will be added to the invoice and will be
paid by ASSOCIATE unless ASSOCIATE provides
SCHLUMBERGER with the proper tax exemption
certificates.
-5-
<PAGE>
3.1.8 Unless different terms are agreed to in writing by
SCHLUMBERGER all deliveries of Products to ASSOCIATE,
or to a location specified by ASSOCIATE, will be made
FOB SCHLUMBERGER's designated shipping point, with
freight prepaid. Freight charges will be invoiced to
ASSOCIATE.
3.1.9 Risk of loss will pass to ASSOCIATE at the point of
shipment. SCHLUMBERGER's liability for shipment and
delivery of goods ceases upon delivery of products in
good condition to shipping company or common carrier
designated by ASSOCIATE or ASSOCIATE's representative
or employee. Goods placed in segregated inventory at
the request of ASSOCIATE will be deemed to have been
shipped and invoiced to ASSOCIATE at the time such
goods are placed into segregated inventory and
ASSOCIATE will be responsible for any loss thereto,
except for losses resulting from SCHLUMBERGER's gross
negligence.
3.1.10 All stipulated delivery or shipment dates are
estimates only. SCHLUMBERGER reserves the right to
make deliveries of products in installments and any
delay in delivery of any installment of any one or
more products will not relieve ASSOCIATE of its
obligation to accept and pay for the remaining
deliveries and does not represent a default by
SCHLUMBERGER under this agreement.
3.1.11 Card quantities specified in purchase orders for
custom-manufactured cards are for uninterrupted
production and one shipment to one destination,
unless otherwise specified and agreed to in writing.
Quantity variations of plus or minus 10% will
constitute an acceptable delivery for
custom-manufactured cards and the excess or
deficiency will be billed proportionally.
3.1.12 If materials are furnished by ASSOCIATE to be
incorporated into manufactured products, a supply of
such materials including 10% in excess of the
quantity required to complete the ASSOCIATE's
purchase order will be furnished FOB to a location
designated by SCHLUMBERGER. SCHLUMBERGER accepts no
liability for storage of ASSOCIATE-supplied
materials.
3.1.13 ASSOCIATE will inspect and accept or reject goods
within ten (10) days from receipt or thirty (30) days
from shipment thereof, whichever is earlier. If
ASSOCIATE fails to notify SCHLUMBERGER in writing of
its rejection and the reason therefor within such
time period the ASSOCIATE will be deemed to have
-6-
<PAGE>
accepted such shipment and waived any right to later
reject the goods.
3.1.14 ASSOCIATE's purchase orders may not be canceled,
suspended, changed or returned without written
consent of SCHLUMBERGER. Except for
custom-manufactured cards, Products that have not
been unpacked will be accepted for return with a 15%
handling charge, if SCHLUMBERGER is notified in
writing within 10 days after receipt of shipment by
ASSOCIATE. Custom-manufactured cards cannot be
returned.
3.1.15 If ASSOCIATE requests changes to the design,
specification, or quantity of Products after a
purchase order is accepted by SCHLUMBERGER and if
such changes are accepted by SCHLUMBERGER then
SCHLUMBERGER will prepare a revised quotation. If the
revisions are accepted by ASSOCIATE, the purchase
order will, if required, be amended accordingly.
3.1.16 Prices for custom-manufactured cards are based on
electronic delivery of artwork from ASSOCIATE.
3.1.17 All four-color process designs require press proofs
and ASSOCIATE approval before starting a production
run. Press proofs for other processes are not
required and will not be submitted unless requested.
Charges for proofs are not included in quoted prices
unless specified and will be invoiced separately.
3.1.18 Colors will be matched within reasonable commercial
variations.
3.1.19 Regardless of any disclosure by ASSOCIATE to
SCHLUMBERGER of the contemplated ultimate destination
of the Products, ASSOCIATE will not export, directly
or indirectly, any product acquired hereunder (or the
"direct product" of any Licensed Programs) without
first obtaining an export license from the U.S.
Department of Commerce or other agency of the U.S.
Government, as required.
3.1.20 The prices offered to ASSOCIATE under this Agreement
are based on ASSOCIATE's representation that it will
develop or has developed applications for the Market,
will or has integrated appropriate Products into
Systems, and/or will sell, distribute and support
Products in the Market.
3.1.21 ASSOCIATE's failure to pay in a timely manner for
Products shipped to it will constitute a breach of
this Agreement.
-7-
<PAGE>
3.1.22 With thirty (30) days advanced notification,
SCHLUMBERGER has the right from time to time to
change the price, terms and conditions upon which
ASSOCIATE may purchase Products.
3.1.22.1 Prior to the effective date of a price
increase, ASSOCIATE can submit purchase
orders for Products at the price in effect
before the increase if the requested
delivery date is within ninety (90) days
from the effective date of the price
increase and SCHLUMBERGER card manufacturing
capacity can accommodate said delivery.
3.1.22.2 Products shipped under purchase orders
submitted by ASSOCIATE and accepted by
SCHLUMBERGER prior to the notification date
of a price increase will be shipped and
invoiced at the price that was in effect
when the purchase order was accepted,
providing shipment occurs within ninety (90)
days from the effective date of the price
increase otherwise price will be revised to
new price.
3.1.22.3 Products shipped under purchase orders
submitted by ASSOCIATE and accepted by
SCHLUMBERGER prior to the effective date of
a price decrease will be shipped and
invoiced at the price in effect at the time
of shipment.
3.1.22.4 Purchase orders submitted by ASSOCIATE and
accepted by SCHLUMBERGER prior to the
effective date of changes to the terms and
conditions will be shipped under the terms
and conditions in effect when the purchase
orders were accepted.
3.1.23 SCHLUMBERGER, at its sole discretion, has the right
to discontinue the manufacture and/or sale of
Products covered by this Agreement with at least
ninety (90) days advanced written notification to
ASSOCIATE.
3.1.24 SCHLUMBERGER has the right to modify or change
Products and to add new products at any time.
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<PAGE>
3.1.25 DIRECT SALES
3.1.26 In a Direct Sales transaction (i) ASSOCIATE obtains
Customer's purchase order for Products and forwards
it to SCHLUMBERGER according to the terms and
conditions contained herein (ii) Associate's full and
total compensation from SCHLUMBERGER is a commission
based on the net sales amount after payment is
received from Customer (iii) SCHLUMBERGER assumes
liability for any Customer receivable.
3.1.27 The sale of Products directly to Customers will be
made according to the terms and conditions contained
in this Agreement and will take precedence over any
terms and conditions which may appear on Customer's
purchase order or any other document unless
previously accepted in writing by SCHLUMBERGER.
Purchase orders that were submitted to and accepted
by SCHLUMBERGER prior to this Agreement are excepted.
3.1.28 All purchase orders obtained by ASSOCIATE will be
promptly forwarded to a designated SCHLUMBERGER sales
office and will be subject to acceptance by
SCHLUMBERGER at designated factory or home offices
upon such terms, warranties, and conditions as will
be acceptable to SCHLUMBERGER in its sole discretion.
Without limiting the foregoing, ASSOCIATE will extend
no warranties or guarantees, orally or in writing,
respecting the performance, design, quality,
merchantability, or fitness for purpose of Products,
except such warranties or guarantees as have received
prior written approval by SCHLUMBERGER, and ASSOCIATE
will not promote, advertise, or offer Products upon
any terms, conditions, or prices except as have
received prior written approval by SCHLUMBERGER.
SCHLUMBERGER will have the right at any time and from
time to time, without notice, to change the terms,
conditions, and prices on which orders will be
accepted.
3.1.29 Prices quoted for Products will be in accordance with
the price lists established from time to time by
SCHLUMBERGER and furnished to ASSOCIATE
3.1.30 ASSOCIATE will be entitled to receive sales
commissions ("Commissions") based on the cumulative
Net Sales of SCHLUMBERGER Products sold to Customers
during the term of this Agreement in accordance with
the provisions contained herein.
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<PAGE>
3.1.31 The Commissions payable to ASSOCIATE hereunder will
be calculated in accordance with the schedule set
forth in Exhibit G attached hereto, which schedule
may be changed at any time and from time to time by
SCHLUMBERGER upon thirty (30) days written notice of
such change to ASSOCIATE.
3.1.32 The term Net Sales as used herein will mean an amount
equal to the product obtained by multiplying the unit
price of each Product as shown on the customer
invoice by the number of such Products actually
shipped as determined from the shipping invoices,
less allowances for trade discounts, returns and
allowances, and charges for packaging, crating,
customs fees and duties, transportation, and
handling. The determination of Net Sales to any
Customer by SCHLUMBERGER will be conclusive.
3.1.33 Net Sales will be credited to ASSOCIATE's account
only after Products have been shipped and invoiced
and such invoice has been paid by the Customer.
SCHLUMBERGER will have the exclusive right to
determine whether a purchase order or sales contract
will be accepted and, if so, the date on which
Products will be shipped to a Customer.
3.1.34 SCHLUMBERGER will have the right to debit ASSOCIATE's
account with all or any portion of the amount of any
Commissions paid or credited to ASSOCIATE which is
allocable to refunds or allowances given to the
Customer with respect to Products for any reason.
SCHLUMBERGER will have the exclusive right to
determine if and when the account of any Customer is
to be placed with a third party for collection.
3.1.35 All Commissions due and payable to ASSOCIATE
hereunder will be paid on or before the 25th day of
the month following the month in which payment is
received by SCHLUMBERGER for shipments previously
invoiced. At the time an original invoice is mailed
to a Customer, SCHLUMBERGER will provide ASSOCIATE
with a copy thereof.
3.1.36 Payment of all ASSOCIATE's costs and expenses will be
the sole responsibility of ASSOCIATE.
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<PAGE>
4 CONFIDENTIALITY
4.1 Both SCHLUMBERGER and ASSOCIATE acknowledge that during the
term of this Agreement, each party may become privy to the
Confidential Information of the other party, whether disclosed
in writing or obtained from the other party in any other
manner, which may include but not be limited to inventions,
proprietary developments, trade secrets, price lists, cost
data, marketing information, Customer data, and manufacturing
techniques. Each party acknowledges that all Confidential
Information is and will be the sole, exclusive and valuable
property of the Disclosing Party, and that any use of any of
the Confidential Information by the Receiving Party will be
solely in connection with the performances of its obligations
under this Agreement. The covenants of this Section will
survive any cancellation or termination of this Agreement as
provided herein.
4.2 Receiving Party will maintain in confidence Disclosing Party's
Confidential Information for three (3) years from the date of
disclosure, provided that (a) when the Confidential
Information is disclosed in written form it is clearly marked
with Disclosing Party's name and the words "confidential" or
"proprietary", or substantially equivalent words; or (b), if
the Confidential Information is disclosed orally or visually
it is summarized in writing or corporeal form and is clearly
marked with Disclosing Party's name and the words
"confidential" or "proprietary", or substantially equivalent
words, and delivered to Receiving Party within thirty (30)
days following each such disclosure.
4.3 For the period of time described in Subsection 4.2, the
Receiving Party will make no use of the Confidential
Information except as expressly permitted herein. The
Receiving Party will not make Confidential Information
available to third parties without the Disclosing Party's
prior written consent. Receiving Party may disclose the
Confidential Information only to its employees on a
need-to-know basis, and will maintain adequate internal
procedures to protect the Confidential Information from
unauthorized disclosure and use. Receiving Party will notify
its employees who use the Confidential Information of the
related obligations created by this Agreement and will use the
same degree of care to avoid unauthorized disclosure as it
employs with its own confidential and/or proprietary
information of like nature, but with no less than a reasonable
standard of care.
4.4 Disclosing Party makes no warranties either expressed or
implied as to the accuracy or fitness for a particular purpose
of the Confidential Information and will have no liability for
any damages whatsoever that may result from its use.
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<PAGE>
4.5 Receiving Party will have no obligation for Confidential
Information that (a) is known to the Receiving Party prior to
the time of disclosure; (b) is independently developed by
Receiving Party without breaching this Agreement; (c) is
lawfully obtained from a third party without restriction on
use or disclosure; (d) is or becomes part of the public domain
through no fault of Receiving Party; (e) is released by the
Disclosing Party in writing; or (f) is disclosed pursuant to
any judicial or governmental requirement or order, provided
that Receiving Party takes reasonable steps to give the
Disclosing Party sufficient prior notice in order to contest
such requirement or order.
4.6 Receiving Party will not be liable for (a) inadvertent
disclosure or use of Confidential Information provided that it
uses at least the same degree of care in safeguarding the
proprietary information as it uses for its own proprietary
information of like importance, and upon discovery of the
inadvertent disclosure or use of the Confidential Information,
it will endeavor to prevent any further inadvertent disclosure
or use; and (b) unauthorized disclosure or use of Confidential
Information by persons who are or who have been in its employ,
unless it fails to safeguard it with at least the same degree
of care as it uses for its own proprietary information of like
importance.
4.7 Title to all tangible forms of the Confidential Information
and any copies thereof will be and remain with the Disclosing
Party. All Confidential Information and copies thereof will be
promptly returned to the Disclosing Party by the Receiving
Party upon written request, or destroyed at the Disclosing
Party's option.
4.8 The Receiving Party will not remove any proprietary copyright,
semiconductor chip protection, trade secret or other legend
("Proprietary Rights Legend") from any form of the
Confidential Information. The Receiving Party, when reasonably
possible and at the Disclosing Party's written request and
expense, will add to the Confidential Information any
Proprietary Rights Legend that Disclosing Party deems
necessary to protect its intellectual property rights.
4.9 Nothing contained in this Agreement will be construed as
granting or conferring by implication or otherwise, any rights
by license or otherwise, to any invention, discovery or
improvement made, conceived, or acquired prior to or after the
date of this Agreement.
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5 TRADEMARKS
5.1 As used herein, the term "Trademarks" will mean and include
all trademarks, trade names, logos, and symbols respectively
owned, controlled, or adopted by SCHLUMBERGER or its
Affiliates, or ASSOCIATE or its Affiliates.
5.2 ASSOCIATE hereby grants to SCHLUMBERGER a limited license to
use the ASSOCIATE's Trademarks listed in Exhibit D attached
hereto solely for the purposes of promoting the sale or
license of Systems or Products, and SCHLUMBERGER hereby grants
to ASSOCIATE a limited license to use the SCHLUMBERGER
Trademarks listed in Exhibit D attached hereto solely for the
purposes of promoting the sale or license of Systems or
Products. Each party must submit documentation containing
usage of the other's Trademarks prior to distribution or
publication for approval by the owning party. These licenses
will terminate automatically upon termination or cancellation
of this Agreement.
5.3 Each party expressly acknowledges that the other party's
Trademarks are the exclusive property of the other party or
its Affiliates, and that all right, title, and interest in
such Trademarks remain in the name of the other party or its
Affiliates. Neither party will claim, obtain, or attempt to
obtain, nor be directly interested or concerned in claiming,
or attempting to obtain in any country during the continuance
of this Agreement or any time thereafter any right, title, or
interest by registration, use, or otherwise in or to any of
the other party's Trademarks, or confusingly similar or
colorable imitations thereof, or by patent, utility model, or
otherwise in any design improvements or inventions embodied in
Products or ASSOCIATE's Systems or by copyright in or to any
copyrightable matter to be supplied under this Agreement. Upon
termination of this Agreement for whatever reason, the parties
will cease immediately use of any and all Trademarks of the
other party or copyrightable material supplied hereunder.
5.4 Each party will identify the other party's Products or Systems
in the advertising, offering for sale, lease or license, or
sale, lease, license thereof only with the trademarks, trade
names, logos, and symbols used by the owning party and will
not otherwise make use of the other party's Trademarks or any
confusingly similar or colorable imitation thereof, except as
may be expressly authorized in writing by the owning party.
5.5 Neither party will use without prior expressed written consent
of the other party any of the other party's Trademarks in its
corporate name or in the name of any subsidiary or related
corporation presently existing or which it may hereafter
organize, or as part of any trade name or business style or in
any other manner except as may be expressly authorized in
writing by
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<PAGE>
the owning party, and in this event, such use will cease of
any such name or business style upon the termination of this
Agreement.
6 LICENSED PROGRAMS
6.1 SCHLUMBERGER hereby grants to ASSOCIATE during the term of
this Agreement a non-exclusive, non-transferable license to
use Licensed Programs (excluding source code) within the
Market for the term of this Agreement and any renewal term, in
accordance with the following terms:
6.1.1 ASSOCIATE will have the right to demonstrate the use
of Licensed Programs to customers interested in
purchasing, licensing or leasing Products from
ASSOCIATE;
6.1.2 ASSOCIATE will also be entitled to use Licensed
Programs to the extent required to fulfill its
maintenance and service responsibilities for Products
under this Agreement;
6.1.3 ASSOCIATE will not remove any copyright or
proprietary notice included in the Licensed Programs
or Confidential Information furnished to ASSOCIATE
and will reproduce all such notices on all copies in
any form, including revised, modified, or translated
versions made by ASSOCIATE, unless otherwise directed
by Schlumberger in writing;
6.1.4 ASSOCIATE will limit use and access of all Licensed
Programs provided by SCHLUMBERGER, and copies
thereof, to such of ASSOCIATE's employees as are
directly involved in the operation and maintenance of
the Products. ASSOCIATE will require its employees to
make no disclosure of Licensed Programs or copies
which are not directly connected with the operation
and maintenance of the Products.
6.2 SCHLUMBERGER may terminate the license granted by giving
ninety (90) days prior written notice to ASSOCIATE, upon the
failure of ASSOCIATE to perform or observe any covenant,
condition or agreement to be performed or observed by it.
6.3 In the event of the termination of the license for any reason,
or the expiration or termination of this Agreement, and in
addition to any other rights or remedies available to
SCHLUMBERGER, ASSOCIATE will return to SCHLUMBERGER or destroy
at the discretion of SCHLUMBERGER the original and all copies,
including partial copies or modifications, of the Licensed
Programs, Proprietary Data, and related materials furnished by
SCHLUMBERGER and SCHLUMBERGER will return to ASSOCIATE or
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destroy at the discretion of ASSOCIATE Proprietary Data, and
related materials furnished by ASSOCIATE.
6.4 SCHLUMBERGER grants to ASSOCIATE during the term of this
Agreement the right to provide sublicenses to Customers for
the purpose of using the Licensed Programs (excluding source
code) applicable to those Products purchased from ASSOCIATE by
such Customers. ASSOCIATE will provide SCHLUMBERGER with a
mutually acceptable sublicense agreement it will use with all
Customers who purchase/use Licensed Programs.
6.5 If software is acquired by or on behalf of a unit or agency of
the U.S. Government, this provision applies.
6.5.1 This software (i) was developed at private expense,
and no part of it was developed with Government
funds; (ii) is a trade secret of SCHLUMBERGER for all
purposes of the Freedom of Information Act; (iii) is
"commercial computer software" subject to limited
utilization as provided in the contract between the
vendor and the governmental entity; and (iv) in all
respects is proprietary data belonging solely to
SCHLUMBERGER. When regulations of the Department of
Defense (DOD) are applicable, this software is sold
only with "Restricted Rights" as that term is defined
in the DOD Supplement to the Federal Acquisition
Regulations, 52.227-7013. Use, duplication or
disclosure is subject to restrictions of the Rights
in Technical Data and Computer Software clause at
52.227-7013, Manufacturer: Schlumberger Technologies,
Inc., 1509 Glen Avenue, Moorestown, NJ 08057.
6.5.2 If this software was acquired under a GSA Schedule,
the Government has agreed to refrain from changing or
removing any insignia or lettering form the software
that is provided or from producing copies of manuals
or disks (except one hard disk copy and one backup or
archival copy) and (i) title to and ownership of
this software and related documentation and any
reproductions thereof will remain with SCHLUMBERGER;
(ii) use of this software and related documentation
will be limited to the facility for which it is
acquired; and (iii) if use of the software is
discontinued at the installation specified in the
purchase order and the Government desires to use it
at another location, it may do so by giving prior
notice to SCHLUMBERGER, specifying the type of
computer and new locations site.
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<PAGE>
7 WARRANTY
7.1 SCHLUMBERGER warrants that the Products and Licensed Programs
supplied with or incorporated in the Products furnished
hereunder will, under normal and proper use, be free from
defects in material and workmanship and will conform to
SCHLUMBERGER's applicable standard written specifications or,
if appropriate, to specifications accepted in writing by
SCHLUMBERGER, for a period of one (1) year from the date of
shipment to ASSOCIATE for terminals and readers and (180) one
hundred eighty days for cards.
7.2 These obligations apply to Products for which (i) written
notice of non-conformance is received before the expiration of
the warranty period; (ii) after SCHLUMBERGER's authorization,
are returned to SCHLUMBERGER's original U.S. shipping point,
freight charges prepaid; and (iii) after examination are
disclosed, to SCHLUMBERGER's satisfaction, to be
non-conforming. Any such repair or replacement will not extend
the period within which such warranty can be asserted.
7.3 This warranty will not apply to Products or Licensed Programs
which have been subjected to operating and/or environmental
conditions in excess of the maximum values stated in the
applicable specifications or otherwise have been subjected to
misuse, tampering, neglect, improper installation, abnormal
stress, repair, modification, alteration, or damage. The
Licensed Program warranty is only valid for Products in which
it has been supplied by SCHLUMBERGER and neither the Licensed
Program nor Product has been modified in any way. THIS
WARRANTY MAY BE ASSERTED BY ASSOCIATE ONLY, NOT BY ASSOCIATE'S
CUSTOMERS OR USERS OF THE ASSOCIATE'S PRODUCTS AND IS IN LIEU
OF ALL OTHER WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY,
INCLUDING ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE OR MERCHANTABILITY, AND OF ALL OTHER OBLIGATIONS OR
LIABILITIES ON SCHLUMBERGER's PART. SCHLUMBERGER NEITHER
ASSUMES NOR AUTHORIZES ANY OTHER PERSON TO ASSUME FOR
SCHLUMBERGER ANY OTHER LIABILITIES IN CONNECTION WITH THE
SALES OF SAID PRODUCTS.
8 LIMITATION OF LIABILITY
8.1 Except as defined herein, ASSOCIATE's exclusive remedy and
SCHLUMBERGER's total liability for any and all losses and
damages from any cause whatsoever arising from or related to
this contract (whether such cause be based in contract,
negligence, strict liability, tort, or otherwise) will in no
event exceed the purchase price of the Products and Licensed
Programs in respect to which such cause arises.
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<PAGE>
8.2 In the event of proven fraudulent use of smart cards, or any
information contained thereon, or any errors resulting from
ASSOCIATE-furnished input data including initialization and
personalization information as a result of careless,
negligent, or felonious acts of an employee or agent of
SCHLUMBERGER, the maximum liability of SCHLUMBERGER will be
$500 per card or account involved, whichever is less, with a
maximum limit of $5000 per year of proven loss per ASSOCIATE.
SCHLUMBERGER will not be held liable for damages resulting
from the use of cards personalized by SCHLUMBERGER according
to inaccurate, incomplete or out of date requirements from
ASSOCIATE. IN NO EVENT WILL SCHLUMBERGER BE LIABLE FOR
INCIDENTAL, CONSEQUENTIAL, INDIRECT OR PUNITIVE DAMAGES OR
DAMAGES FOR LOSS OF REVENUES, LOSS OF PRODUCT OR LOSS OF DATA
RESULTING FROM ANY SUCH CAUSE. SCHLUMBERGER MAY, AT ITS SOLE
OPTION, EITHER REPAIR OR REPLACE DEFECTIVE PRODUCTS AND
LICENSED PROGRAMS OR REFUND THE PURCHASE PRICE PAID UPON
RETURN OF PRODUCTS TO SCHLUMBERGER, AND WILL THEREAFTER HAVE
NO FURTHER OBLIGATION TO ASSOCIATE. THESE LIMITATIONS WILL
APPLY EVEN IF ANY LIMITED REMEDY FAILS IN ITS ESSENTIAL
PURPOSE.
9 FORCE MAJEURE
9.1 SCHLUMBERGER will not be liable to non-performance or delays
caused by acts of God, wars, riots, strikes, fires, shortages
of labor or materials, labor disputes, governmental
restrictions or any other causes beyond its reasonable
control.
9.2 In the event of any such excused delay or failure of
performance, the date of delivery will, at the request of
SCHLUMBERGER, be deferred for a period equal to time lost by
reason of the delay. SCHLUMBERGER will notify ASSOCIATE in
writing of any such event or circumstance within a reasonable
period after it learns of same.
10 PATENTS
10.1 ASSOCIATE will hold SCHLUMBERGER harmless against any expense
or loss resulting from infringement of any patent arising from
compliance with ASSOCIATE's designs, specification, or
instructions.
10.2 Except as provided in the preceding sentence, SCHLUMBERGER
will settle or defend any suit or proceeding brought against
ASSOCIATE insofar as based on a claim that any Product (or
part thereof) manufactured by SCHLUMBERGER and furnished under
this Agreement and not used in combination with other
products, whether or not furnished
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<PAGE>
hereunder, constitutes a direct infringement of any United
States patent if notified promptly in writing and given
authority, information and assistance (at SCHLUMBERGER's
expense) for the settlement of defense of same, and
SCHLUMBERGER will pay the damages and costs awarded therein
against ASSOCIATE or agreed upon in such settlement.
10.3 SCHLUMBERGER may (at its option and expense) either (i)
procure for ASSOCIATE the right to continue using said Product
or part, or (ii) furnish a non-infringing replacement, or
(iii) modify the Product so it becomes non-infringing or (iv)
refund the purchase price and transportation cost thereof upon
return authorized by SCHLUMBERGER. THE FOREGOING STATES THE
ENTIRE LIABILITY OF SCHLUMBERGER FOR PATENT INFRINGEMENT BY
SAID PRODUCTS OR ANY PART THEREOF.
11 RELATIONSHIP OF THE PARTIES
11.1 Nothing contained in this Agreement will be construed to
constitute that an ASSOCIATE is a partner, employee, agent, or
joint venture partner of SCHLUMBERGER, nor will either party
have any authority to represent or bind the other in any
respect.
11.2 ASSOCIATE acknowledges that it has no authority to accept
orders or any moneys from Customers on behalf of SCHLUMBERGER.
12 INDEMNIFICATION
12.1 ASSOCIATE will make no representations or warranties
concerning the quality, performance or other characteristics
of Products or Licensed Programs other than those which are
consistent in all respects with, and do not expand the scope
of, Schlumberger's representations and warranties set forth in
this Agreement and the Exhibits attached hereto. ASSOCIATE
will include in each contract of sale or lease for Products
and each license and sublicense for a Licensed Program
appropriate provisions to limit SCHLUMBERGER's warranty
liability as provided herein and will indemnify, defend and
hold SCHLUMBERGER harmless from and against any costs,
expenses (including attorneys' fees), damages or claims
incurred by SCHLUMBERGER by reason of ASSOCIATE's
representations.
12.2 ASSOCIATE agrees to indemnify SCHLUMBERGER for and against any
and all claims, demands and actions arising out of ASSOCIATE's
activities or performance under this Agreement or any breach
of ASSOCIATE's obligations. This indemnity will be conditioned
upon ASSOCIATE receiving:
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<PAGE>
12.2.1 Prompt written notice of any claims, demands or
actions made against SCHLUMBERGER by another for
which indemnity is sought hereunder by SCHLUMBERGER;
12.2.2 Cooperation in the defense by SCHLUMBERGER;
12.2.3 Control of the defense and/or settlement of such
claim, demand or action as to which indemnity is
sought.
12.3 SCHLUMBERGER agrees to indemnify ASSOCIATE for and against any
and all claims, demands and actions made against ASSOCIATE
arising out of nonconformity of Products or Licensed Programs
with the applicable SCHLUMBERGER specification or any breach
of SCHLUMBERGER's obligations under this Agreement. This
indemnity will be limited to damages awarded to a third party
claimant directly attributable to such non-conformity or
breach, will not include indirect or special damages or
damages for loss of revenues, loss of product or loss of data
and will be conditioned upon SCHLUMBERGER receiving:
12.3.1 Prompt written notice of any claims, demands or
actions made against ASSOCIATE by another for which
indemnity is sought hereunder by ASSOCIATE;
12.3.2 Cooperation in the defense by ASSOCIATE;
12.3.3 Control of the defense and/or settlement of such
claim, demand or action as to which indemnity is
sought.
12.4 Notwithstanding Subsections 12.2 and 12.3 above, neither party
will be liable for and each party will hold the other party
harmless from any liability for incidental, indirect, special
or consequential damages sustained by the other party,
including those arising from or measured by lost revenues or
profits under its contracts with third parties, even if the
other party has been advised of such damages.
13 TERMINATION
13.1 The term of this Agreement will commence on the date first
written above and, unless earlier terminated as hereinafter
provided, will continue until terminated by either party upon
ninety (90) days prior written notice to the other party of
its intent to do so.
13.2 The parties will have the right to terminate this Agreement
immediately by giving written notice to the other party of
such termination, if:
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<PAGE>
13.2.1 Either party becomes insolvent or makes an assignment
for the benefit of creditors, or if proceedings in
bankruptcy, for an arrangement, or for the
appointment of a receiver are filed by or against
either party;
13.2.2 Any assignment or attempted assignment of this
Agreement or any right or obligation hereunder is
made without the prior written approval of the other
party;
13.2.3 Either party will breach any of the covenants or
agreements herein contained, fail to faithfully
perform any of the services required hereunder, or is
determined by the other party to be guilty of
dishonesty or fraudulent misconduct;
13.2.4 Either party undergoes a change in ownership or
control as a result of the death or disassociation of
a principal owner (whether this Agreement be with a
corporation, partnership, or an individual
proprietorship); or if such principal owner becomes
incompetent; or
13.2.5 Either party for any reason suspends or ceases its
activities.
13.3 Unless otherwise agreed between the parties, ASSOCIATE agrees
that termination of this Agreement, however caused, may result
in the cancellation of unfulfilled orders placed for Products
by ASSOCIATE with SCHLUMBERGER as of the effective date of the
termination, and that SCHLUMBERGER will be released from any
and all further liability to ASSOCIATE.
13.4 The acceptance of any order from, or the sale of any Products
to, ASSOCIATE after the termination or expiration of this
Agreement will not be construed as a renewal or extension
hereof, nor as a waiver of termination.
13.5 Neither SCHLUMBERGER nor ASSOCIATE will by reason of the
termination of this Agreement, be liable to the other for
compensation, reimbursement or damages due to the loss of
prospective profits or anticipated sales, or expenditures,
investment, leases or commitments in connection with the
business or good will of SCHLUMBERGER or ASSOCIATE, or
otherwise.
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14 NOTICES
14.1 Any notice herein will be deemed to have been given 48 hours
after it has been deposited in the United States mails,
registered or certified mail, proper postage prepaid,
addressed to the party for whom it is intended at the address
shown below and/or it has been dispatched using the
alternative method for notification agreed upon and described
on Exhibit E attached hereto.
14.2 If to SCHLUMBERGER, send notices to:
Smart Cards and Systems Division
Schlumberger Technologies, Inc.
1601 Schlumberger Drive
Moorestown, NJ 08057
Attention: Associate Program
14.3 If to ASSOCIATE, send notices to:
The Pathways Group, Inc.
14201 NE 200th Street
P.O. Box 448
Woodinville, WA 98072-0448
Attention: Carey F. Daly II
15 NON-ASSIGNMENT
15.1 Neither party hereto may assign this Agreement or any rights
or obligations hereunder without the prior written consent of
the other party hereto.
15.2 The provisions of this Agreement will be binding upon the
successors and assigns of the parties hereto.
16 DISPUTE RESOLUTION
16.1 Any disputes or claims arising under this Agreement will be
resolved through alternative dispute resolution means.
16.2 Initially, the parties will engage in non-binding mediation.
Mediation will be held in Moorestown, New Jersey, USA or such
other site as is mutually agreed to by the parties. The
mediator will be jointly appointed by the parties and will
have expertise in commercial dispute resolution.
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16.3 In the event the dispute or claim is not satisfactorily
resolved through mediation within 90 days of notice of such
claim or dispute by a party, the parties will submit such
dispute, or claim to binding arbitration. Arbitration will be
held in Moorestown, New Jersey, USA or such other site as is
mutually agreed to by the parties. If ASSOCIATE is a foreign
(non-US) corporation and delivery of the goods under this
agreement is to a foreign (non-US) destination, then the
commercial arbitration rules of the International Chamber of
Commerce will apply. In all other instances the commercial
arbitration rules of the American Arbitration Association will
apply. Any judgment, decision or award by the arbitrators will
be final and binding on the parties and may be enforced in any
court having jurisdiction over a party against whom any such
judgment, decision or award is to be enforced. The parties
specifically and knowingly waive any rights under State or
federal constitutions or statutes which grant a party the
right to trial by jury for any claims that might arise under
this agreement or which purports to give a party the right to
appeal an arbitrator's judgment, decision or award.
16.4 The parties will bear their own costs and expenses (including
attorney's fees) for any mediation or arbitration, unless
otherwise directed by the mediator or arbitrator.
17 ENTIRE AGREEMENT; SEVERABILITY
17.1 The failure of either party to enforce at any time or for any
period of time the provisions of this Agreement will not be
construed as a waiver of such provisions or of the right of
such party thereafter to enforce each and every provision
contained herein.
17.2 If any term, clause, or provision contained in this Agreement
is declared or held invalid by a court of competent
jurisdiction, such declaration or holding will not affect the
validity of any other term, clause or provision herein
contained.
17.3 This Agreement including all Exhibits attached hereto sets
forth the entire understanding of the parties and supersedes
all prior agreements, arrangements, and communications,
whether oral or written, pertaining to the SCHLUMBERGER
Associate Program.
17.4 ASSOCIATE has not relied on any representations, oral or
written, except as are made in or expressly referenced herein
and except as provided herein this Agreement will not be
modified or amended except by the mutual written agreement of
the original signers of SCHLUMBERGER and ASSOCIATE below or by
their duly authorized representatives.
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18 INTERPRETATION AND CONSTRUCTION
This Agreement and all questions of its interpretation, performance,
enforcement, and the rights and remedies of the parties hereunder will
be determined in accordance with the laws of the State of New Jersey.
WITNESS the due execution of this Agreement by the parties
hereto as of the date first written above.
Schlumberger Technologies, Inc. The Pathways Group, Inc.
Smart Cards and Systems Divisions
Signature: /s/ J. Schuler Signature: /s/ Carey F. Daly II
Name: Joseph F. Schuler Name: Carey F. Daly II
Title: Director, Sales & Marketing Title: President and CEO
Date: June 16, 1977 Date:
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EXHIBIT A - PRODUCTS
Smart Cards (Category A)
EE2k EE4k
T2G FE417
VisaCash Disposable
Smart Cards (Category B)
PayFlex 0.3k (Micro PayFlex) PayFlex 1k
PayFlex 4k MultiFlex 3k
MultiFlex 8k CryptoFlex 4k
VisaCash Reloadable
Readers (Category C)
SCT SCR60/65
Reflex 20 Reflex 60 (no PIN pad)
Licensed Programs, Packaged Products (Category C)
LogICC (may not be sublicensed) WinPractis
SafePak L210 EZ Formatter
Point of Sales Terminals (Category D)
(not applicable at this time)
Unattended Point of Sales Terminals (Category E)
(not applicable at this time)
EXHIBIT B - CUSTOMERS AND MARKET
Customers
(not applicable at this time)
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Market
Medical/Hospital Services
Travel Services, including Tickets, Rentals and Accommodations
Sports and Events Ticketing
Amusement Park Ticketing Services and Accommodations
EXHIBIT C - DISCOUNT POLICY
ASSOCIATE may purchase Category A, B and C Products listed on Exhibit A from
SCHLUMBERGER for resale to Customers at a discount off the then current price.
The discount will be based on ASSOCIATE's cumulative dollar value (the
"Cumulative Value").of Category A, B and C Products purchased from SCHLUMBERGER
over the preceding six (6) months plus the current month. Upon signing the
Agreement, ASSOCIATE's Cumulative Value will be established at $150,000 unless a
higher value is warranted by ASSOCIATE's cumulative dollar purchases as
described above.
EXHIBIT D -TRADEMARKS
ASSOCIATE Trademarks: (not applicable at this time)
SCHLUMBERGER, Trademarks:
<TABLE>
<S> <C> <C>
"Schlumberger" "Delta 21" "Sigma"
"MagIC" "Payflex" "Multiflex"
"SIMflex" "Cryptoflex" "Reflex xx"
"Cyberflex" "Solo" "Smart Village"
</TABLE>
EXHIBIT E - ALTERNATIVE METHOD FOR NOTIFICATION
(not applicable at this time)
EXHIBIT F - ASSOCIATE CLASSIFICATIONS
A Strategic Associate is expected to purchase or cause the purchase of at least
$900,000 worth of Products from SCHLUMBERGER annually and/or it holds a
strategic position in the Market or within the smart card industry at large.
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A Preferred Associate is expected to purchase or cause the purchase of at least
$600,000 worth of Products from SCHLUMBERGER annually and/or it holds a key
position in the Market.
A Business Associate is expected to purchase or cause the purchase of at least
$300,000 worth of Products from SCHLUMBERGER annually and/or it has developed a
business case and is in the process of developing Systems for the Market.
EXHIBIT G - COMMISSION RATES
ASSOCIATE commission rates for the sale of Products directly to Customers are
defined according to the Product categories in Exhibit A as follows:
<TABLE>
<CAPTION>
Commission Rate Product Category
<S> <C>
1% A
2.5% B
5% C
</TABLE>
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ADDENDUM
(not applicable at this time)
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ADDENDUM No. 1
TO SCHLUMBERGER ASSOCIATE PROGRAM AGREEMENT,
REV 6/97B
This Addendum No. 1 is added to that certain Schlumberger Associate Program
Agreement dated effective June 16, 1997 (hereinafter referred to as SAPA Rev
6/97B) between Schlumberger Technologies, Inc., Smart Card and Systems division
(hereinafter referred to as SCHLUMBERGER) and The Pathways Group, Inc.
(hereinafter referred to as ASSOCIATE).
This Addendum No. I supplements and modifies SAPA Rev 6/97B as follows:
19 Paragraphs 3.1 and 3.2, and all subparagraphs of both, pertaining to
purchase orders, are supplemented and modified as follows:
19.1 ASSOCIATE shall submit all purchase orders in writing. Any
purchase orders may be submitted by fax or email provided they
are confirmed by mail, or other proof of receipt of the
purchase order by SCHLUMBERGER Each purchase order shall
identify the Product by SCHLUMBERGER's Product designation and
state any specifications needed to describe the requirements
of ASSOCIATE or its customer or client. The purchase order
shall state any other terms or conditions required by
ASSOCIATE or its customer or client including volume, delivery
schedule, pricing, payment terms, and other requirements.
19.2 SCHLUMBERGER shall notify ASSOCIATE in writing of any
rejection of an ASSOCIATE's purchase order or rejection of any
of the specific terms and conditions of an ASSOCIATE's
purchase order within ten (10) business days after receipt by
SCHLUMBERGER of an ASSOCIATE's purchase order. Each written
rejection shall be submitted to ASSOCIATE at its Woodinville
office by SCHLUMBERGER, and may be sent by fax or email
provided it is confirmed by mail or other proof of receipt of
the rejection notice by ASSOCIATE.
19.3 If SCHLUMBERGER rejects any of the provisions, terms or
conditions of any purchase order of ASSOCIATE, the entire
purchase order shall be deemed rejected, unless the parties
mutually agree to modification of the specific provisions,
terms and conditions rejected by SCHLUMBERGER within ten (10)
business days after receipt by ASSOCIATE of the notice of
rejection.
19.4 ASSOCIATE's purchase orders which conform to the provisions of
Paragraph 1.1 above shall be deemed to have been accepted by
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SCHLUMBERGER unless rejected within ten (10) business days of
receipt of the purchase order pursuant to Paragraph 1.2 above.
19.5 Except as modified above, Paragraphs 3.1 and 3.2 of SAPA Rev
6/97B, and all subparagraphs of both, shall remain unchanged,
unless otherwise provided in Paragraph 5.1 below.
20 The parties agree to modify SAPA Rev 6/97B, Section 7, entitled
"Warranty," paragraph 7.3 as follows:
20.1 The current text of Paragraph 7.3 shall be deleted and
replaced by the following text:
7.3. The warranties and limitations stated in Paragraph 7.1 as
modified by this Addendum No. 1, Paragraph 2.1 above, may be
passed through to ASSOCIATE's customers and end users of
Products, provided that ASSOCIATE does not change any
provision or limitation or condition of the warranty of
SCHLUMBERGER. ASSOCIATE shall represent and disclose to any of
ASSOCIATE's customers or end users of SCHLUMBERGER's Products
to whom the warranty is passed that the following limitations
apply: This warranty will not apply to Products or Licensed
Programs which have been subjected to operating and/or
environmental conditions in excess of the maximum values
stated in the applicable specifications or otherwise have been
subjected to misuse, tampering, neglect, improper
installation, abnormal stress, repair, modification,
alteration, or damage. The Licensed Program warranty is only
valid for Products in which it has been supplied by
SCHLUMBERGER and neither the Licensed Program nor Product has
been modified in any way. THIS WARRANTY IS IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, INCLUDING
ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR
MERCHANTABILITY, AND OF ALL OTHER OBLIGATIONS OR LIABILITIES
ON SCHLUMBERGER's PART. SCHLUMBERGER NEITHER ASSUMES NOR
AUTHORIZES ANY OTHER PERSON TO ASSUME FOR SCHLUMBERGER ANY
OTHER LIABILITIES IN CONNECTION WITH THE SALES OF SAID
PRODUCTS.
20.2 Except as modified above, Section 7 of SAPA Rev 6/97B shall
remain unchanged, unless otherwise provided in Paragraph 5.1
below.
21 The parties agree to modify Section 13, Paragraph 13.3 of SAPA Rev
6/97B., entitled "Termination," as follows:
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21.1 The current text of Paragraph 13.3 shall be deleted and
replaced by the following.
13.3 Unless otherwise agreed between the parties, SCHLUMBERGER
agrees that on termination of this Agreement, however caused,
except if the cause of termination is failure of ASSOCIATE to
pay obligations owed to SCHLUMBERGER, the unfulfilled purchase
orders of ASSOCIATE previously placed with and accepted by
SCHLUMBERGER shall be filled by SCHLUMBERGER within the
provisions, terms and conditions previously accepted between
the parties, and ASSOCIATE agrees to pay SCHLUMBERGER for
deliveries pursuant to such purchase orders upon the terms
applicable to such purchase orders. Further more, after
termination, ASSOCIATE shall be entitled to submit purchase
orders to SCHLUMBERGER solely for the purpose of providing
replacement parts, equipment or cards (i.e., Product) to any
of ASSOCIATE's customers who were using SCHLUMBERGER Products
prior to termination of this Agreement, during such period as
ASSOCIATE's customer continues to use the SCHLUMBERGER
Products as part of the system serviced by ASSOCIATE upon
prices, terms and conditions available to value-adding
resellers of SCHLUMBERGER. Products who are not participants
in the ASSOCIATES Program.
21.2 Except as modified above, Section 13 of SAPA Rev 6/97B shall
remain unchanged, unless otherwise provided in Paragraph 5.1
below.
22 The parties agree to modify SAPA Rev 6/97B, Section 17, entitled
"Entire Agreement; Severability," as follows:
22.1 SAPA Rev 6/97B may be modified or amended in writing signed by
duly authorized representatives of SCHLUMBERGER and ASSOCIATE.
Such representative need not necessarily be the original
signers of the agreement but must have either express written
authority to bind the party represented, or apparent authority
equal to the original signers.
22.2 Except as modified above, Section 17 of SAPA Rev 6/97B shall
remain unchanged, unless otherwise provided in Paragraph 5.1
below.
23 Provisions Regarding Effect of This Addendum
23.1 If the provisions of this Addendum are deemed inconsistent
with or in conflict with any other provisions of SAPA Rev
6/97B, then this Addendum
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<PAGE>
shall be deemed to take precedence over, supercede, and
control any inconsistencies or conflicts.
23.2 Except as provided in this Addendum, all other terms and
provisions of SAPA Rev 6/97B shall remain the same.
DATED effective July 17, 1997.
<TABLE>
<S> <C>
Schlumberger Technologies, Inc. The Pathways Group, Inc.
Smart Cards and Systems Division
By: /s/ J. Schuler By: /s/ Carey F. Daly II
----------------------------- ------------------------
Joseph F. Schuler Carey F. Daly II
Director, Sales and Marketing President
</TABLE>
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<PAGE>
EXHIBIT 10.7
(SECOND AGREEMENT)
CORPORATE OFFICER EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made between THE PATHWAYS
GROUP, INC., as Employer and CAREY F. DALY, II, as an officer of THE PATHWAYS
GROUP, INC. ("Pathways" or the "Corporation") , effective November 1, 1996. The
terms and conditions of this Agreement are stated below.
I. EMPLOYMENT PROVISION.
1. Employment Positions; Responsibility, Duties and Authority.
This Corporate Officer Employment Agreement is made and
entered into between THE PATHWAYS GROUP, INC., a corporation
organized under the laws of the State of Washington,
hereinafter referred to as the "Corporation" and CAREY F.
DALY, II, its President, Chief Executive Officer and Chairman
of the Board of Directors of the Corporation, hereinafter
referred to as "Daly." The Corporation and Daly each agree
that the Corporation shall employ Daly as the President, Chief
Executive Officer and Chairman of the Board of Directors and
Daly shall perform the responsibilities and duties of, and
shall have the full authority of the officer positions of
President, Chief Executive Officer and Chairman of the Board
of Directors of the Corporation for the term stated in Section
II. of this Agreement, unless sooner terminated pursuant to
the provisions of Section X. of this Agreement.
2. Responsibilities, Duties and Authority of Daly. Daly shall
have the full responsibilities and duties and authority of the
President and of the Chairman of the Board of the Corporation
as provided in the Bylaws of the Corporation, as approved at a
meeting of the Board of Directors of the Corporation on
October 26, 1996, and the applicable Washington State
Corporation statutes pertaining to business corporations.
II. TERM OF THIS AGREEMENT.
This Agreement shall have a term of three (3) years beginning November
1, 1996, and shall end October 31, 1999, unless sooner terminated
pursuant to the provisions of Section X. of this Agreement.
III. LIMITATION ON OUTSIDE ACTIVITIES.
Daly shall devote his full employment energies and abilities to
performance of his responsibilities and duties described in Section
1.2. of this Agreement and shall not, without the consent of the
Corporation based on a resolution of the Board of
<PAGE>
Directors of the Corporation perform service of any kind for
compensation for the benefit of other corporations, except those
corporations which are related to, or are a part of or become a part of
the Pathways family of companies. Pathways hereby expressly gives
permission for Carey F. Daly, II to remain as President, Chief
Executive officer and Chairman of the Board and Director of the
following companies:
Pathways International, Ltd.
Sprinticket, Inc.
Pathways Systems, Inc.
Nothing in this provision shall prevent Daly from doing software design
and/or software programming for his own use. Such software design or
software programming by Daly for his own use shall not be made
available for a commercial use or a business use by license or sale by
other corporations unless it has first been offered at a fair and
reasonable price to this Employer unless and until this Agreement is
terminated pursuant to Section X.
IV. COMPENSATION.
1. Basic Salary. As consideration for all services to be rendered
by Daly to Pathways, Daly shall be paid the following listed
annual salary amounts per year as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
First Year 11/01/96 - 10/31/97 $200,000.00
Second Year 11/01/97 - 10/31/98 $200,000.00
Third Year 11/01/98 - 10/31/99 $200,000.00
</TABLE>
2. Payment of Salary.
A. Salary. The annual salary provided for in Section
IV.1. shall be due and payable in installments by the
corporation semi-monthly on the fifteenth (15th) day
and the first business day after the last day of each
month, which shall be established by this Agreement
as the regular payday, unless such day is a weekend
or holiday, in which event, the salary shall be due
and payable on the next business day after the
regular payday.
B. Accruals of Unpaid Salary
(1) Salaries. Any salary payments and bonus
payments not paid by the Corporation when
due shall accrue as a corporate debt payable
to Daly, and shall be paid as soon as
possible by the Corporation and in any
event, accrued salary
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<PAGE>
shall be paid to the fullest extent possible
whenever a payroll is disbursed to other
employees of Pathways.
(2) Deductions From Compensation. The
Corporation shall have the right and
responsibility to deduct all federal, state
and local government taxes and other charges
as are now in effect, if any, or which may
hereafter be enacted or required by
applicable government laws and regulations,
if any, required as deductions from
compensation of Daly as an employee.
3. Stock Options.
In consideration of Daly entering into this agreement, the
Corporation agrees to issue option to purchase 200,000 shares
of common stock. The options will have an exercise price of
$3.00 per share and will vest equally over three years. The
options will be issued under a stockholders plan intended to
be qualified pursuant to Section 422 of the Internal Revenue
Code of 1986 and the regulations related thereto. The plan
will expire November 1, 2001.
V. EMPLOYMENT BENEFITS IN ADDITION TO CASH COMPENSATION.
1. Participation In Existing Company Benefit Programs.
A. Medical and Health Care Benefit Program. Daly, as an
executive employee shall be entitled to receive and
shall receive all medical and health care benefits
provided by Employer to its executive employees. Such
benefits shall be paid for by the Employer for Daly
and for Daly's dependents, if any, on the terms and
provisions provided in the medical and health care
benefit plan, however, if for any reason Daly cannot
qualify for the current medical and health care
benefits, then Daly shall be entitled to obtain
medical and health care benefits coverage from
whatever source is available and the Employer shall
pay the premium charges for that coverage as an
executive employee benefit for Daly.
B. Life Insurance. The Corporation shall provide and pay
for life insurance on the life of Daly in the amount
of three (3) times his annual salary provided for in
this agreement. The beneficiary shall be Daly's
estate, unless otherwise directed by Daly in writing
at any time prior to his death.
C. Vacation and Holiday Benefits. Daly shall be entitled
to have a paid vacation for thirty (30) days each
calendar year; plus all paid
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<PAGE>
holidays observed by the Employer. Daly shall use
reasonable care in scheduling the vacation time so as
to not interfere unreasonably with Employer's
business, and Daly's performance of his
responsibilities and duties.
2. Participation in Other Employment Benefits. Daly shall be
entitled to receive all other benefits and conditions of
employment which may become available to all other executives
of the Corporation, including by way of illustration, but not
limited to, any life insurance benefits, any disability income
continuation and any profit sharing and any retirement income
plans of any kind, whether qualified or non-qualified, whether
pre-funded or not, if any are established after the inception
date of this Agreement, and before it expires pursuant to
Section II. or sooner terminated pursuant to Section X. of
this Agreement.
3. Stock Issuance. The Corporation and Daly may agree, from time
to time and with the approval of the Board of Directors of the
Corporation, to issue to Daly Common Stock of the Corporation
in consideration of such services or contributions of property
as may be deemed appropriate, and at a value determined by the
Board of Directors of the Corporation in good faith and in
compliance with applicable law. Any such issuance of stock
may, at the request of Daly, and subject to the approval of
the Corporation which may not be unreasonably withheld, be
issued by the Corporation to such party or entity, including
without limitation, an irrevocable trust or similar entity, as
Daly may at the time of issuance direct.
VI. EXPENSE REIMBURSEMENT AND AUTOMOBILE EXPENSE ALLOWANCE.
1. Expense Reimbursement Generally. Daly will be reimbursed in
accordance with the Employees company policies for traveling,
entertainment and any other expenses reasonably incurred and
related to the performance of Daly's duties and
responsibilities on behalf of Employer.
2. Automobile Allowance Plus Expenses. In addition, Daly shall
receive $500.00 per month for automobile expense allowance for
use of his automobile in business, plus additional
reimbursement for insurance, servicing, and operation of his
automobile in business. This allowance shall be reviewed each
contract anniversary date for adequacy and shall be increased
for the following year by the amount Daly's expenses exceed
the allowance, subject to approval by the Corporation's Board
of Directors.
VII. DISABILITY COMPENSATION.
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<PAGE>
1. If Daly becomes disabled at any time, and for any number of
times, due to any cause so that he is physically unable to
perform his ordinary duties and responsibilities of President
and CEO, pursuant to this Agreement, then Daly shall be
entitled to receive, in lieu of salary, an amount equal to his
salary, payable at the same time and in the same manner as
Daly's salary is paid provided however, that this benefit
shall be limited to not more than a total of twelve months
during the term of the Agreement.
2. Daly's entitlement to disability income pursuant to this
Section VII. shall begin and end as determined by a
certificate issued by a qualified M.D. or D.O. licensed by the
State of Washington to practice in this state. The certificate
shall state in substance that Carey F. Daly, II was determined
to be disabled and unable to perform the ordinary and usual
duties of President and CEO of Pathways beginning with [date]
and Daly's disability continues as of this [date]. Such a
certificate shall be submitted every three (3) months
beginning with the date of disability and continuing
thereafter until Daly's disability ends and he is able to
return to work full time or his disability compensation
benefit has been fully used, whichever occurs first.
VIII. ISSUANCE OF STOCK OF THE PATHWAYS GROUP, INC. TO DALY IN CONNECTION
WITH GUARANTEES OF CORPORATE DEBTS.
Daly and Joan L. Daly, his wife and or the marital community have
and/or will have granted personal guarantees of payment to various
lenders of funds to or credit to the Corporation and/or various related
corporations listed in Exhibit "B" attached hereto and in this
Employment Agreement. In lieu of any addition to other compensation,
the Corporation agrees to may issue to Daly one-half (1/2) share for
each dollar of principal debt guaranteed by Daly, and/or by Daly and
Joan L. Daly, and/or their marital community for the Corporation and/or
any corporation listed on Exhibit "B" attached hereto; plus any
corporations which hereafter become affiliated with Pathways either by
acquisition or partial common ownership.
IX. PAYMENT OF CORPORATE DEBTS PERSONALLY GUARANTEED BY DALY,
OR RELEASE OF DALY FROM GUARANTEES BY CORPORATE CREDITORS.
Daly and Joan L. Daly, his wife, and/or their marital community, has
granted personal guarantees of payment to various lenders of funds or
credit to the Corporation and various related corporations listed in
Exhibit "B", entitled DALY'S PERSONAL GUARANTEES OF CORPORATE DEBT,
which Exhibit "B" is attached hereto, and hereby incorporated by
reference into this Employment Agreement. Daly may be required to sign
further or renew personal guarantees of payment of the debts owed to
various lenders of funds or credit to the
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<PAGE>
Corporation and/or its various related corporations in the future.
Those existing guarantees were required mainly because Daly was the
President and Chief Executive Officer and a significant shareholder of
the Corporation or the various related corporations. Any new guarantees
or extensions of existing guarantees will be given mainly for the same
reason, namely that Daly is the President and CEO of the Corporation,
and a significant shareholder of the Corporation. It is the express
intent and agreement of the parties that the Corporation shall pay all
debts personally guaranteed by Daly, or shall, in the alternative,
obtain a specific written release of Daly's personal guarantee by and
from each creditor whose debt Daly has personally guaranteed no later
than the date this Employment Agreement is terminated, or expires.
X. TERMINATION OF DALY'S EMPLOYMENT.
1. Termination By The Corporation. Daly's employment as President
and Chairman of the Board of Directors may be terminated by
the Board of Directors of the Corporation with cause. Cause is
defined as the Committing of acts of gross negligence and
willful malfeasance in the performance of the aforementioned
duties as officer.
2. Terms and Provisions of Termination of Daly's Employment.
Regardless of the reasons or purpose of the termination of
Daly's Employment, the Corporation shall not and may not
terminate Daly's employment as President, Chief Executive
Officer and Chairman of the Board of Directors unless and
until the Corporation has fully arranged for and commenced
performance of the following:
A. Payment by the Corporation of all sums then due and
owing, if any, as compensation, pursuant to Section
IV., Compensation, and/or Section VII., Disability
Compensation of this Employment
Agreement.
B. Payment by the Corporation of all sums then due and
owing, if any, pursuant to Section VI., Reimbursement
of the Employment Agreement.
C. Complete unconditional release by the creditors of
the corporations listed below, of Daly and/or his
wife, Joan L. Daly, and/or their marital community,
from any personal guaranties and the complete release
of any and all of Daly's property, whether real,
personal, tangible or intangible, from any form deed
of trust, security agreement, pledge or other
encumbrance of any kind given by Daly and/or his
wife, Joan L. Daly, and/or their marital community,
given to secure payment of or performance of any
obligations of The Pathways Group, Inc., or any of
its related companies, including
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<PAGE>
but not limited to Pathways International Ltd.,
Sprinticket, Inc. and PT Link, Corporation.
D. Payment by the Corporation for buyout of Remainder of
the Employment Agreement at the rate of fifty percent
(50%) of the regular salary in effect under Section
IV., above, of this Agreement.
3. Effective Date of Daly's Employment Termination. The effective
date of Daly's employment termination pursuant to this
Agreement shall be the latest of the following dates:
A. The date of Daly's employment termination provided
for in the written notice of his employment
termination;
B. The Ninety-first (91st) day after receipt by Daly of
the written notice of his employment termination;
C. The date of fulfillment of all the terms and
provisions of Part X.2, above, entitled Terms and
Provisions of Termination of Daly's Employment by the
Corporation.
XI. PROPERTY RIGHTS.
1. Intellectual Property Rights. All rights, title and interest
of every kind and nature whatsoever, in and to any
intellectual property, including any inventions, patents,
trademarks, copyrights, films, scripts, ideas, creations and
properties invented, created, written, developed, furnished,
produced or disclosed by Daly in the course rendering his
services to the corporation under this Agreement shall, as
between the parties hereto, be and remain the sole and
exclusive property of the Corporation for any and all purposes
and uses whatsoever, and Daly shall have no right, title or
interest of any kind or nature therein or thereto, or in and
to any results and proceeds therefrom.
2. Return of All of the Corporation's Property. Upon termination
of this Agreement, regardless of how termination may be
effected or whenever requested by the Corporation, Daly shall
immediately turn over to the Corporation all of the
Corporation's property, including all items used by Daly in
rendering services hereunder or otherwise, that may be in
Daly's possession or under his control.
XII. CONFIDENTIALITY AND NON-DISCLOSURE OF INFORMATION.
1. During Employment. Daly agrees that during the entire term of
his employment as an executive officer of this corporation, he
will not disclose
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<PAGE>
to any other person, partnership, company or corporation any
confidential information about this Corporation or its related
corporations, or the business activities or interests of this
Corporation or its related corporations, including, but not
limited to, the following, which is agreed as between the
parties to be confidential information: customer data,
customer lists, sales figures, sales projections, estimates of
any kind, sales proposals, price lists, accounting procedures,
any and all accounting records, any technology and
applications of technology developed by the Corporation before
or during, his employment, EXCEPT such disclosure as is for
the benefit of or the furthering the intent of the
Corporation, or is expressly disclosed as part of the
performance of his duties and responsibilities as President,
Chief Executive Officer or Chairman of the Board of Directors.
2. Surrender of All Confidential Information On Termination of
Employment. Daly agrees at the time his employment with the
Corporation terminates, to turn over to the Corporation any
and all confidential information which may be in possession,
including any and all copies thereof.
3. Following Termination of Employment. Daly agrees that
following the termination of his employment with the
Corporation he will not disclose any confidential information,
as described in Section XII.1, above, which he obtained about
the Corporation or its related corporations to any other
person, partnership, company or corporation at any time or for
any purpose.
4. Injunctive Protection of Confidential Information. The parties
recognize and agree that if Daly were to make any unauthorized
disclosure of any confidential information of the kind
described in Section XII.1 above, whether during employment or
following termination of employment, whether directly or
indirectly, and whether voluntarily or under compulsion by
subpoena or other legal process, that the disclosure would
cause irreparable harm to the Corporation and or its related
corporations. Therefore, Daly and the Corporation agree that
if the Corporation believes in good faith that Daly may be
making an unauthorized disclosure or about to make an
unauthorized disclosure of confidential information as
described in Section XII.1.1 above, whether during his
employment or after termination of his employment, and whether
voluntarily or involuntarily, then the Corporation shall be
entitled to obtain a temporary restraining order without
delay, and proceed to obtain a preliminary injunction and
permanent injunction to prevent such unauthorized disclosure.
XIII. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT.
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<PAGE>
1. Non-Competition Period--Duration and Geographic Scope. Daly
and the Corporation recognize and acknowledge that in his
employment as President, Chief Executive Officer and Chairman
of the Board of Directors, he will become familiar with all of
the Corporation's technology, intellectual property,
intellectual property under development, products and all of
the geographic areas throughout the United States and Canada
in which the corporation already has made marketing efforts
and sales of products and services, and he will become
knowledgeable about present and future marketing proposals and
plans for those products and services in those geographic
areas. Daly agrees, as part of the consideration for this
Employment Agreement that Daly will not engage directly or
indirectly in the business of manufacture or sale of any
products or services which compete with the products or
services provided by the Corporation or its related
corporations for a period of two (2) years within the
geographic limits of any state of the United States, or any
province of Canada. The parties agree that the phrase "engage
directly or indirectly in the business of manufacture or sale
of any products or services which compete with the products or
services of the Corporation or its related Corporations" shall
include any situation or circumstance in which Daly shall be
owner, partner, officer, director or shareholder of a
corporation, or agent or employee or consultant of any
business entity engaged or about to become engaged in
competition with the Corporation.
2. Injunctive Relief From Competition By Daly The parties agree
that if Daly were to violate the provisions of Section
XIII.1., above, the use by Daly of the information he learned
while employed by the Corporation could enable him to enable
him to engage in basically unfair competition with the
Corporation and its related corporations, and that such
competition in violation of Section XIII. 1., above, probably
would cause irreparable harm to the marketing and sales
success of the corporation and its related corporations.
Therefore, if Daly violates Section XIII.1., above, the
Corporation shall be entitled to obtain a temporary
restraining order without delay, and proceed to obtain a
preliminary injunction and permanent injunction against such
violations by Daly and any person, partnership, company or
corporation through which or for which he acts, directly or
indirectly to violate Section XIII.1., above.
XIV. NOTICES.
1. How Sent or Delivered. Any notices sent by any party which is
intended to give written notice required by this Employment
Agreement shall be sent or delivered by sender to the intended
recipient by one or more of the Following methods:
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<PAGE>
A. By certified mail, return receipt requested, postage
prepaid, to the last known address of the intended
recipient; or
B. By delivery personally to the intended recipient.
2. Effective Date of Notice. If a written notice is sent or
delivered by either of the above methods, then the effective
date of the notice for purposes of considering it to have been
received by the intended recipient shall be the earliest of
the following:
A. If by certified mail, return receipt requested, which
is delivered, then or on the date the recipient, or
anyone signing for the recipient, signed the return
receipt;
B. If by certified mail, return receipt requested, which
is not delivered, then on the date five business days
after the date the notice was sent.
C. If by personal delivery to the intended recipient,
then on the date the written notice was delivered
personally to the recipient.
3. Proof of Delivery of Notice.
A. Certified Mail, Return Receipt Requested. If the
written notice was sent by certified mail return
receipt requested, proof of sending may be shown by
the U.S. Post Office receipt for the certified mail,
return receipt requested and proof of delivery may be
shown by the signed returned receipt and proof of
attempted delivery sufficient for effective date of
notice without delivery may be shown by the returned
envelope with U.S. Post Office notations showing
attempted delivery dates and notices to the intended
recipient.
B. Personal Delivery. Personal delivery of a written
notice may be shown by a signature of the intended
recipient on a copy of the notice, together with the
legend on the copy of the notice which will read,
"Received," with the date received noted thereafter.
Personal delivery may also be shown by a sworn
statement of the person who delivered the notice,
stated that the notice was delivered to the recipient
or representative of recipient on the date of
delivery, and attaching a copy of the notice, with
reference in the sworn statement to the attached copy
of the notice.
XV. REMEDIES AVAILABLE IN EVENT OF BREACH OF AGREEMENT; VENUE.
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<PAGE>
In the event that any party breaches this Employment Agreement, the
other party shall have the right to pursue any remedies available to
the party claiming breach, including, but not limited to damages,
injunctive relief and declaratory judgment, which may be available
under the laws of the State of Washington. The parties agree that any
claims shall be brought in the appropriate court(s) located in King
County, Washington, which may have jurisdiction pursuant to Washington
Law.
XVI. APPLICABLE LAW.
This Employment Agreement shall be construed and interpreted and
enforceable pursuant to the laws of the State of Washington.
XVII. ENTIRE AGREEMENT.
This Employment Agreement states the entire agreement between the
parties with respect to the employment of Daly by the Corporation. This
Agreement cannot be modified by any oral agreement or course of conduct
by either or both parties and any attempt at such modification shall be
null and void. This Agreement may be modified only by a written
document signed by each party.
Dated this_____ day of November, 1996.
EXECUTIVE OFFICER:
/s/ Carey F. Daly, II.
--------------------------------
Carey F. Daly, II.
THE CORPORATION:
THE PATHWAYS GROUP, INC.
By: /s/ Carey F. Daly, II.
---------------------------
CAREY F. DALY, II., President and
Chief Executive Officer
By: /s/ Glenn A. Okun
---------------------------
GLENN A. OKUN, Director acting per
Board of Directors authority
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<PAGE>
EXHIBIT 10.8
CORPORATE OFFICER EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made between THE PATHWAYS GROUP,
INC., as Employer, and MARK SCHUUR ("Schuur," or the "Executive"), as an officer
of THE PATHWAYS GROUP, INC., a corporation organized under the laws of the State
of Washington ("Pathways" or the "Corporation"), effective November 1, 1996. The
terms and conditions of this Agreement are stated below.
I. EMPLOYMENT PROVISION.
1. Employment Positions, Responsibility, Duties and Authority.
This Corporate Officer Employment Agreement is made and
entered into between PATHWAYS and MARK SCHUUR, its Chief
Financial Officer. The Corporation and Schuur each agree that
the Corporation shall employ Schuur as the Chief Financial
Officer of the Corporation at its corporate headquarters in
Woodinville, Washington, and Schuur shall perform the
responsibilities and duties of, and shall have the full
authority of the officer position of Chief Financial Officer
of the Corporation for the term stated in Section II. of this
Agreement, unless sooner terminated pursuant to the provisions
of Section VIII. of this Agreement.
2. Responsibilities, Duties and Authority of Schuur. Schuur shall
have the full responsibilities and duties and authority of the
Chief Financial Officer of the Corporation as provided in the
Bylaws of the Corporation, as approved at a meeting of the
Board of Directors of the Corporation on October 26, 1996, and
the applicable Washington State Corporation statutes
pertaining, to business corporations.
II. TERM OF THIS AGREEMENT.
This Agreement shall have a term of three (3) years beginning November
1, 1996, and shall end October 31, 1999, unless sooner terminated
pursuant to the provisions of Section VIII. of this Agreement.
III. LIMITATION ON OUTSIDE ACTIVITIES.
Schuur shall devote his full employment energies and abilities to
performance of his responsibilities and duties described in Section
1.2. of this Agreement and shall not, without the consent of the
Corporation based on a resolution of the Board of Directors of the
Corporation perform service of any kind for compensation for the
benefit of other corporations, except as described below, or except
those corporations which are related to, or are a part of or become a
part of the Pathways family of companies. It is understood and agreed
to that Pathways consents to allow Schuur to continue as a board member
of Pizza Blends Inc. and shall continue
<PAGE>
his duties as long as it does not interfere with his duties at
Pathways, or until Pathways notifies Schuur that Pathways no longer
consents to Schuur's outside board duties.
IV. COMPENSATION.
1. Basic Salary. As consideration for all services to be rendered
by Schuur to Pathways, Schuur shall be paid $100,000 per year,
subject to annual merit increase to be determined by the Chief
Executive Officer and/or Board of Directors, but in no case to
be lower than a percentage amount equal to the most recent
annual increase, if any, in the consumer price index, as
published in the Wall Street Journal.
Schuur shall also be paid an annual discretionary bonus as
determined by the Chief Executive Officer and/or Board of
Directors if such a bonus is paid to any other Pathways
executive.
2. Payment of Salary.
A. Salary. The annual salary provided for in Section
IV.1. shall be due and payable in installments by the
Corporation semi-monthly on the fifteenth (15th) day
and the first business day after the last day of each
month, which shall be established by this Agreement
as the regular payday, unless such day is a weekend
or holiday, in which event, the salary shall be due
and payable on the next business day after the
regular payday.
B. Accruals of Unpaid Salary.
(1) Salaries. Any salary payments and bonus
payments not paid by the Corporation when
due shall accrue as a corporate debt payable
to Schuur, and shall be paid as soon as
possible by the Corporation and in any
event, accrued salary shall be paid to the
fullest extent possible whenever a payroll
is disbursed to other employees of Pathways.
(2) Deductions from Compensation. The
Corporation shall have the right and
responsibility to deduct all federal, state
and local government taxes and other charges
as are now in effect, if any, or which may
hereafter be enacted or required by
applicable government laws and regulations,
if any, required as deductions from
compensation of Schuur as an employee.
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3. Stock Options; Vesting; Forfeiture; Acceleration.
In consideration of Schuur entering into this agreement, the
Corporation agrees to issue options to purchase 20,000 shares
of common stock. The options will have an exercise price of
$1.00 per share and will vest equally over three (3) years.
The options will be issued under a stockholders plan intended
to be qualified pursuant to Section 422 of the Internal
Revenue Code of 1986 and the regulations related thereto. The
plan will expire November 1, 2001. Unexercised options awarded
to Schuur hereunder shall be subject to (i) forfeiture in the
event of termination for cause pursuant to Section VIII.1. of
this Agreement, and (ii) acceleration of vesting in the event
of termination of this Agreement other than pursuant to
Section VIII.1. hereof.
V. EMPLOYMENT BENEFITS IN ADDITION TO CASH COMPENSATION.
1. Participation in Existing Company Benefit Programs.
A. Medical and Health Care Benefit Program. Schuur, as
an employee, shall be entitled to receive and shall
receive all medical and health care benefits provided
by Employer to its employees, or as agreed to by
Schuur and Pathways. Such benefits shall be paid for
by the Employer for Schuur and for Schuur's
dependents, if any, on the terms and provisions
provided in the medical and health care benefit plan;
however, if for any reason Schuur cannot qualify for
the current medical and health care benefits, the
Schuur shall be entitled to obtain medical and health
care benefits coverage from whatever source is
available and the Employer shall pay the premium
charges for that coverage as an executive employee
benefit for Schuur.
B. Vacation and Holiday Benefits. Schuur shall be
entitled to have a paid vacation for twenty-one (21)
days each calendar year; plus all paid holidays
observed by the Corporation. Schuur shall use
reasonable care in scheduling the vacation time so as
to not interfere unreasonably with Employer's
business, and Schuur's performance of his
responsibilities and duties. Notwithstanding the
aforementioned provision, Schuur may, during any
annual period and with the prior approval of the
Corporation utilize forty (40) hours during normal
business hours in order to pursue continuing,
professional education. The cost of continuing
professional education courses is to be covered by
Pathways.
2. Participation in Other Employment Benefits. Schuur shall be
entitled to receive all other benefits and conditions of
employment which may become available to all other executives
of the Corporation, including by way of illustration, but not
limited to, any life insurance benefits, any disability
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income continuation and any profit sharing and any retirement
income plans of any kind, whether qualified or non-qualified,
whether pre-funded or not, if any are established after the
inception date of this Agreement, and before it expires
pursuant to Section II. or sooner terminated pursuant to
Section VIII. of this Agreement.
VI. EXPENSE REIMBURSEMENT.
Expense Reimbursement Generally. Schuur will be reimbursed in
accordance with the Employees' company policies for traveling,
entertainment and any other expenses reasonably incurred and related to
the performance of Schuur's duties and responsibilities on behalf of
Employer.
VII. DISABILITY COMPENSATION.
1. If Schuur becomes disabled at any time, and for any number of
times, due to any cause so that he is physically unable to
perform his ordinary duties and responsibilities of the Chief
Financial Officer, pursuant to this Agreement, then Schuur
shall be entitled to receive, in lieu of salary, an amount
equal to his salary, payable at the same time and in the same
manner as Schuur's salary is paid provided however, that this
benefit shall be limited to not more than a total of twelve
(12) months during the term of the Agreement.
2. Schuur's entitlement to disability income pursuant to this
Section VII. shall begin and end as determined by a
certificate issued by a qualified M.D. or D.O. licensed by the
State of Washington to practice in this state. The certificate
shall state in substance that Mark Schuur was determined to be
disabled and unable to perform the ordinary and usual duties
of Chief Financial Officer of Pathways beginning with [date]
and Schuur's disability continues as of this [date] . Such a
certificate shall be submitted every three (3) months
beginning with the date of disability and continuing
thereafter until Schuur's disability ends and he is able to
return to work full time or his disability compensation
benefit has been fully used, which ever occurs first.
VIII. TERMINATION OF EMPLOYMENT.
1. Termination by the Corporation.
(a) Subject to clause (b) below, this Agreement may be
terminated by the Corporation in the event:
(i) the Executive has been convicted of a felony
in the jurisdiction involved; or
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(ii) the Executive willfully breaches a
substantial provision of this Agreement;
(iii) any gross negligence or intentional fraud on
the part of the Executive (which shall
exclude acts of employees or agents not
within the scope of their employment or
agency and not in response to, or subject to
supervision by, the Executive) that
materially adversely affects the business of
the Corporation;
(iv) any act by the Executive involving any
material and impermissible conflict of
interest or self dealing; or
(v) willful and continued failure by the
Executive to perform in accordance with the
direction of the Corporation's Board
(provided such direction is not unlawful).
(b) In the event of a termination pursuant to
subparagraph VIII.1(a) above, the Corporation shall
deliver to the Executive a notice setting forth a
reasonably detailed description of the breached
provision or unauthorized conduct constituting the
basis for termination, and this Agreement shall not
terminate unless the Executive fails to cure same
within 20 working days after receipt of notice. In
the event of a termination pursuant to subparagraph
VIII.1.(a)(i), (iii), (iv), or (v) above, the
Corporation shall deliver to the Executive a notice
stating which of the ground(s) it alleges for
termination of this Agreement, together with a
reasonably detailed description of such ground(s).
2. The Corporation may, at its discretion, terminate the
Executive's employment hereunder without cause. In such event,
options granted pursuant to Section IV.3. hereof shall be
deemed immediately and fully vested upon notice of termination
without cause. The Executive will continue to receive
compensation under Section IV. for up to six (6) months or
until such time as Executive secures employment elsewhere,
whichever occurs first. While Executive is receiving
compensation under Section IV., he may be called upon by the
Corporation to render services.
3. Terms and Provisions of Termination of Schuur's Employment.
Regardless of the reasons or purpose of the termination of
Schuur's Employment, the Corporation shall not and may not
terminate Schuur's employment as Chief Financial Officer
unless and until the Corporation has fully arranged for an
commenced performance of the following:
A. Payment by the Corporation of all sums then due and
owing, if any, as compensation, pursuant to Section
IV. Compensation, and/or Section VII. Disability
Compensation of this Employment Acreement.
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B. Payment by the Corporation of all sums then due and
owing, if any, pursuant to Section VI. Expense
Reimbursement of the Employment Agreement.
4. Effective Date of Schuur's Employment Termination. The
effective date of Schuur's employment termination pursuant to
this Agreement shall be as determined by the Corporation.
IX. PROPERTY RIGHTS.
1. Intellectual Property Rights. All rights, title and interest
of every kind and nature whatsoever, in and to any
intellectual property, including any inventions, patents,
trademarks, copyrights, films, scripts, ideas, creations and
properties invented, created, written, developed, furnished,
produced or disclosed by Schuur in the course of rendering his
services to the Corporation under this Aorreement shall, as
between the parties hereto, be and remain the sole and
exclusive property of the Corporation for any and all purposes
and uses whatsoever, and Schuur shall have no right, title or
interest of any kind or nature therein or thereto, or in and
to any results and proceeds therefrom.
2. Return of all of the Corporation's Property. Upon termination
of this Agreement, regardless of how termination may be
effected or whenever requested by the Corporation, Schuur
shall immediately turn over to the Corporation all of the
Corporation's property, including all items used by Schuur in
rendering services hereunder or otherwise, that may be in
Schuur's possession or under his control.
X. CONFIDENTIALITY AND NON-DISCLOSURE OF INFORMATION.
1. During Employment. The Executive agrees that during the
entire term of his employment as an employee of this
Corporation, he will not disclose to any other person,
partnership, company or corporation any confidential
information about this Corporation or its related
corporations, or the business activities or interests of this
Corporation or its related corporations, including, but not
limited to, the following, which is agreed as between the
parties to be confidential information: customer data,
customer lists, sales figures, sales projections, estimates of
any kind, sales proposals, price lists, accounting procedures,
any and all accounting records, any technology and
applications of technology developed by the Corporation before
or during his employment, EXCEPT such disclosure as is for the
benefit of or for the furthering the intent of the
Corporation, or is expressly disclosed as part of the
performance of his duties and responsibilities as Chief
Financial Officer of the Corporation.
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2. Surrender of All Confidential Information on Termination of
Employment. The Executive agrees at the time his employment
with the Corporation terminates, to tun over to the
Corporation any and all confidential information which may be
in possession, including any and all copies thereof.
3. Following Termination of Employment. The Executive agrees that
following the termination of his employment with the
Corporation, he will not disclose any confidential
information, as described in Section X.1. above, which he
obtained about the Corporation of its related corporations to
any other person, partnership, company or corporation at any
time or for any purpose.
4. Injunctive Protection of Confidential Information. The parties
recognize and agree that if Schuur were to make any
unauthorized disclosure of any confidential information of the
kind described in Section X.1. above, whether during
employment or following termination of employment, whether
directly or indirectly, and whether voluntarily or under
compulsion by subpoena or other legal process, that the
disclosure would cause irreparable harm to the Corporation and
or its related corporations. Therefore, Schuur and the
Corporation agree that if the Corporation believes in good
faith that Schuur may be making an unauthorized disclosure or
about to make an unauthorized disclosure of confidential
information as described in Section X.1. above, whether during
his employment or after termination of his employment, and
whether voluntarily or involuntarily, then the Corporation
shall be entitled to obtain a temporary restraining order
without delay, and proceed to obtain a preliminary injunction
and permanent injunction to prevent such unauthorized
disclosure.
XI. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT.
1. Non-Competition Period -- Duration and Geographic Scope.
Schuur and the Corporation recognize and acknowledge that in
his employment as Chief Financial Officer, he will become
familiar with all of the Corporation's technology,
intellectual property, intellectual property under
development, products and all of the geographic areas
throughout the world in which the Corporation already has made
marketing, efforts and sales of products and services, and he
will become knowledgeable about present and future marketing
proposals and plans for those products and services. Schuur
agrees, as part of the consideration for this Employment
Agreement, that Schuur will not engage directly or indirectly
in the business of manufacture or sale of any products or
services which compete with the products or services provided
by the Corporation or its related corporations for a period of
two (2) years. The parties agree that the phrase "engage
directly or indirectly in the business of manufacture or sale
of any products or services which compete with the products or
services provided by the Corporation or its related
corporations" shall include any situation or circumstance in
which Schuur shall be owner, partner, officer, director or
shareholder of a
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<PAGE>
corporation, or agent or employee or consultant of any
business entity engaged or about to become engaged in
competition with the Corporation.
2. Injunctive Relief from Competition by Schuur. The parties
agree that if Schuur were to violate the provisions of Section
XI.1. above, the use by Schuur of the information he learned
while employed by the Corporation could enable him to engage
in basically unfair competition with the Corporation and its
related corporations, and that such competition in violation
of Section XI.1. above, probably would cause irreparable harm
to the marketing and sales success of the Corporation and its
related corporations. Therefore, if Schuur violates Section
XI.1. above, the Corporation shall be entitled to obtain a
temporary restraining order without delay, and proceed to
obtain a preliminary injunction and permanent injunction
against such violations by Schuur and any person, partnership,
company or corporation through which or for which he acts,
directly or indirectly, to violate Section XI.1. above.
XII. NOTICES.
1. How Sent or Delivered. Any notices sent by any party which is
intended to give written notice required by this Employment
Agreement shall be sent or delivered by sender to the intended
recipient by one or more of the following methods:
A. By certified mail, return receipt requested, postage
prepaid, to the last known address of the intended
recipient; or
B. By delivery personally to the intended recipient.
2. Effective Date of Notice. If a written notice is sent or
delivered by either of the above methods, then the effective
date of the notice for purposes of considering it to have been
received by the intended recipient shall be the earliest of
the following:
A. If by certified mail, return receipt requested, which
is delivered, then or on the date the recipient or
anyone signing for the recipient, signed the return
receipt;
B. If by certified mail, return receipt requested, which
is not delivered, then on the date five (5) business
days after the date the notice was sent.
C. If by personal delivery to the intended recipient,
then on the date the written notice was delivered
personally to the recipient.
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<PAGE>
3. Proof of Delivery of Notice.
A. Certified Mail, Return Receipt Requested. If the
written notice was sent by certified mail, return
receipt requested, proof of sending may be shown by
the U. S. Post Office receipt for the certified mail,
return receipt requested and proof of delivery may be
shown by the signed returned receipt and proof of
attempted delivery sufficient for effective date of
notice without delivery may be shown by the returned
envelope with U. S. Post Office notations showing
attempted delivery dates and notices to the intended
recipient.
B. Personal Delivery. Personal delivery of a written
notice may be shown by a signature of the intended
recipient on a copy of the notice, together with the
legend on the copy of the notice which will read,
"Received," with the date received noted thereafter.
Personal delivery may also be shown by a sworn
statement of the person who delivered the notice,
stated that the notice was delivered to the recipient
or representative of recipient on the date of
delivery, and attaching a copy of the notice, with
reference in the sown statement to the attached copy
of the notice.
XIII. REMEDIES AVAILABLE IN EVENT OF BREACH OF AGREEMENT: VENUE.
In the event that any party breaches this Employment Agreement, the
other party shall have the right to pursue any remedies available to
the party claiming breach, including, but not limited to damages,
injunction relief and declaratory judgment, which may be available
under the laws of the State of Washington. The parties agree that any
claims shall be brought in the appropriate court(s) located in King
County, Washington, which may have jurisdiction pursuant to Washington
law.
XIV. APPLICABLE LAW.
This Employment Agreement shall be construed and interpreted and
enforceable pursuant to the laws of the State of Washington.
XV. ENTIRE AGREEMENT.
This Employment Agreement states the entire agreement between the
parties with respect to the employment of Schuur by the Corporation.
This Agreement cannot be modified by any oral agreement or course of
conduct by either or both parties and any attempt at such modification
shall be null and void. This Agreement may be modified only by a
written document signed by each party.
Dated this ____ day of November, 1996.
EMPLOYEE:
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/s/ Mark T. Schuur
-----------------------------------
MARK SCHUUR
THE CORPORATION:
THE PATHWAYS GROUP, INC.
By /s/ Carey F. Daly II
---------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement between The Pathways Group, Inc.
(hereinafter the "Company") and Joseph Schuler (hereinafter "Executive"),
effective as of November 16, 1997, is made for good and sufficient
consideration, as reflected in the mutual promises, covenants, obligations,
undertakings and conditions set forth below:
1. POSITION AND DUTIES:
The Company shall employ Executive as a Senior Vice President,
Business Development and in any additional capacity or capacities as the
Company's President and Chief Executive Officer may from time to time decide.
Executive shall have the full responsibilities, duties and authorities of the
Company's Senior Vice President, Business Development. In addition, Executive
shall be responsible for implementing and complying with directives issued by
the Company's President and Chief Executive Officer.
2. TERM OF EMPLOYMENT:
Subject to earlier termination as provided in this agreement,
Executive shall be employed for an initial term of three (3) years, which shall
be automatically extended for additional one (1) year periods (such initial term
and all extended terms being referred to collectively herein as the "employment
term") unless either party gives notice in writing to the other not less than
ninety (90) days before the end of the initial term or extended term that the
employment contract shall not be extended.
3. COMPENSATION:
a. Base Salary: Company shall pay a basic salary to Executive
at the rate of One Hundred Thousand Dollars ($100,000.00) per year, payable
semi-monthly, in twenty-four (24) equal installments, subject to all
withholdings and deductions required for federal, state and local taxes and
charges and any other withholdings or deductions authorized by Executive.
Executive's salary shall annually increase in a percentage amount equal to the
most recent annual increase, if any, in the consumer price index, as published
in the Wall Street Journal.-
b. Sales Over-Ride: Three percent (3%) over-ride on Gross
Sales, which will include, but not be limited to Custom Programming, PC Sales,
TIKITBOX Sales, Terminal Sales and Card Sales. This over-ride shall not include
processing revenue.
c. Stock Option: The Company shall issue to Executive options
to purchase One Hundred Thousand (100,000) shares of the Company's common stock,
which options shall vest equally over three (3) years, at an exercise price of
$15.00 per
<PAGE>
share, pursuant to a stockholders plan intended to be qualified under Section
422 of the Internal Revenue Code of 1986 and the regulations promulgated in
relation thereto. The plan will expire November 1, 2001. Unexercised options
awarded to Executive hereunder shall be subject to forfeiture as provided in
Paragraphs 6 and 7 of this agreement.
4. EMPLOYMENT BENEFITS:
Throughout the employment term, Executive shall be entitled to
receive the employment benefits generally offered to all other executive
employees, including, but not limited to, medical, dental, optical, prescription
drugs and life insurance for Executive and his family, at Company expense, and:
a. Executive Compensation Package: Enrollment in
Executive Compensation Package to be announced in early 1998.
b. Vacation: The Company waives its policy on vacations,
to allow for three year treatment.
c. Disability Compensation:
(1) If Executive becomes disabled at any time,
and for any number of times, due to any
cause so that he is physically unable to
perform his ordinary duties and
responsibilities under this agreement, then
Executive shall be entitled to receive, in
lieu of salary, an amount equal to his
salary, payable at the same time and in the
same manner as Executive's salary is paid,
provided however, that this benefit shall be
limited to not more than a total of twelve
(12) months during the term of the
agreement.
(2) Executive's entitlement to disability income
pursuant to this subparagraph shall begin
and end as determined by a certificate
issued by a qualified M.D. or D.O. licensed
by the State of California. The certificate
shall state in substance that, " Executive
was determined to be disabled and unable to
perform the ordinary and usual duties as
Vice President, Business Development of
Pathways, beginning [date] and Executive's
disability continues as of this [date] ."
Such a certificate shall be submitted every
three (3) months beginning with the date of
disability and continuing thereafter until
Executive's disability ends and he is able
to return to work full time or his
disability compensation benefit has been
fully used, whichever occurs first.
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5. EXPENSE REIMBURSEMENT:
During the employment term, the Company shall reimburse
Executive for reasonable out-of-pocket expenses incurred in connection with the
Company's business, including travel expenses, food, and lodging when away from
home, subject to such policies as the Company may from time to time reasonably
establish for its employees.
6. LIMITATION ON OUTSIDE ACTIVITIES:
During his employment, Executive shall devote his full
occupational time, energies, abilities, knowledge and experience to the
performance of his duties under this agreement and shall not render to others
services of any kind for compensation or engage in any other business activity
without the Company's prior written consent. Executive shall not, directly or
indirectly, whether as a partner, employee, creditor, shareholder or otherwise,
promote, participate or engage in any business activity competitive with the
Company or its subsidiaries, affiliates, co-venturers, customers or assigns.
Executive shall not take any action to establish, form, assist or become
employed by any such competing business on termination of Executive's
employment. Executive's breach of any of the provisions of this paragraph shall
give the Company the right, in addition to all other remedies the Company may
have, to terminate the employment and to cancel and/or terminate any and all
compensation and benefits to which Executive might otherwise be entitled under
this agreement.
7. TERMINATION OF EMPLOYMENT:
The employment created by this agreement may be terminated
during the employment term in accordance with the following provisions of this
paragraph:
a. Termination Without Cause by the Company: The employment
may be terminated without cause in the sole and absolute discretion of the
Company upon written notice by the Company to Executive; provided, however, that
if this agreement is terminated pursuant to this subparagraph, Executive shall
receive from Company all salary and benefits provided under this agreement for
twelve (12) months after the effective date of the termination. Such salary and
benefits shall constitute the complete and exclusive obligation of the Company
for termination of the employment and for any and all claims of Executive
arising out of or in connection with Executive's employment or the termination
thereof.
b. Termination Without Cause by the Executive: The employment
may be terminated without cause in the sole and absolute discretion of Executive
upon six (6) months' written notice by Executive to the Company, provided,
however, that if this agreement is terminated pursuant to this subparagraph,
Executive shall forfeit any unexercised, vested stock options under this
agreement.
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c. Termination For Cause by the Company: The Company may
terminate the employment at any time upon written notice to Executive if the
Company ceases a substantial portion of its business operation, in the event of
the sale or change of ownership of the Company or a substantial portion of its
assets, or if, in the sole and absolute determination of the Company:
(1) Its business circumstances change so
materially that it is impracticable for the
Company to continue using Executive's
employment services; or Executive's
continued employment would not confer to the
Company the substantial benefit intended to
be gained by the employment; or
(2) Executive breaches his duty of loyalty to
the Company or any material term, promise,
covenant, condition, obligation, undertaking
or commitment set out in this agreement or
the Company's operational policies or
procedures, personnel policies or procedures
or work rules; commits any material act of
dishonesty or illegality; commits any act or
omission creating an unreasonable risk of
civil or criminal legal action against the
Company; discloses any trade secret or
confidential or proprietary information of
the Company, its subsidiaries, affiliates,
co-venturers, customers or assigns; is
guilty of carelessness, misconduct, neglect
of duty or unsatisfactory work performance;
or acts in any way that significantly
impedes or creates a risk of significant
detriment to the Company's operations,
profits, reputation or other business
interests.
Such termination shall be effective immediately upon notice of
termination under the terms of paragraph 7(A.) herein.
d. Termination For Cause by Executive: Executive may terminate
the employment at any time upon written notice to Executive, if, in the sole and
absolute determination of Executive, the Company breaches any material term,
promise, covenant, condition, obligation, undertaking or commitment set out in
this agreement; commits any material act of dishonesty or illegality; commits
any act or omission creating an unreasonable risk of civil or criminal legal
action against Executive; improperly discloses any personal or private
information of Executive protected by any Constitutional or statutory right to
privacy; acts in a manner constituting constructive discharge of Executive; or
the Company's actions or business circumstances or Executive's personal or
family circumstances make it impossible or impracticable for Executive to
continue performing employment services to the Company. Such termination shall
be effective immediately upon notice of termination.
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<PAGE>
e. Termination In The Event of Disability: If Executive is
unable, due to mental or physical illness or injury, to substantially perform
his duties under this agreement in a satisfactory manner for a period of twelve
(12) months, the' employment shall terminate at the end of such period.
8. CONFIDENTIALITY, PROPERTY RIGHTS AND NO
SOLICITATION:
a. Confidential Information: In the course of his employment
by the Company, Executive will have access to trade secrets and confidential and
proprietary information of the Company, its subsidiaries, affiliates,
co-venturers and customers, including, but not limited to, sales methods and
plans, marketing methods and plans, business development plans and techniques,
business methods and plans, technologies, technology applications, products
(developed and under development), services, product research, processes,
techniques, inventions, discoveries, formulae, patterns, devices, know-how,
sales figures, sales projections, estimates, accounting records, accounting
procedures, customer lists, proposals, price lists, and other customer
information (collectively referred to as "Confidential Information"). Except as
required in the course of his employment by Company, Executive will not, without
Company's prior consent, either during his employment by Company or after
termination of the employment, directly or indirectly disclose to any third
person any Confidential Information. Executive acknowledges and agrees that all
such Confidential Information, regardless of who discovered, created or
developed it, is the property of the Company, solely and exclusively, and is
valuable proprietary information of the Company. Upon termination of the
employment, whether with or without cause, Executive shall immediately return
and deliver to the Company.
b. No Solicitation of Employees: Executive agrees that, during
his employment and for two (2) years thereafter, he will not solicit any of the
Company's employees for a competing business and will not induce or attempt to
induce any of the Company's employees to leave their employment with the
Company.
c. Intellectual Property Rights: All rights, title and
interest of every kind and nature whatsoever in and to any intellectual
property, including, but not limited to, any inventions, patents, trademarks,
copyrights, films, scripts, ideas, creations, concepts, theories, technologies,
technology applications, products (developed and under development), product
research, prototypes and models, whether or not invented, created, written,
developed, furnished, produced or disclosed by Executive in the course of
rendering his services to the Company under this Agreement shall, as between the
parties hereto, be and remain the sole and exclusive property of the Company for
any and all purposes and uses whatsoever, and Executive shall have no right,
title or interest of any kind or nature therein or thereto, or in and to any
results and proceeds therefrom.
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d. Return of all of the Company's Property: Whenever requested
by the Company during the employment, and without request upon termination of
the employment, whether termination is with or without cause, Executive shall
immediately return and deliver to the Company all of the Company's property,
including all items used by Executive in rendering services hereunder and all
originals and copies of the Company's documents and data, including, but not
limited to, all Confidential Information.
9. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT:
Executive and the Company recognize and acknowledge that in
his employment, he will become familiar with all of the Company's sales methods
and plans, marketing, marketing and development, technologies, applications of
technologies, products (developed and under development), product research,
business methods and plans, data, processes, techniques, inventions,
discoveries, formulae, patterns, devices, know-how, services, products, and
other customer information (collectively referred to as "Confidential
Information"), in all of the geographic areas throughout the world in which the
Company already has made marketing efforts and/or sales of products and
services, and he will become knowledgeable about present and future marketing
proposals and plans for those products and services. Executive agrees, as part
of the consideration for this Employment Agreement, that Executive will not
engage, directly or indirectly, nor solicit employees of the Company to engage
in the development, distribution, manufacture or sale of any products or
services which compete with the products or services provided by the Company or
its related companies, for a period of one (1) years. The parties agree that the
phrase "engage, directly or indirectly, nor solicit employees of the Company to
engage in the development distribution, manufacture or sale of any products or
services which compete with the products or services provided by the Company or
its related companies" shall include any situation or circumstance in which
Executive shall be owner, partner, officer, director or shareholder of a
corporation, or an agent, employee or consultant of any business entity engaged,
or about to become engaged, in competition with the Company.
10. INJUNCTIVE RELIEF:
Executive acknowledges and agrees that any breach of the terms
of Paragraphs 8 or 9 above would irreparably injure the Company and that it
would be impossible to measure in money the resulting injury to the Company,
and, in any action to enforce this the terms of Paragraphs 8 or 9 or to enjoin
any breach of those paragraphs, Executive waives any claim or defense that the
Company has an adequate remedy at law or that the Company would not be
irreparably injured by breach of the terms of Paragraphs 8 or 9, and Executive
acknowledges and agrees that the Company will be entitled to temporary,
preliminary and permanent injunctive relief and restraining orders, without any
delay whatsoever, in connection with any breach, or threatened or impending
breach, of any of the terms of those paragraphs. In any action to enforce the
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Company's rights under Paragraphs 8 through 10 of this agreement, the party
prevailing in such action shall be entitled to recover as damages reasonable
attorneys' fees and all other reasonable expenses incurred in the action and in
any efforts prior to or during the action to secure compliance with the terms of
this agreement.
11. ARBITRATION:
Except for claims, disputes and causes of action arising out
of or in connection with Paragraphs 8 through 10 above, the Company and
Executive agree to arbitrate any and all disputes and claims, including
discrimination claims, arising out of or in connection with the employment or
the termination thereof, if the amount in controversy is more than $5,000.00.
This arbitration agreement applies to all disputes between the parties and any
and all claims by Executive against the Company and any officer, director,
employee, agent or representative of the Company, against any corporate parent
or subsidiary of the Company, and/or against any person or company affiliated
with the employer (e.g., a person or company involved in a joint venture,
partnership or other similar business relationship with the employer or one
having an owner, partner or parent or subsidiary corporation in common with the
employer). The arbitration award shall be final and binding on all parties to
the arbitration proceeding. The arbitration shall be conducted in Santa Rosa,
California, pursuant to the California Arbitration Act and the terms of this
agreement. Arbitration may not be initiated after expiration of any statute of
limitation for the commencement of any civil or administration proceeding on the
claim or dispute. Arbitration shall be initiated by written notice by one party
to the other, specifying the nature of each claim or dispute at issue and the
amount and manner of calculation of each item of damages. The parties shall each
appoint one arbitrator, and the parties' arbitrators shall together select a
third neutral arbitrator. If the three arbitrators determine that the claims or
disputes specified in the notice collectively involve an amount in controversy
more than $5,000.00, they shall hear and determine the dispute(s) or claim(s)
according to applicable laws, this arbitration agreement and the Company's work
rules and policies in effect at the time of the events which gave rise to the
arbitration. The three arbitrators shall issue a written decision determining
each dispute, claim and item of damages submitted to the arbitrators.
Determination of each dispute, claim and item of damages shall require the
concurrence of at least two arbitrators, but it is not necessary that the same
two arbitrators concur on every dispute, claim or item of damages. The
arbitration decision shall attest that the requisite concurrence existed as to
each dispute, claim and item of damages. The Company and Executive understand
and expressly agree that, by entering into this arbitration agreement, they are
giving up the right to bring in any court any claim, cause of action or dispute
arising out of or in connection with the employment or the termination thereof,
including the right to a jury trial. The arbitration award may be confirmed by
any court having jurisdiction of the matter, and judgment may be entered on the
confirmed award. Charges and expenses of the neutral arbitrator shall be borne
by the parties equally, and the parties shall deposit their respective shares of
the neutral arbitrator's estimated charges prior to the arbitration hearing. The
parties shall each bear their own cost s', expenses and attorneys' fees in
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<PAGE>
connection with the arbitration, unless a statute or contract applicable to the
claim or dispute expressly provides for recovery of attorneys' fees by the
prevailing party.
12. INCORPORATION AND INTEGRATION:
Executive shall comply with and enforce all of the Company's
operational policies and procedures, personnel policies and procedures and work
rules, as they may be promulgated in writing from time to time. Except for such
operational policies and procedures, personnel policies and procedures and work
rules, this written agreement contains the entire agreement between the parties
and supersedes all prior oral, written and/or implied agreements, promises,
covenants, obligations, undertakings, commitments, representations and
understandings by or between the parties, including all prior employment
agreements, whether or not fully performed by Executive before the date of this
agreement. The Company and Executive acknowledge and agree that there are no
terms, conditions, covenants, obligations or promises, express or implied,
applicable to the employment except those set out in this agreement. There shall
be no amendment, modification, change or enlargement of this agreement except by
a writing signed by the party to be charged with performance of the amendment,
modification, change or enlargement. In the event of any conflict or difference
between this agreement and Company's current or future operational policies and
procedures, personnel policies and procedures and work rules, the provisions of
this agreement shall control.
13. SURVIVAL, GOVERNING LAW, VENUE AND SEVERABILITY:
The representations, warranties, covenants, promises and
restrictions set out in this agreement shall operate continuously and shall
survive termination of the employment created by the agreement. The agreement
shall inure to the benefit of and be binding upon Executive, his heirs, estate,
executors, administrators and all others claiming through or on behalf of
Executive, and upon Company, its subsidiaries, affiliates, successors and
assigns. The agreement shall be construed and governed in accordance with the
laws of the State of California. All actions, arbitrations and proceedings
arising from or in connection with the agreement or the employment it creates
shall be commenced and maintained in Sonoma County, State of California. If any
term, covenant, condition, clause or provision of this agreement is held to be
invalid or unenforceable, then such clause or provision shall be severed
herefrom, and such invalidity or unenforceability shall not affect any other
provision of this agreement, the balance of which shall remain in full force and
effect; provided, however, that if any such term, covenant, condition, clause or
provision may be modified so as to be valid or enforceable as a matter of law,
then such term, covenant, condition, clause or provision shall be deemed
modified so as to be enforceable to the maximum extent permitted by law.
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<PAGE>
14. NOTICES:
Any notices to be given hereunder by any party to another
party shall be in writing and delivered in person or mailed registered or
certified mail, postage prepaid with return receipt requested.
/s/ J. Schuler /s/ Carey F. Daly II
Joseph Schuler The Pathways Group, Inc.
Carey F. Daly II
President & CEO
<PAGE>
EXHIBIT 10.10
The Pathways Group, Inc.
Corporate Office
14201 NE 200th Street
Woodinville, WA 98072
Telephone (425) 483-3411
Facsimile (425) 485-4476
Carey F. Daly, II
President and CEO
December 12, 1997
Dr. Herman Aizawa
Superintendent
Department of Education, State of Hawaii
Queen Liliuokalani Building
1390 Miller Street
Honolulu, HI 96813
Re: Application of Smart Card Technology for the
School Lunch Program,
A+ After School Care Program, and
Bus Program
at the Mililani Schools Complex
Dear Dr. Aizawa,
In an effort to summarize the current status of negotiations between the
Department of Education (DOE) and the Pathways Group, Inc. (PATHWAYS), we are
submitting this Letter of Intent (LOI). This LOI is consistent with recent
discussions between Mr. Carey Daly and Mr. David Mayeda of PATHWAYS and Mr.
Alfred Suga, Ms. Diane Oshiro, Ms. Vicky Kajioka, Mr. Allan Stone and Mr. Gene
Kaneshiro, all representing the DOE. It is understood that this LOI and any
ensuing negotiations resulting between PATHWAYS and the DOE are covered by a
Non-Disclosure Agreement (NDA) which is attached to this LOI.
This letter is only a statement of intent to move forward and gather the
necessary information from the schools involved and to continue negotiations
with Ms. Oshiro and the other participants in this project toward a mutually
successful Pilot Program.
<PAGE>
A binding agreement concerning this Pilot Program between the parties will arise
only when all material terms have been stated in a written agreement approved by
legal counsel of each party and signed by the CEO of PATHWAYS and the
Superintendent of DOE.
All documents concerning the proposed provisions of a binding agreement which
are exchanged in the course of negotiations, even if signed by a CEO or
Superintendent, shall be considered only a part of the negotiations and shall
have no legal effect unless subsequently incorporated in the fully executed
Pilot Agreement. Each party agrees that it will not contend to the contrary.
1. Designation of Negotiators
The parties agree that the persons named below shall represent them in the
negotiations:
For The Department of Education (DOE):
Name and Title: Diane Kaapana Oshiro
Assistant Superintendent
Office of Information &
Telecommunication Service
Business Address: Department of Education
P. O. Box 2360
Honolulu, HI 96804
Business Phone: (808) 586-3307
Business Fax: (808) 586-3645
For The Pathways Group:
Name and Title: David Mayeda
Hawaii Region Manager
Business Address: The Pathways Group, Inc.
745 Fort Street, Suite 333
Honolulu, HI 96813
Business Phone (808) 531-4408
Business Fax: (808) 537-3541
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<PAGE>
2. Conduct of Negotiations
All negotiations, including exchanges of drafts, proposals and other
information, shall be conducted only through the negotiators named above.
3. Points of Tentative Agreement and Further Negotiation
A. Both parties are working towards an agreement for a Pilot
Program for the School Lunch, A+ After School Care and
the Bus program for the Mililani School Complex involving
the installation of integrated, Smart Card based
transaction systems for a minimum period of 90 days.
Details on the pilot are currently in continued
negotiation.
B. In forming a Pilot Project Agreement, the parties agree
to the following general allocation of responsibilities
which may be modified on a case-by-case basis if
circumstances warrant:
(1) PATHWAYS will provide an integrated
system solution for specifically identified
projects, in which PATHWAYS will integrate
the use of Smart Cards, related
reader/writer devices and terminals for
specific engagements into a transaction and
database system. Such a system will provide,
as necessary, for database management,
reports, interfaces, security, card stock
management, personalization, fulfillment,
clearance and the facilitation of bank
settlement The system will include all
software necessary to perform these
functions and facilitate operation of the
integrated system for each identified
project. The identification of the projects,
and the components of each are to be
negotiated to whatever extent is reasonable,
given the status of each identified project.
(2) DOE will provide an initial data set from
various DOE data sources in a format to be
defined and negotiated for each identified
project.
(3) DOE will provide supplemental data to the
original conversion data set in a form and
with specified frequency as defined and
negotiated for each identified project on an
ongoing basis.
C. DOE and PATHWAYS will provide to each other
information and support necessary for each party to
complete this Pilot Project. The terms and conditions
are to be negotiated.
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<PAGE>
D. The parties anticipate working together on the following
projects:
(1) School Lunch Program
(2) School Bus Program
(3) A+ After School Care Program
The terms and conditions of each cooperative effort may vary and
will be subject to negotiation.
4. Target Date for Execution of Pilot Program Agreement
The target date for execution of a Pilot Program Agreement
between the parties is January _____, 1998. However, if a Pilot Program
Agreement has not been signed by that date, nevertheless the parties expect
to continue toward signing of a Pilot Program Agreement as soon as possible
thereafter.
5. Termination of Negotiations
The parties also recognize that either party, at any time, and
without stating any reason, may terminate the negotiations for which this
Letter of Intent provides.
6. Applicable Law
This Letter of Intent shall be construed and interpreted
pursuant to the laws of the State of Hawaii, including its choice of law
rules.
7. Entire Letter of Intent:
This Letter of Intent supercedes prior discussions and
agreements, if any, between the parties concerning a possible Comprehensive
Business Relationship Agreement. The provisions of this Letter of Intent
shall not be amended or modified except by a written amendment to this Letter
of Intent signed by the CEO of Pathways and the Superintendent of the DOE.
This Letter of Intent is expressed in two identical originals to
be signed by both parties.
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<PAGE>
I have signed the enclosed originals. If this Letter of Intent
states our mutually acknowledged current intent respecting the procedures,
purpose and scope of our negotiations, please indicate by signing below and
returning one signed original to PATHWAYS' Corporate Offices in Woodinville,
Washington.
THE PATHWAYS GROUP, INC. The Department of Education (DOE)
State of Hawaii
By: /s/ Carey F. Daly II By: /s/ Herman Aizawa
Carey F. Daly II Herman Aizawa
President & CEO Superintendent
Date: 12/12/97 Date: 12/23/97
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<PAGE>
EXHIBIT 10.11
EQUIPMENT LEASE AGREEMENT
No. 0554
THIS LEASE is made on the 25th day of August, 1997, by and
between Union Bank of California N.A., hereinafter called "Lessor," and The
Pathways Group, Inc., hereinafter called "Lessee." It is hereby mutually
agreed:
WITNESSETH:
1. Lease. Lessor hereby agrees to lease to Lessee and
Lessee hereby agrees to hire from Lessor the unit or units of equipment,
machinery or other personal property (hereinafter called "equipment")
described in the Equipment Lease Schedule or Schedules (hereinafter called
"Schedule") executed by the parties concurrently herewith or hereafter with
reference hereto. Each such Schedule shall be a separate lease upon the terms
contained herein and in the Schedule.
2. Term. The term of any lease hereunder for a unit or
units of equipment shall commence upon delivery to Lessee of the equipment
described on the Equipment Lease Order and shall end at the expiration of the
term stated in the Schedule.
3. Rent. The rent for equipment described in the Schedule
shall be the amount stated in the Schedule. Lessee shall pay Lessor the total
rental without demand in installments in advance, commencing the date of
actual delivery of the equipment, without deduction or offset, in the amounts
and at the times set forth in the Schedule. Rent shall be payable to Lessor
or its assignee (at such place a Lessor or its assignee may from time to time
designate in writing) and shall not abate for any reason during the term.
4. Licensing, Registration and Taxes. Lessee shall obtain
such licensing and registration of the equipment as is required by law. In
addition to rent, Lessee shall pay and discharge when due all license,
registration and other fees, all assessments, sales, use, property, and other
taxes, together with any fines, penalties or interest applicable thereto, now
or hereafter imposed by any state, Federal or local government upon or on
account of the equipment, or the acquisition, purchase, leasing, use,
possession or operation thereof, whether or not measured by rental income
received by Lessor, (EXCLUDING, however, income taxes based on net income or
gross receipts or gross income of Lessor), and whether the same be payable by
or assessed to Lessor or Lessee; provided, however, if under local law or
custom such payments may be made only by Lessor, Lessee shall promptly notify
Lessor and shall reimburse Lessor, upon demand for all payments thereof made
by Lessor. If by law any such fee or tax is billed to Lessor, Lessee at its
expense will do any and all things required to be done by Lessor in
connection therewith and in payment thereof.
5. No Warranties by Lessor. Lessee acknowledges that Lessor
is not the manufacturer or vendor of the equipment, and that LESSOR MAKES NO
WARRANTY, REPRESENTATION, OR PROMISE, EXPRESS OR IMPLIED, AS TO THE
CONDITION, QUALITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR ANY
OTHER MATTER CONCERNING THE EQUIPMENT OR THE MATERIALS OR WORKMANSHIP IN THE
EQUIPMENT, OR THAT THE EQUIPMENT IS FREE OF DEFECTS OR WILL SATISFY ANY
REQUIREMENT FOR SPECIFIC MACHINERY OR CAPACITY OR SPECIAL METHODS, ALL
WARRANTIES BEING THEREBY EXPRESSLY DISCLAIMED. Lessor shall have no
obligation to install, erect, test, adjust or service the equipment.
Responsibility for all matters regarding the equipment is to be borne by
Lessee at its sole risk and expense. Lessee may obtain whatever installation
and service to the equipment the manufacturer or vendor customarily renders,
provided that no such installation or service be at the expense of Lessor.
Lessee hereby waives any claim it might have against Lessor for any loss,
damage, or expense caused by the equipment or by any defect therein, use or
maintenance thereof or servicing or adjustment thereto. During the period of
any lease hereunder in which Lessee renders faithful
<PAGE>
performance of its obligations, Lessor hereby assigns to Lessee any factory
or dealer warranty Lessor may have on the equipment covered by any lease
hereunder. All such warranties are for the benefit of both parties. Lessee
shall make and enforce claims on any such warranty at Lessee's expense.
Lessor may but shall have no obligation whatsoever to claim on or enforce any
warranty. Any monetary recovery on any warranty shall be paid to Lessee and
Lessor. Proceeds of a warranty recovery shall be applied first to satisfy any
interest of Lessor and any remainder paid to Lessee.
6. Lessee's Inspection, Defects, and Indemnity. All
equipment leased will be selected by Lessee who shall select the manufacturer
and the vendor thereof. Lessee agrees Lessor shall have no duty or obligation
whatsoever to inspect any equipment. Promptly after delivery, prior to use,
and prior to executing the Equipment Lease Schedule, Lessee shall inspect for
defects and test the equipment at Lessee's expense. Lessee agrees to notify
Lessor in writing of any defect in or objection to the equipment. If Lessee
fails to make complaint, the equipment shall be deemed to be in good
condition and without defect. Lessee agrees to defend at its own cost and to
indemnify and hold harmless Lessor, its agents and employees, from and
against any and all loss, claims, costs, expenses (including attorneys fees
and legal expense), damages, and liabilities of every kind, for injury to or
death of any person or damage to any property, arising out of or connected
with any latent or other defect in the equipment or any part thereof,
irrespective of whether such losses, claims, costs, expenses, damages or
liabilities were actually or allegedly caused wholly or in part by any act,
failure to act, or negligence of Lessor or any of its agents or employees, or
whether responsibility therefor is based on strict liability imposed upon
Lessor.
"The equal employment opportunity clauses of Executive
Orders 11246 (as amended by Executive Order 11375 and including signers
certification hereby that its does not maintain segregated facilities), 11625
(relating to minority business enterprise). Section 503 of the Rehabilitation
Act of 1973 as amended, Section 402 of the Viet Nam Era Veterans Readjustment
Assistance Act of 1974, written Affirmative Action Compliance Program and all
subsequent orders related to equal employment opportunities and implementing
rules and regulations of the Secretary of Labor are incorporated herein by
reference to the extent such orders are applicable to signer in connection
with this lease."
7. Location, Use. All equipment shall be leased by Lessee
for use in Lessee's business and shall be permanently kept and maintained at
the location shown on the Schedule. Equipment may be re-located by Lessee
with Lessor's prior written consent. On demand, Lessee shall give Lessor
written notice of the exact location of any or all equipment. Lessee agrees
to use equipment only for the purposes for which it was manufactured.
Lessee shall not affix or attach any equipment to real
property or other personal property without the prior written consent of
Lessor. Lessee shall obtain written agreements, releases and waivers, in form
and substance acceptable to Lessor, from all parties interested in any such
realty or other personal property (whether as owner, lien holders, or
otherwise) providing that all equipment shall remain personal property of
Lessor and subject to the lease thereof even though so affixed or attached,
and that all or part of said equipment may be removed or at the Lessor's
option abandoned in place.
Lessee shall use due care in connection with and shall
comply with all laws, ordinances and regulations relating to the possession,
use, operation or maintenance of equipment, and shall make any modification
thereof or addition now or hereafter required by any law, ordinance or
regulation at Lessee's expense. Lessor may at any time during normal business
hours enter the premises where the equipment may be located, for the purpose
of examining the equipment to insure compliance by Lessee with its
obligations under any lease made hereunder.
8. Repairs, Alterations. Lessee, at its expense, shall keep
and maintain the equipment in good repair, condition and working order and
shall keep the equipment protected from the elements. Lessee shall not make
any alterations, additions or improvements to the equipment without
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<PAGE>
the prior written consent of Lessor. All alterations, additions and
improvements shall be made at Lessee's expense and shall on installation
become part of the equipment and the property of Lessor.
9. Insurance. Lessee, at its expense, agrees to procure and
maintain insurance in the amounts and covering the risks as Lessor from time
to time requires, including but not limited to the insurance specified in the
Equipment Lease Schedule. Lessee shall comply with all requirements necessary
to maintain all such insurance in force during the entire term of the lease
and until Lessee returns the equipment to Lessor. All such insurance shall be
in the joint names of Lessor and Lessee and shall be in a form and with
companies acceptable to Lessor. All policies shall provide that insurance may
not be altered or canceled without ten (10) days prior written notice to
Lessor. Lessee shall furnish such evidence of insurance and terms and
conditions of policies as Lessor may require. Public liability and property
damage insurance maintained by Lessee shall inure first to the benefit of
Lessor to the full extent of its liability, if any, and the remainder to the
benefit of Lessee. The proceeds of any theft, fire, extended coverage,
collision or any other insurance providing coverage to risks to equipment
shall be payable solely to Lessor and shall be applied to Lessor in
accordance with the provisions of this lease. Lessee hereby irrevocably
appoints Lessor as Lessee's attorney-in-fact to make claim for, receive
payment, and in Lessee's name, execute and endorse all documents, checks and
drafts for loss, damage, or return premium, under any insurance.
10. Damage or Destruction. Commencing at the time such
risks pass to Lessor from the manufacturer or vendor of the equipment and
continuing during the term and until Lessee returns the equipment to Lessor,
Lessee assumes the entire risk of loss, theft or destruction of, and damage
to, all equipment leased hereunder, from every cause whatsoever, whether or
not covered by insurance, and no such event shall release or relieve Lessee
from its obligation to pay rent or to perform any of its lease obligations.
Lessee agrees to give Lessor written notice forthwith upon the occurrence of
any such event. Should one or more units of leased equipment suffer damage,
or be lost, stolen, or destroyed, for each such unit Lessee shall, at
Lessor's option, either:
(a) Repair each unit damaged at Lessee's expense and the
amount of insurance proceeds, if any, paid on policies of insurance
maintained by Lessee shall be applied to the cost of such repair; or
(b) Replace the equipment with similar equipment,
acceptable to Lessor, at Lessee's expense, in which event the lease shall
continue for such equipment, and the amount of insurance proceeds, if any,
received by Lessor for such unit on policies of insurance maintained buy
Lessee shall be paid to Lessee; or
(c) Pay Lessor the stipulated loss value specified in the
Schedule for the unit, and the lease of such unit of equipment and rental
therefor shall terminate with respect to the item of equipment for which
Lessee has paid. Lessee shall be entitled to receive any salvage value, and
the amount of insurance proceeds, if any, received by Lessor for such unit on
policies of insurance maintained by Lessee shall be paid to Lessee.
If the lease of any one or more but not all units of a lot
of multiple units leased pursuant to a single Schedule shall terminate
pursuant to the foregoing provisions, the lease of the remaining units of
equipment covered by such Schedule shall nevertheless continue in full force
and effect.
11. Indemnity. Lessee agrees to defend at its own cost and
to indemnify and hold harmless Lessor, its agents and employees, from and
against any and all loss, claims, costs, expenses (including attorneys fees
and legal expense), damages and liabilities of every kind, however arising or
caused, resulting directly or indirectly from or in any manner connected with
or pertaining to the equipment, or any part thereof, or ownership, shipment,
transportation, delivery, possession, use, condition (including without
limitation, latent or other defects, whether or not discoverable by Lessor),
location, maintenance or operation thereof (including, without limitation,
such loss, claims, costs,
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<PAGE>
expenses, damages and liabilities due to the death of or injury to Lessee or
Lessor, their agents or employees or any third person or damage to the
property of Lessee or Lessor, their agents or employees or any third person),
irrespective of whether such losses, claims, costs, expenses, damages or
liabilities were actually or allegedly caused wholly or in part by any act,
failure to act, or negligence of Lessor or any of its agents or employees, or
whether responsibility therefore is based on strict liability imposed upon
Lessor.
12. Default. Time is of the essence. Non-payment or delay
by Lessee in the payment of any rental or any other sum payable hereunder or
under any lease for more than ten days, or non-performance or failure by
Lessee to fully perform any covenant, condition or obligation required of
Lessee hereunder or under any lease, or cancellation of coverage by any
carrier of insurance required hereunder or under any lease, shall constitute
a total breach and default by Lessee. If Lessee shall cease to do business or
become insolvent, or if an assignment for the benefit of creditors is made by
Lessee, or if Lessee commits any act of bankruptcy, or if any proceeding in
bankruptcy, insolvency, reorganization, arrangement, receivership, or
proceeding for the benefit of creditors is instituted by or against Lessee,
or if any levy or seizure is made on any unit of equipment, or if a receiver
or trustee is appointed to take possession of any unit of equipment, such
event shall constitute a total breach and default by Lessee. Acceptance of
payment shall not constitute a waiver of any default.
In the event of default by Lessee, to the extent permitted
by applicable law, Lessor may exercise part or all of any one or more of the
following rights and remedies at any time and in any order separately or
concurrently with respect to any or all leases hereunder:
(a) Declare immediately due and payable, and upon demand
Lessee will pay, all the rent then unpaid for the full remaining term on any
or all of the equipment leased to Lessee as Lessor may elect. Payment by
Lessee shall not terminate the lease of such equipment or Lessor's right to
recover possession of such equipment at the expiration of the term or sooner
if Lessee shall continue in default or suffer any subsequent default.
(b) Require Lessee to assemble and turn over to Lessor any
or all of the equipment leased to Lessee as Lessor may elect. On demand of
Lessor therefor, Lessee agrees to assemble and turn over such equipment to
Lessor and if Lessee fails to do so, Lessor shall have the right to recover
and Lessee will immediately pay Lessor, in addition to any other amount, an
amount equal to the stipulated loss value specified in the applicable
Schedules for the time period immediately following the last time period for
which rent has been paid.
(c) Take possession of any or all equipment leased, having
for such purpose the right to enter upon any premises where equipment may be
without any court order or other process of law and repossess and remove said
equipment, either with or without notice to Lessee, using all force permitted
by law so to do. Lessee waives all claims for damages because of entry or
taking possession, whether or not Lessee was in default at the time, if
Lessor reasonably believed that Lessee was in default. Taking possession of
equipment shall not terminate the lease thereof unless Lessee is given a
written notice electing such termination by Lessor. Absent such written
notice, the lease thereof shall remain in effect and Lessee shall remain
liable for all payments to be made thereunder.
(d) From time to time, with or without notice to Lessee and
without terminating the lease thereof, re-let all or part of the equipment to
any other person or persons at such rental and upon such covenants and
conditions as Lessor shall determine for a term or terms of any duration
which may extend beyond the expiration date of the term specified on the
applicable lease. If Lessor re-lets any of the equipment and the rentals
received therefrom be less than that agreed to be paid by Lessee on the
applicable lease, Lessee shall be liable for such deficiency which shall be
paid monthly or from time to time at Lessor's option. Notwithstanding any
such reletting of equipment without termination, Lessor may at any time
thereafter by written notice to Lessee elect to terminate Lessee's lease
thereof for such previous default and enforce its rights on termination.
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<PAGE>
(e) Sell all or any part of the equipment at a public or
private sale held with or without notice to Lessee. Sale of a unit of
equipment shall constitute an election by Lessor to terminate the Lease as to
such unit and Lessor may enforce its rights on termination. If Lessor sells
any part of the equipment, the parties agree that the proceeds of sale, less
an allowance to Lessor on account of the residual value of the equipment
sold, shall be deemed to be the then reasonable rental value of such
equipment for the balance of the stated term.
(f) At any time and from time to time, terminate any or all
or any part of such leases as to such equipment as Lessor may elect. On
termination, in addition to its rights to recover any other amounts, Lessor
shall have the right to recover from Lessee, and Lessee will immediately pay
Lessor, the worth at the time of such termination, of the excess, if any, of
the amount of rent and charges equivalent to rent reserved in the lease for
the equipment concerned for the balance of the stated term thereof over the
then reasonable rental value of such equipment for the same period. If the
lease of any one or more but not all units of a lot of multiple units leased
pursuant to a single Schedule shall be terminated by Lessor pursuant to the
foregoing provisions, the lease of the remaining units of equipment covered
by such Schedule shall nevertheless continue in full force and effect.
(g) Pursue any other remedy which Lessor may have
hereunder, under any other agreement with Lessee, or under the law. Lessor's
rights and remedies are cumulative and not alternative and may be enforced
separately or concurrently. Partial exercise of any right or remedy shall not
preclude other or further exercise thereof or of any other right or remedy.
In addition to any other amounts, Lessee shall be liable for and shall pay
all costs and expenses of Lessor in repossessing, transporting, storing,
repairing, leasing, selling, or otherwise handling said equipment, and the
reasonable attorneys' fees and legal expenses actually incurred by Lessor in
exercising rights and remedies.
13. Non-Waiver. Any forbearance, failure or delay by Lessor
in exercising any right or remedy hereunder or under any lease shall not be
deemed to be a waiver of such right or remedy or of any default by Lessee,
and any single or partial exercise of any right or remedy shall not preclude
the further exercise thereof. No waiver of any of Lessee's obligations shall
occur and all rights and remedies of Lessor shall remain in full force and
effect unless specifically waived in writing signed by a duly authorized
officer of Lessor.
14. Assignment by Lessor. Lessor may assign, pledge or in
any other way transfer any lease hereunder or any interest therein, either in
whole or in part (all of the foregoing being herein referred to as
"assignment"), without notice to Lessee. In the event of such assignment, no
breach or default by Lessor of any lease hereunder or of any other agreement
between Lessee or Lessor shall excuse performance by Lessee of any lease
obligation to the assignee. No assignee shall be obligated to perform any
covenant, condition or obligation required to be performed by Lessor unless
the assignee assumes the Lessor's obligations in writing, except that if
Lessor has paid the amount of any advance rent or security deposit to an
assignee, such assignee shall be obligated to pay Lessee any amount thereof
remaining at the termination of the lease and Lessor shall have no liability
to Lessee for repayment thereof. The right of an assignee to receive the
rentals or to receive the equipment upon termination of any lease hereunder
shall be free of all defenses, setoffs and counterclaims which Lessee may be
entitled to assert against Lessor, but Lessee may separately assert such
claims against Lessor. No alteration or modification of any lease hereunder
may be made without the written consent of the assignee of such lease after
Lessee receives notice of the assignment thereof.
15. Assignment by Lessee. Lessee shall not sell, assign,
pledge, hypothecate, or in any other way transfer any lease hereunder, or any
interest therein, nor sublet, lend, hypothecate, or in any other way transfer
any equipment, or any interest therein, or part with possession or control of
any equipment without the prior written consent of Lessor. Consent to any of
the foregoing acts shall not constitute or be deemed to be consent to any
other or subsequent act.
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<PAGE>
16. Ownership by Lessor. Title to the equipment shall at
all times remain in Lessor and the equipment shall at all times remain the
sole and exclusive property of Lessor. Lessor may grant third parties a
security interest in any equipment and in such event, Lessee agrees to
execute any document reasonably required by Lessor in connection therewith.
Lessee shall prominently affix to the equipment and maintain any labels,
plates or other markings from time to time provided by Lessor stating that
the equipment is owned and leased by Lessor and shall keep equipment free and
clear of all liens, claims, and charges incurred by Lessee.
17. Surrender, Holdover. Upon the expiration or termination
of any lease hereunder, Lessee shall return each item of equipment to Lessor,
free of all advertising or insignia placed thereon by Lessee, and in good
condition, repair and working order, ordinary wear and tear excepted. The
equipment shall be returned by Lessee at Lessee's expense, by delivering the
equipment to any location selected by Lessor within the State of California,
notwithstanding that the equipment may have been relocated with Lessor's
consent. If equipment is returned in condition other than as stated herein,
Lessee shall pay for the necessary repairs to place it in such condition. Any
holding of equipment by Lessee beyond the term of any lease hereunder, shall,
at Lessor's option, be deemed an extension of the original lease on a
month-to-month basis, and all obligations of Lessee shall continue during
such holding over. During any such holding over, Lessor may terminate such
lease upon thirty days written notice to Lessee.
18. Financial Reports. Lessee shall give Lessor a copy of
Lessee's annual financial and profit and loss statements as soon as available
and in any event within 120 days after the end of each fiscal year of Lessee,
and such other financial information, statements and reports as Lessor may
from time to time request.
19. Attorneys Fees. In the event any action or proceeding
is brought to enforce the rights or obligations of the parties hereunder, or
under any Equipment Lease Order, or under any lease, the prevailing party in
such action, in addition to any other relief, shall be entitled to recover
its reasonable attorneys fees and legal expense incurred.
20. Notices. All notices required or permitted under any
lease hereunder shall be sufficient if delivered personally or mailed to the
party at the address hereinafter set forth, or at such other address as
either party may designate in writing from time to time. Any such notice
shall be effective forty-eight (48) hours after it has been deposited in the
United States mail, duly addressed, and postage prepaid.
<TABLE>
<CAPTION>
<S> <C>
Union Bank of California, N.A. The Pathways Group, Inc.
Equipment Leasing Department
LESSOR LESSEE
</TABLE>
21. Nature of Transaction. Lessor makes no representation,
express or implied, concerning the nature or effect of transactions hereunder
for tax or other purposes.
22. General Provisions. Lessor shall not be liable to
Lessee for any loss or damage of any kind by reason of delay or failure in
delivery of any equipment. Lessee shall pay all shipping charges and other
expenses incurred in connection with the delivery of the equipment to Lessee
not paid by the vendor.
Lessee shall give Lessor written notice forthwith in the
event any levy, lien, claim, or charge is imposed upon or asserted against
any leased equipment. Should Lessee fail to pay any sum or perform any act
required of Lessee, Lessor may, but shall not be obligated to, make such
payment or perform such act without thereby waiving the default. Lessee will
reimburse Lessor for any expense or
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<PAGE>
liability incurred by Lessor in so doing, together with interest thereon at
the rate of 10% per annum, payable on demand. If any installment of rent is
not paid within ten days after it is due, Lessee agrees to pay Lessor a
delinquency charge in an amount equal to 5% of such installment. Lessor has
no obligation to accept late payment.
Lessee agrees to execute and deliver to Lessor such
notices, statements and other documents as Lessor may require to affirm or
give notice of the interest of Lessor in any lease or equipment. Lessor is
authorized to insert at any time in any Equipment Lease Order or any Schedule
any information, date or amount intended by the parties to be inserted
therein. No officer, employee or agent of Lessor shall have the power to
waive any of the terms or provisions hereof or to incur additional
obligations on behalf of Lessor unless such waiver or additional obligations
are evidenced by an agreement in writing signed by a duly authorized officer
of Lessor.
Default by Lessor under any lease shall not excuse
performance by Lessee under any other lease. When more than one party signs
as Lessee, they shall be jointly and severally liable to Lessor. All of
Lessee's covenants hereunder and under each lease shall survive the delivery
and return of the equipment leased.
Paragraph headings are not a part of this agreement.
The Equipment Lease and all Schedules hereunder and any
assignments thereof shall be governed by the laws of the State of California.
Lessee agrees to perform its obligations to Lessor and that Lessor may
enforce same in the County of Diego, State of California. If any provision of
this agreement or of any lease hereunder violates any law, such provisions
shall be considered annulled and deemed severable from the remaining
provisions which shall remain in full force and effect. The attached Addendum
A is incorporated herein.
IN WITNESS WHEREOF, the parties have executed this lease on
the day and year first written above.
LESSEE LESSOR
The Pathways Group, Inc. Union Bank Of California, N.A.
By /s/ Mark T. Schuur By
------------------------------- ---------------------------
Mark T. Schuur James F. Nese
Treasurer Assistant Vice President
-7-
<PAGE>
THE PATHWAYS GROUP, INC.
CORPORATE OFFICE
14201 NE 200th Street
Woodinville, WA 98072
Telephone(206) 483-3411 Facsimile(206) 485-4476
September 16, 1997 VIA AIRBORNE EXPRESS
Mr. Jim Nese
Assistant Vice President, Equipment Leasing Department
UNION BANK OF CALIFORNIA 550 South Hope St., 3rd Floor Los Angeles, CA 90071
Dear Jim:
Enclosed please find two signed originals of each of the following lease
documents:
1. Equipment Lease Agreement No. 0554
2. Addendum A to Equipment Lease Agreement No. 0554
3. Addendum B to Equipment Lease Agreement No. 0554
Please sign where indicated on all of the above, retain one executed set for
your files, and return one fully executed original set to my attention.
Thank you for your cooperation.
Yours very truly,
/s/ Mark T. Schuur
Mark T. Schuur
Chief Financial Officer
Encl.
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<PAGE>
ADDENDUM A
TO
EQUIPMENT LEASE AGREEMENT
NO. 0554
This Addendum is a part of the above described Equipment Lease Agreement,
dated August 25, 1997 between Union Bank of California, N.A. as Lessor and
The Pathways Group, Inc. as Lessee.
1. The following clause is inserted between the word "lease," and the word
"or" in the second sentence of Paragraph 12 of the lease:
or default by Lessee under any note or other agreement now
existing or hereafter made with Lessor or any affiliate of
Lessor
2. The phrase "affiliate of Lessor" as used in previous paragraph means
any entity which controls, is controlled by, or is under common control
with Lessor. In the previous sentence, an entity controls another if it
owns, directly or indirectly, 25 % or more of the voting stock or other
equity interest of the entity.
UNION BANK OF CALIFORNIA, N.A. THE PATHWAYS GROUP, INC.
By: By: /s/ Mark T. Schuur
-------------------------- ---------------------------
Jim Nese Mark T. Schuur
Title: Assistant Vice President Title: Treasurer
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<PAGE>
ADDENDUM B
TO
EQUIPMENT LEASE AGREEMENT
NO. 0554
This Addendum is a part of the above described Equipment Lease Agreement,
dated August 25, 1997 between Union Bank of California, N.A. as Lessor and
The Pathways Group, Inc. as Lessee.
Fair Market Value Purchase Option. Provided that the Equipment Lease
Agreement has not earlier been terminated and no Event of Default as defined
in the Equipment Lease Agreement, or other event of Default, has occurred and
is continuing, Lessee may, by giving written notice to Lessor not less than
180 days prior to the expiration of the lease term, purchase all, but not
than all, of the Equipment for the greater of the Equipment, s then Fair
Market Value or 16.67 % of the original Equipment cost as funded by Lessor.
Fair Market Value shall be determined on the basis of, and shall be equal in
amount to, the value which would be obtained in an arm's length transaction
between an informed and willing buyer-user (other than (i) a Lessee currently
in possession an (ii) a used equipment dealer) under no compulsion to sell.
UNION BANK OF CALIFORNIA, N.A. THE PATHWAYS GROUP, INC.
By: By: /s/ Mark T. Schuur
-------------------------- ---------------------------
Jim Nese Mark T. Schuur
Title: Assistant Vice President Title: Treasurer
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<PAGE>
September 8, 1997
Mark T. Schuur, CFO
The Pathways Group Inc.
14201 NE 200th St.
Woodinville, WA 98072-8444
Dear Mr. Schuur:
We are pleased to confirm the availability of a Conditional Sales Lease
(the "Lease") not to exceed Four Hundred Thousand Dollars ($400,000.00) to The
Pathways Groups Inc. ("Lessee"). The Lease is subject to the terms and
conditions detailed below:
TERMS:
<TABLE>
<CAPTION>
<S> <C>
Amount: $400,000.00
Maturity: September 1, 2000
Purpose: Leasing of office furniture and equipment.
</TABLE>
CONDITIONS:
23. Lessee agrees to execute Bank's standard lease documentation. This letter
is supplemental to such documentation.
24. Promptly upon request, Lessee to provide any financial information
reasonably requested by Bank.
25. Lessee to provide Bank with a copy of Lessee's audited financial
statement within 120 days of each calendar/fiscal year end.
26. Lessee to provide Bank with a copy of Lessee's company prepared financial
statement within 60 days after each calendar/fiscal quarter end.
27. Lessee will maintain at all times unencumbered and unrestricted liquid
assets in an aggregate amount equal to at least $800,000.00. Liquid assets
shall mean immediately available: cash, bank deposits or accounts;
obligations of or guaranteed by the U.S. Government or an agency thereof
rated BBB or above; stocks, bonds and other debt instruments regularly traded
on the New York, American or NASDAQ stock exchange with a price per share not
less than $7.50 per share and which can be readily converted into cash. In
the event of violation of this requirement, Lessee shall have fifteen (15)
days from date of the default to provide additional cash collateral
sufficient to fully secure all direct outstanding obligations to Union Bank
of California.
28. Specific funding under each lease contemplated under this agreement will
require the concurance of the Bank's Equipment Leasing Department.
29. Lessee will give a written notice to Bank within fifteen (15) days after
occurrence of:
(a) Any substantial dispute between Lessee and any regulatory body
of law enforcement authority;
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<PAGE>
(b) Any event of default under the Conditional Sales Lease or under any
other financing agreement with any other financial institution, or any
event which with the giving of notice or lapse of time or both, would
become an event of default;
(c) Any other matter which has resulted or might result in a material
adverse change in Lessee's financial condition or operation; and
(d) Any change in Lessee's name or principal place of business.
If the foregoing terms and conditions are satisfactory to you,
indicate your acceptance of this commitment by signing, dating, and returning
the enclosed copy of this letter to us no later than September 23, 1997.
Yours truly,
UNION BANK OF CALIFORNIA
/s/ Todd Sundquist
Todd Sundquist
Vice President
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
Accepted on this 19th day of September , 1997
The Pathways Group, Inc.
/s/ Mark T. Schuur
- -------------------------------
Title: Chief Financial Officer
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<PAGE>
February 25, 1998
Mark T. Schuur, CFO
The Pathways Group, Inc.
14201 N. E. 200th Street
Woodinville, WA 98072
Dear Mark:
Please find enclosed an Authorization To Obtain Credit, Grant Security,
Guarantee Or Subordinate relating to your company's lease with Union Bank of
California. At your earlier convenience, please initial where indicated
confirming your role as both CFO and Treasurer of the company. This change
will bring the subject document into agreement with other lease documents.
Please also find enclosed a revised Covenant Agreement letter reflecting an
increase in your company's Minimum Liquidity Requirement. Please sign the
form where indicated and return to me as soon as convenient. Upon receipt, we
will immediately increase credit card limits for certain of your firm's
officers, per your request.
Thank you.
Sincerely,
/s/ Tod Sundquist
T. C. (Tod) Sundquist
Vice President
Enclosures
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<PAGE>
February 25, 1998
Mark T. Schuur, CFO
The Pathways Group Inc.
14201 NE 200th ST
Woodinville, WA 98072-8444
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. 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 viola tion 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 and obligation on Bank's part to
extend any credit to any party for 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.C. (Tod) Sundquist
Vice President
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<PAGE>
Page 2
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
Accepted and Agreed
The Pathways Group, Inc.("Borrower")
By: /s/ Mark T. Schuur
-------------------------------
Mark T. Schuur, CFO/Treasurer
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<PAGE>
Exhibit 10.12
MASTER PROJECT AGREEMENT
- --------------------------------------------------------------------------------
This MASTER PROJECT AGREEMENT is entered into between THE PATHWAYS
GROUP, INC., a corporation, hereinafter sometimes referred to as "PATHWAYS" and
SCRIP ADVANTAGE, INC., a corporation, hereinafter sometimes referred to as
"SCRIP ADVANTAGE", for the purposes and upon the provisions, terms and
conditions stated below in this Agreement with incorporated attachments.
SECTION I.
RECITALS
1.1 Whereas PATHWAYS represents that its staff has the technical and
practical ability to provide a proprietary PATHWAYS Smart Card
Electronic Scrip System which simplifies scrip fund raising programs
for nonprofit organizations.
1.2 Whereas SCRIP ADVANTAGE is a for profit corporation which supplies
nonprofit organizations with scrip fund raising programs that rely upon
the use of paper scrip purchased from merchants and sold to members of
nonprofit organizations.
1.3 Whereas PATHWAYS and SCRIP ADVANTAGE each wish to implement a PATHWAYS
Smart Card Electronic Scrip System in geographic regions where SCRIP
ADVANTAGE currently markets a paper scrip system, for the purpose of
simplifying scrip fund raising programs for nonprofit organizations;
Now Therefore, the Parties agree as follows:
SECTION II.
PURPOSE
2.1 BASIC AGREEMENT
The purpose of this Master Project Agreement is to provide a basic
agreement for a specific project by which PATHWAYS will provide to
SCRIP ADVANTAGE the right to use and have access to the PATHWAYS Smart
Card Electronic Scrip System ("SMART SCRIP") for its scrip fund raising
programs composed of equipment, hardware and licensed software
programs, and processing services, as more fully provided in the
following sections, paragraphs and sub-paragraphs.
2.2 EXPANSION
In addition, it is the purpose of this Agreement to provide for a
method of expansion of the scope of this original project by
supplementary project agreements in which the provisions, terms and
conditions will be basically similar in order to ultimately provide a
compatible network of projects that can be administered as a single
expanded nationwide Smart Card Electronic Scrip Program.
This expansion will be in accordance with the provisions contained
herein regarding additional projects and will require the written
approval of both parties for said expansion.
SECTION III.
DEFINITIONS
The parties agree that the following words and acronyms in this
Agreement shall be understood to have the following meanings:
<PAGE>
3.1 NONPROFIT ORGANIZATION
Nonprofit Organization means any organization which is generally
recognized under the laws of the State in which it is located as being
operated for a charitable, or educational purpose, or in support of a
charitable or educational purpose, and not as a business for profit.
3.2 PARTICIPATING NONPROFIT ORGANIZATION
Participating Nonprofit Organization or the acronym PNO shall mean a
Nonprofit Organization which has been or is actively enrolled or wishes
to become enrolled as a participant in the SCRIP ADVANTAGE Scrip
Program.
3.3 MERCHANT
Merchant means any business operated for profit, which sells or leases
or charges fees for its products, goods, and/or services to the
consumer public.
3.4 PARTICIPATING MERCHANT
Participating Merchant or the acronym PM shall mean a Merchant which
has been or is actively enrolled or wishes to become enrolled as a
participant in the SCRIP ADVANTAGE Scrip Program.
3.5 PATHWAYS SMART CARD ELECTRONIC SCRIP SYSTEM
PATHWAYS Smart Card Electronic Scrip System means:
(1) the Smart Card Terminal equipment with software designed,
developed and installed by PATHWAYS, which reads and performs
electronic scrip transactions, including
(2) the Smart Cards, with software designed, developed and
installed by PATHWAYS, which accept, hold and relinquish the
electronic scrip, and
(3) the PATHWAYS Processing Center which performs all of the
processing, electronic funds transfer, compilation of data,
and reporting for the PATHWAYS Smart Card Electronic System.
3.6 ACH
"ACH" means Automated Clearing House, which is an electronic system for
transferring funds to and from bank accounts.
3.7 PROCESSING
Processing means the total package of processing services which are
necessary for the functioning of the PATHWAYS Smart Card Electronic
Scrip System, including:
(1) the development and updating of data bases,
(2) compilation and communication of transaction data between
terminals, banks, PNOs and PMs,
(3) the electronic transfer of funds, including "ACH"
transfers, and
(4) preparation and transmittal of reports to SCRIP ADVANTAGE.
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<PAGE>
The SCRIP ADVANTAGE, Inc. database shall remain the sole property
of SCRIP ADVANTAGE, Inc. for its exclusive use.
3.8 TRANSACTION
The word transaction when used in this Agreement means each separate
electronic transfer of funds or data between a Smart Card Terminal and
a Smart Card, or between PATHWAYS Processing Center and each Smart Card
Terminal, or between PATHWAYS Processing Center and a bank, or between
PATHWAYS Processing Center and SCRIP ADVANTAGE, or between SCRIP
ADVANTAGE and PNOs and/or PMs.
Appendix #5, attached hereto, provides a schematic of transaction flow
along with the specific identification of each chargeable transaction
in accordance with this contract. This exhibit is made a part hereto by
this reference.
SECTION IV.
DURATION
4.1 INITIAL TERM
The initial term of this Agreement shall be three (3) years, commencing
upon the execution of this Agreement.
4.2 AUTOMATIC RENEWAL/NOTICE OF NON RENEWAL
This Agreement shall be automatically and continually renewed for one
year, from year to year, after the initial term, unless the Agreement
has previously been terminated pursuant to any of the provisions of
Section XII below, or notice has been sent by one party to the other
and received at least 30 days in advance of the expiration of the
initial term, or any one year renewal term. Any such notice must be
sent pursuant to and satisfy the provisions of Section XII,
SECTION V.
OBLIGATIONS OF PATHWAYS
5.1 PATHWAYS SMART CARD ELECTRONIC SCRIP SYSTEM
PATHWAYS shall deliver to SCRIP ADVANTAGE the right to use the PATHWAYS
Smart Card Electronic Scrip System as defined in paragraph 3.5 above.
The system will include the right of PNOs and PMs who choose to
participate in that system to acquire from PATHWAYS all necessary
terminal equipment including software installed on the terminal ready
for installation at the locations of Nonprofit Organizations and
Merchants who are enrolled as part of the SCRIP ADVANTAGE specific
project, plus the right of members of PNOs to acquire Smart Cards
programmed with the relevant part of the PATHWAYS Smart Card Electronic
Scrip System and user data to enable members of the PNOs to use the
PATHWAYS Smart Card Electronic Scrip System. The system shall also
include access to the services of the PATHWAYS Processing Center,
subject to the provisions of paragraph 6.4. Prices for purchase of
terminals and with software installed are shown in Appendix No. 1,
attached hereto and incorporated herein by reference. Fees for
processing are also shown in Appendix No. 1. ACH fees, if any, shall be
paid by SCRIP ADVANTAGE, and/or may be passed on to the specific PNO or
PM, as agreed between SCRIP ADVANTAGE and the PNO or PM.
5.2 TERMINAL EQUIPMENT AND HARDWARE
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PATHWAYS will program the PATHWAYS Smart Card Electronic Scrip System
terminal equipment to be sold to PNOs AND PMs with all necessary
software to perform the following functions and processes:
a. the ability to read & credit electronic scrip value to, and
deduct electronic scrip value from, the electronic scrip smart
cards issued by SCRIP ADVANTAGE to members of the PNOs through
the PNOS, and process all credit/debit card transactions
introduced to the Electronic Smart Scrip terminals referenced
above, provided the PM is able to obtain credit approval from
a credit card depository.
b. provide the ability of the PATHWAYS Processing Center to
transmit the electronic transactions effected by each PNO from
SCRIP ADVANTAGE.
c. provide the ability to transmit all transaction information
from the terminals to the PATHWAYS Processing Center;
d. provide the ability of the PATHWAYS Processing Center to
generate transaction summary reports for delivery to the PNOs
and to receive from the PNOs their transaction records of
sales of scrip to cardholders recorded by the PNOs terminal.
e. provide for initiation of automatic transfer of funds by "ACH"
transfer to a designated bank account of the PNO in the bank
designated by the PNO on the time schedule provided in the
written agreement between SCRIP ADVANTAGE and the PNO; See
paragraph 6.2, a, below and Appendix No. 2, which is attached
hereto and is hereby incorporated by reference.
f. provide for initiation of automatic transfer of funds by "ACH"
transfer to a designated bank account of the PM in the bank
designated by the PM within 2 business days (not including
weekends or holiday); See paragraph 6.3, a below and Appendix
No. 3, which is attached hereto and is hereby incorporated by
reference.
g. provide periodic data to SCRIP ADVANTAGE in electronic form
showing each electronic scrip smart card transaction in which
any member of a PNO used the SCRIP ADVANTAGE Electronic Scrip
Smart Card issued by the PNO.
5.3 TRAINING
PATHWAYS will provide training to SCRIP ADVANTAGE personnel, and teach
them to train personnel of the PNOs and PMs of SCRIP ADVANTAGE who
enroll in the PATHWAYS Smart Card Electronic Scrip System in the use of
the Terminals and Smart Cards; pursuant to the training program
provisions described in Appendix No.
4 attached hereto and incorporated herein by reference.
5.4 OPERATIONS MANUAL
PATHWAYS will provide an Operations Manual which describes the
functions, uses and operations of the PATHWAYS Smart Card Electronic
Scrip System terminal equipment and the processing and uses of the
Smart Card with the terminal, and the interface with PATHWAYS
Processing Center.
5.5 REGISTRATION FORMS AND EXPLANATORY MATERIALS FOR PARTICIPATING PNOs
AND PMS AND MEMBERS OF PARTICIPATING PNOs
PATHWAYS will provide, to SCRIP ADVANTAGE, its PNOs and PMs and members
of PNOs the necessary registration forms, and explanatory materials to
facilitate the enrollment of PMs, PNOs, and
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<PAGE>
members of PNOs to be used to implement the PATHWAYS Smart Card
Electronic Scrip System in cooperation with SCRIP ADVANTAGE.
SECTION VI.
OBLIGATIONS OF SCRIP ADVANTAGE
RE: IMPLEMENTATION AND OPERATION OF THE SYSTEM
6.1 SUPPLY OF DATA: DIRECT
SCRIP ADVANTAGE will provide to PATHWAYS all data and information
concerning:
a. Name of each PNO participating in a scrip program
with SCRIP ADVANTAGE, with address and current
telephone and facsimile numbers, and the name(s) of
the person(s) with authority to act on behalf of each
PNO, located in the geographic region of this
specific project; and
b. Name of each PM participating in a scrip program with
SCRIP ADVANTAGE with the address of each business
location of the PM, and the current telephone and
facsimile numbers of each business location, and the
name(s) of the person(s) with authority to act on
behalf of each PM at each business location located
in the geographic region of this specific project.
c. Provide the name of bank, the bank account number and
any other information concerning specific bank
account of SCRIP ADVANTAGE to be used to transfer
funds between SCRIP ADVANTAGE and the PNOs and PMs by
"ACH" transfer, and any other information required to
configure the software to make such transfers.
6.2 CONTRACT BETWEEN SCRIP ADVANTAGE AND PNO - SUPPLY OF DATA
INDIRECT FROM PNOS
SCRIP ADVANTAGE shall cause each PNO which agrees to participate in the
PATHWAYS Smart Card Electronic Scrip System under the sponsorship of
SCRIP ADVANTAGE to meet the following requirements of participation in
this specific project:
a. Sign an Agreement between SCRIP ADVANTAGE and the
PNO, the form and content of which shall be
substantially similar to Appendix No. 2, form No.
9701A, which is attached hereto and incorporated by
reference. However, SCRIP ADVANTAGE and Pathways
acknowledge that there many be need to adjust or
rewrite the agreement shown at appendix #2, and agree
to do so where necessary.
b. Provide other information as may be required by
PATHWAYS to configure the software on individual
terminals and the individual member's Smart Cards,
facilitate payment by "ACH" transfer, or other
processing requirements.
6.3 CONTRACT BETWEEN SCRIP ADVANTAGE AND PM - SUPPLY OF DATA
INDIRECT FROM PMS.
SCRIP ADVANTAGE shall cause each PM which agrees to
participate in the PATHWAYS Smart Card Electronic Scrip System
under the sponsorship of SCRIP ADVANTAGE to meet the following
requirements of participation in this specific project:
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a. Sign an Agreement between SCRIP ADVANTAGE and the PM,
the form and content of which shall be substantially
similar to Appendix No. 3, form No. 9701B, which is
attached hereto and incorporated by reference.
However, SCRIP ADVANTAGE and Pathways acknowledge
that there many be need to adjust or rewrite the
agreement shown at appendix #3, and agree to do so
where necessary.
b. Provide other information as may be required by
PATHWAYS to configure the software on individual
terminals, facilitate payment by "ACH" transfer, or
other processing requirements.
6.4 TELEPHONIC ACCESS LINES TO TERMINALS
Access between each Smart Card Terminal placed with SCRIP ADVANTAGE, if
any, or with any PNO and any PM shall be facilitated by that particular user of
the Smart Card Terminal providing connection(s) to telephone lines for the Smart
Card Terminal(s) used. The number of connections and telephone access lines
shall be suitable, taking into consideration the number of Smart Card Terminals
for which the access connection is provided. The access connection to the Smart
Card Terminals must be available on an as needed basis, each day of each year.
The expense of installation, if any, and the cost of service, if any, shall be
borne by the particular operator of the Smart Card Terminal.
SECTION VII.
IMPLEMENTATION OF PATHWAYS SMART CARD
ELECTRONIC SCRIP SYSTEMS - BASIC PROJECT
7.1 INITIAL DATA BASE
SCRIP ADVANTAGE shall provide to PATHWAYS the data described in
paragraph 6.1 a and b. After receipt of that data from SCRIP ADVANTAGE,
PATHWAYS will promptly develop a data base from which SCRIP ADVANTAGE
and PATHWAYS will proceed with the other implementation steps described
in the paragraphs below.
7.2 SCRIP ADVANTAGE and PATHWAYS will agree upon an acceptable graphics
design for the Smart Card which will have on it:
a. the name and/or logo of SCRIP ADVANTAGE displayed as
a primary sponsor;
b. the name or logo of PATHWAYS as the card provider;
c. an attractive picture or other graphic selected by
mutual agreement of the parties.
d. Such instructions and other information as is usual
and customary for facilitating the use of the Smart
Card, including a contact telephone number for SCRIP
ADVANTAGE.
7.3 PNO MEETING(S)
SCRIP ADVANTAGE and PATHWAYS will agree on which PNOs shall be invited
to a meeting sponsored by SCRIP ADVANTAGE for the purpose of
introducing and explaining to the PNOs the PATHWAYS Smart Card
Electronic Scrip System, including its benefits, namely its
versatility, ease of use, security and reduction of time consuming
paperwork; as well as the basis of its functions, operation, costs, and
how funds are generated for the PNOs. SCRIP ADVANTAGE and PATHWAYS will
enroll those PNOs who desire to participate in the SCRIP ADVANTAGE
sponsored PATHWAYS Smart Card Electronic Scrip Program using a contract
form substantially similar to Appendix #2, which is attached hereto and
is hereby incorporated by reference.
7.4 SOLICITATIONS OF PMs
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SCRIP ADVANTAGE and PATHWAYS will agree on which PMs should be
solicited, and which other Merchants who are not PMs should be
solicited to participate in the SCRIP ADVANTAGE sponsored electronic
scrip program using the PATHWAYS Smart Card Electronic Scrip System;
and agree upon a program of individual solicitations of each PM or
other Merchant; and if feasible, group meetings for solicitation of
Merchants in special geographic areas, or Merchants who market specific
kinds of goods or services. Initially, PATHWAYS will participate in all
such individual and group solicitations so as to be assured that the
technical and practical aspects of the PATHWAYS Smart Card Electronic
Scrip System and its operation are fully and correctly understood. As
representatives of SCRIP ADVANTAGE become more familiar with the
technical and practical aspects of the PATHWAYS Smart Card Electronic
Scrip System, it is the intent and expectation of the parties that
there will be a gradual phasing out of the need for participation by
PATHWAYS representatives in the solicitation of PMs or other Merchants
who are not yet PMs except in unusual circumstances in which the nature
or scope or importance of the solicitation justifies the participation
of one or more PATHWAYS representatives.
7.5 SOLICITATION OF MEMBERS OF PNOs
SCRIP ADVANTAGE, and PATHWAYS, and each PNO shall agree upon a suitable
method of presenting the SCRIP ADVANTAGE sponsored PATHWAYS Smart Card
Electronic Scrip Program to its members, either by a presentation at
one or more meetings, or by bulk mailings or both.
SECTION VIII.
OWNERSHIP OF INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION;
CONFIDENTIALITY AND NONDISCLOSURE; LIMITS OF USE; AND RETURN UPON
TERMINATION OF AGREEMENT.
8.1 SOFTWARE, CONCEPTS AND DESIGNS
PATHWAYS owns and shall continue to own all software, concepts and
designs on which the functions and operations of the PATHWAYS Smart
Card Electronic Scrip System are based, and all further developments,
improvements and enhancements of the software, concepts and design by
which functions and operations of the PATHWAYS Smart Card Electronic
Scrip System is modified or improved including but not limited to
documents, memoranda, booklets, instruction sheets and manuals,
displays and graphics, whether in all printed, written or electronic
form, developed by PATHWAYS to explain, promote and/or market the
PATHWAYS Smart Card Electronic Scrip System. SCRIP ADVANTAGE hereby
acknowledges the ownership of PATHWAYS of all software, concepts and
designs on which the functions and operations of the PATHWAYS Smart
Card Electronic Scrip System are based, and all documents, memoranda,
booklets and instruction sheets, manuals, displays and graphics,
whether in printed, written or electronic form, described in this
paragraph.
8.2 LICENSE TO USE SOFTWARE
The software included on the Smart Card Terminals and the Smart Cards
shall be licensed to the authorized users of the Terminals and Cards
for the limited purpose of permitting the authorized users to
participate in the PATHWAYS Smart Card Electronic Scrip System
sponsored by SCRIP ADVANTAGE. The limited license will be issued to
each authorized terminal user at the time the user acquires ownership
or other authorized possession of the terminal. The limited license
will be issued to each authorized card user when the card is issued to
that user.
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8.3 PROHIBITION AGAINST COPYING AND REVERSE ENGINEERING OF SOFTWARE OR
EQUIPMENT OR CARDS
The parties agree that neither SCRIP ADVANTAGE nor anyone acting with
authorization of SCRIP ADVANTAGE shall attempt to copy, compile,
de-compile, disassemble or reverse engineer the Smart Card Terminals,
the Smart Cards, or the Software installed on any of the Smart Card
Terminals, or Smart Cards provided by PATHWAYS to anyone who
participates in this project. Any licenses issued pursuant to paragraph
8.2 shall expressly provide that no one shall be authorized to copy,
compile, de-compile, disassemble or reverse engineer the computer
software or hardware included in the terminals or cards.
8.4 CONFIDENTIALITY AND NONDISCLOSURE OF PATHWAYS INTELLECTUAL PROPERTY AND
PROPRIETARY INFORMATION; LIMITS OF RIGHT TO USE; RETURN UPON
TERMINATION OF AGREEMENT
All trade names, trademarks, service marks, copyrights and licenses
from third parties for the use of trademarks, service marks,
copyrights, or patents, and all software, concepts and designs on which
the functions and operations of the PATHWAYS Smart Card Electronic
Scrip System are based, and all further developments, improvements and
enhancements of the software, concepts and design by which functions
and operations of the PATHWAYS Smart Card Electronic Scrip System is
modified or improved including but not limited to documents, memoranda,
booklets, instruction sheets and manuals, displays and graphics,
whether in all printed, written or electronic form, developed by
PATHWAYS to explain, promote and/or market the PATHWAYS Smart Card
Electronic Scrip System are agreed to be proprietary and confidential
and shall not be disclosed by SCRIP ADVANTAGE to any entity or
person(s) except to the extent authorized by PATHWAYS, or as part of
the implementation of this project or promotion of future projects
between SCRIP ADVANTAGE and PATHWAYS. All trade names, trademarks,
service marks, copyrights and licenses from third parties for the use
of trademarks, service marks, copyrights or patents and all software,
concepts and designs and copies of same, owned by PATHWAYS shall be
returned to PATHWAYS upon termination of this agreement, and no copies
shall be retained or used by SCRIP ADVANTAGE thereafter, except to the
extent necessary to access its business records related to this
agreement .
8.5 CONFIDENTIALITY AND NONDISCLOSURE OF SCRIP ADVANTAGE INTELLECTUAL
PROPERTY AND PROPRIETARY INFORMATION; LIMITS OF RIGHT TO USE; RETURN
UPON TERMINATION OF AGREEMENT
All trade names, trademarks, service marks, and copyrights now owned or
hereafter owned by SCRIP ADVANTAGE, and all information contained in
the existing data base or the additions of information to the data base
as a result of this project, and records of SCRIP ADVANTAGE, which are
disclosed by SCRIP ADVANTAGE to PATHWAYS for use in and adaptation of
the PATHWAYS Smart Card Electronic Scrip system to market and use
electronic scrip in SCRIP ADVANTAGE' Business are agreed to be
proprietary and confidential intangible property of SCRIP ADVANTAGE,
and shall not be disclosed by PATHWAYS to any entity(ies) or person(s)
except to the extent authorized by SCRIP ADVANTAGE or as a part of the
implementation of this project or promotion of future projects between
SCRIP ADVANTAGE and PATHWAYS. All trade names trademarks service marks,
copyrights, and information in the database and information from the
records of SCRIP ADVANTAGE owned by SCRIP ADVANTAGE, shall be returned
to SCRIP ADVANTAGE upon termination of this agreement, and no copies
shall be retained or used by PATHWAYS thereafter, except to the extent
necessary to access its business records related to this agreement
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SECTION IX.
LIMITED WARRANTIES - DISCLAIMER - PASS THROUGH
9.1 LIMITED WARRANTIES
EXCEPT AS EXPRESSLY SET FORTH BELOW, ALL EQUIPMENT, PRODUCTS, AND
SERVICES ARE DELIVERED "AS IS", WITHOUT WARRANTY OF ANY KIND.
A. PATHWAYS warrants that the Licensed Programs will conform to
PATHWAY'S specifications in effect on the date of delivery to
SCRIP ADVANTAGE, or its PNOs OR PMs for the period of twelve
(12) months from the date of delivery. PATHWAYS shall have no
responsibility to update or otherwise maintain the Licensed
Programs except that, in the case of Licensed Program errors
which are caused by PATHWAYS and which SCRIP ADVANTAGE or its
PNOs or PMs discover, substantiate, and report in writing to
PATHWAYS during such warranty period, PATHWAYS shall make
reasonable efforts promptly to produce and deliver to SCRIP
ADVANTAGE or its PNOs or its PMs a corrected version of the
portion of Licensed Programs involved. During the applicable
warranty period, PATHWAYS will make available updates to the
Licensed Programs which PATHWAYS generally releases without
charge (other than a handling charge) to all purchasers of the
Product to which Licensed Program updates apply. In no event
shall PATHWAYS have any obligation or responsibility arising
from this Agreement to correct any data base errors or
transaction errors without charge, if such errors are caused
by misuse of the Smart Card Terminals or input errors by SCRIP
ADVANTAGE, or its PNOs or its PMs or any other user. PATHWAYS
will attempt to correct data base errors or transaction errors
caused by SCRIP ADVANTAGE upon request by SCRIP ADVANTAGE, and
the agreement of SCRIP ADVANTAGE to pay for the correction
service(s).
B. Any Smart Card Terminal Equipment and Smart Cards delivered to
SCRIP ADVANTAGE, or its PNOs or PMs pursuant to this Agreement
shall be warranted as to materials and workmanship only by the
manufacturer pursuant to warranties passed through to SCRIP
ADVANTAGE, or the PNOs or the PMs who acquire the Smart Card
Terminals or Smart Cards.
9.2 PASS THROUGH OF OTHER MANUFACTURER WARRANTIES.
The PATHWAYS Smart Card Electronic Scrip System includes some equipment
and certain basic software not manufactured or designed or programmed
by PATHWAYS. Such items include but are not limited to the Smart Card
Terminals and the Smart Cards. PATHWAYS has received limited warranties
from the manufacturers of such items. Those are limited warranties of
short duration with disclaimers and limitation of liability and
damages. Such warranties will be passed through to the purchasers and
users of the Smart Card Terminals and Smart Cards.
9.3 DISCLAIMER OF ALL OTHER WARRANTIES.
PATHWAYS SPECIFICALLY DISCLAIMS THAT IT HAS MADE OR DOES MAKE ANY
REPRESENTATION OR WARRANTY EXPRESS OR IMPLIED, AS TO THE
MERCHANTABILITY, FITNESS FOR A PARTICULAR USE OR ANY OTHER PURPOSE
EXCEPT AS STATED IN WRITING IN PARAGRAPH 9.1 AND WITH RESPECT TO PASS
THROUGH OF MANUFACTURERS' WARRANTIES IN PARAGRAPH 9.2.
9.4 LIMITATION OF LIABILITY AND DAMAGES
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PATHWAYS SHALL NOT BE LIABLE FOR CONSEQUENTIAL DAMAGES WHETHER
DESCRIBED AS DIRECT OR INDIRECT; OR SPECIAL DAMAGES; OR DAMAGES FOR
LOSS OF REVENUES OR LOSS OF DATA; OR LOSS OF BUSINESS OR BUSINESS
OPPORTUNITIES, NOR PUNITIVE DAMAGES. THE MAXIMUM AMOUNT OF DAMAGES
RECOVERABLE SHALL BE THE PRICE PAID FOR SPECIFIC PRODUCTS OR SPECIFIC
SERVICES OR THE SPECIFIC TRANSACTION ASSERTED TO BE FAULTY BY THE
CLAIMANT, WHETHER THE CLAIMANT BE SCRIP ADVANTAGE OR A PNO OR A PM.
9.5 ALL LICENSES AND AGREEMENTS BETWEEN SCRIP ADVANTAGE AND ITS PNOS AND
PMs TO INCLUDE PARAGRAPHS 9.1 - 9.4 INCLUSIVE
All licenses and agreements between SCRIP ADVANTAGE and its PNOs and
PMs with respect to products and services, including but not limited to
licensed programs and service shall contain the foregoing limited
warranty language, disclaimers, limitation of liability and damages of
paragraphs 9.1 - 9.4 inclusive.
SECTION X.
DISPUTE RESOLUTION
10.1 AGREEMENT FOR MEDIATION OF DISPUTES; THEN ARBITRATE DISPUTES: EXCEPTIONS
If any dispute shall arise between SCRIP ADVANTAGE and PATHWAYS
concerning this Agreement, its meaning, or any subject related to the
making, performance or termination of this Agreement then the parties
agree that, except as may otherwise be specifically provided in this
Agreement, all such disputes shall be referred to mediation, and if the
dispute(s) are not resolved by mediation, then the dispute(s) shall be
referred to binding arbitration, as more specifically provided below.
Claims, if any, by PATHWAYS claiming infringement of trade secrets,
copyrights, patents or trademarks shall be excluded from this Section
XI, and all paragraphs thereof; and such claims, if any, may be brought
in any state or federal court with appropriate jurisdiction and venue.
10.2 MEDIATION OF DISPUTE(S)
The parties hereby agree to use mediation services located in Santa
Rosa, California, and to attend mediation proceedings held in Santa
Rosa, California. The mediation is to be non-binding unless otherwise
agreed in writing by the parties. If the parties are unable to agree
upon the choice of mediator or mediation service, then either party may
apply to the Superior Court of Sonoma County requesting the Court to
order mediation and appoint a mediator or mediation service located in
Santa Rosa, California, to mediate the dispute(s) in Santa Rosa,
California, in fulfillment of this provision. The rules and procedures
for mediation shall be determined by the mediator or mediation service
and provided to each party prior to the first mediation meeting. Any
final resolution of the dispute(s), if any, shall be stated in writing
and signed by both parties. The parties shall each pay one-half of the
costs, expenses, and fees of the mediator or mediation service. Each
party shall pay for its own legal, accounting or other expenses
incurred in connection with the mediation.
10.3 NOTICES RE: MEDIATION
If any party issues a written request for mediation, then a copy of
such request must state:
1) Name of Requesting Party;
2) Name of other Party in the Dispute(s);
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3) Brief Description of the nature and scope of the dispute(s),
and how such dispute(s) relate to this Agreement;
4) The relief or resolution requested by the requesting party;
5) The reference to this Agreement, Section XI, paragraph 11.2,
above concerning mediation.
Such request shall be sent to the mediator or mediation service with a
copy of the request to the other party in the dispute. The original
request and the copy of the request shall each be sent by certified
mail, first class postage prepaid, with return receipt requested,
properly addressed respectively to the mediator or mediation service.
10.4 BINDING ARBITRATION TO RESOLVE DISPUTE(S)
If the parties are unsuccessful in resolving their dispute(s) through
mediation, as provided in paragraph 11.2 above, then either party may
apply to the American Arbitration Association for arbitration of the
dispute pursuant to the American Arbitration Association Rules
applicable to Commercial Disputes. The site of the arbitration shall be
Santa Rosa, California. The arbitration shall be conducted pursuant to
the American Arbitration Association Rules applicable to Commercial
disputes. The party who petitions or applies for arbitration shall pay
all initial costs and fees required by the American Arbitration
Association to commence the arbitration procedures. There shall be one
arbitrator appointed, who shall be an attorney with experience in
commercial disputes. The arbitrator shall have authority to award
actual damages to the extent permitted by this Agreement; but under no
circumstances shall have the authority or power to award punitive
damages. The arbitrator may award a reimbursement of all costs and
expenses, including accounting fees and expenses, expert witness fees
and a reasonable attorney's fee. The arbitrator's findings,
conclusions, and award may be filed in Superior Court of Sonoma County,
and judgment entered based thereon unless the arbitrator's award is
appealed within the time provided and on the limited grounds permitted
by California Law. Once an award and judgment has become final it may
be enforced by legal remedies.
SECTION XI.
EARLY TERMINATION OF AGREEMENT
11.1 EARLY TERMINATION BASED ON ADVANCEMENT OF TECHNOLOGY OR COST
CONSIDERATION; AND RIGHT OF FIRST REFUSAL
A. If SCRIP ADVANTAGE receives a bona fide proposal in writing by
another supplier of a system based on advancement of
technology, or based on improved profitability to SCRIP
ADVANTAGE or its PNOs, then SCRIP ADVANTAGE shall be entitled
to give 90 days advance written notice of early termination of
this Agreement, provided that a complete copy of the bona fide
written proposal by another supplier is delivered to Pathways
with the written notice.
B. Upon receipt of the written notice of early termination, and a
complete copy of the written proposal from another supplier,
based on paragraph 12.1,A, then Pathways shall have a right of
first refusal to equal the proposal of the other supplier by
delivery of a written proposal, within 90 days after receipt
by Pathways of the written notice of termination and the
complete copy of the written proposal from another supplier.
If Pathways does not equal the proposal of the other supplier,
then SCRIP ADVANTAGE may proceed at that time to terminate
this agreement, including provisions for final accounting
between Pathways and SCRIP ADVANTAGE.
C. The provisions of paragraphs 12.1, A and 12.1,B are not
subject to the requirements of paragraphs 11.1 through 11.4
and 12.2 or 12.3.
11.2 PRECONDITION TO EARLY TERMINATION
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Any party who desires to terminate this Agreement prior to the
expiration of the initial term of three years, or prior to the
expiration of any one year renewal term shall first have attempted to
resolve any disputes by giving notice of mediation and willingness to
participate in mediation, pursuant to paragraph 11.2 and 11.3. If
mediation does not resolve the dispute, then the party shall proceed to
arbitration pursuant to paragraph 11.4, and shall request specific
findings and conclusions by the arbitrator that (1) this Agreement has
been materially breached; and (2) the party by the material breach is
entitled to early termination of this Agreement as one of its remedies.
If all of these preconditions have been fulfilled, then the aggrieved
party may give notice of early termination as provided below.
11.3 NOTICE OF EARLY TERMINATION
Any party entitled to early termination of this Agreement as provided
in paragraph 12.2 above shall send written notice to the other party of
intention to terminate this Master Project Agreement on a specific date
not less than 90 days after receipt of the notice by the receiving
party. The written notice shall be addressed to the Chief Executive
Officer of the receiving party, at the address provided below for
written notices. The notice shall expressly state the basis for
termination by reference to the Arbitrator's findings and conclusions
of material breach and entitlement to early termination. Any such
notice shall meet all requirements in Section XIII, below.
SECTION XII.
NOTICES
12.1 METHOD OF DELIVERY OF NOTICES
All notices required by this Agreement shall be in writing and
delivered either in person, or by messenger, or by registered or
certified first class mail with return receipt requested, postage
prepaid, sent to the last known address of the party to receive the
notice.
12.2 EFFECTIVE DATE OF DELIVERY
Notices sent pursuant to paragraph 13.1 shall be deemed delivered at
the earliest of the following:
a. When actually received; or
b. On the fifth full business day after mailing of the
notice by registered or certified mail with return
receipt requested and postage prepaid.
12.3 ADDRESSES FOR NOTICES
The current address for notices sent to the respective parties pursuant
to paragraph 13.1 are:
SCRIP ADVANTAGE, INC. THE PATHWAYS GROUP, INC.
----------------------------- 1221 N. Dutton, Avenue
Fresno, CA 93711 Woodinville, WA 980872
These addresses for notice purposes may be changed by written notice
given in accordance with this paragraph.
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SECTION XIII.
MISCELLANEOUS PROVISIONS
13.1 APPLICABLE LAW
This Agreement is made pursuant to California law including choice of
law rules, and applicable federal law and regulations if appropriate to
the meaning of these provisions concerning federal tax exempt status.
13.2 ENTIRE AGREEMENT; AMENDMENTS
This is intended by the parties to be the entire Agreement between the
parties. All prior oral or written statements, negotiations and
representations are hereby deemed to be superseded by this written
agreement. This Agreement can be amended only by a written amendment or
other written agreement signed by both parties.
DATED: effective 6-19-98
SCRIP ADVANTAGE, INC. THE PATHWAYS GROUP, INC.
By By
-------------------------------- ---------------------------------
Robert Coyle, President CAREY F. DALY II, President & CEO
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APPENDIX NO. 1
COST SCHEDULE FOR
EQUIPMENT, GOODS AND SERVICES
<TABLE>
<CAPTION>
<S> <C>
1. PATHWAYS Smart Card Electronic Scrip Terminal, fully programmed for a
specific Participating Nonprofit Organization including identification
of the PNO, with security and transaction capabilities . . . . . . . . . $ 1,025.00
2. PATHWAYS Smart Card Electronic Scrip Terminal fully programmed
for a specific Participating Merchant including identification of the
PM, with security and transaction capabilities. . . . . . . . . . . . . $ 1,025.00
3. Fulfillment fee for SCRIP ADVANTAGE/PATHWAYS Electronic Scrip Smart
Card for each specific member of a specific PNO, fully programmed with
identification of both the individual member and the issuing PNO, with
security and transaction capabilities . . . . . . . . . . . . . . . . . $ 10.00
4. PATHWAYS Processing Center Fees: per transaction, i.e. each and
every electronic transfer of funds to or from any terminal, or any
card, including each upload or download of data . . . . . . . . . . . . $ .35
5. Periodic electronic data summary issued to SCRIP ADVANTAGE, INC. as
provided in paragraph 5.2, g . . . . . . . . . . . . . . . . . . . . . NO CHARGE
6. If any additional data summary(ies) is/are required to be produced by
PATHWAYS in segregated parts for use by SCRIP ADVANTAGE, or its PNOs or
its PMs an additional processing fee shall be agreed upon between the
parties for the additional processing.
</TABLE>
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APPENDIX NO. 2
SCRIP ADVANTAGE
STANDARD TERMS OF AGREEMENT
WITH PARTICIPATING NONPROFIT ORGANIZATIONS
------------------------------------------------------------------------------
This Agreement entitled SCRIP ADVANTAGE STANDARD TERMS OF AGREEMENT
WITH PARTICIPATING NONPROFIT ORGANIZATIONS is made between the SCRIP ADVANTAGE,
INC. a corporation, hereinafter referred to as "SCRIP ADVANTAGE" and
____________________, a ____________, hereinafter referred to by name or as
"Participating Nonprofit Organization or PNO." This Agreement shall be referred
to hereinafter as the "SCRIP ADVANTAGE/PNO Agreement."
1. RECITALS
1.1 Whereas, SCRIP ADVANTAGE has used and promoted the use of gift
certificates in its scrip program through SCRIP ADVANTAGE'
Participating Nonprofit Organizations (PNOs) for several
years;
1.2 Whereas, SCRIP ADVANTAGE, in cooperation with its
Participating Nonprofit Organizations wishes to modernize its
scrip program by use of modern electronic and computerized
systems for sale and use of electronic scrip;
1.3 Whereas, SCRIP ADVANTAGE has arranged with The Pathways Group,
Inc., hereinafter "PATHWAYS," for the use of the PATHWAYS
Smart Card System by which electronic scrip is placed on smart
cards sponsored and issued by SCRIP ADVANTAGE through its PNOs
for use with merchants who sign agreements with SCRIP
ADVANTAGE as Participating Merchants, hereinafter sometimes
referred to as "PMs."
1.4 Whereas SCRIP ADVANTAGE and the undersigned PNO desire to make
an agreement between them so that the PNO may participate in
SCRIP ADVANTAGE' modernized scrip program utilizing the
PATHWAYS Smart Card System(s);
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
2. PURPOSE
The purpose of this Agreement is to facilitate the use of the PATHWAYS
Smart Card System utilizing electronic scrip on smart cards issued by SCRIP
ADVANTAGE to the PNO's members through the PNO to supplement the current Scrip
program.
3. AGREEMENTS OF SCRIP ADVANTAGE
3.1 SCRIP ADVANTAGE agrees to provide to the PNO through PATHWAYS,
a fully programmed smart card terminal and other services as
specified in Exhibit A. The smart card terminal and other
services will perform the following functions:
a. the ability to read, credit electronic scrip value to, and
deduct electronic scrip value from, the electronic scrip smart
cards issued by SCRIP ADVANTAGE to members of the PNO through
the PNO.
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b. provide the ability of SCRIP ADVANTAGE to transmit from its
terminal to the electronic scrip purchased by the PNO from
SCRIP ADVANTAGE, as provided in paragraph 3.2 below.
c. provide the ability of SCRIP ADVANTAGE to transmit
transaction summary reports to the PNO through its terminal
and to receive from the PNOs transaction summary reports
recorded by the PNO's terminal.
d. provide the ability to transmit all transaction
information to a PATHWAYS Processing Center;
e. provide for an automatic transfer of funds by "ACH"
transfer to a designated bank account of the PNO in the bank
designated by the PNO within 2 business days (not including
weekends or holiday);
f. provide monthly periodic reports pursuant to subparagraph
3.8 below, showing each electronic scrip smart card
transaction in which any member of the PNO used the electronic
scrip smart card issued by SCRIP ADVANTAGE.
3.2 SCRIP ADVANTAGE will provide to the PNO, pursuant to a
purchase order from the PNO the full value of electronic scrip
upon payment in verified funds by the PNO, of ______% of the
value of the electronic scrip ordered by the PNO, (i.e. the
PNO will purchase electronic scrip initially at a _____%
discount.) SCRIP ADVANTAGE will transmit to the PNO the full
value of the electronic scrip, as stated in the purchase
order, within 8 business day hours of receipt of the verified
funds. The electronic scrip will be transmitted to and
recorded in the electronic smart card terminal, for immediate
use by the PNO with its members for the purpose of crediting
electronic scrip smart cards as each member purchases scrip
from the PNO.
3.3 SCRIP ADVANTAGE, through PATHWAYS will provide training in the
use of the electronic scrip smart card terminal, and the
issuance and use of electronic scrip smart cards, and an
operations manual explaining the use of the electronic scrip
smart card terminal without charge to the PNO.
3.4 SCRIP ADVANTAGE will provide to the PNOs, without charge, the
registration materials to be used for enlistment of its
members in SCRIP ADVANTAGE electronic scrip smart card program
using the PATHWAYS Smart Card System. The materials will
explain the use of the electronic scrip smart card, and any
membership enrollment charges which may be required to cover
initial costs.
3.5 SCRIP ADVANTAGE will provide to each member of the PNOs who
enrolls in the electronic scrip smart card program, and pays
the enrollment fee, an electronic scrip smart card which will
be personalized for use by that member. The electronic scrip
smart card will be rechargeable (reusable) with electronic
scrip; and will be usable to pay for the goods and services at
every place of business which has signed to a contract by
SCRIP ADVANTAGE as a PM.
3.6 SCRIP ADVANTAGE will provide to the PNOs a periodically
updated list of SCRIP ADVANTAGE' PMs for use by the PNOs for
its own records.
3.7 On the 20th day of each calendar month SCRIP ADVANTAGE shall
deposit by "ACH" transfer to the designated bank account of
the PNOs, any surplus discounts obtained by SCRIP ADVANTAGE
from its PMs on the specific transactions made by all members
of this PNOs during the prior calendar month.
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3.8 On or before the 20th day of each calendar month SCRIP
ADVANTAGE, through PATHWAYS shall deliver to the PNOs a
complete list and summary of all purchase transactions made by
members of the PNOs using the electronic scrip smart cards
issued to them. The summary shall include the total
discount(s) obtained by SCRIP ADVANTAGE from each PM, less the
discount already received by the PNOs when it purchased the
electronic scrip as provided in paragraph 3.2 above, and less
the administrative charges of SCRIP ADVANTAGE for providing
these services to the PNOs.
4. AGREEMENTS OF PNOS
4.1 PNO agrees to provide an access telephone line, at its own
expense, and without expense to SCRIP ADVANTAGE or its
designated equipment and service provider, to which the
electronic scrip smart card terminal shall be connected on an
"as needed" basis to transmit and receive electronic scrip and
any other information appropriate and reasonably necessary for
the functioning of SCRIP ADVANTAGE' electronic scrip smart
card program.
4.2 PNO agrees to provide to SCRIP ADVANTAGE the name and branch
of its designated bank, the account name, account number, and
a copy of its deposit slip for that account so as to
facilitate the transfer by SCRIP ADVANTAGE of funds to the PNO
by "ACH" transfer as provided for in Paragraph 3.7, above.
4.3 The value of the Smart Scrip Card Terminal with related
software, as provided by SCRIP ADVANTAGE to the PNOs is
$________, which will be acquired by arrangements between the
PNO and PATHWAYS by cash purchase or by leasing, or other
financing arrangement.
4.4 The PNO agrees to protect the Smart Scrip Card Terminal from
damage arising from intentional or negligent misuse for
purpose for which it is not designed or intended. In addition
PNO agrees that if the Smart Scrip Card Terminal is damaged
while in the possession of the PNO so that it will not
function correctly for any reason other than ordinary wear and
tear, or failure of parts not arising from misuse, then the
PNO shall pay for the repairs to make the Smart Scrip Card
Terminal function correctly, such repairs must be performed by
a repair facility approved by SCRIP ADVANTAGE.
4.5 The PNO agrees to replace at full value the Smart Scrip Card
Terminal if it is lost, stolen, or damaged beyond repair by
fire, or water, or other physical casualty or misuse.
5. DURATION AND TERMINATION OF AGREEMENT
5.1 Duration. This Agreement shall be for the term of _____
year(s) and shall automatically renew for one year, from year
to year until terminated by either party.
5.2 Termination for Cause. This Agreement may be terminated by
either party "for cause," for the following reasons if the
procedures stated in paragraph 5.3 are followed:
a. For default by a party for failure to perform one or more
of the obligations of that party as stated in the Agreement.
Upon termination, a final accounting and payment shall be provided to
the PNOs as provided for in paragraphs 3.7 and 3.8.
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5.3 Notice of Termination for Cause. If either party believes it
has a basis for termination of this Agreement for cause which
it wishes to exercise, it must first send a written notice to
the other party giving notice of the intent to terminate this
agreement for cause, and stating briefly the reason(s) for
such termination for cause. The party receiving the notice of
termination for cause shall have 30 days after receipt of the
written notice to cure or find a cure for the cause stated in
the written notice. If the cause stated is immediate jeopardy
of the loss of the tax exempt status of either party then this
Agreement shall be suspended during the 30 day period. The
written notice(s) shall be delivered pursuant to Section 7,
and paragraph 7.1 below.
5.4 Termination Without Cause. If either party desires to
terminate this Agreement without cause, it shall send written
notice to the other party 120 days in advance of the intended
termination date, stating that the sending party intends to
terminate this Agreement on the specific date certain stated
in the notice, which must be at least 120 days after delivery
of the notice. The written notice shall be delivered pursuant
to Section 7 and paragraph 7.1 below. Upon the expiration of
notice period, the Agreement shall terminate. Upon
termination, the electronic scrip and terminal provided to PNO
as identified below shall be returned to SCRIP ADVANTAGE, and
a final accounting and payment shall be provided to the PNO as
provided for in paragraphs 3.7 and 3.8.
6. NOTICES
6.1 Method of Delivery of Notices. All notices required by this
Agreement shall be in writing and delivered either in person,
or by messenger, or by registered or certified first class
mail with return receipt requested, postage prepaid, sent to
the last known address of the party to receive the notice.
6.2 Effective Date of Delivery. Notices sent pursuant to
paragraph 7.1 shall be deemed delivered at the earliest of the
following:
a. When actual received; or
b. On the fifth full business day after mailing of the notice
by registered or certified mail with return receipt requested and
postage prepaid.
6.3 Addresses for Notices. The current address for notices sent to
the respective parties pursuant to paragraph 6.1 are:
[Name of PNO] SCRIP ADVANTAGE, Inc.
[Address] -----------------------
-----------------------
These addresses for notice purposes may be changed by written notice
given in accordance with this paragraph.
7. MISCELLANEOUS PROVISIONS
7.1 Applicable Law.
This Agreement is made pursuant to California law including
choice of law rules, and applicable federal law and
regulations if appropriate to the meaning of these provisions
concerning federal tax exempt status.
7.2 Dispute Resolution by Binding Arbitration.
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If any dispute shall arise between SCRIP ADVANTAGE and PNO
concerning this Agreement, its meaning, or any subject related
to the making, performance or termination of this Agreement
then the parties agree that all such disputes shall be
referred to binding arbitration, as more specifically provided
below. Either party may apply to the American Arbitration
Association for arbitration of the dispute pursuant to the
American Arbitration Association Rules applicable to
Commercial Disputes. The site of the arbitration shall be
Fresno, California, unless otherwise agreed by the parties.
The arbitration shall be conducted pursuant to the American
Arbitration Association Rules applicable to Commercial
disputes. The party who petitions or applies for arbitration
shall pay all initial costs and fees required by the American
Arbitration Association to commence the arbitration
procedures. There shall be one arbitrator appointed, who shall
be an attorney with experience in arbitration of commercial
disputes. The arbitrator shall have authority to award actual
damages to the extent permitted by this Agreement; but under
no circumstances shall have the authority or power to award
punitive damages. The arbitrator may award a reimbursement of
all costs and expenses, including accounting fees and
expenses, expert witness fees and a reasonable attorney's fee.
The arbitrator's findings, conclusions, and award may be filed
in Superior Court in the County where the arbitration occurs
and judgment entered based thereon unless the arbitrator's
award is appealed within the time provided and on the limited
grounds permitted by California Law. Once an award and
judgment has become final it may be enforced by legal
remedies.
7.3 Entire Agreement; Amendments.
This is intended by the parties to be the entire Agreement
between the parties. All prior oral or written statements,
negotiations and representations are hereby deemed to be
superseded by this written Agreement. The Agreement can be
amended only by a written amendment or other written agreement
signed by both parties.
Smart Scrip Card Terminal (_______,________) Serial number:___________________
Dated: ______________, 199___.
PNO:_____________________________ SCRIP ADVANTAGE, Inc.
Name of PNO
By_________________________________ By___________________________
(Print Name of Authorized
Signature)
- ------------------------------------
TITLE OR POSITION
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EXHIBIT A
Attachment to SCRIP ADVANTAGE Standard Terms of Agreement
With Participating Non Profit Organization
SCRIP ADVANTAGE, INC. (SCRIP ADVANTAGE) hereby identifies and names THE
PATHWAYS GROUP, INC. hereinafter referred to as PATHWAYS, as SCRIP ADVANTAGE'
service and technology provider for the Smart Card System and Services to be
provided with respect to the SCRIP ADVANTAGE Standard Terms of Agreement with
NPOs, until and unless SCRIP ADVANTAGE provides written notice otherwise.
PATHWAYS shall provide (1) the availability of all Smart Card
Terminals, properly programmed to integrate each terminal into the SCRIP
ADVANTAGE/PATHWAYS Smart Card Electronic Scrip System; and (2) availability of
all SCRIP ADVANTAGE/PATHWAYS Electronic Scrip Smart cards properly programmed
with data specific for security of the cards, and the software necessary to use
the card in the SCRIP ADVANTAGE Smart Card Electronic Scrip System; and (3) the
PATHWAYS Processing Center to which all Smart Card Terminals in the system will
be connected pursuant to the agreements between SCRIP ADVANTAGE and the PNOs and
SCRIP ADVANTAGE and the PMs, and SCRIP ADVANTAGE and PATHWAYS.
Under no circumstance within the control of SCRIP ADVANTAGE during the
existence of this agreement to which this Exhibit A is attached, will SCRIP
ADVANTAGE fail to provide the Non Profit Organization (PNOs) with the full
products services provided for under Part 3, Agreements of SCRIP ADVANTAGE, of
this agreement, either directly or through a service and technology provider.
20
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APPENDIX No. 3
SCRIP ADVANTAGE
STANDARD TERMS OF AGREEMENT
WITH PARTICIPATING MERCHANTS
This Agreement entitled SCRIP ADVANTAGE STANDARD TERMS OF AGREEMENT
WITH PARTICIPATING MERCHANTS is made between the SCRIP ADVANTAGE, INC., a
California corporation, hereinafter referred as "SCRIP ADVANTAGE," and
___________________, a __________________, hereinafter referred to by name or as
"PM." This Agreement shall be referred to hereinafter as the "SCRIP ADVANTAGE/PM
Agreement."
1. RECITALS
1.1 Whereas, the SCRIP ADVANTAGE has used and promoted the use of
gift certificates in its scrip program through SCRIP
ADVANTAGE' participating nonprofit organizations, hereinafter
"PNOs," for several years:
1.2 Whereas, the SCRIP ADVANTAGE, in cooperation with its PNOs
wishes to modernize its scrip program by use of modern
electronic and computerized systems for sale and use of
electronic scrip;
1.3 Whereas, SCRIP ADVANTAGE has arranged with The Pathways Group,
Inc., hereinafter "PATHWAYS" for the use of the Pathways Smart
Card Electronic Scrip System by which electronic scrip is
placed on smart cards sponsored and issued by SCRIP ADVANTAGE
through its PNOs for use with Merchants who sign agreements
with SCRIP ADVANTAGE as Participating Merchants," hereinafter
sometimes referred to as "PMs."
1.4 Whereas SCRIP ADVANTAGE and the undersigned PM desire to make
an agreement between them so that the PM may participate as a
Merchant in the SCRIP ADVANTAGE modernized scrip program
utilizing the Pathways Smart Card Electronic Scrip System;
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
2. PURPOSE
The purpose of this Agreement is to facilitate the use of the Pathways
Smart Card Electronic Scrip System with the PM to replace the outmoded and labor
intensive use of paper scrip previously commonly used, such as merchant gift
certificates.
3. AGREEMENTS OF SCRIP ADVANTAGE
3.1 SCRIP ADVANTAGE agrees to provide to PM through PATHWAYS,
access to the Pathways Smart Card Electronic Scrip System
which will perform the following functions:
a. the ability to read the smart cards issued by SCRIP
ADVANTAGE through its PNOs;
b. deduct the purchase price including sales taxes, if
any, for any purchase from the electronic scrip on
smart cards issued by SCRIP ADVANTAGE through its
PNOs;
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c. store all transaction information necessary to do a
complete accounting report for each transaction,
including the purchase price, the sales tax, if any,
the identity of the card user, the identity of the
PNO though which the electronic scrip on the current
card was issued;
d. provide the technical ability to transmit all
transaction information to the PATHWAYS Processing
Center;
e. provide for initiating an automatic transfer of
accrued funds by "ACH" transfer to a designated bank
account of the PM in the bank designated by the PM
within 2 business days (not including weekends or
holidays);
f. provide _____ periodic reports showing each
electronic scrip smart card transaction which
occurred during the period and the amount disbursed
to the PM by the SCRIP ADVANTAGE for each transaction
and the total number of transactions with respect to
the total amount of disbursements and the balance of
any disbursements to be made with respect to those
transactions.
3.2 SCRIP ADVANTAGE will provide appropriate placards, signs
and/or window appliques which advise the purchasing public
that the SCRIP ADVANTAGE electronic scrip smart card is
honored at the PM's business location for all purchasers.
SCRIP ADVANTAGE will also provide, through PATHWAYS, a
hardware reference manual and an operators guidebook for the
PATHWAYS Smart Card Electronic Scrip System.
3.3 The SCRIP ADVANTAGE will, acting through PATHWAYS, access the
electronic scrip smart card terminals at a specific agreed
time each day, on a daily basis, and collect and upload the
records of each electronic scrip smart card transaction
recorded by PM's electronic scrip smart card terminals and not
previously uploaded during a prior day. The SCRIP ADVANTAGE
will, on the next day of banking operations, submit the
electronic scrip smart card transaction information through
its accounting department to SCRIP ADVANTAGE' bank, which
will, within the next banking day, disburse to PM _____% of
the total proceeds of each daily compilation of each of the
electronic scrip smart card transactions.
4. AGREEMENTS OF PM
4.1 PM agrees to accept and honor any electronic scrip smart card
issued by SCRIP ADVANTAGE through its PNOs during the term of
this SCRIP ADVANTAGE/PM/Agreement, without restriction for
payment of goods and/or services offered to the purchasing
public by the PM.
4.2 PM agrees to acquire from or through PATHWAYS, at PM's own
expense, one or more electronic scrip smart card terminals for
the purpose of reading the electronic scrip smart cards, and
processing the transactions using such cards. The acquisition
may be by purchase or lease.
4.3 PM agrees to provide an access telephone line at its own
expense to which each electronic scrip smart card terminal
shall be connected on an "as needed" basis to transmit the
transaction information to and receive compiled transaction
information from SCRIP ADVANTAGE, through the PATHWAYS
Processing Center. This telephone line is not required to be a
dedicated line, but it must be available for contacts between
the PM's Smart Card Terminals and the Pathways Processing
Center in order to upload transaction data and permit access
for confirmation purposes when necessary to validate
transactions.
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4.4 PM agrees that it will charge against the electronic scrip
smart cards issued by SCRIP ADVANTAGE through its PNOs as if
each transaction were for cash, i.e., any special
merchandising or sale offered to any cash purchaser shall be
available to the electronic scrip smart card user including
"specials," "coupons," or other sales promotion offerings.
4.5 PM agrees that with respect to any purchase by a holder of an
electronic scrip smart card issued by SCRIP ADVANTAGE through
its PNOs that PM will honor a full exchange and/or refund
policy as to such purchases identical to that offered for cash
purchases with a sales receipt.
4.6 PM agrees to accept the electronic scrip smart card issued by
SCRIP ADVANTAGE through its PNOs without restriction to pay
the card holder's charge accounts or contracts of any kind,
including but not limited to, open account obligations,
monthly installment account obligations, or installment
contract obligations.
5. DURATION AND TERMINATION OF AGREEMENT
5.1 Duration. This Agreement shall be for the term of ____
month(s) and shall automatically renew for one year, from year
to year thereafter until terminated by either party.
5.2 Termination for Cause. This Agreement may be terminated by
either party "for cause," for the following reasons if the
procedures stated in paragraph 5.3 are followed: For default
by a party for failure to perform one or more of the
obligations of that party as stated in the agreement.
5.2.1 Upon termination, a final upload of information pursuant to
paragraph 3.3 shall occur as soon as possible, and a final
report shall be sent to the PM as provided for in paragraph
3.1(f). SCRIP ADVANTAGE will pick up and PM agrees to return
all materials provided pursuant to paragraph 3.2 above. SCRIP
ADVANTAGE and PM shall cooperate in good faith to accomplish
these activities without delay. Upon completion of those
activities, all software licenses and sublicenses by which PM
is authorized to use the SCRIP ADVANTAGE sponsored electronic
scrip smart card program shall be automatically terminated
without further notice or delay.
5.3 Notice of Termination for Cause. If either party believes it
has a basis for termination of this Agreement for cause which
it wishes to exercise, it must first send a written notice to
the other party giving notice of the intent to terminate this
agreement for cause, and stating briefly the reason(s) for
such termination for cause. The party receiving the notice of
termination for cause shall have 30 days after receipt of the
written notice to cure or find a cure for the cause stated in
the written notice. The written notice(s) shall be delivered
pursuant to Section 7, and paragraph 7.1 below.
5.4 Termination Without Cause. If either party desires to
terminate this Agreement without cause, it shall send written
notice to the other party 120 days in advance of the intended
termination date, stating that the sending party intends to
terminate this Agreement on the specific date certain stated
in the notice, which must be at least 120 days after delivery
of the notice. The written notice shall be delivered pursuant
to Section 7 and paragraph 7.1 below.
5.4.1 Upon the expiration of notice period, the agreement shall
terminate. Upon termination, a final upload of information
pursuant to paragraph 3.3 shall occur as soon as possible, and
a final report shall be sent to the PM as provided for in
paragraph 3.1(f). SCRIP ADVANTAGE will pick up and PM agrees
to return all printed materials provided pursuant to paragraph
3.2 above. PM and SCRIP ADVANTAGE shall cooperate in good
faith to accomplish these activities without delay. Upon
completion of those activities, all software licenses and
sublicenses by which PM is authorized to use the SCRIP
ADVANTAGE sponsored electronic scrip smart card program shall
be automatically terminated without further notice or delay.
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6. NOTICES
6.1 Method of Delivery of Notices. All notices required by this
Agreement shall be in writing and delivered either in person,
or by messenger, or by registered or certified first class
mail with return receipt requested, postage prepaid, sent to
the last known address of the party to receive the notice.
6.2 Effective Date of Delivery. Notices sent pursuant to
paragraph 7.1 shall be deemed delivered at the earliest of the
following:
a. When actually received; or
b. On the fifth full business day after mailing of
the notice by registered or certified mail with
return receipt requested and postage prepaid.
6.3 Addresses for Notices. The current address for notices sent to
the respective parties pursuant to paragraph 7.1 are:
[Name of PM] SCRIP ADVANTAGE, INC.
[Address] --------------------------
--------------------------
--------------------------
These addresses for notice purposes may be changed by
written notice given in accordance with this
paragraph.
7. MISCELLANEOUS PROVISIONS
7.1 Applicable Law. This Agreement is made pursuant to California
law including choice of law rules, and applicable federal law
and regulations if appropriate to the meaning of these
provisions concerning federal tax exempt status.
7.2 Dispute Resolution. (The parties hereby agree to and shall use
mediation services available within the State of California
prior to bringing any proceeding for arbitration. If all
issues are not resolved to the satisfaction of both parties by
mediation, then either party may request arbitration pursuant
to the American Arbitration Associations Commercial Rules and
pursuant to California law. The parties agree that the
arbitrator shall have no authority or power to award punitive
damages. The arbitration award from such arbitration
proceedings shall be binding upon both parties except for any
limited rights of appeal provided by California law. All
mediations and arbitrations shall be held in California unless
otherwise mutually agreed to be held elsewhere by both
parties.
7.3 Entire Agreement; Amendments. This is intended by the parties
to be the entire agreement between the parties. All prior oral
or written statements, negotiations and representations are
hereby deemed to be superseded by this written Agreement. This
Agreement can be amended only by a written amendment or other
written agreement signed by both parties.
Smart Scrip Card Terminal (_________,________) Serial number:_________
Dated:_____________, 199___.
PM:________________ SCRIP ADVANTAGE, INC.
Name of PM
24
<PAGE>
By_______________________ By_________________________
(Print Name of Authorized President
Signature)
----------------------
TITLE OR POSITION
25
<PAGE>
APPENDIX NO. 4
ATTACHED TO MASTER PROJECT AGREEMENT
BETWEEN SCRIP ADVANTAGE AND PATHWAYS
DATED: _____/_____/_____
PATHWAYS SMART CARD ELECTRONIC SCRIP SYSTEM
TRAINING PROGRAM DESCRIPTION
PATHWAYS will provide training to SCRIP ADVANTAGE key employees and
representatives on the following subjects in the following manner:
1. PATHWAYS will conduct a basic original Training seminar complete with
oral, visual and printed materials which will explain and demonstrate
all procedures and steps which the SCRIP ADVANTAGE key personnel and
representatives need to know and understand:
a) The functions and uses of the Smart Card Terminals program by
PATHWAYS use in the PATHWAYS Smart Card Electronic Scrip System
(hereinafter referred to as the PATHWAYS SYSTEM.).
b) The functions and use of Smart Cards programmed by PATHWAYS for
use in the PATHWAYS SYSTEM.
c) The basic information needed from each PNO so that its fund
raising program can be included in the PATHWAYS SYSTEM.
d) The basic information needed from a member of a PNO to enroll as
a cardholder in the PATHWAYS SYSTEM.
e) The basic information needed from each PM to enroll each PM in
the PATHWAYS SYSTEM.
2. PATHWAYS will conduct a second seminar, separate from the basic original
training seminar, in which key employees and representatives of SCRIP
ADVANTAGE will be taught how to present the PATHWAYS system as part of
the SCRIP ADVANTAGE program offered to its PNOs. The purpose of this
seminar will be to teach SCRIP ADVANTAGE personnel how to enroll PNO
members in the new SCRIP ADVANTAGE/PATHWAYS SYSTEM; and thereafter train
the key personnel of each enrolled PNO in the functions and uses of the
Smart Card Terminals and the Smart Card that are part of the PATHWAYS
SYSTEM.
3. PATHWAYS will conduct a third seminar, separate from the above two
listed seminars, in which the key employees and representatives of SCRIP
ADVANTAGE will be taught how to present the PATHWAYS SYSTEM to a
Merchant in order to encourage the Merchant to enroll as a PM, and
thereafter train the key personnel of each PM in the functions and uses
of the Smart Card Terminals and Smart Cards that are part of the SCRIP
ADVANTAGE/PATHWAYS SYSTEM.
4. PATHWAYS will provide a reasonable amount of follow-up training to
insure that SCRIP ADVANTAGE key personnel are trained to use any
upgrades of Smart Card Terminals or Smart Cards, regarding both
equipment and cards, as well as any upgrades in software as developed
from time to time.
5. It is the intent and expectation of PATHWAYS and SCRIP ADVANTAGE that
both parties will cooperate to schedule and hold the seminars listed
herein, promptly after signing the Master Project Agreement, in order to
implement the Master Project Agreement with reasonable efficiency and
speed.
Approval of SCRIP ADVANTAGE - Initials:_______________
Approval of PATHWAYS - initials: ______________
26
<PAGE>
27
<PAGE>
APPENDIX NO. 5
SCRIP ADVANTAGE/PATHWAYS TRANSACTION FLOW
Chargeable to SPI
Reference
1. Non-Profit Organizations: Order Smart Scrip, Receive Smart Scrip
2. SCRIP Merchants: Accept Smart Scrip, Accept Credit/Debit Cards, Transmit
Claim Batch to TPG
3. Pathways Group: ACH from PNO to SAI, ACH from SPI to Merchant, Forward
CC/DR Batch, Smart Card "Auto" Reload (E-Bank)
4. SCRIP ADVANTAGE: Receive ACH from PNO, Send ACH to Merchant
5. Non Profit Account: Send ACH to SAI for purchases
6. Merchant Account: Receive ACH for claims, Receive ACH for CC payment/
charge back
7. Credit Card Switch: All credit/debit transactions, all charge back
transactions
[GRAPHIC]
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PROMISSORY NOTE WITH OPTION TO CONVERT
DEBT OBLIGATION TO EQUITY INVESTMENT
PROMISSORY NOTE
Date: June 19, 1998 _________________, California
For value received of $50,000.00, receipt of which is hereby
acknowledged, Scrip Advantage Inc., a corporation, promises to pay to the order
of The Pathways Group, Inc., upon demand the sum of Fifty Thousand Dollars
($50,000.00), with interest at the rate of Ten Percent (10%) interest per annum
beginning June 19, 1998, payable quarterly on the last day of each quarter,
payments beginning September 30, 1998; and thereafter on December 31, March 31,
June 30, and September 30, of each year until the note is fully paid.
This note may be paid by the maker, in whole or in part, at
any time prior to and without demand by holder; but must be paid upon demand by
holder.
In the event any action is brought by the holder of this note
to collect payment of this note, the maker corporation agrees to pay reasonable
attorney fees and court costs.
The promissory note is an unconditional obligation of the
maker corporation. The Payee has the right to be fully paid according to its
terms.
This is not a negotiable promissory note. It is coupled with
attached "Continuing Option To Convert Debt Obligation To Equity Investment",
which is a separate but related right of the payee named above or
assignee/holder of this note, which cannot be separately assigned without this
note. This note may be converted, in whole or in part, into shares of Scrip
Advantage Inc. upon fulfillment of and pursuant to conditions, terms and
provisions of the attached "Continuing Option To Convert Debt Obligation To
Equity Investment."
The maker corporation hereby agrees that until such time as
this note is fully paid or otherwise satisfied, that The Pathways Group, Inc.
shall be entitled to designate and appoint one Director to Board of Directors of
the maker corporation.
Dated this 14th day of July, 1998
SCRIP ADVANTAGE INC.
By /s/ R.J. Coyle, Sr.
Robert J. Coyle, President
<PAGE>
CONTINUING OPTION TO CONVERT
DEBT OBLIGATION TO EQUITY INVESTMENT
Scrip Advantage, Inc., hereby grants to The Pathways Group,
Inc., the Payee/holder of the attached promissory note, or its assignee, a
Continuing Option To Convert any part or all of the debt obligation represented
by the above attached demand promissory note, including any accrued interest, if
any, to an equity investment in the voting common shares, or voting preferred
shares of stock of Scrip Advantage, Inc., on the following conditions, terms,
and provisions stated below. This Continuing Option To Convert, (etc.) including
all conditions terms and provisions shall hereinafter be referred to as " Option
to Convert."
The Pathways Group, Inc., may request at any time, in support
of its right to evaluate this Option to Convert, a copy of any or all of the
following records of Scrip Advantage, Inc., or its successor in interest:
A. A copy of the Articles of Incorporation;
B. A copy of the Bylaws of the Corporation;
C A copy of the Minutes of Meetings of the Board of
Directors,
D. A copy of the Minutes of Meetings of Shareholders;
E. A copy of the financial statements of Scrip Advantage,
Inc.;
F. A copy of a complete list of the shareholders of
Scrip Advantage, Inc., showing the name and number of
shares held by each shareholder; and
G. Such other information related to and in support of or
confirmation of any of the above information.
The determination of price per share and other terms and conditions of
this Option to Convert shall be negotiated in good faith between the parties
without undue delay, and within not more than thirty (30) days after delivery to
Scrip Advantage Inc., of a written notice from The Pathways Group, Inc., or its
assignee, that the holder of this Option to Convert desires to consider the
exercise thereof. If negotiations produce a price, terms and conditions
acceptable to The Pathways Group, Inc., then upon acceptance of the price, terms
and conditions by The Pathways Group, Inc., or its assignee, the Option to
Convert shall be deemed exercised, and the shares shall be issued to the option
holder, at which time so much of the debt obligation as has been converted to
equity investment shall be deemed paid. If the holder of the Promissory Note and
Option to Convert does not convert the entire unpaid debt at the time of the
exercise of the option, then, the balance of the debt represented by the
Promissory Note shall remain due and owing until paid, and the Option to Convert
shall remain in effect as to such remaining debt.
This Option to Convert shall continue in effect until the attached
promissory note is paid in full. The Option to Convert may be repeatedly
exercised as to part or all of the then unpaid debt remaining due pursuant to
the terms of the promissory note, in the discretion of the holder of the
Promissory Note and Option to Convert.
This Option to Convert is not assignable except if assigned together
with the Promissory Note to which it is attached. Any attempt to assign this
Option to Convert except with the Promissory Note shall be void and the Option
to Convert shall continue to be held by the holder of the Promissory Note. J
Dated this 19th day of June , 1998
Scrip Advantage, Inc.
By /s/ R.J. Coyle, Sr.
-------------------------------
Robert J. Coyle, President
