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UNITED STATES
SECURITIES AND EXCHANGE k
Washington, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission file number 000-24119
THE PATHWAYS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1617556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14201 NE 200th Street, Woodinville, Washington 98072
(Address of principal executive offices) (Zip Code)
(425) 483-3411
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, par value $.01 per share NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. / /
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a specified
date within the past 60 days prior to the date of filing: $23,195,692 as
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of March 24, 2000. The aggregate market value was based upon the closing price
for the Common Stock, par value $.01 per share, of the registrant as quoted by
the NASDAQ for such date.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes / / No / /
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As of April 12,
2000, 14,613,162 shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933. The listed documents should be clearly
descried for identification purposes (e.g., annual report to security holder for
fiscal year ended December 24, 1980). NONE.
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PART I
ITEM 1. BUSINESS
The Pathways Group, Inc. and its subsidiaries ("Pathways" or the
"Company") designs, markets and services custom smart card applications and
services. 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 both open and 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 has 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. The Company reincorporated in Delaware
in May 1997. The Company's executive offices are located at 14201 NE 200th
Street, Woodinville, Washington 98072 and its telephone number is (425)
483-3411. The Company also has a sales, marketing and research and development
office located at 1221 North Dutton Avenue, Santa Rosa, California 95401. A
sales and marketing office is located at Grosvenor Center, 2500 Makai Tower, 733
Bishop Street, Honolulu, Hawaii 96813.
The Company's shares are currently traded on the NASDAQ SmallCap market
under the symbol "PTHW".
The Company believes that it is unique in the smart card industry in
that it provides "cradle to grave" solutions as a full service hardware
integrator, software developer and backroom transaction processor. By adopting
this market strategy, the Company believes that it can become a leading
developer and marketer of integrated smart card software systems and that it is
positioned to provide customers sophisticated smart card business solutions
across a wide range of applications. The Company's systems accommodate credit
and debit payment methods, electronic benefit transfer, electronic funds
transfer and smart card systems utilizing its threestate infrastructure (backup
redundancies in California, Washington and Hawaii) of processing centers on a
"24x7" basis.
A smart card is a credit card-sized plastic card in which an integrated
circuit, usually containing a microprocessor and reusable memory, has been
embedded. In their simplest form, smart cards provide memory storage
capabilities, such as cash cards, in which the card is discarded after the value
stored on the card is depleted, or "read only" cards, in which stored
information may be accessed by terminals and computers. Most smart cards,
including the Company's smart cards, are more sophisticated. Information and
software can be stored on such cards by reading and writing to the card's
microprocessor chip and can be easily, securely and accurately accessed and
manipulated by electronic data processing equipment.
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Smart cards first appeared in the 1970s in France, and at present
smart card technology is established and extensively used in Europe and Asia.
The research firm Dataquest estimates that approximately 156 million cards
were in circulation worldwide at the end of 1996, that the 1996 worldwide
smart card market exceeded $1.2 billion in sales and that the market will
approach $3 billion in sales by the year 2000. (Source: Don Cunningham,
Global Journal of Advanced Card Technology, Smart Card Industry Association,
1997.) Current statistics provided (Smart Cards 2010--"The Revolution in the
Cards Market", Lafferty Publications) reveal that there are currently in
excess of three billion chip cards in use worldwide.
Smart card installations within Europe dominate the worldwide smart
card industry with a 70% share. It is predicted that by the end of the year 2000
the United States and the Asia-Pacific region will account for 25% of the global
market. (Source: Don Cunningham, Global Journal of Advanced Card Technology,
Smart Card Industry Association, 1997.) The same resource as (Smart Cards 2010)
reveals that the United States is poised to adopt the technology more readily
than first believed.
The French were the first to develop practical smart card technology
and applications. Roland Moreno, a Frenchman and the founder of Innovatron, is
considered by many to be the pioneer of smart card technology. Today, the
majority of chip card manufacturers are licensees of Innovatron. Initially
installed only in pay telephones, smart cards are now being used for
transportation, car parking, arcade games and vending machines. Any coin
operated machine can be converted to a smart card format. Other possible
applications include ATMs, point-of-sale terminals, personal computers,
electronic ticketing and automatic fare collection.
The Company believes that smart card technology represents the next
step in the evolution of credit/debit financial services and related products
and services. Smart card systems differ from other payment mechanisms in their
ability to securely store large quantities of data on a credit-card sized medium
by means of a microprocessor chip. The sophisticated encryption algorithms and
other security mechanisms that the chip employs provide information protection.
The Company's products address the needs of the healthcare and affinity group
markets, among others, with multiple purse and banking products being marketed
in the first quarter of 2000.
In addition, a major factor in the rapid growth of smart card usage is
the ability to process small transactions. Smart card technology eliminates the
need to carry cash and coins for most day to day transactions. By enabling an
individual to exchange information and payment through one portable platform,
the Company expects that this technology will open up new opportunities with
regard to the way people interact with financial institutions, healthcare
providers, retailers and others. All information-based industries are candidates
for smart card conversion.
The Company anticipates that while it will continue to realize revenue
from transaction processing, significant additional revenue growth opportunities
exist in the area of developing, marketing and, when appropriate, providing
transaction processing services to a variety of markets, many of
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which the Company does not presently serve. The Company believes that these
opportunities include the academic campus, retail, banking, travel and
traditional healthcare markets, to name a few.
The Company's core technology involves the development of smart card
application systems and solutions. This core technology has been customized for
prepaid alternative health care, retail affinity and the banking and educational
institutions markets, but such technology is capable of being customized for
other markets. The Company is encouraged by the results of these initial
programs, and believes that such pilot programs will lead to the national
rollouts of such products.
While the Company's initial programs and other smart card applications
were being designed and developed, the Company's revenues initially were derived
largely from credit and debit card transaction processing fees from its
automated ticketing kiosk software. As the Company's resources are being
increasingly devoted to the realization of the smart card application system
component of the Company's business plan, revenues from the automated kiosk
business have begun to grow back to previous levels.
The Company considers the automated ticketing kiosk business integral
to its plans for becoming a full-service smart card designer, developer and
provider. It intends to continue to use those devices in the ski and amusement
markets that the Company has already penetrated, as well as to expand into other
markets and integrate its current capabilities to include the processing of
smart card transactions in addition to debit and credit card processing. It is
anticipated that the Company's kiosks will serve as smart card dispensing,
"reloading" and transaction processing points, as well as e-commerce fulfillment
devices.
The Company has three principal subsidiaries:
o SPRINTICKET, INC. ("Sprinticket") provides credit card
transaction processing for ski areas and amusement parks
utilizing Sprinticket's proprietary hardware and software.
Sprinticket marketed proprietary ticketing machines and
software manufactured under contract by Pathways
International, Ltd.
o THE PATHWAYS GROUP INC., a Hawaii corporation, was organized
to market the Company's products in Hawaii and Asia.
o PATHWAYS INTERNATIONAL, LTD. retains the copyright for an
automated non-profit organization accounting system that no
longer is being marketed. Since its inception, Pathways
International was the corporation through which the Company
first conducted its software development and hardware
manufacturing under contract with companies which later became
part of the Company.
o THE PATHWAYS GROUP, Gmbh, an Austrian corporation, was
organized to market the Company's products in Europe.
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SMART CARD TECHNOLOGY
Owning a smart card is similar to carrying a computer in a handbag or
wallet. The Company expects that smart cards will eventually replace everything
people carry in their wallets, including driver's licenses, other important
personal identification, credit cards and cash. Smart cards offer consumers the
ability to transmit payment and information data securely and conveniently
across a point-of-sale terminal.
Over the long term, the Company believes that "multifunctionality" will
become an increasingly important smart card feature. "Multifunctionality" means
that several applications will be combined on one card. A card may contain many
sections that may include personal information, health care data, a prepaid area
and credit line access. The Company is currently developing smart card
applications incorporating multifunctionality technology. As smart cards are
developed to store highly personal information, card security will need to be
more elaborate in order to achieve consumer acceptance of the technology.
A smart card is a plastic card, approximately the size of a credit
card, which comprises an integrated circuit that usually contains a
microprocessor and reusable memory. Smart cards range from simple single
application cards to sophisticated multi-application cards. A memory card (also
known as a "dumb" smart card) is the most simple type. This type of card can
only store data and is discarded after the value stored on the card is depleted.
These "read only" cards store information that may be accessed by terminals and
computers. It is difficult to copy these cards, but they offer no protection
from loss nor do they contain inherent processing power without the intervention
of sophisticated terminal level software.
A more complex card may have one password to restrict its use to one
person or machine. Most cards, including the Company's smart cards, are more
sophisticated. Electronic data processing equipment can accurately and securely
store and manipulate information on such cards by reading and writing to the
card's microprocessor chip. The most sophisticated cards can manipulate several
passwords and can utilize authentication and ciphering techniques to provide
total security. The latest card types are now beginning to support the JAVA
application language to allow for greater flexibility and compatibility across
card manufacturers, terminal manufacturers and processing platforms.
Although many smart cards today incorporate both magnetic stripe
technology and chip technology, the Company believes that chip technology will
increasingly become the preferred medium. Chip technology is more difficult to
counterfeit and can store up to 80 times more data than a magnetic stripe. The
majority of chip cards contain one to eight kilobytes of memory; however, it is
the Company's understanding that a 16-kilobyte card will be introduced this year
by the card manufacturers and that a 64-kilobyte card is currently in prototype
form. If and when such cards are introduced, the Company will seek to utilize
the latest technology in developing software for such cards. The primary benefit
of this computing power is that a single card performs numerous functions. For
example, the card can be programmed to effect payment for goods or to provide
personal health information. In addition, transactions conducted with a smart
card can be authorized offline, unlike
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magnetic stripe cards, which do not have the capability to interface with remote
processing systems. Cards can also be further defined as either a contact or a
contactless card. A contact card must be directly placed into a reading
terminal. Contactless technology utilizes radio frequencies and requires no
direct contact between the card and the reader. Advantages of a contactless card
are convenience and speed. The user simply passes the contactless card within
several inches of the reader, the transaction data is downloaded to the reader
and a return message is recorded in the card.
To produce each smart card application for a particular client, the
Company must develop customized software and integrate appropriate hardware
technology to adapt the card to the customer's needs. The Company believes that
its engineers have sufficient expertise in hardware technology and computer
programming languages necessary for such development efforts. The manufacturing
cost of a card varies from less than $1 to approximately $10, depending on the
amount of information the smart card holds and the complexity of the
microprocessor. Similarly, the cost of a reader terminal can vary from $500 to
$2,000, depending on the complexity and functionality of the terminal.
CURRENT PRODUCTS AND PILOT PROGRAMS
AFFINITY GROUP PROGRAMS. The Company has developed applications that
address the current trend in retail environments of rewarding repeat customers.
These applications, in conjunction with the PROTON purse, are the platform for a
product being marketed in the state of Hawaii for the current Millennium project
contract awarded to the Company. In addition to this product being directed to
the Hawaii project, it provides the proof-of-concept for a planned marketing
push in the United States later this year.
INTERNET COMMERCE MARKET. The Company has contracted to provide an
e-commerce site for the state of Hawaii. This site(hi2k.net) is currently
operational and is processing transactions. As is the case with the above smart
card initiative, the e-commerce initiative provides yet another platform for
proof-of-concept. The Company has been approached by several prospective
clients, as well as existing clients, to provide a similar solution for their
use. This very important product allows a non-invasive penetration of existing
markets.
HAWAII STUDENT CARD. The Company has operated a pilot program in the
State of Hawaii for the implementation of an electronic school lunch program,
with later expansion to include student identification, bus transportation and
student prepaid activities. Due to the present economic situation in the state
of Hawaii, there has been very little activity beyond the pilot. However, the
pilot did provide proof-of-concept. Accordingly, the Company is searching for
the appropriate sales representatives to market this product across the United
States.
TIKITBOX II. Sprinticket, a subsidiary of the Company, manufactures and
markets automated ticketing dispensers under the name Tikitbox(R) and provides
credit card processing services in connection with those dispensers. Separate
kiosks are provided for indoor and outdoor use. Indoor models have touch
screens, full motion video and stereo sound, and are equipped to dispense both
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fixed and variable value Smart Cards. Base prices for kiosks are $15,000 to
$20,000 and do not include the supporting hardware (which varies according to
client need). Customers for this equipment include companies that issue some
form of ticket that is required for access into any facility or any service.
Markets for the Sprinticket products include travel, entertainment, leisure,
government and health care. Recently, in response to a client request, an
initiative has been launched by the Company to utilize these devices as
e-commerce fulfillment devices for orders placed on the Internet.
The Company's contracts for Sprinticket installations to date include:
o Deer Valley, Utah
o Winter Park Resort, Colorado
o Six Flags Magic Mountain, California and
o Six Flags Great Adventure, New Jersey.
o Blue and Gold Fleet, California
o Big Mountain Ski and Summer Resort, Montana
PREPAID MEDICAL BENEFIT CARDS. My Choice LLC, a defined benefits
medical provider in the alternative medical care industry, utilizes a natural
medicine benefit card developed by the Company. Use of the Company's card
entitles the holder to a discount on natural medical services. The Company,
pursuant to a development agreement with My Choice, designed a card holder
issuance system, a medical provider acceptance and reimbursement system and a
statistical database that drives an ACH type reimbursement. (ACH, or automated
clearinghouse, is a system of electronic funds transfer to which most banks
subscribe as an economic substitute for wire transfers using the Federal Reserve
System.)
CASH-FREE MIDWAY CARD. The Company recently completed a pilot project
with a client to provide a proof of concept for the use of chip cards in the
carnival and state fair settings. This project was completed successfully in the
fourth quarter of 1999 and the Company has signed a new contract with the client
for the year 2000. This product currently is being marketed across the United
States to amusement parks, tour operators and state fairs. Further, as a
by-product of this project, the Company has developed a new hardware device for
use in high-speed encryption of smart cards with the variable information
required. The Company intends to apply for both copyright and patent protection
of this intellectual property, as it may be use in other smart card applications
the Company sells.
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ADVANTAGES OF THE COMPANY'S PRODUCTS
The Company's software products encompass a number of technological
breakthroughs, which are discussed below. The most important aspect of the
Company's smart card system is its seamless integration from card fulfillment
through claims adjudication and customized transnational reporting without
depending on third party commercial software products. Other advantages of the
Company's products include:
o SMART CARD ISSUANCE (FULFILLMENT) WITH AUTOMATED DATABASE
CREATION. Unlike other systems under development, the Pathways
product utilizes the latest in database creation technology to
facilitate a detailed tracking mechanism for all smart card
transactions from issuance to payment and includes the ability
to replace lost or stolen cards in a timely fashion. The
nearest competitor continues to penalize the user with a "Lose
it, you lose it" philosophy. The aforementioned high-speed
card-loading device recently created by the Company also puts
it in a unique position of offering large card issuers a more
cost-effective solution for card personalization and
encryption.
o FULLY FUNCTIONAL MULTIPLE PURSE MODULES. The Pathways product,
in its first release, possesses the ability to utilize
multiple "purses," or functions, on the same card. This
capability, for example, would allow a medical or insurance
application to reside on the same card with a merchant loyalty
program. The current "HMC" product being distributed has the
full multi-function, multi-purse features built in.
o MIXED TRANSACTION (CREDIT/DEBIT/ATM CARD/SMART CARD)
PROCESSING AT THE POINT OF SALE WITH ON-LINE AUTHORIZATION
WHERE APPLICABLE. The Pathways product can be configured for
the diverse communications and security protocols associated
with debit, ATM and credit, as well as smart, card
transactions. A debit card transaction or an ATM card
transaction requires the introduction of a personal
identification number ("PIN") for security purposes and
requires a telephone connection for purchase authorization.
Credit cards normally require similar communication
arrangements, although they rarely require a PIN number. Smart
cards, in a secure application, always require a PIN number
but normally only require a telephone connection to send
end-of-day data for claim processing. Current competing
developers are focused on the smart card requirements and have
not addressed the other needs.
o PRODUCT SERVICE PROVIDER CLAIM PROCESSING. A standard feature
of the Company's product allows the consumer to use his or her
smart card for non-smart card transactions, such as credit or
debit card transactions. The software directs the transaction
processing to the appropriate credit card processor
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for authorization and settlement. System sponsors may also
avail themselves of the full suite of backroom services
offered by Pathways.
o AUTOMATED "E-BANK" CARD RECHARGE. A drawback facing smart card
developers, integrators, issuers and processors is the
inability of their smart cards to "recharge." The absence of
sufficient funds to cover a transaction requires that the
transaction be terminated and the card inserted into an ATM
(not yet available) or a special location for recharge. The
Company has developed technology that endows smart cards with
recharging capabilities at the point of purchase, as well as
enabling them to connect to electronic banking systems, thus
creating an uninterrupted chain of cashless commercial
transactions. The Company believes that its recharging
capability is unique in the smart card industry.
o AUTOMATED CLAIM ADJUDICATION AND SETTLEMENT THROUGH ACH. The
Pathways system has the ability to submit a claim
automatically to the operator of the prepaid funds pool
(normally the card issuer), adjudicate the claim and trigger
an ACH transfer of funds to the provider/merchant.
o MANAGEMENT REPORTING (VIA AUTOMATED BACK ROOM). The Company
provides claims adjudication by means of a Structured Query
Language ("SQL") compliant database that can service
substantially all management reporting needs. Every element of
the database is positioned using "data pointers," which allow
such information to be extracted for customized client
reports.
o ISO SMART CARD DEVELOPMENT TOOLKIT. The Company has developed
a set of proprietary software tools that are the building
blocks for all of its current and future applications. These
tools are used to develop applications using the Rapid
Application Development ("RAD") technique within the SQL
paradigm. This technique allows the Company to combine its
software modules to create a product satisfying its customer's
needs in a shorter time period than would be possible in the
absence of these toolkits.
o E-COMMERCE FUNCTIONALITY. The Company's product offering also
allows the cardholder to utilize its smart card in both a
traditional "bricks and mortar" environment as well as an
Internet environment. This offering, scheduled for release in
the third quarter 2000, is, to the Company's knowledge, well
in advance of any other smart card developer/processor.
All of the above modules are integrated seamlessly, to form a "cradle
to grave" process which, to the Company's knowledge, is unlike any other system
available at the current time.
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STRATEGIC RELATIONSHIPS
The Company entered into a license agreement in May 1999 with Proton
World, an international open smart card solutions provider based in Brussels,
Belgium. Proton World was created by major smart card industry participants
American Express, ERG, InterPay Nederland and Visa International, and is
currently the largest electronic purse platform with 30 million cards issued and
accepted at 230,000 terminals in 15 countries. The Company is the second company
licensed by Proton World in the United States. The license terms provide for
up-front license fees and ongoing fees for each Proton-compliant smart card
issued.
The Company has entered into a strategic relationship with BankSys,
Inc., a manufacturer and developer of smart card terminal and processing
equipment. The relationship with BankSys is designed to allow Pathways and
BankSys to do joint development of certain smart card applications involving the
PROTON purse and secure access applications.
The Company has entered into an agreement with Bull Systems to engineer
applications across the entire Bull product line of smart cards.
The Company has extensive informal relationships with a variety of card
and terminal manufacturers that the Company is currently evaluating for
inclusion in its product line. The Company expects that the formation of
strategic alliances, both formal and informal, with such entities will be an
integral element in expanding its product offerings.
COMPANY STRATEGY AND PRODUCT DEVELOPMENT
The Company's objective is to become a leading provider of smart card
solutions across a wide range of applications. The Company focuses its marketing
strategy on product development and innovation in the area of smart card and
debit card technology with the goal of capturing the transaction processing
revenue segment of such business. Transaction processing includes a network of
"backroom" services that include maintaining and updating appropriate databases
to reflect all information on user cards and transnational changes to such
information, effecting the movement of electronic money to and from a funds pool
holder, and periodic reporting to all parties in the transaction.
The Company hopes to realize its strategy to increase transaction fee
revenue by focusing on smart card applications in consumer situations that
necessitate card usage on a weekly or more frequent basis. The Company believes
that currently it is one of a limited number of companies serving as a hardware
integrator, software developer and backroom transaction processor, under one
roof.
The Company anticipates that while it will continue to realize revenue
from transaction processing, significant additional revenue growth opportunities
exist in the area of developing, marketing and, when appropriate, providing
transaction processing services to a variety of markets, many of
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which the Company does not currently serve. The Company believes these
opportunities include the academic campus, retail, banking, travel and
traditional healthcare markets. The Company's product development efforts are
focused on software and systems for smart card applications. The Company has
identified the following industries as those best suited to benefit from smart
card technology and has commenced research and development efforts aimed at
meeting perceived needs:
o AFFINITY PROGRAMS. The trend in retail, fund raising (as
discussed above with respect to Scrip Advantage) and other
repeat customer businesses is the move toward customer
rewards. This application represents a tremendous opportunity
and an explosive growth area that is virtually untapped. By
incorporating a smart card into a traditional point of sale
application, the retailer will realize complete tracking of
all aspects of the sales process including the ability to
reward repeat customers with premiums or discounts through the
use of a smart card without the traditional computerized
infrastructure. Retailers could use the data accumulated to
target market areas not being penetrated and focus marketing
and advertising expenditures on those areas.
o RETAILING. All types of retailing can be embraced and enhanced
with smart card technology. The Company believes that
providing a cardholder a large number of retail or point of
sale venues in which to use a smart card will significantly
increase the adoption of smart card technology. The retail
sector encompasses everything from "Mom and Pop" stores to
national department stores. Retailers are acutely aware of the
value of their contact with the consumer. The key to repeat
business is to accurately identify and satisfy customer needs.
Smart cards enable retailers to track customer behavior and
base marketing decisions gleaned from this valuable
information. This technology can also reduce the risk of
fraud, improve inventory management and offer the customer
convenience and better service.
o TRAVEL AND ENTERTAINMENT. The travel and entertainment
industry holds great promise with regard to smart card
applications. All categories that comprise this market,
including air travel, car rentals, movie theaters, sporting
events, restaurants, casinos, video stores, sports arenas,
hotels and other venues would benefit from a multifunctional
card. This is an enormous global market with strong growth
predicted for the near future. Business travelers in
particular are bogged down by paper-based expense
reimbursement. Paper-based reimbursement systems are hampered
with the potential for fraud in addition to being costly to
administer. Smart cards can enable businesses to more
effectively monitor travel and entertainment expenses.
Smart cards offer solutions in terms of their ability to
collect and disseminate data and conduct electronic commerce.
Several major airlines have initiated smart card pilot
programs that allow ticketless travel, store frequent flier
miles
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and process payments. In a resort setting, a multifunction
card allows an individual access to restaurants, shopping,
sports and entertainment activities and lodging while keeping
track of loyalty points.
o GOVERNMENT SERVICES. The government is becoming involved in
electronic commerce. The initial focus is centered on a
national Electronic Benefits Transfer (EBT) proposed by Vice
President Gore. One proposed and piloted application is to
replace paper food stamps with a smart card. Such a change
would eliminate the cumbersome printing, warehousing,
transporting and disposal of this paper medium. Other
applications could include the administration of welfare and
Medicaid benefits and other government payments.
o TRANSPORTATION. Opportunities exist to apply smart card
technology to public and private transit systems, including
bridge, tunnel and highway toll systems. Smart cards would
significantly reduce the time spent and costs associated with
collecting and processing fares and tolls. A multipurpose card
could be used for taxis, trains, tolls and parking meters in
addition to other small expenditures. Commercial vehicles
could utilize this technology to store data about the cargo,
the carrier, maintenance records and the driver.
o HEALTH CARE. The Company believes that the healthcare
industry, with its millions of participants and voluminous and
individualized information and payment requirements, can
benefit significantly from smart card technology. Smart cards
can be designed to provide patient identification and medical
record storage and retrieval, as well as electronic benefit
transfers, determination of eligibility and drug interaction
information. In an emergency situation, a quick assessment of
vital information such as allergies, prescriptions and
immunizations is critical for effective healthcare delivery.
Additionally, patient cards can be used to improve and
streamline administrative and billing procedures as well as
insurance reimbursement.
o INTERNET COMMERCE AND SECURE ACCESS. The Company believes that
the Internet Commerce and secure access arenas are the next
emerging marketplace for smart cards. This belief is validated
by recent statements in the press by Microsoft spokesmen. The
Company is in final stage development of products to meet this
anticipated demand.
MARKETING AND DISTRIBUTION
The Company intends to market its electronic purse technology to any
and all affinity groups where electronic cash is a viable medium. Although the
Company expects to continue to market smart card systems directly through the
Company's management and employees, the Company
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intends to establish strategic marketing alliances and licensing or other
arrangements with systems integrators, value-added resellers and other smart
card vendors and may also retain the services of sales representatives and
marketing and other consultants. Distribution of products will be handled
directly by the Company's sales and marketing staff.
Service of smart card terminals and related equipment will be performed
on a "Depot Repair/Hot Swap" service basis. "Depot Repair/Hot Swap" service is
the process of replacing faulty equipment with functional equipment via express
transportation methods. Faulty units are repaired if possible at the depot.
COMPETITION
Because smart cards are potential substitutes for the use of cash in
the economy, the market for smart card applications is enormous. As smart cards
constitute a relatively new technology, there is room for many participants in
this market. Some companies currently involved in smart card development include
but are not limited to: Bull, Card Europe, Gemplus, Innovatron, Philips
Electronics, Racom Systems, Aladdin Knowledge Systems, MONDEX, MasterCard,
Motorola, Schlumberger, Siemens, DigiCash, Cylink, AT&T Universal Card and Visa.
All of these vendors are actively involved in producing smart card terminals.
Some, like Schlumberger, also produce the actual smart card media.
Although the Company is unaware of competitors providing its
combination of products and services to the Company's targeted markets, a few
competitors, or potential competitors (e.g., MONDEX, Diebold, Visa and Digicash)
actually develop software applications to deal with issuance, acceptance and
adjudication of smart card transactions. Of record to date in the United States,
Pathways presently is one of a limited number of companies offering full service
integration, software development and transaction processing. The Company
believes its range of services and products are broader and more encompassing
than any existing competitor.
RESEARCH AND DEVELOPMENT
Smart card applications are the result of creating innovative solutions
to the needs of consumers. This requires significant experience in software
development and knowledge of a variety of business sectors. The Company has
expended substantial resources in the development of its products. The Company
has capitalized software development costs in the aggregate amount of $3,958,504
from inception through December 31, 1999, and $173,924, $272,564 and $439,707
for the years ended December 31, 1999, 1998 and 1997, respectively. In addition,
the Company expensed $599,746, $474,120 and $102,000 as research and development
costs for the years ended December 31, 1999, 1998 and 1997, respectively.
12
<PAGE>
GOVERNMENT REGULATION
The Company can provide no assurance that a Federal, state or foreign
agency will not attempt to regulate its activities.
Regulation E of the Federal Reserve Board governs certain electronic
funds transfers made by regulated financial institutions and providers of access
devices and electronic funds transfer systems. Regulation E requires written
receipts for transactions, monthly statements, pre-transaction disclosures and
error resolution procedures. Although certain aspects of the Company's services
may be subject to Regulation E, the Company believes that most of its services
are not subject to Regulation E. There can be no assurance that the Federal
Reserve Board will not require all of the Company's services to comply with
Regulation E, revise Regulation E, or adopt new rules and regulations for
electronic funds transfers that could lead to increased operating costs for the
Company, and could also reduce the convenience and functionality of the
Company's services, possibly resulting in reduced market acceptance. In
addition, if the Federal Reserve Board challenges the Company's position, the
costs of responding to such a challenge could result in significant drains on
the Company's financial and management resources, which could adversely affect
the Company's business, financial condition or operating results.
Management believes that current state and federal regulations
concerning electronic commerce do not apply to the Company's current product
line. However, there is a move towards taxation of Internet use by several
states, including the state of Washington. There are some strategic plans under
consideration to conduct commerce on the Internet using the Company's core
technology. This technology is being developed with a strict eye on these
legislative issues and the Company's management subscribes to industry watch
publications that address these issues. Planning for such eventualities assures
minimal interruption to the business of the Company should these laws be
enacted.
COPYRIGHTS, TRADEMARKS, PATENTS, PROPRIETARY RIGHTS AND LICENSES
As of December 31, 1999, the Company held no patents or other
registered intellectual property rights with respect to its smart card products.
The Company presently has registered the Compass Design, The Pathways Group,
Inc. mark and Sprinticket. The Pathways Group, Inc. (U.S.) has been registered
but the Company is awaiting confirmation as of this date. The following marks
have been allowed and are awaiting filing of Statement of Use: C-Teller (Japan),
Island Access Card (U.S.), Keiki Card (U.S.), Kokua Card (U.S.), Kokua Kard
(U.S.), Renaissance (U.S.), Smart Scrip (U.S.), Tikitbox (U.S.), The Pathways
Group and Compass Design (U.S.), V-Teller (Japan), V-Teller (U.S.). Applications
which are currently pending: C-Teller (Canada),C-Teller (EU), C-Teller (U.S.),
E-Teller (Canada), E-Teller (U.S.), Fund Master (Canada), Fund Master (U.S.),
Smart Scrip (Canada), Sprinticket (Canada), Sprinticket (EU), Stylized E (U.S.),
Stylized TPG (U.S.), Tikitbox (Canada), Tikitbox (Japan), The Pathways Group and
Compass Design (U.S.), The Pathways Group and Compass Design (U.S.), Compass
Design (EU), V-Teller (Canada), V-Teller (EU), V-Teller (Japan), Kama'aina Card
(U.S.), hi2k.net (U.S.), and Akamai Card (U.S.).
13
<PAGE>
The Company filed applications to register the following marks with the
U.S. Patent and Trademark Office: C.H.I.P. SMART CARD, COMPASS DESIGN (Company
logo), C-TELLER, E-TELLER (U.S. and Canada), FUND MASTER, ISLAND ACCESS CARD,
KEIKI CARD, KOKUA CARD, KOKUA KARD, MENEHUNE CARD, QUEST SMART CARD,
RENAISSANCE, SMART GIFT CARD, SMART SCRIP (U.S. and Canada), SMART STUDENT CARD,
THE BUS CARD, THE PATHWAYS GROUP & COMPASS DESIGN (Company logo), THE PATHWAYS
GROUP INC., TIKITBOX, TSUNAMI CARD, V-TELLER and WIC SMART CARD.
The Company seeks to register these marks generally on software,
hardware, terminals, kiosks and other machines used in connection with
transaction and database processing or electronic access cards or integrated
chip cards.
The Company may prepare applications for patent protection of toolkits
for smart card programming applications as well as certain commercial
applications of that technology. However, historically the Company has viewed
these items as trade secrets and relied on protection under those rules. There
can be no assurances that any such patent protection will be granted, or if
granted, will have any commercial value. As stated above, the Company recently
has developed a device that should prove to have a commercial value and be
instrumental in the encryption of smart cards in general. See "Advantages of the
Company's Products".
Although the Company does not believe that its products or services
infringe on the intellectual property rights of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that any such assertion will not result in any costly
litigation or require the Company to cease using, or obtain a license to use,
such products or services in violation of the intellectual property rights of
such parties.
EMPLOYEES
As of December 31, 1999, the Company had a total of 63 full-time
employees. Key employees are employed under employment contracts, which includes
a binding non-compete and non-disclosure clause. Each of Carey F. Daly, II, the
Company's President and Chief Executive Officer, Robert W. Haller, Executive
Vice President, Monte P. Strohl, Senior Vice President, Sales and Marketing, and
Christopher R. Miller, Senior Vice President, Business Development, has an
employment contract with the Company. The Company anticipates that it may
substantially increase the number of its employees in the near term. None of the
Company's employees is represented by a labor union. The Company considers its
relations with its employees to be very good.
ITEM 2. PROPERTIES
The Company leases its principal facilities totaling approximately
8,000 square feet in Woodinville, Washington. The lease expires in the year
2000. The Company expects that it will be
14
<PAGE>
able to renew such lease, or find replacement space if necessary, on terms
reasonably acceptable to it. The Company has leased additional space for
transaction processing, marketing and research and development operations in
Santa Rosa, California, and a marketing office in Honolulu, Hawaii. The Company
has executed a lease agreement in Honolulu which allows the Company to
accommodate a satellite transaction processing center. The Company anticipates
that additional facility leases will be required to accommodate its growth
plans.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising
in the ordinary course of its business, none of which is material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company offered its common stock to the public in July 1997
pursuant to Regulation A of the Securities Act of 1993 ("Securities Act"). The
Company offered 833,333 shares of Common Stock, par value $.01 per share
("Common Stock"), for a purchase price of $6.00 per share. The offering
commenced on July 15, 1997, and terminated on July 21, 1997. All shares offered
were sold, providing $5,000,000 in gross proceeds to the Company.
The Company offered shares of its Common Stock in a private offering in
July and August 1998 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, resulting in gross proceeds to the Company of $8,999,485. The Company
engaged Allen & Company Incorporated and Mitchum Jones & Templeton, Inc. ("MJT")
to act as placement agents for the offering, each of which received a placement
fee of 5 percent of the purchase price per share for shares placed by them.
The Company sold 300,000 shares of Series A Preferred Stock, par value
$0.01 per share (the "Series A Preferred Stock"), and 1,200,000 warrants to
acquire shares of the Company's Common Stock in August and September 1999. The
securities were sold in units of 1 share of Series A Preferred Stock and 4
warrants, each warrant entitling the holder to acquire one share of Common Stock
at an exercise price of $2.50 per share, and the price per unit was $10.00,
which resulted in $3,000,000 in gross proceeds to the Company. The warrants are
immediately exercisable and expire 3 years after the date of issue. The Company
engaged Mitchum Jones and Templeton, Inc. to act as placement agent, which
received 150,000 warrants as its placement fee; each warrant entitles MJT to
acquire 1 share of Common Stock at an exercise price of $2.50 per share.
In November 1999, the Company commenced an offshore offering to
non-U.S. investors pursuant to Regulation S of the Securities Act for up to
4,000,000 shares of Common Stock. The Company engaged advice! International Gmbh
of Vienna, Austria, as placement agent, in connection with such offering. As of
December 31, 1999, the Company sold 845,200 shares of Common Stock pursuant to
such Regulation S offering, at prices ranging from $2.00 per share to $3.25 per
share, which resulted in $2,301,675 in gross proceeds to the Company. Since
January 1, 2000, the Company has sold an additional 1,208,900 shares in the
Regulation S offering, at prices ranging from $1.75 to $2.06 per share.
The Company's Common Stock has traded in the NASDAQ SmallCap Market
under the symbol PTHW since October 1998. Previously, the Company's Common Stock
was traded on the electronic bulletin board of the National Association of
Securities Dealers.
The approximate high and low closing prices for each fiscal quarter in
the fiscal years ended December 31, 1998, and 1999 are as follows:
16
<PAGE>
Common Stock Prices
Fiscal Quarter High Low
--------------------------- ------- -------
1st Qtr 98................. $ 25 $23 1/2
2nd Qtr 98................. $ 25 $ 17
3rd Qtr 98................. $20 3/8 $ 14
4th Qtr 98................. $19 1/8 $ 13
1st Qtr. 99................ $ 19 $ 13
2nd Qtr. 99................ $12 5/8 $ 6 5/8
3rd Qtr. 99................ $ 7 1/4 $2 3/16
4th Qtr. 99................ $ 6 3/8 $ 1.72
During the first quarter of fiscal 2000 (through March 24, 2000), the
Company's Common Stock had a high price of $4.31 and a low of $2.16. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
As of March 24, 2000, there were approximately 65 holders of record
of the Company's Common Stock. This number of holders of record does not include
beneficial owners of the Company's Common Stock, which shares are held in the
names of various security holders, dealers and clearing agencies. The Company
believes that the number of beneficial owners of its Common Stock held by others
or in nominee names exceeds 350. The Company has not paid any cash dividends and
does not anticipate doing so in the immediate future as it intends to invest any
earnings in the development of the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected financial information derived
from the audited consolidated financial statements set forth elsewhere in
this Form 10-K or in Forms 10-K previously filed, and should be read in
conjunction with such audited consolidated financial statements and notes
thereto. The following tables summarize certain financial data derived from
audited consolidated financial statements of the Company for the fiscal years
ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
17
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues ........... $ 186,309 $ 76,565 $ 61,785 $ 108,418 $ 512,250
Gross profit ................. 122,840 41,702 42,293 43,224 443,169
(Loss) from operations ....... (9,002,694) (7,336,717) (3,535,487) (2,265,572) (2,318,948)
Other Income (Expense) ....... 44,303 84,256 (51,034) (567,305) (332,599)
Net (Loss) before taxes ...... (8,958,391) (7,252,461) (3,586,521) (2,832,877) (2,651,547)
----------- ----------- ----------- -----------
Net (Loss) ................... $(8,958,391) $(7,252,461) $(3,586,521) $(2,832,877) $(2,651,547)
=========== =========== =========== =========== ===========
(Loss) per share basic and
diluted ...................... $ (0.68) $ (0.55) $ (0.30) $ (0.57) $ (1.49)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Current assets ............... $ 1,249,690 $ 5,261,583 $ 4,130,369 $ 2,874,727 $ 92,827
Total assets ................. 4,276,685 7,978,688 6,716,840 5,072,139 2,630,217
Long-term obligations
under capital lease ........ 0 0 0 0 0
Total liabilities ............ 1,741,703 1,613,020 1,491,674 2,110,544 5,332,238
Working capital .............. (431,232) 3,819,466 3,148,595 1,496,074 (2,647,394)
Redeemable preferred stock ... 1,489,527 -- -- -- --
Stockholders' equity (deficit) $ 1,045,455 $ 6,365,668 $ 5,225,166 $ 2,961,595 $(2,702,021)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS 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 that 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
18
<PAGE>
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 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."
In addition to the risks and uncertainties discussed above, the
report of the Company's independent accountants on the Company's financial
statements for the fiscal years ended December 31, 1999 and 1998 states that
there is substantial doubt as to the ability of the Company to continue as a
going concern.
The Company has required substantial working capital to fund its
operations. To date, the Company has financed its operations principally through
the net proceeds from its initial public offering, and other debt and equity
financings. The Company's ability to continue as a going concern is dependent
upon numerous factors, including its ability to obtain additional financing, its
ability to increase its level of future revenues or its ability to reduce
operating expenses.
Management has made the following arrangements to obtain sufficient
funds to satisfy the Company's cash requirements:
o As previously announced, the Company has engaged an investment banking
firm to conduct a best efforts basis offering of shares of the
Company's common stock for gross proceeds of up to $15,000,000. The
offering requires the filing of a registration statement and
registration of a sufficient number of shares of the Company's common
stock to cover the shares to be issued under the offering. The purchase
price of the shares to be sold under the offering will be 90% of
average daily prices as defined in the agreement.
o In addition, the investment bank has offered a $1,500,000 bridge loan
to be funded on a best efforts basis.
o The President and Chief Executive Officer of the Company has committed
to provide the Company with his personal guarantee of up to $3,000,000
to support bank loans to the Company. The President will be provided
common stock warrant coverage equal to 25% of the value committed under
the guarantee. Presently, bank loans have been applied for but are not
yet completed.
In the event that the above financings are not completed or are not
sufficient in amount or timeliness, the Company has identified reductions in
staffing, rent and other expenses to be made if necessary.
There can be no assurance that the Company will be able to obtain additional
financing, reduce expenses or successfully complete other steps to continue as a
going concern. If the Company is unable to obtain sufficient funds to satisfy
its cash requirements, it may be forced to curtail operations, dispose of
assets, or seek extended payments terms from its vendors. Such events would
materially and adversely affect the Company's financial position and results of
operations.
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.
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. Transaction revenues
generated in 1999 and 1998 primarily relate to credit card processing fees from
the unattended ticketing kiosks installed in several ski area and amusement park
venues. Transaction revenues increased $39,054 or 142% for 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 from the sale of unattended kiosks, smart cards and
terminals increased $70,692, or 144%, for 1999 compared to1998, due to the
following:
o The sale and installation of 5 kiosks and 3 manager
workstations in 1999 compared to 3 kiosks and 1 manager
workstation in 1998.
o The sale of 5,000 smart cards to Funtastic Traveling Shows in
1999.
o Recognition of $12,375 in software maintenance and upgrade
fees in 1999.
The details of the Company's revenues for the last three fiscal years are as
follows:
<TABLE>
($) 1999 % ($) 1998 % ($) 1997 %
--------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Transaction processing fees, net $ 66,513 35.70% $27,459 35.86% $39,009 63.14%
Sale of kiosks, smart and
affinity cards and smart
card terminals 119,796 64.30% 49,105 64.14% 22,775 36.86%
--------- ------ ------- ------ ------- ------
Total $ 186,309 100.00% $76,564 100.00% $61,784 100.00%
========= ====== ======= ====== ======= ======
</TABLE>
19
<PAGE>
The Company has installed its Tikitbox II unattended ticketing systems
at the following locations:
Winter Park Ski Resort in Colorado
Six Flags Great Adventure in New Jersey
Six Flags Magic Mountain Amusement Parks in California.
Blue & Gold Fleet in San Francisco
Deer Valley Ski Area in Utah
Big Mountain Ski Resort in Montana
In late 1997 and during 1998, the Company developed an upgraded version
of its unattended kiosk to accommodate acceptance and vending of smart cards,
among other things, 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
current 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.
The Company signed contracts for sale of one additional kiosk in Deer
Valley ($12,995), and one kiosk at Big Mountain Ski & Summer Resort in Montana
($17,566), both of which were installed in November 1999.
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.
In August 1999 the Company signed an agreement with Funtastic
Travelling Shows, one of the largest carnival operators in the United States, to
implement a smart card system that removes all cash from the midway. In October
1999, the Company sold 5,000 smart cards ($20,000) to Funtastic and successfully
installed and operated the system at a carnival in San Bruno, California. Based
upon the success of this pilot, the Company and Funtastic agreed to a limited
rollout to three additional venues in November 1999. In January 2000, the
Company signed an additional contract with Funtastic for the sale of 4,000
additional smart cards, the rental of thirty-eight terminals, and monthly
maintenance fees for the terminals.
20
<PAGE>
In October 1999, the Company announced that it had signed agreements to
provide smart card transaction processing as well as software and hardware
maintenance and support services to MyChoice Health Services, Inc. MyChoice is a
Portland, Oregon-based company offering technological strategies for the access
of alternative medicine network services in Oregon. The agreements provide for
Pathways to provide smart card transaction processing and reporting in addition
to software and hardware maintenance services, including help desk and technical
phone support for MyChoice and its membership and provider network. The
agreements are for three years.
In January 2000, the Company signed a contract with Sun Valley Company
to install three unattended ticketing kiosks for the winter ski season.
Transaction processing fees and maintenance fees have been waived for this first
season of use in exchange for an agreement by Sun Valley to purchase additional
equipment from the Company, and to pay transaction and maintenance fees for
future seasons.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,223,499 or 21% in 1999 when compared to
1998, and $3,245,006 or 121% in 1998 when compared to 1997.
The increases from 1998 to 1999 primarily result from payroll related
costs. These include the increase in staff during 1999, from 58 at the beginning
of the year to 63 at the end of the year, and additions to executive management,
including renewal of contracts and sign up bonuses for two executives. Rent,
Office & Facility expenses increased due to the inclusion of a full twelve
months of rent for the R&D facility in Santa Rosa and an increased rental rate
for the expanded Hawaii office. In addition, two lease schedules were added
under the Union Bank of California lease agreement in August 1998, that resulted
in twelve months' expense in 1999 compared to four months' expense in 1998.
Marketing, Selling and travel related expenses were higher due to the Company's
marketing activities in Europe. Other selling, general and administrative costs
increased in 1999 due to increased investor relations costs resulting from the
expense of private placement of preferred stock in August 1999 and a private
placement of common stock in November and December 1999. In addition, a loan for
$50,000 to Scrip Advantage was determined not to be not collectible, and was
written off as a bad debt expense.
The increases from 1997 to 1998 are primarily the result of expanded
payroll and employee support costs associated with an increased number of
full-time employees in 1998 and 1997 and additional bonus compensation to senior
executives in 1998. In 1998, the Company had staff levels beginning at 35 and
increasing to 58 for the year 1998 as compared to 15 increasing to 35 for 1997.
In addition, the Company has incurred increases in sales and marketing related
expenditures commensurate with the increase in marketing personnel and in
administrative costs associated with becoming a publicly traded company,
including professional services and investor relations' expenditures.
The Company expects the level of selling, general and administrative
costs to continue to increase as a result of continued marketing and customer
support activities and an increase in the
21
<PAGE>
number of operating and technical personnel necessary to support its expected
sales efforts, product development, and customer support activity.
Below is a detail of the increase in selling, general, and
administrative expenses in major categories for the years ending 1999 as
compared to 1998, and 1998 as compared to 1997.
- --------------------------------------------------------------------------------
INCREASE IN THE INCREASE IN THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
SG&A INCREASE VS. THE YEAR ENDED VS. THE YEAR ENDED
ATTRIBUTABLE TO: DECEMBER 31, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Payroll and payroll related
expenses $ 715,036 $2,282,204
- --------------------------------------------------------------------------------
Rent, office, and facility
(including equipment) expenses $ 161,648 $ 358,001
- --------------------------------------------------------------------------------
Marketing, selling, and
travel related expenses $ 132,937 $ 359,697
- --------------------------------------------------------------------------------
Professional and public
company related expenses $ 25,281 $ 80,248
- --------------------------------------------------------------------------------
Other SG&A related expenses $ 188,597 $ 64,856
------------ ---------------
- --------------------------------------------------------------------------------
Total Increase in SG&A $1,223,499 $3,245,006
- --------------------------------------------------------------------------------
AMORTIZATION OF SOFTWARE COSTS. Amortization of software costs
increased $145,235 in 1999 compared to 1998 and increased $28,183 in 1998 as
compared to 1997. The large increase seen in 1999 compared to 1998 results from
a reevaluation and shortening of the amortization periods being used for various
projects, resulting in a higher amortization amount for 1999 compared to 1998,
as discussed in the notes to the financial statements.
In accordance with prevailing standards for the accounting for software
development costs, the Company would, if it were determined that an impairment
of software development costs existed, write down the value at which such
software development costs are carried in the Company's financial statements.
Any such write-down, if made, would be reflected as a charge to operations in
the period any such impairment was determined and could have a material adverse
effect on the Company's financial position and results of operations for such
period. The Company believes its capitalized software is not impaired, and is
stated at net realizable value.
DEPRECIATION. Depreciation increased $120,755 for the year ending 1999
as compared to 1998 and increased $155,330 for the year ending 1998 as compared
to 1997 primarily
22
<PAGE>
due to an increase in capital expenditures. Capital expenditures continued
during 1999, but at a more modest level than in 1998, due to the continued
addition of computer equipment to support an increase in marketing and technical
activities and personnel.
INTEREST INCOME (NET). The Company had net interest income of $44,303
in 1999 compared to $84,256 in 1998 and net interest expense of $51,034 in 1997.
The decline in net interest income in 1999 as compared to 1998 reflects the pay
down of total long term debt from $507,850 to $169,688 during 1999 (resulting in
less interest expense), and lower net cash equivalent balances throughout 1999
as compared to 1998 (resulting in less interest being earned).
RESEARCH AND DEVELOPMENT. Research and development increased $125,626
in 1999 as compared to 1998, and $372,120 in 1998 as compared to 1997. The
increase in 1999 over 1998 reflects increases in programming staff and their
related research and development efforts. The increase in 1998 over 1997
reflects the increase in programming staff and their related research and
development efforts, and the expenditure of $49,145 on equipment and software
used for testing.
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 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 September 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. 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 agreement 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 issues 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.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was ($431,232) at December 31, 1999 and
$3,819,466 at December 31, 1998. The decrease in working capital at December 31,
1999 compared to December 31, 1998 is primarily due to the Company's net loss
during the year, and the resulting use of cash for operating expenses and the
payment of accrued expenses. In addition, the current liabilities at December
31, 1999 reflect an accrued license fee of $700,000 due to Proton World.
The Company signed a placement agency agreement in March 2000 with
an investment banking firm, pursuant to which the firm has agreed to raise an
aggregate of up to $15 million on a best efforts basis through the sale of
the Company's equity securities.
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 required the Company to issue 300,000 shares of preferred
stock and warrants to purchase 1,200,000 shares. 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 remain
unredeemed an additional warrant for each six shares of preferred stock held (or
a total of 50,000 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
paid a placement fee to Mitchum Jones and Templeton of warrants to purchase
150,000 shares of common stock at $2.50 per share. 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
closed the additional $2,000,000 (200,000 shares of preferred stock and 800,000
warrants) on September 3, 1999. The Company has agreed to register the shares of
Common Stock underlying the warrants.
The Company has also entered into a letter of intent with Advice!
Investment Services GmbH of Vienna, Austria, with respect to an offering of
shares of the Company's Common Stock pursuant to Regulation S under the
Securities Act of 1933. Pursuant to the Regulation S offering, the Company
intends to offer and sell up to a maximum of 4,000,000 shares at prices based on
the market price of the Common Stock prior to closing. As of December 31, 1999,
the Company sold 845,200 shares pursuant to the Regulation S offering, with net
proceeds to the Company of $2,151,675. Since
24
<PAGE>
January 1, 2000, the Company has sold an additional 1,208,900 shares in the
Regulation S offering, at prices ranging from $1.75 to $2.06 per share.
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 1997, the Company sold 833,333 shares of common stock in an
initial public offering. The net proceeds of the offering was $4,857,956.
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.
The Company's capital expenditures for the year ended December 31, 1999
were $388,069 compared to $623,439 in 1998. The decrease in 1999 compared to
1998 is primarily due to significant costs incurred in 1998 for computer
equipment and leasehold improvements for its transaction processing center in
Santa Rosa, California. The Company expects continued investments in capital
expenditures for increased personnel, and transaction processing infrastructure
to support more complex operations and higher 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. In the event the Company is unable to generate
significant revenues from the rollout of its current
25
<PAGE>
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 was 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 was aware of the potential year 2000 problem, and
undertook a Year 2000 project to address the Company's readiness and exposure to
Year 2000 issues. The Year 2000 project addressed 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 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 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 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 was completed prior to the end of 1999. For the
internally used operating systems, software, and technology the Company has
identified as material, the Company assessed the Year 2000 exposure through
testing and vendor inquiry. This process was completed by the end of second
quarter, 1999. Material operating systems, software, and other technology deemed
to be adversely affected by the Year 2000 problem were upgraded or replaced. In
addition to operating systems, software, and other technology, the operation of
office and facilities equipment, such as fax machines, photocopiers, telephone
systems, security systems, elevators, and other common devices that could be
affected by the Year 2000 problem were tested after January 1, with no problems
found.
The Company identified major suppliers and other third party vendors
integral to the operations of the Company's business. The Company 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 identified alternative providers of products and services deemed
material to the Company's operations. This process was completed by the end of
the second quarter 1999.
26
<PAGE>
However, the Company had no control over and could not predict the corrective
actions of these third party vendors and suppliers. Thus, while the Company
expected that it would be able to resolve any significant Year 2000 problems
related to third party products and services, there was no assurance that it
would 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 had a material adverse effect on the Company's
business, financial condition, and results of operations, but no such problems
have arisen.
The Company believes that with the completion of the Year 2000 project,
significant interruptions of normal operations were reduced or eliminated. As a
result of the preparations made, the Company experienced no disruptions in its
systems or products as a result of the calendar turning to the Year 2000.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Annual 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. These
risks and uncertainties include, without limitation:
o the ability of the Company to continue as a going concern
(see "Report of Independent Accountants" on page F-1);
o the rate of market development and acceptance of smart card
technology;
o the unpredictability of the Company's sales 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 (see
"Description of Business -- Competition" above);
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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<PAGE>
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;
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial information required by this item appears in the pages marked
F-1 through F-20 at the end of this Report and are incorporated herein by
reference as if fully set forth herein.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Accountant's Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Carey F. Daly, II 56 Chairman of the Board of Directors; President; Chief
Executive Officer; Director
Robert E. Boeck 53 Senior Vice President, Finance; Director
Charles W. Dunn 63 Senior Vice President, Treasurer; Director
Robert J. Fishman 53 Director
Robert W. Haller 45 Executive Vice President; Director
Christopher R. Miller 55 Senior Vice President, Business Development
Glenn A. Okun 37 Director
Mark T. Schuur 39 Director
Monte P. Strohl 48 Senior Vice President, Sales and Marketing; Director
Linda Wing 55 Director
</TABLE>
Each director shall hold office until the next annual meeting of the
Company's stockholders, which is anticipated to occur in the spring or summer of
2000. The Company's Bylaws provide for the creation of classes of directors
comprising the Board of Directors. The Company anticipates that it will
implement the classified Board structure at the next annual meeting. Under such
structure, each class will serve separately expiring terms of office such that
all of the directors will not be up for election at any one time.
29
<PAGE>
CAREY F. DALY, II is the President and Chief Executive Officer of the
Company, the Chairman of the Board of Directors and a Director of the Company.
Mr. Daly founded The Pathways Group, Inc. in October 1993. Mr. Daly is also
President of Pathways International, Ltd. and SPRINTICKET, Inc. Mr. Daly has
over 30 years of computer operating system, computer programming and design
experience. From 1968 to 1969, Mr. Daly served as an internal auditor and
Director of Financial Planning for American Standard, Baltimore, Maryland. He
also worked for major computer companies as a systems engineer in Baltimore,
Maryland from 1970 through 1973. He received an LLB degree in business law from
LaSalle University in 1974 and a BS degree in accounting as well as an AA in
computer science from Baltimore Business College in 1968.
Mr. Daly is the software engineering designer of the SPRINTICKET
product line, the Pathways Medical smart card system, the Pathways E-Teller
Transaction Processing System as well as several other commercial software
systems.
ROBERT E. BOECK is the Senior Vice President, Finance, and a
director of the Company. Mr. Boeck joined the Company in February 2000. Mr.
Boeck was financial actuary for Canada Life Assurance Company from December
1998 to February 2000. From February 1996 to December 1998, he was a
consulting actuary for KPMG. Mr. Boeck had his own actuarial consulting
practice from January 1995 to February 1996. Mr. Boeck is the brother-in-law
of Mr. Daly. Mr. Boeck earned a B.S. in Mathematics from University of
Nebraska and is also a Fellow of the Society of Actuaries.
CHARLES W. DUNN is the Senior Vice President and Treasurer, and a
Director, of the Company. Mr. Dunn joined the Company in February 2000.
Previously, Mr. Dunn was associated with Merchants Group International, a
merchant banking group located in San Francisco, from October 1998. During this
time he served as interim CFO of several clients companies, including Parthenon,
LP a broker/dealer firm, Pericles, LP, a hedge fund, and FurnitureONline.com.
Earlier, Mr. Dunn was President and CEO of IntegriSoft, Inc. and Advanced
Softeware Automation, Inc., its predecessor, two companies developing software
testing tools for embedded systems, and President and CEO of their investment
company parent, having started in 1992. Mr. Dunn received a MBA from University
of California at Berkeley, and a PhD in economics from the University of Paris
(Sorbonne).
ROBERT J. FISHMAN was elected as a Director of the Company in February
2000. Mr. Fishman has been President/CEO of Fishman Enterprises since April
1999. From May 1998 through March 1999, he was Vice President of Airport
Services, Hawaiian Airlines, Inc. Mr. Fishman was Managing Director for the City
and County of Honolulu from October 1994 through June 1998.
ROBERT W. HALLER is the Executive Vice President of the Company, and
since February 2000, has also served as a Director of the Company. Mr. Haller
joined SPRINTICKET, Inc. as the Sales Manager in November 1991. Previously, he
was Sales Manager of QT, Inc. Mr. Haller served as Senior Vice President,
Marketing and Sales of the company since 1996, and became Executive Vice
President in December 1997. Mr. Haller has played a significant role in the
development of the Company's marketing plans and products. Mr. Haller received a
BS in human biology from the University of Washington in 1977.
30
<PAGE>
CHRISTOPHER R. MILLER is Senior Vice President of Business Development,
and a Director. Mr. Miller joined the Company in November 1999. He was managing
partner at Miller Culver & Maillard, a law firm, from 1987 to 1999, and served
as of-counsel at Lanahan & Reilly, also a law firm, from February 1999 to
October 1999. During this time, Mr. Miller's legal practice focused on general
corporate and business law, business litigation, intellectual property licensing
and international contract negotiation and drafting. Mr. Miller received his
B.A. in Philosophy/Psychology from Sonoma State University in 1971 and a J.D.
from the University of San Francisco, School of Law in 1975.
GLENN A. OKUN has been a Director of the Company since the fourth
quarter of 1996. Mr. Okun became the Chairman and Chief Executive Officer of
Mitchum Jones & Templeton, Inc., an investment banking firm, in April 1998, and
became a managing director of Jolson Merchant Partners LLC, an investment
management firm, in 1999. Mr. Okun also serves as a director for Farlake Plc,
also an investment management firm, since April 1998. For more than five years
prior to April 1998, Mr. Okun was a Director and Vice President of Allen &
Company Incorporated, an investment banking firm. Allen & Company acted as a
financial advisor to the Company from May 1995 to May 1999. Mr. Okun received a
MBA and a LLB from Harvard University in 1989.
MARK T. SCHUUR is a Director of the Company, and served as Senior Vice
President and Chief Financial Officer of the Company from September 1996 through
March 2000. From May 1992 through September 1996, Mr. Schuur served as Chief
Financial Officer, Treasurer and a Director of Pizza Blends Inc., Western
Blending Inc. and Flavor Blends Inc., affiliated privately-held food
manufacturers based in Bellevue, Washington; Mr. Schuur presently serves as a
director for those companies. Prior to that, Mr. Schuur was a General Practice
Manager at Coopers & Lybrand in Seattle, Washington. Mr. Schuur received his BA
degree in business administration (accounting emphasis) from the University of
Washington in 1983.
MONTE P. STROHL has been a Director of the Company since June 1998 and
has been serving as Senior Vice President of Sales and Marketing since November
1999. Mr. Strohl is currently the president of MS Digital, which he founded in
1994 and has acted as President and Chief Executive Officer since that time. MS
Digital is a company specializing primarily in corporate communication and cable
broadcasting. MS Digital provides hardware and software solutions to companies
wishing to communicate over cable television (public or internal), or intranets.
MS Digital's clients include universities, municipalities and Fortune 500
companies. Before founding MS Digital, Mr. Strohl worked as Vice President of
sales for OMNI International, which sold video production solutions
internationally. Mr. Strohl is one of the original founders of Pathways
International, Ltd., the predecessor corporation of the Company.
LINDA WING has been a Director of the Company since June 1998. Since
1993, she has served as President and Chief Executive Officer of Human Systems
Design, an organizational development firm that assists management of companies
in developing their strategic planning. Ms. Wing currently teaches a course in
strategic management at Metro State University in Minneapolis, Minnesota. She is
also an editor of the journal "Empowerment in Organization," which is published
by MCB University Press. She holds a masters of business administration from the
University of St. Thomas and several undergraduate degrees from Mankato State
University in finance and industrial
31
<PAGE>
relations. Ms. Wing is presently working on obtaining her doctorate in
organizational theory from the Fielding Institute in Santa Barbara, California.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows compensation for services rendered to the
Company during the fiscal years ended December 31, 1999, 1998 and 1997,
respectively, by the Carey F. Daly, II, President and Chief Executive Officer,
Mark T. Schuur, former Senior Vice President and Chief Financial Officer of the
Company, Robert W. Haller, Executive Vice President, Christopher R. Miller,
Senior Vice President of Business Development and Joseph F. Schuler, former
Senior Vice President of Sales and Marketing. Each executive officer serves
under the authority of the Board of Directors. No other executive officer of the
Company received cash compensation that exceeded $100,000 during the fiscal
years ended December 31, 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------ -------------------------------------
Award Payouts
-------------------------- ----------
Securities All Other
Other Annual Restricted Underlying LTIP Compen-
Compensation Stock Options/SARs Payouts sation
Name and Principal Position Year Salary ($) Bonus ($)(c) ($) Award(s)($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carey F. Daly, II, President 1999 $247,693 $531,971 $ 0 $0 223,000/0 0 0
Chief Executive Officer and 1998 200,000 220,000 0 0 0/0 0 0
Chairman of the Board 1997 200,000 0 8,333(a) 0 0/0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
Mark T. Schuur(b), Senior 1999 $129,381 $ 0 $ 0 $0 12,880/0 0 0
Vice President and Chief 1998 124,005 97,663 0 0 15,000/0(e) 0 0
Financial Officer 1997 112,916 0 0 0 15,000/0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
Robert W. Haller, Executive 1999 $115,909 $ 0 $ 0 $0 110,380/0 0 0
Vice President 1998 89,943 79,945 0 0 15,000/0(e) 0 0
1997 69,376 23,717 0 0 15,000/0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
Joseph F. Schuler(d), 1999 $103,672 $ 0 $ 0 $0 0(f)/0 0 0
Senior Vice President, 1998 107,000 46,450 0 0 0/0 0 0
Sales and Marketing 1997 10,000(e) 0 0 0 100,000/0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
Christopher R. Miller(g), 1999 $26,841 $100,000 $ 0 $0 100,000/0 0 0
Senior Vice President, 1998 - - - - - - -
Business Development 1997 - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents payment for accrued vacation benefits.
(b) Mr. Schuur's employment with the Company terminated in March 2000.
32
<PAGE>
(c) The Company has no set bonus policy. Bonuses are awarded by the
Compensation Committee of the Board, which is currently comprised of
Ms. Wing and Mr. Fishman, independent directors of the Board. During
1999, the Compensation Committee consisted of Ms. Wing and Mr. Strohl
(prior to his becoming an executive officer of the Company).
(d) Mr. Schuler's employment with the Company terminated in October 1999.
(e) The Company repriced Mr. Schuur's and Mr. Haller's stock options on
December 4, 1998.
(f) Mr. Schuler received options to acquire 10,940 shares of the Company's
Common Stock on June 1, 1999. Those options terminated after Mr.
Schuler terminated his employment with the Company.
(g) Mr. Miller joined the Company in November 1999. Mr. Miller received
$26,841 as salary and $100,000 as a bonus for the Company's fiscal year
ended December 31, 1999, $50,000 of which was paid in 1999 and the
remaining $50,000 of which was paid in January 2000. Lanahan & Reilley,
the firm for which Mr. Miller served from February to November 1999 as
of-counsel, billed the Company for $65,000 of legal fees and expenses.
STOCK INCENTIVE PLAN
The Board of Directors of the Company adopted an Amended and Restated
Stock Incentive Plan (the "Incentive Plan") on December 16, 1997 in order to
attract and retain qualified personnel. Under the Incentive Plan, options to
purchase up to 2,000,000 shares of Common Stock may be granted to officers and
key employees of the Company and directors who are also officers or key
employees of the Company. Options granted under the Incentive Plan are intended
to qualify as incentive stock options within the meaning of the Internal Revenue
Code of 1986, as amended.
Subject to the terms of the Incentive Plan, the Board of Directors is
authorized to select optionees and determine the number of shares covered by
each option, its exercise price and certain of its other terms. The exercise
price of incentive stock options granted under the Incentive Plan may not be
less than the fair market value of the Company's Common Stock on the date of the
grant and may not be less than 110% of such fair market value with respect to
any incentive stock option granted to a participant who owns 10% or more of the
Company's outstanding Common Stock. In general, options become exercisable in
equal annual installments. The period within which any incentive stock option
may be exercised cannot exceed ten years from the date of grant. Unless
otherwise provided in an award agreement with a participant, all options expire
immediately upon the termination of the participant's employment. If the
participant's employment terminates due to retirement or resignation, the Board
of Directors may permit options to continue until the expiration date set forth
in the applicable award agreement. If the participant's employment terminates
due to death or disability, the options will continue until the expiration date
set forth in the applicable award agreement. To the extent required by law for
an option to qualify as an incentive stock option, no option intended to qualify
as an incentive stock option may be exercised while any options previously
granted to that optionee are outstanding. As of the date of this Form 10-K,
1,251,283 options are outstanding.
33
<PAGE>
DIRECTORS STOCK OPTION PLAN
The Board of Directors of the Company adopted a Directors Stock Option
Plan (the "Directors Plan") on December 14, 1998 in order to attract and retain
directors. Under the Directors Plan, options to purchase up to 100,000 shares of
Common Stock may be granted to eligible non-employee directors of the Company.
The following persons ("Eligible Directors") are eligible to receive
grants of stock options pursuant to the Directors Plan: directors of the Company
who are not officers or employees of the Company or any subsidiary thereof (a
"Non-employee Director") and who (i) have not been designated by the Company's
Board of Directors within 30 days after becoming a director of the Company as
being eligible to receive awards under a the Amended and Restated Stock
Incentive Plan or (ii) having been eligible to participate in the Amended and
Restated Stock Incentive Plan, have ceased to be so eligible as a result of a
determination by the Board of Directors. The eligibility of any such director to
participate in the Directors Plan shall cease if such director is subsequently
designated as being eligible to receive awards under the Amended and Restated
Stock Incentive Plan for as long as he or she remains so eligible.
Shares related to options (or portions thereof) that are forfeited,
canceled or terminated, expire unexercised, are surrendered in exchange for
other options or are otherwise settled in such manner that all or some of the
shares covered by an option are not and will not be issued will be restored to
the total number of shares available for issuance pursuant to options granted
under the Directors Plan. In the event of any change in the number of shares of
outstanding Common Stock of the Company by reason of a stock split, stock
dividend, combination or reclassification of shares, recapitalization, merger,
consolidation or similar event, proportional adjustments will be made in the
number of shares of the Company's Common Stock (a) reserved for issuance
pursuant to the Directors Plan, (b) for which stock options shall be granted,
and (c) covered by outstanding stock options, as well as in the exercise price
of such outstanding options. In addition, equitable adjustments will be made in
the event of any other change affecting the Company's Common Stock or any
distribution (other than normal cash dividends) to stockholders of the Company.
Under the Directors Plan, non-qualified stock options to purchase
shares of the Company's Common Stock are granted automatically to Eligible
Directors at the times specified in the Directors Plan. In general, unless an
Eligible Director has received a previous grant of a stock option (under the
Directors Plan, the Amended and Restated Stock Incentive Plan or otherwise), he
or she will receive an initial option to purchase 10,000 shares of the Company's
Common Stock on the date on which he or she first becomes eligible to
participate in the Directors Plan. Thereafter, as long as the Eligible Director
(including any Eligible Director who received a previous grant) remains eligible
to participate in the Directors Plan, he or she will receive annually, on the
date of the Annual Meeting of Stockholders, an option to purchase 5,000 shares
of the Company's Common Stock, beginning on the date specified in the Directors
Plan. Notwithstanding the foregoing, no stock option shall be granted to any
person whose service as a director of the Company ends on the date on which the
option would otherwise be granted.
34
<PAGE>
The Directors Plan is administered by the Company's Board of Directors
or a committee composed of not less than two members thereof as may be
designated from time to time by all such members. The Board or such committee
administers the Directors Plan, but has no discretion regarding the grant,
amount, timing, terms and conditions of stock options granted under the
Directors Plan.
The exercise price of any stock option granted pursuant to the
Directors Plan is the fair market value of the Company's Common Stock on date of
grant. Each stock option is exercisable, cumulatively, as to one-third of the
shares after the first anniversary of the date of grant and as an additional
one-third after each of the second and third anniversaries of the date of grant.
Each option is exercisable for a period of ten years from the date of grant.
The price at which shares of the Company's Common Stock may be
purchased upon exercise of an option must be paid in full in cash at the time of
exercise or by (i) tendering shares of the Company's Common Stock or
surrendering another stock option, (ii) delivering a promissory note issued by
the participant to the Company or otherwise as determined by the Board or the
committee, or (iii) any other means acceptable to the Board or the committee.
In order to enable the Company to satisfy any tax payment obligations
resulting from any exercise of a stock option under the Directors Plan, the
Company has the right, among other things, to withhold from the shares of the
Company's Common Stock receivable by a participant an appropriate number of
shares for payment thereof. In addition, participants may elect to have the
Company deduct applicable taxes by withholding an appropriate number of shares
of the Company's Common Stock or to elect to tender to the Company other shares
of the Company's Common Stock held by the participant for the purpose of
satisfying tax payment obligations.
Except as described below, if a participant's association with the
Company terminates, any unexercised stock option (or portion thereof) shall, to
the extent it is exercisable pursuant to the terms of such option on the date of
such termination, remain exercisable for a period of three months following the
date of termination or until the stated expiration of the stock option, if
earlier. If a participant dies, or ceases to be associated with the Company
because he (i) is disabled, (ii) retires at age 62 or thereafter or (iii)
assumes a position with a governmental, charitable or educational agency or
institution, any stock option granted under the Directors Plan then held by such
participant shall become fully exercisable as of the date on which such
participant dies or ceases to be associated with the Company, and shall be
exercisable through the expiration date specified in the applicable option
agreement.
Stock options granted under the Directors Plan are subject to
acceleration of exercisability in the event of a change in control of the
Company, as set forth in agreements between the Company and certain of its
directors which provide for certain protections and benefits in the event of a
change of control (as defined in such agreements), or as provided in applicable
option agreements. In general, awards granted under the Directors Plan are not
assignable or transferable by a participant, except under the limited
circumstances contemplated by the Directors Plan.
35
<PAGE>
The Board or the committee may amend, suspend or terminate the
Directors Plan for the purpose of meeting or addressing any changes in any
applicable tax, securities or other law. In addition, the Directors Plan may
not, without the approval of the stockholders, as set forth therein, be amended
to (i) increase materially the aggregate number of shares of the Company's
Common Stock that may be issued under the Directors Plan (except for adjustments
pursuant to Section 8 of the Directors Plan), (ii) materially increase the
benefits accruing to participants, or (iii) modify materially the eligibility
requirements of the Directors Plan. Nor may the Directors Plan be changed in
such a way as to alter, impair, amend, modify, suspend or terminate any rights
of a participant or any obligations of the Company under any stock options
theretofore granted in any manner adverse to such participant, without the
consent of such participant. The Directors Plan terminates ten years after the
date of approval by the stock holders of the Company, subject to earlier
termination by the Board as set forth above, by the affirmative vote of a
majority of the votes cast at a stockholders' meeting at which the approval of
the Directors Plan is considered, PROVIDED that the total vote cast represents
over 50% of all shares entitled to vote on the proposal. The Directors Plan was
approved by the stockholders at the Annual Meeting of Stockholders in 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------
Percent of Total Potential Realizable Value at
Options/ Assumed Annual Rates of Stock
Options/ SARS Price Appreciation for
SARS Granted to Exercise Option Term
Granted in Employees in or Base Price Expiration -----------------------------
Name Fiscal Year(#) Fiscal Year ($/sh) Date 5%($) 10%($)
---- -------------- ----------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Carey F. Daly, II 23,000(a) 1.8% $9 1/16 5/30/09 $131,085 $332,195
200,000(b) 15.9% $ 3 10/31/09 $377,337 $956,245
Mark T. Schuur 12,880(c) 1.09% $9 1/16 5/30/09 $ 73,407 $186,030
Robert W. Haller 10,380(d) 0.8% $9 1/16 5/30/09 $ 59,159 $149,921
100,000(e) 7.9% $ 3 10/31/09 $188,668 $478,123
Joseph F. Schuler(f) 0 - - - - -
Christopher R. Miller 100,000(g) 7.9% $ 3 10/31/09 $188,668 $478,123
</TABLE>
(a) The options vest in three annual installments as follows: 7,667 options
on June 1, 2000; 7,667 options on June 1, 2001; and 7,666 options on
June 1, 2002.
(b) The options vest in three annual installments as follows: 66,667
options on November 1, 2000; 66,667 options on November 1, 2001; and
66,666 options on November 1, 2002.
(c) The options vest in three annual installments as follows: 4,293 options
on June 1, 2000; 4,293 options on June 1, 2001; and 4,294 options on
June 1, 2002.
36
<PAGE>
(d) The options vest in three annual installments as follows: 3,460 options
on June 1, 2000; 3,460 options on June 1, 2001; and 3,460 options on
June 1, 2002.
(e) The options vest in three annual installments as follows: 33,333
options on November 1, 2000; 33, 333 options on November 1, 2001;
33,334 options on November 1, 2002.
(f) Mr. Schuler received a grant of options to acquire 10,940 on June 1,
1999; these options have now terminated due to Mr. Schuler's
termination of his employment with the Company.
(g) The options vest in three annual installments as follows: 33,333
options on November 1, 2000; 33,333 options on November 1, 2001; and
33,334 options on November 1, 2002.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs(a) Options/SARsa
at Fiscal Year- at Fiscal Year-
End (#) End ($)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise(#) ($) Unexercisable Unexercisable
- ----------------------------------- ------------------- ---------------- --------------------------- ---------------------
<S> <C> <C> <C> <C>
Carey F. Daly, II N/A N/A 200,000/223,000 $0/$0
Mark T. Schuur N/A N/A 21,666/12,880 $0/$0
Robert W. Haller N/A N/A 15,000/110,834 $0/0
Joseph F. Schuler N/A N/A 0/0 $0/$0
Christopher R. Miller N/A N/A 0/100,000 $0/$0
- ----------------------------------- ------------------- ---------------- --------------------------- ---------------------
</TABLE>
(a) To date, the Company has issued no SARs.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 24, 2000, by (i)
each person who is known by the Company to own beneficially more than 5 percent
of the Company's outstanding Common Stock; (ii) each of the Company's officers
and directors; and (iii) all officers and directors as a group.
As of March 24, 2000, there were 14,613,162 shares of Common Stock
outstanding. Each share of Common Stock is entitled to one vote per share.
37
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF PERCENT OF COMMON
BENEFICIAL OWNERS AND SHARES OF COMMON STOCK STOCK BENEFICIALLY
DIRECTORS AND OFFICERS BENEFICIALLY OWNED OWNED
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
5% BENEFICIAL OWNERS:
Allen & Company Incorporated(1) 2,780,932(2) 19.0%
711 Fifth Avenue
New York, New York 10022
- ------------------------------------------------------------------------------------------------------
Deferred Compensation Trust for Carey F. Daly, II(3) 1,876,978 12.8%
1221 North Dutton Ave.
Santa Rosa, California 95401
- ------------------------------------------------------------------------------------------------------
Joseph A. Jolson 1,156,565(4) 7.9%
Jolson Merchant Partners Group LLC
Joseph A. Jolson 1991 Trust
JMP Asset Management LLC
Mitchum Jones & Templeton Group, Inc.
Mitchum Jones & Templeton, Inc.
Harvest Opportunity Partners I, LLC
Harvest Opportunity Partners II, LLC
One Embarcadero Center, Suite 2150
San Francisco, California 94111
- ------------------------------------------------------------------------------------------------------
OFFICERS AND DIRECTORS:
Carey F. Daly, II 685,972(5) 4.6%
1221 North Dutton Ave.
Santa Rosa, California 95401
- ------------------------------------------------------------------------------------------------------
Robert E. Boeck --(6) --
1221 North Dutton Ave.
Santa Rosa, California 95401
- ------------------------------------------------------------------------------------------------------
Charles W. Dunn --(7) --
1221 North Dutton Ave.
Santa Rosa, California 95401
- ------------------------------------------------------------------------------------------------------
Robert J. Fishman --(8) --
Pacific Tower
1001 Pacific Street
Honolulu, Hawaii 96813
- ------------------------------------------------------------------------------------------------------
Mark T. Schuur 35,000(9) *
14201 NE 200th Street
Woodinville, Washington 98072
- ------------------------------------------------------------------------------------------------------
Glenn A. Okun 511,303(10) 3.5%
Mitchum Jones & Templeton, Inc.
One Embarcadero Center, Suite 2150
San Francisco, California 94111
- ------------------------------------------------------------------------------------------------------
Monte P. Strohl 67,000(11) *
14201 NE 200th Street
Woodinville, Washington 98072
- ------------------------------------------------------------------------------------------------------
Linda Wing --(12) --
6117 Wilryan Avenue
Minneapolis, Minnesota 55436
- ------------------------------------------------------------------------------------------------------
Robert W. Haller 63,633(13) *
14201 NE 200th St.
Woodinville, Washington 98072
- ------------------------------------------------------------------------------------------------------
Christopher R. Miller --(14) --
1221 North Dutton Avenue
Santa Rosa, California 95401
- ------------------------------------------------------------------------------------------------------
38
<PAGE>
<CAPTION>
NAME AND ADDRESS OF PERCENT OF COMMON
BENEFICIAL OWNERS AND SHARES OF COMMON STOCK STOCK BENEFICIALLY
DIRECTORS AND OFFICERS BENEFICIALLY OWNED OWNED
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Officers and Directors as a Group (10 persons) 1,362,908 8.8%
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%.
(1) Allen & Company Incorporated, a New York corporation, is wholly-owned
by Allen Holding Inc., a Delaware corporation of which members of the
Allen family are beneficial owners of a majority of the shares. The
remaining shares of Allen Holding Inc. are owned by officers of Allen
actively involved in its business.
(2) Excludes approximately 1,578,000 additional shares owed by persons
affiliated with Allen & Company Incorporated.
(3) Mr. Daly has no voting power over or power to dispose of the 1,876,978
shares held in the trust. Mr. Edward L. Mueller, General Counsel to the
Company, is the trustee.
(4) Jolson Merchant Partners Group LLC ("JMP Group"), of which
Mr. Jolson is the manager, holds 20,000 shares of the Company's
Common Stock. Mitchum Jones & Templeton Group, Inc. ("MJT Group"),
of which JMP Group is the sole shareholder, holds 4,500 shares of
Common Stock and immediately exercisable warrants to acquire 150,000
shares of Common Stock. Mitchum Jones & Templeton, Inc., of which MJT
Group is the sole shareholder, holds 18,765 shares of Common Stock. The
Joseph A. Jolson 1991 Trust holds 32,000 shares of the Company's
Common Stock and immediately exercisable warrants to acquire 100,000
shares of Common Stock. Harvest Opportunity Partners I, LLC
("Harvest I"), holds immediately exercisable warrants to acquire
800,000 shares of Common Stock. Harvest Opportunity Partners II, LLC
("Harvest II"), holds 31,300 shares of Common Stock. JMP Asset
Management LLC, of which JMP Group is the sole member, is the manager
of both Harvest I and Harvest II.
(5) Includes options to acquire 200,000 shares, which options are currently
exercisable. Excludes (a) 119,000 shares owned by Mr. Daly's wife, (b)
options to acquire 223,000 shares, which options are not currently
exercisable and (c) 1,876,978 shares held in the Deferred Compensation
Trust for Carey F. Daly, II, over which Mr. Daly has no power to vote
or dispose.
(6) Excludes options to acquire 100,000 options, which are not currently
exercisable, granted pursuant to the Company's Amended and Restated
Stock Incentive Plan.
(7) Excludes options to acquire 100,000 options, which are not currently
exercisable, granted pursuant to the Company's Amended and Restated
Stock Incentive Plan.
(8) Excludes options to acquire 10,000 shares, which are not currently
exercisable granted pursuant to the Directors Stock Option Plan.
(9) Includes options to acquire 6,666 shares, which are currently
exercisable.
(10) Includes 75,000 shares owned by Mr. Okun jointly with his wife.
Excludes 149,955 shares held in an account of a client of Mr. Okun,
shares over which Mr. Okun has the power to vote and discretion to
dispose. Mr. Okun disclaims beneficial ownership of the 149,955 shares.
Also excludes options to acquire 10,000 shares, which options are not
currently exercisable, granted pursuant to the Directors Stock Option
Plan.
(11) Excludes (i) options to acquire 10,000 shares, which are not currently
exercisable, granted pursuant to the Directors Stock Option Plan and
(ii) options to acquire 100,000 shares, which are not currently
exercisable, granted pursuant to the Company's Amended and Restated
Stock Incentive Plan. Mr. Strohl is no longer able to participate under
the Company's Director Stock Option now that Mr. Strohl participates
under the Amended and Restated Stock Incentive Plan.
(12) Excludes options to acquire 10,000 shares, which options are not
currently exercisable, granted pursuant to the Directors Stock Option
Plan.
39
<PAGE>
(13) Includes options to acquire 15,000 shares, which are currently
exercisable. Excludes options to acquire 110,834 shares, which are not
currently exercisable, granted pursuant to the Company's Amended and
Restated Stock Incentive Plan.
(14) Excludes options to acquire 100,000 shares, which are not currently
exercisable, granted pursuant to the Company's Amended and Restated
Stock Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1996, the Company issued to Allen & Company Incorporated, a former
financial advisor to the Company, 300,000 shares of its Common Stock in payment
for $300,000 in fees owed by the Company to Allen & Company for financial
consulting services. Allen & Company purchased shares of Common Stock of the
Company (including the 1996 fee for services) in connection with a series of
transactions at a weighted average price per share of $0.70. Mr. Glenn Okun, a
director of the Company, was also a Director and Vice President of Allen &
Company until April 1998.
In connection with the Company's private offering of Common Stock
pursuant to Rule 506 of Regulation D of the Securities Act, commenced in July
1998 and completed in August 1998, the Company entered into a Placement
Agency Agreement with Allen & Company Incorporated, whereby the Company
agreed to pay Allen & Company Incorporated a placement fee of 5% of the
aggregate amount of Common Stock purchased by a subscriber. The Company paid
Allen & Company Incorporated an aggregate amount of $349,974 as its placement
fee. In addition, Mitchum Jones & Templeton, Inc. ("MJT"), an investment
banking firm for whom Mr. Okun is now a principal, received a 5% placement
fee in connection with a subscription for Common Stock of the Company by one
of that firm's clients. MJT received $100,000 as its placement fee for that
purchase. Allen & Company Incorporated did not receive a placement fee in
connection with the subscription by MJT's client.
The Company engaged MJT as its placement agent in connection with its
private offering of Common Stock in August and September 1999. MJT received
immediately exercisable warrants to acquire 150,000 shares of the Company's
Common Stock as its placement fee.
Commencing in 1999, the Company began using the services of Sunset
Aviation, Inc. ("Sunset Aviation") to charter private aircraft for business
travel. In making private charter flight arrangements on behalf of the Company,
Sunset Aviation frequently used an aircraft owned by DHS Aviation, Inc. ("DHS
Aviation"), a corporation of which Mr. Daly is the sole stockholder. During the
1999 fiscal year, the Company paid Sunset Aviation $448,319 for its charter
services, $24,535 of which was paid to DHS Aviation.
In March 2000, the President and Chief Executive Officer of the
Company committed to provide the Company with a personal guarantee for one
year of up to $3,000,000 to support bank loans to the Company. The President
and Chief Executive Officer will be provided Common Stock warrant coverage
equal to 25% of the value committed under the guarantee. Presently, bank
loans have been applied for but are not yet completed.
In connection with the agreement with Scrip Advantage, Scrip Advantage
has agreed to elect a Company designee to its Board of Directors. Initially,
Carey F. Daly II, the President and Chief Executive Officer of the Company, will
be elected to such Board. The Company has advanced
40
<PAGE>
$50,000 to Scrip Advantage in exchange for a demand promissory note. The note is
convertible into equity of Scrip Advantage at the Company's sole option.
The Company believes that the terms of the transactions with affiliates
of the Company are fair and reasonable in light of prevailing market conditions
at the time when such arrangements were implemented and in light of the
circumstances under which such arrangements were made. The disinterested members
of the Board of Directors will continue to review any ongoing relationships with
such affiliates to assure that such transactions are consistent with the
fiduciary duties of the directors to the stockholders of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this Report:
- ------- -----------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company(1)
- ------- -----------------------------------------------------------------------
3.2 Amended and Restated By-Laws of the Company(1)
- ------- -----------------------------------------------------------------------
3.3 Certificate of Designations for Series A Preferred Stock of the
Company(2)
- ------- -----------------------------------------------------------------------
3.4 Form of Common Stock Purchase Warrant(2)
- ------- -----------------------------------------------------------------------
4.1 Form of Subscription Agreement for the shares of Common Stock sold
during the 1998 private placement(3)
- ------- -----------------------------------------------------------------------
10.1 Joint Marketing and Servicing Agreement, dated as of February 19, 1998,
between First Hawaiian Bank and The Pathways Group, Inc.(1)
- ------- -----------------------------------------------------------------------
10.2 Development Agreement, dated as of June 5, 1995, between Stephen A.
Gregg and The Pathways Group, Inc.(1)
- ------- -----------------------------------------------------------------------
10.3 Authorization and Loan Agreement (Guaranty Loans) , dated February 13,
1992, among Towne Bank of Woodinville, U.S. Small Business
Administration and Pathways International Ltd.(1)
- ------- -----------------------------------------------------------------------
10.4 Restructure and Extension Agreement, dated as of July 1, 1996, between
SeaFirst Bank and The Pathways Group, Inc. and Pathways International
Ltd.(1)
- ------- -----------------------------------------------------------------------
10.5 Restructure and Extension Agreement, dated as of July 1, 1997, between
SeaFirst Bank and PT Link Corporation and The Pathways Group, Inc.(1)
- ------- -----------------------------------------------------------------------
10.6 Schlumberger Associate Program Agreement, dated June 16, 1997, between
Schlumberger Technologies, Inc. and The Pathways Group, Inc., together
with Addendum No. 1 thereto(3)
- ------- -----------------------------------------------------------------------
10.7 Executive Employment Agreement, dated as of November 1, 1999, between
The Pathways Group, Inc. and Carey F. Daly, II (filed herewith)
- ------- -----------------------------------------------------------------------
10.8 Executive Employment Agreement, dated as of February 8, 2000, between
The Pathways Group, Inc. and Charles W. Dunn (filed herewith)
- ------- -----------------------------------------------------------------------
41
<PAGE>
- ------- -----------------------------------------------------------------------
10.9 Executive Employment Agreement, dated as of February 14, 2000, between
The Pathways Group, Inc. and Robert Boeck (filed herewith)
- ------- -----------------------------------------------------------------------
10.10 Executive Employment Agreement, dated as of November 1, 1999, between
The Pathways Group, Inc. and Monte Strohl (filed herewith).
- ------- -----------------------------------------------------------------------
10.11 Executive Employment Agreement, dated as of November 1, 1999, between
The Pathways Group, Inc. and Robert W. Haller (filed herewith).
- ------- -----------------------------------------------------------------------
10.12 Executive Employment Agreement, dated as of November 1, 1999, between
The Pathways Group, Inc. and Christopher R. Miller (filed herewith)
- ------- -----------------------------------------------------------------------
10.13 Letter of Intent, dated December 12, 1997, from The Pathways Group,
Inc. and The Department of Education, State of Hawaii(4)
- ------- -----------------------------------------------------------------------
10.14 Equipment Lease Agreement, dated August 25, 1997, between Union Bank of
California, N.A., and The Pathways Group, Inc., together with Addendums
A and B dated September 16, 1997, Conditional Sales Lease dated
September 8, 1997 and Covenant Agreement, dated February 25, 1998(4)
- ------- -----------------------------------------------------------------------
10.15 Master Project Agreement, dated June 19, 1998, between Scrip Advantage,
Inc. and The Pathways Group, Inc., together with a Promissory Note,
dated June 19, 1998, given by Scrip Advantage, Inc. to The Pathways
Group, Inc.(4)
- ------- -----------------------------------------------------------------------
10.16 Covenant Agreement, dated August 13, 1998, between Union Bank of
California and The Pathways Group, Inc.(3)
- ------- -----------------------------------------------------------------------
10.17 Placement Agency Agreement, dated July 22, 1998 between The Pathways
Group, Inc. and Allen & Company Incorporated(3)
- ------- -----------------------------------------------------------------------
10.18 Amended and Restated Stock Incentive Plan(3)
- ------- -----------------------------------------------------------------------
10.19 Directors Stock Option Plan(5)
- ------- -----------------------------------------------------------------------
10.20 Letter of Intent, dated November 4, 1998, between The Pathways Group,
Inc. and LinkOpp Marketing, Inc.(5)
- ------- -----------------------------------------------------------------------
10.21 Letter of Intent, dated February 1, 1999, between The Pathways Group,
Inc. and Consolidated Amusement Company, Inc.(5)
- ------- -----------------------------------------------------------------------
10.22 Amended Bank Lease Agreement dated as of June 22, 1999, between Union
Bank of California and the Pathways Group, Inc.(2)
- ------- -----------------------------------------------------------------------
10.23 Agreement, dated July 20, 1999, between Hawaiian Millenium Commission
and The Pathways Group (Hawaii)(2)
- ------- -----------------------------------------------------------------------
10.24 License Agreement, dated May 13, 1999, between Proton World
International S.A. and the Pathways Group, Inc. (filed herewith)
- ------- -----------------------------------------------------------------------
21 Subsidiaries of Registrant (filed herewith)
- ------- -----------------------------------------------------------------------
27 Financial Data Schedule (filed herewith)
- ------- -----------------------------------------------------------------------
- ----------
1 Incorporated herein by reference to the exhibit contained in the
Company's Registration Statement on Form 10SB under the Securities
Exchange Act of 1934, as amended, filed with the Securities and
Exchange Commission on April 29, 1998.
2 Incorporated herein by reference to the exhibit contained in the
Company's Quarterly Report in Form 10- QSB, for the fiscal quarter
ended June 30, 1999.
42
<PAGE>
3 Incorporated by reference to the exhibit contained in the Company's
Registration Statement on Form SB-2 under the Securities Act of 1933,
as amended, filed with the Securities and Exchange Commission on
September 24, 1998.
4 Incorporated herein by reference to the exhibit contained in the
Company's Registration Statement on Form 10SB/A-1 under the Securities
Exchange Act of 1934, as amended, filed with the Securities and
Exchange Commission on August 7, 1998.
5 Incorporated herein by reference to the exhibit contained in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed with the Securities and Exchange Commission on March
31, 1999.
(b) REPORTS ON FORM 8-K
None.
43
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT
ACCOUNTANTS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
The Pathways Group, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
The Pathways Group, Inc. and Subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has incurred recurring losses and negative
cash flows from operations and has deficits in working capital. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
April 12, 2000
F-1
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 645,065 $ 4,628,544
Accounts receivable 5,523 102,793
Inventories 338,438 361,467
Prepaid expenses and other current assets 260,664 168,779
------------ ------------
TOTAL CURRENT ASSETS 1,249,690 5,261,583
------------ ------------
Restricted cash 272,000 222,000
Software, net of accumulated amortization of $3,292,221
and $2,528,560 666,283 1,256,020
Property and equipment, net 1,003,231 1,100,061
Software license 1,000,000 --
Deposits and other assets 85,481 139,024
------------ ------------
TOTAL ASSETS $ 4,276,685 $ 7,978,688
------------ ------------
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks, current maturities $ 108,908 $ 336,947
Accounts payable 319,646 251,140
Accrued expenses and unearned revenue 552,368 854,030
Software license fee payable 700,000 --
------------ ------------
TOTAL CURRENT LIABILITIES 1,680,922 1,442,117
Notes payable to banks, net of current maturities 60,781 170,903
------------ ------------
TOTAL LIABILITIES 1,741,703 1,613,020
------------ ------------
Commitments and contingencies
MANDITORILY REDEEMABLE PREFERRED STOCK
Preferred stock, Series A mandatorily redeemable,
$.01 par value; 1,000,000 shares authorized;
300,000 shares issued and outstanding; aggregate
liquidation preference of $3,075,000 1,489,527
------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 50,000,000 shares
authorized; 14,410,862 and 13,565,662 shares
issued and outstanding, respectively 144,109 135,657
Additional paid in capital 30,639,640 26,439,081
Unearned compensation (495,833)
Accumulated deficit (29,242,461) (20,209,070)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,045,455 6,365,668
------------ ------------
TOTAL LIABILITIES, MANDITORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 4,276,685 $ 7,978,688
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales, net $ 186,309 $ 76,565 $ 61,785
Cost of goods sold 63,469 34,863 19,492
Write-off of inventories 132,000
Selling, general and administrative expenses 7,142,012 5,918,513 2,673,507
Research & development 599,746 474,120 102,000
Amortization of software 766,877 621,642 593,459
Depreciation 484,899 364,144 208,814
------------ ------------ ------------
TOTAL OPERATING EXPENSES 9,189,003 7,413,282 3,597,272
------------ ------------ ------------
LOSS FROM OPERATIONS
(9.002,694) (7,336,717) (3,535,487)
============ ============ ============
Other income (expense)
Interest income, net 44,303 84,256 (51,034)
Loan guarantee fees to stockholder -- -- --
------------ ------------ ------------
NET LOSS (8,958,391) (7,252,461) (3,586,521)
============ ============ ============
Basic and diluted net loss per share $ (0.68) $ (0.55) $ (0.30)
Shares used in per share calculation 13,615,613 13,148,939 12,102,755
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDING DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
---------- ---------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 11,756,004 $ 117,560 $ 12,214,123 $ (9,370,088) $ 2,961,595
Redemption of common stock for cash (33,737) (337) (27,663) (28,000)
Issuance of common stock for
convertible debenture 3,000 30 2,970 3,000
Issuance of common stock upon exercise
of stock options and warrants 345,887 3,459 1,013,677 1,017,136
Net proceeds from initial public
offering of common stock 833,333 8,333 4,849,623 4,857,956
Net loss (3,586,521) (3,586,521)
---------- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1997 12,904,487 129,045 18,052,730 (12,956,609) 5,225,166
Net proceeds from private placement of
common stock 654,508 6,545 8,379,284 8,385,829
Issuance of common stock upon exercise
of stock options 6,667 67 7,067 7,134
Net loss (7,252,461) (7,252,461)
---------- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1998 13,565,662 135,657 26,439,081 (20,209,070) 6,365,668
Net proceeds from private placement of
common stock 845,200 8,452 2,143,223 2,151,675
Value ascribed to warrants issued in
conjunction with sale of mandatorily
redeemable preferred stock 1,445,244 1,445,244
Warrants issued for placement fees 253,681 253,681
Accretion of manditorily redeemable
preferred stock (166,589) (166,589)
Preferred stock dividends (75,000) (75,000)
Unearned compensation 525,000 $ (525,000)
Amortization of unearned compensation 29,167 29,167
Net loss (8,958,391) (8,958,391)
---------- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1999 14,410,862 $ 144,109 $ 30,639,640 $ (495,833) $(29,242,461) $ 1,045,455
========== ========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,958,391) $(7,252,461) $(3,586,521)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 484,899 364,144 208,354
Amortization 796,372 621,642 593,459
Write-off of inventories 132,000 -- --
Write-off of note receivable 50,000 -- --
Effects of changes in operating assets and liabilities
Accounts receivable 97,270 (36,300) 36,018
Inventories (108,971) (158,718) 56,963
Prepaid expense and other current assets (91,885) (67,372) (101,407)
Other assets (18,917) (137,913)
Accounts payable 68,506 44,154 (335,404)
Accrued expenses and unearned revenue (301,662) 631,233 (120,839)
----------- ----------- -----------
Net cash used in operating activities (7,831,862) (5,872,595) (3,387,290)
=========== =========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (388,069) (623,439) (542,752)
Capitalized software development costs (173,924) (272,564) (439,707)
Restricted cash (50,000) (151,500) (70,500)
Advance to Scrip Advantage -- (50,000) --
Software licenses (300,000) -- --
----------- -----------
----------- ----------- -----------
Net cash used in investing activities (911,993) (1,097,503) (1,052,959)
=========== =========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable to banks
(338,162) (554,041) (34,750)
Principal payments on notes payable to stockholders -- -- (2,500)
Redemption of common stock -- -- (28,000)
Proceeds from issuance of mandatorily preferred
stock, net of cash offering costs of $265,214 2,946,863 -- --
Net proceeds from issuing common stock, net of
offering costs of $150,000, $597,980, and $142,040
for 1999, 1998 and 1997 respectively 2,151,675 8,392,963 5,875,092
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES
4,760,376 7,838,922 5,809,842
=========== =========== ===========
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,983,479) 868,824 1,369,593
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,628,544 3,759,720 2,390,127
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 645,065 $ 4,628,544 $ 3,759,720
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION:
THE COMPANY
The accompanying consolidated financial statements include the accounts of
The Pathways Group, Inc. ("TPG") and its wholly-owned and majority-owned
subsidiaries. All intercompany balances and transactions have been
eliminated. TPG's subsidiaries include Pathways International, Ltd.
("PIL"), SPRINTICKET, Inc. ("ST"), PT Link, Inc. ("PT Link") and The
Pathways Group, a wholly-owned subsidiary incorporated in the state of
Hawaii in August of 1997. TPG and its subsidiaries (the "Company") are
primarily engaged in providing specialized transaction processing services
through the development of proprietary software and hardware systems
including credit card and multiple application smart card technologies. The
Company derives its revenue principally from transaction processing fees
charged to the merchant and the sale of related terminals, hardware systems
and smart cards.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern and do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets and liabilities that may result from this uncertainty. The Company has
incurred substantial operating loses during the last three years as a result of
its research and development efforts. In addition, the Company has also
experienced negative cash flows from operations and its balance sheet reflects a
deficit in working capital at December 31, 1999. These matters raise substantial
doubt about the Company's ability to continue as a going concern, without
additional financing.
The Company has required substantial working capital to fund its operations. To
date, the Company has financed its operations principally through the net
proceeds from its initial public offering and other debt and equity financings.
The Company's ability to continue as a going concern is dependent upon numerous
factors, including its ability to obtain additional financing, its ability to
increase its level of future revenues or its ability to reduce operating
expenses.
Management has made the following arrangements to obtain sufficient funds to
satisfy the Company's cash requirements:
The Company has engaged an investment banking firm to conduct a best
efforts basis offering of shares of the Company's common stock for gross
proceeds of up to $15,000,000. The offering requires the filing of a
registration statement and registration of a sufficient number of shares of the
Company's common stock to cover the shares to be issued under the offering. The
purchase price of the shares to be sold under the offering will be 90% of
average daily prices as defined in the agreement.
In addition, the investment bank has offered a $1,500,000 bridge loan
to be funded on a best efforts basis.
The President and Chief Executive Officer of the Company has committed
to provide the Company with his personal guarantee of up to $3,000,000 to
support bank loans to the Company. The President will be provided common stock
warrant coverage equal to 25% of the value committed under the guarantee.
Presently, bank loans have been applied for but are not yet completed.
In the event that the above financings are not completed or are not
sufficient in amount or timeliness, the Company has identified reductions in
staffing, rent and other expenses to be made if necessary.
There can be no assurance that the Company will be able to obtain additional
financing, reduce expenses or successfully complete other steps to continue as a
going concern. If the Company is unable to obtain sufficient funds to satisfy
its cash requirements, it may be forced to curtail operations, dispose of
assets, or seek extended payments terms from its vendors. Such events would
materially and adversely affect the Company's financial position and results
of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt securities purchased with an original
maturity of three months or less to be cash equivalents. As of December 31,
1999 and 1998, cash equivalents consisted of money market accounts
principally invested in U.S.
government obligations.
RESTRICTED CASH
The Company entered into an operating lease agreement whereby the Company
is required to maintain a certificate of deposit at the bank as collateral
for the lease. As of December 31, 1999 $272,000 has been classified as
restricted cash.
INVENTORIES
Inventories are stated at the lower of cost (as determined by the first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is provided
by the straight-line method over the estimated useful lives of the property
and equipment which is estimated to be five years, with the exception of
computer equipment as to which the life is three years. Leasehold
improvements are amortized over the lesser of the estimated useful lives of
the improvement or the related lease term. Expenditures for renewals and
betterments are capitalized; expenditures for maintenance and repairs are
charged to expense as incurred. The cost and accumulated depreciation of
assets sold or otherwise disposed of are removed from the accounts, and the
related gains and losses are included in the results of operations.
F-6
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SOFTWARE
Software development costs incurred in conjunction with product development
are charged to expense until technological feasibility is established.
Thereafter, all software development costs are capitalized and reported at
the lower of unamortized cost or net realizable value of each product. The
establishment of technological feasibility and the on-going assessment of
the recoverability of costs require considerable judgement by the Company
with respect to certain external factors, including, but not limited to,
anticipated future gross product revenues, estimated economic life and
changes in software and hardware technology. After consideration of the
above factors, the Company amortizes capitalized software costs by the
greater of (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product
or (b) the straight-line method over the remaining estimated economic life
of the product including the period being reported on, ranging from three
to five years.
In 1999, the Company changed the estimate of economic useful lives of
capitalized software costs for certain applications from five years to
three years due to new information and developments arising from customer
negotiations. The effect of this change on 1999 results of operations was
to increase net loss by approximately $206,000 or $.015 per share.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred in accordance with
Statement of Financial Standards (SFAS) No. 2, Accounting for Research and
Development Costs.
INCOME TAXES
Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is recorded for the amount of income tax
payable or refundable for the period, increased or decreased by the changes
in deferred tax assets and liabilities during the period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents and accounts receivable
approximate fair value due to their short-term maturities. The carrying
value of mandatorily redeemable preferred stock and debt approximate
estimated fair value because the rates of interest on the debt approximate
current interest rates for similar obligations with like maturities.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its cash with high quality financial
institutions. At times, such cash may exceed federally insured limits.
F-7
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION AND REVENUE SHARING AGREEMENTS
Revenue from hardware and software sales are recognized when a product is
shipped. The revenue for sales of ticket dispensers and manager
workstations are recognized when on site installation is completed. The
Company has revenue sharing and transaction processing agreements with
merchants who process commercial transactions through the Company's
hardware and software systems provided on site to the merchants.
Transaction processing fee revenue is recognized at the time transactions
processing services are performed and earned. Revenues collected for
warranty services to be performed in the future are deferred and recognized
ratably over the related contract period.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates and assumptions.
It is reasonably possible that the estimates of anticipated future gross
revenues and the remaining estimated economic lives used to calculate
depreciation and amortization of the Company's long lived assets and
software may be reduced significantly in the near term. As a result, the
carrying amount of the capitalized software costs ($666,283) 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.
NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 (SFAS NO. 128),
"Earning per share," requires the presentation of basic and diluted
earnings (loss) per share for all periods presented.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted average number of shares of common stock outstanding
during the period. Basic and diluted net loss per share are the same for
all periods presented because impact of common stock equivalents is
antidilutive.
A reconciliation of net loss used in the calculation of basic and diluted
net loss per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Loss $ (8,958,391) $ (7,252,461) $ (3,586,521)
Accretion of manditorily redeemable
convertible preferred stock (166,589)
Preferred stock dividends (75,000)
------------ ------------ ------------
Net loss for common stock $ (9,199,980) $ (7,252,461) $ (3,586,521)
============ ============ ============
Weighted average shares of common stock 13,615,613 13,148,939 12,102,755
outstanding
Basic and diluted net loss per share $ (0.68) $ (0.55) $ (0.30)
</TABLE>
F-8
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Comprehensive Income". This statement establishes standards for reporting
and display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes items such as foreign
currency translation adjustments. Management believes this standard is not
applicable as the Company does not have any items in its financial
statements meeting the criteria for comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public
companies report information about operating segments. This statement,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers and
the major countries in which the Company holds assets and reports revenues.
Management believes this standard is not applicable as the Company
currently operates as one segment.
3. INVENTORIES:
Inventories at December 31,1999 and 1998 consisted of the following:
1999 1998
-------- --------
Smart cards and related packaging $ 74,705 $158,917
Smart card terminals 72,840 61,846
Assembled unattended kiosks and components 190,893 140,704
-------- --------
$338,438 $361,467
======== ========
In 1999, the Company wrote off $132,000 of smart card inventory.
F-9
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1999 and 1998 consisted of the
following:
1999 1998
----------- -----------
Ticket dispensing systems $ 476,318 $ 476,318
Computer equipment and software 1,215,136 853,670
Furniture and fixtures 220,023 211,360
Leasehold improvements 348,474 334,461
----------- -----------
2,259,951 1,875,809
Less accumulated depreciation and amortization (1,256,720) (775,748)
----------- -----------
$ 1,003,231 $ 1,100,061
=========== ===========
5. NOTE RECEIVABLE:
In 1998 the Company advanced $50,000 to Scrip Advantage, Inc. in exchange
for a demand note receivable with interest bearing at 10%, which is
included in deposits and other assets in the accompanying consolidated
balance sheet. The note receivable is convertible into common stock of
Scrip Advantage at the Company's option. As of December 31, 1999, the
Company has determined that the receivable was not collectible, and the
amount was written off as bad debt expense in Selling General and
Administrative Expense.
F-10
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. NOTES PAYABLE TO BANKS:
Notes payable to banks at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Note payable to bank, interest at bank's prime rate (7.75% at December 31,
1998) plus 1.5%, principal due in various Installments from May 1998
through February 1999, interest due monthly, guaranteed by certain
stockholders and Collateralized by substantially all of the assets of PIL - $ 130,000
Note payable to bank, interest at prime (7.75% at December 31, 1998) plus
1.5%, principal due in various installments from February 1998 through May
1, 1999 (however, the note payable will be due in full upon sale or
transfer of either a Controlling ownership interest in PT Link or
substantially all of PT Link's assets occurring prior to May 1, 1999),
interest due monthly and collateralized by substantially all of the
assets of PT Link - 110,000
Note payable to bank, interest at 10.5%,
principal due in various installments
from February 1998 through September 2001, interest due
monthly, guaranteed by certain stockholders and
Collateralized by substantially all of the assets of PIL $ 169,689 267,850
---------- ----------
507,850
Less current maturities (108,908) (336,947)
---------- ----------
$ 60,781 $ 170,903
========== ==========
</TABLE>
The contractual principal maturities of notes payable to banks at December
31, 1999 are as follows:
2000 $108,908
2001 60,781
--------
$169,689
========
F-11
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. ACCRUED EXPENSES AND UNEARNED REVENUE:
Accrued expenses and unearned revenue at December 31, 1999 and 1998
consisted of the following:
1999 1998
-------- --------
Interest payable $ -- $ 1,912
Accrued payroll, bonus, and related taxes 360,815 599,339
Insurance premium payable 120,197 90,262
Other accrued expenses 65,906 159,122
Unearned revenue 5,450 3,395
-------- --------
$552,368 $854,030
======== ========
8. SOFTWARE LICENSE AGREEMENT:
In May 1999, the Company entered into a License Agreement (the "Agreement")
with Proton World International S.A. As of December 31, 1999 licensing fees
of $1,000,000 have been capitalized as Software License in the balance
sheet. This amount include $925,000 of license fees and $75,000 of implied
maintenance fees. Of this $1,000,000, $300,000 was due and paid at the time
of the signing of the agreement. The remaining balance of the licensing
fees are payable upon the initiation of a pilot project and upon the
rollout of the project as defined in the Agreement.
The Company's amortization of the $925,000 license fees will be the greater
of the straight line amortization over 2 years, or $0.37 per smart card
sold. The amortization of the implied maintenance fees will be straight
line over a 6 month period. There was no amortization expense recorded for
the year ended December 31, 1999, as the testing and acceptance of the
system had not been completed and the underlying system had not been placed
into service.
F-12
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME TAXES:
At December 31, 1999, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $28,500,000 which expire
through 2019. As a result of acquisitions, the availability of these net
operating losses to offset future taxable income will be limited to a
prescribed amount each year as specified in the Internal Revenue Code. Net
operating losses accumulated through the dates of acquisition for companies
acquired may be limited to their separate taxable income.
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate of 34%:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax benefit at statutory rate $(3,045,853) $(2,465,837) $(1,219,417)
Losses which provide no current tax benefit 3,037,701 2,458,918 1,215,851
Other, net 8,152 6,919 3,566
----------- ----------- -----------
Income tax benefit $ -- $ -- $ --
=========== =========== ===========
</TABLE>
Deferred income taxes under the liability method reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes.
F-13
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME TAXES: (CONTINUED)
The significant components of the Company's deferred income tax assets and
liabilities at December 31, 1999 and 1998 are as follows:
1999 1998
------------ ------------
Deferred income tax assets:
Tax loss carryforwards $ 9,766,907 $ 5,929,544
Debt guarantee fees to stockholder 439,466 439,466
Accrued compensation 111,246 204,150
Depreciation -- 50,615
Other 127,078 --
------------ ------------
Deferred income tax assets 10,444,697 6,623,775
------------ ------------
Deferred income tax liability:
Depreciation 69,024 --
Other 1,222 1,222
------------ ------------
Deferred income tax liability 70,246 1,222
------------ ------------
Valuation allowance (10,374,451) (6,622,553)
------------ ------------
Net deferred income tax assets $ -- $ --
============ ============
A full valuation allowance has been recorded at December 31, 1999 and 1998
based on management's determination that the recognition criteria for
realization have not been met.
F-14
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMITMENTS:
LEASE COMMITMENTS
The Company leases its facilities in Woodinville, WA, Santa Rosa, CA and
Honolulu, HI and also leases certain vehicles and office equipment under
operating lease agreements expiring in the years 2000 to 2004. In 1997, the
Company entered into a master lease agreement with a bank that provides up
to $400,000 of credit to the Company for the lease of certain computer and
office equipment and furniture. The lease is for a period of 34 months and
contains an option to acquire the equipment at the end of the lease term
for the fair market value of the equipment. The lease provisions require
the Company to maintain $200,000 in a certificate of deposit at the bank as
collateral for the lease, and to deposit additional funds if the Company's
cash and cash equivalents are not maintained above $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.
As of December 31, 1999 $272,000 has been classified as restricted cash. In
March 2000, the Company terminated this lease obligation and purchased the
assets underlying the lease for $209,742. In connection with the
termination of the lease the Bank released $40,258 of the Company's
deposit.
The leases above and other equipment leases have been accounted for as
operating leases. As of December 31, 1999 the Company has drawn all
$400,000 of the lease line. The approximate future minimum rental
commitments as of December 31, 1999 under all operating leases are as
follows:
2000 $ 578,000
2001 429,000
2002 307,000
2003 117,000
2004 20,000
-----------
$ 1,451,000
===========
Lease expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $603,000, $463,000, and $147,000 respectively.
11. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS:
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain employees
and officers. The agreements provide for future salary, benefits and stock
option grants to the employee/officers during their terms of employment.
The agreements also contain non-compete restrictions on the
employee/officers and provide for certain severance obligations in the
event of termination with cause (as defined). In addition, one of the
officers receives one-half share of TPG common stock for each dollar of
debt personally guaranteed by the officer.
F-15
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS: (CONTINUED)
STOCK OPTIONS
In December 1997, the Company's Board of Directors adopted The Pathways
Group, Inc. 1996 Stock Incentive Plan (the "Plan"), which provides for the
issuance of incentive stock options ("ISOs") and non-qualified options to
key management and reserved a total of 2,000,000 shares of common stock
pursuant to the Plan.
ISOs may be issued to employees of the Company and have a maximum term of
10 years from the date of the grant. The exercise price for ISOs may not be
less than 100% of the estimated fair market value of common stock at the
time of the grant, and the aggregate fair market value (as determined at
the date of the grant) of shares issuable upon the exercise of ISOs for the
first time by an employee in any one calendar year may not exceed $100,000.
In the case of options granted to holders of more than 10% of the voting
power of the Company, the exercise price may not be less than 110% of the
estimated fair market value of the common stock at the time of grant, and
the term of the option may not exceed five years. Options become
exercisable in whole or in part from time to time as determined by the
Board of Directors, which will administer the Plan.
Generally, options vest over periods ranging from one to three years.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock Based Compensation". The Company has elected to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair value of the
Company's stock at the date of grant over the exercise price to be paid to
acquire the stock.
In December 1998, the Company adopted the Pathways Group, Inc. Directors
stock option plan to assist the Company in attracting and retaining outside
directors. The terms of the plan reserve a total of 100,000 shares of
common stock for issuance to outside non-employee directors. Initial grants
of options to acquire 10,000 shares were granted to three non-employee
directors in December 1998.
F-16
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS: (CONTINUED)
STOCK OPTIONS (CONTINUED)
Option activity for each of the three years ended December 31, 1999 is as
follows:
WEIGHTED
SHARES AVERAGE
EXERCISE PRICE
Balance December 31, 1996 230,000 $ 2.83
Granted 214,000 19.79
Exercised (10,001) 1.71
Cancelled (6,666) 3.00
---------- ---------
Balance December 31, 1997 427,333 11.35
Granted 84,000 14.88
Exercised (6,667) 1.07
Cancelled (57,000) 24.00
---------- ---------
Balance December 31, 1998 447,666 10.55
Granted 979,862
5.32
Exercised 0
Cancelled (161,245) 13.04
---------- ---------
Balance December 31, 1999 1,266,283 $ 6.18
========== =========
No compensation expense has been recorded for options granted in 1998 and
1997 because the exercise price of the options granted was equal to the
fair value of the related shares based upon the price of the Company's
common stock. During 1999, the Company granted options to employees with
exercise prices less than the fair value of the related shares based upon
the price of the Company's common stock. This resulted in recording
unearned compensation of $525,000, which is being amortized over the
vesting period of the individual options using the straight-line basis.
Compensation expense of $29,167 was recognized in 1999.
F-17
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS: (CONTINUED)
STOCK OPTIONS (CONTINUED)
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------------------------
ACTUAL EXERCISE NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
PRICES OF AVERAGE AVERAGE OF AVERAGE
SHARES EXERCISE PRICES REMAINING SHARES EXERCISE PRICES
CONTRACTUAL
LIFE (IN YEARS)
<S> <C> <C> <C> <C> <C>
$1.07 6,666 $ 1.07 7 6,666 $ 1.07
$2.75 - $3.00 807,000 $ 3.00 9 200,000 $ 3.00
$7.75 - $9.875 285,784 $ 8.97 9 0 $ --
$12.00 - $15.00 120,333 $ 14.33 8 46,999 $13.64
$24.00 46,500 $ 24.00 8 43,500 $24.00
--------------- --------- ---------- ---------- ------
1,266,283 $ 6.18 297,165 $ 7.71
========= ========== ========== ======
</TABLE>
Pro forma information regarding the net loss is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee
stock options granted after December 31, 1995 under the fair value method
of that statement.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
following table presents pro forma net loss and net loss per share for the
year ending December 31,1999 and 1998 as if the Company accounted for
compensation expense related to stock options under the fair value method
prescribed by SFAS 123:
DECEMBER 31, DECEMBER 31,
1999 1998
Pro forma net loss $(10,067,227) $(8,514,217)
Pro forma net loss per share $ (0.75) $ (0.65)
F-18
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS: (CONTINUED)
STOCK OPTIONS (CONTINUED)
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option pricing model under the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Risk free interest rate 5.07% to 6.13% 4.13% to 5.61% 5.79% to 5.93%
Expected lives 3 to 5 years 3 to 5 years 3 to 5 years
Volatility 98% 83% 55%
Expected dividend rate 0 0 0
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997,
as calculated using the Black-Scholes option pricing model, was $4.05,
$9.28 and $9.85 per option respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Weighted average fair value of options granted
with exercise price less than the fair value of $1.92 $ - $ -
the stock on the date of grant
Weighted average fair value of options granted
with exercise price equal to the fair value of $7.29 $ 9.28 $ 9.85
the stock on the date of grant
Weighted average exercise price of options
granted with exercise price less than the fair $3.00 $ - $ -
value of the stock on the date of grant
Weighted average exercise price of options
granted with exercise price equal to the fair $5.92 $ 10.55 $ 11.35
value of the stock on the date of grant
</TABLE>
11. CAPITAL STOCK TRANSACTIONS:
COMMON STOCK
In July 1997, the Company sold 833,333 shares of common stock in an initial
public offering at $6.00 per share. The net proceeds from the offering were
$4,857,956.
In July and August of 1998, the Company sold 654,508 shares of common stock
through a private placement at $13.75 per share. The net proceeds from the
sale shares were $8,385,829.
In November 1999, the Company sold 845,200 shares of common stock through a
private placement at $2.73 per share. The net proceeds from the offering
were $2,151,675.
F-19
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. CAPITAL STOCK TRANSACTIONS: (CONTINUED)
PREFERRED STOCK
In August 1999, the Company entered into an agreement with an investment
bank, 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 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 required the Company to issue
300,000 shares of preferred stock and warrants to purchase 1,200,000
shares. The preferred stock is redeemable at any time, but no later than
December 31, 2001; requires quarterly dividends payable at 6 percent per
annum or an in kind dividend at a rate of 10 percent per annum; contains
provisions relating to preferential liquidation rights, voting rights for
the warrants issuable under the preferred stock and registration
provisions.
In accordance with generally accepted accounting principles, the Company
has allocated the proceeds from the sale of preferred stock between the
common stock warrants issued and the redeemable preferred stock based on
their relative fair market values. Accordingly, the Company has recorded
$1,445,244 as discount on preferred stock and as additional paid in
capital. In addition, the Company has recorded the estimated fair value of
warrants issued for investment banking services of $253,681 as offering
costs of preferred stock and additional paid in capital. The difference
between the recorded amount of preferred stock and the amount mandatorily
redeemable on December 31, 2001 is being amortized through periodic
accretion, using the effective interest method, which increases preferred
stock and reduces additional paid in capital. The following table
summarizes the recording of the sale of redeemable preferred stock and the
balance as of December 31, 1999:
<TABLE>
<S> <C>
Gross proceeds $ 3,000,000
Discounts recorded on preferred stock (1,445,244)
Cash paid for offering costs (53,137)
Value of warrants issued for investment banking fee (253,681)
-----------
Preferred stock at issuance 1,247,938
Accretion of preferred stock 166,589
Dividend shares issued 75,000
-----------
Preferred stock balance at December 31, 1999 $ 1,489,527
===========
Paid in Capital
Increase in paid in capital for value of warrants issued to investors $ 1,445,244
Increase in paid in capital for value of warrants issued for investment banking 253,681
services
Accretion on preferred stock (166,589)
-----------
Net increase in paid in capital $ 1,532,336
===========
</TABLE>
F-20
<PAGE>
THE PATHWAYS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash paid during the year for interest $ 37,695 $ 98,227 $ 241,637
Non-cash transactions:
Notes payable converted to common stock 3,000
Proton License agreement 700,000
Value ascribed to warrants issued in conjunction with 1,445,244
sale of preferred stock
Accretion of manditorily redeemable preferred stock (166,589)
Warrants issued for placement fees 253,681
Unearned compensation 525,000
Dividends in kind shares on Series A Preferred Stock (75,000)
</TABLE>
13. RELATED PARTY TRANSACTIONS:
In 1998, the Company paid a total of $505,602 to Allen and Company
Incorporated, a shareholder, and Mitchum, Jones and Templeton, whose chief
executive officer is a director and stockholder of the Company for
investment banking services and direct expenses in connection with the
Company's private placement.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
April 14, 2000 By: /s/ CAREY F. DALY, II
------------------------------------------
Carey F. Daly, II
President, Chief Executive Officer and
Chairman of the Board (principal executive
officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ CAREY F. DALY, II President, Chief Executive April 14, 2000
- ----------------------------- Officer, Chairman of the
Carey F. Daly, II Board and Director
/s/ CHARLES W. DUNN Chief Financial Officer and April 14, 2000
- ----------------------------- Director
Charles W. Dunn
/s/ ROBERT E. BOECK Director April 14, 2000
- -----------------------------
Robert E. Boeck
/s/ ROBERT J. FISHMAN Director April 14, 2000
- -----------------------------
Robert J. Fishman
/s/ ROBERT W. HALLER Director April 14, 2000
- -----------------------------
Robert W. Haller
<PAGE>
Signature Title Date
--------- ----- ----
/s/ GLENN A. OKUN Director April 14, 2000
- -----------------------------
Glenn A. Okun
/s/ MARK T. SCHUUR Director April 14, 2000
- -----------------------------
Mark T. Schuur
/s/ MONTE P. STROHL Director April 14, 2000
- -----------------------------
Monte P. Strohl
Director
- -----------------------------
Linda Wing
<PAGE>
Exhibit 10.7
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement between The Pathways Group, Inc. (hereinafter
the "Company") and Carey F. Daly II, its President, Chief Executive Officer and
Chairman of the Board of Directors of the Corporation (hereinafter "Daly"),
effective as of November 1, 1999, is made for good and sufficient consideration,
as reflected in the mutual promises, covenants, obligations, undertakings and
conditions set forth below:
1. POSITION AND DUTIES:
(a) RESPONSIBILITIES AND AUTHORITY:
The Company shall employ Executive as President, Chief Executive
Officer and Chairman of the Board. Daly shall have the full responsibilities,
duties and authorities of the Company's President, Chief Executive Officer and
Chairman of the Board.
(b) RIGHT TO APPOINT EXECUTIVES:
In the event of a Change of Control of the Company, and as a condition
of agreeing to remain as President and Chief Executive Officer, Daly shall have
the exclusive right to appoint executive officers of the Company. "Change of
Control" means any of the events described in subparagraphs (i) through (iv)
below:
(i) The acquisition, after the effective date of this Agreement, by any
Person of Beneficial Ownership of 20 % or more of the Stock or the
Voting Power of the Company, but excluding for this purpose any
acquisition by the Company (or an Affiliate) or by an employee
benefit plan sponsored by the Company (or an Affiliate). When two or
more persons act in concert for the purpose of acquiring Stock or
Voting Power of the Company, such Persons shall be deemed to be a
single Person;
(ii) Individuals who are Incumbent Directors cease to constitute at least
a majority of the Board of Directors of the Company;
(iii) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, if after such transaction, the Persons who
had Beneficial Ownership of the Stock and Voting Power of the Company
before such transaction will not have Beneficial Ownership of at
least 30% of the Stock and Voting Power of the corporation resulting
from such transaction; or
(iv) The sale or other disposition by the Company of 50% or more of the
Stock of the Company, or any other transaction pursuant to which the
Company ceases to control the Company.
2. TERM OF EMPLOYMENT:
Subject to earlier termination as provided in this agreement, Daly
shall be employed for a term of three (3) years, which shall be automatically
extended for additional one (1) year periods
<PAGE>
(such initial term and all extended terms being required to collectively herein
as the "employment term") unless either party gives notice in writing to the
other not less than ninety (90) days before the end of the initial term or
extended term that the employment contract shall not be extended.
3. COMPENSATION:
(a) BASE SALARY: Company shall pay a basic salary to Daly at the rate
of Three Hundred Twenty Five Thousand Dollars ($325,000.00) per year, payable
semi-monthly, in twenty-four (24) equal installments, subject to all
withholdings and deductions required for federal, state and local taxes and
charges and any other withholdings or deductions authorized by Daly. In addition
to the base salary established above, Daly will receive a bonus, payable in
increments as directed by Daly, in the amount of Three Hundred Thousand Dollars
($300,000.00).
(b) AUTOMOBILE ALLOWANCE: The Company shall pay to Daly an annual
Automobile Allowance in the annual amount of Seven Thousand Eight Hundred
Dollars ($7,800.00), payable semi-monthly in twenty-four equal installments,
subject to all withholdings and deductions required for federal, state and local
taxes and charges and any other withholdings authorized by Daly.
(c) STOCK OPTION: In addition to the options awarded under the previous
contract, which options expire on November 1, 2001, The Company shall issue to
Daly options to purchase Two Hundred Thousand (200,000) shares of the Company's
common stock, which options shall vest equally over three (3) years, at an
exercise price of $3.00 per share, pursuant to a stockholders plan intended to
be qualified under Section 422 of the Internal Revenue Code of 1986 and the
regulations promulgated in relation thereto. The plan will expire November 1,
2004. Unexercised options awarded to Daly hereunder shall be subject to
forfeiture as provided in Paragraphs 6 and 7 of this agreement.
4. EMPLOYMENT BENEFITS:
Throughout the employment term, Daly shall be entitled to receive the
employment benefits generally offered to all other executive employees,
including, but not limited to, medical, dental, optical, prescription drugs and
life insurance for Daly and his family, at Company expense, and:
(a) EXECUTIVE COMPENSATION PACKAGE: Enrollment in Executive
Compensation Package.
(b) VACATION: The Company waives its policy on vacations, to allow
for four weeks per year.
(c) LIFE INSURANCE: The Company shall provide and pay for life
insurance on the life of Daly in the amount of three (3) times
his annual salary provided for in this agreement. The
beneficiary shall be Daly's estate, unless otherwise directed
by Daly in writing at any time prior to his death.
2
<PAGE>
(d) STOCK ISSUANCE: The Company and Daly may agree from time to
time, with the approval of the Board of Directors, to issue to
Daly Common Stock of the Company in consideration of such
services or contributions of property as may be deemed
appropriate, and at a value determined by the Board of
Directors in good faith and in compliance with applicable law.
Any such issuance of stock may, at the request of Daly, and
subject to the approval of the Company which may not be
unreasonably withheld, be issued by the Company to such party
or entity, including without limitation, an irrevocable trust
or similar entity, as Daly may at the time of issuance direct.
(e) DISABILITY COMPENSATION:
(1) If Daly becomes disabled at any time, and for any
number of times, due to any cause so that he is
physically unable to perform his ordinary duties and
responsibilities under this agreement, then Daly
shall be entitled to receive, in lieu of salary, an
amount equal to his salary, payable at the same time
and in the same manner as Daly's salary is paid,
provided however, that this benefit shall be limited
to not more than a total of twelve (12) months during
the term of the agreement.
(2) Daly's entitlement to disability income pursuant to
this subparagraph shall begin and end as determined
by a certificate issued by a qualified M.D. or D.O.
licensed by the State of California. The certificate
shall state in substance that, " Daly was determined
to be disabled and unable to perform the ordinary and
usual duties as President, Chief Executive Officer
and Chairman of the Board of Pathways, beginning
[DATE] and Daly's disability continues as of this
[DATE] . Such a certificate shall be submitted every
three (3) months beginning with the date of
disability and continuing thereafter until Daly's
disability ends and he is able to return to work full
time or his disability compensation benefit has been
fully used, whichever occurs first.
5. EXPENSE REIMBURSEMENT:
During the employment term, the Company shall reimburse Daly for
reasonable out-of-pocket expenses incurred in connection with the Company's
business, including travel expenses, food, and lodging when away from home,
subject to such policies as the Company may from time to time reasonably
establish for its employees.
6. LIMITATION ON OUTSIDE ACTIVITIES:
During his employment, Daly shall devote his full occupational time,
energies, abilities, knowledge and experience to the performance of his duties
under this agreement and shall not render to others services of any kind for
compensation or engage in any other business activity without the Company's
prior written consent. Daly shall not, directly or indirectly, whether as a
3
<PAGE>
partner, employee, creditor, shareholder or otherwise, promote, participate or
engage in any business activity competitive with the Company or its
subsidiaries, affiliates, co-venturers, customers or assigns. Daly shall not
take any action to establish, form, assist or become employed by any such
competing business on termination of Daly's employment. Daly's breach of any of
the provisions of this paragraph shall give the Company the right, in addition
to all other remedies the Company may have, to terminate the employment and to
cancel and/or terminate any and all compensation and benefits to which Daly
might otherwise be entitled under this agreement. Pathways hereby expressly
gives permission for Daly to remain as President, Chief Executive and Chairman
of the Board of the following companies:
Pathways International. Ltd.
Sprinticket, Inc.
Pathways Systems, Inc.
The Pathways Group, Inc. (Hawaii)
Nothing in this provision shall prevent Daly from doing software design
and/or software programming for his own use. Such software design or software
programming by Daly for his own use shall not be made available for a commercial
use or a business use by license or sale by other corporations unless it has
first been offered at a fair and reasonable price to this Employer unless and
until this Agreement is terminated as provided in Paragraph 7 of the Agreement.
7. TERMINATION OF EMPLOYMENT:
The employment created by this agreement may be terminated during the
employment term in accordance with the following provisions of this paragraph:
(a) TERMINATION WITHOUT CAUSE BY THE COMPANY: The employment
maybe terminated without cause in the sole and absolute discretion of
the Company upon written notice by the Company to Daly; provided,
however, that if this agreement is terminated pursuant to this
subparagraph, Daly shall receive from Company all salary and benefits
provided under this agreement for six (6) months after the effective
date of the termination. Such salary and benefits shall constitute the
complete and exclusive obligation of the Company for termination of the
employment and for any and all claims of Daly arising out of or in
connection with Daly's employment or the termination thereof.
(b) TERMINATION WITHOUT CAUSE BY DALY: The employment may be
terminated without cause in the sole and absolute discretion of DALY
upon six (6) months' written notice by DALY to the Company, provided,
however, that if this agreement is terminated pursuant to this
subparagraph, DALY shall forfeit any unexercised, vested stock options
under this agreement.
(c) TERMINATION FOR CAUSE BY THE COMPANY: The Company may
terminate the employment at any time upon written notice to DALY if the
Company ceases a substantial portion of its business operation, in the
event of the sale or change of ownership of the
4
<PAGE>
Company or a substantial portion of its assets, or it in the sole and
absolute determination of the Company:
(1) Its business circumstances change so materially that
it is impracticable for the Company to continue using
DALY'S employment services; or Daly's continued
employment would not confer to the Company the
substantial benefit intended to be gained by the
employment; or
(2) DALY breaches his duty of loyalty to the Company or
any material term, promise, covenant, condition,
obligation, undertaking or commitment set out in this
agreement or the Company's operational policies or
procedures, personnel policies or procedures or work
rules; commits any material act of dishonesty or
illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action
against the Company; discloses any trade secret or
confidential or proprietary information of the
Company, its subsidiaries, affiliates, co-venturers,
customers or assigns; is guilty of carelessness,
misconduct, neglect of duty or unsatisfactory work
performance; or acts in any way that significantly
impedes or creates a risk of significant detriment to
the Company's operations, profits, reputation or
other business interests.
Such termination shall be effective immediately upon written notice of
termination.
(d) TERMINATION FOR CAUSE BY DALY: DALY may terminate the
employment at any time upon written notice to Company, if, in the sole
and absolute determination of Daly, the Company breaches any material
term, promise, covenant, condition, obligation, undertaking or
commitment set out in this agreement; commits any material act of
dishonesty or illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action against Daly;
improperly discloses any personal or private information of Daly
protected by any Constitutional or statutory right to privacy; acts in
a manner constituting constructive discharge of Daly; or the Company's
actions or business circumstances or Daly's personal or family
circumstances make it impossible or impracticable for Daly to continue
performing employment services to the Company. Such termination shall
be effective immediately upon written notice of termination.
(e) TERMINATION IN THE EVENT OF DISABILITY: If Daly is unable,
due to mental or physical illness or injury, to substantially perform
his duties under this agreement in a satisfactory manner for a period
of twelve (12) months, the employment shall terminate at the end of
such period.
(f) RELEASE OF CORPORATE OBLIGATIONS GUARANTEED BY DALY: If
Daly's employment with the Company is terminated for any reason,
including acquisition of the Company by outside interests, the Company
shall provide complete and unconditional releases by any and all
creditors of the Company, and its affiliates and subsidiaries, from any
and all personal guarantees executed by Daly and/or his wife, Joan L.
Daly. Said releases shall
5
<PAGE>
include, but are not limited to, releases of any all property, real or
personal, tangible or intangible, from any form of deed of trust,
security agreement, pledge or other encumbrance of any kind given to
secure payment of or performance of any obligations of the Company, its
affiliates and subsidiaries.
8. CONFIDENTIALITY, PROPERTY RIGHTS AND NO SOLICITATION:
(a) CONFIDENTIAL INFORMATION: In the course of his employment
by the Company, Daly will have access to trade secrets and confidential
and proprietary information of the Company, its subsidiaries,
affiliates, co-venturers and customers, including, but not limited to,
personnel, products (developed and under development), proposals,
services, operations, procedures, customers, customer lists, customer
needs, customer contacts, customer relations, customer data and
information, marketing areas, marketing proposals, marketing methods
and plans, business development plans and techniques, business methods
and plans, sales methods and plans, sales figures, sales projections,
price lists, pricing formulae and information, inventions, discoveries,
formulae, patents, trademarks, copyrights, films, scripts, ideas,
creations, concepts, theories, technologies, technology applications,
data, product research, prototypes, models, designs, system design
documents, specifications and requirements, schematics, software,
codes, program components and documentation, processes, techniques,
tools, devices, know-how, estimates, accounting records, and accounting
procedures (collectively referred to as "Confidential Information").
Except as required in the course of his employment by Company, Daly
will not, without Company's prior consent, either during his employment
by Company or after termination of the employment, directly or
indirectly disclose to any third person any Confidential Information.
Daly acknowledges and agrees that all such Confidential Information,
regardless of who discovered, created or developed it, is the property
of the Company, solely and exclusively, and is valuable proprietary
information of the Company. Upon termination of the employment, whether
with or without cause, Daly shall immediately return and deliver to the
Company.
(b) NO SOLICITATION OF EMPLOYEES: Daly agrees that, during his
employment and for two (2) years thereafter, he will not solicit any of
the Company's employees for a competing business and will not induce or
attempt to induce any of the Company's employees to leave their
employment with the Company.
(c) INTELLECTUAL PROPERTY RIGHTS: All rights, title and
interest of every kind and nature whatsoever in and to any intellectual
property, including, but not limited to, any inventions, patents,
trademarks, copyrights, films, scripts, ideas, creations, concepts,
theories, technologies, technology applications, products (developed
and under development), product research, prototypes and models,
whether or not invented, created, written, developed, furnished,
produced or disclosed by Daly in the course of rendering his services
to the Company under this Agreement shall, as between the parties
hereto, be and remain the sole and exclusive property of the Company
for any and all purposes and uses whatsoever, and Daly shall have no
right, title or interest of any kind or nature therein or thereto, or
in and to any results and proceeds therefrom.
6
<PAGE>
(d) RETURN OF ALL OF THE COMPANY'S PROPERTY: Whenever
requested by the Company during the employment, and without request
upon termination of the employment, whether termination is with or
without cause, Daly shall immediately return and deliver to the Company
all of the Company's property, including all items used by Daly in
rendering services hereunder and all originals and copies of the
Company's documents and data, including, but not limited to, all
Confidential Information.
(e) PROTECTION OF OTHER COMPANIES' TRADE SECRETS AND
CONFIDENTIAL INFORMATION: Daly understands that state and federal laws
provide severe penalties for misappropriation and unauthorized
disclosure of trade secrets and confidential, proprietary business
information belonging to Employee's previous employers or to any other
company. Daly agrees and warrants that, in connection with his/her
employment by Pathways, he/she will not misappropriate, use or disclose
any trade secret or confidential, proprietary information belonging to
any previous employer or any other company. Daly agrees and warrants
that, if he/she has any question or uncertainty about whether
particular information might be a trade secret or confidential,
propriety business information of a previous employer or another
company, Daly will immediately contact Pathways' General Counsel.
9. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT:
Daly and the Company recognize and acknowledge that in his employment,
he will become familiar with all of the Company's sales methods and plans,
marketing, marketing and development, technologies, applications of
technologies, products (developed and under development), product research,
business methods and plans, data, processes, techniques, inventions,
discoveries, formulae, patterns, devices, know-how, services, products, and
other customer information (collectively referred to as "Confidential
Information"), in all of the geographic areas throughout the world in which the
Company already has made marketing efforts and/or sales of products and
services, and he will become knowledgeable about present and future marketing
proposals and plans for those products and services. Daly agrees, as part of the
consideration for this Employment Agreement, that Daly will not engage, directly
or indirectly, nor solicit employees of the Company to engage in the
development, distribution, manufacture or sale of any products or services which
compete with the products or services provided by the Company or its related
companies, for a period of two (2) years. The parties agree that the phrase
"engage, directly or indirectly, nor solicit employees of the Company to engage
in the development distribution, manufacture or sale of any products or services
which compete with the products or services provided by the Company or its
related companies" shall include any situation or circumstance in which Daly
shall be owner, partner, officer, director or shareholder of a corporation, or
an agent, employee or consultant of any business entity engaged, or about to
become engaged, in competition with the Company.
10. INJUNCTIVE RELIEF:
Daly acknowledges and agrees that any breach of the terms of Paragraphs
8 or 9 above would irreparably injure the Company and that it would be
impossible to measure in money the
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resulting injury to the Company, and, in any action to enforce this the terms of
Paragraphs 8 or 9 or to enjoin any breach of those paragraphs, Daly waives any
claim or defense that the Company has an adequate remedy at law or that the
Company would not be irreparably injured by breach of the terms of Paragraphs 8
or 9, and Daly acknowledges and agrees that the Company will be entitled to
temporary, preliminary and permanent injunctive relief and restraining orders,
without any delay whatsoever, in connection with any breach, or threatened or
impending breach, of any of the terms of those paragraphs. In any action to
enforce the Company's rights under Paragraphs 8 through 10 of this agreement,
the party prevailing in such action shall be entitled to recover as damages
reasonable attorneys' fees and all other reasonable expenses incurred in the
action and in any efforts prior to or during the action to secure compliance
with the terms of this agreement.
11. ARBITRATION:
Except for claims, disputes and causes of action arising out of or in
connection with Paragraphs 8 through 10 above, the Company and Daly agree to
arbitrate any and all disputes and claims, including discrimination claims,
arising out of or in connection with the employment or the termination thereof,
if the amount in controversy is more than $5,000.00. This arbitration agreement
applies to all disputes between the parties and any and all claims by Daly
against the Company and any officer, director, employee, agent or representative
of the Company, against any corporate parent or subsidiary of the Company,
and/or against any person or company affiliated with the employer (e.g., a
person or company involved in a joint venture, partnership or other similar
business relationship with the employer or one having an owner, partner or
parent or subsidiary corporation in common with the employer). The arbitration
award shall be final and binding on all parties to the arbitration proceeding.
The arbitration shall be conducted in Santa Rosa, California, pursuant to the
California Arbitration Act and the terms of this agreement. Arbitration may not
be initiated after expiration of any statute of limitation for the commencement
of any civil or administration proceeding on the claim or dispute. Arbitration
shall be initiated by written notice by one party to the other, specifying the
nature of each claim or dispute at issue and the amount and manner of
calculation of each item of damages. The parties shall each appoint one
arbitrator, and the parties' arbitrators shall together select a third neutral
arbitrator. lf the three arbitrators determine that the claims or disputes
specified in the notice collectively involve an amount in controversy more than
$5,000.00, they shall hear and determine the dispute(s) or claim(s) according to
applicable laws, this arbitration agreement and the Company's work rules and
policies in effect at the time of the events which gave rise to the arbitration.
The three arbitrators shall issue a written decision determining each dispute,
claim and item of damages submitted to the arbitrators. Determination of each
dispute, claim and item of damages shall require the concurrence of at least two
arbitrators, but it is not necessary that the same two arbitrators concur on
every dispute, claim or item of damages. THE ARBITRATION DECISION SHALL ATTEST
THAT THE REQUISITE CONCURRENCE EXISTED AS TO EACH DISPUTE, CLAIM AND ITEM OF
DAMAGES. THE COMPANY AND DALY UNDERSTAND AND EXPRESSLY AGREE THAT, BY ENTERING
INTO THIS ARBITRATION AGREEMENT, THEY ARE GIVING UP THE RIGHT TO BRING IN ANY
COURT ANY CLAIM, CAUSE OF ACTION OR DISPUTE ARISING OUT OF OR IN CONNECTION WITH
THE EMPLOYMENT OR THE TERMINATION THEREOF, INCLUDING THE RIGHT TO A JURY TRIAL.
The arbitration award may be confirmed by any court having jurisdiction of the
matter, and judgment may be entered on the confirmed award. Charges and expenses
of the neutral arbitrator shall be borne by the parties
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equally, and the parties shall deposit their respective shares of the neutral
arbitrator's estimated charges prior to the arbitration hearing. The parties
shall each bear their own costs, expenses and attorneys' fees in connection with
the arbitration, unless a statute or contract applicable to the claim or dispute
expressly provides for recovery of attorneys' fees by the prevailing party.
12. INCORPORATION AND INTEGRATION:
DALY shall comply with and enforce all of the Company's operational
policies and procedures, personnel policies and procedures and work rules, as
they may be promulgated and announced from time to time. Except for such
operational policies and procedures, personnel policies and procedures and work
rules, this written agreement contains the entire agreement between the parties
and supersedes all prior oral, written and/or implied agreements, promises,
covenants, obligations, undertakings, commitments, representations and
understandings by or between the parties, including all prior employment
agreements, whether or not fully performed by DALY before the date of this
agreement. The Company and DALY acknowledge and agree that there are no terms,
conditions, covenants, obligations or promises, express or implied, applicable
to the employment except those set out in this agreement. There shall be no
amendment, modification, change or enlargement of this agreement except by a
writing signed by the party to be charged with performance of the amendment,
modification, change or enlargement. In the event of any conflict or difference
between this agreement and Company's current or future operational policies and
procedures, personnel policies and procedures and work rules, the provisions of
this agreement shall control.
13. SURVIVAL, GOVERNING LAW, VENUE AND SEVERABILITY:
The representations, warranties, covenants, promises and restrictions
set out in this agreement shall operate continuously and shall survive
termination of the employment created by the agreement. The agreement shall
inure to the benefit of and be binding upon Daly, his heirs, estate, executors,
administrators and all others claiming through or on behalf of Daly, and upon
Company, its subsidiaries, affiliates, successors and assigns. The agreement
shall be construed and governed in accordance with the laws of the State of
California. All actions, arbitrations and proceedings arising from or in
connection with the agreement or the employment it creates shall be commenced
and maintained in Sonoma County, State of California. If any term, covenant,
condition, clause or provision of this agreement is held to be invalid or
unenforceable, then such clause or provision shall be severed herefrom, and such
invalidity or unenforceability shall not affect any other provision of this
agreement, the balance of which shall remain in full force and effect; provided,
however, that if any such term, covenant, condition, clause or provision may be
modified so as to be valid or enforceable as a matter of law, then such term,
covenant, condition, clause or provision shall be deemed modified so as to be
enforceable to the maximum extent permitted by law.
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14. NOTICES:
Any notices to be given hereunder by any party to another party shall
be in writing and delivered in person or mailed registered or certified mail,
postage prepaid with return receipt requested.
The Pathways Group, Inc.
By
- ------------------------------------ -------------------------------------
Carey F. Daly II Carey F. Daly II
President & CEO
By
-------------------------------------
Monte Strohl, Director acting
authority of the Board of Directors
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Exhibit 10.8
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement between The Pathways Group, Inc. (hereinafter
the "Company") and Charles W. DUNN (hereinafter "DUNN"), effective as of
February 8, 2000, is made for good and sufficient consideration, as reflected in
the mutual promises, covenants, obligations, undertakings and conditions set
forth below:
1. POSITION AND DUTIES:
The Company shall employ DUNN as Senior Vice President, Treasurer and
in any additional capacity or capacities as the Company's President and Chief
Executive Officer may from time to time decide. DUNN shall have the full
responsibilities, duties and authorities of the Company's Senior Vice President,
Treasurer. In addition, DUNN shall be responsible for implementing and complying
with directives issued by the Company's President and Chief Executive Officer.
2. TERM OF EMPLOYMENT:
Subject to earlier termination as provided in this agreement, DUNN
shall be employed for a term of three (3) years, which shall be automatically
extended for additional one (1) year periods (such initial term and all extended
terms being referred to collectively herein as the "employment term") unless
either party gives notice in writing to the other not less than ninety (90) days
before the end of the initial term or extended term that the employment contract
shall not be extended.
3. COMPENSATION:
(a) BASE SALARY: Company shall pay a basic salary to DUNN at
the rate of One Hundred Twenty Five Thousand Dollars ($125,000.00) per
year, payable semi-monthly, in twenty-four (24) equal installments,
subject to all withholdings and deductions required for federal, state
and local taxes and charges and any other withholdings or deductions
authorized by DUNN.
(b) BONUS: DUNN shall also be paid an annual discretionary
performance bonus as determined by the Chief Executive Officer and/or
Board of Directors.
(b) AUTOMOBILE ALLOWANCE: The Company shall pay to DUNN an
annual Automobile Allowance in the annual amount of Seven Thousand
Eight Hundred Dollars ($7,800.00), payable semi-monthly in twenty-four
equal installments, subject to all withholdings and deductions required
for federal, state and local taxes and charges and any other
withholdings authorized by DUNN.
(c) STOCK OPTIONS: The Company shall issue to DUNN options to
purchase One Hundred Thousand (100,000) shares of the Company's common
stock, which options shall vest equally over three (3) years, at an
exercise price of $2 1/4 per share, pursuant to
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a stockholders plan intended to be qualified under Section 422 of the
Internal Revenue Code of 1986 and the regulations promulgated in
relation thereto. The plan will expire January 12, 2005. Unexercised
options awarded to DUNN hereunder shall be subject to forfeiture as
provided in Paragraphs 6 and 7 of this agreement.
4. EMPLOYMENT BENEFITS:
Throughout the employment term, DUNN shall be entitled to receive the
employment benefits generally offered to all other executive employees,
including, but not limited to, medical, dental, optical, prescription drugs and
life insurance for DUNN and his family, at Company expense, and:
(a) EXECUTIVE COMPENSATION PACKAGE: Enrollment in Executive
Compensation Package.
(b) VACATION: The Company waives its policy on vacations, to allow
for four weeks per year.
(c) LIFE INSURANCE: The Company shall provide and pay for life
insurance on the life of DUNN in the amount of three (3) times
his annual salary provided for in this agreement. The
beneficiary shall be DUNN's estate, unless otherwise directed
by DUNN in writing at any time prior to his death.
(d) STOCK ISSUANCE: The Company and DUNN may agree from time to
time, with the approval of the Board of Directors, to issue to
DUNN Common Stock of the Company in consideration of such
services or contributions of property as may be deemed
appropriate, and at a value determined by the Board of
Directors in good faith and in compliance with applicable law.
Any such issuance of stock may, at the request of DUNN, and
subject to the approval of the Company which may not be
unreasonably withheld, be issued by the Company to such party
or entity, including without limitation, an irrevocable trust
or similar entity, as DUNN may at ---- the time of issuance
direct.
(e) DISABILITY COMPENSATION:
(1) If DUNN becomes disabled at any time, and for any
number of times, due to any cause so that he is
physically unable to perform his ordinary duties and
responsibilities under this agreement, then DUNN
shall be entitled to receive, in lieu of salary, an
amount equal to his salary, payable at the same time
and in the same manner as DUNN's salary is paid,
provided however, that this benefit shall be limited
to not more than a total of twelve (12) months during
the term of the agreement.
(2) DUNN's entitlement to disability income pursuant to this
subparagraph shall
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begin and end as determined by a certificate issued
by a qualified M.D. or D.O. licensed by the State of
California. The certificate shall state in substance
that DUNN was determined to be disabled and unable to
perform the ordinary and usual duties as Senior Vice
President, Treasurer of Pathways, beginning [DATE]
and DUNN's disability continues as of this [DATE].
Such a certificate shall be submitted every three (3)
months beginning with the date of disability and
continuing thereafter until DUNN's disability ends
and he is able to return to work full time or his
disability compensation benefit has been fully used,
whichever occurs first.
5. EXPENSE REIMBURSEMENT:
During the employment term, the Company shall reimburse DUNN for
reasonable out-of pocket expenses incurred in connection with the Company's
business, including travel expenses, food, and lodging when away from home,
subject to such policies as the Company may from time to time reasonably
establish for its employees.
6. LIMITATION ON OUTSIDE ACTIVITIES:
During his employment, DUNN shall devote his full occupational time,
energies, abilities, knowledge and experience to the performance of his duties
under this agreement and shall not render to others services of any kind for
compensation or engage in any other business activity without the Company's
prior written consent. DUNN shall not, directly or indirectly, whether as a
partner, employee, creditor, shareholder or otherwise, promote, participate or
engage in any business activity competitive with the Company or its
subsidiaries, affiliates, co-venturers, customers or assigns. DUNN shall not
take any action to establish, form, assist or become employed by any such
competing business on termination of DUNN's employment. DUNN's breach of any of
the provisions of this paragraph shall give the Company the right, in addition
to all other remedies the Company may have, to terminate the employment and to
cancel and/or terminate any and all compensation and benefits to which DUNN
might otherwise be entitled under this agreement.
7. TERMINATION OF EMPLOYMENT:
The employment created by this agreement may be terminated during the
employment term in accordance with the following provisions of this paragraph:
(a) TERMINATION WITHOUT CAUSE BY THE COMPANY: The employment
may be terminated without cause in the sole and absolute discretion of
the Company upon written notice by the Company to Dunn; provided,
however, that if this agreement is terminated pursuant to this
subparagraph, Dunn shall receive from Company all salary and benefits
provided under this agreement for six (6) months after the effective
date of the termination. Such salary and benefits shall constitute the
complete and exclusive obligation of the Company for termination of the
employment and for any and all claims
3
<PAGE>
of Dunn arising out of or in connection with Dunn's employment or the
termination thereof.
(b) TERMINATION WITHOUT CAUSE BY DUNN: The employment may be
terminated without cause in the sole and absolute discretion of DUNN
upon six (6) months written notice by DUNN to the Company, provided,
however, that if this agreement is terminated pursuant to this
subparagraph, DUNN shall forfeit any unexercised, vested stock options
under this agreement.
(c) TERMINATION FOR CAUSE BY THE COMPANY: The Company may
terminate the employment at any time upon written notice to DUNN if the
Company ceases a substantial portion of its business operation, in the
event of the sale or change of ownership of the Company or a
substantial portion of its assets, or if, in the sole and absolute
determination of the Company:
(1) Its business circumstances change so materially that
it is impracticable for the Company to continue using
DUNN'S employment services; or DUNN's continued
employment would not confer to the Company the
substantial benefit intended to be gained by the
employment; or
(2) DUNN breaches his duty of loyalty to the Company or
any material term, promise, covenant, condition,
obligation, undertaking or commitment set out in this
agreement or the Company's operational policies or
procedures, personnel policies or procedures or work
rules; commits any material act of dishonesty or
illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action
against the Company; discloses any trade secret or
confidential or proprietary information of the
Company, its subsidiaries, affiliates, co-venturers,
customers or assigns; is guilty of carelessness,
misconduct, neglect of duty or unsatisfactory work
performance; or acts in any way that significantly
impedes or creates a risk of significant detriment to
the Company's operations, profits, reputation or
other business interests.
Such termination shall be effective immediately upon written notice of
termination.
(d) TERMINATION FOR CAUSE BY DUNN: DUNN may terminate the
employment at any time upon written notice to Company, if, in the sole
and absolute determination of DUNN, the Company breaches any material
term, promise, covenant, condition, obligation, undertaking or
commitment set out in this agreement; commits any material act of
dishonesty or illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action against DUNN;
improperly discloses any personal or private information of DUNN
protected by any Constitutional or statutory right to privacy; acts in
a manner constituting constructive discharge of DUNN; or the Company's
actions or business circumstances or DUNN's personal or family
circumstances make it impossible or
4
<PAGE>
impracticable for DUNN to continue performing employment services to
the Company. Such termination shall be effective immediately upon
written notice of termination.
(e) TERMINATION IN THE EVENT OF DISABILITY: If DUNN is unable,
due to mental or physical illness or injury, to substantially perform his duties
under this agreement in a satisfactory manner for a period of twelve (12)
months, the employment shall terminate at the end of such period.
8. CONFIDENTIALITY, PROPERTY RIGHTS AND NO SOLICITATION:
(a) CONFIDENTIAL INFORMATION: In the course of his employment
by the Company, DUNN will have access to trade secrets and confidential
and proprietary information of the Company, its subsidiaries,
affiliates, co-venturers and customers, including, but not limited to,
personnel, products (developed and under development), proposals,
services, operations, procedures, customers, customer lists, customer
needs, customer contacts, customer relations, customer data and
information, marketing areas, marketing proposals, marketing methods
and plans, business development plans and techniques, business methods
and plans, sales methods and plans, sales figures, sales projections,
price lists, pricing formulae and information, inventions, discoveries,
formulae, patents, trademarks, copyrights, films, scripts, ideas,
creations, concepts, theories, technologies, technology applications,
data, product research, prototypes, models, designs, system design
documents, specifications and requirements, schematics, software,
codes, program components and documentation, processes, techniques,
tools, devices, know-how, estimates, accounting records, and accounting
procedures (collectively referred to as "Confidential Information").
Except as required in the course of his employment by Company, DUNN
will not, without Company's prior consent, either during his employment
by Company or after termination of the employment, directly or
indirectly disclose to any third person any Confidential Information.
DUNN acknowledges and agrees that all such Confidential Information,
regardless of who discovered, created or developed it, is the property
of the Company, solely and exclusively, and is valuable proprietary
information of the Company. Upon termination of the employment, whether
with or without cause, DUNN shall immediately return and deliver to the
Company all Confidential Information in his possession or control.
(b) NO SOLICITATION OF EMPLOYEES: Dunn agrees that, during his
employment and for two (2) years thereafter, he will not solicit any of
the Company's employees for a competing business and will not induce or
attempt to induce any of the Company's employees to leave their
employment with the Company.
(c) INTELLECTUAL PROPERTY RIGHTS: All rights, title and
interest of every kind and nature whatsoever in and to any intellectual
property, including, but not limited to, any inventions, patents,
trademarks, copyrights, films, scripts, ideas, creations, concepts,
theories, technologies, technology applications, products (developed
and under development), product research, prototypes and models,
whether or not invented, created,
5
<PAGE>
written, developed, furnished, produced or disclosed by Dunn in the
course of rendering his services to the Company under this Agreement
shall, as between the parties hereto, be and remain the sole and
exclusive property of the Company for any and all purposes and uses
whatsoever, and DUNN shall have no right; We or interest of any kind or
nature therein or thereto, or in and to any results and proceeds
therefrom.
(d) RETURN OF ALL OF THE COMPANY'S PROPERTY. Whenever
requested by the Company during the employment, and without request
upon termination of the employment, whether termination is with or
without cause, Dunn shall immediately return and deliver to the Company
all of the Company's property, including all items used by Duan in
rendering services hereunder and all originals and copies of the
Company's documents and data, including, but not limited to, all
Confidential Information.
(e) PROTECTION OF OTHER COMPANIES' TRADE SECRETS AND
CONFIDENTIAL INFORMATION: Dunn understands that state and federal laws
provide severe penalties for misappropriation and unauthorized
disclosure of trade secrets and confidential, proprietary business
information belonging to Employee's previous employers or to any other
company. Dunn agrees and warrants that, in connection with his/her
employment by Company, he/she will not misappropriate, use or disclose
any trade secret or confidential, proprietary information belonging to
any previous employer or any other company. Dunn agrees and warrants
that, if he/she has any question or uncertainty about whether
particular information might be a trade secret or confidential,
propriety business information of a previous employer or another
company, Dunn will immediately contact Company's General Counsel.
9. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT:
Dunn and the Company recognize and acknowledge that in his employment,
he will become familiar with all of the Company's sales methods and plans,
marketing, marketing and development, technologies, applications of
technologies, products (developed and under development), product research,
business methods and plans, data, processes, techniques, inventions,
discoveries, formulae, patterns, devices, know-how, services, products, and
other customer information (collectively referred to as "Confidential
Information"), in all of the geographic areas throughout the world in which the
Company already has made marketing efforts and/or sales of products and
services, and he will become knowledgeable about present and future marketing
proposals and plans for those products and services. Dunn agrees, as part of the
consideration for this Employment Agreement, that Dunn will not engage, directly
or indirectly, nor solicit employees of the Company to engage in the
development, distribution, manufacture or sale of any products or services which
compete with the products or services provided by the Company or its related
companies, for a period of two (2) years. The parties agree that the phrase
"engage, directly or indirectly, nor solicit employees of the Company to engage
in the development distribution, manufacture or sale of any products or services
which compete with the products or services provided by the Company or its
related companies" shall include any situation or circumstance in which Dunn
shall be owner, partner, officer, director or shareholder
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<PAGE>
of a corporation, or an agent, employee or consultant of any business entity
engaged, or about to become engaged, in competition with the Company.
10. INJUNCTIVE RELIEF:
Dunn acknowledges and agrees that any breach of the terms of Paragraphs
8 or 9 above would irreparably injure the Company and that it would be
impossible to measure in money the resulting injury to the Company, and, in any
action to enforce this the terms of Paragraphs 8 or 9 or to enjoin any breach of
those paragraphs, Dunn waives any claim or defense that the Company
7
<PAGE>
has an adequate remedy at law or that the Company would not be irreparably
injured by breach of the terms of Paragraphs 8 or 9, and Dunn acknowledges and
agrees that the Company will be entitled to temporary, preliminary and permanent
injunctive relief and restraining orders, without any delay whatsoever, in
connection with any breach, or threatened or impending breach, of any of the
terms of those paragraphs. In any action to enforce the Company's rights under
Paragraphs 8 through 10 of this agreement, the party prevailing in such action
shall be entitled to recover as damages reasonable attorneys' fees and all other
reasonable expenses incurred in the action and in any efforts prior to or during
the action to secure compliance with the terms of this agreement.
11. ARBITRATION:
Except for claims, disputes and causes of action arising out of or in
connection with Paragraphs 8 through 10 above, the Company and Dunn agree to
arbitrate any and 51 disputes and claims, including discrimination claims,
arising out of or in connection with the employment or the termination thereof,
if the amount in controversy is more than $5,000.00. This arbitration agreement
applies to all disputes between the parties and any and all claims by Dunn
against the Company and any officer, director, employee, agent or representative
of the Company, against any corporate parent or subsidiary of the Company,
and/or against any person or company affiliated with the employer (e.g., a
person or company involved in a joint venture, partnership or other similar
business relationship with the employer or one having an owner, partner or
parent or subsidiary corporation in common with the employer). The arbitration
award shall be final and binding on all parties to the arbitration proceeding.
The arbitration shall be conducted in Santa Rosa, California, pursuant to the
California Arbitration Act and the terms of this agreement. Arbitration may not
be initiated after expiration of any statute of limitation for the commencement
of any civil or administration proceeding on the claim or dispute. Arbitration
shall be initiated by written notice by one party to the other, specifying the
nature of each claim or dispute at issue and the amount and manner of
calculation of each item of damages. The parties shall each appoint one
arbitrator, and the parties' arbitrators shall together select a third neutral
arbitrator. If the three arbitrators determine that the claims or disputes
specified in the notice collectively involve an amount in controversy more than
$5,000.00, they shall hear and determine the dispute(s) or claim(s) according to
applicable laws, this arbitration agreement and the Company's work rules and
policies in effect at the time of the events which gave rise to the arbitration.
The three arbitrators shall issue a written decision determining each dispute,
claim and item of damages submitted to the arbitrators. Determination of each
dispute, claim and item of damages shall require the concurrence of at least two
arbitrators, but it is not necessary that the same two arbitrators concur on
every dispute, claim or item of damages. The arbitration decision shall attest
that the requisite concurrence existed as to each dispute, claim and item of
damages. THE COMPANY AND DUNN UNDERSTAND AND EXPRESSLY AGREE THAT, BY ENTERING
INTO THIS ARBITRATION AGREEMENT, THEY ARE GIVING UP THE RIGHT TO BRING IN ANY
COURT ANY CLAIM, CAUSE OF ACTION OR DISPUTE ARISING OUT OF OR IN CONNECTION WITH
THE EMPLOYMENT OR THE TERMINATION THEREOF, INCLUDING THE RIGHT TO A JURY TRIAL.
The arbitration award may be confirmed by any court having jurisdiction of the
matter, and judgment may be entered on the confirmed award. Charges and expenses
of the neutral arbitrator shall be borne by the parties equally, and the
8
<PAGE>
parties shall deposit their respective shares of the neutral arbitrator's
estimated charges prior to the arbitration hearing. The parties shall each bear
their own cost, expenses and attorneys' fees
in connection with the arbitration, unless a statute or contract applicable to
the claim or dispute expressly provides for recovery of attorneys' fees by the
prevailing party.
12. INCORPORATION AND INTEGRATION:
Dunn shall comply with and enforce all of the Company's operational
policies and procedures, personnel policies and procedures and work rules, as
they may be promulgated and announced from time to time. Except for such
operational policies and procedures, personnel policies and procedures and work
rules, this written agreement contains the entire agreement between the parties
and supersedes all prior oral, written and/or implied agreements, promises,
covenants, obligations, undertakings, commitments, representations and
understandings by or between the parties, including all prior employment
agreements, whether or not fully performed by Dunn before the date of this
agreement. The Company and Dunn acknowledge and agree that there are no terms,
conditions, covenants, obligations or promises, express or implied, applicable
to the employment except those set out in this agreement. There shall be no
amendment, modification, change or enlargement of this agreement except by a
writing signed by the party to be charged with performance of the amendment,
modification, change or enlargement. In the event of any conflict or difference
between this agreement and Company's current or future operational policies and
procedures, personnel policies and procedures and work rules, the provisions of
this agreement shall control.
9
<PAGE>
13. SURVIVAL, GOVERNING LAW, VENUE AND SEVERABILITY:
The representations, warranties, covenants, promises and restrictions set out in
this agreement shall operate continuously and shall survive termination of the
employment created by the agreement. The agreement shall inure to the benefit of
and be binding upon Dunn, his heirs, estate, executors, administrators and all
others claiming through or on behalf of Dunn, and upon Company, its
subsidiaries, affiliates, successors and assigns. The agreement shall be
construed and governed in accordance with the laws of the State of California.
All actions, arbitrations and proceedings arising from or in connection with the
agreement or the employment it creates shall be commenced and maintained in
Sonoma County, State of California. If any term, covenant, condition, clause or
provision of this agreement is held to be invalid or unenforceable, then such
clause or provision shall be severed herefrom, and such invalidity or
unenforceability shall not affect any other provision of this agreement, the
balance of which shall remain in full force and effect; provided, however, that
if any such term, covenant, condition, clause or provision may be modified so as
to be valid or enforceable as a matter of law, then such term, covenant,
condition, clause or provision shall be deemed modified so as to be enforceable
to the maximum extent permitted by law.
14. NOTICES:
Any notices to be given hereunder by any party to another party shall
be in writing and delivered in person or mailed registered or certified mail,
postage prepaid with return receipt requested.
The Pathways Group, Inc.
By
- ------------------------------------ -------------------------------------
Charles W. Dunn Carey F. Daly II
President & CEO
By
-------------------------------------
Monte Strohl, Director acting under
authority of the Board of Directors
10
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Exhibit 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement between The Pathways Group, Inc. (hereinafter
the "Company") and Robert Boeck (hereinafter "Boeck"), effective as of February
14, 2000, is made for good and sufficient consideration, as reflected in the
mutual promises, covenants, obligations, undertakings and conditions set forth
below:
1. POSITION AND DUTIES:
The Company shall employ Boeck as Senior Vice President, Finance and in
any additional capacity or capacities as the Company's President and Chief
Executive Officer may from time to time decide. Boeck shall have the full
responsibilities, duties and authorities of the Company's Senior Vice President,
Finance. In addition, Boeck shall be responsible for implementing and complying
with directives issued by the Company's President and Chief Executive Officer.
2. TERM OF EMPLOYMENT:
Subject to earlier termination as provided in this agreement, Boeck
shall be employed for a term of three (3) years, which shall be automatically
extended for additional one (1) year periods (such initial term and all extended
terms being referred to collectively herein as the "employment term") unless
either party gives notice in writing to the other not less than ninety (90) days
before the end of the initial term or extended term that the employment contract
shall not be extended.
3. COMPENSATION:
(a) BASE SALARY: Company shall pay a basic salary to Boeck at
the rate of One Hundred Twenty Five Thousand Dollars ($125,000.00) per
year, payable semi-monthly, in twenty-four (24) equal installments,
subject to all withholdings and deductions required for federal, state
and local taxes and charges and any other withholdings or deductions
authorized by Boeck.
(b) BONUS: Boeck shall also be paid an annual discretionary
performance bonus as determined by the Chief Executive Officer and/or
Board of Directors.
(b) AUTOMOBILE ALLOWANCE: The Company shall pay to Boeck an
annual Automobile Allowance in the annual amount of Seven Thousand
Eight Hundred Dollars ($7,800.00), payable semi-monthly in twenty-four
equal installments, subject to all withholdings and deductions required
for federal, state and local taxes and charges and any other
withholdings authorized by Boeck.
(c) STOCK OPTION: The Company shall issue to Boeck options to
purchase One Hundred Thousand (100,000) shares of the Company's common
stock, which options
<PAGE>
shall vest equally over three (3) years, at an exercise price of $2
15/32 per share, pursuant to a stockholders plan intended to be
qualified under Section 422 of the Internal Revenue Code of 1986 and
the regulations promulgated in relation thereto. The plan will expire
January 12, 2005. Unexercised options awarded to Boeck hereunder shall
be subject to forfeiture as provided in Paragraphs 6 and 7 of this
agreement.
4. EMPLOYMENT BENEFITS:
Throughout the employment term, Boeck shall be entitled to receive the
employment benefits generally offered to all other executive employees,
including, but not limited to, medical, dental, optical, prescription drugs and
life insurance for Boeck and his family, at Company expense, and:
(a) EXECUTIVE COMPENSATION PACKAGE: Enrollment in
Executive Compensation Package.
(b) VACATION: The Company waives its policy on vacations,
to allow for four weeks per year.
(c) LIFE INSURANCE: The Company shall provide and pay for
life insurance on the life of Boeck in the amount of
three (3) times his annual salary provided for in
this agreement. The beneficiary shall be Boeck's
estate, unless otherwise directed by Boeck in writing
at any time prior to his death.
(d) STOCK ISSUANCE: The Company and Boeck may agree from
time to time, with the approval of the Board of
Directors, to issue to Boeck Common Stock of the
Company in consideration of such services or
contributions of property as may be deemed
appropriate, and at a value determined by the Board
of Directors in good faith and in compliance with
applicable law. Any such issuance of stock may, at
the request of Boeck, and subject to the approval of
the Company which may not be unreasonably withheld,
be issued by the Company to such party or entity,
including without limitation, an irrevocable trust or
similar entity, as Boeck may at the time of issuance
direct.
(e) DISABILITY COMPENSATION:
(1) If Boeck becomes disabled at any time, and
for any number of times, due to any cause so
that he is physically unable to perform his
ordinary duties and responsibilities under
this agreement, then Boeck shall be entitled
to receive, in lieu of salary, an amount
equal to his salary, payable at the same
time and in the same manner as Boeck's
salary is paid, provided however, that this
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benefit shall be limited to not more than a
total of twelve (12) months during the term
of the agreement.
(2) Boeck's entitlement to disability income
pursuant to this subparagraph shall begin
and end as determined by a certificate
issued by a qualified M.D. or D.O. licensed
by the State of California. The certificate
shall state in substance that Boeck was
determined to be disabled and unable to
perform the ordinary and usual duties as
Senior Vice President, Finance of Pathways,
beginning [DATE] , and Boeck's disability
continues as of this
[DATE] . Such a certificate shall be
submitted every three (3) months beginning
with the date of disability and continuing
thereafter until Boeck's disability ends and
he is able to return to work full time or
his disability compensation benefit has been
fully used, whichever occurs first.
5. EXPENSE REIMBURSEMENT:
During the employment term, the Company shall reimburse Boeck for
reasonable out-of pocket expenses incurred in connection with the Company's
business, including travel expenses, food, and lodging when away from home,
subject to such policies as the Company may from time to time reasonably
establish for its employees.
6. LIMITATION ON OUTSIDE ACTIVITIES:
During his employment, Boeck shall devote his full occupational time,
energies, abilities, knowledge and experience to the performance of his duties
under this agreement and shall not render to others services of any kind for
compensation or engage in any other business activity without the Company's
prior written consent. Boeck shall not, directly or indirectly, whether as a
partner, employee, creditor, shareholder or otherwise, promote, participate or
engage in any business activity competitive with the Company or its
subsidiaries, affiliates, co-venturers, customers or assigns. Boeck shall not
take any action to establish, form, assist or become employed by any such
competing business on termination of Boeck's employment. Boeck's breach of any
of the provisions of this paragraph shall give the Company the right, in
addition to all other remedies the Company may have, to terminate the employment
and to cancel and/or terminate any and all compensation and benefits to which
Boeck might otherwise be entitled under this agreement.
7. TERMINATION OF EMPLOYMENT:
The employment created by this agreement may be terminated during the
employment term in accordance with the following provisions of this paragraph:
(a) TERMINATION WITHOUT CAUSE BY THE COMPANY: The employment
may be terminated without cause in the sole and absolute discretion of
the Company upon written
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<PAGE>
notice by the Company to Boeck; provided, however, that if this
agreement is terminated pursuant to this subparagraph, Boeck shall
receive from Company all salary and benefits provided under this
agreement for six (6) months after the effective date of the
termination. Such salary and benefits shall constitute the complete and
exclusive obligation of the Company for termination of the employment
and for any and all claims of Boeck arising out of or in connection
with Boeck's employment or the termination thereof.
(b) TERMINATION WITHOUT CAUSE BY BOECK: The employment may be
terminated without cause in the sole and absolute discretion of BOECK
upon six (6) months written notice by BOECK to the Company, provided,
however, that if this agreement is terminated pursuant to this
subparagraph, BOECK shall forfeit any unexercised, vested stock options
under this agreement.
(c) TERMINATION FOR CAUSE BY THE COMPANY: The Company may
terminate the employment at any time upon written notice to BOECK if
the Company ceases a substantial portion of its business operation, in
the event of the sale or change of ownership of the Company or a
substantial portion of its assets, or if, in the sole and absolute
determination of the Company:
(1) Its business circumstances change so materially that
it is impracticable for the Company to continue using
BOECK'S employment services; or BOECK'S continued
employment would not confer to the Company the
substantial benefit intended to be gained by the
employment; or
(2) BOECK breaches his duty of loyalty to the Company or
any material term, promise, covenant, condition,
obligation, undertaking or commitment set out in this
agreement or the Company's operational policies or
procedures, personnel policies or procedures or work
rules; commits any material act of dishonesty or
illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action
against the Company; discloses any trade secret or
confidential or proprietary information of the
Company, its subsidiaries, affiliates, co-venturers,
customers or assigns; is guilty of carelessness,
misconduct, neglect of duty or unsatisfactory work
performance; or acts in any way that significantly
impedes or creates a risk of significant detriment to
the Company's operations, profits, reputation or
other business interests.
Such ternination shall be effective immediately upon written notice of
termination.
(d) TERMINATION FOR CAUSE BY BOECK: BOECK may terminate the
employment at any time upon written notice to Company, if, in the sole
and absolute determination of Boeck, the Company breaches any material
term, promise, covenant, condition, obligation, undertaking or
commitment set out in this agreement; commits any material act of
dishonesty or illegality; commits any act or omission creating an
unreasonable risk
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<PAGE>
of civil or criminal legal action against BOECK; improperly discloses
any personal or private information of BOECK protected by any
Constitutional or statutory right to privacy; acts in a manner
constituting constructive discharge of BOECK; or the Company's actions
or business circumstances or BOECK'S personal or family circumstances
make it impossible or impracticable for BOECK to continue performing
employment services to the Company. Such termination shall be effective
immediately upon written notice of termination.
(e) TERMINATION IN THE EVENT OF DISABILITY: If BOECK is
unable, due to mental or physical illness or injury, to substantially
perform his duties under this agreement in a satisfactory manner for a
period of twelve (12) months, the employment shall terminate at the end
of such period.
8. CONFIDENTIALITY, PROPERTY RIGHTS AND NO SOLICITATION:
(a) CONFIDENTIAL INFORMATION: In the course of his employment
by the Company, BOECK will have access to trade secrets and
confidential and proprietary information of the Company, its
subsidiaries, affiliates, co-venturers and customers, including, but
not limited to, personnel, products (developed and under development),
proposals, services, operations, procedures, customers, customer lists,
customer needs, customer contacts, customer relations, customer data
and information, marketing areas, marketing proposals, marketing
methods and plans, business development plans and techniques, business
methods and plans, sales methods and plans, sales figures, sales
projections, price lists, pricing formulae and information, inventions,
discoveries, formulae, patents, trademarks, copyrights, films, scripts,
ideas, creations, concepts, theories, technologies, technology
applications, data, product research, prototypes, models, designs,
system design documents, specifications and requirements, schematics,
software, codes, program components and documentation, processes,
techniques, tools, devices, know-how, estimates, accounting records,
and accounting procedures (collectively referred to as "Confidential
Information"). Except as required in the course of his employment by
Company, BOECK will not, without Company's prior consent, either during
his employment by Company or after termination of the employment,
directly or indirectly disclose to any third person any Confidential
Information. BOECK acknowledges and agrees that all such Confidential
Information, regardless of who discovered, created or developed it, is
the property of the Company, solely and exclusively, and is valuable
proprietary information of the Company. Upon termination of the
employment, whether with or without cause, Boeck shall immediately
return and deliver to the Company all Confidential Information in his
possession or control.
(b) NO SOLICITATION OF EMPLOYEES: Boeck agrees that, during
his employment and for two (2) years thereafter, he will not solicit
any of the Company's employees for a competing business and will not
induce or attempt to induce any of the Company s employees to leave
their employment with the Company.
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<PAGE>
(c) INTELLECTUAL PROPERTY RIGHTS: All rights, title and
interest of every kind and nature whatsoever in and to any intellectual
property, including, but not limited to, any inventions, patents,
trademarks, copyrights, films, scripts, ideas, creations, concepts,
theories, technologies, technology applications, products (developed
and under development), product research, prototypes and models,
whether or not invented, created, written, developed, furnished,
produced or disclosed by Boeck in the course of rendering his services
to the Company under this Agreement shall, as between the parties
hereto, be and remain the sole and exclusive property of the Company
for any and all purposes and uses whatsoever, and Boeck shall have no
right title or interest of any kind or nature therein or thereto, or in
and to any results and proceeds therefrom.
(d) RETURN OF ALL OF THE COMPANY'S PROPERTY. Whenever
requested by the Company during the employment, and without request
upon termination of the employment, whether termination is with or
without cause, Boeck shall immediately return and deliver to the
Company all of the Company's property, including all items used by
Boeck in rendering services hereunder and all originals and copies of
the Company's documents and data, including, but not limited to, all
Confidential Information.
(e) PROTECTION OF OTHER COMPANIES' TRADE SECRETS AND
CONFIDENTIAL INFORMATION: Boeck understands that state and federal laws
provide severe penalties for misappropriation and unauthorized
disclosure of trade secrets and confidential proprietary business
information belonging to Employee's previous employers or to any other
company. Boeck agrees and warrants that, in connection with his/her
employment by Company, he/she will not misappropriate, use or disclose
any trade secret or confidential, proprietary information belonging to
any previous employer or any other company. Boeck agrees and warrants
that, if he/she has any question or uncertainty about whether
particular information might be a trade secret or confidential,
propriety business information of a previous employer or another
company, Boeck will immediately contact Company's General Counsel.
9. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT:
Boeck and the Company recognize and acknowledge that in his employment,
he will become familiar with all of the Company's sales methods and plans,
marketing, marketing and development, technologies, applications of
technologies, products (developed and under development), product research,
business methods and plans, data, processes, techniques, inventions,
discoveries, formulae, patterns, devices, know-how, services, products, and
other customer information (collectively referred to as "Confidential
Information"), in all of the geographic areas throughout the world in which the
Company already has made marketing efforts and/or sales of products and
services, and he will become knowledgeable about present and future marketing
proposals and plans for those products and services. Boeck agrees, as part of
the consideration for this Employment Agreement, that Boeck will not engage,
directly or indirectly, nor solicit employees of the Company to engage in the
development, distribution, manufacture or sale of any products or services which
compete with the products or services provided by the Company or its related
companies, for a period of two (2) years. The parties
6
<PAGE>
agree that the phrase "engage, directly or indirectly, nor solicit employees of
the Company to engage in the development distribution, manufacture or sale of
any products or services which compete with the products or services provided by
the Company or its related companies" shall include any situation or
circumstance in which Boeck shall be owner, partner, officer, director or
shareholder of a corporation, or an agent, employee or consultant of any
business entity engaged, or about to become engaged, in competition with the
Company.
10. INJUNCTIVE RELIEF:
Boeck acknowledges and agrees that any breach of the terms of
Paragraphs 8 or 9 above would irreparably injure the Company and that it would
be impossible to measure in money the resulting injury to the Company, and, in
any action to enforce this the terms of Paragraphs 8 or 9 or to enjoin any
breach of those paragraphs, Boeck waives any claim or defense that the Company
has an adequate remedy at law or that the Company would not be irreparably
injured by breach of the terms of Paragraphs 8 or 9, and Boeck acknowledges and
agrees that the Company will be entitled to temporary, preliminary and permanent
injunctive relief and restraining orders, without any delay whatsoever, in
connection with any breach, or threatened or impending breach, of any of the
terms of those paragraphs. In any action to enforce the Company's rights under
Paragraphs 8 through 10 of this agreement, the party prevailing in such action
shall be entitled to recover as damages reasonable attorneys' fees and all other
reasonable expenses incurred in the action and in any efforts prior to or during
the action to secure compliance with the terms of this agreement.
11. ARBITRATION:
Except for claims, disputes and causes of action arising out of or in
connection with Paragraphs 8 through 10 above, the Company and Boeck agree to
arbitrate any and all disputes and claims, including discrimination claims,
arising out of or in connection with the employment or the termination thereof,
if the amount in controversy is more than $5,000.00. This arbitration agreement
applies to all disputes between the parties and any and all claims by Boeck
against the Company and any officer, director, employee, agent or representative
of the Company, against any corporate parent or subsidiary of the Company,
and/or against any person or company affiliated with the employer (e.g., a
person or company involved in a joint venture, partnership or other similar
business relationship with the employer or one having an owner, partner or
parent or subsidiary corporation in common with the employer). The arbitration
award shall be final and binding on all parties to the arbitration proceeding.
The arbitration shall be conducted in Santa Rosa, California, pursuant to the
California Arbitration Act and the terms of this agreement. Arbitration may not
be initiated after expiration of any statute of limitation for the commencement
of any civil or administration proceeding on the claim or dispute. Arbitration
shall be initiated by written notice by one party to the other, specifying the
nature of each claim or dispute at issue and the amount and manner of
calculation of each item of damages. The parties shall each appoint one
arbitrator, and the parties' arbitrators shall together select a third neutral
arbitrator. If the three arbitrators determine that the claims or disputes
specified in the notice collectively involve an amount in controversy more than
$5,000.00, they shall hear and determine the dispute(s) or claim(s) according to
applicable laws, this arbitration agreement and
7
<PAGE>
the Company's work rules and policies in effect at the time of the events which
gave rise to the arbitration. The three arbitrators shall issue a written
decision determining each dispute, claim and item of damages submitted to the
arbitrators. Determination of each dispute, claim and item of damages shall
require the concurrence of at least two arbitrators, but it is not necessary
that the same two arbitrators concur on every dispute, claim or item of damages.
The arbitration decision shall attest that the requisite concurrence existed as
to each dispute, claim and item of damages. THE COMPANY AND BOECK UNDERSTAND AND
EXPRESSLY AGREE THAT, BY ENTERING INTO THIS ARBITRATION AGREEMENT, THEY ARE
GIVING UP THE RIGHT TO BRING IN ANY COURT ANY CLAIM, CAUSE OF ACTION OR DISPUTE
ARISING OUT OF OR IN CONNECTION WITH THE EMPLOYMENT OR THE TERMINATION THEREOF,
INCLUDING THE RIGHT TO A JURY TRIAL. The arbitration award may be confirmed by
any court having jurisdiction of the matter, and judgment may be entered on the
confirmed award. Charges and expenses of the neutral arbitrator shall be borne
by the parties equally, and the parties shall deposit their respective shares of
the neutral arbitrator's estimated charges prior to he arbitration hearing. The
parties shall each bear their own costs, expenses and attorneys' fees in
connection with the arbitration, unless a statute or contract applicable to the
claim or dispute expressly provides for recovery of attorneys' fees by the
prevailing party.
12. INCORPORATION AND INTEGRATION:
Boeck shall comply with and enforce all of the Company's operational
policies and procedures, personnel policies and procedures and work rules, as
they may be promulgated and announced from time to time. Except for such
operational policies and procedures, personnel policies and procedures and work
rules, this written agreement contains the entire agreement between the parties
and supersedes all prior oral, written and/or implied agreements, promises,
covenants, obligations, undertakings, commitments, representations and
understandings by or between the parties, including all prior employment
agreements, whether or not fully performed by Boeck before the date of this
agreement. The Company and Boeck acknowledge and agree that there are no terms,
conditions, covenants, obligations or promises, express or implied, applicable
to the employment except those set out in this agreement. There shall be no
amendment, modification, change or enlargement of this agreement except by a
writing signed by the party to be charged with performance of the amendment,
modification, change or enlargement. In the event of any conflict or difference
between this agreement and Company's current or future operational policies and
procedures, personnel policies and procedures and work rules, the provisions of
this agreement shall control.
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<PAGE>
13. SURVIVAL, GOVERNING LAW, VENUE AND SEVERABILITY:
The representations, warranties, covenants, promises and restrictions
set out in this agreement shall operate continuously and shall survive
termination of the employment created by the agreement. The agreement shall
inure to the benefit of and be binding upon Boeck, his heirs, estate, executors,
administrators and all others claiming through or on behalf of Boeck, and upon
Company, its subsidiaries, affiliates, successors and assigns. The agreement
shall be construed and governed in accordance with the laws of the State of
California. All actions, arbitrations and proceedings arising from or in
connection with the agreement or the employment it creates shall be commenced
and maintained in Sonoma County, State of California. If any term, covenant,
condition, clause or provision of this agreement is held to be invalid or
unenforceable, then such clause or provision shall be severed herefrom, and such
invalidity or unenforceability shall not affect any other provision of this
agreement, the balance of which shall remain in full force and effect; provided,
however, that if any such term, covenant, condition, clause or provision may be
modified so as to be valid or enforceable as a matter of law, then such term,
covenant, condition, clause or provision shall be deemed modified so as to be
enforceable to the maximum extent permitted by law.
14. NOTICES:
Any notices to be given hereunder by any party to another party shall
be in writing and delivered in person or mailed registered or certified mail,
postage prepaid with return receipt requested.
The Pathways Group, Inc.
By
- ------------------------------------ -------------------------------------
Robert Boeck Carey F. Daly II
President & CEO
By
-------------------------------------
Monte Strohl, Director acting under
authority of the Board of Directors
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Exhibit 10.10
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement between The Pathways Group, Inc. (hereinafter
the "Company") and Monte Strohl (hereinafter "Strohl"), effective as of November
1, 1999, is made for good and sufficient consideration, as reflected in the
mutual promises, covenants, obligations, undertakings and conditions set forth
below:
1. POSITION AND DUTIES:
The Company shall employ Strohl as Senior Vice President of Sales and
Marketing and in any additional capacity or capacities as the Company's
President and Chief Executive Officer may from time to time decide. Strohl shall
have the full responsibilities, duties and authorities of the Company's Senior
Vice President of Sales and Marketing. In addition, Strohl shall be responsible
for implementing and complying with directives issued by the Company's President
and Chief Executive Officer.
2. TERM OF EMPLOYMENT:
Subject to earlier termination as provided in this agreement, Strohl
shall be employed for a term of three (3) years, which shall be automatically
extended for additional one (1) year periods (such initial term and all extended
terms being referred to collectively herein as the "employment term") unless
either party gives notice in writing to the other not less than ninety (90) days
before the end of the initial term or extended term that the employment contract
shall not be extended.
3. COMPENSATION:
(a) BASE SALARY: Company shall pay a basic salary to Strohl at
the rate of One Hundred Fifty Thousand Dollars ($150,000.00) per year,
payable semi-monthly, in twenty-four (24) equal installments, subject
to all withholdings and deductions required for federal, state and
local taxes and charges and any other withholdings or deductions
authorized by Strohl.
(b) BONUS: Strohl shall also be paid an annual discretionary
performance bonus as determined by the Chief Executive Officer and/or
Board of Directors.
(b) AUTOMOBILE ALLOWANCE: The Company shall pay to Strohl an
annual Automobile Allowance in the annual amount of Seven Thousand
Eight Hundred Dollars ($7,800.00), payable semi-monthly in twenty-four
equal installments, subject to all withholdings and deductions required
for federal, state and local taxes and charges and any other
withholdings authorized by Strohl.
(c) STOCK OPTION: The Company shall issue to Strohl options to
purchase One Hundred Thousand (10,000) shares of the Company's common
stock, which options shall
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vest equally over three (3) years, at an exercise price of $3.00 per
share, pursuant to a stockholders plan intended to be qualified under
Section 422 of the Internal Revenue Code of 1986 and the regulations
promulgated in relation thereto. The plan will expire November 1, 2004.
Unexercised options awarded to Strohl hereunder shall be subject to
forfeiture as provided in Paragraphs 6 and 7 of this agreement.
4. EMPLOYMENT BENEFITS:
Throughout the employment term, Strohl shall be entitled to receive the
employment benefits generally offered to all other executive employees,
including, but not limited to, medical, dental, optical, prescription drugs and
life insurance for Strohl and his family, at Company expense, and:
(a) EXECUTIVE COMPENSATION PACKAGE: Enrollment in
Executive Compensation Package.
(b) VACATION: The Company waives its policy on vacations,
to allow for four weeks per year.
(c) LIFE INSURANCE: The Company shall provide and pay for
fife insurance on the life of Strohl in the amount of
three (3) times his annual salary provided for in
this agreement. The beneficiary shall be Strohl's
estate, unless otherwise directed by Strohl in
writing at any time prior to his death.
(d) STOCK ISSUANCE: The Company and Strohl may agree from
time to time, with the approval of the Board of
Directors, to issue to Strohl Common Stock of the
Company in consideration of such services or
contributions of property as may be deemed
appropriate, and at a value determined by the Board
of Directors in good faith and in compliance with
applicable law. Any such issuance of stock may, at
the request of Strohl, and subject to the approval of
the Company which may not be unreasonably withheld,
be issued by the Company to such party or entity,
including without limitation, an irrevocable trust or
similar entity, as Strohl may at the time of issuance
direct.
(e) DISABILITY COMPENSATION:
(1) If Strohl becomes disabled at any time, and for
any number of times, due to any cause so that he
is physically unable to perform his ordinary
duties and responsibilities under this
agreement, then Strohl shall be entitled to
receive, in lieu of salary, an amount equal to
his salary, payable at the same time and in the
same manner as Strohl's salary is paid, provided
however, that this benefit shall be limited to
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not more than a total of twelve (12) months
during the term of the agreement.
(2) Strohl's entitlement to disability income
pursuant to this subparagraph shall begin and
end as determined by a certificate issued by a
qualified M.D. or D.O. licensed by the State of
California. The certificate shall state in
substance that, Strohl was determined to be
disabled and unable to perform the ordinary and
usual duties as Senior Vice President of Sales
and Marketing of Pathways, beginning [DATE] ,
and Strohl's disability continues as of this
[DATE] . Such a certificate shall be submitted
every three (3) months beginning with the date
of disability and continuing thereafter until
Strohl's disability ends and he is able to
return to work full time or his disability
compensation benefit has been fully used,
whichever occurs first.
5. EXPENSE REIMBURSEMENT:
During the employment term, the Company shall reimburse Strohl for
reasonable out-of-pocket expenses incurred in connection with the Company's
business, including travel expenses, food, and lodging when away from home,
subject to such policies as the Company may from time to time reasonably
establish for its employees.
6. LIMITATION ON OUTSIDE ACTIVITIES:
During his employment, Strohl shall devote his full occupational time,
energies, abilities, knowledge and experience to the performance of his duties
under this agreement and shall not render to others services of any kind for
compensation or engage in any other business activity without the Company's
prior written consent. Strohl shall not, directly or indirectly, whether as a
partner, employee, creditor, shareholder or otherwise, promote, participate or
engage in any business activity competitive with the Company or its
subsidiaries, affiliates, co-venturers, customers or assigns. Strohl shall not
take any action to establish, form, assist or become employed by any such
competing business on termination of Strohl's employment. Strohl's breach of any
of the provisions of this paragraph shall give the Company the right, in
addition to all other remedies the Company may have, to terminate the employment
and to cancel and/or terminate any and all compensation and benefits to which
Strohl might otherwise be entitled under this agreement.
7. TERMINATION OF EMPLOYMENT:
The employment created by this agreement may be terminated during the
employment term in accordance with the following provisions of this paragraph:
(a) TERMINATION WITHOUT CAUSE BY THE COMPANY: The employment
may be terminated without cause in the sole and absolute discretion of
the Company upon written notice by the Company to Strohl; provided,
however, that if this agreement is terminated
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pursuant to this subparagraph, Strohl shall receive from Company all
salary and benefits provided under this agreement for six (6) months
after the effective date of the termination. Such salary and benefits
shall constitute the complete and exclusive obligation of the Company
for termination of the employment and for any and all claims of Strohl
arising out of or in connection with Strohl's employment or the
termination thereof.
(b) TERMINATION WITHOUT CAUSE BY STROHL: The employment may be
terminated without cause in the sole and absolute discretion of Strohl
upon six (6) months' written notice by Strohl to the Company, provided,
however, that if this agreement is terminated pursuant to this
subparagraph, Strohl shall forfeit any unexercised, vested stock
options under this agreement.
(c) TERMINATION FOR CAUSE BY THE COMPANY: The Company may
terminate the employment at any time upon written notice to Strohl if
the Company ceases a substantial portion of its business operation, in
the event of the sale or change of ownership of the Company or a
substantial portion of its assets, or if, in the sole and absolute
determination of the Company:
(1) Its business circumstances change so materially that
it is impracticable for the Company to continue using
Strohl's employment services; or Strohl's continued
employment would not confer to the Company the
substantial benefit intended to be gained by the
employment; or
(2) Strohl breaches his duty of loyalty to the Company or
any material term, promise, covenant, condition,
obligation, undertaking or commitment set out in this
agreement or the Company's operational policies or
procedures, personnel policies or procedures or work
rules; commits any material act of dishonesty or
illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action
against the Company; discloses any trade secret or
confidential or proprietary information of the
Company, its subsidiaries, affiliates, co-venturers,
customers or assigns; is guilty of carelessness,
misconduct, neglect of duty or unsatisfactory work
performance; or acts in any way that significantly
impedes or creates a risk of significant detriment to
the Company's operations, profits, reputation or
other business interests.
Such termination shall be effective immediately upon written notice of
termination.
(d) TERMINATION FOR CAUSE BY STROHL: Strohl may terminate the
employment at any time upon written notice to Company, if, in the sole
and absolute determination of Strohl, the Company breaches any material
term, promise, covenant, condition, obligation, undertaking or
commitment set out in this agreement; commits any material act of
dishonesty or illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action against Strohl;
improperly discloses any personal or
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private information of Strohl protected by any Constitutional or
statutory right to privacy; acts in a manner constituting constructive
discharge of Strohl; or the Company's actions or business circumstances
or Strohl's personal or family circumstances make it impossible or
impracticable for Strohl to continue performing employment services to
the Company. Such termination shall be effective immediately upon
written notice of termination.
(e) TERMINATION IN THE EVENT OF DISABILITY: If Strohl is
unable, due to mental or physical illness or injury, to substantially
perform his duties under this agreement in a satisfactory manner for a
period of twelve (12) months, the employment shall terminate at the end
of such period.
8. CONFIDENTIALITY, PROPERTY RIGHTS AND NO SOLICITATION:
(a) CONFIDENTIAL INFORMATION: In the course of his employment
by the Company, Strohl will have access to trade secrets and
confidential and proprietary information of the Company, its
subsidiaries, affiliates, co-venturers and customers, including, but
not limited to, personnel, products (developed and under development),
proposals, services, operations, procedures, customers, customer lists,
customer needs, customer contacts, customer relations, customer data
and information, marketing areas, marketing proposals, marketing
methods and plans, business development plans and techniques, business
methods and plans, sales methods and plans, sales figures, sales
projections, price lists, pricing formulae and information, invention,
discoveries, formulae, patents, trademarks, copyrights, films, scripts,
ideas, creations, concepts, theories, technologies, technology
applications, data, product research, prototypes, models, designs,
system design documents, specifications and requirements, schematics,
software, codes, program components and documentation, processes,
techniques, tools, devices, know-how, estimates, accounting records,
and accounting procedures (collectively referred to as "Confidential
Information"). Except as required in the course of his employment
Company, Strohl will not, without Company's prior consent, either
during his employment by Company or after termination of the
employment, directly or indirectly disclose to any third person any
Confidential Information. Scold acknowledges and agrees that all such
Confidential Information, regardless of who discovered, created or
developed it, is the property of the Company, solely and exclusively,
and is valuable proprietary information of the Company. Upon
termination of the employment, whether with or without cause, Strohl
shall immediately return and deliver to the Company.
(b) NO SOLICITATION OF EMPLOYEES: Strohl agrees that, during
his employment and for two (2) years thereafter, he will not solicit
any of the Company's employees for a competing business and will not
induce or attempt to induce any of the Company's employees to leave
their employment with the Company.
(c) INTELLECTUAL PROPERTY RIGHT: All rights, title and
interest of every kind and nature whatsoever in and to any intellectual
property, including, but not limited to, any inventions, patents,
trademarks, copyrights, films, scripts, ideas, creations, concepts,
theories, technologies, technology applications, products (developed
and under
5
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development), product research, prototypes and model, whether or not
invented, created, written, developed, furnished, produced or disclosed
by Strohl in the course of rendering his services to the Company under
this Agreement shall, as between the parties hereto, be and remain the
sole and exclusive property of the Company for any and all purposes and
uses whatsoever, and Strohl shall have no right, title or interest of
any kind or nature therein or thereto, or in and to any results and
proceeds therefrom.
(d) RETURN OF ALL OF THE COMPANY'S PROPERTY. Whenever
requested by the Company during the employment, and without request
upon termination of the employment, whether termination is with or
without cause, Strohl shall immediately return and deliver to the
Company all of the Company's property, including all items used by
Strohl in rendering services hereunder and all originals and copies of
the Company's documents and data, including, but not limited to, all
Confidential Information.
(e) PROTECTION OF OTHER COMPANIES' TRADE SECRETS AND
CONFIDENTIAL INFORMATION: Strohl understands that state and federal
laws provide severe penalties for misappropriation and unauthorized
disclosure of trade secrets and confidential, proprietary business
information belonging to Employee's previous employers or to any other
company. Strohl agrees and warrants that, in connection with his/her
employment by Company, he/she will not misappropriate, use or disclose
any trade secret or confidential, proprietary information belonging to
any previous employer or any other company. Strohl agrees and warrants
than if he/she has any question or uncertainty about whether particular
information might be a trade secret or confidential, propriety business
information of a previous employer or another company, Strohl will
immediately contact Company's General Counsel.
9. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT:
Strohl and the Company recognize and acknowledge that in his
employment, he will become familiar with all of the Company's sales methods and
plans, marketing, marketing and development, technologies, applications of
technologies, products (developed and under development), product research,
business methods and plans, data, processes, techniques, inventions,
discoveries, formulae, patterns, devices, know-how, services, products, and
other customer information (collectively referred to as "Confidential
Information"), in all of the geographic areas throughout the world in which the
Company already has made marketing efforts and/or sales of products and
services, and he will become knowledgeable about present and future marketing
proposals and plans for those products and services. Strohl agrees, as part of
the consideration for this Employment Agreement, that Strohl will not engage,
directly or indirectly, nor solicit employees of the Company to engage in the
development, distribution, manufacture or sale of any products or services which
compete with the products or services provided by the Company or its related
companies, for a period of two (2) years. The parties agree that the phrase
engage, directly or indirectly, nor solicit employees of the Company to engage
in the development distribution, manufacture or sale of any products or services
which compete with the products or services provided by the Company or its
related companies" shall include any situation or circumstance in which Strohl
shall be owner, partner, officer, director or shareholder
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of a corporation, or an agent, employee or consultant of any business entity
engaged, or about to become engaged, in competition with the Company.
10. INJUNCTIVE RELIEF:
Strohl acknowledges and agrees that any breach of the terms of
Paragraphs 8 or 9 above would irreparably injure the Company and that it would
be impossible to measure in money the resulting injury to the Company, and, in
any action to enforce this the terms of Paragraphs 8 or 9 or to enjoin any
breach of those paragraphs, Strohl waives any claim or defense that the Company
has an adequate remedy at law or that the Company would not be irreparably
injured by breach of the terms of Paragraphs 8 or 9, and Strohl acknowledges and
agrees that the Company will be entitled to temporary, preliminary and permanent
injunctive relief and restraining orders, without any delay whatsoever, in
connection with any breach, or threatened or impending breach, of any of the
terms of those paragraphs. In any action to enforce the Company's rights under
Paragraphs 8 through 10 of this agreement, the party prevailing in such action
shall be entitled to recover as damages reasonable attorneys' fees and all other
reasonable expenses incurred in the action and in any efforts prior to or during
the action to secure compliance with the terms of this agreement.
11. ARBITRATION:
Except for claims, disputes and causes of action arising out of or in
connection with Paragraphs 8 through 10 above, the Company and Strohl agree to
arbitrate any and all disputes and claims, including discrimination claims,
arising out of or in connection with the employment or the termination thereof,
if the amount in controversy is more than $5,000.00. This arbitration agreement
applies to all disputes between the parties and any and all claims by Strohl
against the Company and any officer, director, employee, agent or representative
of the Company, against any corporate parent or subsidiary of the Company,
and/or against any person or company affiliated with the employer (e.g., a
person or company involved in a joint venture, partnership or other similar
business relationship with the employer or one having an owner, partner or
parent or subsidiary corporation in common with the employer). The arbitration
award shall be final and binding on all parties to the arbitration proceeding.
The arbitration shall be conducted in Santa Rosa, California, pursuant to the
California Arbitration Act and the terms of this agreement. Arbitration may not
be initiated after expiration of any statute of limitation for the commencement
of any civil or administration proceeding on the claim or dispute. Arbitration
shall be initiated by written notice by one party to the other, specifying the
nature of each claim or dispute at issue and the amount and manner of
calculation of each item of damages. The parties shall each appoint one
arbitrator, and the parties' arbitrators shall together select a third neutral
arbitrator. If the three arbitrators determine that the claims or disputes
specified in the notice collectively involve an amount in controversy more than
$5,000.00, they shall hear and determine the dispute(s) or claim(s) according to
applicable laws, this arbitration agreement and the Company's work rules and
policies in effect at the time of the events which gave rise to the arbitration.
The three arbitrators shall issue a written decision determining each dispute,
claim and item of damages submitted to the arbitrators. Determination of each
dispute, claim and item of damages shall require the concurrence of at least two
arbitrators, but it is not necessary that the
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<PAGE>
same two arbitrators concur on every dispute, claim or item of damages. THE
ARBITRATION DECISION SHALL ATTEST THAT THE REQUISITE CONCURRENCE EXISTED AS TO
EACH DISPUTE, CLAIM AND ITEM OF DAMAGES. THE COMPANY AND STROHL UNDERSTAND AND
EXPRESSLY AGREE THAT, BY ENTERING INTO THIS ARBITRATION AGREEMENT, THEY ARE
GIVING UP THE RIGHT TO BRING IN ANY COURT ANY CLAIM, CAUSE OF ACTION OR DISPUTE
ARISING OUT OF OR IN CONNECTION WITH THE EMPLOYMENT OR THE TERMINATION THEREOF,
INCLUDING THE RIGHT TO A JURY TRIAL. The arbitration award may be confirmed by
any court having jurisdiction of the matter, and judgment may be entered on the
confirmed award. Charges and expenses of the neutral arbitrator shall be borne
by the parties equally, and the parties shall deposit their respective shares of
the neutral arbitrator's estimated charges prior to the arbitration hearing. The
parties shall each bear their own costs, expenses and attorneys' fees in
connection with the arbitration, unless a statute or contract applicable to the
claim or dispute expressly provides for recovery of attorneys' fees by the
prevailing party.
12. INCORPORATION AND INTEGRATION:
Strohl shall comply with and enforce all of the Company's operational
policies and procedures, personnel policies and procedures and work rules, as
they may be promulgated and announced torn time to tine. Except for such
operational policies and procedures, personnel policies and procedures and work
rules, this written agreement contains the entire agreement between the parties
and supersedes all prior oral, written and/or implied agreements, promises,
covenants, obligations, undertakings, commitments, representations and
understandings by or between the parties, including all prior employment
agreements, whether or not fully performed by Strohl before the date of this
agreement. The Company and Strohl acknowledge and agree that there are no terms,
conditions, covenants, obligations or promises, express or implied, applicable
to the employment except those set out in this agreement. There shall be no
amendment, modification, change or enlargement of this agreement except by a
writing signed by the party to be charged with performance of the amendment,
modification, change or enlargement. In the event of any conflict or difference
between this agreement and Company's current or future operational policies and
procedures, personnel policies and procedures and work rules, the provisions of
this agreement shall control.
13. SURVIVAL, GOVERNING LAW, VENUE AND SEVERABILITY:
The representations, warranties, covenants, promises and restrictions
set out in this agreement shall operate continuously and shall survive
termination of the employment created by the agreement. The agreement shall
inure to the benefit of and be binding upon Strohl, his heirs, estate,
executors, administrators and all others claiming through or on behalf of
Strohl, and upon Company, its subsidiaries, affiliates, successors and assigns.
The agreement shall be construed and governed in accordance with the laws of the
State of California. All actions, arbitrations and proceedings arising from or
in connection with the agreement or the employment it creates shall be commenced
and maintained in Sonoma County, State of California. If any term, covenant,
condition, clause or provision of this agreement is held to be invalid or
unenforceable, then such clause or provision shall be severed herefrom, and such
invalidity or unenforceability shall not affect any other provision of this
agreement, the balance of which shall remain in full force and effect; provided,
however, that if any such term, covenant, condition, clause or provision may be
8
<PAGE>
modified so as to be valid or enforceable as a matter of law, then such term,
covenant, condition, clause or provision shall be deemed modified so as to be
enforceable to the maximum extent permitted by law.
14. NOTICES:
Any notices to be given hereunder by any party to another party shall
be in writing and delivered in person or mailed registered or certified mail,
postage prepaid with return receipt requested.
The Pathways Group, Inc.
By
- ------------------------------------ -------------------------------------
Monte Strohl Carey F. Daly II
President & CEO
By
-------------------------------------
Monte Strohl, Director acting
authority of the Board of Directors
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Exhibit 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement between The Pathways Group, Inc. (hereinafter
the "Company") and Robert W. Haller (hereinafter "Haller"), effective as of
November 1, 1999, is made for good and sufficient consideration, as reflected in
the mutual promises, covenants, obligations, undertakings and conditions set
forth below:
1. POSITION AND DUTIES:
The Company shall employ Haller as Executive Vice President and in any
additional capacity or capacities as the Company's President and Chief Executive
Officer may from time to time decide. Haller shall have the full
responsibilities, duties and authorities of the Company's Executive Nice
President. In addition, Haller shall be responsible for implementing and
complying with directives issued by the Company's President and Chief Executive
Officer.
2. TERM OF EMPLOYMENT:
Subject to earlier termination as provided in this agreement, Haller
shall be employed for a term of three (3) years, which shall be automatically
extended for additional one (1) year periods (such initial term and all extended
terms being referred to collectively herein as the "employment term") unless
either party gives notice in writing to the other not less than ninety (90) days
before the end of the initial term or extended term that the employment contract
shall not be extended.
3. COMPENSATION:
(a) BASE SALARY: Company shall pay a basic salary to Haller at
the rate of One Hundred Sixty Five Thousand Dollars ($165,000.00) per
year, payable semi-monthly, in twenty-four (24) equal installments,
subject to all withholdings and deductions required for federal, state
and local taxes and charges and any other withholdings or deductions
authorized by Haller.
(b) BONUS. Haller shall also be paid an annual discretionary
performance bonus as determined by the Chief Executive Officer and/or
Board of Directors.
(b) AUTOMOBILE ALLOWANCE: The Company shall pay to Haller an
annual Automobile Allowance in the annual amount of Seven Thousand
Eight Hundred Dollars ($7,800.00), payable semi-monthly in twenty-four
equal installments, subject to all withholdings and deductions required
for federal, state and local taxes and charges and any other
withholdings authorized by Haller.
(c) STOCK OPTION: The Company shall issue to Haller options to
purchase One Hundred Thousand (100,000) shares of the Company's common
stock, which options shall vest equally over three (3) years, at an
exercise price of $3.00 per share, pursuant to
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<PAGE>
a stockholders plan intended to be qualified Under Section 422 of the
Internal Revenue Code of 1986 and the regulations promulgated in
relation thereto. The plan will expire November 1, 2004. Unexercised
options awarded to Haller hereunder shall be subject to forfeiture as
provided in Paragraphs 6 and 7 of this agreement.
4. EMPLOYMENT BENEFITS:
Throughout the employment term, Haller shall be entitled to receive the
employment benefits generally offered to all other executive employees,
including, but not limited to, medical, dental, optical, prescription drugs and
life insurance for Haller and his family, at Company expense, and:
(a) EXECUTIVE COMPENSATION PACKAGE: Enrollment in
Executive Compensation Package.
(b) VACATION: The Company waives its policy on vacations,
to allow for four weeks per year.
(c) LIFE INSURANCE: The Company shall provide and pay for
life insurance on the life of Haller in the amount of
three (3) times his annual salary provided for in
this agreement. The beneficiary shall be Haller's
estate, unless otherwise directed by Haller in
writing at any time prior to his death.
(d) STOCK ISSUANCE: The Company and Haller may agree from
time to time, with the approval of the Board of
Directors, to issue to Haller Common Stock of the
Company in consideration of such services or
contributions of property as may be deemed
appropriate, and at a value determined by the Board
of Directors in good faith and in compliance with
applicable law. Any such issuance of stock may, at
the request of Haller, and subject to the approval of
the Company which may not be unreasonably withheld,
be issued by the Company to such party or entity,
including without limitation, an irrevocable trust or
similar entity, as Haller may at the time of issuance
direct.
(e) DISABILITY COMPENSATION:
(1) If Haller becomes disabled at any time, and for
any number of times, due to any cause so that
he is physically unable to perform his ordinary
duties and responsibilities under this
agreement, then Haller shall be entitled to
receive, in lieu of salary, an amount equal to
his salary, payable at the same time and in the
same manner as Haller's salary is paid,
provided however, that this benefit shall be
limited to not more than a total of twelve (12)
months during the term of the agreement.
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(2) Haller's entitlement to disability income
pursuant to this subparagraph shall begin and
end as determined by a certificate issued by a
qualified M.D. or D.O. licensed by the State of
California. The certificate shall state in
substance that, "Haller was determined to be
disabled and unable to perform the ordinary and
usual duties as Executive Vice President of
Pathways, beginning [DATE] , and Haller's
disability continues as of this [DATE] ." Such
a certificate shall be submitted every three
(3) months beginning with the date of
disability and continuing thereafter until
Haller's disability ends and he is able to
return to work full time or his disability
compensation benefit has been fully used,
whichever occurs first.
5. EXPENSE REIMBURSEMENT:
During the employment term, the Company shall reimburse Haller for
reasonable out-of-pocket expenses incurred in connection with the Company's
business, including travel expenses, food, and lodging when away from home,
subject to such policies as the Company may from time to time reasonably
establish for its employees.
6. LIMITATION ON OUTSIDE ACTIVITIES:
During his employment, Haller shall devote his full occupational time,
energies, abilities, knowledge and experience to the performance of his duties
under this agreement and shall not render to others services of any kind for
compensation or engage in any other business activity without the Company's
prior written consent. Haller shall not, directly or indirectly, whether as a
partner, employee, creditor, shareholder or otherwise, promote, participate or
engage in any business activity competitive with the Company or its
subsidiaries, affiliates, co-venturers, customers or assigns. Haller shall not
take any action to establish, form, assist or become employed by any such
competing business on termination of Haller's employment. Haller's breach of any
of the provisions of this paragraph shall give the Company the right, in
addition to all other remedies the Company may have, to terminate the employment
and to cancel and/or terminate any and all compensation and benefits to which
Haller might otherwise be entitled under this agreement.
7. TERMINATION OF EMPLOYMENT:
The employment created by this agreement may be terminated during the
employment term in accordance with the following provisions of this paragraph:
(a) TERMINATION WITHOUT CAUSE BY THE COMPANY: The employment
may be terminated without cause in the sole and absolute discretion of
the Company upon written notice by the Company to Haller; provided,
however, that if this agreement is terminated pursuant to this
subparagraph, Haller shall receive from Company all salary and benefits
provided under this agreement for six (6) months after the effective
date of the
3
<PAGE>
termination. Such salary and benefits shall constitute the complete and
exclusive obligation of the Company for termination of the employment
and for any and all claims of Haller arising out of or in connection
with Haller's employment or the termination thereof.
(b) TERMINATION WITHOUT CAUSE BY HALLER: The employment may be
terminated without cause in the sole and absolute discretion of Haller
upon six (6) months' written notice by Haller to the Company, provided,
however, that if this agreement is terminated pursuant to this
subparagraph, Haller shall forfeit any unexercised, vested stock
options under this agreement.
(c) TERMINATION FOR CAUSE BY THE COMPANY: The Company may
terminate the employment at any time upon written notice to Haller if
the Company ceases a substantial portion of its business operation, in
the event of the sale or change of ownership of the Company or a
substantial portion of its assets, or if, in the sole and absolute
determination of the Company:
(1) Its business circumstances change so
materially that it is impracticable for the
Company to continue using Haller's
employment services; or Haller's continued
employment would not confer to the Company
the substantial benefit intended to be
gained by the employment; or
(2) Haller breaches his duty of loyalty to the
Company or any material term, promise,
covenant, condition, obligation, undertaking
or commitment set out in this agreement or
the Company's operational policies or
procedures, personnel policies or procedures
or work rules; commits any material act of
dishonesty or illegality; commits any act or
omission creating an unreasonable risk of
civil or criminal legal action against the
Company; discloses any trade secret or
confidential or proprietary information of
the Company, its subsidiaries, affiliates,
co-venturers, customers or assigns; is
guilty of carelessness, misconduct, neglect
of duty or unsatisfactory work performance;
or acts in any way that significantly
impedes or creates a risk of significant
detriment to the Company's operations,
profits, reputation or other business
interests.
Such termination shall be effective immediately upon written notice of
termination.
(d) TERMINATION FOR CAUSE BY HALLER: Haller may terminate the
employment at any time upon written notice to Company, if, in the sole
and absolute determination of Haller, the Company breaches any material
term, promise, covenant, condition, obligation, undertaking or
commitment set out in this agreement; commits any material act of
dishonesty or illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action against Haller;
improperly discloses any personal or
4
<PAGE>
private information of Haller protected by any Constitutional or
statutory right to privacy; acts in a manner constituting constructive
discharge of Haller; or the Company's actions or business circumstances
or Haller's personal or family circumstances make it impossible or
impracticable for Haller to continue performing employment services to
the Company. Such termination shall be effective immediately upon
written notice of termination.
(e) TERMINATION IN THE EVENT OF DISABILITY: If Haller is
unable, due to mental or physical illness or injury, to substantially
perform his duties under this agreement in a satisfactory manner for a
period of twelve (12) months, the employment shall terminate at the end
of such period.
8. CONFIDENTIALITY, PROPERTY RIGHTS AND NO SOLICITATION:
(a) Confidential Information: In the course of his employment
by the Company, Haller will have access to trade secrets and
confidential and proprietary information of the Company, its
subsidiaries, affiliates, co-venturers and customers, including, but
not limited to, personnel, products (developed and under development),
proposals, services, operations, procedures, customers, customer lists,
customer needs, customer contacts, customer relations, customer data
and information, marketing areas, marketing proposals, marketing
methods and plans, business development plans and techniques, business
methods and plans, sales methods and plans, sales figures, sales
projections, price lists, pricing formulae and information, inventions,
discoveries, formulae, patents, trademarks, copyrights, films, scripts,
ideas, creations, concepts, theories, technologies, technology
applications, data, product research, prototypes, models, designs,
system design documents, specifications and requirements, schematics,
software, codes, program components and documentation, processes,
techniques, tools, devices, know-how, estimates, accounting records,
and accounting procedures (collectively referred to as "Confidential
Information"). Except as required in the course of his employment by
Company, Haller will not, without Company's prior consent, either
during his employment by Company or after termination of the
employment, directly or indirectly disclose to any third person any
Confidential Information. Haller acknowledges and agrees that all such
Confidential Information, regardless of who discovered, created or
developed it, is the property of the Company, solely and exclusively,
and is valuable proprietary information of the Company. Upon
termination of the employment, whether with or without cause, Haller
shall immediately return and deliver to the Company.
(b) NO SOLICITATION OF EMPLOYEES: Haller agrees that, during
his employment and for two (2) years thereafter, he will not solicit
any of the Company's employees for a competing business and will not
induce or attempt to induce any of the Company's employees to leave
their employment with the Company.
(c) INTELLECTUAL PROPERTY RIGHTS: All rights, title and
interest of every kind and nature whatsoever in and to any intellectual
property, including, but not limited to, any inventions, patents,
trademarks, copyrights, films, scripts, ideas, creations, concepts,
theories, technologies, technology applications, products (developed
and under
5
<PAGE>
development), product research, prototypes and models, whether or not
invented, created, written, developed, furnished, produced or disclosed
by Haller in the course of rendering his services to the Company under
this Agreement shall, as between the parties hereto, be and remain the
sole and exclusive property of the Company for any and all purposes and
uses whatsoever, and Haller shall have no right, title or interest of
any kind or nature therein or thereto, or in and to any results and
proceeds therefrom.
(d) RETURN OF ALL OF THE COMPANY'S PROPERTY: Whenever
requested by the Company during the employment, and without request
upon termination of the employment, whether termination is with or
without cause, Haller shall immediately return and deliver to the
Company all of the Company's property, including all items used by
Haller in rendering services hereunder and all originals and copies of
the Company's documents and data, including, but not limited to, all
Confidential Information.
(e) PROTECTION OF OTHER COMPANIES' TRADE SECRETS AND
CONFIDENTIAL INFORMATION: Haller understands that state and federal
laws provide severe penalties for misappropriation and unauthorized
disclosure of trade secrets and confidential, proprietary business
information belonging to Employee's previous employers or to any other
company. Haller agrees and warrants that, in connection with his/her
employment by Company, he/she will not misappropriate, use or disclose
any trade secret or confidential, proprietary information belonging to
any previous employer or any other company. Haller agrees and warrants
that, if he/she has any question or uncertainty about whether
particular information might be a trade secret or confidential,
propriety business information of a previous employer or another
company, Haller will immediately contact Company's General Counsel.
9. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT:
Haller and the Company recognize and acknowledge that in his
employment, he will become familiar with all of the Company's sales methods and
plans, marketing, marketing and development, technologies, applications of
technologies, products (developed and under development), product research,
business methods and plans, data, processes, techniques, inventions,
discoveries, formulae, patterns, devices, know-how, services, products, and
other customer information (collectively referred to as "Confidential
Information"), in all of the geographic areas throughout the world in which the
Company already has made marketing efforts and/or sales of products and
services, and he will become knowledgeable about present and future marketing
proposals and plans for those products and services. Haller agrees, as part of
the consideration for this Employment Agreement, that Haller will not engage,
directly or indirectly, nor solicit employees of the Company to engage in the
development, distribution, manufacture or sale of any products or services which
compete with the products or services provided by the Company or its related
companies, for a period of two (2) years. The parties agree that the phrase
"engage, directly or indirectly, nor solicit employees of the Company to engage
in the development distribution, manufacture or sale of any products or services
which compete with the products or services provided by the Company or its
related companies" shall include any situation or circumstance in which Haller
shall be owner, partner, officer, director or shareholder
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<PAGE>
of a corporation, or an agent, employee or consultant of any business entity
engaged, or about to become engaged, in competition with the Company.
10. INJUNCTIVE RELIEF:
Haller acknowledges and agrees that any breach of the terrns of
Paragraphs 8 or 9 above would irreparably injure the Company and that it would
be impossible to measure in money the resulting injury to the Company, and, in
any action to enforce this the terms of Paragraphs 8 or 9 or to enjoin any
breach of those paragraphs, Haller waives any claim or defense that the Company
has an adequate remedy at law or that the Company would not be irreparably
injured by breach of the terms of Paragraphs 8 or 9, and Haller acknowledges and
agrees that the Company will be entitled to temporary, preliminary and permanent
injunctive relief and restraining orders, without any delay whatsoever, in
connection with any breach, or threatened or impending breach, of any of the
terms of those paragraphs. In any action to enforce the Company's rights under
Paragraphs 8 through 10 of this agreement, the party prevailing in such action
shall be entitled to recover as damages reasonable attorneys' fees and all other
reasonable expenses incurred in the action and in any efforts prior to or during
the action to secure compliance with the terms of this agreement.
11. ARBITRATION:
Except for claims, disputes and causes of action arising out of or in
connection with Paragraphs 8 through 10 above, the Company and Haller agree to
arbitrate any and all disputes and claims, including discrimination claims,
arising out of or in connection with the employment or the termination thereof,
if the amount in controversy is more than $5,000.00. This arbitration agreement
applies to all disputes between the parties and any and all claims by Haller
against the Company and any officer, director, employee, agent or representative
of the Company, against any corporate parent or subsidiary of the Company,
and/or against any person or company affiliated with the employer (e.g., a
person or company involved in a joint venture, partnership or other similar
business relationship with the employer or one having an owner, partner or
parent or subsidiary corporation in common with the employer). The arbitration
award shall be final and binding on all parties to the arbitration proceeding.
The arbitration shall be conducted in Santa Rosa, California, pursuant to the
California Arbitration Act and the terms of this agreement. Arbitration may not
be initiated after expiration of any statute of limitation for the commencement
of any civil or administration proceeding on the claim or dispute. Arbitration
shall be initiated by written notice by one party to the other, specifying the
nature of each claim or dispute at issue and the amount and manner of
calculation of each item of damages. The parties shall each appoint one
arbitrator, and the parties' arbitrators shall together select a third neutral
arbitrator. If the three arbitrators determine that the claims or disputes
specified in the notice collectively involve an amount in controversy more than
$5,000.00, they shall hear and determine the dispute(s) or claim(s) according to
applicable laws, this arbitration agreement and the Company's work rules and
policies in effect at the time of the events which gave rise to the arbitration.
The three arbitrators shall issue a written decision determining each dispute,
claim and item of damages submitted to the arbitrators. Determination of each
dispute, claim and item of damages shall require the concurrence of at least two
arbitrators, but it is not necessary that the
7
<PAGE>
same two arbitrators concur on every dispute, claim or item of damages. The
arbitration decision shall attest that the requisite concurrence existed as to
each dispute, claim and item of damages. THE COMPANY AND HALLER UNDERSTAND AND
EXPRESSLY AGREE THAT, BY ENTERING INTO THIS ARBITRATION AGREEMENT, THEY ARE
GIVING UP THE RIGHT TO BRING IN ANY COURT ANY CLAIM, CAUSE OF ACTION OR DISPUTE
ARISING OUT OF OR IN CONNECTION WITH THE EMPLOYMENT OR THE TERMINATION THEREOF,
INCLUDING THE RIGHT TO A JURY TRIAL. The arbitration award may be confirmed by
any court having jurisdiction of the matter, and judgment may be entered on the
confirmed award. Charges and expenses of the neutral arbitrator shall be borne
by the parties equally, and the parties shall deposit their respective shares of
the neutral arbitrator's estimated charges prior to the arbitration hearing. The
parties shall each bear their own costs, expenses and attorneys' fees in
connection with the arbitration, unless a statute or contract applicable to the
claim or dispute expressly provides for recovery of attorneys' fees by the
prevailing party.
12. INCORPORATION AND INTEGRATION:
Haller shall comply with and enforce all of the Company's operational
policies and procedures, personnel policies and procedures and work rules, as
they may be promulgated and announced from time to time. Except for such
operational policies and procedures, personnel policies and procedures and work
rules, this written agreement contains the entire agreement between the parties
and supersedes all prior oral, written and/or implied agreements, promises,
covenants, obligations, undertakings, commitments, representations and
understandings by or between the parties, including all prior employment
agreements, whether or not fully performed by Haller before the date of this
agreement. The Company and Haller acknowledge and agree that there are no terms,
conditions, covenants, obligations or promises, express or implied, applicable
to the employment except those set out in this agreement. There shall be no
amendment, modification, change or enlargement of this agreement except by a
writing signed by the party to be charged with performance of the amendment,
modification, change or enlargement. In the event of any confhct or difference
between this agreement and Company's current or future operational policies and
procedures, personnel policies and procedures and work rules, the provisions of
this agreement shall control.
13. SURVIVAL, GOVERNING LAW, VENUE AND SEVERABILITY:
The representations, warranties, covenants, promises and restrictions
set out in this agreement shall operate continuously and shall survive
termination of the employment created by the agreement. The agreement shall
inure to the benefit of and be binding upon HALLER, his heirs, estate,
executors, administrators and all others claiming through or on behalf of
HALLER, and upon Company, its subsidiaries, affiliates, successors and assigns.
The agreement shall be construed and governed in accordance with the laws of the
State of California. All actions, arbitrations and proceedings arising from or
in connection with the agreement or the employment it creates shall be commenced
and maintained in Sonoma County, State of California. If any term, covenant,
condition, clause or provision of this agreement is held to be invalid or
unenforceable, then such clause or provision shall be severed herefrom, and such
invalidity or unenforceability shall not affect any other provision of this
agreement, the balance of which shall remain in full force and effect; provided,
however, that if any such term, covenant, condition, clause or provision may be
8
<PAGE>
modified so as to be valid or enforceable as a matter of law, then such term,
covenant, condition, clause or provision shall be deemed modified so as to be
enforceable to the maximum extent permitted by law.
14. NOTICES:
Any notices to be given hereunder by any party to another party shall
be in writing and delivered in person or mailed registered or certified mail,
postage prepaid with return receipt requested.
The Pathways Group, Inc.
By
- ------------------------------------ -------------------------------------
Robert W. Haller Carey F. Daly II
President & CEO
By
-------------------------------------
Monte Strohl, Director acting
authority of the Board of Directors
9
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Exhibit 10.12
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement between The Pathways Group, Inc. (hereinafter
the "Company") and Christopher R. Miller (hereinafter "Miller"), effective as of
November 1, 1999, is made for good and sufficient consideration, as reflected in
the mutual promises, covenants, obligations, undertakings and conditions set
forth below:
1. POSITION AND DUTIES:
The Company shall employ Miller as Senior Vice President for Business
Development and in any additional capacity or capacities as the Company's
President and Chief Executive Officer may from time to time decide. Miller shall
have the full responsibilities, duties and authorities of the Company's Senior
Vice President for Business Development. In addition, Miller shall be
responsible for implementing and complying with directives issued by the
Company's President and Chief Executive Officer.
2. TERM OF EMPLOYMENT:
Subject to earlier termination as provided in this agreement, Miller
shall be employed for a term of three (3) years, which shall be automatically
extended for additional one (1) year periods (such initial term and all extended
terms being referred to collectively herein as the "employment term") unless
either party gives notice in writing to the other not less than ninety (90) days
before the end of the initial term or extended term that the employment contract
shall not be extended.
3. COMPENSATION:
(a) BASE SALARY: Company shall pay a base salary to Miller at
the rate of One Hundred Fifty Thousand Dollars ($150,000.00) per year,
payable semi-monthly, in twenty-four (24) equal installments, subject
to all withholdings and deductions required for federal, state and
local taxes and charges and any other withholdings or deductions
authorized by Miller. In addition to the base salary established above,
and in recognition of the fact that Miller is relinquishing significant
income opportunities in the immediate future by ceasing the private
practice of law at this time, Miller will receive a one-time signing
bonus of One Hundred Thousand Dollars ($100,000.00) payable as follows:
Fifty Thousand Dollars ($50,000.00) payable at signing, Twenty Five
Thousand Dollars payable January 3, 2000 and Twenty Five Thousand
Dollars payable February 1, 2000.
(b) BONUS: Miller shall also be paid an annual discretionary
performance bonus as determined by the Chief Executive Officer and/or
Board of Directors.
(b) AUTOMOBILE ALLOWANCE: The Company shall pay to Miller an
annual Automobile Allowance in the annual amount of Seven Thousand
Eight Hundred Dollars ($7,800.00), payable semi-monthly in twenty-four
equal installments, subject to all
<PAGE>
withholdings and deductions required for federal, state and local taxes
and charges and any other Executive Employment Agreement withholdings
authorized by Miller.
(c) STOCK OPTION: The Company shall issue to Miller options to
purchase One Hundred Thousand (100,000) shares of the Company's common
stock, which options shall vest equally over three (3) years, at an
exercise price of $3.00 per share, pursuant to a stockholders plan
intended to be qualified under Section 422 of the Internal Revenue Code
of 1986 and the regulations promulgated in relation thereto. The plan
will expire November 1, 2004. Unexercised options awarded to Miller
hereunder shall be subject to forfeiture as provided in Paragraphs 6
and 7 of this agreement.
4. EMPLOYMENT BENEFITS:
Throughout the employment term, Miller shall be entitled to receive the
employment benefits generally offered to all other executive employees,
including, but not limited to, medical, dental, optical, prescription drugs and
life insurance for Miller and his family, at Company expense, and:
(a) EXECUTIVE COMPENSATION PACKAGE: Enrollment in
Executive Compensation Package.
(b) VACATION: The Company waives its policy on vacations,
to allow for four weeks per year.
(c) LIFE INSURANCE: The Company shall provide and pay for
life insurance on the life of Miller in the amount of
three (3) times his annual salary provided for in
this agreement. The beneficiary shall be Miller's
estate, unless otherwise directed by Miller in
writing at any time prior to his death.
(d) STOCK ISSUANCE: The Company and Miller may agree from
time to time, with the approval of the Board of
Directors, to issue to Miller Common Stock of the
Company in consideration of such services or
contributions of property as may be deemed
appropriate, and at a value determined by the Board
of Directors in good faith and in compliance with
applicable law. Any such issuance of stock may, at
the request of Miller, and subject to the approval of
the Company which may not be unreasonably withheld,
be issued by the Company to such party or entity,
including without limitation, an irrevocable trust or
similar entity, as Miller may at the time of issuance
direct.
(e) DISABILITY COMPENSATION:
(1) If Miller becomes disabled at any time, and
for any number of times, due to any cause so
that he is physically unable to perform
2
<PAGE>
his ordinary duties and responsibilities
under this agreement, then Miller shall be
entitled to receive, in lieu of salary, an
amount equal to his salary, payable at the
same time and in the same manner as Miller's
salary is paid, provided however, that this
benefit shall be limited to not more than a
total of twelve (12) months during the term
of the agreement.
(2) Miller's entitlement to disability income
pursuant to this subparagraph shall begin
and end as determined by a certificate
issued by a qualified M.D. or D.O. licensed
by the State of California. The certificate
shall state in substance that, " Miller was
determined to be disabled and unable to
perform the ordinary and usual duties as
Senior Vice President, Business Development
of Pathways, beginning [DATE] Miller's
disability continues as of this [DATE ."
Such a certificate shall be submitted every
three (3) months beginning with the date of
disability and continuing thereafter until
Miller's disability ends and he is able to
return to work full time or his disability
compensation benefit has been fully used,
whichever occurs first.
5. EXPENSE REIMBURSEMENT:
During the employment term, the Company shall reimburse Miller for
reasonable out-of pocket expenses incurred in connection with the Company's
business, including travel expenses, food, and lodging when away from home,
subject to such policies as the Company may from time to time reasonably
establish for its employees.
6. LIMITATION ON OUTSIDE ACTIVITIES:
During his employment, Miller shall devote his full occupational time,
energies, abilities, knowledge and experience to the performance of his duties
under this agreement and shall not render to others services of any kind for
compensation or engage in any other business activity without the Company's
prior written consent. Notwithstanding the foregoing, it is understood and
agreed that for a transitional period of time, not to exceed one year, Miller
shall remain as Of Counsel to Lanahan & Reilley LLP in order to wind up certain
matters for which he is presently responsible. Miller shall not, directly or
indirectly, whether as a partner, employee, creditor, shareholder or otherwise,
promote, participate or engage in any business activity competitive with the
Company or its subsidiaries, affiliates, co-venturers, customers or assigns.
Miller shall not take any action to establish, form, assist or become employed
by any such competing business on termination of Miller's employment. Miller's
breach of any of the provisions of this paragraph shall give the Company the
right, in addition to all other remedies the Company may have, to terminate the
employment and to cancel and/or terminate any and all compensation and benefits
to which Miller might otherwise be entitled under this agreement.
3
<PAGE>
7. TERMINATION OF EMPLOYMENT:
The employment created by this agreement may be terminated during the
employment term in accordance with the following provisions of this paragraph:
(a) TERMINATION WITHOUT CAUSE BY THE COMPANY: The employment
maybe terminated without cause in the sole and absolute discretion of
the Company upon written notice by the Company to Miller; provided,
however, that if this agreement is terminated pursuant to this
subparagraph, Miller shall receive from Company all salary and benefits
provided under this agreement for six (6) months after the effective
date of the termination. Such salary and benefits shall constitute the
complete and exclusive obligation of the Company for termination of the
employment and for any and all claims of Miller arising out of or in
connection with Miller's employment or the termination thereof.
(b) TERMINATION WITHOUT CAUSE BY MILLER: The employment may be
terminated without cause in the sole and absolute discretion of Miller
upon six (6) months' written notice by Miller to the Company, provided,
however, that if this agreement is terminated pursuant to this
subparagraph, Miller shall forfeit any unexercised, vested stock
options under this agreement.
(c) TERMINATION FOR CAUSE BY THE COMPANY: The Company may
terminate the employment at any time upon written notice to Miller if
the Company ceases a substantial portion of its business operation, in
the event of the sale or change of ownership of the Company or a
substantial portion of its assets, or if, in the sole and absolute
determination of the Company:
(1) Its business circumstances change so materially that
it is impracticable for the Company to continue using
Miller's employment services; or Miller's continued
employment would not confer to the Company the
substantial benefit intended to be gained by the
employment; or
(2) Miller breaches his duty of loyalty to the Company or
any material term, promise, covenant, condition,
obligation, undertaking or commitment set out in this
agreement or the Company's operational policies or
procedures, personnel policies or procedures or work
rules; commits any material act of dishonesty or
illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action
against the Company; discloses any trade secret or
confidential or proprietary information of the
Company, its subsidiaries, affiliates, co-venturers,
customers or assigns; is guilty of carelessness,
misconduct, neglect of duty or unsatisfactory work
performance; or acts in any way that significantly
impedes or creates a risk of significant detriment to
the Company's operations, profits, reputation or
other business interests.
4
<PAGE>
Such termination shall be effective immediately upon written notice of
termination.
(d) TERMINATION FOR CAUSE BY MILLER: Miller may terminate the
employment at any time upon written notice to Company, if, in the sole
and absolute determination of Miller, the Company breaches any material
term, promise, covenant, condition, obligation, undertaking or
commitment set out in this agreement; commits any material act of
dishonesty or illegality; commits any act or omission creating an
unreasonable risk of civil or criminal legal action against Miller;
improperly discloses any personal or private information of Miller
protected by any Constitutional or statutory right to privacy; acts in
a manner constituting constructive discharge of Miller; or the
Company's actions or business circumstances or Miller's personal or
family circumstances make it impossible or impracticable for Miller to
continue performing employment services to the Company. Such
termination shall be effective immediately upon written notice of
termination.
(e) TERMINATION IN THE EVENT OF DISABILITY: If Miller is
unable, due to mental or physical illness or injury, to substantially
perform his duties under this agreement in a satisfactory manner for a
period of twelve (12) months, the employment shall terminate at the end
of such period.
8. CONFIDENTIALITY, PROPERTY RIGHTS AND NO SOLICITATION:
(a) CONFIDENTIAL INFORMATION: In the course of his employment
by the Company, Miller will have access to trade secrets and
confidential and proprietary information of the Company, its
subsidiaries, affiliates, co-venturers and customers, including, but
not limited to, personnel, products (developed and under development),
proposals, services, operations, procedures, customers, customer lists,
customer needs, customer contacts, customer relations, customer data
and information, marketing areas, marketing proposals, marketing
methods and plans, business development plans and techniques, business
methods and plans, sales methods and plans, sales figures, sales
projections, price lists, pricing formulae and information, inventions,
discoveries, formulae, patents, trademarks, copyrights, films, scripts,
ideas, creations, concepts, theories, technologies, technology
applications, data, product research, prototypes, models, designs,
system design documents, specifications and requirements, schematics,
software, codes, program components and documentation, processes,
techniques, tools, devices, know-how, estimates, accounting records,
and accounting procedures (collectively referred to as "Confidential
Information"). Except as required in the course of his employment by
Company, Miller will not, without Company's prior consent, either
during his employment by Company or after termination of the
employment, directly or indirectly disclose to any third person any
Confidential Information. Miller acknowledges and agrees that all such
Confidential Information, regardless of who discovered, created or
developed it, is the property of the Company, solely and exclusively,
and is valuable proprietary information of the Company. Upon
termination of the employment, whether with or without cause, MILLER
shall immediately return and deliver to the Company.
5
<PAGE>
(b) NO SOLICITATION OF EMPLOYEES: Miller agrees that, during
his employment and for two (2) years thereafter, he will not solicit
any of the Company's employees for a competing business and will not
induce or attempt to induce any of the Company's employees to leave
their employment with the Company.
(c) INTELLECTUAL PROPERTY RIGHTS: All rights, title and
interest of every kind and nature whatsoever in and to any intellectual
property, including, but not limited to, any inventions, patents,
trademarks, copyrights, films, scripts, ideas, creations, concepts,
theories, technologies, technology applications, products (developed
and under development), product research, prototypes and models,
whether or not invented, created, written, developed, furnished,
produced or disclosed by Miller in the course of rendering his services
to the Company under this Agreement shall, as between the parties
hereto, be and remain the sole and exclusive property of the Company
for any and all purposes and uses whatsoever, and Miller shall have no
right, title or interest of any kind or nature therein or thereto, or
in and to any results and proceeds therefrom.
(d) RETURN OF ALL OF THE COMPANY'S PROPERTY. Whenever
requested by the Company during the employment, and without request
upon termination of the employment, whether termination is with or
without cause, Miller shall immediately return and deliver to the
Company all of the Company's property, including all items used by
Miller in rendering services hereunder and all originals and copies of
the Company's documents and data, including, but not limited to, all
Confidential Information.
(e) PROTECTION OF OTHER COMPANIES' TRADE SECRETS AND
CONFIDENTIAL INFORMATION: Miller understands that state and federal
laws provide severe penalties for misappropriation and unauthorized
disclosure of trade secrets and confidential, proprietary business
information belonging to Employee's previous employers or to any other
Company. Miller agrees and warrants that, in connection with his/her
employment by Pathways, he/she will not misappropriate, use or disclose
any trade secret or confidential, proprietary information belonging to
any previous employer or any other Company. Miller agrees and warrants
that, if he/she has any question or uncertainty about whether
particular information might be a trade secret or confidential,
propriety business information of a previous employer or another
Company, Miller will immediately contact Pathways' General Counsel.
9. NON-COMPETITION AFTER TERMINATION OF EMPLOYMENT:
Miller and the Company recognize and acknowledge that in his
employment, he will become familiar with all of the Company's sales methods and
plans, marketing, marketing and development, technologies, applications of
technologies, products (developed and under development), product research,
business methods and plans, data, processes, techniques, inventions,
discoveries, formulae, patterns, devices, know-how, services, products, and
other customer information (collectively referred to as "Confidential
Information"), in all of the geographic areas throughout the world in which the
Company already has made marketing efforts and/or sales of products and
services, and he will become knowledgeable about present and
6
<PAGE>
future marketing proposals and plans for those products and services. Miller
agrees, as part of the consideration for this Employment Agreement, that Miller
will not engage, directly or indirectly, nor solicit employees of the Company to
engage in the development, distribution, manufacture or sale of any products or
services which compete with the products or services provided by the Company or
its related companies, for a period of two (2) years. The parties agree that the
phrase "engage, directly or indirectly, nor solicit employees of the Company to
engage in the development distribution, manufacture or sale of any products or
services which compete with the products or services provided by the Company or
its related companies" shall include any situation or circumstance in which
Miller shall be owner, partner, officer, director or shareholder of a
corporation, or an agent, employee or consultant of any business entity engaged,
or about to become engaged, in competition with the Company.
10. INJUNCTIVE RELIEF:
Miller acknowledges and agrees that any breach of the terms of
Paragraphs 8 or 9 above would irreparably injure the Company and that it would
be impossible to measure in money the resulting injury to the Company, and, in
any action to enforce this the terms of Paragraphs 8 or 9 or to enjoin any
breach of those paragraphs, Miller waives any claim or defense that the Company
has an adequate remedy at law or that the Company would not be irreparably
injured by breach of the terms of Paragraphs 8 or 9, and Miller acknowledges and
agrees that the Company will be entitled to temporary, preliminary and permanent
injunctive relief and restraining orders, without any delay whatsoever, in
connection with any breach, or threatened or impending breach, of any of the
ten-ns of those paragraphs. In any action to enforce the Company's rights under
Paragraphs 8 through 10 of this agreement, the party prevailing in such action
shall be entitled to recover as damages reasonable attorneys' fees and all other
reasonable expenses incurred in the action and in any efforts prior to or during
the action to secure compliance with the terms of this agreement.
11. ARBITRATION:
Except for claims, disputes and causes of action arising out of or in
connection with Paragraphs 8 through 10 above, the Company and Miller agree to
arbitrate any and all disputes and claims, including discrimination claims,
arising out of or in connection with the employment or the termination thereof,
if the amount in controversy is more than $5,000.00. This arbitration agreement
applies to all disputes between the parties and any and all claims by Miller
against the Company and any officer, director, employee, agent or representative
of the Company, against any corporate parent or subsidiary of the Company,
and/or against any person or company affiliated with the employer (e.g., a
person or company involved in a joint venture, partnership or other similar
business relationship with the employer or one having an owner, partner or
parent or subsidiary corporation in common with the employer). The arbitration
award shall be final and binding on all parties to the arbitration proceeding.
The arbitration shall be conducted in Santa Rosa, California, pursuant to the
California Arbitration Act and the terms of this agreement. Arbitration may not
be initiated after expiration of any statute of limitation for the commencement
of any civil or administration proceeding on the claim or dispute. Arbitration
shall be initiated by written notice by one party to the other, specifying the
nature of each claim
7
<PAGE>
or dispute at issue and the amount and manner of calculation of each item of
damages. The parties shall each appoint one arbitrator, and the parties'
arbitrators shall together select a third neutral arbitrator. If the three
arbitrators determine that the claims or disputes specified in the notice
collectively involve an amount in controversy more than $5,000.00, they shall
hear and determine the dispute(s) or claim(s) according to applicable laws, this
arbitration agreement and the Company's work rules and policies in effect at the
time of the events which gave rise to the arbitration. The three arbitrators
shall issue a written decision determining each dispute, claim and item of
damages submitted to the arbitrators. Determination of each dispute, claim and
item of damages shall require the concurrence of at least two arbitrators, but
it is not necessary that the same two arbitrators concur on every dispute, claim
or item of damages. The arbitration decision shall attest that the requisite
concurrence existed as to each dispute, claim and item of damages. THE COMPANY
AND MILLER UNDERSTAND AND EXPRESSLY AGREE THAT, BY ENTERING INTO THIS
ARBITRATION AGREEMENT, THEY ARE GIVING UP THE RIGHT TO BRING IN ANY COURT ANY
CLAIM, CAUSE OF ACTION OR DISPUTE ARISING OUT OF OR IN CONNECTION WITH THE
EMPLOYMENT OR THE TERMINATION THEREOF, INCLUDING THE RIGHT TO A JURY TRIAL. The
arbitration award may be confirmed by any court having jurisdiction of the
matter, and judgment may be entered on the confirmed award. Charges and expenses
of the neutral arbitrator shall be borne by the parties equally, and the parties
shall deposit their respective shares of the neutral arbitrator's estimated
charges prior to the arbitration hearing. The parties shall each bear their own
costs, expenses and attorneys' fees in connection with the arbitration, unless a
statute or contract applicable to the claim or dispute expressly provides for
recovery of attorneys' fees by the prevailing party.
12. INCORPORATION AND INTEGRATION:
Miller shall comply with and enforce all of the Company's operational
policies and procedures, personnel policies and procedures and work rules, as
they may be promulgated and announced from time to time. Except for such
operational policies and procedures, personnel policies and procedures and work
rules, this written agreement contains the entire agreement between the parties
and supersedes all prior oral, written and/or implied agreements, promises,
covenants, obligations, undertakings, commitments, representations and
understandings by or between the parties, including all prior employment
agreements, whether or not fully performed by Miller before the date of this
agreement. The Company and Miller acknowledge and agree that there are no terms,
conditions, covenants, obligations or promises, express or implied, applicable
to the employment except those set out in this agreement. There shall be no
amendment, modification, change or enlargement of this agreement except by a
writing signed by the party to be charged with performance of the amendment,
modification, change or enlargement. In the event of any conflict or difference
between this agreement and Company's current or future operational policies and
procedures, personnel policies and procedures and work rules, the provisions of
this agreement shall control.
8
<PAGE>
13. SURVIVAL, GOVERNING LAW, VENUE AND SEVERABILITY:
The representations, warranties, covenants, promises and restrictions
set out in this agreement shall operate continuously and shall survive
termination of the employment created by the agreement The agreement shall inure
to the benefit of and be binding upon Miller, his heirs, estate, executors,
administrators and all others claiming through or on behalf of Miller, and upon
Company, its subsidiaries, affiliates, successors and assigns. The agreement
shall be construed and governed in accordance with the laws of the State of
California. All actions, arbitrations and proceedings arising from or in
connection with the agreement or the employment it creates shall be commenced
and maintained in Sonoma County, State of California. If any term, covenant,
condition, clause or provision of this agreement is held to be invalid or
unenforceable, then such clause or provision shall be severed herefrom, and such
invalidity or unenforceability shall not affect any other provision of this
agreement, the balance of which shall remain in full force and effect; provided,
however, that if any such term, covenant, condition, clause or provision may be
modified so as to be valid or enforceable as a matter of law, then such term,
covenant condition, clause or provision shall be deemed modified so as to be
enforceable to the maximum extent permitted by law.
14. NOTICES:
Any notices to be given hereunder by any party to another party shall
be in writing and delivered in person or mailed registered or certified mail,
postage prepaid with return receipt requested.
The Pathways Group, Inc.
By
- ------------------------------------ -------------------------------------
Christopher R. Miller Carey F. Daly II
President & CEO
By
-------------------------------------
Monte Strohl, Director acting under
authority of the Board of Directors
9
<PAGE>
EXHIBIT 10.24
MAY 13 1999
PROTON WORLD INTERNATIONAL S.A.
AND
THE PATHWAYS GROUP, INC.
------------------------------------
PROTON LICENSE AGREEMENT
------------------------------------
<PAGE>
CONTENTS
CLAUSE PAGE
1. INTERPRETATION.............................................................2
2. OBJECT OF THE AGREEMENT....................................................6
3. LICENCES...................................................................7
4. DELIVERY AND INSTALLATION OF THE LICENSEE SYSTEM..........................11
5. IMPLEMENTATION OF THE LICENSEE SYSTEM.....................................14
6. PW SERVICES...............................................................15
7. INTELLECTUAL PROPERTY RIGHTS..............................................16
8. OTHER UNDERTAKINGS AND OBLIGATIONS........................................17
9. FINANCIAL TERMS AND CONDITIONS............................................18
10. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION...........................22
11. MISCELLANEOUS PROVISIONS..................................................25
12. TERM AND TERMINATION......................................................28
13. GOVERNING LAW AND DISPUTE RESOLUTION......................................30
Schedule 1 - Reference Functional Specifications (RFS)
Schedule 2 - User Requirements Document (URD)
Schedule 3 - Detailed Functional Specifications (DFS)
Schedule 4 - Equipment and Third Party Equipment
Schedule 5 - Software and Third Party Software
Schedule 6 - Project Plan
Schedule 7 - Fee Payments Schedule
Schedule 8 - Maintenance and Support Services
-1-
<PAGE>
Schedule 9 - Documentation
Schedule 10 - Local facilities
Schedule 11 - Main terms of Issuing Sub-License
Schedule 12 - Main terms of New Applications Operating Licence
Schedule 13 - Form of Completion Certificate
-2-
<PAGE>
This LICENCE AGREEMENT is entered into on May 13, 1999
BETWEEN
1. PROTON WORLD INTERNATIONAL S.A., a company incorporated under the laws
of Belgium, with its registered office at 1130 Brussels, Belgium, 10
Rue du Planeur ("PW"),
AND
2. The Pathways Group, Inc., an American company incorporated under the
laws of the state of Delaware, with a registered office at Santa Rosa,
California CA 95401, USA, 1221 North Dutton Avenue (the "Licensee").
WHEREAS
A. PW has developed and owns a commercial smart card based technology
comprising several applications, including the intersector electronic
purse, the latter known under the name "Proton System".
B. The Licensee intends to launch an electronic purse program in the
United States of America including its territories and wishes in this
respect to issue smart cards and operate a smart card system based on
the Proton technology.
C. PW and the Licensee now wish to define, in this Agreement, the terms
and conditions under which PW shall make the Proton technology
available to the Licensee.
NOW IT HAS BEEN AGREED AS FOLLOWS:
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<PAGE>
1. INTERPRETATION
1.1 In this Agreement, save as otherwise provided and unless the context
otherwise requires, the following terms and expressions shall have the
following meaning:
"ACCEPTANCE" means the express or implied acceptance of the System by
the Licensee, and completion of the process set out in Clause 4.3
Acceptance.
"AFFILIATE" means any person or entity controlling, controlled by or
under common control with a party hereto.
"BASIC ADAPTATIONS" means those basic technical adaptations to be made
by PW to the Proton System so as to allow it potentially to be used in
a Licensed Country; the Basic Adaptations include adaptations to the
currency of a Licensed Country, to local language (based on Latin
alphabet), local time and date conventions, power supply, nominal
authorisation, and clearing and settlement interfaces.
"BASIC DFS" means the first version of the DFS, being an adaptation of
the RFS taking into account the Basic Adaptations.
"DETAILED FUNCTIONAL SPECIFICATIONS" or "DFS" means the detailed
technical and functional specifications to be established jointly by PW
and the Licensee; the DFS shall be issued in two successive versions,
being the Basic DFS and the Final DFS, both of which shall, when
available, be attached as Schedule 3 hereto.
"DEFECT" means any failure of the Licensee System that would prevent it
from operating in material conformity with the DFS.
"DOCUMENTATION" means all specifications, documents, manuals, drawings
and other material (other than Equipment and Software) that may be made
available by PW to the Licensee hereunder; the Documentation is
described in Schedule 9.
"EQUIPMENT" means the hardware identified in Schedule 4.A, and which is
to be procured by the Licensee from PW.
"FINAL DFS" means the DFS adapted on the basis of the detailed
technical and operational requirements of the Licensee, as those
requirements are set out in the URD.
"INTELLECTUAL PROPERTY RIGHTS" means patents, trade marks, service
marks, registered designs, trade and business names, know-how,
unregistered trade marks and service marks, copy rights, rights in
designs, inventions, customer lists, trade secrets, computer programs
(including the applicable source code), computer data bases and related
documentation and manuals, rights under licences, consents, orders and
statutes, and rights of the same or similar nature, in any part of the
world, and applications for any of these rights.
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"ISSUING SUB-LICENCE" means a licence granted by the License, in
accordance with Clauses 3.2 USA ISSUING SUB-LICENCE or 3.4 NEW
APPLICATIONS ISSUING SUB-LICENCE, to third parties enabling such third
parties to issue smart cards based on the Proton System.
"PILOT LAUNCH" means the beginning of the pilot phase of the Licensee
System (being, at that gage the Proton System adapted on the basis of
the Basic DFS), such event being deemed to have happened upon
completion of the first successful transaction by a cardholder using
the Licensee System.
"LICENCE" means any licence validly granted to the Licensee hereunder.
"LICENSEE SYSTEM" means the Proton System as adapted, on the basis of
the DFS, to the requirements of the Licensee.
"LICENSED COUNTRY" means any country in respect of which the Licensee
holds a valid Operating Licence.
"MoU" means the memorandum of understanding between the parties dated
May, 6 1999.
"MICRO-CONTROLLER DISPOSABLE CARD" means disposable cards based on the
Proton System.
"NEW APPLICATIONS" means any and all applications other than the Proton
System, marketed by Proton World (including, but not limited to,
loyalty programmes, Internet commerce, JAVA API capabilities and access
control).
"NEW APPLICATIONS ISSUING SUB-LICENCE" means a licence granted by the
Licensee, in accordance with Clause 3.4 NEW APPLICATIONS ISSUING
SUB-LICENCE, to third parties enabling such third parties to issue
smart cards based on the Proton System and intended for New
Applications.
"NEW APPLICATIONS OPERATING LICENCE" means a licence granted to the
Licensee, in accordance with Clause 3.3 NEW APPLICATIONS OPERATING
LICENCE, enabling the Licensee to use the Proton System for New
Applications.
"NEW RELEASE" means any amendment to the Proton System which is
determined by PW as constituting a new generation of the Proton System
or a significant improvement in is performance.
"NEW SYSTEM" means any change to the Proton System that results, in
PW's reasonable opinion, in a fundamental change in the nature,
functionality or applications of the Proton System.
"PROJECT" means the definition, delivery, installation, testing and
implementation of the Licensee System.
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"PROJECT PLAN" means the planning chart setting out the details, timing
and responsibilities for the Project, as set out in Schedule 6. "PROTON
SYSTEM" means the Proton commercial electronic stored value payment
system of PW, whose functionality and specifications are set out in the
RFS.
"REFERENCE FUNCTIONAL SPECIFICATIONS" or "RFS" means the functional and
technical specifications of the Proton System, as set out in Schedule
1.
"RELEASE FEE" means the fee payable by the Licensee in consideration
for a New Release of the Proton System.
"RESTRICTED COUNTRIES" means the countries to which any global licence
granted hereunder will not extend, and where the Licensee shall not be
entitled to use the Licensee System. The Restricted Countries are the
countries in which PW has granted exclusive licenses to parties other
than the Licensee.
"ROLL-OUT LAUNCH" means the wide-scale implementation of the Licensee
System (being, at that stage, the Proton System adapted on the basis of
the Final DFS), such event being deemed to have happened as soon as
1,000 terminals and 15,000 cards are in use in connection with the
Licensee System.
"SECURITY MODULE" means hardware and software relating to the security
of the Proton System and the Licensee System, comprising a Chip Card
Security Module (CSM), Secure Application Module (SAM) or Host Security
Module (HSM) and the related Analysis and Design Documentation (ADD).
"SOFTWARE" means the computer programmes listed in Schedule 5A, the use
of which is useful or necessary in connection with the Licensee System,
and which shall be procured by the Licensee from PW.
"THIRD PARTY EQUIPMENT" means the hardware listed in Schedule 4 B, the
use of which is useful or necessary in connection with the Licensee
System, and which shall be procured by the Licensee from third parties.
"THIRD PARTY SOFTWARE" means the computer programmes listed in Schedule
5 B, the use of which is useful or necessary in connection with the
Licensee System, and which shall be procured by the Licensee from third
parties.
"UPGRADES" means any minor amendment to the Proton System that
constitutes an improvement of its performance but does not amount to a
New Release.
"USER REQUIREMENTS DOCUMENT", or "URD" means the document setting out
the specific functional and operational requirements and constraints of
the Licensee, and which will be taken into account in the development
of the Licensee System; the URD will, when established, be attached as
Schedule 2 hereto.
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"WARRANTY PERIOD" means a period of 6 months from Acceptance.
1.2 In addition, in this Agreement:
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a
Belgian public holiday; or a public holiday in the United States of
America, including the states of California and Washington.
"CONTROL" shall, in respect of a legal entity, mean the ability, de
facto or de jure, to exercise a decisive influence on the appointment
of a majority of its directors or on its management; and
any references to the "ISSUE OF SMART CARDS" shall be deemed to refer
also to the enabling and activation of New Applications on existing
Proton-compatible smart cards.
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2. OBJECT OF THE AGREEMENT
2.1 Subject to the terms and conditions of this Agreement, PW agrees to (a)
grant to the Licensee certain rights to use its technology, pursuant to
the licences referred to in Clause 3., (b) provide Equipment and
Software to the Licensee, and (c) provide certain services to the
Licensee in relation to the foregoing.
2.2 Such rights, products and services are provided by PW so that die
Licensee System may be used by the Licensee in an electronic purse
programme. The delivery, installation, testing and launch of such
programme shall be made in accordance with the Project Plan and with
the provisions of Clause 4.
2.3 In consideration for the rights, products and services granted and
provided by PW, the Licensee shall pay the fees and expenses set out in
Clause 8.
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3. LICENCES
3.1 USA OPERATING LICENCE
3.1.1 GRANT OF USA OPERATING LICENCE
PW hereby grants to the Licensee a non-exclusive, non-transferable
Licence to use the Licensee System in the United States of America
including its territories, subject to the terms and conditions set out
in Clause 3.1.2 TERMS AND CONDITIONS OF USA OPERATING LICENCE.
3.1.2 TERMS AND CONDITIONS OF USA OPERATING LICENCE
(a) FUNCTIONAL SCOPE. The USA Operating Licence entitles the
Licensee to use the Licensee System in connection with the
Proton System, to the exclusion of any other New Applications.
(b) CARD ISSUANCE. The USA Operating Licence also entitles the
Licensee to either (i) issue smart cards that are compatible
with the Licensee System and are intended for electronic purse
applications, or (ii) to grant to third parties the right to
issue such smart cards pursuant to the terms of an Issuing
Sub-Licence entered into in accordance with Clause 3.2 USA
ISSUING SUB-LICENCE or, as the case may be, Clause 3.4 NEW
APPLICATIONS ISSUING SUB-LICENCE., 3.5 ADDITIONAL OPERATING
LICENCES or 3.6.3 The Global Licence shall also entitle the
Licensee to grant Issuing Sub-Licences in respect of all
countries except the Restricted Countries. Such additional
Issuing SubLicences shall (a) be governed by the terms of an
Issuing Sub-Licence agreement to be entered into between the
Licensee and the relevant third party, and (b) each give rise
to payments of the fees determined, mutatis mutandis as set
out in Clause 9.1.4 USA ISSUING SUB-LICENCE FEE. Each Issuing
SubLicence shall be consistent with the requirements set out
in Schedule 11, and shall be reviewed and approved by PW prior
to its execution.
(c) GEOGRAPHICAL SCOPE. The Licensee shall be entitled to use the
Licensee System only in the United States of America including
its territories, and the Licensee may not use, develop, sell
or operate the Licensee System or any products or services
based thereon in any other country.
(d) NO EXCLUSIVITY. The USA Operating Licence is granted to the
Licensee on a non-exclusive basis and shall not prevent third
parties to (or prevent PW to allow third parties to) use,
develop, sell or operate products or services based on the
Proton System in the USA including its territories.
(e) USE AND ACCESS. The Licensee shall, pursuant to the USA
Operating Licensee, be entitled to:
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(i) receive and use, for its own purposes, the RFS and
Final DFS in respect of the Licensee System;
(ii) receive and use the application-related object code
software for the central host platform of the
Licensee System;
(iii) use and operate the Licensee System on a single
platform, to the exclusion of any other platform; the
Licensee may make back-up copies of the Licensee
System and may operate the Licensee System on a
redundant system utilising mirroring techniques,
solely in the event of a failure of the primary
system, but may not make copies that run on platforms
other than the aforementioned single platform.
(iv) purchase smart cards from third party vendors that
have been licensed and certified by PW;
(v) purchase terminals from third party vendors that have
been licensed and certified by PW;
(vi) purchase security devices (HSM for the central host
platform and CSM for the terminals) from PW; and
(vii) procure related services, such as card
personalisation, from third party vendors that have
been licensed and certified by PW.
(f) IMPROVEMENTS. The Licensee shall, under the USA Operating
Licence, be entitled to receive technological improvements of
the System, subject to the following:
(i) Upgrades shall be provided by PW to the Licensee free
of charge, PROVIDED THAT all services provided by PW
for the installation, implementation and training in
respect of any Upgrade shall be paid for by the
Licensee on the basis set out in Clause 9.2.3 OTHER
SERVICES;
(ii) New Releases shall be provided against payment of the
Release Fee and, as the case may be fees and expenses
of related services, calculated in accordance with
Clause 9.2.3 OTHER SERVICES;
(iii) New Systems shall not be available under the USA
Operating Licence, but may be provided to the
Licensee pursuant to a separate licence, the terms of
which shall be negotiated in good faith on a
case-by-case basis.
3.2 USA ISSUING SUB-LICENCE
3.2.1 The Licensee shall have the option, exercisable by written notice to
PW, to grant to third parties the right to issue smart cards compatible
with the Licensee System and intended for
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electronic purse applications. For the purposes of this Agreement, any
references to the "issue of smart cards" shall be deemed to refer also
to the enabling and activation of new applications on existing
Proton-compatible smart cards
3.2.2 The grant of each such right to third parties shall (a) be governed by
the terms of an Issuing Sub-Licence agreement to be entered into
between the Licensee and the relevant third party, and (b) in each case
give rise to payments of the fees referred to in Clause 9.1.4 USA
ISSUING SUB-LICENCE FEE. Each Issuing Sub-Licence shall be consistent
with the requirements set out in Schedule 11, and shall be reviewed and
approved by PW prior to its execution.
3.2.3 A third party is considered as a Sub-Licensee in case at least one of
the following conditions has been met:
(i) the third party maintains and uses its own
pre-personalisation key
(ii) the third party uses a specific issuer id
(iii) the third party manages its own float account
(iv) the third party is liable for any financial risk
associated to card usage by the card holders.
3.3 NEW APPLICATIONS OPERATING LICENCE
The Licensee shall have the option, exercisable by written notice to
PW, to purchase from PW the right to use the Licensee System in the USA
including its territories in connection with New Applications. Such
right shall be conditional upon agreement on the terms and conditions
of a New Applications Operating Licence agreement, substantially in the
form of Schedule 12 hereto.
3.4 NEW APPLICATIONS ISSUING SUB-LICENCE
3.4.1 In the event that the Licensee holds a valid New Applications Operating
Licence, it shall have the right either to issue smart cards or to
grant to third parties the right to issue smart cards intended for use
in connection with New Applications.
3.4.2 The grant of each such right to third parties shall (a) be governed by
the terms of a New Applications Issuing Sub-Licence agreement to be
entered into between the Licensee and the relevant third party, and (b)
in each case give rise to payments of the fees referred to in Clause
9.1.5 NEW APPLICATIONS LICENSE FEES AND NEW APPLICATIONS ISSUING
SUB-LICENCE. Each Issuing Sub-Licence shall be consistent with the
requirements set out in Schedule 11, and shall be reviewed and approved
by PW prior to its execution.
3.5 ADDITIONAL OPERATING LICENCES
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The Licensee shall have the option, exercisable by written notice to
PW, to acquire additional operating licences (the "ADDITIONAL OPERATING
LICENCES") in respect of one or more additional countries, which are
not Restricted Countries. Each of the Additional Operating Licences
shall be governed mutatis mutandis by the provisions of Clause 3.1 USA
OPERATING LICENCE above, and shall be subject to payment of an
Additional Operating Licence Fee as set out in Clause
9.1.6 ADDITIONAL OPERATING LICENCE FEES.
Clauses 3.2 USA ISSUING SUB-LICENCE, 3.3 NEW APPLICATIONS OPERATING
LICENCE and 3.4 NEW APPLICATIONS ISSUING SUB-LICENCE shall apply
MUTATIS MUTANDIS in respect of each country other than the USA
including its territories for which an Additional Operating Licence is
validly granted.
3.6 GLOBAL LICENCE
3.6.1 The Licensee shall have the option, exercisable by written notice to
PW, to purchase from PW an extension of the geographical scope of the
USA Operating Licence from a national basis to a global basis (the
"GLOBAL LICENCE"), PROVIDED HOWEVER THAT the Global Licence shall not
extend to any of the Restricted Countries. Such Global Licence shall be
governed mutatis mutandis by Clause 3.1.2 TERMS AND CONDITIONS OF USA
OPERATING LICENCE (but for sub-paragraph (c) GEOGRAPHICAL SCOPE. The
Licensee shall be entitled to use the Licensee System only in the
United States of America including its territories, and the Licensee
may not use, develop, sell or operate the Licensee System or any
products or services based thereon in any other country thereof), and
shall save in the circumstances referred to in Clause 3.6.2 A Global
Licence shall be deemed granted to the Licensee in the event that the
Licensee shall have acquired, in addition to the USA Operating Licence,
four (4) Additional Operating Licences and shall have paid all relevant
fees in respect thereof, be subject to payment of the fees set out in
Clause 9.1.7 GLOBAL LICENCE.
3.6.2 A Global Licence shall be deemed granted to the Licensee in the event
that the Licensee shall have acquired, in addition to the USA Operating
Licence, four (4) Additional Operating Licences and shall have paid all
relevant fees in respect thereof.
3.6.3 The Global Licence shall also entitle the Licensee to grant Issuing
Sub-Licences in respect of all countries except the Restricted
Countries. Such additional Issuing SubLicences shall (a) be governed by
the terms of an Issuing Sub-Licence agreement to be entered into
between the Licensee and the relevant third party, and (b) each give
rise to payments of the fees determined, mutatis mutandis as set out in
Clause 9.1.4 USA ISSUING SUB-LICENCE FEE. Each Issuing Sub-Licence
shall be consistent with the requirements set out in Schedule 11, and
shall be reviewed and approved by PW prior to its execution.
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4. DELIVERY AND INSTALLATION OF THE LICENSEE SYSTEM
4.1 CO-OPERATION IN RELATION TO DELIVERY AND INSTALLATION
4.1.1 CO-OPERATION
The parties agree to co-operate in good faith and to provide each other
with all support and assistance as may be required with a view to
completing the Project in accordance with the provisions of the Project
Plan.
4.1.2 PROJECT COMMITTEE
The parties shall forthwith upon execution of this Agreement establish
a committee (the "PROJECT COMMITTEE") comprised of one project manager
per party, each assigned with one (a more assistant as appropriate. The
initial project managers shall be Mr. Ludo Janssens for PW and Mr. Eli
Rosner for the Licensee.
The Project Committee shall have general responsibility for the
supervision and monitoring of the Project, and in particular for
assessing conformity of the progress of the Project with the Project
Plan.
If any party reasonably believes that the Project Manager appointed by
the other party is not able to successfully lead that other party's
efforts to comply with the Project Plan, the party may request the
replacement of such Project Manager.
4.1.3 FACILITIES
The Licensee hereby undertakes to make available to PW at no cost all
such equipment and facilities as may be reasonably required by PW for
the purposes of performing its obligations under this Agreement. The
Licensee undertakes in particular (a) to make available to the PW
Project Manager and any other PW representatives that may be providing
services on the Licensee's premises suitable office space equipped with
office automation and telecommunications equipment as described in
Schedule 10, (b) make available to PW all facilities and equipment
required for the purposes of installing, operating and testing the
Licensee Equipment during the Project, and (c) install at its premises,
at its costs and expenses, all other equipment referred to in Schedule
10, including an X.25 connection with PW or a connection with equal or
better security, approved by both parties.
4.2 DELIVERY AND INSTALLATION
The delivery and installation of the Licensee System shall be effected
in accordance with the provisions of the Project Plan.
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4.3 ACCEPTANCE
4.3.1 COMPLETION CERTIFICATE
Upon completion, to PW's satisfaction, of the installation process as
described in the Project Plan, PW shall perform a test (the "COMPLIANCE
TEST") for the purpose of verifying that the Licensee System, and any
related Equipment and Software, conforms the Final DFS in all material
respects. If the Compliance Test reveals any Defects, PW shall use all
best endeavours to remedy such Defects as soon as possible; if the
Compliance Test is satisfactory, PW shall confirm the complete and
satisfactory installation of the Licensee System by written notice to
the Licensee (the "COMPLETION CERTIFICATE"), substantially in the form
of Schedule 13 hereto.
4.3.2 OPERATING TESTS
After issuance of the Completion Certificate, the Licensee may during a
period of 30 calendar days (the "OPERATING TEST PERIOD") perform all
such tests as it shall deem appropriate for the purposes of assessing
compliance of the Licensee Equipment with the Final DFS under real
operating conditions. Within 10 Business Days from the end of the
Operating Test Period, the Licensee shall either (a) notify PW in
writing of the existence of a Defect, in which case PW shall use all
best endeavours to remedy such defects and, when resolved, shall issue
a new Completion Certificate, or (b) express its full and final
Acceptance of the Licensee System by returning to PW a copy of the
Completion Certificate, countersigned by the Licensee.
Irrevocable and unconditional Acceptance shall be deemed to have
occurred, and the Licensee System shall be deemed accepted without
qualifications or reservations, on the date that is 10 Business Days
after the end of the Operating Test Period, unless the Licensee has,
prior to such date, notified PW in writing of the existence of a
Defect.
4.4 SHIPMENTS AND PHYSICAL DELIVERIES
4.4.1 SHIPMENTS
In the event that any components of the Proton System, the Licensee
System or the Equipment are to be delivered to the Licensee in the
United States of America including its territories, such delivery shall
be effected by a carrier (the "Carrier") jointly chosen by the parties.
4.4.2 COST OF DELIVERIES
The costs and expenses of any such shipments shall be borne as follows:
(a) PW shall bear the cost of shipment of any training materials
and documentation referred to in Schedule 9, and of any
Software Updates;
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(b) The Licensee shall bear the cost of shipment of any other
items to be delivered pursuant to this Agreement.
4.4.3 TRANSFER OF RISKS
The Licensee shall be solely liable for any loss or damage to any
components of the Proton System, the Licensee System or the Equipment
as from their delivery by PW to the Carrier.
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5. IMPLEMENTATION OF THE LICENSEE SYSTEM
5.1 LAUNCH
The Licensee shall use all best efforts to ensure that (a) the Pilot
Launch of the licensee System occurs within 12 months of the execution
of this Agreement, and (b) the Roll-Out Launch of the Licensee System
occurs within 12 months of the occurrence of the Pilot Launch.
5.2 PROMOTION
The licensee shall use all best efforts to market, promote and
establish the Proton System (as implemented in the Licensee System) as
a leading electronic purse system in the retail banking,
telecommunications, transportation, EBT and prepaid medical sector in
the United States of America including its territories.
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6. PW SERVICES
6.1 MAINTENANCE SERVICES
PW shall, upon request from the Licensee, provide maintenance services,
as described in Schedule 8, part A. In consideration for the provision
of maintenance services, the Licensee shall pay the fees and expenses
set out in Clause 9.2.1 MAINTENANCE.
6.2 SUPPORT SERVICES
PW shall, upon request from the Licensee, provide support services, as
described in Schedule 8, part B. In consideration for the provision of
support services, the Licensee shall pay the fees and expenses set out
in Clause 9.2.2 SUPPORT.
6.3 OTHER SERVICES
PW may if so requested by the Licensee provide services other than
those referred to in Clauses 6.1 MAINTENANCE SERVICES
PW shall, upon request from the Licensee, provide maintenance services,
as described in Schedule 8, part A. In consideration for the provision
of maintenance services, the Licensee shall pay the fees and expenses
set out in Clause 9.2.1 MAINTENANCE.
6.2 SUPPORT SERVICES and 6.1 MAINTENANCE SERVICES above, against
payment of the fees and expenses set out in Clause 9.2.3 OTHER
SERVICES.
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7. INTELLECTUAL PROPERTY RIGHTS
7.1 OWNERSHIP OF SYSTEM AND RELATED MATERIALS
The Proton System, and any and all elements thereof included in the
Licensee System, as well as any other information, documentation,
software or other material in whatever form provided or made available
by PW to the Licensee hereunder shall remain the sole ownership of PW.
Any and all Intellectual Property Rights in respect of the foregoing
shall remain the sole ownership of PW. The Licensee shall acquire no
rights in respect of the foregoing other than as expressly provided in
this Agreement.
7.2 USE OF SYSTEM
The licensee shall only use the Licensee System in the manner and for
the purposes provided in this Agreement, and shall not reproduce any
part of the Licensee System otherwise than as expressly provided in
this Agreement. The Licensee shall not use the Licensee System in
conjunction with any hardware or software other than those expressly
approved by PW, which approval will not be unreasonably withheld.
7.3 VIOLATIONS
The Licensee shall notify PW immediately if it becomes aware of any
unauthorised use of the Licensee System or any part thereof or any of
the Intellectual property Rights relating thereto, and shall assist PW,
at PW's expense, in taking all steps to defend and protect PW's rights
therein.
7.4 IMPROVEMENTS
In the event that the Licensee would make improvements or additions to
the Proton System, the Licensee shall grant to PW a non-exclusive,
non-transferable, royalty-free licence in respect of such improvements
or additions, such licence being valid for the duration of this
Agreement.
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8. OTHER UNDERTAKINGS AND OBLIGATIONS
8.1 OBLIGATIONS AND UNDERTAKINGS OF THE LICENSEE
8.1.1 EXISTING EXCLUSIVITIES
The Licensee declares that it is aware that rights to use the Proton
System have been granted to third parties on an exclusive basis in the
Restricted Countries, and undertakes to refrain from using or
authorising the use of the Licensee System in any of the Restricted
Countries. The Licensee also acknowledges and accepts that certain
third parties have been granted non-exclusive rights to use the Proton
System on a global basis.
8.1.2 ACCESS TO INFORMATION
The Licensee undertakes to provide upon first demand by PW any
information which PW may reasonably require for the purposes of
assessing the due compliance by the Licensee with its obligations
hereunder and of determining the amounts payable by the Licensee
pursuant to Clause 9. Financial terms and conditions. The Licensee
shall, if so requested by PW, allow an independent auditor to audit all
relevant financial and accounting data, including the amounts of stored
value cards acquired from third parties. The Licensee shall fully
cooperate with such auditor and make available to it all books, records
and other information as may be relevant for the purposes of the audit.
The conclusion of the audit shall be binding on the parties, and any
adjustment to the fees payable arising from the audit shall be paid
forthwith. The costs and expenses of the audit shall be shared equally
between the parties, unless the results of the audit reveal a
discrepancy of 5 % or more with data previously supplied by the
Licensee, in which case the costs and expenses of the audit shall be
borne in full by the Licensee.
8.1.3 TECHNICAL OBLIGATIONS
The Licensee shall adhere to the Minimal Security Requirements set
forth in Schedule 14.
8.1.4 INSURANCE
The Licensee shall take out and maintain, with an insurance company of
prime repute, adequate coverage against any and all risks relating to
(a) the operation of the Licensee System and (b) the shipment and
delivery of components of the Licensee System, the equipment or the
Software. In respect of the latter risks, the Licensee shall procure
that PW be named in the relevant policies as a named insured party, and
that both PW and the Licensee be named as loss payees.
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9. FINANCIAL TERMS AND CONDITIONS
9.1 LICENCE FEES
9.1.1 INITIAL LICENCE FEES
FEE ADVANCE. PW hereby acknowledges receipt of a fee advance (the "FEE
ADVANCE") in the amount of USD 30,000 paid by the Licensee pursuant to
the MoU on account of the USA Operating Licence Fee.
9.1.2 USA OPERATING LICENCE FEE
In consideration for the Country Operating Licence, the Licensee shall
pay a fee (the "USA OPERATING LICENCE FEE") in an amount equal to USD
955,000 less the Fee Advance, corresponding to a card volume of up to
2,500,000 cards. The Licensee will give 90 days advance notice of an
anticipated increase in card volume, which will result in an additional
fee due in accordance with the schedule set forth below:
First additional 2,500,000 cards: additional fee of USD 540,000
Next additional 5,000,000 cards: additional fee of USD 460,000
Next additional 90,000,000 cards: additional fee of USD 1,500,000
Additional cards over 100,000,000: additional fee of USD 6,500,000
The USD 1,000,000 Operating License Fee is to be paid as follows:
30% within 30 days after signature of the License Agreement
(less the Fee Advance).
30% within 30 days after the Pilot Launch.
20% within 30 days after the Roll-out Launch.
The remaining 20% at Acceptance of the Roll-out Launch.
9.1.3 FEES PER CARD
(a) NDC FEE. The Licensee shall pay a fee per card in respect of
all nondisposable cards (the "NDC FEE") based on the Proton
System which are issued either by the Licensee or by third
parties pursuant to an Issuing SubLicence and procured by the
Licensee from sources other than PW but certified by PW. The
amount of the NDC Fee shall be based on the number of cards so
issued, as follows:
(i) From 0 to 3,000,000 cards: USD 0.33 per card;
(ii) From 3,000,001 to 10,000,000 cards: USD 0.30 per
card;
(iii) From 10,000,001 to 15,000,000 cards: USD 0.27 per
card; and
(iv) Above 15,000,001 cards: USD 0.25 per card.
-18-
<PAGE>
(b) MCDC FEE. The Licensee shall, in respect of Micro Controller
Disposable Cards based on the Proton System which are issued
pursuant to a Issuing Sub Licence and procured by the Licensee
from sources other than PW but certified by PW, pay a fee (the
"MCDC FEE") per card in the amount of USD 0.10.
(c) For the avoidance of doubt, in the event that the Licensee
would agree with a Sub-Issuer on fees per card higher than
those set out above, PW shall only be entitled to the NDC Fees
set out above, and the positive difference between such
minimum fees and the fees actually collected shall remain with
the licensee.
9.1.4 USA ISSUING SUB-LICENCE FEE
In consideration for the right to grant USA Issuing Sub-Licences, the
Licensee shall, in addition to the fees referred to in Clause 9.1.3
FEES PER CARD pay a fee (the "USA ISSUING SUB-LICENCE FEE") equal to
(a) 1,500,000 USD for each Issuing Sub-Licence granted to a
Co-Issuer with 6,000,000 or more accounts or customers;
(b) 1,250,000 USD for each Issuing Sub-Licence granted to a
Co-Issuer with 4,000,000 or more but less than 6,000,000
accounts or customers;
(c) 1,000,000 USD for each Issuing Sub-Licence granted to a
Co-Issuer with 3,000,000 or more but less than 4,000,000
accounts or customers;
(d) 750,000 USD for each Issuing Sub-Licence granted to a
Co-Issuer with 2,000,000 or more but less than 3,000,000
accounts or customers; and
(e) 500,000 USD for each Issuing Sub-Licence granted to a
Co-Issuer with less than 2,000,000 accounts or customers.
9.1.5 NEW APPLICATIONS LICENSE FEES AND NEW APPLICATIONS ISSUING SUB-LICENCE
FEES
The fees payable in respect of any New Applications Licenses and/or New
Applications Issuing Sub-Licenses shall be determined on a case-by-case
basis by mutual agreement between PW and the Licensee.
9.1.6 ADDITIONAL OPERATING LICENCE FEES
In consideration for each Additional Operating Licence, the Licensee
shall pay a fee (the "ADDITIONAL OPERATING LICENCE FEE") in the amount
of USD 2,000,000.
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<PAGE>
9.1.7 GLOBAL LICENCE FEES
(a) GLOBAL LICENCE FEE. The extension of the geographical scope of
the operating Licence in the manner provided in Clause 3.6
GLOBAL LICENCE, shall be subject to payment of a fee (the
"GLOBAL LICENCE FEE") in an amount equal to (a) USD
10,000,000, less (b) the amount of the USA Operating Licence
Fee and of any Additional Operating Licence Fees.
(b) NDC FEES. In the event that the Licensee acquires a Global
Licence (whether pursuant to Clause 3 A.1 The Licensee shall
have the option, exercisable by written notice to PW, to
purchase from PW an extension of the geographical scope of the
USA Operating Licence from a national basis to a global basis
(the "GLOBAL LICENCE"), PROVIDED HOWEVER THAT the Global
Licence shall not extend to any of the Restricted Countries or
to Clause 3.6.2 A Global Licence shall be deemed granted to
the Licensee in the event that the Licensee shall have
acquired, in addition to the USA Operating Licence, four (4)
Additional Operating Licences and shall have paid all relevant
fees in respect thereof., the amount of the NDC Fees payable
to PW shall automatically be reduced to USD 0.25 per card.
(c) MCDC FEES. The MCDC Fees as set out in Clause (b) MCDC FEE
shall not be amended as a result of the Licensee acquiring a
Global Licence.
9.2 SERVICES
9.2.1 MAINTENANCE
In consideration for the card fee as set out in Clause 9.1.3, the
Licensee will automatically receive all Upgrades of the Reference
Functional Specifications.
Subject to the execution of a separate Maintenance Contract between the
parties, prior to the expiration of the Warranty Period, PW shall
provide Maintenance Services to the Licensee as described in Schedule
8B. The annual maintenance fee for such services shall be fifteen
percent (15 %) of the total Operating License Fee and shall be payable,
annually and anticipatively, commencing at the end of the Warranty
Period, or as mutually agreed in writing by the parties. The
maintenance fees under the maintenance contract may be revised after
three (3) years upon mutual agreement of the parties.
9.2.2 SUPPORT
In consideration for support services to be provided by PW pursuant to
Clause 6.2 SUPPORT SERVICES, the Licensee shall pay (a) fees equal to
1,400 USD multiplied by the relevant number of man-days, and (b) all
reasonable costs and expenses incurred by PW in the provision of such
support services, including but not limited to fees of sub-contractors
or third party suppliers of PW and out-of-pocket expenses such as
travel and accommodation, which may be incurred by PW or its
representatives in the provision of such services.
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<PAGE>
9.2.3 OTHER SERVICES
In consideration for any services (including installation services) in
addition to the maintenance services and the support services, the
Licensee shall pay PW (a) fees equal to (i) 1,400 USD multiplied by the
number of man-days, if the services are provided within 12 months from
the date hereof and (ii) such other amount per man-days as PW shall
reasonably determine, if the services are provided thereafter, and (b)
all reasonable costs including as die case may be fees of
sub-contractors or third-party suppliers of PW) and out-of pocket
expenses such as travel and accommodation which may be incurred by PW
or its representatives in connection with the provision of such
services.
9.2.4 FREE SERVICES
Notwithstanding the above, the first 10 man days of service provided by
PW pursuant to this Agreement shall be provided free of charge.
9.3 PAYMENTS
9.3.1 INVOICES. All amounts payable to PW shall be invoiced by PW at the
relevant time, as specified in the payments schedule set out in
Schedule 7.
9.3.2 PAYMENTS. All invoices issued by PW shall be paid within 30 days from
the date of their issuance, by wire transfer to the account specified
on the invoice.
9.3.3 LATE PAYMENT INTEREST. Any amounts unpaid on their relevant due date
shall bear interest as of right and without notice at a rate of 10% per
annum from the due date until the effective date of full payment.
9.3.4 TAXES. All payments to be made by the Licensee hereunder shall be made
free and clear of and without deduction on account of tax unless such
deduction shall be required by applicable law, in which case the sum
payable by the Licensee shall be increased to the extent necessary to
ensure that after the making of the required deduction, PW receives and
retains a net sum equal to the sum which it would have received and
retained had no such deduction been required.
-21-
<PAGE>
10. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION
10.1 REPRESENTATIONS AND WARRANTIES BY PW
10.1.1 REPRESENTATIONS AND WARRANTIES
PW represents and warrants to the Licensee as follows:
(a) GOOD STANDING; NO VIOLATION. PW is a SOCIETE ANONYME duly
incorporated and in existence under the laws of Belgium. The
entry by PW into this Agreement shall not result in any breach
of any law, regulation or contract by which PAW is bound.
(b) OWNERSHIP. PW owns or is otherwise entitled to license the
Licensee System to the Licensee in the manner set out in this
Agreement. To the best of PW's knowledge, the use of the
Licensee System by the Licensee shall, provided that the
Licensee complies with all its obligations hereunder, not
infringe the Intellectual Property Rights of any third
parties.
(c) CONFORMITY TO SPECIFICATIONS. On the date hereof, the Proton
System is conform in all material respects to the
specifications and functionality set out in the RFS, and the
Licensee System is conform in all material respects to the
specifications and functionality set out in the DFS.
(d) OPERATION. The Licensee System will operate in material
conformity to the DFS.
10.1.2 THE LICENSEE'S REMEDIES
The Licensee's remedies for any breach of the warranties set out in
Clause 10.1.1 REPRESENTATIONS AND WARRANTIES shall be subject to the
following terms and conditions:
(a) IN RESPECT OF THE WARRANTY SET OUT IN CLAUSE (B) OWNERSHIP. PW
owns or is otherwise entitled to license the Licensee System
to the Licensee in the manner set out in this Agreement. To
the best of PW's knowledge, the use of the Licensee System by
the Licensee shall, provided that the Licensee complies with
all its obligations hereunder, not infringe the Intellectual
Property Rights of any third parties (ownership), the
Licensee's remedies shall be subject to the following:
(i) The Licensee shall notify PW as soon as it shall
become aware of any infringement claim by any third
party (an "IP Claim");
(ii) The Licensee shall allow PW to conduct, at its
expense, the defence against any such IP Claim;
(iii) Subject to compliance by Licensee with sub-paragraphs
(i) and (ii) above, PW shall indemnify the Licensee
against any direct damages/liability which
-22-
<PAGE>
may be awarded against it, by an enforceable court
decision or arbitration award, as a result of the
Licensee System being held to infringe the
Intellectual Property Rights of a THIRD PARTY,
provided that the obligation of PW to indemnify the
Licensee pursuant to this sub-paragraph shall be
subject to a maximum amount which will be negotiated
and set forth in a separate addendum within six
months of the date of this License Agreement. The
parties agree that PW may not settle any such damage
claim without the consent of the Licensee, which
consent will not be unreasonably be withheld.
(iv) In the event that an IP Claim would result in the use
of all or part of the Licensee System being held
illegal in any relevant territory, PW undertakes
either (i) to obtain the right to use the Licensee
System in the relevant territory, or (ii) to amend
the Licensee System or replace any counterfeiting
components of the Licensee System so as to allow it
to be lawfully used in the relevant territory.
(v) Any liability of PW pursuant to this Clause 10.1.2
THE LICENSEE'S REMEDIES(a) In respect of the warranty
set out in Clause (b) OWNERSHIP. PW owns or is
otherwise entitled to license the Licensee System to
the Licensee in the manner set out in this Agreement.
To the best of PW's knowledge, the use of the
Licensee System by the Licensee shall, provided that
the Licensee complies with all its obligations
hereunder, not infringe the Intellectual Property
Rights of any third parties (OWNERSHIP), the
Licensee's remedies shall be subject to the
following: is expressly excluded if the IP Claim
results or is related directly or indirectly to usage
of the Licensee System by the Licensee in a manner
not consistent with the terms of this Agreement.
(b) In respect of all other warranties set out in Clause 10.1.1
REPRESENTATIONS AND WARRANTIES.
(i) PW expressly disclaims any liability for any Defects
which result directly or indirectly from either (x)
additions or amendments, by the Licensee, to the
Licensee System (unless such additions or amendments
have been expressly authorised by PW in writing), (y)
any usage of the Licensee System by the Licensee in a
manner not consistent with the terms of this
Agreement, or (z) any unauthorised use of the
Licensee System in conjunction with hardware or
software not provided by PW or authorised by it in
writing;
(ii) PW's obligations under the warranties shall be
subject to compliance by the Licensee with any and
all reasonable instructions issued from time to time
by PW to the Licensee in writing;
(iii) The Licensee's sole remedy in respect of a breach of
warranties shall be to request PW to replace or
repair (at PW's option) the component of the Licensee
System or the Equipment which has caused the breach
of the
-23-
<PAGE>
relevant warranty; Any such replacement shall first
be attempted remotely, via customary communication
links (in respect of Equipment malfunctions) or via
the network connection between PW and the Licensee
(in respect of Software); in the event that such
attempts fail to remedy the Defect, then PW shall at
its own costs send suitable personnel to the
Licensee's premises;
(iv) PW's obligations under the warranties shall expire at
the end of the Warranty Period. Any support or repair
services after such period shall be provided by PW
against payment of the fees set out in Clause 9.2.3
OTHER SERVICES.
10.1.3 OTHER LIABILITIES OF PW
PW expressly disclaims any liability to the Licensee other than as
expressly provided in Clause 10.1 REPRESENTATIONS AND WARRANTIES BY PW.
For the avoidance of doubt, PW (a) gives no representations and
warranties other than those expressly set out above, and (b) shall not
be liable for any indirect or consequential losses or damages incurred
by the Licensee in relation to the Licensee System.
10.2 REPRESENTATIONS AND WARRANTIES BY THE LICENSEE
The Licensee represents and warrants to PW that
(a) GOOD STANDING; NO VIOLATION. It is a limited liability company
duly incorporated and in existence under the laws of the
United States of America and its territories. The entry by the
Licensee into this Agreement and the performance of its
obligations hereunder shall not result in any breach of any
law, regulation or contract by which it is bound.
(b) RESOURCES. The Licensee has the necessary commercial,
financial, technical and human resources to successfully
operate an electronic purse programme in the United States of
America and its territories.
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<PAGE>
11. MISCELLANEOUS PROVISIONS
11.1 CONFIDENTIALITY
11.1.1 For the purposes of this Agreement, "CONFIDENTIAL INFORMATION" means
any and all information of a confidential nature (including but not
limited to technical, commercial and financial data, know-how, software
and designs) disclosed or made available (whether in writing, in
electronic fomat, verbally or by any other means and whether directly
or indirectly) by one party to any other party (the "RECEIVING PARTY")
whether before or after the date of this Agreement.
11.1.2 Each party acknowledges that it may have or be given access to
Confidential Information of or regarding the other party. During the
term of this Agreement and for a period of 5 years after termination or
expiration of this Agreement for any reason whatsoever the Receiving
Party shall:
(a) keep the Confidential Information confidential;
(b) not disclose the Confidential Information to any other person
other than its employees, agents and advisors (in each case on
a need to know basis and subject to obtaining, where
reasonably practicable, adequate confidentiality undertakings
from such persons) without the prior written consent of the
other party; and
(c) not use the Confidential Information for any purpose other
than for the performance of this Agreement.
11.1.3 The obligations contained in Clauses 11.1.2 Each party acknowledges
that it may have or be given access to Confidential Information of or
regarding the other party. During the term of this Agreement and for a
period of 5 years after termination or expiration of this Agreement for
any reason whatsoever the Receiving Party shall: and 11.1.1 For the
purposes of this Agreement, "CONFIDENTIAL INFORMATION" means any and
all information of a confidential nature (including but not limited to
technical, commercial and financial data, know-how, software and
designs) disclosed or made available (whether in writing, in electronic
format, verbally or by any other means and whether directly or
indirectly) by one party to any other party (the "RECEIVING PARTY")
whether before or after the date of this Agreement shall not apply to
any Confidential Information which:
(a) is at the date of this Agreement or at any time after the date
of this Agreement comes into the public domain other than
through breach of this Agreement by the Receiving Party;
(b) can be shown by the Receiving Party to the reasonable
satisfaction of the other party to have been known to the
Receiving Party prior to it being disclosed by the other party
to the Receiving Party or to have been independently developed
or obtained by such party without making use of Confidential
Information of the Company; or
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<PAGE>
(c) subsequently comes lawfully into the possession of the
Receiving Party from a third party.
11.1.4 The terms of this Agreement (including its Schedules) are confidential
and may not be disclosed to any third party except where such
disclosure is required by law or judicial order, PROVIDED in such case
that the party required to make the disclosure shall notify the other
party as soon as possible and, where possible in the circumstances,
prior to making the disclosure.
11.2 ANNOUNCEMENTS
11.2.1 Subject to Clause 11.2.2 Where the announcement, communication or
circular is required by law or a regulation of a stock exchange, the
party required to make it must if practicable first consult with, and
take into account the reasonable requirements of, the other party, no
public announcement, communication or circular concerning the
transaction referred to in this Agreement may be made at any time
(before or after Completion) by any party hereto without having first
obtained the written consent of the other party who shall not
unreasonably refuse, withhold or delay such consent. A party shall be
deemed to have granted such consent if it fails to reply to a request
for consent within two business days from the receipt of the notice.
11.2.2 Where the announcement, communication or circular is required by law or
a regulation of a stock exchange, the party required to make it must if
practicable first consult with, and take into account the reasonable
requirements of, the other party.
11.3 SEVERABILITY
The invalidity or unenforceability of any provision hereof shall not
affect the validity or enforceability of this Agreement or of any other
provision hereof. The provision held to be invalid and/or unenforceable
shall orgy be ineffective to the extent of such unenforceability or
invalidity.
11.4 COSTS
Except where this Agreement provides otherwise, each party hereto shall
pay its own costs relating to the negotiation, preparation and
execution and implementation by it of this Agreement and of all other
documents referred to herein.
11.5 NOTICES
All notices to be made in writing under this Agreement shall be given
in the English language by registered mail, express courier service or
telefax (confirmed by registered mail or express courier service) to
the following addresses or such other addresses as the parties may have
designated to each other by notice given in accordance with this
Clause:
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<PAGE>
(a) PW, to Proton World International S.A., Rue du Planeur 10,
1130 Brussels, Belgium, for the attention of Messrs. Armand
Linkens and Daniel Skala, telefax number +32 2724 50 60;
(b) The Licensee, to , The Pathways Group, Inc., 1221 North Dutton
Avenue, Santa Rosa, California 95401, for the attention of Mr.
Carey F. Daly II and Mr. Robert Haller, telefax number +
1-707-546.4041.
11.6 OTHER AGREEMENTS - AMENDMENTS
This Agreement supersedes and replaces any and all prior negotiations,
arrangements and understandings, whether or not in writing, between the
parties with respect to the subject matter of the Agreement. No
variation of this Agreement is valid unless it is in writing and signed
by or on behalf of each party.
11.7 ASSIGNMENT
This Agreement shall be binding upon and inure for the benefit of the
successors of the parties but may not be assigned (other than by a
party hereto to an Affiliate and PROVIDED THAT, in such case, the
assignor shall be jointly and severally liable for the obligations of
the assignee pursuant to this Agreement) without the consent of the
other party.
11.8 NO PARTNERSHIP
This Agreement does not create and shall not be construed as creating
any partnership between the Parties, and each party hereto is acting in
its own name and for its own account.
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<PAGE>
12. TERM AND TERMINATION
12.1 TERM
This Agreement is entered into for a period of 10 years from the date
of its execution, and shall then be automatically renewed for
successive periods of five years, provided that the Licensee has met
the performance goals to be negotiated and set forth in a separate
addendum within six months of the date of this License Agreement.
12.2 EARLY TERMINATION
This Agreement may be terminated by any party in the event:
(a) that the other party shall have been in material breach of its
obligations hereunder and shall have failed to remedy such
breach within 30 days of a written notice of breach; or
(b) that the other party shall have been declared bankrupt.
12.3 CONSEQUENCES OF TERMINATION
Upon termination of this Agreement, whether pursuant to Clause 12.1
TERM or Clause 12.2 EARLY TERMINATION
(a) All rights and obligations pursuant to this Agreement shall
terminate immediately, save for (i) this Clause 12.3
CONSEQUENCES OF TERMINATION which shall continue to apply
until all obligations thereunder shall have been satisfied,
and (ii) Clauses 11.1 CONFIDENTIALITY and
13. Governing Law and Dispute Resolution, which shall
continue to apply for a period of 5 years from the
date of termination;
(b) Any then Issuing Sub-Licences then existing shall, at PW's
option either (i) be terminated under the Licensee's
responsibility, or (H) be assigned in full to PW, in which
case the Licensee shall indemnify PW and keep it indemnified
against any and all claims of or liabilities towards the
sub-licensee to the extent that such claims or liabilities
relate to facts or circumstances having occurred prior to the
assignment of the Issuing Sub-Licence;
(c) the Licensee shall pay forthwith (i) any outstanding invoices,
and (ii) fees, cost and expenses in respect of products and
services in progress or already provided but not yet invoiced,
and for which PW shall issue a global invoice;
(d) the Licensee shall promptly return, at its expenses, all
material provided to it by PW hereunder (other than Equipment
duly paid for), including but not limited to all
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<PAGE>
copies of the Proton System and the Licensee System and any
software incorporated therein or relating thereto and any
related documentation and materials.
-29-
<PAGE>
13. GOVERNING LAW AND DISPUTE RESOLUTION
13.1 GOVERNING LAW
This Agreement shall be governed by and interpreted exclusively in
accordance with the laws of Belgium.
13.2 DISPUTE RESOLUTION
13.2.1 MEDIATION. Any dispute between the Parties hereto arising in connection
with this Agreement shall first be resolved by mediation within the
Project Committee. Failing amicable resolution by the Project Committee
within 30 days, the matter may, at the request of any party to the
dispute, be escalated for mediation to the Chief Executive Officer of
the ultimate parent company of the parties to the dispute.
13.2.2 ARBITRATION. Failing amicable resolution by the CEOs within 30 days
from a request for mediation, the matter shall (without prejudice to
the right of any party to seek preliminary injunction in summary
proceedings ("EN REFERE"), in which case the courts of Brussels shall
have exclusive jurisdiction) be submitted for final decision to a panel
of three arbitrators, appointed and acting in accordance with the rules
of the CEPANI.
The arbitration tribunal shall sit in Brussels, Belgium; proceedings
shall be conducted in the English language.
-30-
<PAGE>
Done in Chicago on May 13 1999 in 2 originals, each party acknowledging
having received one signed original.
PROTON WORLD INTERNATIONAL S.A. THE PATHWAYS GROUP, INC.
/s/ ARMAND LINKENS /s/ CAREY F. DALY II
- ----------------------------- -----------------------------
Armand Linkens Carey F. Daly II
Managing Director President and CEO
-31-
<PAGE>
Exhibit 21
The subsidiaries of The Pathways Group, Inc. are as follows:
State or Country Name Under Which
Subsidiary of Organization Subsidiary Does Business
- ---------------------------- ---------------- ------------------------
Sprinticket, Inc. Washington Sprinticket
The Pathways Group, Inc. Hawaii The Pathways Group
Pathways International, Ltd. Washington The Pathways Group
The Pathways Group Gmbh Austria The Pathways Group
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 645,065
<SECURITIES> 0
<RECEIVABLES> 5,523
<ALLOWANCES> 0
<INVENTORY> 338,438
<CURRENT-ASSETS> 1,249,690
<PP&E> 2,259,951
<DEPRECIATION> 1,256,720
<TOTAL-ASSETS> 4,276,685
<CURRENT-LIABILITIES> 1,680,922
<BONDS> 60,781
1,489,527
0
<COMMON> 144,109
<OTHER-SE> 901,346
<TOTAL-LIABILITY-AND-EQUITY> 4,276,685
<SALES> 186,309
<TOTAL-REVENUES> 186,309
<CGS> 63,469
<TOTAL-COSTS> 63,469
<OTHER-EXPENSES> 9,125,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (44,303)
<INCOME-PRETAX> (8,958,391)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,958,391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,958,391)
<EPS-BASIC> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
