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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
|_| Transition report pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to _______________
Commission file number 000-24119
THE PATHWAYS GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1617556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14201 N.E. 200TH STREET, WOODINVILLE, WA 98072
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(Address of principal executive offices)
(425) 483-3411
--------------
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No | |
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court.
Yes | | No | |
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: AS OF AUGUST 16,1999:
13,565,662 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE.
Transitional Small Business Disclosure Format (check one):
Yes | | No |X|
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's fiscal quarter
ended June 30, 1999 are attached to this Report, commencing at page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for historical information, the material contained in
this Management's Discussion and Analysis or Plan of Operation is
forward-looking. This discussion includes, in addition to historical
information, forward looking statements which involve risks and uncertainties.
The Company's actual results could differ materially from the results discussed
in the forward looking statements. Factors that could cause or contribute to
such differences are discussed below and in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission. These risks and uncertainties include the rate of market
development and acceptance of smart card technology, the unpredictability of the
Company's sales cycle, the limited revenues and significant operating losses
generated to date, the ability of the Company to achieve adequate levels of
revenue to recover its investment in capitalized software development costs and
software licenses, the possibility of significant ongoing capital requirements,
and the ability of the Company to secure additional financing as and when
necessary. For the purposes of the safe harbor protection for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995,
readers are urged to review the list of certain important factors set forth in
"Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995".
GENERAL
The Pathways Group, Inc. and its subsidiaries collectively
("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 is located at 1221 North Dutton Avenue,
Santa Rosa, California 95404, and its telephone number is (707) 546-3010. A
sales and marketing office is located at Grosvenor Center, 2500 Makai Tower, 733
Bishop Street, Honolulu, Hawaii 96813.
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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. The Company believes it will continue to report minimal revenues until
additional significant contracts are signed or until the existing contracts,
discussed below, proceed through the pilot stage to a full rollout. Revenues
generated in the three month and six month periods ended June 30, 1999 and 1998,
primarily relate to credit card processing fees from its unattended ticketing
kiosks installed in several ski area and amusement park venues. Revenues
increased $39,160 or 320% for the three months ending June 30, 1999 compared to
the corresponding period in 1998 due to an increase in the number of kiosks
installed and operating, which resulted in higher volumes of transactions being
processed. Revenues increased $43,769, or 315%, for the six months ended June
30, 1999 compared to the same period in 1998, due to the increased transaction
volumes being realized, and the consummated sale ($17,990) of an unattended
kiosk to Deer Valley in Utah, which had been installed on a pilot basis. In
addition, the beginning of the spring and summer season and extended hours at
amusement parks at which the Company's kiosks are installed resulted in a higher
volume of transactions, and higher processing fees for the Company. In the first
six months of 1999, the Company processed a total of $1,236,073 (13,064
transactions or fees realized of $37,771) through the installed base of kiosks,
compared to $344,427 (4,483 transactions or fees realized of $11,264) for the
same period in 1998.
In late 1997 and during 1998, the Company developed an
upgraded version of its unattended kiosk to, among other things, accommodate
acceptance and vending of smart cards and also engineered and developed an
indoor kiosk to be utilized as a smart card recharge device. The Company began
marketing efforts of its new indoor and outdoor kiosk products in the first
quarter of 1999. The Company has also changed its marketing strategy for its
unattended kiosks. Previously, the Company leased the kiosks to a customer and
collected gross transaction charges of approximately 5% throughout the lease
term. The Company's new marketing strategy is to sell the kiosk to a customer
for cash and collect ongoing gross transaction fees of approximately 1.75% to
2%. The Company believes this model is more profitable and eliminates negative
cash flow required to install and sell the kiosk products.
In the fourth quarter of 1998, the Company installed its
Tikitbox II unattended ticketing system at Winter Park Ski Resort in Colorado
and upgraded its existing systems at Six Flags Great Adventure and Magic
Mountain Amusement Parks. These contracts are accompanied by transaction
processing arrangements at fees generally ranging from 2% to 5%. In addition,
the Company has a number of units installed on a pilot basis, and is involved in
negotiations with those customers for the purchase of multiple units. These
pilot agreements provide for the Company to charge transaction fees of generally
5% during the pilot period. Although there can be no assurance of the successful
outcome of the pilot programs or negotiations, the Company expects to increase
its kiosk sales in 1999 compared to previous years. In June, 1999, the Company
signed contracts for sale of two unattended kiosks to the Blue & Gold Fleet in
San Francisco ($30,885), one additional kiosk in Deer Valley ($12,995), and one
kiosk at Big Mountain Ski & Summer Resort in Montana ($17,566), with revenues to
be realized in the third quarter.
In July 1999, the Company signed agreements with the State of
Hawaii Millennium Commission to design, develop and maintain the official WEB
site for its Hawaii millennium celebration, and to be the official transaction
processor for the transactions over the WEB site. In addition, the Company will
issue commemorative smart cards to be used for discounts, promotions and
ticketing to special events.
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With the exception of the installation of its initial smart
card system and resulting sales cards and terminals in 1996, the Company has not
realized meaningful revenues from its smart card system products. The Company's
marketing efforts have resulted in a number of letters of intent and pilot
agreements, including the installation of a pilot program in Honolulu, Hawaii
and signing of a letters of intent with Linkopp Marketing (an internet small
business membership organization), and Consolidated Theatres. Although these
efforts have not resulted in significant revenues to date, the Company believes
that its agreements and activities demonstrate the substantial market for smart
card systems in the United States.
The Company's business model is based upon the Company's
contracting with large membership based businesses to be a turnkey provider of
smart card based systems. The Company anticipates licensing its software for use
by its clients and entering into agreements whereby the Company will perform all
backroom processing of the transactions that occur over the system in addition
to selling smart cards and smart card readers programmed by the Company. The
Company expects to receive transaction-processing fees for its backroom
processing services. The Company anticipates that revenue generated from
contracts will be dominated initially by the sales of smart card terminals,
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.
GROSS MARGIN. Gross margin was 80% for the three months ended
June 30, 1999 and 82% for the six months ended June 30, 1999, as compared to 77%
for the three months ended June 30, 1998 and 75% for the six months ended June
30, 1998. The increase in gross margin for these periods in 1999 as compared
with the corresponding periods in 1998 relates to lower charge backs from credit
card transactions. In its new transaction processing contracts, effective for
1999, the Company no longer accepts liability for charge backs to a merchant or
amusement/ski area as it has in prior years. As a result, the Company expects
gross margins on its credit card processing fees to be higher than in past
years.
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. The Company expects future
gross margin percentages will be heavily influenced by potential competition as
well as 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 cards by
cardholders and the resulting transaction processing fees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses increased $372,577 or 32.6% during the three months
ended June 30, 1999, and increased $697,909 or 30.7% during the six months ended
June 30, 1999, as compared to the corresponding periods in 1998. These increases
are primarily the result of expanded payroll and employee support costs
associated with an increased number of full-time employees. The Company had
fifty-four full-time employees at June 30, 1999, as compared to forty-four on
June 30, 1998. In addition, the Company has incurred increases in sales and
marketing related expenditures commensurate with the increase in marketing
personnel. The level of selling, general and administrative costs is expected to
continue to increase, although more modestly than in the past four quarters, as
a result of ongoing marketing and customer support activities, and an increase
in the number of operating and technical personnel necessary to support the
Company's expected sales, product development, and customer support activities.
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. The Company, through its wholly-owned subsidiary,
opened a sales and marketing office in Honolulu, Hawaii, during the third
quarter 1997 and expanded the office in September 1998. In October 1998, the
Company also leased and occupied a 6,390 square foot research and development
facility. This space is also utilized in the
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assembly and testing of Tikitbox II unattended ticketing and smart card systems.
Consequently the selling, general, and administrative expenses for the three
months and the six months ended June 30, 1999 reflect the costs of operating the
Company's expanded Hawaii office and new research and development facility
whereas the corresponding periods in 1998 do not reflect these operating
expenses. 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. Below is a detail of the
increase in selling, general, and administrative expenses in major categories
for the three month and six month periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
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INCREASE FOR THE THREE MONTHS INCREASE FOR THE SIX MONTHS
ENDED JUNE 30, 1999 VS. THE THREE ENDED JUNE 30, 1999 VS. THE SIX
SG&A INCREASE ATTRIBUTABLE MONTHS ENDED JUNE 30, 1998 MONTHS ENDED JUNE 30, 1998
TO:
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<S> <C> <C>
Payroll and payroll related $88,997 $323,797
expenses
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Rent, office, and facility $51,063 $128,734
(including equipment)
expenses
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Marketing, selling, and $134,638 $188,377
travel related expenses
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Other SG&A related expenses $97,879 $57,001
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Total Increase in SG&A $372,577 $697,909
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</TABLE>
RESEARCH AND DEVELOPMENT. Research and development increased
$110,690 in the three months ended June 30, 1999 and increased $180,932 in the
six months ended June 30, 1999, as compared to the same periods in 1998. The
increase in 1999 over 1998 reflects the increase in programming staff and their
related research and development efforts, and expenditures on equipment and
software used for testing new product technologies and offerings.
AMORTIZATION OF SOFTWARE COSTS. Amortization of software costs
increased $25,230 for the three months ended June 30, 1999, and increased
$50,349 for the six months ended June 30, 1999, compared to the corresponding
periods in 1998. This increase results from a reevaluation of the amortization
schedules being used for various projects, and the shortening of the
amortization period for some projects, as discussed in the notes to the
financial statements. This results in a higher amortization amount for 1999
compared to 1998.
DEPRECIATION. Depreciation increased $13,687 for the three
months ended June 30, 1999, and increased $56,134 for the six months ended June
30, 1999, as compared to the corresponding periods in 1998 primarily due to
continued increases in capital expenditures. Capital expenditures in 1999 and
1998 relate to the addition of computer equipment to support an increase in
marketing and technical activities and personnel, the leasehold improvements at
the Company's Santa Rosa, California transaction processing center and research
and development facility, and the opening and expansion of its Hawaii office.
INTEREST INCOME / EXPENSE (NET). The Company had an increase
of $17,430 in net interest income for the three months ended June 30, 1999 and
an increase of $34,327 in net interest income for the six months ended June 30,
1999, as compared to the same periods in 1998, due to reductions in the total
debt outstanding and increased interest income from the investment of available
funds from common stock sales.
PROTON WORLD LICENSING AGREEMENT. In May 1999, The Company
entered into a License Agreement with Proton World International S.A. Under the
terms of the Agreement, the Company, acquired a non-exclusive, non-transferable
license to use the Proton technology in the United States
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including its territories. In exchange for its licensing rights under the
Agreement and for the issuance of up to 2,500,000 smart cards, the Company has
agreed to pay licensing fees. The Agreement provides for additional license fees
to be paid for additional card issuance levels over 2,500,000 cards. In
addition, a royalty fee will be paid on each smart card and smart card capable
reader or terminal sold or issued. Through June 30, 1999, the Company has
incurred a licensing fee of $1,000,000, which has been recorded as Software
Licenses in the consolidated balance sheet. Of this $1,000,000, $300,000 was due
and payable at the time of the signing of the license agreement and $270,000 was
still outstanding as of the date of this filing. The Company anticipates payment
of this fee after the completion of its financing described in Liquidity and
Capital Resources below. The remaining balance of the license fees are payable
upon the initiation of a pilot project and upon the rollout of the project as
defined in the Agreement. The Agreement also requires the Company to pay ongoing
certification, maintenance and support service fees and expenses as those
services are provided by Proton World. The license greement has a term of ten
years and is automatically renewable for successive five year periods subject to
the achievement by the Company of certain performance goals.
Proton World is the world's largest electronic purse platform
with over thirty million cards issued in 15 countries. The licensed technology
from Proton World smart card provides a secure open-platform system which
enables issuers and sponsors of smart card programs to have their cards be
accepted at other issuers/sponsors terminals and readers as long as they are
issued under Proton technology. The system also encompasses back room
transaction processing and clearing functions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was ($774,744) at June 30, 1999
and $3,819,466 at December 31, 1998. The decrease in working capital at June 30,
1999 compared to December 31, 1998 is primarily due to the Company's net loss in
the first six months of the year, and the resulting use of cash for operating
expenses and the payment of accrued expenses. In addition, the current
liabilities at June 30, 1999 reflect an accrued license fee of $970,000 due to
Proton World. Exclusive of this accrued license fee payable, working capital at
June 30, 1999 would have been $195,256.
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In March 1999, the Company received a firm commitment for
additional funding of $3,000,000 through the sale of common stock. Due to a
significant decline in the price of the Company's common stock, the Company
subsequently determined that closing this transaction was not its most
advantageous financing alternative. Consequently, in August 1999, the Company
entered into an agreement with Mitchum, Jones and Templeton, an investment bank
in San Francisco, CA, whose chief executive officer is a director of the
Company, for a firm commitment financing for $3,000,000 of units, with each unit
comprised of one share of redeemable preferred stock financing and four common
stock purchase warrants. Each unit has a subscription price of $10.00, and each
warrant has an exercise price of $2.50 per share and a term of three years. In
the aggregate, the firm commitment offering will require the Company to issue
300,000 shares of preferred stock and warrants to purchase 1,200,000 shares of
Common Stock. In addition, Mitchum Jones and Templeton has agreed to a best
efforts offering of units for an additional $3,000,000 on the same terms and
conditions as the committed financing. The preferred stock is redeemable at any
time, but no later than December 31, 2001; requires quarterly dividends payable
at six percent per annum or an in-kind dividend at a rate of ten percent per
annum; contains provisions relating to preferential liquidation rights, voting
rights for the warrants issuable under the preferred stock and registration
provisions. In addition, in the event the Company does not redeem the preferred
shares before December 31, 1999, the Company will be required to issue during
each quarter the shares of preferred stock remain unredeemed, an additional
warrant for each six shares of preferred stock held (or a total of 50,000 common
stock purchase warrants for each 300,000 shares of preferred stock outstanding).
The terms of the preferred stock also prohibit the Company from issuing further
debt, or increasing its bank obligations without approval of preferred
stockholders. In connection with the sale of the units, the Company agreed to
pay a placement fee to Mitchum, Jones and Templeton of $300,000 or warrants to
purchase 150,000 shares of common stock at $2.50 per share with respect to the
committed portion of the offering. If the best efforts offering is concluded,
Mitchum Jones and Templeton will receive an additional placement fee on the same
terms. On August 13, 1999, the Company closed the sale of $1,000,000 of units
(100,000 shares of preferred stock and 400,000 warrants) and anticipates closing
the additional $2,000,000 committed to the Company by August 29, 1999. The
Company has agreed to register the shares of Common Stock underlying the
warrants no later than November 1999. Prior to this closing, the Company's chief
executive officer advanced $300,000 to the Company to pay certain payroll and
operating expenses. The Company intends to repay this advance from the proceeds
of the first closing.
The Company believes that its existing cash reserves, revenues
and proceeds from the firm and the best efforts financings described above will
be adequate to fund the Company's operations through 1999. The Company considers
the proceeds from the sale of the units of preferred stock and warrants to be
bridge financing and intends to pursue aggressively further equity financing to
continue to expand its sales and marketing efforts and operations.
On July 23, 1998, the Company commenced a private offering of
its Common Stock and completed the offering on August 21, 1998. The offering was
conducted pursuant to Rule 506 of Regulation D under the Securities Act. The
Company sold 654,508 shares at $13.75 per share to accredited investors
including GE Capital, a wholly owned investment management subsidiary of General
Electric Company, and Whittier Trust. The Company engaged Allen & Company
Incorporated and Mitchum, Jones & Templeton to act as placement agents for the
offering, each of which received a placement fee of 5% of the purchase price per
share for shares placed by them. These shares were subsequently registered for
resale via the Company's Form SB-2 filed with the Securities and Exchange
Commission on September 24, 1998. The registration statement became effective on
October 9, 1998.
In May 1999, the Company entered into a License Agreement with
the Proton World International, S.A. of Brussels, Belgium. The Company intends
to incorporate this technology into its core product offerings which will
require substantial investments in the following: up front licensing fees;
substantial ongoing royalty fees; expenditures on training, certification,
maintenance and support services; expansion of computer hardware at its
transaction processing centers; and additional technical and marketing staff to
capitalize on the market opportunity the Company believes has been created as a
result of the Agreement.
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The Company's capital expenditures for the three months ended
June 30, 1999 decreased $118,873 compared to the same period in 1998. The
capital expenditures for the six months ended June 30, 1999 decreased by
$262,579 as compared to the same period in 1998. These decreases are primarily
due to significant costs incurred in the first half of 1998 for computer
equipment and leasehold improvements for its transaction processing center in
Santa Rosa, California. Although capital expenditures decreased for the quarter,
the Company expects continued investments in capital expenditures for increased
personnel, and transaction processing infrastructure to support more complex
operations and high volumes.
The Company has historically relied upon proceeds from the
sale or issuance of its common shares and from the issuance of notes payable
and lease financing to satisfy its working capital requirements. The Company
expects to continue to depend upon equity financing to fund operations and
satisfy its working capital needs until it is able to generate significant
sales or achieve profitability. There can be no assurance that the Company
will achieve sales of the magnitude to generate sufficient cash flow from
operations to continue to execute its business plans. However, the Company
believes that the potential revenue to be realized from the rollout of its
current contracts, its current cash resources, including proceeds from the
pending private placement, reduction in expenditures (if necessary) and
available trade and other credit facilities are sufficient to meet its
present anticipated working capital needs through 1999. In the event the
Company is unable to generate significant revenues from the rollout of its
current contracts or additional contracts the Company may negotiate, the
Company will be required to seek alternative sources of financing to fund its
operations. The Company's estimate of its cash requirements and its ability
to meet them are forward-looking statements, and there can be no assurance
that the Company's cash requirements will be met without additional debt or
equity financing. There can be no assurance that, if needed, additional
financing will be available on acceptable terms to the Company, if at all.
YEAR 2000
During recent years, there has been significant global
awareness raised regarding the potential disruption to business operations
worldwide resulting from the inability of current technology to process properly
the change from the year 1999 to 2000. The Company is aware of the potential
year 2000 problem, and has undertaken a Year 2000 project to address the
Company's readiness and exposure to Year 2000 issues. The Year 2000 project
addresses the Company's products; internally used operating systems, software,
and other technology; and third party vendors and suppliers. Each of these areas
is discussed below.
The Company believes that it has substantially identified and
resolved all potential Year 2000 problems with any of the products that it
develops and markets. In order to confirm its belief, the Company has
implemented an ongoing program to test its products for Year 2000 issues. The
Company believes that if any Year 2000 issues are identified, the Company will
be able to correct the problem with a minimal cost or time investment. However,
management also believes that it is not possible to determine with complete
certainty that all Year 2000 problems affecting the Company's products have been
identified or corrected due to the fact that these products interact with other
third party vendor systems not under the Company's control (see below). In
addition, the Company's evaluation is based on a limited number of actual
customer installations.
The Company has conducted a process to identify all internally
used operating systems, software, and other technology that may be impacted by
the Year 2000 problem. This process is now substantially complete. For the
internally used operating systems, software, and technology the Company has
identified as material, the Company is assessing the Year 2000 exposure through
testing and vendor inquiry. Material operating systems, software, and other
technology deemed to be adversely affected by the Year 2000 problem will be
upgraded or replaced. The Company currently estimates the range of costs to
upgrade or replace systems it believes may be impacted by the Year 2000 issues
to be from $50,000 to $150,000. In addition to operating systems, software, and
other technology, the operation of
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office and facilities equipment, such as fax machines, photocopiers, telephone
systems, security systems, elevators, and other common devices may be affected
by the Year 2000 problem.
The Company has identified major suppliers and other third
party vendors integral to the operations of the Company's business. The Company
has initiated communications with those suppliers and third party vendors to
assess their readiness to deal with Year 2000 problems. As part of the Year 2000
project, the Company will identify alternative providers of products and
services deemed material to the Company's operations. However, the Company has
no control over and cannot predict the corrective actions of these third party
vendors and suppliers. The Company intends to arrange, to the extent available,
alternate supplier arrangements in the event a third party vendor is materially
impacted by Year 2000 issues. While the Company expects that it will be able to
resolve any significant Year 2000 problems related to third party products and
services, there can be no assurance that it will be successful in resolving any
such problems. Any failure of these third party vendors and suppliers to resolve
Year 2000 problems with their systems in a timely manner could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The discussions of the Company's efforts relating to Year 2000
compliance are forward-looking statements. The Company's ability to achieve Year
2000 compliance and the associated level of incremental costs could be adversely
impacted by, among other things, the availability and cost of programming and
testing resources, vendors' ability to modify proprietary software, and other
unanticipated problems. The failure to correct a material Year 2000 problem
could result in an interruption of certain normal business activities or
operations. Such failures could materially affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, the Company is unable at this time to
determine those consequences. The Company believes that, with the completion of
the Year 2000 project as scheduled, the possibility of significant interruptions
of normal operations should be reduced or eliminated.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this quarterly report contain
"forward-looking statements" within the meaning of the private Securities
Litigation Reform Act of 1995. These are statements that do not relate strictly
to historical or current facts. Such forward-looking statements involve known
and unknown risks and uncertainties. The Company's actual results could differ
materially from the results discussed in the forward looking statements. Factors
that could cause or contribute to such differences are discussed below and in
the Company's Registration Statements on Form 10K, and on Forms 10SB, SB-2, as
amended, which Statements have been previously filed with the Securities and
Exchange Commission. These risks and uncertainties include, without limitation:
o The rate of market development and acceptance of smart card
technology;
o The unpredictability of the Company's sale cycle;
o The limited revenues and significant operating losses generated to
date;
o The possibility of significant ongoing capital requirements;
o The loss of any significant customer;
o The ability of the Company to compete successfully with the other
providers of smart cards and smart card services;
o The ability of the Company to secure additional financing as and
when necessary;
o The ability of the Company to retain the services of its key
management, and to attract new members of the management team;
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o The ability of the Company to effect and retain appropriate patent,
copyright and trademark protection of its products;
o The ability of the Company to achieve adequate levels of revenue to
recover its investment in capitalized software development costs and
software licenses.
For the purposes of the safe harbor protection for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995, readers are
urged to review the list of certain important factors set forth in "Cautionary
Statement for Purposes of the `Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995".
The Company undertakes no obligation to release publicly any
revisions to the forward-looking statements or to reflect events or
circumstances after the date of this Report.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1999, the Company entered into an agreement with
Mitchum, Jones and Templeton, an investment bank in San Francisco, CA, whose
chief executive officer is a director of the Company, for a firm commitment
financing for $3,000,000 of units, with each unit comprised of one share of
redeemable preferred stock financing and four common stock purchase warrants.
Each unit has a subscription price of $10.00, and each warrant has an
exercise price of $2.50 per share and a term of three years. In the
aggregate, the firm commitment offering will require the Company to issue
300,000 shares of preferred stock and warrants to purchase 1,200,000 shares
of Common Stock. In addition, Mitchum Jones and Templeton has agreed to a
best efforts offering of units for an additional $3,000,000 on the same terms
and conditions as the committed financing. The preferred stock is redeemable
at any time, but no later than December 31, 2001; requires quarterly
dividends payable at six percent per annum or an in-kind dividend at a rate
of ten percent per annum; contains provisions relating to preferential
liquidation rights, voting rights for the warrants issuable under the
preferred stock and registration provisions. In addition, in the event the
Company does not redeem the preferred shares before December 31, 1999, the
Company will be required to issue during each quarter the shares of preferred
stock remain unredeemed, an additional warrant for each six shares of
preferred stock held (or a total of 50,000 common stock purchase warrants for
each 300,000 shares of preferred stock outstanding). The terms of the
preferred stock also prohibit the Company from issuing further debt, or
increasing its bank obligations without approval of preferred stockholders.
In connection with the sale of the units, the Company agreed to pay a
placement fee to Mitchum, Jones and Templeton of $300,000 or warrants to
purchase 150,000 shares of common stock at $2.50 per share with respect to
the committed portion of the offering. If the best efforts offering is
concluded, Mitchum Jones and Templeton will receive an additional placement
fee on the same terms. On August 13, 1999, the Company closed the sale of
$1,000,000 of units (100,000 shares of preferred stock and 400,000 warrants)
and anticipates closing the additional $2,000,000 committed to the Company by
August 29, 1999. The Company believes that the offer and sale of the units
are exempt from registration under the Securities Act of 1933 pursuant to the
provisions of Section 4(2). The Company has agreed to register the shares of
Common Stock underlying the warrants no later than November 1999. Prior to
this closing, the Company's chief executive officer advanced $300,000 to the
Company to pay certain payroll and operating expenses. The Company intends to
repay this advance from the proceeds of the first closing.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Stockholders (the
"Annual Meeting") on June 21, 1999. At the Annual Meeting, the following actions
were taken:
1. The proposal to elect Mark T. Schuur as a director of the
Company was approved by a vote of 6,997,766 votes in favor of his
election, with 15,177 votes against and no abstentions, representing a
vote of 99.8% of the votes cast in favor of the election of Mr. Schuur.
2. The proposal to elect Linda S. Wing as a director of the
Company was approved by a vote of 6,997,766 votes in favor of her
election, with 15,177 votes against and no abstentions, representing a
vote of 99.8% of the votes cast in favor of the election of Ms. Wing.
11
<PAGE>
3. The proposal to elect Glenn A. Okun as a director of the
Company was approved by a vote of 6,997,766 votes in favor of his
election, with 15,177 votes against and no abstentions, representing a
vote of 99.8% of the votes cast in favor of the election of Mr. Okun.
4. The proposal to elect Monte P. Strohl as a director of the
Company was approved by a vote of 6,997,766 votes in favor of his
election, with 15,177 votes against and no abstentions, representing a
vote of 99.8% of the votes cast in favor of the election of Mr. Strohl.
5. The proposal to elect Carey F. Daly, II as a director of
the Company was approved by a vote of 6,997,766 votes in favor of his
election, with 15,177 votes against and no abstentions, representing a
vote of 99.8% of the votes cast in favor of the election of Mr. Daley.
6. The proposal to approve the Amended and Restated Stock
Incentive Plan was adopted by a vote of 5,901,013 votes in favor, with
198,375 votes against and no abstentions and 1,111,930 broker
non-votes, representing a vote of 96.6% of the votes cast in favor of
the proposal.
7. The proposal to approve the Directors Stock Option Plan
was adopted by a vote of 5,901,013 votes in favor, with 134,846 votes
against and no abstentions and 1,111,930 broker non-votes,
representing a vote of 97.7% of the votes cast in favor of the
proposal.
8. The proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the independent auditors of the Company
was adopted by a vote of 7,003,390 votes in favor, with 19 votes
against and 9,553 votes abstaining and no broker non-votes,
representing a vote of 99.99% of the votes cast in favor of the
proposal.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 3.1 Certificate of Designations for
Series A Preferred Stock of The
Pathways Group, Inc., filed with the
Secretary of State of Delaware on
August 12, 1999
Exhibit 3.2 Form of Common Stock Purchase
Warrant
Exhibit 10.1 Amended Bank Lease Agreement, dated
as of June 22, 1999, between Union
Bank of California and The Pathways
Group, Inc.
Exhibit 10.2 Agreement, dated July 20, 1999,
between Hawaiian Millenium
Commission and The Pathways Group
(Hawaii)
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
None.
12
<PAGE>
THE PATHWAYS GROUP, INC.
Index to Consolidated Financial Statements (Unaudited)
for the Fiscal Quarter Ended June 30, 1999
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-5
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 326,837 $ 4,628,544
Accounts and interest receivable 143,309 102,793
Inventories 366,897 361,467
Prepaid expenses and deposits 94,500 168,779
------------ ------------
Total current assets 931,543 5,261,583
Restricted cash 272,000 222,000
Software, net 1,013,577 1,256,020
Property and equipment, net 967,894 1,100,061
Software license 1,000,000 0
Deposits and other assets 151,670 139,024
------------ ------------
TOTAL ASSETS $ 4,336,684 $ 7,978,688
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks, current maturities $ 103,219 $ 336,947
Software license fee payable 970,000 0
Accounts payable 423,878 251,140
Accrued expenses and deferred revenue 209,190 854,030
------------ ------------
Total current liabilities 1,706,287 1,442,117
Notes payable to banks, net of current maturities 116,674 170,903
------------ ------------
TOTAL LIABILITIES 1,822,961 1,613,020
------------ ------------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no
shares issued and outstanding
Common stock, $0.01 par value; 50,000,000 shares authorized; $ 135,657 $ 135,657
13,565,662 issued and outstanding at June 30, 1999 and at December
31, 1998
Additional paid in capital 26,439,081 26,439,081
Accumulated deficit (24,061,015) (20,209,070)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,513,723 6,365,668
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,336,684 $ 7,978,688
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
Sales, net $ 51,397 $ 12,237
Direct cost of sales 10,181 2,842
Selling, general and administrative expenses 1,515,650 1,143,073
Research and development 209,041 98,351
Amortization of software 191,196 165,966
Depreciation 117,807 104,120
------------ ------------
Total operating expenses 2,043,875 1,514,352
------------ ------------
Loss from operations (1,992,478) (1,502,115)
Interest income (expense), net 7,341 (10,089)
------------ ------------
NET LOSS $ (1,985,137) $ (1,512,204)
============ ============
Basic and diluted net loss per share $ (0.15) $ (0.12)
Shares used in per share calculations 13,565,662 12,904,487
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
Sales, net $ 57,649 $ 13,880
Direct cost of sales 10,485 3,501
Selling, general and administrative expenses 2,974,018 2,276,109
Research and development 352,226 171,294
Amortization of software 377,554 327,205
Depreciation 234,714 178,580
------------ ------------
Total operating expenses 3,948,997 2,956,689
------------ ------------
Loss from operations (3,891,348) (2,942,809)
Interest income, net 39,403 5,076
------------ ------------
NET LOSS $ (3,851,945) $ (2,937,733)
============ ============
Basic and diluted net loss per share $ (0.28) $ (0.23)
Shares used in per share calculations 13,565,662 12,904,487
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,851,945) $(2,937,733)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 234,714 178,580
Amortization of software 377,554 327,205
Effects of changes in operating assets and liabilities:
Accounts and interest receivable (40,516) (15,177)
Inventories (5,430) (4,821)
Prepaid expenses and deposits 74,279 31,500
Accounts payable 172,738 51,980
Accrued expenses (644,840) (62,928)
----------- -----------
Net cash used in operating activities (3,683,446) (2,431,394)
----------- -----------
Cash flows from investing activities:
Capital expenditures (102,547) (365,126)
Capitalized software development costs (135,111) (146,466)
Restricted cash (50,000) (129,500)
Issuance of Note Receivable to Scrip Advantage 0 (50,000)
Software license (30,000) 0
Other assets (12,646) 15,283
----------- -----------
Net cash used in investing activities (330,304) (675,809)
----------- -----------
Cash flows from financing activities:
Principal payments on notes payable to banks (287,957) (269,708)
----------- -----------
Net cash used in financing activities (287,957) (269,708)
----------- -----------
Decrease in cash and cash equivalents (4,301,707) (3,376,911)
Cash and cash equivalents, beginning of period 4,628,544 3,759,720
----------- -----------
Cash and cash equivalents, end of period $ 326,837 $ 382,809
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements are
unaudited, but include all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position at such dates and of the operations and
cash flows for the periods then ended. The financial information is presented in
a condensed format, and it does not include all of the footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles. Operating results for the periods ended June 30,
1999 and 1998 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 December 31, 1998
Form 10-K filed with the Securities and Exchange Commission.
2. THE COMPANY
The accompanying consolidated financial statements include the
accounts of The Pathways Group, Inc. ("TPG") and its wholly owned subsidiaries.
All intercompany balances and transactions have been eliminated. TPG's
subsidiaries include Pathways International, Ltd. ("PIL"), SPRINTICKET, Inc.
("ST"), PT Link, Inc. ("PT Link") and The Pathways Group, Inc., a wholly owned
subsidiary incorporated in the State of Hawaii. TPG and its subsidiaries (the
"Company") are primarily engaged in providing specialized transaction processing
services through the development of proprietary software and hardware systems
including credit card and multiple application smart card technologies. The
Company derives its revenue principally from transaction processing fees charged
to the merchant and the sale of related terminals, hardware systems and smart
cards. The Company has invested heavily in designing and developing its
proprietary hardware and application software systems and in establishing and
expanding its sales and marketing capabilities. The Company plans to continue
these efforts in preparation for, and in anticipation of, the growth in smart
card-based electronic commerce that the Company anticipates will create a
substantial market for its data and transaction processing services.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Smart cards and related packaging $160,361 $158,917
Smart card terminals and computer hardware 65,915 61,846
Assembled unattended kiosks and components 140,621 140,704
-------- --------
$366,897 $361,467
======== ========
</TABLE>
4. 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 as 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.
F-5
<PAGE>
It is reasonably possible that the estimates of anticipated
future gross revenues and the remaining estimated economic lives used to
calculate depreciation and amortization of the Company's long lived assets and
software and license may be reduced significantly in the near term. As a result,
the carrying amount of the capitalized software costs ($1,013,577) may be
reduced entirely in the near term. In addition, the carrying amount of long
lived assets may be reduced materially in the near term.
5. CAPITAL STOCK TRANSACTIONS
In August 1999, the Company received a firm commitment for the
sale of $3,000,000 of redeemable preferred stock. (See Liquidity and Capital
Resources section of management's discussion and analysis on page 6.) On August
13, 1999, the Company closed the sales of $1,000,000 of preferred stock and
anticipates closing the other $2,000,000 on August 29, 1999. Prior to this
closing, the Company's CEO advanced $300,000 to pay certain operating and
payroll costs of the Company. This advance was repaid out of the proceeds of the
sale of preferred shares.
In August 1998, the Company received net proceeds of
$8,385,829 from the sale of 654,508 shares of common stock. The offering was
conducted pursuant to Rule 506 of Regulation D under the Securities Act. These
shares were subsequently registered for sale pursuant to a Registration
Statement on Form SB-2 that was declared effective by the Securities and
Exchange Commission on October 9, 1998.
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDING SIX MONTHS ENDING
JUNE 30, 1999 JUNE, 1998
------------- ----------
<S> <C> <C>
Cash paid for interest $ 17,509 $ 48,952
</TABLE>
In May 1999, the Company entered into a software license agreement in
exchange for an obligation to pay $1,000,000. Software licenses of $1,000,000
and software license fee payable of $970,000 have been recorded in the
consolidated balance sheet at June 30, 1999, as a result of this non-cash
transaction.
7. BANK AGREEMENTS
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 which 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. In June 1999, the Company amended its lease agreement
with the Bank. Under the revised agreement, the Bank reduced its minimum cash
requirement from $850,000 to $250,000, and the Company deposited an additional
$50,000 in a certificate of deposit with the Bank as additional collateral for
the lease agreement.
8. EARNINGS PER SHARE
The Company calculates earnings per share based on SFAS
No.128, "Earnings Per Share". Basic earnings per share is calculated using the
average number of common shares outstanding. Potentially dilutive shares
resulting from common stock options have been excluded from the computation of
diluted earnings per share for the six months ended June 30, 1999 and 1998 as
they are antidilutive.
F-6
<PAGE>
The number of common stock options outstanding at June 30, 1999 and 1998 that
could be potentially dilutive are 802,528 and 410,833 respectively.
9. SOFTWARE LICENSE AGREEMENT
In May 1999 the Company entered into an agreement with Proton
World, the leading international provider of end-to-end smart card solutions,
based in Brussels, Belgium. Licensing fees paid or accrued at June 30, 1999 are
$1,000,000 and have been capitalized in the consolidated balance sheet.
The Company's amortization of these fees will be the greater
of the straight line amortization over two years, or $0.40 per smart card sold.
There was no amortization expense recorded for the six months ending June 30,
1999.
10. CHANGE IN ACCOUNTING ESTIMATE
In the first quarter of 1999, the Company changed the
estimated economic life of capitalized software costs for certain applications
from five years to three years due to new information and developments arising
from recent customer negotiations. The cumulative impact of this change in
estimated economic life on net loss for six and three months ended June 30, 1999
was $74,508 (or $.0055 per share) and $39,489 (or $.0029 per share).
F-7
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PATHWAYS GROUP, INC.
By /s/ Mark T. Schuur
-------------------------------
Mark T. Schuur
Senior Vice President and Chief
Financial Officer
Date: August 16, 1999
<PAGE>
Exhibit 3.1
THE PATHWAYS GROUP, INC.
CERTIFICATE OF DESIGNATIONS
OF
SERIES A PREFERRED STOCK
---------------------------------
Pursuant to Section 151(g) of the
Delaware General Corporation Law
---------------------------------
THE PATHWAYS GROUP, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), DOES
HEREBY CERTIFY that the following resolution was duly adopted by the Board of
Directors of the Corpo ration at a meeting duly called and held on August 11,
1999, at which a quorum was present and acting throughout:
RESOLVED, that, pursuant to authority conferred upon the Board of
Directors of the Corporation pursuant to Article Fourth of the Certificate
of Incorporation of the Corporation, a series of Preferred Stock of the
Corporation to be designated Series A Preferred Stock, par value $.01 per
share, be, and it hereby is, created, to consist of 750,000 shares of
Preferred Stock which the Corporation has authority to issue, and that the
designations, powers, preferences and relative, participating, optional
and other special rights and relative qualifications, limitations or
restrictions of the shares of such series hereby are fixed as follows:
1. DESIGNATION. 750,000 authorized shares of Preferred Stock, par
value $.01 per share, may be issued in and as a series to be designated the
"Series A Preferred Stock" (the "Series A Preferred Stock").
2. RANK. The Series A Preferred Stock shall be senior in right to
any other equity securities of the Corporation with respect to dividend payments
and the distribution of assets upon Liquidation (as defined in paragraph 3
hereof).
3. LIQUIDATION RIGHTS.
<PAGE>
(a) LIQUIDATION. In the event of the voluntary or involuntary
liquidation, dissolution or winding up ("Liquidation") of the Corporation, the
holders of the Series A Preferred Stock shall be entitled to have paid to them
out of the assets of the Corporation, before any distribution is made to or set
apart for the holders of any other series of preferred stock or any other class
or series of stock ranking junior to the Series A Preferred Stock in respect of
distribution of assets upon Liquidation, an amount per share in cash equal to
the Liquidation Value (as defined below) for each share of Series A Preferred
Stock held (including any shares of Preferred Stock issuable as dividends
pursuant to paragraph 4(a) hereof up to and including the date of final
distribution to the holders of the Series A Preferred Stock pursuant to this
paragraph 3 (the "Liquidation Date")).
For the purposes of this Certificate, the "Liquidation Value" of
each share of Series A Preferred Stock means $10.00 per share plus cumulative
but unpaid dividends. For purposes of this paragraph 3, each of the following
shall be considered a "Liquidation": (i) the adoption by Corporation of any plan
of liquidation providing for the distribution of all or substantially all of its
assets; (ii) the sale or disposition of all or substantially all of the assets
or business of the Corporation pursuant to a merger, consolidation or other
transaction (unless the stockholders of the Corporation immediately prior to
such merger, consolidation or other transaction beneficially own, directly or
indirectly, 80% or more of the combined voting power of the entity or entities,
if any, that succeed to the business of the Corporation, in substantially the
same proportion as they owned the combined voting power of the Corporation);
(iii) the combination of the Corporation with another company pursuant to which
the Corporation is the surviving corporation if, immediately after the
combination, the stockholders of the Corporation immediately prior to the
combination hold, directly or indirectly, less than 50% of the combined voting
power of the combined company; or (iv) any person (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than any person who was a beneficial owner of Common
Stock of the Corporation, par value $.01 per share (the "Common Stock") on or
before the date hereof, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act) of securities of the Corporation representing more
than 50% of the combined voting power of the Corporation.
(b) INSUFFICIENT LIQUIDATION PROCEEDS. If, upon any Liquidation of
the Corpo ration, the assets of the Corporation or proceeds thereof
distributable among the holders of the shares of Series A Preferred Stock shall
be insufficient to pay in full the preferential amounts payable to such holders,
then such assets or the proceeds thereof shall be distributed among such holders
ratably in accordance with the respective amounts that would be payable on such
shares if all amounts payable thereon were not paid in full.
4. DIVIDENDS.
(a) SERIES A DIVIDENDS. Holders of outstanding shares of Series A
Preferred Stock shall be entitled to receive dividends at the rate of: (i) six
percent (6.0%) PER ANNUM of the Face Value (as defined below), if such dividend
is paid in cash, and (ii) ten percent (10.0%) PER
-2-
<PAGE>
ANNUM of the Face Value if such dividend is paid in-kind through the issuance of
shares of Series A Preferred Stock. Such dividends shall accrue on a quarterly
basis, and shall be payable as of the end of each fiscal quarter of the
Corporation. Whether the dividends on the Preferred Stock are to be paid in cash
or in-kind shall be at the sole election of the Company at the end of each
fiscal quarter of the Company. If the Company elects to pay the dividends
in-kind by issuing additional shares of Preferred Stock, it shall so notify the
holders of the Series A Preferred Stock in writing, and such additional shares
shall be issued or deemed issued only immediately prior to the redemption of the
Series A Preferred Stock Shares of Series A Preferred Stock accrued as dividends
pursuant to this Paragraph 4(a) shall not be deemed outstanding for the purposes
of this Paragraph 4 or for the purposes of Paragraph 5(b) or 6, and no dividends
shall be accrue with respect thereto. In the event that a dividend payment is
made partly in cash and partly in-kind, each holder of Series A Preferred Stock
will be entitled to receive the same proportion of cash and in-kind stock. Each
dividend will be payable to holders of record of the Series A Preferred Stock at
the close of business on the date (a "Record Date") which is the last day of the
fiscal quarter of the Corporation. Accrued dividends on outstanding shares of
the Series A Preferred Stock shall be cumulative, whether or not declared, from
and including the most recent date to which dividends have been paid, or if no
dividends have been paid, from the date of original issue thereof. "Face Value"
shall mean $10.00 per share of Series A Preferred Stock.
(b) OTHER DIVIDENDS. So long as any shares of Series A Preferred
Stock are outstanding, no dividend, other than a dividend payable in Junior
Stock (as defined below), shall be declared or set aside for payment or other
distribution declared or made upon Junior Stock, nor shall the Junior Stock be
redeemed, purchased or otherwise acquired for any consideration by the
Corporation (except by conversion into or exchange for stock of the Corporation
ranking junior to the Series A Preferred Stock as to dividends or upon
Liquidation) unless, in each case, the full cumulative dividends on all
outstanding shares of Series A Preferred Stock shall have been paid or declared
and set apart. For the purposes of this paragraph 4(b), "Junior Stock" means the
Common Stock and any other class of stock of the Corporation hereinafter
authorized which shall rank under the Series A Preferred Stock as to all
dividend payments or the distribu tion of assets upon Liquidation.
5. WARRANTS.
(a) INITIAL WARRANTS. Upon the initial issuance of each share of
Series A Preferred Stock, each initial purchaser of such share shall receive
four three-year warrants (each an "Initial Warrant") for each share of Series A
Preferred Stock purchased by such purchaser. Each Initial Warrant shall entitle
the holder thereof to purchase one share of Common Stock. Each Initial Warrant
shall be immediately exercisable, shall terminate on the date which is three
years from its issuance and shall have an exercise price (the "Exercise Price")
equal to $2.50 per share of Common Stock.
(b) QUARTERLY WARRANTS. If, prior to January 1, 2000, the
Corporation shall not have redeemed the Series A Preferred Stock in full, then
on the last day of each fiscal quarter
-3-
<PAGE>
ending March 31, June 30, September 30 and December 31 (each a "Warrant Issue
Date") thereafter until the Series A Preferred Stock shall have been redeemed in
full, commencing March 31, 2000, the Corporation shall issue to each holder of
record of Series A Preferred Stock on such Warrant Issue Date an additional
warrant (each, a "Quarterly Warrant") to purchase one share of the Corporation's
Common Stock for each six shares of Series A Preferred Stock owned by such
holder on the Warrant Issue Date. Each Quarterly Warrant shall be exercisable
for three years from the date of issuance thereof and shall be exercisable at
the Exercise Price. Notwithstanding the foregoing, no Quarterly Warrants shall
be issuable with respect to any shares of Series A Preferred Stock accrued or
issued as a dividend in accordance with Paragraph 4(a) hereof.
(c) THE WARRANTS. The Initial Warrants and the Quarterly Warrants
(collectively, the "Warrants") may only be exercised by the record holder
thereof. Each Warrant shall be evidenced by a warrant certificate in
substantially the form attached hereto as Exhibit A.
(d) PAYMENT OF EXERCISE PRICE. Each Warrant may be exercised by the
holder thereof by surrendering to the Corporation the certificate evidencing the
Warrant and paying to the Corporation in cash the Exercise Price for each share
of Common Stock to be purchased, and upon receipt of such cash payment, the
Corporation shall issue to such exercising holder the Common Stock purchased.
Each Warrant may also be exercised upon the terms and conditions set forth in
the certificate evidencing the Warrant.
(e) STOCK TO BE RESERVED. The Corporation shall at all times reserve
and keep available out of its authorized but unissued Common Stock or its issued
Common Stock held in treasury, or both, solely for the purpose of issuance upon
the exercise of the Initial Warrants such number of shares of Common Stock as
shall then be issuable upon the exercise of such Initial Warrants. Upon the
issuance of each Quarterly Warrant, the Corporation shall thereafter at all
times reserve and keep available out of its authorized but unissued Common Stock
or its issued Common Stock held in treasury, or both, solely for the purpose of
issuance upon the exercise of the Quarterly Warrants such number of shares of
Common Stock as shall then be issuable upon the exercise of such Quarterly
Warrants. If at any time the number of authorized but unissued shares of the
Common Stock shall not be sufficient to effect the exercise of the Initial
Warrants and the Quarterly Warrants then outstanding, the Corporation shall take
such corporate action as may in the opinion of its counsel be necessary to
increase its authorized but unissued Common Stock to such number of shares as
shall be sufficient for that purpose. The Corporation cove nants and agrees that
all shares of the Common Stock which shall be so issuable shall, upon issuance,
be duly authorized and validly issued, fully paid and nonassessable and free
from all preemptive rights of stockholders and liens and charges with respect to
the issue thereof. The Corporation shall take all such action as may be
necessary to assure that all such shares of the Common Stock may be so issued
without violation of any applicable law or regulation, any requirements of any
exchange upon which the Common Stock of the Corporation may be listed, the
charter or by-laws of the Corporation, or any agreement, instrument or order to
which the Corporation or any of its subsidiaries is then subject.
-4-
<PAGE>
6. VOTING. Each share of the Series A Preferred Stock shall be
entitled to a number of votes equal to the number of shares of Common Stock
which may be purchased upon the exercise of the Warrants issued with respect
to such share of the Series A Preferred Stock in accordance with the terms of
the Series A Preferred Stock; PROVIDED, HOWEVER, that upon the exercise of
such Warrants, the shares of Series A Preferred Stock with respect to which
such Warrants were initially issued shall cease to have such number of votes
as shall equal the number of shares of Common Stock purchased upon the
exercise of such Warrants; and PROVIDED FURTHER, that if the holder of the
shares of Series A Preferred Stock shall, for any reason, sell, assign,
pledge or otherwise transfer the Warrants issued with respect to such Series
A Preferred Stock, the shares of Series A Preferred Stock with respect to
which such Warrants were initially issued shall cease to have such number of
votes as shall equal the number of Warrants sold, assigned, pledged or
transferred. Except as provided below or as otherwise required by law, the
holders of the Series A Preferred Stock shall vote together with the holders
of the Common Stock of the Corporation as a single class. Neither the
Certificate of Incorporation nor this Certificate may be amended to alter or
change the powers, preferences or special rights of the Series A Preferred
Stock without the consent of the holders of at least a majority of the number
of outstanding shares of the Series A Preferred Stock outstanding at the
time, given by such holders together as one class, and given by vote in
person, by proxy at a meeting or by consent as permitted under law.
7. REDEMPTION.
(a) OPTIONAL REDEMPTION. The Corporation may, at any time, redeem
the Series A Preferred Stock, in whole or in part, in accordance with the
procedures set forth in this Paragraph 7. The Corporation shall give written
notice to holders of shares of the Series A Preferred Stock (including Series A
Preferred Stock issued as dividends) of its election to redeem the Series A
Preferred Stock, which notice shall also set forth the Record Date (as
hereinafter defined) for determining the holders of Series A Preferred Stock
whose shares are to be redeemed, the number of shares of Series A Preferred
Stock to be redeemed and the date fixed for such redemption (the "Optional
Redemption Date"). The Board of Directors of the Corporation shall select the
date (the "Record Date") as of which the holders of Series A Preferred Stock
whose shares are to be redeemed will be determined. The Corporation shall give
such notice not less than 30 days prior to the Optional Redemption Date. Each
share of Series A Preferred Stock to be redeemed shall be redeemed for a price
equal to the Liquidation Value.
(b) MANDATORY REDEMPTION. If, on or prior to November 30, 2001, the
Corporation shall not have redeemed all of the outstanding shares of Series A
Preferred Stock, the Corporation shall redeem for cash all of the outstanding
shares of Series A Preferred Stock on December 31, 2001 (the "Mandatory
Redemption Date").
(c) PAYMENT OF REDEMPTION PRICE. On the Optional Redemption Date or
the Mandatory Redemption Date, as the case may be, the Corporation shall pay the
redemption price,
-5-
<PAGE>
in cash, to each holder of Series A Preferred Stock whose shares are being
redeemed. If the Corporation shall be unable to redeem in full all of the issued
and outstanding shares of Series A Preferred Stock to be redeemed, the
redemption amount shall be paid among such holders ratably in accordance with
the respective amounts that would be payable on such shares if all amounts
payable thereon were not paid in full.
(d) OUTSTANDING WARRANTS NOT AFFECTED. The redemption of the Series
A Preferred Stock shall not impair or limit in any way the exercisability, in
accordance with their terms, of the Warrants theretofore issued or accrued but
not yet issued.
8. IDENTICAL RIGHTS. Each share of the Series A Preferred Stock
shall have the same relative rights and preferences as, and shall be identical
in all respects with, all respects with, and all other shares of the Series A
Preferred Stock.
9. CERTIFICATES. So long as any shares of the Series A Preferred
Stock are outstanding, there shall be set forth on the face or back of each
stock certificate issued by the Corporation a statement that the Corporation
shall furnish without charge to each stockholder who so requests, the powers,
preferences and rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences or such rights.
10. MISCELLANEOUS.
(a) COMMUNICATIONS. All notices and other communications required or
permitted to be given to holders of shares of Series A Preferred Stock pursuant
to this Certificate shall be in writing and shall be deemed to have been duly
given (i) when delivered by hand or by Federal Express or a similar overnight
courier to or (ii) five days after being deposited in any United States post
office enclosed in a postage prepaid registered mail envelope addressed to the
persons shown on the books of the Corporation as the holders of the shares at
the addresses as they appear in the books of the Corporation, as of a record
date or a date determined in accordance with the Corporation's Certificate of
Incorporation or By-laws, this Certificate and applicable law.
(b) DESIGNATIONS AND PREFERENCES. Except as may otherwise be
required by law, shares of Series A Preferred Stock will not have any
designations, preferences, limitations or relative rights other than those
specifically set forth in this Certificate or in the Corporation's Certificate
of Incorporation.
(c) HEADINGS. Headings used in this Certificate are for convenience
only and shall not be used in the interpretation of this Certificate. References
to paragraphs are to the paragraphs of this certificate.
-6-
<PAGE>
(d) WAIVER; AMENDMENT. The preferences, special rights or powers of
the Series A Preferred Stock may be waived, and any of the provisions of the
Series A Preferred Stock may be amended, by the affirmative vote at a meeting or
the written consent of holders of record of at least a majority of the
outstanding shares of Series A Preferred Stock.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to
be signed and its corporate seal hereunto affixed by Carey F. Daly, II, its
President, and to be attested by Mark T. Schuur, its Chief Financial Officer, on
this 11th day of August, 1999.
THE PATHWAYS GROUP, INC.
/s/ CAREY F. DALY, II
------------------------
Carey F. Daly, II
President
Attest:
/s/ MARK T. SCHUUR
- -----------------------
Mark T. Schuur
Chief Financial Officer
-7-
<PAGE>
CORPORATE ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss:
COUNTY OF SONOMA )
On this 11th day of August, 1999 before the undersigned, a Notary
Public in and for the State of California, personally appeared Carey Francis
Daly, II, known to me to be the person who executed the foregoing Certificate of
Designations and known to me to be President of The Pathways Group, Inc. and
acknowledged to me that he executed the same as an official and duly authorized
act of such entity for the purposes therein expressed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the State and County and on the day and year first above written.
(SEAL) /s/ IRENE S. VEGAR
-----------------------------------------
Notary Public
My commission expires: December 2, 2002
CORPORATE ACKNOWLEDGMENT
STATE OF )
) ss:
COUNTY OF )
On this ______ day of ________, 1999 before the undersigned, a
Notary Public in and for the State of ____________, personally appeared
________________________, known to me to be the person who executed the
foregoing Certificate of Designations and known to me to be _______________ of
___________________________________________ and acknowledged to me that he/she
executed the same as an official and duly authorized act of such entity for the
purposes therein expressed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal in the State and County and on the day and year first above
written.
(SEAL) ______________________________________
Notary Public
My commission expires: _______________
-8-
<PAGE>
Exhibit 3.2
FORM OF WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE
STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO DISTRIBUTION, AND MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL SATISFACTORY TO THE PATHWAYS GROUP, INC. THAT REGISTRATION IS NOT
REQUIRED UNDER SUCH ACT OR SUCH LAWS.
VOID AFTER 5:00 P.M. (PACIFIC TIME) THREE YEARS FROM ISSUANCE DATE
No. ____ Issuance Date:____________
THE PATHWAYS GROUP, INC.
WARRANTS TO PURCHASE COMMON STOCK
THIS CERTIFIES that or his registered assigns (hereinafter called
the "Holder") is the registered holder of the aggregate number of Warrants
("Warrants") entitling the Holder to purchase from The Pathways Group, Inc., a
corporation organized and existing under the laws of the State of Delaware (the
"Company"), subject to the terms and conditions set forth hereinafter,
__________________________________________ (_____________) fully paid and
non-assessable shares (each, a "Warrant Share") of the Common Stock, par value
$.01 per share ("Common Stock"), of the Company (subject to adjustment as
provided herein). The Holder shall be entitled to exercise the Warrants upon
surrender of this Warrant Certificate, and with the subscription form annexed
hereto duly executed, and payment in lawful money of the United States of the
subscription price of $2.50 (as it may be adjusted as provided herein, the
"Subscription Price") for each Warrant Share being purchased, at any time on or
after the date hereof and at or prior to 5:00 P.M. (Pacific Time) three years
from the issuance date hereof (the "Expiration Date"), at the office of the
Company or, if the Company shall designate a warrant transfer agent, at the
office of such warrant transfer agent. The Warrants represented by this Warrant
Certificate may be exercised by the Holder in whole or in part, but not as to a
fraction of a Warrant Share. Payment of the Subscription Price shall be made in
cash or by certified or official bank check.
1. This Warrant is exercisable, at the option of the Holder, in
whole or in part at any time and from time to time on or before the Expiration
Date. Upon the surrender of this Warrant Certificate and payment of the
Subscription Price, as herein provided, the Warrants shall be deemed to have
been exercised and the person exercising the same shall become the holder of
<PAGE>
record of the shares of Common Stock so purchased for all purposes on the date
of such surrender and payment; PROVIDED, HOWEVER, that if such date is a date on
which the stock transfer books of the Company are closed, such person shall be
deemed to have become the record holder of such shares of Common Stock on the
next succeeding date on which the stock transfer books are open. As soon as
practicable after such surrender and payment, the Company shall issue and
deliver to, or upon the order of, the Holder a certificate or certificates
representing the Warrant Shares so purchased and, in the case of a fractional
interest in a Warrant Share, cash as provided herein. Upon surrender of this
Warrant Certificate to the Company (or its warrant transfer agent, if any), the
Company (or warrant transfer agent) shall cancel this Warrant Certificate, and
to the extent there is a partial exercise of the Warrants evidenced hereby, the
Holder of the Warrant certificate shall receive a replacement Warrant
Certificate of like tenor and date evidencing the number of Warrants which shall
not have been exercised, unless such Warrants shall have expired.
2. Notwithstanding the foregoing, if the Company shall give notice
to its stockholders of the liquidation, dissolution or winding up of the
Company, the right to exercise the Warrants evidenced hereby shall terminate at
the close of business on the third full business day prior to the date specified
in such notice as the record date for determining the Company's stockholders
entitled to receive any distribution upon liquidation, dissolution or winding
up.
3. The number and kinds of shares of stock of the Company issuable
upon exercise of the Warrants evidenced hereby are subject to modification and
adjustment upon the happening of certain events set forth as follows:
a) If, at any time after the date hereof, the Company shall declare
or pay a dividend or make a distribution to its stockholders consisting of
Common Stock of the Company, the Holder of the Warrants evidenced hereby
shall, upon the exercise of such Warrants after the record date for such
dividend, receive, in addition to the Warrants Shares otherwise issuable
upon such exercise, the number of shares of Common Stock as to which such
Holder would have been entitled to receive had such Holder exercised such
Warrants immediately prior to the record date for such dividend.
b) If, at any time after the date hereof, the Company shall, by
subdivision, combination or reclassification of Common Stock, or through
merger or consolidation, or otherwise, alter or modify the number, kind or
class of shares of Common Stock, or other securities or property of the
Company, then as of the record date of such alteration or modification,
the Warrant Shares issuable upon the exercise of a warrant shall be
adjusted so as to consist of the number of shares of capital stock or
other securities or property of the Company which the Holder would have
owned or have been entitled to receive had the Warrants evidenced hereby
been exercised immediately prior to the record date for such subdivision,
combination or reclassification of Common Stock, or merger or
consolidation, or other alteration or modification.
-2-
<PAGE>
c) If, at any time after the date hereof, the Company shall make any
distribution of its assets upon or with respect to the Common Stock, as a
liquidating or partial liquidating dividend (other than a liquidation,
dissolution, or winding up of the Company as provided for below, or other
than as a cash dividend payable out of earnings legally available for
dividends under the laws of the State of Delaware), the Holder of the
Warrants evidenced hereby shall, upon the exercise of such Warrants after
the record date for such distribution or, in the absence of a record date,
after the date of such distribution, receive, in addition to the Warrant
Shares issuable upon such exercise, the amount of such assets which would
have been distributed to such Holder had such Holder exercised such
Warrants immediately prior to the record date for such distribution or, in
the absence of a record date, immediately prior to the date of such
distribution.
d) Unless the context otherwise indicates, all references to Warrant
Shares in this Warrant Certificate shall, in the event of an adjustment
hereunder, be deemed to refer also to any other securities or property
receivable upon exercise of the Warrants pursuant to such adjustment.
e) The Warrant Certificate need not be amended because of any
adjustment in the number and/or content of Warrant Shares pursuant
thereto, and any Warrant Certificate delivered after such adjustment may
state the same number of Warrant Shares as is stated in the Warrant
Certificate originally delivered. However, the Company may, with the prior
written consent of the holders of a majority of outstanding Warrants,
amend the form of Warrant Certificate, provided such amendment in form
does not affect the substance thereof; and any Warrant Certificate
thereafter countersigned and delivered, whether in exchange or
substitution for an outstanding Warrant Certificate or otherwise, may be
in the form as so amended.
f) The Company shall not be required to issue fractional shares of
Common Stock upon exercise of the Warrants. If, by reason of the
calculation of the number of Warrant Shares issuable upon exercise of the
Warrants or any adjustment made pursuant to the terms hereof the Holder of
the Warrants evidenced hereby would be entitled, upon the exercise
thereof, to receive a fractional interest in a share of Common Stock, the
Company shall, upon such exercise, purchase such fractional interest for
an amount in cash equal to (i) the then current market value of such
fractional interest, computed on the basis of the average closing bid and
asked prices of shares of Common Stock on the exercise date as furnished
to the Company by any member of member firm of a registered national
securities exchange selected from time to time by the Company for that
purpose or (ii) if such shares of Common Stock are listed on a national
securities exchange, at the closing price of such shares on the exercise
date.
g) The Holder of the Warrants evidenced hereby shall not, upon the
exercise thereof, be entitled to any dividends that may have accrued with
respect to the Warrant Shares issuable in respect thereof, or to any
interest that may have accrued upon any evidence of indebtedness included
in the Warrant Shares, prior to the exercise date.
-3-
<PAGE>
h) Whenever the number and/or content of Warrant Shares is adjusted
pursuant to the terms hereof, the Company shall promptly mail to the
Holder of the War rants evidenced hereby at the address registered with
the Company a notice setting forth the adjusted number and/or content of
Warrant Shares. Notwithstanding anything to the contrary herein, no
provisions of this Warrant Certificate shall entitle the Holder of the
Warrants evidenced hereby to any adjustment in Warrant Shares as a result
of the grant or exercise of options to public stockholders of the Company.
4. In lieu of exercise of any portion of the Warrant, the Warrant
represented by this Warrant Certificate (or any portion thereof) may, at the
election of the Holder, be converted into the nearest whole number of Warrant
Shares equal to: (a) the product of (i) the number of Warrant Shares to be so
purchased, and (ii) the excess, if any, of (A) the market price per share as of
the date of conversion over (B) the Subscription Price per Warrant Share,
divided by (b) the market price per share as of the date of conversion. The
rights provided under this Section 4 may be exercised in whole or in part and at
any time and from time to time while any portion of the Warrant remains
outstanding. In order to exercise the conversion privilege, the Holder shall
surrender to the Company, at its offices, this Warrant Certificate accompanied
by a duly completed Notice of Conversion in the form attached hereto. This
Warrant (or so much thereof as shall have been surrendered for conversion) shall
be deemed to have been converted immediately prior to the close of business on
the day of surrender of such Warrant Certificate for conversion in accordance
with the foregoing provisions. As promptly as practicable on or after the
conversion date, the Company shall issue and shall deliver to the Holder (i) a
certificate or certificates representing the number of shares of Common Stock to
which the Holder shall be entitled as a result of the conversion, and (ii) if
the Warrant Certificate is being converted in part only, a new certificate of
like tenor and date for the balance of the unconverted portion of the Warrant
Certificate.
5. This Warrant Certificate may be exchanged either separately or in
combination with one or more other Warrant Certificates evidencing Warrants for
one or more new certificates of like tenor and date for the same aggregate
number of Warrants as are evidenced by the Warrant Certificate exchanged.
6. In the event of the liquidation, dissolution, or winding up of
the Company (which shall not include an event described in the next paragraph),
a notice thereof shall be filed by the Company with the warrant transfer agent,
if any shall have been designated by the Company, at least thirty (30) days
prior to the record date (which date shall be specified in such notice) for
determining security holders of the Company entitled to receive any distribution
upon such liquidation, dissolution, or winding up. Such notice also shall
specify the date on which the right to exercise Warrants shall expire as
provided above. A copy of such notice shall be mailed to the Holder of the
Warrants evidenced hereby at the address registered with the Company not more
than thirty (30) nor less than twenty (20) days before such record date.
-4-
<PAGE>
7. In the case of any consolidation or merger of the Company with or
into another corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of the class or classes of
Warrant Shares), or in the case of any sale or transfer to another corporation
of the property of the Company in its entirety or substantially in its entirety,
the Holder of the Warrants evidenced hereby, upon the exercise thereof at any
time after such consolidation, merger, sale or transfer, shall be entitled to
receive the kind and amount of shares of Common Stock and other securities and
property which such Holder would have received upon such consolidation, merger,
sale, or transfer had such Holder exercised its Warrants immediately prior
thereto.
8. The issue of any shares of Common Stock or other certificate upon
the exercise of the Warrants shall be made without charge to the Holder hereof
for any tax in respect of the issue thereof. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of any certificate in a name other than that of the
Holder of this Warrant Certificate, and the Company shall not be required to
issue or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.
9. This Warrant Certificate and all rights hereunder are
transferable on the books of the Company only upon compliance with the
provisions of the Securities Act of 1933, as amended, and applicable state
securities laws, upon surrender of this Warrant Certificate, with the form of
assignment attached hereto duly executed by the Holder hereof or by its attorney
duly authorized in writing, to the Company at its principal executive offices,
or at the office of the warrant transfer agent, if any shall have been
designated by the Company, and thereupon there shall be issued in the name of
the transferee or transferees, in exchange for this Warrant Certificate, a new
Warrant Certificate or Warrant Certificates of like tenor and date, representing
in the aggregate the number of warrants evidenced hereby.
10. If this Warrant Certificate shall be lost, stolen, mutilated or
destroyed, the Company shall, on such terms as to indemnify or otherwise protect
the Company as the Company may in its discretion impose, issue a new Warrant
Certificate of like denomination, tenor and date as the Warrant Certificate so
lost, stolen, mutilated or destroyed. Any such new Warrant Certificate shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant Certificate shall be at
any time enforceable by anyone.
11. The Company may deem and treat the Holder of this Warrant
Certificate as the absolute owner of this Warrant Certificate for all purposes
and shall not be affected by any notice to the contrary.
12. This Warrant Certificate and the Warrants evidenced hereby shall
not, prior to the exercise thereof, entitle the Holder to any rights of a
stockholder of the Company
-5-
<PAGE>
either at law in or equity including, without limitation, the right to vote, to
receive dividends and other distributions, to exercise any preemptive rights or
to receive any notice of meetings of stockholders or of any other proceedings of
the Company.
13. In the event that one or more of the provisions of this Warrant
Certificate shall for any reason be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Warrant Certificate, but this Warrant Certificate
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
14. This Warrant Certificate shall be binding upon any successors or
assigns of the Company.
15. This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
provisions thereof governing conflicts of law.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be duly executed and delivered by its officer hereunder duly authorized.
THE PATHWAYS GROUP, INC.
By:
-----------------------------------------------
President
Countersigned:
- -------------------------------------
-6-
<PAGE>
[Form of Subscription]
(To be Executed by the Holder Desiring to Exercise
Warrants Evidenced by the Within Warrant Certificate)
To: THE PATHWAYS GROUP, INC.
The undersigned hereby irrevocable elects to exercise Warrants,
evidenced by the within Warrant Certificate, for, and to purchase thereunder,
full shares of Common Stock, par value $.01 per share, of The Pathways Group,
Inc. issuable upon exercise of said Warrants and delivery of $ in cash.
The undersigned requests that certificates for such shares by issued
in the name of ________________.
SOCIAL SECURITY
OR TAX IDENTIFICATION NUMBER:_______________
____________________________________________
____________________________________________
(Please print name and address)
Date:_______________________ ______________________________________
(Signature)
If said number of Warrants shall not be all of the Warrants
evidenced by the within Warrant Certificate, the undersigned requests that a new
Warrant Certificate evidencing the Warrants not so exercised be issued in the
name of and delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________
(Signature)
-7-
<PAGE>
NOTICE: The signature on this subscription form must correspond with the
name as written upon the face of the within Warrant Certificate, or
upon the assignment thereof, in every particular, without
alteration, enlargement, or any change whatsoever and must be
guaranteed by a bank, other than a savings bank, or trust company
having an office or correspondent in New York, New York, or by a
firm having membership on a regional securities exchange and an
office in New York, New York.
-8-
<PAGE>
TRANSFER OF WARRANT CERTIFICATE
For value received _____________________________________ hereby
sells, assigns and transfers unto _____________________________________ Warrants
to purchase shares of Common Stock, par value $.01 per share, of THE PATHWAYS
GROUP, INC. (the "Company"), which Warrants are represented by the attached
Warrant Certificate, and does hereby irrevocably constitute and appoint attorney
to transfer such Warrants on the books of such Company, with full power of
substitution in the premises.
_____________________________________
(Signature)
Social Security or other
Identifying Number of Transferor:_______________________________
Address of Assignee:____________________________________________
________________________________________________________________
Dated:__________________________________________________________
In the Presence of:_____________________________________________
-9-
<PAGE>
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert, pursuant to
Section 4 of the Warrant Certificate accompanying this Notice of Conversion,
______ Warrants into shares of the Common Stock of the Company.
The number of shares to be received by the undersigned shall be
calculated in accordance with the provisions of Section 4 of the Warrant
Certificate.
-----------------------------------------
Name of Holder
-----------------------------------------
Signature
Address:
-----------------------------------------
-----------------------------------------
-10-
<PAGE>
Exhibit 10.1
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, collectively referred to as the "Loan") from Bank to Borrower, but
excluding any credit which is secured by real property and any credit subject to
the provisions of any state or Federal consumer credit or truth-in-lending
statute or regulation.
The Loan is evidenced by one or more promissory notes or other evidence 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 "Note"). 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 $250,000.00. Liquid assets shall mean
immediately available: cash, bank deposit 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 of less than $7.50 and which can readily converted
into cash. In the event of violation of this liquidity maintenance provision,
Borrower shall have fifteen days from the even 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.
COLLATERAL REQUIREMENT
Borrower shall provide Bank with minimum cash collateral of $250,000.00 in the
form of Certificate(s) of Deposit. For purposes of measuring the Liquidity
Requirement described above, Bank and Borrower agree that subject cash
collateral shall be counted among liquid assets.
<PAGE>
The Pathways Group Inc.
Covenant Agreement
Page 2
This Covenant Agreement supersedes and replaces in its entirety that certain
letter from Bank to Borrower dated August 13, 1998.
Sincerely,
/s/ Patricia Kach
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 and Agreed this 6/22/99
The Pathways Group, Inc., ("Borrower")
By: /s/ MARK T. SCHUUR
-----------------------------
Mark T. Schurr, CFO/Treasurer
<PAGE>
Exhibit 10.2
HAWAII MILLENNIUM COMMISSION
NONEXCLUSIVE LICENSE AGREEMENT
THIS AGREEMENT ("Agreement"), by and between the HAWAII
MILLENNIUM COMMISSION, a temporary commission established by Executive Order No.
99-01 on March 5, 1999, whose principal place of business is located at 1050 Ala
Moana Boulevard, Bay 24, Honolulu, Hawaii 96814, hereinafter referred to as the
"Commission" or "Licensor", and The Pathways Group, Inc., a corporation
organized under the laws of the State of Hawaii, whose principal place of
business is located at Grosvenor Center, 2500 Makai Tower, 733 Bishop Street,
Honolulu, Hawaii 96813, hereinafter referred to as the "Licensee",
RECITALS
WHEREAS, the objective of Licensor is to attract visitors to
the State of Hawaii which includes former island residents, former visitors and
new visitors; and
WHEREAS, the Licensor is the owner of all rights, title and
interest in and to certain designations comprising designs, trade names,
trademarks, logotypes, and certain logographics and/or symbols (collectively
"Indicia"), as are set forth on Exhibit "B" attached hereto and incorporated
herein by this reference; and
WHEREAS, the Licensor has exercised its rights of ownership
with respect to its Indicia in the United States through Federal and/or State
registration or use and Licensee recognizes and affirms the Licensor's rights of
ownership to said Indicia; and
WHEREAS, the Licensee desires a license to use the Indicia in
the geographic areas specified below, and Licensor is willing, subject to the
conditions specified below, to grant such a non-exclusive license;
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, the parties agree to the terms set forth as follows:
A. EFFECTIVE DATE: The effective date of this Agreement
shall be July 20, 1999.
B. TERM: This Agreement shall remain in full force and
effect from the effective date stated herein, through
January 31, 2001, unless terminated by either party as
provided for in Exhibit "A" attached hereto.
1
<PAGE>
C. ROYALTY PAYMENT AND FEES: In consideration of this
nonexclusive license agreement, Licensee agrees to
fulfill all of the terms and conditions contained in
that Website Development Agreement attached hereto as
Exhibit "D".
D. NOTICE: All notices and other communications shall be
given in writing to the other party at their respective
addresses noted hereunder, or such other address as may
be designated from time to time during the term of this
Agreement;
LICENSOR:
HAWAII MILLENNIUM COMMISSION
1050 Ala Moana Boulevard
Bay 24
Honolulu, Hawaii 96814
Telephone: (808) 550-2000
Facsimile: (808) 597-8768
LICENSEE:
The Pathways Group, Inc.
Hawaii Region
Grosvenor Center
Suite 2500, Makai Tower
733 Bishop Street
Honolulu, Hawaii 96813
Telephone: (808) 599-6190
Facsimile: (808) 537-3541
E. TERMS AND CONDITIONS: The terms and conditions attached
hereto as Exhibit "A" are incorporated herein and made a
part hereof by reference.
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives on the day and year written
hereunder.
LICENSOR:
HAWAII MILLENNIUM COMMISSION
By: _______________________________
Title: ____________________________
Date: _____________________________
LICENSEE:
THE PATHWAYS GROUP, INC.
By: Joseph F. Schuler
Title: Senior Vice President
Date: 7/16/1999
CITY AND COUNTY OF HONOLULU )
) SS:
STATE OF HAWAII )
On this ___ day of __________, 19__, before me appeared
___________________ of ______________________, to me personally known, who,
being by me duly sworn, did say that he/she is the person described in and who
executed the foregoing instrument, and acknowledged that he/she executed the
same as his/her free act and deed, and further declares that he/she is the
___________________ of said Corporation, and has the authority to bind the
Corporation herein.
Notary Public
My commission expires:___________
3
<PAGE>
EXHIBIT "A"
TERMS AND CONDITIONS
1. DEFINITIONS
1.1 "Indicia" means the names, symbols, designs, colors, trade
names, trademarks, abbreviations, slogans, seals, logotypes,
logographics and/or symbols set forth on Exhibit "B" attached
hereto and shall include the term "Official Hawaii Millennium
Smart Card".
1.2 "Licensed product" means the article of merchandise listed in
Exhibit "C", attached hereto, bearing one or more Indicia.
2. GRANT OF LICENSE
2.1 Non-exclusive license. Subject to the terms and conditions of
this Agreement, Licensor hereby grants to Licensee a
non-exclusive license to use the Indicia on and in conjunction
with the marketing, promotion, and sale of the licensed
product in the State of Hawaii.
2.2 Extent of license - no right to sublicense. Licensee shall
have no right to sublicense others to use the Indicia.
2.3 Limitations of license - not a promotional license. Licensee
may not use Indicia in connection with premiums, for publicity
purpose, for fundraising, as giveaways in combination with
sales or to be disposed of under similar methods of
merchandising, absent express written approval by Licensor.
Licensee may not use any Indicia in connection with any
sweepstakes, lottery, game of chance, or similar promotional
or sales device, scheme or program.
3. TERM OF AGREEMENT
3.1 This agreement shall remain in full force and effect from the
effective date and for the term specified on the first page of
this Agreement, unless terminated by either party as provided
in paragraph 9 herein prior to the expiration of the term of
this Agreement. Upon such expiration or termination, all
rights granted to Licensee herein shall cease.
1
<PAGE>
4. PRODUCT QUALITY AND APPROVALS
4.1 Quality standards. Licensee agrees that it is essential to
protect the reputation of the Licensor and that all goods
sold, promoted or advertised which incorporate the Indicia
shall be of high and consistent quality, in full conformance
with all applicable federal, state and county laws and
regulations. Licensee also agrees that it is essential to
protect the good will associated with the Indicia licensed to
Licensee hereunder. Licensee therefore agrees that any use of
Indicia by Licensee shall be accomplished in such a manner as
to protect the good will associated with the Indicia and not
in a manner that would at any time place the Indicia, the
Commission or the State of Hawaii in a negative light.
Licensee may be required to furnish documentation stating that
the product to be licensed meets the United States
government's standards for testing of said product.
4.2 Written approval required. Licensee may not manufacture, sell,
promote or distribute any licensed product until it has
received written approval from the Licensor of the same, in
the manner provided herein. Such approval may be granted,
withdrawn or withheld as the Licensor, in its sole discretion,
may determine.
4.3 Sample requirements and approval procedure. Prior to the
production, sale, promotion or distribution of any product,
Licensee shall submit to Licensor, AT LICENSEE'S EXPENSE, one
sample of the product together with all tags, labels, cartons
and containers, including packing and wrapping material, as it
would produce for sale or distribution. The sample is for the
Licensor's records and is not returnable. Samples may be
furnished as follows:
(a) Specification sheet, concept, layout and description
of proposed product showing how Indicia and other
artwork and wording will be used; AND
(b) Quality sample (blank product and sketches with PMS
colors specified) or colored renderings of proposed
artwork; OR
(c) Actual finished sample.
The Licensor shall have fourteen (14) days from the receipt of
a sample within which to approve or disapprove the product. If
the Licensor fails to approve the product within fourteen (14)
days from the receipt
2
<PAGE>
thereof, the product shall be deemed to be disapproved. Only
products manufactured in strict conformity with the submitted
sample shall be accepted hereunder.
4.4 Modification of previously approved product. Licensee agrees
that any proposed change to a licensed product involving any
alteration in structure, design or quality of the product
shall be submitted for written approval prior to any use,
sale, or other distribution to the public. Licensee agrees to
withhold any use, sale or other distribution of such licensed
product until approved in writing by the Licensor.
4.5 Defective products. In the event that the quality standards
hereinabove referred to are not met or are not maintained
throughout the period of manufacture, sale, promotion or
distribution of any licensed product, or a licensed product is
deemed by the Licensor to be a safety, health or other hazard
or risk to the public, and Licensor notifies Licensee of any
defect in any product or of any deviation from the approved
use of any of the Indicia; upon notification, Licensee shall
immediately cease production of said product and shall have
forty-eight (48) hours to remove said product from public sale
and distribution. Defective products in Licensee's inventory
shall not be sold under or in association with any of the
Indicia; however, if it is possible to correct all defects or
deviations in the products, such products may be sold. If it
is not possible to correct the defects, or Licensee chooses
not to correct all defects in the products in Licensee's
inventory, Licensee shall remove all of the Indicia which are
used on the defective products. If Licensee succeeds in
removing all of the Indicia, Licensee may dispose of such
products as it chooses so long as there is no association of
those products with the Licensor.
4.6 Inspection of licensee's premises. To assure that the
provisions of this Agreement are being observed, the Licensee
agrees that it will allow the Licensor or its designee, upon
24 hours notice, to enter the Licensee's premise and the
premise where the licensed products are being manufactured
during regular business hours for the purpose of inspecting
the licensed products.
5. TRADEMARK USE AND OWNERSHIP
5.1 Proper use of Indicia. Licensee agrees that it will use the
Indicia only in the prescribed form and manner, without
alteration, modification or dilution, and consistent with all
State and Federal laws. Licensee shall cause to appear on or
within each licensed product (by means of a tag, label,
imprint or other appropriate device), such copyright,
trademark, service mark or other designation which Licensor
may designate. Licensee shall use no other markings in
association with the licensed product other those specified by
the Licensor, without first obtaining the Licensor's prior
written approval. Licensee agrees to submit to Licensor copies
of any advertisement or promotional materials containing the
licensed product for Licensor's approval prior to any use
thereof.
5.2 Acknowledgment of licensor's ownership. Licensee acknowledges
Licensor's ownership of the Indicia. Licensee agrees that it
will not do anything inconsistent with such ownership, and
that use of the Indicia by Licensee shall inure to the benefit
of Licensor. Licensee agrees that it will not, during the term
of the license herein or thereafter, challenge the rights of
Licensor to its Indicia.
Licensee agrees that it shall not apply for registration,
copyright or otherwise seek to obtain ownership of the Indicia
in any country. Licensee shall provide, at reasonable cost to
be borne by Licensor, any evidence, documents and testimony
concerning the use by Licensee of any one or more of the
Indicia, which Licensor may request for use in obtaining or
defending the registration of any Indicia.
3
<PAGE>
5.3. Indicia usage not endorsement or sponsorship. Licensee agrees
that it will neither state nor imply either directly or
indirectly that the Licensee or the Licensee's activities are
supported, endorsed, or sponsored by the Licensor and upon the
direction of the Licensor, shall issue express disclaimers to
that effect.
5.4 Goodwill in Indicia. License recognizes the goodwill
associated with the Indicia and acknowledges that said
goodwill belongs to the Licensor.
6. TERMINATION OF AGREEMENT
6.1 Termination upon 30 days notice. This Agreement may be
terminated by EITHER party without cause upon thirty (30) days
written notice to the other party.
6.2 Termination for cause. Without prejudice to any other right,
the Licensor shall have the right to terminate this agreement
with less than thirty (30) days written notice in the event
that:
4
<PAGE>
(a) Licensee materially breaches any of the conditions or
provisions of this Agreement;
(b) Licensee shall not have begun a bona fide
manufacturing, distribution and sales operation of
said licensed product within three (3) months from
the date of this Agreement;
(c) Licensee shall fail to manufacture, distribute or
sell such licensed product for a period of three (3)
consecutive months;
(d) Licensee files a petition in bankruptcy or is
adjudicated as bankrupt or insolvent, or makes
assignment for the benefit of creditors, or an
arrangement pursuant to any bankruptcy law, or if the
Licensee discontinues its business or if a receiver
is appointed for the Licensee for the Licensee's
business;
(e) Licensee becomes subject to any voluntary or
involuntary order of any governmental agency
involving the recall of any of the licensed products
and/or promotional and packaging material because of
safety, health or other hazards or risks to the
public.
Licensor shall give ten (10) days written notice to the
Licensee of the basis for such termination. The license and
the rights granted under this Agreement shall terminate ten
(10) days after mailing of such written notice unless such
default is cured within the ten (10) day period.
In the event that any product is produced, sold or distributed
prior to its approval, Licensor reserves the right upon
notification of the Licensee to demand that Licensee
immediately cease production of said product and remove all
such product from public sale and distribution within
forty-eight (48) hours of such notification. If said product
is not removed from public sale and distribution within
forty-eight (48) hours of notification, Licensor shall have
the option to immediately terminate this Agreement.
6.3 Material breach. A material breach shall include but not be
limited to the following:
(a) Licensee's use of Indicia in a manner which is
contrary to the provisions of this Agreement;
5
<PAGE>
(b) Licensee's manufacturing, sale, promotion,
distribution and/or use of any licensed product that:
(1) fails to meet quality standards set forth
herein;
(2) has not been granted the Licensor's written
approval;
(c) Licensee's refusing or neglecting a request by
Licensor for sample products or other product
specifications, or access to the premises of
Licensee;
(d) Licensee's actions which jeopardize the Licensor's
ownership of its Indicia or the goodwill associated
with such Indicia.
7. POST-TERMINATION AND EXPIRATION RIGHTS AND OBLIGATIONS
7.1 No right to manufacture, sell, promote or distribute licensed
product. If this agreement is terminated pursuant to
paragraphs 6.1 or 6.2, the Licensee and its receivers,
representatives, trustees, agents, administrators, successors
of permitted assigns of the Licensee shall have no further
right to manufacture, sell, promote, or distribute licensed
product.
7.3 Post-termination or expiration procedures. After the
expiration or termination of this Agreement, all rights
granted to the Licensee shall revert to the Licensor and the
Licensee shall immediately refrain from further use of the
Indicia or any further reference to them, either directly or
indirectly, in connection with the manufacture, sale,
promotion or distribution of the Licensee's products. The
Licensee agrees to immediately discontinue the manufacture of
all licensed products and the use of all Indicia.
8. INDEMNIFICATION
8.1 Licensee shall defend, indemnify, and hold harmless Licensor
and the State of Hawaii, their officers, employees and agents
from and against any and all losses and expenses (including
attorneys' fees), claims, suits, or other liability of any
kind, including without limitation product liability, (1)
arising directly or indirectly out of the acts or omissions of
Licensee, its officers, agents or employees, or (2) arising
out of or in connection with the exercise of the license
granted by this Agreement. Licensor shall have no obligation
to indemnify Licensee as a result of activities by Licensee
under this agreement for infringement of any patent,
copyright, or trademark belonging to any third party, or for
damages or costs involved in any proceeding based upon such
infringement, or for any royalty or obligation incurred by
Licensee because of any patent, copyright or trademark held by
a third party.
9. INFRINGEMENT
9.1 Licensee agrees to notify Licensor promptly of any known use
of the Indicia by others not duly authorized by Licensor.
Notification of such infringement shall include all details
known by Licensee that would enable or aid Licensor to
investigate such infringement brought to its attention by
Licensee. However, the Licensor shall have the sole right to
determine whether or not any action shall be taken on account
of any such infringements. Any award to the Licensor for the
payment by a third party of damages or profits by reason of
infringement or unfair competition will be solely for the
benefit of the Licensor. No action shall be taken by the
Licensee in the nature of an assertion of any legal right to
an Indicia subject to this Agreement or for any purpose
whatsoever, without prior written approval of the Licensor.
6
<PAGE>
10. LIABILITY INSURANCE
10.1 Coverage required. The Licensee shall, throughout the term of
this Agreement procure and maintain at its sole cost and
expense from a qualified licensed insurance company, a general
liability all risks insurance policy. The Licensor and the
State of Hawaii shall be named as additional insureds under
any such policy of insurance. Such policy shall provide
protection against any and all losses and expenses (including
attorneys' fees), claims, suits, or other liability of any
kind, including without limitation product liability, (1)
arising directly or indirectly out of the acts or omissions of
Licensee, its officers, agents or employees, or (2) arising
out of or in connection with the exercise of the license
granted by this Agreement. The amount of coverage shall be
$________________________ for personal injuries arising out of
each occurrence, and coverage thereunder of
$________________________________ for property damage arising
out of each occurrence. The policy shall provide for ten (10)
days notice to the Licensor from the insurer by Registered or
Certified mail, return receipt requested, in the event of any
modification, cancellation or termination. In addition, the
policies shall state that any insurance maintained by the
Licensor will apply in excess of, and not contribute with,
insurance provided by the Licensee's policy.
10.2 Certificate of insurance to be deposited with Licensor.
Licensee shall furnish Licensor a certificate of insurance
with the required endorsement, naming the Licensor and the
State of Hawaii as additional insureds, within thirty (30)
days after the execution of this Agreement, and in no event
shall the Licensee manufacture, sell, promote or distribute
the licensed products prior to receipt by the Licensor of such
evidence of insurance. Licensor shall have the right to
inspect the original policies of such insurance.
10.3 Licensor's right to adjust insurance coverage required. The
Licensor retains the right to adjust the insurance coverage
required on a semi-annual basis if the Licensor deems the
existing coverage to be insufficient to provide adequate
protection to the Licensor and the State of Hawaii. The
Licensor's requirements shall be reasonable, but, shall be
designed to assure protection from and against the kind and
extent of the risks which exist at the time a change in
insurance coverage is required. The Licensor shall notify the
Licensee of any change in the minimum required coverage limits
for such insurance by written notice, at least sixty (60) days
prior to the date of such required change.
11. SERVERABILITY
11.1 In the event that any term or provision of this Agreement
shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegally or
enforceability shall not affect any other term or provision of
this Agreement which shall be interpreted and construed as if
such term or provision, to the extent the term or provision
shall have been held invalid, illegal or unenforceable, had
never been contained.
12. MODIFICATION AND WAIVER
12.1 This Agreement may not be amended, modified, or rescinded
except by a written agreement executed by both the Licensor
and Licensee or as provided herein. It is agreed that no
waiver by either party of any breach or default of any of the
provisions of this Agreement shall be deemed a waiver as to
any subsequent and/or similar breach or default.
7
<PAGE>
13. ASSIGNABILITY
13.1 This Agreement shall inure to the benefit of the Licensor, its
successors and assigns, but will be personal to Licensee and
shall be assignable by Licensee only with the prior written
consent of the Licensor.
14. NEGATION OF AGENCY
14.1 Licensee is an independent contractor. Nothing contained
herein shall be deemed to create an agency, joint venture, or
partnership relationship between the Licensor and the
Licensee. Licensee shall have no right to obligate or bind
Licensor in any manner whatsoever, and nothing contained in
this Agreement shall give or is intended to give any rights of
any kind to third persons.
15. NOTICES
15.1 Licensor and Licensee shall send all notices and other
communications, in writing, to the other at their respective
addresses noted on the first page of this Agreement, or such
other addresses as may be designated from time to time during
the term of this Agreement.
Any notice of termination or expiration of this Agreement
shall be communicated to the other party at its last address
for which notice was effective, in writing, and sent by
Registered or Certified Mail, postage prepaid, return receipt
requested, and shall be deemed to have been given at the time
such notice is mailed or sent. All other written communication
by either party, except as otherwise specified in this
Agreement, shall be sent by first class mail or by facsimile
and shall be deemed to have been given at the time such notice
is mailed or sent.
16. GOVERNING LAW
16.1 This Agreement shall be construed, interpreted and applied in
accordance with the laws of the State of Hawaii. The parties
hereto consent to the personal jurisdiction and venue of any
court of competent jurisdiction, Federal or State, situated in
the City and County of Honolulu, State of Hawaii, for the
bringing of any action hereunder.
17. AGREEMENT SUBJECT TO APPROVAL
17.1 The terms and conditions of this Agreement are subject to the
approval of the Commission and the Department of the Attorney
General, State of Hawaii. The Commission reserves the right to
amend any provision herein; however, in the event that
material changes are made by said Commission, the Licensee
shall have an option to terminate this agreement as provided
herein.
18. HEADINGS
18.1 The headings used in connection with the paragraphs and
subparagraphs of this Agreement are inserted only for purposes
of reference. Such headings shall not be deemed to govern,
limit, expand, modify or in any other manner affect the scope,
meaning or intent of the provisions of this Agreement or any
part thereof, nor shall such headings otherwise be given any
legal effect.
19. ENTIRE AGREEMENT
8
<PAGE>
19.1 This Agreement constitutes the entire agreement and understanding
between the parties, both oral and written, and cancels, terminates and
supersedes any prior agreement or understanding between the parties. There are
no representations, promises, agreements, warranties, covenants or undertakings,
written or oral, express or implied, other than those contained herein.
9
<PAGE>
EXHIBIT "B" - Indicia
MILLENNIUM LOGO
THE OFFICIAL LOGO OF THE HAWAII
MILLENNIUM COMMISION
THE SLOGAN
"Hawaii 2000 - The Dawn Of The New Millennium."
This theme was considered to be, by far, the strongest of few options and
apparently unique in popular usage.
The year 2000 is not, in fact, the start of the millennium. It is the following
year, 2001. The year 2000 in this context is, therefore, considered
the dawn of the new millennium.
THE TYPEFACE
Serif Times Roman was selected for its strength, symbolic of the
people of the state of Hawaii
GRAPHIC ELEMENTS
The type, with its earth tones, symbolizes the land of the Hawaiian Islands
anchored in the midst of the Pacific Ocean. Directly above it are eight
rays of light, one for each island, symbolic of the lava that created our
islands, and the power of light that drives our people's past, resent and
future. The climax of the design is the North Star, used
by ancient Polynesian navigators to steer them safely to
the land of aloha. Regardless of how many millenia
we celebrate, the North Star will always
watch over Hawaii.
10
<PAGE>
EXHIBIT "C" - Licensed Product
1. The Official Hawaii Millennium Smart Card (either individually or in
commemorative sets).
2. The Official Hawaii Millennium Smart Card Network.
11
<PAGE>
EXHIBIT "D" - Website Development Agreement
12
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 326,837
<SECURITIES> 0
<RECEIVABLES> 143,309
<ALLOWANCES> 0
<INVENTORY> 366,897
<CURRENT-ASSETS> 931,543
<PP&E> 1,977,887
<DEPRECIATION> (1,009,993)
<TOTAL-ASSETS> 4,336,684
<CURRENT-LIABILITIES> 1,706,287
<BONDS> 116,674
0
0
<COMMON> 135,657
<OTHER-SE> 2,378,066
<TOTAL-LIABILITY-AND-EQUITY> 4,336,684
<SALES> 57,649
<TOTAL-REVENUES> 57,649
<CGS> 10,485
<TOTAL-COSTS> 10,485
<OTHER-EXPENSES> 3,938,512
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<INTEREST-EXPENSE> (39,403)
<INCOME-PRETAX> (3,851,945)
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