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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-24119
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THE PATHWAYS GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1617556
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14201 N.E. 200TH STREET, WOODINVILLE, WASHINGTON 98072
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(Address of principal executive offices)
(425) 483-3411
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of May 11, 2000: 15,821,762
shares of Common Stock, par value $0.01 per share.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
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FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's fiscal quarter ended March 31,
2000 are attached to this Report, commencing at page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for historical information, the material contained in this
Management's Discussion and Analysis or Plan of Operation is forward-looking.
This discussion includes, in addition to historical information, forward-looking
statements, which involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences are
discussed below and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, as filed with the Securities and Exchange Commission.
These risks and uncertainties include the rate of market development and
acceptance of smart card technology, the unpredictability of the Company's sales
cycle, the limited revenues and significant operating losses generated to date,
the ability of the Company to achieve adequate levels of revenue to recover its
investment in capitalized software development costs and software licenses, the
possibility of significant ongoing capital requirements, and the ability of the
Company to secure additional financing as and when necessary. For the purposes
of the safe harbor protection for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995, readers are urged to review
the list of certain important factors set forth in "Cautionary Statement for
Purposes of the "Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995."
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.
Management has made the following arrangements to obtain sufficient funds to
satisfy the Company's cash requirements:
- 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
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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 volume weighted 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.
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.
GENERAL
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 also formed The
Pathways Group GmbH as a wholly owned subsidiary, which is to be based in
Vienna, Austria.
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The Company recently signed an agreement to acquire SmartCard
Solutions, Inc., a privately held technology services company based in Aspen,
Colorado, in a stock-for-stock transaction. The agreement was signed in
April 2000. SmartCard Solutions has developed an information management system
that facilitates point-of-sale ticketing and season passes for resorts, advanced
sales, retail and rental purchasing (including inventory control and back office
auditing), financial reporting and access control. The system is currently in
use at several prominent Rocky Mountain resort areas where approximately
3.5 million transactions per season are processed. In consideration for the
transfer of the outstanding capital stock of SmartCard Solutions, Pathways has
agreed to issue 218,750 shares of its Series B Convertible Preferred Stock
("Series B Stock"), which is not convertible for one year from the date of
issuance. After the expiration of one year from the date of issuance, if the
market price of Pathways' publicly traded Common Stock is less than $8.00 per
share, each share of the Series B Stock will be converted into two shares of
Common Stock. If the market price of one share of Common Stock is equal to or
greater than $8.00 per share, each share of Pathways' Series B Stock will be
converted into one share of Common Stock. At $8.00 per share, the nominal value
of the transaction is $1,750,000.
The Company also signed an agreement in April 2000 to purchase MS
Digital, Inc., a privately-held corporation based in Washington that
specializes in customized multi-media communications systems. The majority
shareholder of MS Digital is Monte Strohl, who is a director and Senior Vice
President, Marketing and Sales, of the Company; the other two shareholders
are Jay Potts and Gary Baker, both of whom are employees of the Company. The
acquisition is a stock-for-stock transaction valued at $3,000,000. MS Digital
provides corporate communications, call center information systems integrated
with Lucent phone systems, cable television information systems,
point-of-sale information systems, interactive kiosks, and multi-media
presentations. Major cities in western Washington use MS Digital's call
system for their municipal television stations for display of programming
schedules, community events, election results, and emergency and general
information. Pathways will offer MS Digital's core technologies of
multi-media and web presentations to clients interested in high-quality
graphics, motion video, and animation, as part of an e-commerce site or
point-of-sale system. Pathways also plans to incorporate the call center
portion of MS Digital's products into operations of the Company's growing
technical and client support department as a way to increase customer
service. Many of the large communications companies with which MS Digital
works currently utilize card-based products for the marketing and sales of
their services. MS Digital's existing relationship with these companies will
provide an opportunity for marketing of Pathways' smart card technology to MS
Digital's client base.
RESULTS OF OPERATIONS
REVENUES. The Company has generated limited revenues from operations to
date as it has continued to develop and market its smart card systems. The
Company believes it will continue to report minimal revenues until additional
significant contracts are signed or until the existing contracts, discussed
below, proceed through the pilot stage to a full rollout. Revenues generated in
the three-month period ended March 31, 2000 primarily relate to smart card
sales,
3
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credit card processing fees and maintenance fees and revenues from equipment
leasing. Revenues in 1999 were related primarily to credit card processing
fees. Revenues increased $28,630 or 458% for the three months ended March 31,
2000, compared to the corresponding period in 1999, due to an increase in
smart card sales of $14,000, maintenance fees of $5,965 and equipment leasing
revenues of $8,988.
In late 1997 and during 1998, the Company developed an upgraded version of
its unattended kiosk to, among other things, accommodate acceptance and vending
of smart cards and also engineered and developed an indoor kiosk to be utilized
as a smart card recharge device. The Company began marketing efforts of its new
indoor and outdoor kiosk products in the first quarter of 1999. The Company has
also changed its marketing strategy for its unattended kiosks. Previously, the
Company leased the kiosks to a customer and collected gross transaction charges
of approximately 5% throughout the lease term. The Company's 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 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 May 1999, the Company entered into a License Agreement with the Proton
World International, S.A. of Brussels, Belgium. The Company intends to
incorporate this technology into its core product offerings, which will
require substantial investments in the following: up front licensing fees;
ongoing royalty fees; expenditures on training, certification, maintenance
and support services; expansion of computer hardware at its transaction
processing centers; and additional technical and marketing staff to
capitalize on the market opportunity the Company believes has been created as
a result of the License Agreement.
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
4
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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.
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. The Company
waived transaction processing fees and maintenance fees for the 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 $603,978 or 41% during the three months ended
March 31, 2000, as compared to the corresponding period in 1999. The increase
experienced in the first three months is primarily the result of expanded
payroll and employee support costs associated with an increased number of
full-time employees. The Company had 67 full-time employees at March 31, 2000,
as compared to 58 on March 31, 1999, and 63 at the end of 1999.
Rent, office and facility expenses increased $18,503 or 15% during the three
months ended March 31, 2000. This was due to an increase in repairs,
maintenance, and janitorial costs. 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 the first quarter,
compared to the same period during the prior year, due to increased investor
relations costs.
In addition, the Company has incurred increases in sales and marketing
related expenditures commensurate with the increase in marketing personnel. The
level of selling, general and administrative costs is expected to continue to
increase, although at a reduced rate, as a result of ongoing marketing and
customer support activities, and an increase in the number of operating and
technical personnel necessary to support the Company's expected sales, product
development, and customer support activities.
Below is a detail of the changes in selling, general, and administrative
expenses in major categories for the three-month periods ended March 31, 2000
and 1999:
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<TABLE>
<CAPTION>
INCREASE FOR THE THREE MONTHS
ENDED MARCH 31, 2000 VS. THE
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------
<S> <C>
SG&A Increase attributable to:
Payroll and payroll related expenses........................ $429,327
Rent, office, and facility (including equipment) expenses... $ 18,503
Marketing, selling, and travel related expenses............. $104,921
Professional and public company related expenses............ $ 12,225
Other SG&A related expenses................................. $ 38,992
Total Increase in SG&A...................................... $603,978
</TABLE>
AMORTIZATION OF SOFTWARE COSTS. Amortization of software costs decreased
$68,308 in the three-months ended March 31, 2000 compared to the same period in
1999 due to declining balances in software costs and a decrease in the amount
capitalized.
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 $28,926 for the three-month period
ended March 31, 2000, as compared to the same period in 1999, primarily due to
the purchase of assets for $209,742, which were leased, and the purchase of
terminals for $104,000, which are to be leased to a customer.
INTEREST INCOME (NET). The Company had a net interest expense of $6,859 in
the period ended March 31, 2000, as compared to a net interest income of $32,061
in the period ended March 31, 1999. This decrease is due to the reduction in
funds invested during that period.
RESEARCH AND DEVELOPMENT. Research and development increased $93,521 in the
period ended March 31, 2000, as compared to the same period in 1999. The
increase in 2000 over 1999 reflects increases in programming staff and their
related research and development efforts, and expenditures on equipment and
software used for testing new product technologies and offerings.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $(698,914) at March 31, 2000 and
$(431,232) at December 31, 1999. The decrease in working capital at March 31,
2000 compared to December 31, 1999 is primarily due to the Company's net loss in
the first three months of 2000, and the resulting use of cash for operating
expenses and the payment of accrued expenses.
The Company's capital expenditures for the three months ended March 31, 2000
increased $249,497 compared to the same period in 1999. The increase for the
three months ended March 31, 2000 is primarily due to the purchase of assets for
$209,742, which were leased, and the purchase of terminals for $104,000, which
are to be leased to a customer. The Company expects continued investments in
capital expenditures for increased personnel, and transaction processing
infrastructure to support more complex operations and high volumes.
The Company signed an agreement in March 2000 with an investment banking
firm in New York City pursuant to which the firm would raise an aggregate of
up to $15 million on a best efforts basis through the sale of the Company's
equity securities. Further, the Company signed an agreement with the same
investment banking firm pursuant to which the firm would raise a bridge loan
to the equity financing of $1.5 million, also on a best efforts basis.
The Company commenced an offshore offering in November 1999 to non-U.S.
investors pursuant to Regulation S of the Securities Act of 1933, as amended,
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 the
offering. As of March 31, 2000, the Company had sold 2,459,400 shares of Common
Stock in connection with the offering, with net proceeds to the Company of
$4,824,752, at prices ranging from $1.75 to $3.25 per share. The Regulation S
offering has been terminated, as no further sales of shares will be made
pursuant thereto.
In August 1999, the Company entered into an agreement with Mitchum Jones and
Templeton, Inc., for a firm commitment financing for $3,000,000 of units, each
unit comprising one share of redeemable Series A Preferred Stock and four
warrants to acquire 4 shares of Common Stock. Mitchum Jones and Templeton is an
investment bank in San Francisco, California whose chief executive officer is
also a director of the Company. Each unit had a subscription price of $10.00,
and each warrant has an exercise price of $2.50 per share and expires after
three years. The Company issued 300,000 shares of Series A Preferred Stock and
warrants to acquire 1,200,000 shares of Common Stock; the financing closed in
two tranches, one in August 1999 and the other in September 1999. The Series A
Preferred Stock is redeemable at any time, but no later than December 31, 2001
and requires quarterly dividends payable at six percent per annum in cash or ten
percent per annum in Series A Preferred Stock. The Series A Preferred Stock also
contains provisions relating to preferential liquidation rights and voting
rights for the warrants issuable under the terms of the Series A Preferred
Stock. If the Company does not redeem the Series A Preferred Stock before
December 31, 1999, the Company will be required to issue an additional warrant
to acquire one share of Common Stock for each six shares of Series A Preferred
Stock outstanding during each quarter that any shares of Series A Preferred
Stock remain unredeemed; in the aggregate, this provision will require the
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Company to issue 50,000 warrants per quarter for each 300,000 shares of
Series A Preferred Stock outstanding. The terms of the Series A Preferred Stock
also prohibit the Company from issuing further debt or increasing its bank
obligations without approval of the holders of the Series A Preferred Stock.
Mitchum Jones and Templeton received a placement fee in warrants to acquire
150,000 shares of common stock at $2.50 per share. The Company has agreed to
register the shares of Common Stock underlying the warrants.
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 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released SEC
Staff Accounting Bulletin No. 101--Revenue Recognition in Financial
Statements. This pronouncement summarizes certain of the SEC Staff's views on
applying generally accepted accounting principles to revenue recognition. SAB
101A, an amendment to SAB 101, provides that the Company must implement SAB
101 for its quarter ended June 30, 2000. The Company is in the process of
reviewing the impact of adoption of SAB 101 on its financial statements.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this quarterly report contain
"forward-looking statements" within the meaning of the private Securities
Litigation Reform Act of 1995. These are statements that do not relate strictly
to historical or current facts. Such forward-looking statements involve known
and unknown risks and uncertainties. The Company's actual results could differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences are discussed below and in
the Company's periodic reports filed pursuant to the Securities Exchange Act of
1934, as amended, including the Company's annual report on Form 10K for the
fiscal year ended December 31, 1999, which has been previously filed with the
Securities and Exchange Commission. These risks and uncertainties include,
without limitation:
- The ability of the Company to continue as a going concern
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- The rate of market development and acceptance of smart card technology
- The unpredictability of the Company's sale cycle
- The limited revenues and significant operating losses generated to date
- The possibility of significant ongoing capital requirements
- The loss of any significant customer
- The ability of the Company to compete successfully with the other
providers of smart cards and smart card services
- The ability of the Company to secure additional financing as and when
necessary
- The ability of the Company to retain the services of its key management,
and to attract new members of the management team
- The ability of the Company to effect and retain appropriate patent,
copyright and trademark protection of its products
- The ability of the Company to achieve adequate levels of revenue to
recover its investment in capitalized software development costs and
software licenses
For the purposes of the safe harbor protection for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995,
readers are urged to review the list of certain important factors set forth in
"Cautionary Statement for Purposes of the "Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995."
The Company undertakes no obligation to release publicly any revisions to
the forward-looking statements or to reflect events or circumstances after the
date of this Report.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company commenced an offshore offering in November 1999 to non-U.S.
investors pursuant to Regulation S of the Securities Act of 1933, as amended,
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 the
offering. As of March 31, 2000, the Company had sold 2,459,400 shares of Common
Stock in connection with the offering, with net proceeds to the Company of
$4,824,752, at prices ranging from $1.75 to $3.25 per share. The Regulation S
offering has been terminated, as no further sales of shares will be made
pursuant thereto.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company recently signed an agreement to acquire SmartCard
Solutions, Inc., a privately held technology services company based in Aspen,
Colorado, in a stock-for-stock transaction. The agreement was signed in
April 2000. SmartCard Solutions has developed an information management system
that facilitates point-of-sale ticketing and season passes for resorts, advanced
sales, retail and rental purchasing (including inventory control and back office
auditing), financial reporting and access control. The system is currently in
use at several prominent Rocky Mountain resort areas where approximately
3.5 million transactions per season are processed. In consideration for the
transfer of the outstanding capital stock of SmartCard Solutions, Pathways has
agreed to issue 218,750 shares of its Series B Convertible Preferred Stock
("Series B Stock"), which is not convertible for one year from the date of
issuance. After the expiration of one year from the date of issuance, if the
market price of Pathways' publicly traded Common Stock is less than $8.00 per
share, each share of the Series B Stock will be converted into two shares of
Common Stock. If the market price of one share of Common Stock is equal to or
greater than $8.00 per share, each share of Pathways' Series B Stock will be
converted into one share of Common Stock. At $8.00 per share, the nominal value
of the transaction is $1,750,000.
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The Company also signed an agreement in April 2000 to purchase MS
Digital, Inc., a privately-held corporation based in Washington that
specializes in customized multi-media communications systems. The majority
shareholder of MS Digital is Monte Strohl, who is a director and Senior Vice
President, Marketing and Sales, of the Company; the other two shareholders
are Jay Potts and Gary Baker, both of whom are employees of the Company. The
acquisition is a stock-for-stock transaction valued at $3,000,000. MS Digital
provides corporate communications, call center information systems integrated
with Lucent phone systems, cable television information systems,
point-of-sale information systems, interactive kiosks, and multi-media
presentations. Major cities in western Washington use MS Digital's call
system for their municipal television stations for display of programming
schedules, community events, election results, and emergency and general
information. Pathways will offer MS Digital's core technologies of
multi-media and web presentations to clients interested in high-quality
graphics, motion video, and animation, as part of an e-commerce site or
point-of-sale system. Pathways also plans to incorporate the call center
portion of MS Digital's products into operations of the Company's growing
technical and client support department as a way to increase customer
service. Many of the large communications companies with which MS Digital
works currently utilize card-based products for the marketing and sales of
their services. MS Digital's existing relationship with these companies will
provide an opportunity for marketing of Pathways' smart card technology to MS
Digital's client base.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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<S> <C>
Exhibit 3.1 Certificate of Designations for Series A Preferred Stock*
Exhibit 3.2 Certificate of Designations for Series B Preferred Stock
(filed herewith)
Exhibit 10.1 Agreement of Purchase and Sale of Stock entered into in
connection with acquisition of SmartCard Solutions, Inc.
(filed herewith)
Exhibit 10.2 Agreement of Purchase and Sale of Stock entered into in
connection with acquisition of MS Digital, Inc. (filed
herewith)
Exhibit 10.3 Agreement with Hawaiian Millenium Commission**
Exhibit 10.4 License Agreement with Proton World International, S.A.*
Exhibit 27 Financial Data Schedule (filed herewith)
</TABLE>
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* Incorporated herein by reference to the exhibit contained in the Company's
Annual Report on Form 10K for the fiscal year ended December 31, 1999.
** Incorporated by reference to the exhibit contained in the Company's
Quarterly Report on Form 10QSB for the fiscal quarter ended June 30, 1999.
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(b) Reports on Form 8-K
None.
12
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THE PATHWAYS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE FISCAL QUARTER ENDED MARCH 31, 2000
<TABLE>
<S> <C>
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Cash Flows....................... F-4
Notes to Consolidated Financial Statements.................. F-5
</TABLE>
F-1
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CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 467,087 $ 645,065
Accounts and interest receivable.......................... 32,516 5,523
Inventories............................................... 354,810 338,438
Prepaid expenses and deposits............................. 280,372 260,664
------------ ------------
Total current assets.................................... 1,134,785 1,249,690
Restricted cash............................................. 22,000 272,000
Software, net............................................... 567,053 666,283
Property and equipment, net................................. 1,270,504 1,003,231
Software license............................................ 1,000,000 1,000,000
Deposits and other assets................................... 83,146 85,481
------------ ------------
TOTAL ASSETS............................................ $ 4,077,488 $ 4,276,685
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks, current maturities................ $ 116,100 $ 108,908
Accounts payable.......................................... 728,890 319,646
Accrued expenses and deferred revenue..................... 288,709 552,368
Software license fee payable.............................. 700,000 700,000
------------ ------------
Total current liabilities............................... 1,833,699 1,680,922
Notes payable to banks, net of current maturities........... 52,350 60,781
------------ ------------
TOTAL LIABILITIES....................................... 1,886,049 1,741,703
------------ ------------
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 $3,150,000........................................... 1,703,907 1,489,527
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized; 15,751,762 issued and outstanding at
March 31, 2000.......................................... 157,518 144,109
Additional paid in capital.................................. 32,620,180 30,639,640
Unearned compensation....................................... (369,886) (495,833)
Accumulated deficit......................................... (31,920,280) (29,242,461)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY.............................. 487,532 1,045,455
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $ 4,077,488 $ 4,276,685
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
Sales, net.................................................. $ 34,882 $ 6,252
Direct cost of sales........................................ 16,253 304
Selling, general and administrative expenses................ 2,062,346 1,458,368
Research and development.................................... 236,706 143,185
Amortization of software.................................... 118,050 186,358
Depreciation................................................ 145,833 116,907
----------- -----------
Total operating expenses.................................. 2,579,188 1,905,122
----------- -----------
Loss from operations........................................ (2,544,306) (1,898,870)
Interest income (expense), net.............................. (6,859) 32,061
----------- -----------
NET LOSS.................................................. $(2,551,165) $(1,866,809)
=========== ===========
Basic and diluted net loss per share...................... $ (0.18) $ (0.14)
Shares used in per share calculations..................... 15,358,353 13,565,662
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,551,165) $(1,866,809)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................ 145,833 116,907
Amortization of software................................ 118,049 186,358
Amortization of unearned compensation................... 38,447
Effects of changes in operating assets and liabilities:
Accounts and interest receivable...................... (26,993) 19,373
Inventories........................................... (16,372) (6,791)
Prepaid expenses and deposits......................... (19,708) 45,585
Other assets.......................................... 1,262 (13,279)
Accounts payable...................................... 409,244 26,887
Accrued expenses...................................... (263,660) (606,185)
----------- -----------
Net cash used in operating activities............... (2,165,063) (2,097,954)
----------- -----------
Cash flows from investing activities:
Capital expenditures...................................... (413,104) (70,165)
Capitalized software development costs.................... (17,747) (88,831)
Restricted Cash........................................... 250,000 0
Other assets.............................................. 0 0
----------- -----------
Net cash used in investing activities............... (180,851) (158,996)
----------- -----------
Cash flows from financing activities:
Proceeds from issuing common stock........................ 2,169,174 0
Principal payments on notes payable to banks.............. (1,238) (144,036)
----------- -----------
Net cash used in financing activities............... 2,167,936 (144,036)
----------- -----------
Decrease in cash and cash equivalents....................... (177,978) (2,400,986)
Cash and cash equivalents, beginning of year................ 645,065 4,628,544
----------- -----------
Cash and cash equivalents, end of period.................... $ 467,087 $ 2,227,558
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements are unaudited, but
include all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position at such dates and of the operations and cash flows for the
periods then ended. The financial information is presented in a condensed
format, and it does not include all of the footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles. Operating results for the periods ended March 31, 2000
and 1999 are not necessarily indicative of results that may be expected for the
entire year. The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and reported
amounts of revenue and expenses during the reporting period. Actual results
could differ materially from such assumptions and estimates. The accompanying
financial statements and related footnotes should be read in conjunction with
the Company's audited financial statements, included in its annual report on
Form 10-K for the fiscal year ended December 31, 1999, filed with the Securities
and Exchange Commission.
2. THE COMPANY
The accompanying consolidated financial statements include the accounts of
The Pathways Group, Inc. ("TPG") and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated. TPG's subsidiaries
include Pathways International, Ltd. ("PIL"), SPRINTICKET, Inc. ("ST"), PT
Link, Inc. ("PT Link") and The Pathways Group, Inc., a wholly owned subsidiary
incorporated in the State of Hawaii. TPG and its subsidiaries (the "Company")
are primarily engaged in providing specialized transaction processing services
through the development of proprietary software and hardware systems including
credit card and multiple application smart card technologies. The Company
derives its revenue principally from transaction processing fees charged to the
merchant and the sale of related terminals, hardware systems and smart cards.
The Company has invested heavily in designing and developing its proprietary
hardware and application software systems and in establishing and expanding its
sales and marketing capabilities. The Company plans to continue these efforts in
preparation for, and in anticipation of, the growth in smart card-based
electronic commerce that the Company anticipates will create a substantial
market for its data and transaction processing services.
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
F-5
<PAGE>
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:
- 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.
- 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.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
<S> <C> <C>
Smart cards and related packaging..................... $ 74,705 $ 74,705
Smart card terminals and computer hardware............ 73,837 72,840
Assembled unattended kiosks and components............ 206,268 190,893
-------- --------
$354,810 $338,438
======== ========
</TABLE>
F-6
<PAGE>
4. USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates
and assumptions.
It is reasonably possible that the estimates of anticipated future gross
revenues and the remaining estimated economic lives used to calculate
depreciation and amortization of the Company's long lived assets and software
and license may be reduced significantly in the near term. As a result, the
carrying amount of the capitalized software costs ($567,053) may be reduced
entirely in the near term. In addition, the carrying amount of long-lived assets
may be reduced materially in the near term.
5. CAPITAL STOCK TRANSACTIONS
COMMON STOCK
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.
In the first quarter of 2000, the Company sold 1,340,900 shares of common
stock through a private placement at prices ranging from $1.75 per share to
$2.50 per share. The net proceeds from the offering were $2,169,174.
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
F-7
<PAGE>
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 March 31, 2000:
<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
===========
Preferred stock balance at December 31, 1999................ $ 1,489,527
Accretion of preferred stock................................ 139,380
Dividends Payable........................................... 75,000
-----------
Preferred stock balance at March 31, 2000................... $ 1,703,907
===========
Paid in Capital.............................................
Increase in paid in capital at December 31, 1999............ $ 1,532,336
Additional warrants issued.................................. 51,653
Accretion on preferred stock................................ (139,380)
-----------
Net increase in paid in capital at March 31, 2000........... $ 1,444,609
===========
</TABLE>
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Cash paid for interest.................................... $ 18,108 $9,143
Non-cash transactions:
Accretion of mandatorily redeemable preferred stock..... 139,380 0
Amortization of unearned compensation................... 38,447 0
Dividends in kind shares on Series A Preferred Stock.... 75,000 0
Reversal of unearned compensation....................... 87,500
</TABLE>
7. BANK AGREEMENTS
In 1997, the Company entered into a master lease agreement with a Bank which
provided up to $400,000 of credit to the Company for the lease of certain
computer and office equipment and furniture for a period of 34 months, 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
F-8
<PAGE>
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. 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.
8. NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings 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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Net loss.................................................. $(2,551,165) $(1,866,809)
Accretion of mandatorily redeemable preferred stock....... (139,380) --
Preferred stock dividends in kind......................... (75,000) --
Preferred stock dividends - warrants...................... (51,653)
Net loss for common stock................................. $(2,817,198) $(1,866,809)
Weighted average shares of common stock outstanding
(shares used in computing basic and diluted net loss per
share).................................................. 15,358,353 13,565,662
Basic and diluted net loss per share...................... $ (0.18) $ (0.14)
</TABLE>
9. SOFTWARE LICENSE AGREEMENT
In May 1999, the Company entered into a License Agreement (the "Agreement")
with Proton World International S.A. As of March 31, 2000 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
F-9
<PAGE>
expense recorded for the three months ended March 31, 2000, as the testing
and acceptance of the system had not been completed and the underlying system
had not been placed into service.
10. ACQUISITIONS
The Company recently signed an agreement to acquire SmartCard
Solutions, Inc., a privately held technology services company based in Aspen,
Colorado, in a stock-for-stock transaction. The agreement was signed in
April 2000.
In April 2000, the Company signed an agreement to purchase MS
Digital, Inc., a privately held corporation based in Washington that specializes
in customized multi-media communications systems. The agreement was signed in
April 2000.
F-10
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE PATHWAYS GROUP, INC.
By /s/ Carey F. Daly II
----------------------------------
Carey F. Daly II
President, Chief Executive Officer
and Chairman
Date: May 15, 2000
<PAGE>
Exhibit 3.1
THE PATHWAYS GROUP, INC.
CERTIFICATE OF DESIGNATIONS
OF
SERIES B PREFERRED STOCK
- --------------------------------------------------------------------------------
PURSUANT TO SECTION 151(g) OF THE
DELAWARE GENERAL CORPORATION LAW
- --------------------------------------------------------------------------------
THE PATHWAYS GROUP, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), DOES
HEREBY CERTIFY that the following resolution was duly adopted by the Board of
Directors of the Corporation at a meeting duly called and held on April 7, 2000,
at which a quorum was present and acting throughout:
RESOLVED that, pursuant to authority conferred upon the Board
of Directors of the Corporation pursuant to Article Fourth of the Certificate of
Incorporation of the Corporation, a series of Preferred Stock of the Corporation
designated Series B Preferred Stock, par value $.01 per share, be, and it hereby
is, created, to consist of 218,750 shares of Preferred Stock which the
Corporation has authority to issue, and that the designations, powers,
preferences and relative, participating, optional and other special rights and
relative qualifications, limitations or restrictions of the share of such series
hereby are fixed as follows:
1. DESIGNATION. 218,750 authorized shares of Preferred Stock, par value
$.01 per share, may be issued in and as a series to be designated the "Series B
Preferred Stock" (the "Series B Preferred Stock").
2. RANK. The Series B Preferred Stock shall be junior in right to
Series A Preferred Stock and senior in right to any Common Stock or any other
equity security of the Corporation of a lessor priority than the Series B
Preferred Stock with respect to dividend payments and distribution of assets
upon Liquidation (discussed below).
3. DIVIDENDS. Holders of outstanding shares of Series B Preferred Stock
shall be entitled to receive, when and if declared by the Board of Directors and
out of any funds legally available therefor, dividends at the rate of six
percent (6.0%) PER ANNUM of the price at which the initial shares of Series B
Preferred Stock are issued ("Initial Sales Price"), payable during
1
<PAGE>
each fiscal year of the Corporation. The dividends payable to Series B Preferred
Stock are subordinate to the rights of the Corporation's Series A Preferred
Stock and the rights of any series of Preferred Stock with rights senior to the
Series B Preferred Stock. Dividends on the Series B Preferred Stock shall not be
cumulative and no rights shall accrue to the holders of the Series B Preferred
Stock in the event the Corporation shall fail to declare or pay dividends on the
full Series B Preferred Stock in the amount of six percent (6%) of the Initial
Sales Price per share per fiscal year, or in any amount in any prior year of the
Corporation, whether or not the earnings of the Corporation in that previous
fiscal year were sufficient to pay such dividends in whole or in part. If the
Board of Directors shall declare a dividend on the outstanding shares of Series
B Preferred Stock and the amount available for payment thereof is insufficient
to permit the payment of the full preferential amounts required to be paid to
the holders of the outstanding shares of Series B Preferred Stock, then the
amount available for such dividend payments shall be distributed ratably among
the holders of the outstanding shares of Series B Preferred Stock.
4. PREFERENCE ON LIQUIDATION.
a. PREFERENCE PRICE. In the event of the voluntary or involuntary
liquidation, dissolution or winding up ("Liquidation") of the
Corporation, the holders of Series B Preferred Stock shall be
entitled to have paid to them out of the assets of the
Company, after distribution is made to or set apart for the
holders of Series A Preferred Stock or the rights of any
series of Preferred Stock with rights senior to the Series B
Preferred Stock but before any distribution is made to or set
apart for the holders of any common stock or any other class
or series of stock of a lesser priority than the Series B
Preferred Stock, $8.00 per share for each share of Series B
Preferred Stock held ("Preference Price"), plus any declared
but unpaid dividends on each such share. Thereafter, the
holders of Series B Preferred Stock shall not be entitled to
any further distribution in the event of Liquidation. For
purposes of this paragraph 4, each of the following shall be
considered a Liquidation:
(i) the adoption by the Corporation of any plan of liquidation
providing for the distribution of all or substantially all of
its assets; (ii) the sale or disposition of all or
substantially all of the assets or business of the Corporation
pursuant to a merger, consolidation or other transaction
(unless the stockholders of the Corporation immediately prior
to such merger, consolidation or other transaction
beneficially own, directly or indirectly, 80% or more of the
combined voting power of the entity or entities, if any, that
succeed to the business of the Corporation, in substantially
the same proportion as they owned the combined voting power of
the Corporation); (iii) the combination of the Corporation
with another company pursuant to which the Corporation is the
surviving corporation if, immediately after the combination,
the Corporation holds, directly or indirectly, less than 50%
of the combined voting power of the combined company; or (iv)
any person (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other
2
<PAGE>
than any person who was a beneficial owner of Common Stock of
the Corporation, par value $.01 per share (the "Common Stock)
on or before the date hereof, is or becomes the "beneficial
owner" (as defined in Rule 13(d)-3 under the Exchange Act) of
securities of the Corporation representing more than 50% of
the combined voting power of the Corporation.
b. PARTIAL PAYMENT. If, upon any liquidation of this Corporation,
the assets of this Corporation available for distribution to
its stockholders shall be insufficient to pay the full
Preference Prices required to be paid to the holders of the
outstanding shares of Series B Preferred Stock, then, subject
to the rights of any series of Preferred Stock with rights
senior to the Series B Preferred Stock, all of the assets of
this Corporation legally available for distribution to the
holders of equity securities shall be distributed ratably
among the holders of the outstanding shares of Series B
Preferred Stock.
5. CONVERSION. The holders of the outstanding shares of Series B
Preferred Stock shall have the conversion rights set forth below (the
"CONVERSION RIGHTS"):
a. RIGHT TO CONVERT. Each share of Series B Preferred Stock shall
be convertible, after one (1) year from the date of issuance
of the Series B Preferred Stock, at the office of this
Corporation or any transfer agent selected at the
Corporation's sole discretion, for the shares of Series B
Preferred Stock or Common Stock, into that number of shares of
Common Stock, defined as publicly traded common stock of
Pathways, as follows:
(1) Subject to any adjustments detailed herein, if, after
the expiration of exactly one year from that date of
issuance of the Pathways Preferred Stock
("Anniversary Date"), the market price of Pathways'
publicly traded common stock is less than $8.00 per
share, each share of Pathways Preferred Stock shall
be convertible into two shares of Pathways' publicly
traded common stock. If, on the Anniversary Date, the
market price of Pathways' publicly traded common
stock is equal to or exceeds $8.00 per share, each
share of Pathways Preferred Stock shall be
convertible into one share of Pathways' publicly
traded common stock.
b. MECHANICS OF CONVERSION. Each outstanding share of Series B
Preferred Stock is convertible at the option of the holder
thereof (after the one (1) year time period mentioned in
subparagraph (a), above), by surrendering the certificate or
certificates therefor, duly endorsed, at the office of this
Corporation or of any transfer agent for the shares of Series
B Preferred Stock or Common Stock and giving written notice to
this Corporation at such office that such holder elects to
convert the same and stating therein the number of shares of
Series B Preferred Stock being converted. Thereupon, this
Corporation shall issue and deliver at such office to such
holder a certificate or certificates for the number of shares
of
3
<PAGE>
Common Stock to which such holder is entitled and shall
promptly pay in cash all declared but unpaid dividends on the
shares being converted or, if this Corporation so elects or is
legally or financially unable to pay in cash, the Corporation
shall pay such dividends in shares of Common Stock (valued at
the Common Stock's fair market value at the time of surrender
as determined in good faith by the Board of Directors). Such
conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the
certificate or certificates representing the shares to be
converted, and the person entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated
for all purposes as the record holder of such shares of Common
Stock on such date.
c. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If this
Corporation at any time or from time to time after the date
this Certificate is filed with the Secretary of State of the
State of Delaware (the "FILING DATE") effects a division of
the outstanding shares of Common Stock, then the Conversion
Price shall be proportionately decreased and, conversely, if
this Corporation at any time, or from time to time, after the
Filing Date combines the outstanding shares of Common Stock,
then the Conversion Price shall be proportionately increased.
Any adjustment under this Section 5.c. shall be effective on
the close of business at the Corporation on the date such
division or combination becomes effective.
d. ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If this
Corporation at any time or from time to time after the Filing
Date pays or fixes a record date for the determination of
holders of shares of Common Stock entitled to receive a
dividend or other distribution in the form of shares of Common
Stock, or rights or options for the purchase of, or securities
convertible into, Common Stock, then in each such event the
Conversion Price shall be decreased, as of the time of such
payment or, in the event a record date is fixed, as of the
close of business of such record date, by multiplying the
Conversion Price by a fraction (i) the numerator of which
shall be the total number of shares of Common Stock
outstanding immediately prior to the time of such payment or
the close of business on such record date, as the case may be,
and (ii) the denominator of which shall be THE SUM OF (A) the
total number of shares of Common Stock outstanding immediately
prior to the time of such payment or the close of business on
such record date, as the case may be, PLUS (B) the number of
shares of Common Stock issuable in payment of such dividend or
distribution or upon exercise of such option or right of
conversion; PROVIDED, HOWEVER, that if a record date is fixed
and such dividend is not fully paid or such other distribution
is not fully made on the date fixed therefor, then the
Conversion Price shall not be decreased as of the close of
business on such record date as hereinabove provided as to the
portion not fully paid or distributed and thereafter the
Conversion Price shall be decreased pursuant to this Section
5.d. as of the date or dates of actual payment of such
dividend or distribution.
4
<PAGE>
e. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If this
Corporation at any time or from time to time after the Filing
Date pays, or fixes a record date for the determination of
holders of shares of Common Stock entitled to receive, a
dividend or other distribution in the form of securities of
this Corporation other than shares of Common Stock or rights
or options for the purchase of, or securities convertible
into, Common Stock, then in each such event provision shall be
made so that the holders of outstanding shares of Series B
Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of this Corporation which
they would have received had their respective shares of Series
B Preferred Stock been converted into shares of Common Stock
on the date one day before such event and had such holders
thereafter, from the date of such event to and including the
actual date of conversion of their shares, retained such
securities, subject to all other adjustments called for during
such period under this Section 5.e. with respect to the rights
of the holders of the outstanding shares of Series B Preferred
Stock.
f. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If
at any time or from time to time after the Filing Date the
number of shares of Common Stock issuable upon conversion of
the shares of Series B Preferred Stock, is changed into the
same or a different number of shares of any other class or
classes of stock or other securities, whether by
recapitalization, reclassification or otherwise (other than a
recapitalization, division or combination of shares or a stock
dividend, or a reorganization, merger, consolidation or sale
of assets provided for elsewhere in this Section 5), then in
any such event each holder of outstanding shares of Series B
Preferred Stock shall have the right thereafter to convert
such shares of Series B Preferred Stock into the same kind and
amount of stock and other securities receivable upon such
recapitalization, reclassification or other change, as the
maximum number of shares of Common Stock into which such
shares of Series B Preferred Stock, could have been converted
immediately prior to such recapitalization, reclassification
or change, all subject to further adjustment as provided
herein.
g. REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS.
If at any time or from time to time after the Filing Date
there is a capital reorganization of the Common Stock (other
than a recapitalization, division, combination,
reclassification or exchange of shares provided for elsewhere
in this Section 5) or a merger or consolidation of this
Corporation into or with another corporation, then, as a part
of such capital reorganization, merger or consolidation,
provision shall be made so that the holders of outstanding
shares of Series B Preferred Stock shall thereafter receive
upon conversion thereof the number of shares of stock or other
securities or property of this Corporation, or of the
successor corporation resulting from such merger or
consolidation or sale, to which a holder of the
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number of shares of Common Stock into which their shares of
Series B Preferred Stock were convertible would have been
entitled on such capital reorganization, merger, consolidation
or sale. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Section 5
with respect to the rights of the holders of the outstanding
shares of Series B Preferred Stock after such capital
reorganization, merger, consolidation, or sale. The provisions
of this Section 5 (including adjustment of the Conversion
Price and the number of shares into which the outstanding
shares of Series B Preferred Stock may be converted) shall be
applicable after that event and be as nearly equivalent to
such Conversion Prices and number of shares as may be
practicable.
h. FRACTIONAL SHARES. No fractional shares of Common Stock shall
be issued upon conversion of Series B Preferred Stock. In lieu
of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall (after aggregating all
shares into which shares of Preferred Stock held by each
holder could be converted) pay cash equal to such fraction
multiplied by the effective Conversion Price.
6. VOTING RIGHTS. The holders of the outstanding shares of Series B
Preferred Stock shall be entitled to vote concerning the sale of all or
substantially all of the assets of the Company or the merger or consolidation of
the Company with another entity such that the Company is not the surviving
entity and such other matters as may be required under the provisions of the
Delaware General Corporation Law, as amended, and the Rules and Regulations of
the Delaware Commissioner of Corporations as promulgated thereunder. On such
matters, the holders of the outstanding shares of Series B Preferred Stock shall
be entitled to cast that number of votes equal to the number of shares of Common
Stock into which such holder's shares of Series B Preferred Stock are
convertible immediately after the close of business on the record date fixed for
any meeting at which such vote is to be taken or, if no such record date is
established, the date such vote is taken or the effective date of such written
consent. Except for the foregoing, the holders of Series B Preferred Stock shall
have no other voting rights.
7. IDENTICAL RIGHTS. Each share of the Series B Preferred Stock shall
have the same relative rights and preferences as, and shall be identical in all
respects with, all other shares of Series B Preferred Stock.
8. CERTIFICATES. So long as any shares of the Series B Preferred Stock
are outstanding, there shall be set forth on the face or back of each stock
certificate issued by the Corporation a statement that the Corporation shall
furnish without charge to each stockholder who so requests, the powers,
preferences and rights of each class of stock or series thereof and the
qualifications, limitations, or restrictions of such preferences or rights.
9. MISCELLANEOUS.
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a. COMMUNICATIONS. All notices and other communications required
or permitted to be given to holders of shares of Series B
Preferred Stock pursuant to this Certificate shall be in
writing and shall be deemed to have been duly given (i) when
delivered by hand or by Federal Express or a similar overnight
courier or (ii) five (5) days after being deposited in any
United States post office enclosed in a postage prepaid
registered mail envelope addressed to the persons shown on the
books of the Corporation as the holders of the shares at the
addresses as they appear in the books of the Corporation, as
of a record date or a date determined in
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accordance with the Corporation's Certificate of Incorporation
or Bylaws, this Certificate and applicable law.
b. DESIGNATIONS AND PREFERENCES. Except as may otherwise be
required by law, shares of Series B Preferred Stock will not
have any designations, preferences, limitations or relative
rights other than those specifically set forth in this
Certificate or in the Corporation's Certificate of
Incorporation.
c. HEADINGS. Headings used in this Certificate are for
convenience only and shall not be used in the interpretation
of this Certificate. References to paragraphs are to the
paragraphs of this Certificate.
d. WAIVER; AMENDMENT. The preferences, special rights or powers
of the Series B Preferred Stock may be waived, and any of the
provisions of the Series B Preferred Stock may be amended, by
the affirmative vote at a meeting or the written consent of
holders of record of at least a majority of the outstanding
shares of Series B Preferred Stock.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed on
this 4th day of May, 2000.
THE PATHWAYS GROUP, INC.
/s/ EDWARD L. MUELLER
- ------------------------------------
Edward L. Mueller, Secretary
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Exhibit 10.1
AGREEMENT OF PURCHASE AND SALE OF STOCK
April 6, 2000
THIS AGREEMENT OF PURCHASE AND SALE OF STOCK (this "AGREEMENT"), is
dated as of the date set forth above, and is made and entered into by and among
the Pathways Group, Inc., a Delaware corporation ("Pathways"), Smart Card
Solutions, Inc., a Colorado corporation, as the sole shareholder ("Shareholder")
of Smart Card Solutions Acquisition, Inc., a Colorado corporation
("Corporation"), and Corporation.
RECITALS
A. Shareholder recently formed Corporation for the purpose of
making the exchange of stock set forth below. Shareholder has represented that
it owns all the outstanding stock of Corporation.
B. Pathways desires to purchase from Shareholder, and Shareholder
desires to sell to Pathways, all the outstanding stock of Corporation (the
Shares) in exchange for Pathways Preferred Stock (as defined in Section 2.3.1
below) in a stock for stock transaction intended to qualify as a tax-free
reorganization under the Code (as defined in Section 1.4 below).
C. The Boards of Directors of Pathways, Shareholder and
Corporation (collectively, the "Constituent Corporations") deem it advisable and
in the best interests of the Constituent Corporations and in the best interests
of the shareholders of the Constituent Corporations that Pathways purchase all
the outstanding stock of Corporation from Shareholder.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained in this agreement, Pathways,
Shareholder and Corporation hereby agree as follows:
1. DEFINITIONS. The following terms when used herein have the
meanings set forth below:
1.1 "AFFILIATE" has the meaning set forth in the rules
and regulations promulgated by the Securities and
Exchange Commission under the Securities Act of 1933,
as amended.
1.2 "CLOSING" and "CLOSING DATE" have the respective
meanings set forth in SECTION 8.
1.3 "COBRA" has the meaning set forth in SECTION 3.11(c).
1.4 "CODE" means the Internal Revenue Code of 1986, as
amended.
1.5 "DOL" has the meaning set forth in SECTION 3.11(b).
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1.6 "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
1.7 "ERISA AFFILIATE" has the meaning set forth in
SECTION 3.11(a).
1.8 "ENCUMBRANCES" means, with respect to an item,
claims, liabilities, liens, pledges, mortgages,
restrictions, options, charges and encumbrances of
any kind, whether accrued, absolute, contingent or
otherwise, affecting that item.
1.9 "GAAP" means generally accepted accounting
principles, consistently applied.
1.10 "GOVERNMENT CONTRACT PARTY" means any independent or
executive agency, division, subdivision, audit group,
or procuring office of the federal government,
including any prime contractor of the federal
government and any higher level subcontractor of a
prime contractor of the federal government, and
including any employees or agents thereof, in each
case acting in such capacity.
1.11 "GOVERNMENTAL ENTITY" means any court, administrative
agency or commission or other governmental authority
or agency, domestic or foreign.
1.12 "IRS" has the meaning set forth in SECTION 3.11(b).
1.13 "LICENSED INTELLECTUAL PROPERTY" has the meaning set
forth in Section 3.10(a).
1.14 "MATERIAL ADVERSE EFFECT" with respect to an entity
means a material adverse effect on the business,
assets (including intangible assets), financial
condition, or results of operations of such entity
and its Subsidiaries, taken as a whole.
1.15 "SUBSIDIARY" means, with respect to any parent
corporation or other entity, a corporation or other
entity in which a percentage of its voting securities
sufficient to elect at least a majority of the Board
of Directors or other managers is owned or otherwise
controlled, directly or indirectly, by such parent
corporation or other entity.
"TAX" means all federal, state, local and foreign
income, property, employment, sales, use, license,
payroll, occupation, franchise, occupation,
recording, value added, transfer, excise and other
taxes, fees, levies or assessments of any nature
whatsoever (whether payable directly or by
withholding) and, with respect to such tax, any
estimated tax, interest, penalties and
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additions and related charges of Governmental Entities.
2. PURCHASE AND SALE OF STOCK.
2.1 TAX-FREE REORGANIZATION. Shareholder and Pathways
adopt this Agreement as a plan of reorganization under Code Section
368(a)(1)(B).
2.2 SALE AND TRANSFER OF SHARES. Subject to the terms and
conditions set forth in this Agreement, on the Closing Date, Shareholder will
transfer and convey the Shares to Pathways, and Pathways will acquire the Shares
from Shareholder.
2.3 CONSIDERATION AT CLOSING. As full payment for the
transfer of the Shares by Shareholder to Pathways, in accordance with the
provisions of Section 8, (Closing Provisions) Pathways must deliver the
following at closing:
2.3.1 Two Hundred Eighteen Thousand Seven Hundred
Fifty (218,750) shares of Series B
Convertible Preferred Stock of Pathways
("Pathways Preferred Stock"), the terms and
conditions of which are attached hereto as
Exhibit A.
2.3.2 Shareholder may not exercise any conversion
rights or privileges with respect to the
Pathways Preferred Stock for one year from
the date of issuance of Pathways Preferred
Stock to Shareholder.
2.3.3 Subject to any adjustments detailed in
Exhibit A, if, after the expiration of
exactly one year from that date of issuance
of the Pathways Preferred Stock
("Anniversary Date"), the market price of
Pathways' publicly traded common stock is
less than $8.00 per share, each share of
Pathways Preferred Stock shall be
convertible into two shares of Pathways'
publicly traded common stock. If, on the
Anniversary Date, the market price of
Pathways' publicly traded common stock is
equal to or exceeds $8.00 per share, each
share of Pathways Preferred Stock shall be
convertible into one share of Pathways'
publicly traded common stock.
2.3.4 The form of Certificate of Designation of
the Pathways Preferred Stock is attached
hereto as Exhibit A.
3. REPRESENTATIONS AND WARRANTIES OF SELLING PARTIES. Except as
set forth in the Disclosure Schedule attached hereto as Exhibit B, which refers
to the Section of such representations and warranties as are thereby qualified,
Corporation and Shareholder ("Selling Parties") represent and warrant to
Pathways as set forth below.
3.1 ORGANIZATION. Corporation and Shareholder are corporations
duly organized, validly existing and in good standing under the laws of the
State of Colorado and each has all requisite corporate power and authority to
own, operate and lease properties and to carry on its business as it is now
being conducted. Corporation and Shareholder are duly qualified or licensed to
do business and in good standing in each jurisdiction in which the nature of its
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business or properties makes such qualification or licensing necessary except
where the lack of such qualification or licensing (individually or in the
aggregate) would not have a Material Adverse Effect on Corporation or
Shareholder. True, correct and complete copies of Corporation's and
Shareholder's Articles of Incorporation and Bylaws, as in effect on the date
hereof and as will be in effect immediately prior to the Closing, have been
delivered to Pathways.
3.2 CAPITALIZATION. The issued and outstanding capital stock of
Corporation consists of, and immediately prior to the Closing will consist of,
10,000,000 shares of Corporation's Common Stock. All such issued and outstanding
shares have been duly authorized, are validly issued, fully paid and
nonassessable and were issued and sold in compliance with all applicable
securities laws. As of the date of the closing of this Agreement there are no
outstanding options to purchase shares of Corporation's or Shareholder's Common
Stock. Except for the foregoing, there are no outstanding rights, options,
warrants, conversion rights or other agreements for the purchase or acquisition
from Corporation or Shareholder of any shares of its capital stock or securities
convertible into or exchangeable for any shares of such capital stock. There are
no preemptive rights to purchase or otherwise acquire any securities of
Corporation or Shareholder pursuant to any provisions of law, the Articles of
Incorporation or Bylaws of Corporation or Shareholder, or any agreement to which
Corporation or Shareholder is a party or otherwise. There is no voting or stock
restriction agreement, proxy or similar agreement to which Corporation or
Shareholder is a party. There are no outstanding contractual obligations,
commitments, understandings or arrangements of Corporation or Shareholder to
repurchase, redeem or otherwise acquire or make any payment in respect of any
shares of capital stock of Corporation or Shareholder and, except as
contemplated by this Agreement, there are no irrevocable proxies with respect to
shares of capital stock of Corporation or Shareholder.
3.3 POWER, AUTHORIZATION AND VALIDITY.
(a) Corporation and Shareholder have the corporate right,
power, legal capacity and authority to execute and deliver, and to consummate
the transactions contemplated by this Agreement and, subject to such approval of
the same by Corporation's or Shareholder shareholders as may be required by law,
to perform their respective obligations under this Agreement. The execution and
delivery of, and the consummation of the transactions contemplated by this
Agreement, have been duly and validly approved and authorized by the Board of
Directors of Corporation and Shareholder and all other necessary corporate
action on the part of Corporation and Shareholder, except for approval by
Corporation's shareholders.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to Corporation or Shareholder in connection with the execution
and delivery of, and the consummation by Corporation or Shareholder of the
transactions contemplated by, this Agreement, except for the filing of
appropriate documents with the relevant authorities of other states in which
Corporation and Shareholder are qualified to do business.
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(c) Upon the execution and delivery of this Agreement by
Corporation and Shareholder, this Agreement will constitute a valid and binding
obligation of Corporation and Shareholder, enforceable against Corporation and
Shareholder in accordance with its terms.
3.4 NO VIOLATION OF EXISTING AGREEMENTS. he execution and delivery
of this Agreement does not, and the consummation of the transactions
contemplated hereby and compliance with the provisions hereof will not, conflict
with, or result in any violation of or default under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss of a
benefit under, (i) any provision of the Articles of Incorporation or Bylaws of
Corporation or Shareholder, (ii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit, concession,
franchise or license to which Corporation or Shareholder is a party or by which
Corporation or Shareholder or any of their properties or assets are bound or
affected, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Corporation or Shareholder or their properties or
assets. The consummation of the transactions contemplated by this Agreement will
not require the consent of any third party or have a material adverse effect
upon any such right, license, franchise, lease or agreement.
3.5 SUBSIDIARIES. Corporation (except as mentioned in this
Agreement) and Shareholder (i) have no Subsidiaries, (ii) do not own or control
(directly or indirectly) any capital stock, bonds or other securities of, and do
not have any proprietary interest in, any other corporation, general or limited
partnership, firm, association or business organization, entity or enterprise,
and (iii) do not control (directly or indirectly) the management or policies of
any other corporation, partnership, firm, association or business organization,
entity or enterprise.
3.6 FINANCIAL STATEMENTS.
(a) Corporation and Shareholder have delivered to
Pathways the Corporation's and Shareholder's Financial Statements. Except as
expressly set forth in the notes, exhibits or schedules thereto, the Corporation
and Shareholder Financial Statements have been prepared in accordance with GAAP
and present fairly the financial position of Corporation and Shareholder as of
their respective dates and the results of operations, equity transactions and
cash flow of Corporation and Shareholder for the periods indicated.
(b) Corporation and Shareholder have no debt, liability,
or obligation of any nature, whether accrued, absolute, contingent, or
otherwise, and whether due or to become due, that is not reflected or reserved
against on the Corporation or Shareholder balance sheet included in the
Corporation's and Shareholder's Financial Statements (the "CORPORATION BALANCE
SHEET" and "Shareholder Balance Sheet," respectively), except for those that are
not required by GAAP to be included in a balance sheet or the notes thereto. The
reserves, if any, reflected on the Corporation Balance Sheet or Shareholder
Balance Sheet are adequate in light of the contingencies with respect to which
they are made.
(c) The accounts receivable shown on the Corporation
Balance Sheet and on the Shareholder Balance Sheet arose in the ordinary course
of business and have been collected, or are reasonably expected to be
collectible in the book amounts thereof, less an amount not in
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excess of the allowance for doubtful accounts and returns provided for in the
Corporation Balance Sheet or in the Shareholder Balance Sheet, as the case may
be. The accounts receivable of Corporation and Shareholder arising after the
date of the Corporation Balance Sheet or Shareholder Balance Sheet and before
the date of this Agreement are on Section 3.6(c) of the Corporation Disclosure
Schedule or Shareholder Disclosure Statement and arose in the ordinary course of
business and have been collected, or will be collectible in the book amounts
thereof, less allowances for doubtful accounts and returns determined in
accordance with the past practices of Corporation or Shareholder. None of such
accounts receivable is subject to any valid and material claim of offset or
recoupment or counterclaim, and neither Corporation nor Shareholder has any
knowledge of any specific facts that would be likely to give rise to any such
claim; no material amount of such accounts receivable is contingent upon the
performance by Corporation or Shareholder of any obligation; and no agreement
for deduction or discount has been made with respect to any such accounts
receivable.
(d) The inventories shown on the Corporation Balance
Sheet or Shareholder Balance Sheet, or thereafter acquired by Corporation or
Shareholder, consist of items of a quantity and quality usable or salable in the
ordinary course of Corporation's or Shareholder's business. Changes to the
inventories of Corporation or Shareholder arising after the date of the
Corporation Balance Sheet or the Shareholder Balance Sheet and before the date
of this Agreement are in Section 3.6(d) of the Corporation Disclosure Schedule
or the Shareholder Disclosure Schedule. The value at which inventories are
carried reflect the inventory valuation policy of Corporation and Shareholder,
which is consistent with its past practice and in accordance with GAAP. Due
provision has been made on the books of Corporation and Shareholder, consistent
with past practices, to provide for all slow-moving, obsolete, or unusable
inventories at their estimated useful or scrap values, and such inventory
reserves are adequate to provide for such slow-moving, obsolete or unusable
inventory and inventory shrinkage.
3.7 TAX MATTERS.
(a) Corporation and Shareholder have duly filed all tax
returns, reports and estimates required to be filed by them, for all years and
periods (and portions thereof) for which any such returns, reports or estimates
were due on or prior to the Closing Date. All such returns, reports and
estimates, as filed, were complete, correct and accurate in all material
respects. All taxes due from Corporation and Shareholder have been paid with
respect to years and periods ending on or prior to the Closing Date. Neither
Corporation nor Shareholder has received any notice of any pending assessments,
asserted deficiencies or claims for additional taxes that are payable and have
not been paid, except to the extent that they are subject to a bona fide dispute
with the relevant taxing authority. The reserves for taxes, if any, reflected on
the Corporation Balance Sheet and Shareholder Balance Sheet included in the
Corporation Financial Statements and Shareholder Financial Statements are
adequate and there are no tax liens on any property or asset of Corporation or
Shareholder other than liens for taxes not yet due. There have been no
examinations of any of Corporation's or Shareholder's tax returns or reports by
any Governmental Entity. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any tax return or
report for any period and no request for such an agreement or waiver is pending.
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(b) All taxes that Corporation and Shareholder have been
required to collect or withhold have been duly collected or withheld and, to the
extent required, have been paid to the proper taxing authority.
(c) Neither Corporation nor Shareholder is a party to any
tax-sharing agreement or similar arrangement with any other party.
(d) At no time has Corporation or Shareholder been
included in the federal consolidated income tax return of any affiliated group
of corporations.
(e) Neither Corporation nor Shareholder is obligated to
make any "parachute payment," as defined in Section 280G of the Code.
(f) Neither Corporation nor Shareholder will be required
to include any material adjustment in taxable income for any tax period (or
portion thereof) ending after the Closing Date pursuant to Section 481(c) of the
Code or any provision of the tax laws of any jurisdiction requiring tax
adjustments as a result of a change in method of accounting implemented by
Corporation or Shareholder prior to the Closing Date for any tax period (or
portion thereof) ending on or before the Closing Date or pursuant to the
provisions of any agreement entered into by Corporation or Shareholder prior to
the Closing Date with any taxing authority with regard to the tax liability of
Corporation or Shareholder for any tax period (or portion thereof) ending on or
before the Closing Date.
(g) Neither Corporation nor Shareholder is under any
contractual obligation to pay any tax obligations of any other person, or any
tax obligation with respect to any transaction of any other person or to
indemnify any other person with respect to any tax.
(h) Neither Corporation and Shareholder has at any time
filed a consent to the application of Section 341(f)(2) of the Code to any
property or assets held, acquired or to be acquired by it, and will not file any
such consent before the Closing Date.
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since March 21, 2000,
Corporation and Shareholder have conducted their business in the ordinary and
usual course and, without limiting the generality of the foregoing, neither
Corporation nor Shareholder:
(a) suffered any event or occurrence that has had a
Material Adverse Effect on Corporation or Shareholder;
(b) suffered any damage, destruction or loss, whether or
not covered by insurance, that had a Material Adverse Effect on Corporation or
Shareholder;
(c) granted any increase in the compensation payable or
to become payable by Corporation or Shareholder to their officers or employees;
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(d) declared, set aside or paid any dividend or made any
other distribution on or in respect of the shares of its capital stock or
declared any direct or indirect redemption, retirement, purchase or other
acquisition of such shares;
(e) made any change in the accounting methods or
practices it follows, whether for general financial or tax purposes, or any
change in depreciation or amortization policies or rates except as may be
required by any modification or change in GAAP;
(f) sold, assigned, transferred, or otherwise disposed of
any patent, trademark, trade name, brand name, copyright (or pending application
for any patent, trademark or copyright), invention, process, know-how, formula
or trade secret or interest therein or other intangible asset or licensed any of
the foregoing;
(g) suffered any labor dispute;
(h) entered into any material commitment or obligation,
except with Pathways;
(i) incurred any material liability (including, without
limitation, any contingent liability with respect to the obligation of others),
except in connection with the transactions contemplated by this Agreement;
(j) permitted or allowed any of its property or assets to
be subjected to any Encumbrance, except in the ordinary course of its business
and except for liens of current taxes not yet due;
(k) made any capital expenditure or commitment for
additions to property, plant or equipment in excess of $10,000 in the aggregate;
(l) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets to, or entered into any agreement
or arrangement with, any of its Affiliates, officers, employees, directors or
shareholders or any Affiliate of any of the foregoing, other than salary or
benefits to Corporation or Shareholder employees in the ordinary course of
business; or
(m) agreed to take any action described in this Section
3.8 or outside of the ordinary course of its business or that would constitute a
breach of any of the representations or warranties of Corporation or Shareholder
contained in this Agreement.
3.9 TITLE AND RELATED MATTERS; PROPERTY.
(a) Corporation and Shareholder have good and marketable title
to all the properties and assets, real and personal, reflected on the
Corporation Balance Sheet or Shareholder Balance Sheet included in the
Corporation Financial Statements or Shareholder Financial Statements or acquired
after the date of such Corporation Balance Sheet or Shareholder Balance Sheet
(except properties and assets sold or otherwise disposed of since the date of
such balance sheet in the ordinary course of business or property which is
leased), free and clear of all
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Encumbrances, except for purchase money security interests and the lien of
current taxes not yet due and payable and Encumbrances which are immaterial in
the aggregate. Section 3.9(a) of the Corporation Disclosure Schedule and
Shareholder Disclosure Schedule lists all material items of equipment owed or
leased by Corporation or Shareholder, and such equipment is (i) adequate for the
conduct of the business of Corporation or Shareholder as currently conducted and
as proposed to be conducted, and (ii) in good operating condition, regularly and
properly maintained, subject to normal wear and tear.
(b) All real and personal property leases to which
Corporation or Shareholder are a party are valid, binding, enforceable and
effective in accordance with their respective terms. There is not any existing
default by Corporation or Shareholder under any of such leases or any event of
default or event that, with notice or lapse of time or both, would constitute an
event of default by Corporation or Shareholder or, to Corporation's or
Shareholder's knowledge, by any other party to any of such leases which could be
expected to have a Material Adverse Effect on Corporation or Shareholder. True,
correct and complete copies of each Corporation or Shareholder lease described
in this Section 3.9(b) have been provided to for Pathways.
3.10 INTELLECTUAL PROPERTY.
(a) Corporation and Shareholder own, or are licensed
(including pursuant to licenses, sublicenses or other agreements, collectively
referred to herein as "LICENSED INTELLECTUAL PROPERTY") or otherwise possess a
legal right to use, all (i) issued patents and patent applications, (ii)
trademarks, trade names, service marks and domain names, (iii) copyrights and
mask works, and (iv) other processes, formulae, methods, schematics, technology,
know-how, inventions (whether or not patentable), computer software programs or
applications, tangible or intangible proprietary and confidential information or
materials and trade secrets, to the extent any of such rights are material to
the conduct of the business of Corporation or Shareholder as currently conducted
or as proposed to be conducted (all of which are referred to as the "CORPORATION
INTELLECTUAL PROPERTY RIGHTS")
(b) Sections 3.10(b) of the Corporation Disclosure
Schedule and Shareholder Disclosure Schedule contain an accurate and complete
list of (i) all patents and patent applications and all trademarks, trade names,
service marks and registered copyrights, included in the Corporation
Intellectual Property Rights, including the jurisdictions in which each such
Corporation Intellectual Property Right has been issued or registered or in
which any such application for such issuance and registration has been filed,
(ii) all licenses, sublicenses, distribution agreements and other agreements to
which Corporation or Shareholder is a party and pursuant to which any person is
authorized to use any Corporation Intellectual Property Rights or has the right
to manufacture, reproduce, market or exploit any Corporation or Shareholder
Product or any adaptation, translation or derivative work based on any
Corporation or Shareholder Product or any portion thereof, (iii) all licenses,
sublicenses and other agreements to which Corporation or Shareholder is a party
and pursuant to which Corporation or Shareholder is authorized to use any
Licensed Intellectual Property, which is incorporated in or forms a part of any
Corporation or Shareholder Product, (iv) all joint development or joint venture
agreements to which Corporation and Shareholder is a party, and (v) all
agreements with Governmental Entities
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or other third parties pursuant to which Corporation or Shareholder has obtained
funding for research and development activities.
(c) Neither Corporation nor Shareholder is, nor will it
be as a result of the execution and delivery of this Agreement or the
performance of its obligations under this Agreement, in breach of any license,
sublicense or other agreement relating to the Corporation Intellectual Property
Rights or Licensed Intellectual Property.
(d) Neither Corporation nor Shareholder: (i) has received
notice that it has been sued in any suit, action or proceedings which involves a
claim of infringement or misappropriation of any patent, trademark, service
mark, copyright, trade secret or other proprietary right of any third party;
(ii) has received any communications alleging that Corporation or Shareholder
has violated, or by conducting its business as proposed, would violate any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of any third party; (iii) has any reason to believe that the
manufacturing, marketing, licensing or sale of any Corporation or Shareholder
Product or the provision of services in the course of Corporation's or
Shareholder's business infringes or misappropriates any patent, trademark,
service mark, copyright, trade secret or other proprietary right of any third
party; or (iv) hasany knowledge of any claim challenging or questioning the
validity or effectiveness of any license or agreement relating to any
Corporation Intellectual Property Rights or Licensed Intellectual Property.
(e) All designs, drawings, specifications, source code,
object code, documentation, flow charts and diagrams incorporating, embodying or
reflecting any of the Corporation or Shareholder Products at any stage of their
development (the "CORPORATION COMPONENTS") were written, developed and created
solely and exclusively by employees of Corporation or Shareholder without the
assistance of any third party or were created by third parties who assigned
exclusive ownership of all their rights to Corporation or Shareholder pursuant
to valid and enforceable agreements. Each person currently or formerly employed
by Corporation or Shareholder (including independent contractors, if any) that
has or had access to confidential information of Corporation or Shareholder have
executed and delivered to Corporation or Shareholder a confidentiality and
non-disclosure agreement substantially in the form previously provided to
Pathways. Corporation or Shareholder have at all times used commercially
reasonable efforts to treat the Corporation and Shareholder Products and
Corporation Components as containing trade secrets and have not disclosed or
otherwise dealt with such items in such a manner as to cause the loss of such
trade secrets by their release into the public domain. Corporation and
Shareholder have taken all reasonable steps that are required to protect
Corporation's and Shareholder's rights in confidential information and trade
secrets of Corporation and Shareholder or provided by any other person to
Corporation and Shareholder.
(f) Neither the execution and delivery of any such
agreement, nor the carrying on of Corporation's or Shareholder's business as
currently conducted and as currently proposed to be conducted by any such person
as an employee, consultant or independent contractor, as the case may be, has
conflicted or will conflict with or result in a breach of the terms, conditions
or
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provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such persons is obligated.
(g) To the knowledge of Corporation or Shareholder, no
person is infringing or misappropriating any Corporation Intellectual Property
Rights.
(h) Each (i) patent, (ii) trademark, (iii) copyright,
(iv) service mark or (v) other Corporation Intellectual Property Right that has
been registered, filed, certified or otherwise perfected by recordation with any
Governmental Entity ("CORPORATION REGISTERED INTELLECTUAL PROPERTY") is valid
and subsisting, and all necessary registration, maintenance and renewal fees in
connection with such Corporation Registered Intellectual Property which are due
before the Closing have been or will be paid prior to the Closing and all
necessary documents and certificates in connection with such Corporation
Registered Intellectual Property which are due before the Closing have been or
will be filed prior to the Closing with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Corporation Registered
Intellectual Property. In each case in which Corporation or Shareholder has
acquired any Corporation Intellectual Property rights from any person,
Corporation or Shareholder has, as the case may be, obtained a valid assignment
sufficient to irrevocably transfer all rights in such Corporation Intellectual
Property Rights (including the right to seek past and future damages with
respect thereto) to Corporation or Shareholder and, to the maximum extent
provided for by, and in accordance with, applicable laws and regulations,
Corporation and Shareholder have recorded each such assignment with the relevant
governmental authorities, including the United States Patent and Trademark
Office, the U.S. Copyright Office, or their respective equivalents in any
relevant foreign jurisdiction, as the case may be.
(i) There are no contracts, licenses or agreements
between Corporation or Shareholder and any other person with respect to
Corporation Intellectual Property Rights under which there is any dispute known
to Corporation or Shareholder regarding the scope of such agreement, or
performance under such agreement including with respect to any payments to be
made or received by Corporation or Shareholder.
3.11 EMPLOYEE BENEFIT PLANS.
(a) Sections 3.11 of the Corporation Disclosure Schedule
and Shareholder Disclosure Schedule lists, with respect to Corporation or
Shareholder and any trade or business (whether or not incorporated) which is
treated as a single employer with Corporation or Shareholder (an "ERISA
AFFILIATE") within the meaning of Section 414(b), (c), (m) or (o) of the Code,
each plan, program, policy, practice, contract, agreement or other arrangement
providing for employment, compensation, severance, relocation, termination pay,
deferred compensation, sabbatical, performance awards, bonus, stock or
stock-related awards, fringe benefit, cafeteria benefit, dependent care,
including, without limitation, each "employee benefit plan" as defined in
Section 3(3) of ERISA which is maintained, contributed to, or required to be
contributed to by Corporation or Shareholder or any ERISA Affiliate or with
respect to which Corporation or Shareholder or any ERISA Affiliate has or may
have any liability (collectively, the "CORPORATION
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OR SHAREHOLDER EMPLOYEE PLAN(S)"). None of the Corporation or Shareholder
Employee Plans promise or provide retiree medical or other retiree welfare
benefits to any person. Neither Corporation nor Shareholder has any plan or
commitment to establish any new Corporation or Shareholder Employee Plans or
amend any Corporation or Shareholder Employee Plan which would materially
increase the expense of maintaining such Plan above the level of expense
incurred with respect to that Plan for the most recent fiscal year included in
Corporation's or Shareholder's Financial Statements, except for such amendments
as may be required by law.
(b) DOCUMENTS. Except for such items the nondisclosure of
which would not have a Material Adverse Effect on Corporation, Corporation and
Shareholder have furnished to Pathways true and complete copies of the current
documents relating to each of the Corporation or Shareholder Employee Plans,
including (without limitation) plan documents, trust documents, the most recent
determination or opinion letter issued by the Internal Revenue Service ("IRS"),
group annuity contracts, plan amendments that have not yet been incorporated
into the current version of a restated plan document, insurance policies or
contracts, employee booklets, administrative service agreements, summary plan
descriptions, Form 5500 reports filed for the last three plan years, standard
COBRA forms and notices, all registration statements and prospectuses, any
correspondence or inquiry by the IRS (other than that relating to any
determination letter application) or Department of Labor ("DOL"), and any
material employee communications relating to any Corporation or Shareholder
Employee Plan that is materially inconsistent with the terms of any Corporation
or Shareholder Employee Plan.
(c) COMPLIANCE. Each Corporation or Shareholder Employee
Plan has been administered in accordance with its terms and is in material
compliance with the requirements prescribed by any and all statutes, rules and
regulations (including ERISA and the Code) in all material respects, and
Corporation and Shareholder and each ERISA Affiliate have performed all material
obligations required to be performed by them under, are not in material default
under or in violation of and have no knowledge of any material default or
violation by any other party to, any of the Corporation or Shareholder Employee
Plans. Any Corporation or Shareholder Employee Plan intended to be qualified
under Section 401(a) of the Code has obtained from the Internal Revenue Service
a favorable determination letter or opinion letter as to its qualified status
under the Code and nothing has occurred since the issuance of each such letter
which could reasonably be expected to cause the loss of the tax-qualified status
of any Corporation or Shareholder Employee Plan subject to Code Section 401(a).
There are no suits, administrative proceedings, including any audit or inquiry
by the IRS or DOL, actions or other litigation pending, or to the knowledge of
Corporation or Shareholder threatened against or with respect to any Corporation
or Shareholder Employee Plan, other than routine claims for benefits and those
relating to Qualified Domestic Relations Orders. Corporation and Shareholder and
each of its United States subsidiaries have complied in all material respects
with the health care continuation and notice provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), or any applicable state
continuation coverage requirements, the Family and Medical Leave Act of 1993,
the Health Insurance Portability and Accountability Act and the Cancer Rights
Act of 1998.
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(d) NO TITLE IV OR MULTIEMPLOYER PLAN. Neither
Corporation nor Shareholder has not now, nor has it ever, maintained,
established, sponsored, participated in, or contributed to, any pension plan
which is subject to Title IV of ERISA or Section 412 of the Code. Neither
Corporation nor Shareholder nor any ERISA Affiliate is a party to, has made or
is required to make any contribution to, or otherwise incurred any obligation or
liability under any "multiemployer plan" as defined in Section 3(37) of ERISA.
Neither Corporation nor Shareholder nor any ERISA Affiliate has any actual or
potential withdrawal liability for any complete or partial withdrawal from any
multiemployer plan.
(e) EFFECT OF TRANSACTION. The consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee or other service provider of Corporation or Shareholder to
severance benefits or any other payment (including, without limitation,
unemployment compensation, golden parachute or bonus), except as expressly
provided in EXHIBIT C to this Agreement, or (ii) accelerate the time of payment
or vesting of any such benefits, or increase the amount of compensation due any
such employee or service provider. No benefit payable or which may become
payable by Corporation or Shareholder pursuant to any Corporation or Shareholder
Employee Plan or as a result of or arising under this Agreement shall constitute
an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code)
which is subject to the imposition of an excise tax under Section 4999 of the
Code or the deduction for which would be disallowed by reason of Section 280G of
the Code.
3.12 CONTRACTS.
(a) Except as set forth in the Corporation Disclosure
Schedule or Shareholder Disclosure Schedule, neither Corporation nor Shareholder
is a party or subject to any agreement, obligation or commitment, written or
oral:
(i) that calls for any fixed or contingent
payment or expenditure or any related series of fixed and/or contingent payments
or expenditures by or to Corporation or Shareholder totaling more than $10,000
in any year;
(ii) with agents, advisors, salesmen, sales
representatives, independent contractors or consultants that are not cancelable
by it on no more than thirty (30) days' notice and without liability, penalty or
premium;
(iii) to provide funds to or to make any
investment in any other person or entity (in the form of a loan, capital
contribution or otherwise);
(iv) with respect to obligations as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any other person or entity;
(v) for any line of credit, standby financing,
revolving credit or other similar financing arrangement;
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(vi) for the sale or lease of any real property
involving more than $10,000 per annum;
(vii) to provide any warranty or indemnity
relating to products or services provided by Corporation or Shareholder, other
than any warranties or indemnities contained in Corporation's or Shareholder's
standard terms and conditions of sale provided to Pathwaysand warranties implied
by law; or
(viii) with any distributor, original equipment
manufacturer, value added remarketer or other person for the distribution of any
of the Corporation or Shareholder Products.
(b) To Corporation's or Shareholder's knowledge, no party
to any such contract, agreement or instrument intends to cancel, withdraw,
modify or amend such contract, agreement or instrument.
(c) Sections 3.12(c) of the Corporation Disclosure
Schedule and Shareholder Disclosure Schedule list each vendor that (i)
manufactures for or supplies to Corporation or Shareholder any material product
or component of any Corporation or Shareholder Product and to which Corporation
or Shareholder paid more than $50,000 in 1997, 1998 or 1999, or (ii) is the sole
source for any product or component of any Corporation or Shareholder Product.
(d) Neither Corporation nor Shareholder is in default
under or in breach or violation of, nor, to Corporation's or Shareholder's
knowledge, is there any valid basis for any claim of default by Corporation or
Shareholder under, or breach or violation by Corporation or Shareholder of, any
contract, commitment or restriction to which Corporation or Shareholder is a
party or by which it or any of its properties or assets is bound or affected,
where such defaults, breaches, or violations would, in the aggregate, have a
Material Adverse Effect on Corporation or Shareholder. To Corporation's or
Shareholder's knowledge, no other party is in default under or in breach or
violation of, nor, to Corporation's or Shareholder's knowledge, is there any
valid basis for any claim of default by any other party under, or any breach or
violation by any other party of, any contract, commitment, or restriction to
which Corporation or Shareholder is a party or by which any of its properties or
assets is bound or affected, where such defaults, breaches, or violations would,
individually or in the aggregate, have a Material Adverse Effect on Corporation
or Shareholder.
3.13 COMPLIANCE WITH LAW. Corporation and Shareholder possess all
regulatory consents, authorizations, approvals, licenses and permits required by
any Governmental Entity in connection with the conduct of all aspects of its
business as presently conducted. Corporation and Shareholder have complied with
all such consents, authorizations, approvals, licenses and permits and with all
applicable laws, regulations and other requirements of each Governmental Entity
having jurisdiction over Corporation or Shareholder. Neither Corporation nor
Shareholder has received any (i) notification of any asserted present or past
failure by Corporation or Shareholder to comply with such laws, rules or
regulations, or (ii) written complaint, inquiry or request for information from
any Governmental Entity relating thereto.
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3.14 LABOR DIFFICULTIES. To Corporation's or Shareholder's
knowledge, Neither Corporation nor Shareholder is engaged in any unfair labor
practice or is in violation of any applicable laws respecting employment and
employment practices, terms and conditions of employment, and wages and hours.
There are no proceedings pending or, to Corporation's or Shareholder's
knowledge, reasonably expected or threatened, between Corporation or Shareholder
and any of its current or former employees. There are no claims pending or, to
Corporation's or Shareholder's knowledge, reasonably expected or threatened,
against Corporation or Shareholder under any workers' compensation or disability
plan or policy. Corporation and Shareholder have provided all employees with all
wages, benefits and compensation earned up through the date of this Agreement.
There is no unfair labor practice complaint against Corporation or Shareholder
pending, or, to Corporation's or Shareholder's knowledge, threatened, nor are
there any grievances which could form the basis for such a complaint before the
National Labor Relations Board. To Corporation's or Shareholder's knowledge, (i)
the consummation of the transactions contemplated by the Transaction Documents
will not have a Material Adverse Effect on its relations with Corporation or
Shareholder employees, and (ii) none of the Corporation or Shareholder employees
intends to leave its employment, whether as a result of the transactions
contemplated by the Transaction Documents or otherwise.
3.15 CERTAIN TRANSACTIONS.
(a) No Affiliate of Corporation or Shareholder has any
interest in (i) any material equipment or other property or asset, real or
personal, tangible or intangible, including, without limitation, any of the
Corporation Intellectual Property Rights, used in connection with or pertaining
to the business of Corporation or Shareholder, (ii) any creditor, supplier,
customer, manufacturer, agent, representative, or distributor of any of the
Corporation or Shareholder Products, (iii) any entity that competes with
Corporation or Shareholder, or with which Corporation or Shareholder is
affiliated or has a business relationship, or (iv) any agreement, obligation or
commitment, written or oral, to which Corporation or Shareholder is a party;
PROVIDED, HOWEVER, that no Affiliate of Corporation or Shareholder or other
person shall be deemed to have such an interest solely by virtue of the
ownership of less than 5% of the outstanding stock or debt securities of any
publicly held company, the stock or debt securities of which are traded on a
recognized stock exchange or quoted on Nasdaq.
(b) Neither Corporation nor Shareholder is a party to any
(i) agreement with any officer or other employee of Corporation or Shareholder
(x) the benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of a transaction involving Corporation or
Shareholder in the nature of any of the transactions contemplated by this
Agreement, (y) providing any term of employment or compensation guaranty, or (z)
except as set forth in EXHIBIT C, providing severance benefits or other benefits
after the termination of employment of such officer or other employee regardless
of the reason for such termination of employment, or (ii) agreement or plan,
including, without limitation, any stock option plan, stock appreciation right
plan or stock purchase plan (other than such plans with respect to any
Corporation or Shareholder options), any of the benefits of which will be
increased, or the vesting of benefits of which will be accelerated, by the
occurrence of any of the transactions
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contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement.
3.16 EMPLOYEES AND CONSULTANTS. True, correct and complete copies
of all written agreements and descriptions of all oral agreements with
individual employees and consultants to which Corporation or Shareholder are a
party have been delivered to Pathways. The Corporation Disclosure Schedule and
Shareholder Disclosure Schedule list the names of all Corporation and
Shareholder employees.
3.17 INSURANCE. Section 3.17 of the Corporation Disclosure Schedule
or Shareholder Disclosure Schedule lists all forms of insurance held by
Corporation or Shareholder. To Corporation's or Shareholder's knowledge,
Corporation or Shareholder have not done anything, either by way of action or
inaction, that would invalidate any insurance policies and other forms of
insurance held by Corporation or Shareholder in whole or in part. There is no
claim by Corporation or Shareholder pending under any of such policies.
3.18 LITIGATION. There is no action, proceeding, claim or
investigation pending against Corporation or Shareholder or affecting any of its
properties, assets or operations before any court or administrative agency, and,
to Corporation's or Shareholder's knowledge, no such action, proceeding, claim
or investigation has been threatened, nor is there any reasonable basis
therefor. Without limiting the generality of the preceding sentence, there is no
basis for any shareholder or former shareholder of Corporation or Shareholder,
or any other person, firm, corporation or entity, to assert a claim against
Corporation, Shareholder, or Pathways based upon (i) issuance or rights to
issuance by Corporation or Shareholder of any shares of Corporation or
Shareholder capital stock, (ii) any rights as a Corporation's or Shareholder's
shareholder, including any option or preemptive rights or rights to notice or to
vote, or (iii) any rights under any agreement between Corporation or Shareholder
and any of its shareholders or former shareholders, or option holders or former
option holders in their capacity as such. There is no judgment, decree,
injunction, rule or order of any Governmental Entity outstanding against
Corporation or Shareholder or, to Corporation's or Shareholder's knowledge,
affecting any of its properties, assets or operations. No product liability or
warranty claim has been asserted or threatened against Corporation or
Shareholder nor, to Corporation's or Shareholder's knowledge, is there any
specific situation, set of facts or occurrence that provides a basis for any
such claim.
3.19 CORPORATE MINUTES, ETC. Corporation and Shareholder have made
available to Pathways true, correct and complete copies of (i) its minute book
containing complete records of all proceedings, consents, actions, and meetings
of its shareholders, Board of Directors and any committees thereof, (ii) all
material permits, orders, and consents issued by any Governmental Entity with
respect to Corporation or Shareholder, or any securities of Corporation or
Shareholder, and all applications for such permits, orders, and consents, and
(iii) the stock certificate and transfer books and the stock register of
Corporation or Shareholder setting forth all issuances and transfers of any
capital stock of Corporation or Shareholder. The corporate minute books, stock
certificate books, stock registers and other corporate records of Corporation or
Shareholder and the copies thereof provided to Pathways are complete and
accurate in all
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material respects, and the signatures appearing on all documents contained
therein are the true signatures of the persons purporting to have signed the
same.
3.20 COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS. Corporation and
Shareholder have complied with and not violated any laws, regulations or
requirements of any Governmental Entity related to pollution or protection of
the environment, including those relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, or hazardous or toxic
materials, substances, or wastes into air, surface water, groundwater, or land,
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants, contaminants
or hazardous or toxic materials, substances, or wastes. To Corporation's or
Shareholder's knowledge, there are no conditions, circumstances, activities,
practices, incidents, or actions which are likely to form the basis of any
claim, action, suit, proceeding, hearing or investigation against Corporation or
Shareholder based on or related to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment, of any pollutant,
contaminant, or hazardous or toxic materials, substances or wastes.
3.21 NO BROKERS. Neither Corporation nor Shareholder is obligated
for the payment of fees or expenses of any broker, finder or other person in
connection with the origination, negotiation or execution of this Agreement or
in connection with any transaction contemplated hereby.
3.22 GOVERNMENT CONTRACTS. All agreements pursuant to which
Corporation or Shareholder has sold or licensed any of its products to, or
performed services for, any Government Contract Party are listed in Section 3.22
of the Corporation Disclosure Schedule or Shareholder Disclosure Schedule. All
of Corporation's or Shareholder's technical data and computer software was
developed exclusively at private expense.
3.23 RESTRICTIONS ON BUSINESS ACTIVITIES. Except for Agreements
with Pathways, there is no agreement (non-compete or otherwise), commitment,
judgment, injunction, order or decree to which Corporation or Shareholder is a
party or otherwise binding upon Corporation or Shareholder which has or may
reasonably be expected to have the effect of prohibiting or impairing any
business practice of Corporation or Shareholder, any acquisition of property
(tangible or intangible) by Corporation or Shareholder, the conduct of business
by Corporation or Shareholder or otherwise limiting the freedom of Corporation
or Shareholder to engage in any line of business or to compete with any person.
Without limiting the generality of the foregoing, Neither Corporation nor
Shareholder has entered into any agreement under which Corporation or
Shareholder is restricted from selling, licensing or otherwise distributing any
of its technology or products to or providing services to, customers or
potential customers or any class of customers, in any geographic area, during
any period of time or in any segment of the market.
3.25 DISCLOSURE. Corporation and Shareholder have delivered to
Pathways a true, complete and correct copy of each document referred to in the
Corporation Disclosure Schedule or Shareholder Disclosure Schedule or otherwise
required by this Section 3 to be delivered.
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3.26 NO MATERIAL ADVERSE EFFECT. There has been no Material Adverse
Effect on Corporation or Shareholder since March 21, 2000, and to Corporation's
or Shareholder's knowledge, since March 21, 2000 there has not occurred any
event which could reasonably be expected to have a Material Adverse Effect on
Corporation or Shareholder.
3.27 NO MISREPRESENTATION. No representation or warranty by
Corporation or Shareholder in this Agreement, or any statement, certificate or
schedule furnished or to be furnished by Corporation or Shareholder pursuant to
this Agreement, when taken together, contains or shall contain any untrue
statement of a material fact or omits or shall omit to state a material fact
required to be stated therein or necessary in order to make such statements, in
light of the circumstances under which they were made, not misleading.
3.28 ADDITIONAL REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER.
Shareholder further represents and warrants to Pathways that:
A. AUTHORIZATION. Shareholder has full power and
authority to submit, sell, assign and transfer the
Shares represented by the certificate(s) submitted on
the Closing Date (described in Section 8), free and
clear of all liens, encumbrances and claims of
others. All obligations and agreements set forth in
this Agreement shall survive the death or incapacity
of Shareholder and shall be binding upon the personal
representatives, estates, successors and assigns of
Shareholder. The Shareholder will, upon request,
execute and deliver any additional documents
necessary or desirable to complete the surrender of
such Shares.
B. PURCHASE ENTIRELY FOR OWN ACCOUNT. Shareholder hereby
confirms that the Pathways Preferred Stock to be
acquired under the terms and conditions of this
Agreement will be acquired for investment for the
account of the Shareholder, not as a nominee or
agent, and not with a view to the resale or
distribution of any part thereof, and that such
Shareholder has no present intention of selling,
granting any participation in, or otherwise
distributing the same. The Shareholder further
represents that such Shareholder does not presently
have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or
grant participations to such persons or to any third
person, with respect to the Pathways Preferred Stock.
The Shareholders represent that he or she has full
power and authority to execute this Agreement.
C. DISCLOSURE OF INFORMATION. The Shareholder has had an
opportunity to discuss Pathways' business,
management, financial affairs and the terms and
conditions of this Agreement with Pathways'
management and has had an opportunity to review
Pathways' facilities. The Shareholder understands
that such information provided in this Agreement and
other material provided by Pathways' to Shareholder
was intended to describe the aspects of Pathways'
business that Pathways believes to be material.
The Shareholder
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acknowledges that no form of public solicitation or
advertisement was used in connection with the offer
and sale of the stock, and by reason of his or her
business or financial experience, or the business or
financial experience of his or her professional
advisor, has the capacity to protect his or her own
interest in connection with the offer and sale of the
stock.
D. RESTRICTED SECURITIES. Shareholder understand that
Pathways Preferred Stock has not been registered
under the Securities Act, by reason of a specific
exemption from the registration provisions of the
Security Act which depends upon, among other things,
the bona fide nature of the investment intent and the
accuracy of the Shareholders' representations as
expressed herein. The Shareholder understands that
the Pathways Preferred Stock is characterized as
"restricted securities" under the federal securities
laws inasmuch as they are being acquired from
Pathways in a transaction not involving a public
offering and that under such laws and applicable
regulations such Pathways Preferred Stock may be
resold without registration under the Securities Act
only in certain limited circumstances. Shareholder
acknowledges that the Pathways Preferred Stock must
be held indefinitely unless subsequently registered
under the Securities Act or an exemption from such
registration is available. Shareholder is aware of
the provisions of Rule 144 promulgated under the
Securities Act which permits limited resale of shares
purchased in a private placement subject to the
satisfaction of certain conditions, including, among
other things, the existence of a public market for
the shares, the availability of certain current
public information about Pathways, the resale
occurring not less than a specified number of years
after a party has purchased and paid for the security
to be sold, the sale being effected through a
"broker's transaction" or in transactions directly
with a "market maker" (as provided by Rule 144(f))
and the number of shares being sold during any
three-month period not exceeding specified
limitations.
E. LEGENDS. Shareholder understands that the shares of
Pathways Preferred Stock, may bear one or all of the
following legends:
(1) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
(2) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ISSUED UNDER THE LIMITED OFFERING EXEMPTION PROVIDED BY SECTION 25102(F) OF THE
CALIFORNIA CORPORATIONS CODE.
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(3) Any legend required by the blue sky laws of any state
to the extent such laws are applicable to the shares represented by the
certificate so legended.
F. INDEMNIFICATION. Shareholder acknowledge that they understand
the meaning and consequences of the representations and
warranties of this Section 3 hereof and Shareholder hereby
agrees to indemnify and hold harmless Pathways, its
shareholders, officers, directors, agents and employees and
attorneys thereof, from and against any and all loss, damage
or liability due to or arising out of a breach of any such
representations or warranties. Notwithstanding the foregoing,
however, no representation, warranty, acknowledgment or
agreement made herein by Shareholder shall in any manner be
deemed to constitute a waiver of any rights granted to
Shareholder under federal or state securities laws.
G. INVESTORS REPRESENTATION STATEMENT. Shareholder agrees that if
Pathways Preferred Stock is transferred to the shareholders of
Shareholder, Shareholder will optain from shareholders an
Investment Representation Statement, substantially in the form
attached hereto as Exhibit E.
4. REPRESENTATIONS AND WARRANTIES OF PATHWAYS. Except as
specifically disclosed in Pathways' Disclosure Schedule attached hereto as
Exhibit D, Pathways represents and warrants to Corporation for the benefit of
all Corporation's shareholders that:
4.1 ORGANIZATION AND GOOD STANDING. Pathways is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and have all requisite corporate power and
authority to carry on its business as it is now being conducted. Pathways is
duly qualified or licensed to do business and in good standing in each
jurisdiction in which the nature of its business or properties makes such
qualification or licensing necessary, except where the lack of such
qualification or licensing (individually or in the aggregate) would not have a
Material Adverse Effect on Pathways.
4.2 POWER, AUTHORIZATION AND VALIDITY.
(a) Pathways has the corporate right, power, legal
capacity and authority to execute and deliver, and to consummate the
transactions contemplated by this Agreement and to perform its obligations under
it. The execution and delivery of, and the consummation of the transactions
contemplated by this Agreement is or will be validly approved and authorized by
all necessary corporate action.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, is required
by or with respect to Pathways in connection with the execution and delivery of,
and the consummation by it of the transactions contemplated by this Agreement,
except for such filings under federal and state securities laws as have already
been completed or which are not yet due.
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(c) Upon the execution and delivery of this Agreement by
Pathways, this Agreement will constitute a valid and binding obligation of
Pathways, enforceable in accordance with its terms.
4.3 CAPITALIZATION. The authorized capital stock of
Pathways consists of fifty million (50,000,000) shares of Common Stock, $.01 par
value per share ("PATHWAYS COMMON STOCK"), of which thirteen million five
hundred sixty two thousand (13,562,000)shares are issued and outstanding, and
one million (1,000,000) shares of Preferred Stock, $.01 par value per share
("PATHWAYS PREFERRED STOCK"), of which seven hundred fifty thousand (750,000)
shares have been designated as Series A Preferred Stock, of which three hundred
thousand (300,000) shares are issued and outstanding, and two hundred eighteen
thousand seven hundred fifty (218,750) will be designated as Series B Preferred
Stock, of which no shares are issued and outstanding
4.4 NO VIOLATION OF EXISTING AGREEMENTS. The execution
and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby and compliance with the provisions hereof will
not, conflict with, or result in any violation of or default under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a benefit under, (i) any provision of the Certificate of
Incorporation or Bylaws of Pathways, as currently in effect, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license to which Pathways is a
party or by which Pathways or any of its properties or assets is bound or
affected, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Pathways or its properties or assets.
4.5 NO BROKERS. Pathways is not obligated for the payment
of fees or expenses of any broker or finder in connection with the origination,
negotiation or execution of this Agreement or in connection with any transaction
contemplated hereby.
4.6 LITIGATION. There is no litigation pending, or to the
knowledge of Pathways threatened, against Pathways or any of its officers and
directors which, if determined adversely, have an adverse effect on Pathways'
ability to deliver the Consideration.
4.7 Disclosure. Pathways has hereto delivered to
Corporation for distribution to Corporation's shareholders each of the
following:
(a) Annual report of Pathway on Form 10-K as filed with
the Securities and Exchange Commission ("SEC") for
Pathway's fiscal year ended on December 31, 1999; and
(b) Quarterly reports of the Pathways on Form 10-Q as
filed with the SEC as filed with the SEC for each of
the three 1999 fiscal quarters of Pathways through
September 30, 1999.
Other than as contemplated or caused by this Agreement, there
has not been any Material Adverse Effect on Pathways since
December 31, 1999, and to Pathways' knowledge,
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since December 31, 1999 there has not occurred any event that
could reasonably be expected to have a Material Adverse Effect
on Pathways.
5. COVENANTS OF SELLING PARTIES. Shareholder and Corporation
covenant to and agree with Pathways as follows:
5.1 CONDUCT OF BUSINESS; INTERIM OPERATIONS. During the period
from the date of this Agreement and continuing until the earlier of the
termination of this Agreement, Corporation agrees, subject to the limitations
described in Section 5.1(r) below, to carry on its business in the usual,
regular and ordinary course in substantially the same manner as previously
conducted, to pay its debts and taxes when due, subject to good faith disputes
over such debts or taxes, to pay or perform its other obligations when due, and,
to the extent consistent with such business, to use all commercially reasonable
efforts consistent with past practices and policies to (i) preserve intact its
present business organization, (ii) keep available the services of its present
officers and key employees, and (iii) preserve its relationships with customers,
suppliers, distributors, licensors, licensees and others having business
dealings with it. Corporation shall promptly notify Pathways of any event or
occurrence where such event or occurrence would result in a breach of any
covenant of Corporation set forth in this Agreement or cause any representation
or warranty of Corporation set forth in this Agreement to be untrue as of the
date of, or giving effect to, such event or occurrence. Except as expressly
contemplated by this Agreement, Corporation shall not, without the prior written
consent of Pathways:
(a) transfer or license to any person or entity or
otherwise extend, amend or modify any rights to the Corporation Intellectual
Property Rights;
(b) declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except from
former employees, directors and consultants in accordance with agreements
providing for the repurchase of shares in connection with any termination of
service by such party;
(c) issue, deliver or sell or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities (except
upon the exercise or conversion of securities outstanding on the date of this
Agreement);
(d) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership or other business organization or division;
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(e) sell, lease, license or otherwise dispose of any of
its properties or assets except for transactions entered into in the ordinary
course of business consistent with past practice;
(f) take any action to: (i) increase or agree to increase
the compensation payable or to become payable to its officers or employees, (ii)
grant any severance or termination pay to, or enter into any employment or
severance agreements with, any officer or employee, (iii) enter into any
collective bargaining agreement, or (iv) establish, adopt, enter into or amend
in any material respect any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees;
(g) revalue any of its assets, including writing down the
value of inventory or writing off notes or accounts receivable other than in the
ordinary course of business consistent with past practice or as required by
GAAP;
(h) incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or warrants
or rights to acquire any debt securities or guarantee any debt securities of
others, other than indebtedness incurred under outstanding lines of credit in
the ordinary course of business consistent with past practice;
(i) amend or propose to amend its Articles of
Incorporation or Bylaws;
(j) incur or commit to incur any individual capital
expenditure in excess of $5,000 or aggregate capital expenditures in excess of
$10,000;
(k) amend or terminate any material contract, agreement
or license to which it is a party except in the ordinary course of business;
(l) waive or release any material right or claim, except
in the ordinary course of business;
(m) initiate any litigation or arbitration proceeding;
(n) accelerate, amend or change the period of
exercisability of any options or restricted stock granted to employees of
Corporation or authorize cash payments in exchange for any options granted under
any of such plans;
(o) compromise or otherwise settle or adjust any
assertion or claim of a deficiency in taxes (or interest thereon or penalties in
connection therewith), extend the statute of limitations with any tax authority
or file any pleading in court in any tax litigation or any appeal from an
asserted deficiency;
(p) change any of Corporation's or Shareholder's
accounting policies or practices except as may be required by any modification
or change in GAAP;
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(q) change any of Corporation's or Shareholder's
personnel policies in any material respect (except for changes contemplated by
the Severance Plan);
(r) grant any person a power of attorney or similar
authority; or
(s) agree in writing or otherwise to take any of the
actions described in subsections (a) through (r) above, or any action which is
reasonably likely to make any of its representations or warranties contained in
this Agreement untrue or incorrect in any material respect on the date made (to
the extent so limited) or as of the Closing Date.
5.2 ACCESS TO INFORMATION. Until the Closing, subject to the terms
and provisions of the Confidentiality and Nondisclosure Agreement attached
hereto as Exhibit F, Corporation will allow Pathways and its agents free access
upon reasonable notice and during normal working hours to its files, books,
records, and offices, including, without limitation, any and all information
relating to taxes, commitments, contracts, leases, licenses, Corporation
Intellectual Property Rights, personal property and financial condition. Until
the Closing, Corporation shall cause its accountants to cooperate with Pathways
and its agents in making available all financial information reasonably
requested, including, without limitation, the right to examine all working
papers pertaining to Corporation in the possession, custody or control of such
accountants, subject to the execution by Pathways of a customary agreement with
such accountants with respect to the use of such working papers.
5.3 SHAREHOLDER CONSENT. Corporation shall promptly after the date
hereof take all action necessary in accordance with Colorado Law and its
Articles of Incorporation and Bylaws to solicit and obtain shareholder consent
and approval to consummate the transactions contemplated by this Agreement.
Corporation shall use commercially reasonable efforts to solicit such consent
and approval from the shareholders of Corporation at the earliest practicable
date and not later than April 7, 2000. The Board of Directors of Corporation
will recommend to the Corporation Shareholders that the transactions
contemplated by this Agreement be approved and will use commercially reasonable
efforts to solicit the approval of such matters by the Corporation Shareholders.
Corporation will provide to Pathways copies of all documents and other
information furnished to the shareholders of Corporation, if applicable, in
connection with such solicitation.
5.4 REGULATORY APPROVALS. Prior to the Closing, Corporation will
execute and file, or join in the execution and filing of, any application or
other document that may be necessary in order to obtain the authorization,
approval or consent of any Governmental Entity that may be reasonably required
in connection with the consummation of the transactions contemplated by this
Agreement. Corporation will use commercially reasonable efforts to obtain or, as
applicable, to assist Pathways in obtaining all such authorizations, approvals
and consents.
5.5 SATISFACTION OF CONDITIONS PRECEDENT. Corporation will use
commercially reasonable efforts to satisfy or cause to be satisfied all the
conditions precedent that are set forth in Sections 8.1 and 2 and to cause the
transactions contemplated by this Agreement to be consummated, and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties
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which may be necessary or reasonably required on its part in order to effect the
transactions contemplated hereby.
5.6 OTHER NEGOTIATIONS. From and after the date of this Agreement
until the termination of this Agreement by its terms, Corporation shall not,
directly or indirectly through any officer, director, employee, representative
or agent of Corporation or otherwise, (i) solicit, initiate, or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, a proposal or offer for a merger, consolidation, share exchange, business
combination, sale of all or a material portion of assets, sale of shares of
capital stock (including without limitation by way of a tender offer) or similar
transactions involving Corporation other than the transactions contemplated by
this Agreement (any of the foregoing inquiries or proposals being referred to in
this Agreement as an "ACQUISITION PROPOSAL"), (ii) engage or participate in
negotiations or discussions concerning, or provide any information to any person
or entity relating to, any Acquisition Proposal, or (iii) agree to, enter into,
accept, approve or recommend any Acquisition Proposal.Shareholder and
Corporation ("Selling Parties"), jointly and severally, warrant that:
6 CONDITIONS PRECEDENT TO PATHWAYS' PERFORMANCE. The obligations
of Pathways to purchase the Shares under this Agreement are subject to the
satisfaction, at or before the closing, of all the conditions set out in this
Agreement. Pathways may waive any or all of these conditions in whole or in part
without prior notice; provided, however, that no such waiver of a condition will
constitute a waiver by Pathways of any of its other rights or remedies, at law
or in equity, if Shareholder or Corporation are in default of any of their
representations, warranties, or covenants under this Agreement.
6.1 ACCURACY OF SELLING PARTIES' WARRANTIES. Except as otherwise
permitted by this Agreement, all warranties by each of the Selling Parties in
this Agreement, or in any written statement that will be delivered to Pathways
by any of them under this Agreement, must be true on the closing date as though
made at this time.
6.2 PERFORMANCE BY SELLING PARTIES. Selling Parties must have
performed, satisfied, and complied with all covenants, agreements, and
conditions required by this agreement to be performed or complied with by them,
or any of them, by the closing date.
6.3 NO MATERIAL ADVERSE CHANGE. During the period from the date of
this Agreement to the closing date, there will not have been any material
adverse change in the financial condition or the results of operations of the
Corporation, and Corporation will not have sustained any insured or uninsured
loss or damage to its assets that materially affects its ability to conduct a
material part of its business.
6.4 OPINION OF SELLING PARTIES' COUNSEL. Pathways will have
received from counsel for Selling Parties, an opinion dated the closing date, in
a form approved by counsel for Pathways, that:
6.4.1 Corporation and Shareholder are corporations duly
incorporated, validly existing, and in good standing under the laws of the State
of Colorado, and each has all necessary
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corporate power to own its properties as now owned and operate its business as
now operated.
6.5 APPROVAL OF DOCUMENTATION. The form and substance of all
certificates, instruments, opinions, and other documents delivered to Pathways
under this Agreement will be satisfactory in all reasonable respects to Pathways
and its counsel.
7 CONDITIONS PRECEDENT TO SELLING PARTIES' PERFORMANCE.
The obligations of Shareholder to sell and transfer the Shares under
this Agreement are subject to the satisfaction, at or before the closing, of
all the conditions set out in this Agreement. Shareholder may waive any or
all of these conditions in whole or in part without prior notice; provided,
however, that no such waiver of a condition will constitute a waiver by
Shareholder of any of its other rights or remedies, at law or in equity, if
Pathways is in default of any of its representations, warranties, or
covenants under this Agreement.
7.1 ACCURACY OF PATHWAYS' WARRANTIES. Except as otherwise
permitted by this Agreement, all warranties by Pathways in this Agreement, or in
any written statement that delivered by Pathways under this Agreement, must be
true on the closing date as though made at that time.
7.2 PERFORMANCE BY PATHWAYS. Pathways must have performed,
satisfied, and complied with all covenants, agreements, and conditions required
by this agreement to be performed or complied with by it by the closing date.
7.3 PATHWAYS' STOCK VALIDLY ISSUED. The shares of Pathways
Preferred Stock to be issued and delivered under this Agreement will be, when
delivered, validly issued, fully paid, and nonassessable.
7.4 PATHWAYS' CORPORATE APPROVAL. The board of directors of
Pathways will have duly authorized and approved the execution and delivery of
this Agreement and all corporate action necessary or proper to fulfill Pathways'
obligations to be performed under this Agreement on or before the closing date.
8 CLOSING. The transfer of the Shares by Shareholder to Pathways
("Closing") will take place at the offices of Shareholder, 117 Aspen Airport
Business Center, Aspen, Colorado 81611 at 10:00 a.m. local time, on April 7,
2000, or at such other time and place as the parties may agree to in writing
("Closing Date").
8.1 SELLING PARTIES' OBLIGATIONS AT CLOSING. At closing,
Shareholder and Corporation must deliver to Pathways the following instruments,
in form and substance satisfactory to Pathways and its counsel, the following:
8.1.1 A certificate or certificates representing the
Shares, registered in the name of Shareholder, duly endorsed by Shareholder for
transfer or accompanied by an assignment of the Shares duly executed by
Shareholder,. On submission of that certificate or certificates to Corporation
for transfer, Corporation will issue to Pathways a certificate representing the
Shares, registered in Pathways' name.
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8.1.2 The stock books, stock ledgers, minute books, and
corporate seals of Corporation.
8.1.3 The opinion of counsel as provided in paragraph 6.4
of this Agreement.
8.1.4 Except as otherwise specified by Pathways, the
written resignations of all the officers and directors of Corporation.
8.2. PATHWAYS' OBLIGATIONS AT CLOSING. At the closing, Pathways
must deliver to Shareholder a certificate representing the total number of
shares of Pathways Preferred Stock to be issued and delivered at the closing
under paragraph 1.3 of this Agreement.
9 SELLING PARTIES' INDEMNITY. Shareholder and Corporation will
indemnify, defend, and hold harmless Pathways against and in respect of all
claims, demands, losses, costs, expenses, obligations, liabilities, damages,
recoveries, and deficiencies, including interest, penalties, and reasonable
attorneys' fees, that Pathways may incur or suffer, which arise, result from ,or
relate to any breach of, or failure by Selling Parties to perform, any of their
representations, warranties, covenants, or agreements in this Agreement or in
any schedule, certificate, exhibit, or other instrument furnished or to be
furnished by Selling Parties under this Agreement.
10. MISCELLANEOUS.
10.1 GOVERNING LAWS. It is the intention of the parties hereto that
the internal laws of the State of Colorado (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto.
10.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure to
the benefit of, the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
10.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
10.4 ENTIRE AGREEMENT. This Agreement, the exhibits hereto, the
documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied,
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written or oral, between the parties with respect hereto and thereto. The
express terms hereof control and supersede any course of performance or usage of
the trade inconsistent with any of the terms hereof.
10.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
10.6 AMENDMENT AND WAIVERS. Any term or provision of this Agreement
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
10.7 SURVIVAL OF AGREEMENTS. Except as set forth below in this
SECTION 10.7, all covenants, agreements, representations and warranties made
herein shall survive the consummation of the transactions contemplated hereby
notwithstanding any investigation of the parties hereto.
10.8 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
10.9 ATTORNEY FEES. Should suit be brought to enforce or interpret
any part of this Agreement, the prevailing party shall be entitled to recover,
as an element of the costs of suit and not as damages, reasonable attorney fees
to be fixed by the court (including without limitation, costs, expenses and fees
on any appeal). The prevailing party shall be the party entitled to recover its
costs of suit, regardless of whether such suit proceeds to final judgment. A
party not entitled to recover its costs shall not be entitled to recover
attorney fees. No sum for attorney fees shall be counted in calculating the
amount of a judgment for purposes of determining if a party is entitled to
recover costs or attorney fees.
10.10 NOTICES. Any notice provided for or permitted under this
Agreement will be treated as having been given when (a) delivered personally,
(b) sent by confirmed telex or telecopy, (c) sent by commercial overnight
courier with written verification of receipt, or (d) mailed postage prepaid by
certified or registered mail, return receipt requested, to the party to be
notified, at the address set forth below, or at such other place of which the
other party has been notified in accordance with the provisions of this SECTION
10.10.
Pathways: The Pathways Group, Inc.
1221 North Dutton Avenue
Santa Rosa, California 95401
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Attn: Christopher R. Miller
Shareholder: SmartCard Solutions, Inc.
117 Aspen Airport Business Center
Aspen, Colorado 81611
Attn: Jay D. Lussan
Corporation: SmartCard Solutions Acquisition, Inc.
117 Aspen Airport Business Center
Aspen, Colorado 81611
Attn: Jay D. Lussan
Any notice provided in any other manner will be treated as having been received
only upon actual receipt of the party to be notified.
10.11 TIME. Time is of the essence of this Agreement.
10.12 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated
by the respective parties hereto and their attorneys and the language hereof
shall not be construed for or against any party. The titles and headings herein
are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
10.13 NO JOINT VENTURE. Nothing contained in this Agreement shall be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other party. No party shall hold itself out as having any authority
or relationship in contravention of this SECTION 10.
10.14 PRONOUNS. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
10.15 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
10.16 ABSENCE OF THIRD-PARTY BENEFICIARY RIGHTS. No provisions of
this Agreement are
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intended, nor shall be interpreted, to provide or create any third-party
beneficiary rights or any other rights of any kind in any client, customer,
affiliate, Shareholder, partner of any party hereto or any other person or
entity except employees and Shareholders of Windsor specifically referred to
herein, and, except as so provided, all provisions hereof shall be personal
solely between the parties to this Agreement.
10.17 DISPUTE RESOLUTION. ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT, SHALL BE RESOLVED ONLY BY BINDING ARBITRATION,
CONDUCTED BY THE JUDICIAL ARBITRATION AND MEDIATION SERVICE (JAMS) (OR THEIR
SUCCESSOR AND IF NO SUCCESSOR, THEN BY THE AMERICAN ARBITRATION ASSOCIATION), IN
DENVER, COLORADO. WRITTEN NOTICE OF THE DEMAND FOR ARBITRATION SHALL BE SERVED
ON THE OTHER PARTY TO THIS AGREEMENT AND FILED WITH THE ARBITRATION SERVICE. THE
DEMAND FOR ARBITRATION SHALL BE MADE WITHIN A REASONABLE TIME AFTER THE DISPUTE
HAS ARISEN, AND IN NO EVENT SHALL IT BE MADE AFTER THE DATE UPON WHICH IT WOULD
HAVE BEEN BARRED BY THE TERMS OF THIS AGREEMENT OR APPLICABLE LAW. EACH
ARBITRATOR MUST BE EXPERIENCED IN THE SUBJECT MATTER OF THE ARBITRATION.
ARBITRATION SHALL BE COMPLETED NOT LATER THAN 180 DAYS FOLLOWING ITS INITIATION.
IN REACHING THEIR AWARD, THE ARBITRATORS SHALL FOLLOW AND BE BOUND BY
SUBSTANTIVE COLORADO LAW, AS IF THEY WERE JUDGES SITTING IN A COLORADO COURT OF
LAW. HOWEVER, ARBITRATORS SHALL IN NO MANNER AWARD PUNITIVE DAMAGES (OR DAMAGES
CALCULATED BY APPLYING A MULTIPLIER) OR DAMAGES FOR EMOTIONAL DISTRESS. THE
AWARD SHALL BE IN WRITING AND SHALL CONTAIN FINDINGS OF FACT AND CONCLUSION OF
LAW AND SHALL SET FORTH THE NATURE, AMOUNT AND MANNER OF CALCULATION OF ALL
DAMAGES. THE AWARD SHALL BE FINAL AND BINDING, AND JUDGMENT MAY BE ENTERED UPON
IT IN ANY COURT HAVING JURISDICTION. THIS PROVISION HAS BEEN EXPRESSLY AGREED TO
BY THE PARTIES WITH FULL UNDERSTANDING THAT IT ACTS TO WAIVE THEIR RESPECTIVE
CONSTITUTIONAL RIGHTS TO A TRIAL BY JUDGE OR JURY AND THEIR RESPECTIVE RIGHTS TO
PUNITIVE OR EMOTIONAL DISTRESS DAMAGES.
10.18 AUTHORITY TO SIGN. Each of the persons signing below on behalf
of any party hereby represents and warrants that he or she is signing with full
and complete authority to bind the party on whose behalf of whom he or she is
signing, to each and every term of this Agreement.
[Signature page follows.]
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first set forth above.
SMART CARD SOLUTIONS, INC., THE PATHWAYS GROUP, INC.
(a Colorado corporation) (a Delaware corporation)
By: /s/ JAY LOUSSAN By: /s/ CAREY F. DALY, II
------------------------------------- -------------------------
Chief Executive Officer Chief Executive Officer
SMART CARD SOLUTIONS
ACQUISITIONS, INC.
(a Colorado corporation)
By: /s/ JAY LOUSSAN
- ----------------------------------------
Chief Executive Officer
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Exhibit 10.2
AGREEMENT OF PURCHASE AND SALE OF STOCK
April 21, 2000
THIS AGREEMENT OF PURCHASE AND SALE OF STOCK (this "AGREEMENT"), is
dated as of the date set forth above, and is made and entered into by and among
the Pathways Group, Inc., a Delaware corporation ("Pathways"); Monte Strohl, Jay
Potts and Gary Baker (collectively referred to herein as "Shareholders"); MS
Digital, Inc., a Washington corporation, ("Corporation").
RECITALS
A. Shareholders have represented they own all the outstanding
stock of Corporation.
B. Pathways desires to purchase from Shareholders, and
Shareholders desires to sell to Pathways, all the outstanding stock of
Corporation (the "Shares") in exchange for Pathways Common Stock (as defined in
Section 4.3 below) in a stock for stock transaction intended to qualify as a
tax-free reorganization under the Code (as defined in Section 1.4 below).
C. Boards of Directors of Pathways and Corporation (collectively,
the "Constituent Corporations") and the Shareholders deem it advisable and in
the best interests of the Constituent Corporations and in the best interests of
the shareholders of the Constituent Corporations that Pathways purchase all the
outstanding stock of Corporation from Shareholders.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained in this agreement, Pathways,
Shareholders and Corporation hereby agree as follows:
1. DEFINITIONS. The following terms when used herein have the
meanings set forth below:
1.1 "AFFILIATE" has the meaning set forth in the rules
and regulations promulgated by the Securities and
Exchange Commission under the Securities Act of 1933,
as amended.
1.2 "CLOSING" and "CLOSING DATE" have the respective
meanings set forth in SECTION 8.
1.3 "COBRA" has the meaning set forth in SECTION 3.11(c).
1.4 "CODE" means the Internal Revenue Code of 1986, as
amended.
1.5 "DOL" has the meaning set forth in SECTION 3.11(b).
1.6 "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
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1.7 "ERISA AFFILIATE" has the meaning set forth in
SECTION 3.11(a).
1.8 "ENCUMBRANCES" means, with respect to an item,
claims, liabilities, liens, pledges, mortgages,
restrictions, options, charges and encumbrances of
any kind, whether accrued, absolute, contingent or
otherwise, affecting that item.
1.9 "GAAP" means generally accepted accounting
principles, consistently applied.
1.10 "GOVERNMENT CONTRACT PARTY" means any independent or
executive agency, division, subdivision, audit group,
or procuring office of the federal government,
including any prime contractor of the federal
government and any higher level subcontractor of a
prime contractor of the federal government, and
including any employees or agents thereof, in each
case acting in such capacity.
1.11 "GOVERNMENTAL ENTITY" means any court, administrative
agency or commission or other governmental authority
or agency, domestic or foreign.
1.12 "IRS" has the meaning set forth in SECTION 3.11(b).
1.13 "LICENSED INTELLECTUAL PROPERTY" has the meaning set
forth in Section 3.10(a).
1.14 "MATERIAL ADVERSE EFFECT" with respect to an entity
means a material adverse effect on the business,
assets (including intangible assets), financial
condition, or results of operations of such entity
and its Subsidiaries, taken as a whole.
1.15 "SUBSIDIARY" means, with respect to any parent
corporation or other entity, a corporation or other
entity in which a percentage of its voting securities
sufficient to elect at least a majority of the Board
of Directors or other managers is owned or otherwise
controlled, directly or indirectly, by such parent
corporation or other entity.
1.16 "TAX" means all federal, state, local and foreign
income, property, employment, sales, use, license,
payroll, occupation, franchise, occupation,
recording, value added, transfer, excise and other
taxes, fees, levies or assessments of any nature
whatsoever (whether payable directly or by
withholding) and, with respect to such tax, any
estimated tax, interest, penalties and additions and
related charges of Governmental Entities.
2. PURCHASE AND SALE OF STOCK.
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2.1 TAX-FREE REORGANIZATION. Shareholders and Pathways adopt this
Agreement as a plan of reorganization under Code Section 368(a)(1)(B).
2.2 SALE AND TRANSFER OF SHARES. Subject to the terms and
conditions set forth in this Agreement, on the Closing Date, Shareholders will
transfer and convey the Shares to Pathways, and Pathways will acquire the Shares
from Shareholders.
2.3. CONSIDERATION AT CLOSING. As full payment for the transfer of
the Shares by Shareholders to Pathways, in accordance with the provisions of
Section 8 (Closing provisions), Pathways must deliver the following:.
2.3.1. On the Closing Date or as expeditiously as reasonably
possible, the number of shares of Pathways Common Stock, having a par
value of $0.01 per share, determined by dividing the market price of
Pathways Common Stock into One-Million Five Hundred Thousand Dollars
($1,500,000.00). The market price for the shares of Pathways Common
Stock for this purpose will be the closing price for such stock on the
NASDAQ Stock Exchange on the day immediately preceding the Closing Date
("Closing Date Market Price"). These shares shall be allocated to the
Shareholders as follows:
(a) Monte Strohl shall receive the number of shares of
Pathways Common Stock determined by dividing the
Closing Date Market Price of Pathways Common Stock
into One Million Twenty Thousand Dollars
($1,020,000.00). Of these shares, the number of
shares of Pathways Common Stock determined by
dividing the Closing Date Market Price into Eight
Hundred Fifty Thousand Dollars ($850,000.00) shall be
registered on Form S-3 with the Securities and
Exchange Commission ("SEC") pursuant to the
Securities Act of 1933, as amended, as expeditiously
as reasonably possible and the remaining number of
shares of Pathways Common Stock determined by
dividing the Closing Date Market Price into One
Hundred Seventy Thousand ($170,000) shall not require
the filing of a Form S-3, registration statement or
similar document. Pathways will take every reasonable
step possible to ensure that the registered shares
are filed as soon as possible after Pathways' SEC
counsel has received an executed copy of this
Agreement. .
(b) Jay Potts shall receive the number of shares of
Pathways Common Stock determined by dividing the
market price of Pathways Common Stock (as determined
above) into Four Hundred Fifty Thousand Dollars
($450,000.00). Of these shares, the number of shares
of Pathways Common Stock determined by dividing the
Closing Date Market Price into One Hundred Thousand
Dollars ($100,000.00) shall be registered on Form S-3
with the SEC pursuant to the Securities Act of 1933,
as amended, as expeditiously as reasonably possible,
and the remaining number shares determined by
dividing the Closing Date Market Price into Three
Hundred Fifty Thousand Dollars ($350,000.00) shall
not require the
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filing of a Form S-3, registration statement or
similar document. Pathways will take every reasonable
step possible to ensure that the registered shares
are filed as soon as possible after Pathways' SEC
counsel has received an executed copy of this
Agreement.
(c) Gary Baker shall receive the number of shares of
Pathways Common Stock determined by dividing the
market price of Pathways Common Stock (as determined
above) into Thirty Thousand Dollars ($30,000.00).
None of these shares shall require the filing of a
Form S-3, registration statement or similar
document..
It is understood and agreed that none of the shares to be
registered on Form S-3 shall be issued to Shareholders until such time
as such registration statement has been declared effective by the SEC.
No fractional shares of Pathways Common Stock shall be issued
as consideration under this SECTION 2.3 of the Agreement. In the event
that such fractional shares result from the calculations described in
this SECTION 2.3, the number of shares resulting therefrom shall be
rounded down and reduced to the previous whole share.
2.3.2 On or before December 1, 2000, Monte Strohl shall
receive the following consideration: (i) Pathways may, at the sole
option of the Chairman of the Board of Directors of Pathways
("Chairman"), at any time after the Closing Date, issue to Monte Strohl
the number of shares of Pathways Common Stock determined by dividing
the closing market price on the day immediately preceding the day
Pathways decides to issue the stock ("Second Market Price") into One
Million Five Hundred Thousand Dollars ($1,500,000.00); or (ii) if
Pathways does not exercise its option to issue shares of Pathways
Common Stock, then on December 1, 2000, Pathways shall issue to Monte
Strohl the number of shares of Pathways Common Stock determined by
dividing the closing market price of Pathways' Common Stock on November
30, 2000, into One Million Five Hundred Thousand Dollars
($1,500,000.00). These shares shall not require the filing of a Form
S-3, registration statement or similar document.
No fractional shares of Pathways Common Stock shall be issued
as consideration under this SECTION 2.3 of the Agreement. In the event
that such fractional shares result from the calculations described in
this SECTION 2.3, the number of shares resulting therefrom shall be
rounded down and reduced to the previous whole share.
2.4 APPRAISAL RIGHTS. If any holders of Corporation capital stock
exercise appraisal rights in connection with the share exchange under Washington
Law, any shares of Corporation capital stock with respect to which such rights
have been duly demanded and perfected ("DISSENTING SHARES") shall not be
converted into the right to receive the consideration described in Sections 2.3
but shall be converted into the right to receive such consideration as may be
determined to be due with respect to such Dissenting Shares pursuant to
Washington Law. Corporation shall give Pathways prompt notice of any demand
received by Corporation for
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appraisal of or payment for Corporation capital stock, and Pathways shall have
the right to participate in all negotiations and proceedings with respect to
such demand. Corporation agrees that, except with the prior written consent of
Pathways, or as required under Washington Law, it will not voluntarily make any
payment with respect to, or settle or offer to settle, any such demand for
appraisal or payment. Each holder of Dissenting Shares (a "DISSENTING
SHAREHOLDER") who, pursuant to the provisions of Washington Law, becomes
entitled to payment of the fair market value of any shares of Corporation
capital stock shall receive payment therefor (but only after the fair market
value therefor shall have been agreed upon or finally determined pursuant to
such provisions). In the event that any holder of any shares of Corporation
capital stock fails to make an effective demand for payment or otherwise loses
his status as a Dissenting Shareholder, Pathways shall, as of the later of the
Closing Date of the Agreement or the occurrence of such event, issue and
deliver, upon surrender by such Dissenting Shareholder of his certificate or
certificates representing shares of Corporation capital stock, the Consideration
to which such Dissenting Shareholder would have been entitled to under Sections
2.3 of this Agreement.
2.5 ACCOUNTING TREATMENT. The share exchange contemplated by this
Agreement is intended to be treated as a pooling of interest for accounting
purposes.
3. REPRESENTATIONS AND WARRANTIES OF SELLING PARTIES. Except as
set forth in the Disclosure Schedule attached hereto as Exhibit A, which refers
to the Section of such representations and warranties as are thereby qualified,
Corporation and Shareholders ("Selling Parties") represent and warrant to
Pathways as set forth below.
3.1 ORGANIZATION. Corporation is a corporation duly organized,
validly existing and in good standing under the laws of the State of Washington
and has all requisite corporate power and authority to own, operate and lease
its properties and to carry on its business as it is now being conducted.
Corporation is duly qualified or licensed to do business and in good standing in
each jurisdiction in which the nature of its business or properties makes such
qualification or licensing necessary except where the lack of such qualification
or licensing (individually or in the aggregate) would not have a Material
Adverse Effect on Corporation. True, correct and complete copies of
Corporation's Articles of Incorporation and Bylaws, as in effect on the date
hereof and as will be in effect immediately prior to the Closing, have been
delivered to Pathways.
3.2 CAPITALIZATION. The issued and outstanding capital stock of
Corporation consists of, and immediately prior to the Closing will consist of
100,000 shares of Corporation's Common Stock. All such issued and outstanding
shares have been duly authorized, are validly issued, fully paid and
nonassessable and were issued and sold in compliance with all applicable
securities laws. As of the date of this Agreement there are no outstanding
options to purchase shares of Corporation's Common Stock. Except for the
foregoing, there are no outstanding rights, options, warrants, conversion rights
or other agreements for the purchase or acquisition from Corporation of any
shares of its capital stock or securities convertible into or exchangeable for
any shares of such capital stock. There are no preemptive rights to purchase or
otherwise acquire any securities of Corporation pursuant to any provisions of
law, the Articles of
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Incorporation or Bylaws of Corporation, or any agreement to which Corporation is
a party or otherwise. There is no voting or stock restriction agreement, proxy
or similar agreement to which Corporation is a party. There are no outstanding
contractual obligations, commitments, understandings or arrangements of
Corporation to repurchase, redeem or otherwise acquire or make any payment in
respect of any shares of capital stock of Corporation and, except as
contemplated by this Agreement, there are no irrevocable proxies with respect to
shares of capital stock of Corporation.
3.3 POWER, AUTHORIZATION AND VALIDITY.
(a) Corporation has the corporate right, power, legal
capacity and authority to execute and deliver, and to consummate the
transactions contemplated by this Agreement and, subject to such approval of the
same by the Corporation's shareholders as may be required by law, to perform its
obligations under this Agreement. The execution and delivery of, and the
consummation of the transactions contemplated by this Agreement has been duly
and validly approved and authorized by the Board of Directors of Corporation and
all other necessary corporate action on the part of Corporation, except for
approval by Corporation's shareholders.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to Corporation in connection with the execution and delivery of,
and the consummation by Corporation of the transactions contemplated by, this
Agreement, except for the filing of appropriate documents with the relevant
authorities of other states in which Corporation is qualified to do business.
(c) Upon the execution and delivery of this Agreement by
Corporation, this Agreement will constitute a valid and binding obligation of
Corporation, enforceable against Corporation in accordance with its terms.
3.4 NO VIOLATION OF EXISTING AGREEMENTS. The execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated hereby and compliance with the provisions hereof will not, conflict
with, or result in any violation of or default under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss of a
benefit under, (i) any provision of the Articles of Incorporation or Bylaws of
Corporation, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, concession, franchise or license
to which Corporation is a party or by which Corporation or any of its properties
or assets is bound or affected, or (iii) any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Corporation or its properties
or assets. The consummation of the transactions contemplated by this Agreement
will not require the consent of any third party or have a material adverse
effect upon any right, license, franchise, lease or agreement.
3.5 SUBSIDIARIES. Corporation (i) has no Subsidiaries, (ii) does
not own or control (directly or indirectly) any capital stock, bonds or other
securities of, and does not have any proprietary interest in, any other
corporation, general or limited partnership, firm, association or business
organization, entity or enterprise, and (iii) does not control (directly or
indirectly) the
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management or policies of any other corporation, partnership, firm, association
or business organization, entity or enterprise.
3.6 FINANCIAL STATEMENTS.
(a) Corporation has delivered to Pathways the
Corporation's balance sheet for the year ended December 31, 1999, and its
statements of operations and statement of cash flows for the fiscal year then
ended ("Financial Statements"). Except as expressly set forth in the notes,
exhibits or schedules thereto, the Corporation Financial Statements have been
prepared in accordance with GAAP and present fairly the financial position of
Corporation as of their respective dates and the results of operations, equity
transactions and cash flow of Corporation for the periods indicated.
(b) Corporation has no debt, liability, or obligation of
any nature, whether accrued, absolute, contingent, or otherwise, and whether due
or to become due, that is not reflected or reserved against on the Corporation
balance sheet included in the Corporation's Financial Statements (the
"CORPORATION BALANCE SHEET"), except for those that are not required by GAAP to
be included in a balance sheet or the notes thereto. The reserves, if any,
reflected on the Corporation Balance Sheet are adequate in light of the
contingencies with respect to which they are made.
(c) The accounts receivable shown on the Corporation
Balance Sheet arose in the ordinary course of business and have been collected,
or are reasonably expected to be collectible in the book amounts thereof, less
an amount not in excess of the allowance for doubtful accounts and returns
provided for in the Corporation Balance Sheet. The accounts receivable of
Corporation arising after the date of the Corporation Balance Sheet and before
the date of this Agreement are on Section 3.6(c) of the Corporation Disclosure
Schedule and arose in the ordinary course of business and have been collected or
will be collectible in the book amounts thereof, less allowances for doubtful
accounts and returns determined in accordance with the past practices of
Corporation. None of such accounts receivable is subject to any valid and
material claim of offset or recoupment or counterclaim, and Corporation has no
knowledge of any specific facts that would be likely to give rise to any such
claim; no material amount of such accounts receivable is contingent upon the
performance by Corporation of any obligation; and no agreement for deduction or
discount has been made with respect to any such accounts receivable.
(d) The inventories shown on the Corporation Balance
Sheet, or thereafter acquired by Corporation, consist of items of a quantity and
quality usable or salable in the ordinary course of Corporation's business.
Changes to the inventories of Corporation arising after the date of the
Corporation Balance Sheet and before the date of this Agreement are in Section
3.6(d) of the Corporation Disclosure Schedule. The value at which inventories
are carried reflect the inventory valuation policy of Corporation, which is
consistent with its past practice and in accordance with GAAP. Due provision has
been made on the books of Corporation, consistent with past practices, to
provide for all slow-moving, obsolete, or unusable
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inventories at their estimated useful or scrap values, and such inventory
reserves are adequate to provide for such slow-moving, obsolete or unusable
inventory and inventory shrinkage.
3.7 TAX MATTERS.
(a) Corporation has duly filed all tax returns, reports
and estimates required to be filed by it, for all years and periods (and
portions thereof) for which any such returns, reports or estimates were due on
or prior to the Closing Date. All such returns, reports and estimates, as filed,
were complete, correct and accurate in all material respects. All taxes due from
Corporation have been paid with respect to years and periods ending on or prior
to the Closing Date. Corporation has received no notice of any pending
assessments, asserted deficiencies or claims for additional taxes that are
payable and have not been paid, except to the extent that they are subject to a
bona fide dispute with the relevant taxing authority. The reserves for taxes, if
any, reflected on the Corporation Balance Sheet included in the Corporation
Financial Statements are adequate and there are no tax liens on any property or
asset of Corporation other than liens for taxes not yet due. There have been no
examinations of any of Corporation's tax returns or reports by any Governmental
Entity. There are no outstanding agreements or waivers extending the statutory
period of limitation applicable to any tax return or report for any period and
no request for such an agreement or waiver is pending.
(b) All taxes that Corporation has been required to
collect or withhold have been duly collected or withheld and, to the extent
required, have been paid to the proper taxing authority.
(c) Corporation is not a party to any tax-sharing
agreement or similar arrangement with any other party.
(d) At no time has Corporation been included in the
federal consolidated income tax return of any affiliated group of corporations.
(e) Corporation is not obligated to make any "parachute
payment," as defined in Section 280G of the Code.
(f) Corporation will not be required to include any
material adjustment in taxable income for any tax period (or portion thereof)
ending after the Closing Date pursuant to Section 481(c) of the Code or any
provision of the tax laws of any jurisdiction requiring tax adjustments as a
result of a change in method of accounting implemented by Corporation prior to
the Closing Date for any tax period (or portion thereof) ending on or before the
Closing Date or pursuant to the provisions of any agreement entered into by
Corporation prior to the Closing Date with any taxing authority with regard to
the tax liability of Corporation for any tax period (or portion thereof) ending
on or before the Closing Date.
(g) Corporation is not under any contractual obligation
to pay any tax obligations of any other person, or any tax obligation with
respect to any transaction of any other person or to indemnify any other person
with respect to any tax.
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(h) Corporation has not at any time filed a consent to
the application of Section 341(f)(2) of the Code to
any property or assets held, acquired or to be
acquired by it, and will not file any such consent
before the Closing Date.
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1999,
Corporation has conducted its business in the ordinary and usual course and,
without limiting the generality of the foregoing, has not:
(a) suffered any event or occurrence that has had a
Material Adverse Effect on Corporation;
(b) suffered any damage, destruction or loss, whether or
not covered by insurance, that had a Material Adverse Effect on Corporation;
(c) granted any increase in the compensation payable or
to become payable by Corporation to its officers or employees;
(d) declared, set aside or paid any dividend or made any
other distribution on or in respect of the shares of its capital stock or
declared any direct or indirect redemption, retirement, purchase or other
acquisition of such shares;
(e) made any change in the accounting methods or
practices it follows, whether for general financial or tax purposes, or any
change in depreciation or amortization policies or rates except as may be
required by any modification or change in GAAP;
(f) sold, assigned, transferred, or otherwise disposed of
any patent, trademark, tradename, brand name, copyright (or pending application
for any patent, trademark or copyright), invention, process, know-how, formula
or trade secret or interest therein or other intangible asset or licensed any of
the foregoing;
(g) suffered any labor dispute;
(h) entered into any material commitment or obligation,
except with Pathways;
(i) incurred any material liability (including, without
limitation, any contingent liability with respect to the obligation of others),
except in connection with the transactions contemplated by this Agreement;
(j) permitted or allowed any of its property or assets to
be subjected to any Encumbrance, except in the ordinary course of its business
and except for liens of current taxes not yet due;
(k) made any capital expenditure or commitment for
additions to property, plant or equipment in excess of $10,000 in the aggregate;
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(l) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets to, or entered into any agreement
or arrangement with, any of its Affiliates, officers, employees, directors or
shareholders or any Affiliate of any of the foregoing, other than salary or
benefits to Corporation employees in the ordinary course of business; or
(m) agreed to take any action described in this Section
3.8 or outside of the ordinary course of its business or that would constitute a
breach of any of the representations or warranties of Corporation contained in
this Agreement.
3.9 TITLE AND RELATED MATTERS; PROPERTY.
(a) Corporation has good and marketable title to all the
properties and assets, real and personal, reflected on the Corporation Balance
Sheet included in the Corporation Financial Statements or acquired after the
date of such Corporation Balance Sheet (except properties and assets sold or
otherwise disposed of since the date of such balance sheet in the ordinary
course of business or property which is leased), free and clear of all
Encumbrances, except for purchase money security interests and the lien of
current taxes not yet due and payable and Encumbrances which are immaterial in
the aggregate. Section 3.9(a) of the Corporation Disclosure Schedule lists all
material items of equipment owed or leased by Corporation, and such equipment is
(i) adequate for the conduct of the business of Corporation as currently
conducted and as proposed to be conducted, and (ii) in good operating condition,
regularly and properly maintained, subject to normal wear and tear.
(b) All real and personal property leases to which
Corporation is a party are valid, binding, enforceable and effective in
accordance with their respective terms. There is not any existing default by
Corporation under any of such leases or any event of default or event that,
with notice or lapse of time or both, would constitute an event of default by
Corporation or, to Corporation's knowledge, by any other party to any of such
leases which could be expected to have a Material Adverse Effect on
Corporation. True, correct and complete copies of each Corporation lease
described in this Section 3.9(b) have been provided to Pathways.
3.10 INTELLECTUAL PROPERTY.
(a) Corporation owns, or is licensed (including pursuant
to licenses, sublicenses or other agreements, collectively referred to herein as
"LICENSED INTELLECTUAL PROPERTY") or otherwise possesses a legal right to use,
all (i) issued patents and patent applications, (ii) all trademarks, trade
names, service marks and domain names, (iii) copyrights and mask works, and (iv)
other processes, formulae, methods, schematics, technology, know-how, inventions
(whether or not patentable), computer software programs or applications,
tangible or intangible proprietary and confidential information or materials and
trade secrets, to the extent any of such rights are material to the conduct of
the business of Corporation as currently conducted or as proposed to be
conducted (all of which are referred to as the "CORPORATION INTELLECTUAL
PROPERTY RIGHTS")
(b) Section 3.10(b) of the Corporation Disclosure
Schedule contains an accurate and complete list of (i) all patents and patent
applications and all trademarks, trade
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names, service marks and registered copyrights, included in the Corporation
Intellectual Property Rights, including the jurisdictions in which each such
Corporation Intellectual Property Right has been issued or registered or in
which any such application for such issuance and registration has been filed,
(ii) all licenses, sublicenses, distribution agreements and other agreements to
which Corporation is a party and pursuant to which any person is authorized to
use any Corporation Intellectual Property Rights or has the right to
manufacture, reproduce, market or exploit any products or services of
Corporation that have been and are currently being distributed or provided by
Corporation, and all products currently under development by Corporation
("Corporation Product") or any adaptation, translation or derivative work based
on any Corporation Product or any portion thereof, (iii) all licenses,
sublicenses and other agreements to which Corporation is a party and pursuant to
which Corporation is authorized to use any Licensed Intellectual Property, which
is incorporated in or forms a part of any Corporation Product, (iv) all joint
development or joint venture agreements to which Corporation is a party, and (v)
all agreements with Governmental Entities or other third parties pursuant to
which Corporation has obtained funding for research and development activities.
(c) Corporation is not, nor will it be as a result of the
execution and delivery of this Agreement or the performance of its obligations
under this Agreement, in breach of any license, sublicense or other agreement
relating to the Corporation Intellectual Property Rights or Licensed
Intellectual Property.
(d) Corporation: (i) has not received notice that it has
been sued in any suit, action or proceedings which involves a claim of
infringement or misappropriation of any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party; (ii) has
not received any communications alleging that Corporation has violated, or by
conducting its business as proposed, would violate any patent, trademark,
service mark, copyright, trade secret or other proprietary right of any third
party; (iii) has no reason to believe that the manufacturing, marketing,
licensing or sale of any Corporation Product or the provision of services in the
course of Corporation's business infringes or misappropriates any patent,
trademark, service mark, copyright, trade secret or other proprietary right of
any third party; and (iv) has no knowledge of any claim challenging or
questioning the validity or effectiveness of any license or agreement relating
to any Corporation Intellectual Property Rights or Licensed Intellectual
Property.
(e) All designs, drawings, specifications, source code,
object code, documentation, flow charts and diagrams incorporating, embodying or
reflecting any of the Corporation Products at any stage of their development
(the "CORPORATION COMPONENTS") were written, developed and created solely and
exclusively by employees of Corporation without the assistance of any third
party or were created by third parties who assigned exclusive ownership of all
their rights to Corporation pursuant to valid and enforceable agreements. Each
person currently or formerly employed by Corporation (including independent
contractors, if any) that has or had access to confidential information of
Corporation has executed and delivered to Corporation a confidentiality and
non-disclosure agreement substantially in the form previously provided to
Pathways. Corporation has at all times used commercially reasonable efforts to
treat the Corporation Products and Corporation Components as containing trade
secrets and have not
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disclosed or otherwise dealt with such items in such a manner as to cause the
loss of such trade secrets by their release into the public domain. Corporation
has taken all reasonable steps that are required to protect Corporation's rights
in confidential information and trade secrets of Corporation or provided by any
other person to Corporation.
(f) Neither the execution and delivery of any such
agreement, nor the carrying on of Corporation's business as currently conducted
and as currently proposed to be conducted by any such person as an employee,
consultant or independent contractor, as the case may be, has conflicted or will
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such persons is obligated.
(g) To the knowledge of Corporation, no person is
infringing or misappropriating any Corporation Intellectual Property Rights.
(h) Each (i) patent, (ii) trademark, (iii) copyright,
(iv) service mark or (v) other Corporation Intellectual Property Right that has
been registered, filed, certified or otherwise perfected by recordation with any
Governmental Entity ("CORPORATION REGISTERED INTELLECTUAL PROPERTY") is valid
and subsisting, and all necessary registration, maintenance and renewal fees in
connection with such Corporation Registered Intellectual Property which are due
before the Closing have been or will be paid prior to the Closing and all
necessary documents and certificates in connection with such Corporation
Registered Intellectual Property which are due before the Closing have been or
will be filed prior to the Closing with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Corporation Registered
Intellectual Property. For each product, technology or service of Corporation
that constitutes or includes a copyrightable work, Corporation has registered
the copyright in the latest version of such work with the United States
Copyright Office. In each case in which Corporation has acquired any Corporation
Intellectual Property rights from any person, Corporation has obtained a valid
assignment sufficient to irrevocably transfer all rights in such Corporation
Intellectual Property Rights (including the right to seek past and future
damages with respect thereto) to Corporation and, to the maximum extent provided
for by, and in accordance with, applicable laws and regulations, Corporation has
recorded each such assignment with the relevant governmental authorities,
including the United States Patent and Trademark Office, the U.S. Copyright
Office, or their respective equivalents in any relevant foreign jurisdiction, as
the case may be.
(i) There are no contracts, licenses or agreements
between Corporation and any other person with respect to Corporation
Intellectual Property Rights under which there is any dispute known to
Corporation regarding the scope of such agreement, or performance under such
agreement including with respect to any payments to be made or received by
Corporation.
3.11 EMPLOYEE BENEFIT PLANS.
(a) Section 3.11 of the Corporation Disclosure Schedule
lists, with respect to Corporation and any trade or business (whether or not
incorporated) which is treated as a single employer with Corporation (an "ERISA
AFFILIATE") within the meaning of Section 414(b), (c),
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(m) or (o) of the Code, each plan, program, policy, practice, contract,
agreement or other arrangement providing for employment, compensation,
severance, relocation, termination pay, deferred compensation, sabbatical,
performance awards, bonus, stock or stock-related awards, fringe benefit,
cafeteria benefit, dependent care, including, without limitation, each "employee
benefit plan" as defined in Section 3(3) of ERISA which is maintained,
contributed to, or required to be contributed to by Corporation or any ERISA
Affiliate or with respect to which Corporation or any ERISA Affiliate has or may
have any liability (collectively, the "CORPORATION EMPLOYEE PLAN(S)"). None of
the Corporation Employee Plans promise or provide retiree medical or other
retiree welfare benefits to any person. Corporation does not have any plan or
commitment to establish any new Corporation Employee Plans or amend any
Corporation Employee Plan which would materially increase the expense of
maintaining such Plan above the level of expense incurred with respect to that
Plan for the most recent fiscal year included in Corporation's Financial
Statements, except for such amendments as may be required by law.
(b) DOCUMENTS. Except for such items the nondisclosure of
which would not have a Material Adverse Effect on Corporation, Corporation has
furnished to Pathways true and complete copies of the current documents relating
to each of the Corporation Employee Plans, including (without limitation) plan
documents, trust documents, the most recent determination or opinion letter
issued by the Internal Revenue Service ("IRS"), group annuity contracts, plan
amendments that have not yet been incorporated into the current version of a
restated plan document, insurance policies or contracts, employee booklets,
administrative service agreements, summary plan descriptions, Form 5500 reports
filed for the last three plan years, standard COBRA forms and notices, all
registration statements and prospectuses, any correspondence or inquiry by the
IRS (other than that relating to any determination letter application) or
Department of Labor ("DOL"), and any material employee communications relating
to any Corporation Employee Plan that is materially inconsistent with the terms
of any Corporation Employee Plan.
(c) COMPLIANCE. Each Corporation Employee Plan has been
administered in accordance with its terms and is in material compliance with the
requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code) in all material respects, and Corporation and
each ERISA Affiliate have performed all material obligations required to be
performed by them under, are not in material default under or in violation of
and have no knowledge of any material default or violation by any other party
to, any of the Corporation Employee Plans. Any Corporation Employee Plan
intended to be qualified under Section 401(a) of the Code has obtained from the
Internal Revenue Service a favorable determination letter or opinion letter as
to its qualified status under the Code and nothing has occurred since the
issuance of each such letter which could reasonably be expected to cause the
loss of the tax-qualified status of any Corporation Employee Plan subject to
Code Section 401(a). There are no suits, administrative proceedings, including
any audit or inquiry by the IRS or DOL, actions or other litigation pending, or
to the knowledge of Corporation threatened against or with respect to any
Corporation Employee Plan, other than routine claims for benefits and those
relating to Qualified Domestic Relations Orders. Corporation and each of its
United States subsidiaries have complied in all material respects with the
health care continuation and notice provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA"), or any applicable
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state continuation coverage requirements, the Family and Medical Leave Act of
1993, the Health Insurance Portability and Accountability Act and the Cancer
Rights Act of 1998.
(d) NO TITLE IV OR MULTIEMPLOYER PLAN. Corporation does
not now, nor has it ever, maintained, established, sponsored, participated in,
or contributed to, any pension plan which is subject to Title IV of ERISA or
Section 412 of the Code. Neither Corporation nor any ERISA Affiliate is a party
to, has made or is required to make any contribution to, or otherwise incurred
any obligation or liability under any "multiemployer plan" as defined in Section
3(37) of ERISA. Neither Corporation nor any ERISA Affiliate has any actual or
potential withdrawal liability for any complete or partial withdrawal from any
multiemployer plan.
(e) EFFECT OF TRANSACTION. The consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee or other service provider of Corporation to severance benefits
or any other payment (including, without limitation, unemployment compensation,
golden parachute or bonus) or (ii) accelerate the time of payment or vesting of
any such benefits, or increase the amount of compensation due any such employee
or service provider. No benefit payable or which may become payable by
Corporation pursuant to any Corporation Employee Plan or as a result of or
arising under this Agreement shall constitute an "excess parachute payment" (as
defined in Section 280G(b)(1) of the Code) which is subject to the imposition of
an excise tax under Section 4999 of the Code or the deduction for which would be
disallowed by reason of Section 280G of the Code.
3.12 CONTRACTS.
(a) Except as set forth in the Corporation Disclosure
Schedule, Corporation is not a party or subject to any agreement, obligation or
commitment, written or oral:
(i) that calls for any fixed or contingent
payment or expenditure or any related series of fixed and/or contingent payments
or expenditures by or to Corporation totaling more than $10,000 in any year;
(ii) with agents, advisors, salesmen, sales
representatives, independent contractors or consultants that are not cancelable
by it on no more than thirty (30) days' notice and without liability, penalty or
premium;
(iii) to provide funds to or to make any
investment in any other person or entity (in the form of a loan, capital
contribution or otherwise);
(iv) with respect to obligations as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any other person or entity;
(v) for any line of credit, standby financing,
revolving credit or other similar financing arrangement;
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(vi) for the sale or lease of any real property
involving more than $10,000 per annum;
(vii) to provide any warranty or indemnity
relating to products or services provided by Corporation, other than any
warranties or indemnities contained in Corporation's standard terms and
conditions of sale provided to Pathways' legal counsel and warranties implied by
law; or
(viii) with any distributor, original equipment
manufacturer, value added remarketer or other person for the distribution of any
of the Corporation Products.
(b) To Corporation's knowledge, no party to any such
contract, agreement or instrument intends to cancel, withdraw, modify or amend
such contract, agreement or instrument.
(c) Section 3.12(c) of the Corporation Disclosure
Schedule lists each vendor that (i) manufactures for or supplies to Corporation
any material product or component of any Corporation Product and to which
Corporation paid more than $50,000 in 1997, 1998 or 1999, or (ii) is the sole
source for any product or component of any Corporation Product.
(d) Corporation is not in default under or in breach or
violation of, nor, to Corporation's knowledge, is there any valid basis for any
claim of default by Corporation under, or breach or violation by Corporation of,
any contract, commitment or restriction to which Corporation is a party or by
which it or any of its properties or assets is bound or affected, where such
defaults, breaches, or violations would, in the aggregate, have a Material
Adverse Effect on Corporation. To Corporation's knowledge, no other party is in
default under or in breach or violation of, nor, to Corporation's knowledge, is
there any valid basis for any claim of default by any other party under, or any
breach or violation by any other party of, any contract, commitment, or
restriction to which Corporation is a party or by which any of its properties or
assets is bound or affected, where such defaults, breaches, or violations would,
individually or in the aggregate, have a Material Adverse Effect on Corporation.
3.13 COMPLIANCE WITH LAW. Corporation possesses all regulatory
consents, authorizations, approvals, licenses and permits required by any
Governmental Entity in connection with the conduct of all aspects of its
business as presently conducted. Corporation has complied with all such
consents, authorizations, approvals, licenses and permits and with all
applicable laws, regulations and other requirements of each Governmental Entity
having jurisdiction over Corporation. Corporation has not received any (i)
notification of any asserted present or past failure by Corporation to comply
with such laws, rules or regulations, or (ii) written complaint, inquiry or
request for information from any Governmental Entity relating thereto.
3.14 LABOR DIFFICULTIES. To Corporation's knowledge, Corporation is
not engaged in any unfair labor practice and is not in violation of any
applicable laws respecting employment and employment practices, terms and
conditions of employment, and wages and hours. There are no proceedings pending
or, to Corporation's knowledge, reasonably expected or threatened, between
Corporation and any of its current or former employees. There are no claims
pending
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or, to Corporation's knowledge, reasonably expected or threatened,
against Corporation under any workers' compensation or disability plan or
policy. Corporation has provided all employees with all wages, benefits and
compensation earned up through the date of this Agreement. There is no unfair
labor practice complaint against Corporation pending, or, to Corporation's
knowledge, threatened, nor are there any grievances which could form the basis
for such a complaint before the National Labor Relations Board. To Corporation's
knowledge, (i) the consummation of the transactions contemplated by the
Transaction Documents will not have a Material Adverse Effect on its relations
with Corporation employees, and (ii) none of the Corporation employees intends
to leave its employment, whether as a result of the transactions contemplated by
the Transaction Documents or otherwise.
3.15 CERTAIN TRANSACTIONS.
(a) No Affiliate of Corporation has any interest in (i)
any material equipment or other property or asset, real or personal, tangible or
intangible, including, without limitation, any of the Corporation Intellectual
Property Rights, used in connection with or pertaining to the business of
Corporation, (ii) any creditor, supplier, customer, manufacturer, agent,
representative, or distributor of any of the Corporation Products, (iii) any
entity that competes with Corporation, or with which Corporation is affiliated
or has a business relationship, or (iv) any agreement, obligation or commitment,
written or oral, to which Corporation is a party; PROVIDED, HOWEVER, that no
Affiliate of Corporation or other person shall be deemed to have such an
interest solely by virtue of the ownership of less than 5% of the outstanding
stock or debt securities of any publicly held company, the stock or debt
securities of which are traded on a recognized stock exchange or quoted on
NASDAQ.
(b) Corporation is not a party to any (i) agreement with
any officer or other employee of Corporation (x) the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving Corporation in the nature of any of the transactions
contemplated by this Agreement, (y) providing any term of employment or
compensation guaranty, or (z) providing severance benefits or other benefits
after the termination of employment of such officer or other employee regardless
of the reason for such termination of employment, or (ii) agreement or plan,
including, without limitation, any stock option plan, stock appreciation right
plan or stock purchase plan, any of the benefits of which will be increased, or
the vesting of benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
3.16 EMPLOYEES AND CONSULTANTS. True, correct and complete copies
of all written agreements and descriptions of all oral agreements with
individual employees and consultants to which Corporation is a party have been
delivered to Pathways. The Corporation Disclosure Schedule lists the names of
all Corporation employees.
3.17 INSURANCE. Section 3.17 of the Corporation Disclosure Schedule
lists all forms of insurance held by Corporation. To Corporation's knowledge,
Corporation has not done anything, either by way of action or inaction, that
would invalidate any insurance policies and
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other forms of insurance held by Corporation in whole or in part. There is no
claim by Corporation pending under any of such policies.
3.18 LITIGATION. There is no action, proceeding, claim or
investigation pending against Corporation or affecting any of its properties,
assets or operations before any court or administrative agency, and, to
Corporation's knowledge, no such action, proceeding, claim or investigation has
been threatened, nor is there any reasonable basis therefor. Without limiting
the generality of the preceding sentence, there is no basis for any shareholder
or former shareholder of Corporation, or any other person, firm, corporation or
entity, to assert a claim against Corporation, Shareholder, or Pathways based
upon (i) issuance or rights to issuance by Corporation of any shares of
Corporation capital stock, (ii) any rights as a Corporation Shareholder,
including any option or preemptive rights or rights to notice or to vote, or
(iii) any rights under any agreement between Corporation and any of its
shareholders or former shareholders, or option holders or former option holders
in their capacity as such. There is no judgment, decree, injunction, rule or
order of any Governmental Entity outstanding against Corporation or, to
Corporation's knowledge, affecting any of its properties, assets or operations.
No product liability or warranty claim has been asserted or threatened against
Corporation nor, to Corporation's knowledge, is there any specific situation,
set of facts or occurrence that provides a basis for any such claim.
3.19 CORPORATE MINUTES, ETC. Corporation has made available to
counsel for Pathways true, correct and complete copies of (i) its minute book
containing complete records of all proceedings, consents, actions, and meetings
of its shareholders, Board of Directors and any committees thereof, (ii) all
material permits, orders, and consents issued by any Governmental Entity with
respect to Corporation, or any securities of Corporation, and all applications
for such permits, orders, and consents, and (iii) the stock certificate and
transfer books and the stock register of Corporation setting forth all issuances
and transfers of any capital stock of Corporation. The corporate minute books,
stock certificate books, stock registers and other corporate records of
Corporation and the copies thereof provided to counsel for Pathways are complete
and accurate in all material respects, and the signatures appearing on all
documents contained therein are the true signatures of the persons purporting to
have signed the same.
3.20 COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS. Corporation has
complied with and not violated any laws, regulations or requirements of any
Governmental Entity related to pollution or protection of the environment,
including those relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, or hazardous or toxic materials,
substances, or wastes into air, surface water, groundwater, or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of pollutants, contaminants or
hazardous or toxic materials, substances, or wastes. To Corporation's knowledge,
there are no conditions, circumstances, activities, practices, incidents, or
actions which are likely to form the basis of any claim, action, suit,
proceeding, hearing or investigation against Corporation based on or related to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the emission, discharge, release or threatened
release into the environment, of any pollutant, contaminant, or hazardous or
toxic materials, substances or wastes.
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3.21 NO BROKERS. Corporation is not obligated for the payment of
fees or expenses of any broker, finder or other person in connection with the
origination, negotiation or execution of this Agreement or in connection with
any transaction contemplated hereby.
3.22 GOVERNMENT CONTRACTS. All agreements pursuant to which
Corporation has sold or licensed any of its products to, or performed services
for, any Government Contract Party are listed in Section 3.22 of the Corporation
Disclosure Schedule. All of Corporation's technical data and computer software
was developed exclusively at private expense.
3.23 RESTRICTIONS ON BUSINESS ACTIVITIES. Except for Agreements
with Pathways, there is no agreement (non-compete or otherwise), commitment,
judgment, injunction, order or decree to which Corporation is a party or
otherwise binding upon Corporation which has or may reasonably be expected to
have the effect of prohibiting or impairing any business practice of
Corporation, any acquisition of property (tangible or intangible) by
Corporation, the conduct of business by Corporation or otherwise limiting the
freedom of Corporation to engage in any line of business or to compete with any
person. Without limiting the generality of the foregoing, Corporation has not
entered into any agreement under which Corporation is restricted from selling,
licensing or otherwise distributing any of its technology or products to or
providing services to, customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
3.25 DISCLOSURE. Corporation has delivered to Pathways a true,
complete and correct copy of each document referred to in the Corporation
Disclosure Schedule or otherwise required by this Section 3 to be delivered.
3.26 NO MATERIAL ADVERSE EFFECT. There has been no Material Adverse
Effect on Corporation since March 21, 2000, and to Corporation's knowledge,
since March 21, 2000 there has not occurred any event which could reasonably be
expected to have a Material Adverse Effect on Corporation.
3.27 NO MISREPRESENTATION. No representation or warranty by
Corporation in this Agreement, or any statement, certificate or schedule
furnished or to be furnished by Corporation pursuant to this Agreement, when
taken together, contains or shall contain any untrue statement of a material
fact or omits or shall omit to state a material fact required to be stated
therein or necessary in order to make such statements, in light of the
circumstances under which they were made, not misleading.
3.28 ADDITIONAL REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS.
With respect to the Non-Registered Pathways Common Stock, Shareholders hereby
further represents and warrants to Pathways that:
A. PURCHASE ENTIRELY FOR OWN ACCOUNT. Shareholders
hereby confirm that the Pathways Common Stock to be acquired under the
terms and conditions of this Agreement will be acquired for investment
for the account of the Shareholders, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that
such Shareholders have no present intention of selling, granting any
participation in,
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or otherwise distributing the same. The Shareholders further represent
that such Shareholders do not presently have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such persons or to any third person, with respect to
the Pathways Common Stock. The Shareholders represent that they have
full power and authority to execute this Agreement.
B. DISCLOSURE OF INFORMATION. The Shareholders have had
an opportunity to discuss Pathways' business, management, financial
affairs and the terms and conditions of this Agreement with Pathways'
management and has had an opportunity to review Pathways' facilities.
Shareholders understand that such information provided in this
Agreement and other material provided by Pathways' to Shareholders was
intended to describe the aspects of Pathways' business that Pathways
believes to be material. Shareholders acknowledge that no form of
public solicitation or advertisement was used in connection with the
offer and sale of the stock, and by reason of his or her business or
financial experience, or the business or financial experience of his or
her professional advisor, has the capacity to protect his or her own
interest in connection with the offer and sale of the stock.
C. RESTRICTED SECURITIES. Shareholders understand that
Pathways Common Stock has not been registered under the Securities Act,
by reason of a specific exemption from the registration provisions of
the Securities Act which depends upon, among other things, the bona
fide nature of the investment intent and the accuracy of the
Shareholders' representations as expressed herein. The Shareholders
understand that the Pathways Common Stock is characterized as
"restricted securities" under the federal securities laws inasmuch as
they are being acquired from Pathways in a transaction not involving a
public offering and that under such laws and applicable regulations
such Pathways Common Stock may be resold without registration under the
Securities Act only in certain limited circumstances. Shareholders
acknowledge that the Pathways Common Stock must be held indefinitely
unless subsequently registered under the Securities Act or an exemption
from such registration is available. Shareholders are aware of the
provisions of Rule 144 promulgated under the Securities Act which
permits limited resale of shares purchased in a private placement
subject to the satisfaction of certain conditions, including, among
other things, the existence of a public market for the shares, the
availability of certain current public information about Pathways, the
resale occurring not less than a specified number of years after a
party has purchased and paid for the security to be sold, the sale
being effected through a "broker's transaction" or in transactions
directly with a "market maker" (as provided by Rule 144(f)) and the
number of shares being sold during any three-month period not exceeding
specified limitations.
D. LEGENDS. The Shareholders understand that the shares
of Pathways Common Stock, and any securities issued in respect thereof
or exchange therefor, may bear one or all of the following legends:
(1) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
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AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES
LAWS, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES
UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
(2) THE ADMINISTRATOR OF SECURITIES OF THE STATE OF
WASHINGTON HAS NOT REVIEWED THIS OFFERING OR THIS
PRIVATE PLACEMENT MEMORANDUM. THE SECURITIES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF
WASHINGTON, CHAPTER 21.20.040 RWC (THE "WASHINGTON
ACT"), AND THEREFORE, CANNOT BE TRANSFERRED OR RESOLD
UNLESS THEY ARE REGISTERED UNDER THE WASHINGTON ACT
OR UNLESS AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
(3) Any legend required by the blue sky laws of any state
to the extent such laws are applicable to the shares
represented by the certificate so legended.
E. INDEMNIFICATION. Shareholders acknowledge that they
understand the meaning and consequences of the representations and
warranties of this Section 3 hereof and Shareholders hereby agree to
indemnify and hold harmless Pathways, its shareholders, officers,
directors, agents and employees and attorneys thereof, from and against
any and all loss, damage or liability due to or arising out of a breach
of any such representations or warranties. Notwithstanding the
foregoing, however, no representation, warranty, acknowledgment or
agreement made herein by Shareholders shall in any manner be deemed to
constitute a waiver of any rights granted to Shareholders under federal
or state securities laws.
3.29. AUTHORIZATION. Shareholders have full power and authority to
submit, sell, assign and transfer the Shares represented by the certificate(s)
submitted on the Closing Date (described in Section 8), free and clear of all
liens, encumbrances and claims of others. All obligations and agreements set
forth in this Agreement shall survive the death or incapacity of Shareholders
and shall be binding upon the personal representatives, estates, successors and
assigns of Shareholders. Shareholders will, upon request, execute and deliver
any additional documents necessary or desirable to complete the surrender of
such Shares.
4. REPRESENTATIONS AND WARRANTIES OF PATHWAYS. Except as
specifically disclosed in Pathways' Disclosure Schedule attached HERETO AS
EXHIBIT C, Pathways represents and warrants to Corporation for the benefit of
all Corporation's shareholders that:
4.1 ORGANIZATION AND GOOD STANDING. Pathways is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and
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have all requisite corporate power and authority to carry on its business as it
is now being conducted. Pathways is duly qualified or licensed to do business
and in good standing in each jurisdiction in which the nature of its business or
properties makes such qualification or licensing necessary, except where the
lack of such qualification or licensing (individually or in the aggregate) would
not have a Material Adverse Effect on Pathways.
4.2 POWER, AUTHORIZATION AND VALIDITY.
(a) Pathways has the corporate right, power, legal
capacity and authority to execute and deliver, and to consummate the
transactions contemplated by this Agreement and to perform its obligations under
it. The execution and delivery of, and the consummation of the transactions
contemplated by this Agreement is or will be validly approved and authorized by
all necessary corporate action.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, is required
by or with respect to Pathways in connection with the execution and delivery of,
and the consummation by it of the transactions contemplated by this Agreement,
except for such filings under federal and state securities laws as have already
been completed or which are not yet due.
(c) Upon the execution and delivery of this Agreement by
Pathways will have been, this Agreement will constitute a valid and binding
obligation of Pathways, enforceable in accordance with its terms.
4.3 CAPITALIZATION. The authorized capital stock of Pathways
consists of Fifty Million (50,000,000) shares of Common Stock, $0.01 par value
per share ("PATHWAYS COMMON STOCK"), of which Fourteen Million Six Hundred
Thirteen Thousand One Hundred Sixty Two (14,613,162) shares are issued and
outstanding, and One Million (1,000,000) shares of Preferred Stock, $0.01 par
value per share ("PATHWAYS PREFERRED STOCK"), Three Hundred Thousand (300,000)
of which shares have been designated.
4.4 NO VIOLATION OF EXISTING AGREEMENTS. The execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated hereby and compliance with the provisions hereof will not, conflict
with, or result in any violation of or default under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss of a
benefit under, (i) any provision of the Certificate of Incorporation or Bylaws
of Pathways, as currently in effect, (ii) any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license to which Pathways is a party or by which
Pathways or any of its properties or assets is bound or affected, or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Pathways or its properties or assets.
4.5 NO BROKERS. Pathways is not obligated for the payment of fees
or expenses of any broker or finder in connection with the origination,
negotiation or execution of this Agreement or in connection with any transaction
contemplated hereby.
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4.6 LITIGATION. There is no litigation pending, or to the
knowledge of Pathways threatened, against Pathways or any of its officers and
directors which, if determined adversely, have an adverse effect on Pathways'
ability to deliver the Consideration.
4.7 DISCLOSURE. Pathways has hereto delivered to Corporation for
distribution to Corporation's shareholders each of the following:
(a) Annual report of Pathway on Form 10-K as filed with
the Securities and Exchange Commission ("SEC") for
Pathway's fiscal year ended on December 31, 1999; and
(b) Quarterly reports of the Pathways on Form 10-Q as
filed with the SEC as filed with the SEC for each of
the three 1999 fiscal quarters of Pathways through
September 30, 1999.
Other than as contemplated or caused by this Agreement, there has not
been any Material Adverse Effect on Pathways since December 31, 1999, and to
Pathways' knowledge, since December 31, 1999 there has not occurred any event
that could reasonably be expected to have a Material Adverse Effect on Pathways.
5. COVENANTS OF SELLING PARTIES. Shareholders and Corporation
covenant to and agree with Pathways as follows:
5.1 CONDUCT OF BUSINESS; INTERIM OPERATIONS. During the period
from the date of this Agreement and continuing until the earlier of the
termination of this Agreement, Corporation agrees, subject to the limitations
described in Section 5.1(r) below, to carry on its business in the usual,
regular and ordinary course in substantially the same manner as previously
conducted, to pay its debts and taxes when due, subject to good faith disputes
over such debts or taxes, to pay or perform its other obligations when due, and,
to the extent consistent with such business, to use all commercially reasonable
efforts consistent with past practices and policies to (i) preserve intact its
present business organization, (ii) keep available the services of its present
officers and key employees, and (iii) preserve its relationships with customers,
suppliers, distributors, licensors, licensees and others having business
dealings with it. Corporation shall promptly notify Pathways of any event or
occurrence where such event or occurrence would result in a breach of any
covenant of Corporation set forth in this Agreement or cause any representation
or warranty of Corporation set forth in this Agreement to be untrue as of the
date of, or giving effect to, such event or occurrence. Except as expressly
contemplated by this Agreement, Corporation shall not, without the prior written
consent of Pathways:
(a) transfer or license to any person or entity or
otherwise extend, amend or modify any rights to the Corporation Intellectual
Property Rights;
(b) declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu
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of or in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except from
former employees, directors and consultants in accordance with agreements
providing for the repurchase of shares in connection with any termination of
service by such party;
(c) issue, deliver or sell or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock or securities
convertible into shares of its capital stock, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities (except
upon the exercise or conversion of securities outstanding on the date of this
Agreement);
(d) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership or other business organization or division;
(e) sell, lease, license or otherwise dispose of any of
its properties or assets except for transactions entered into in the ordinary
course of business consistent with past practice;
(f) take any action to: (i) increase or agree to increase
the compensation payable or to become payable to its officers or employees, (ii)
grant any severance or termination pay to, or enter into any employment or
severance agreements with, any officer or employee, (iii) enter into any
collective bargaining agreement, or (iv) establish, adopt, enter into or amend
in any material respect any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees;
(g) revalue any of its assets, including writing down the
value of inventory or writing off notes or accounts receivable other than in the
ordinary course of business consistent with past practice or as required by
GAAP;
(h) incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or warrants
or rights to acquire any debt securities or guarantee any debt securities of
others, other than indebtedness incurred under outstanding lines of credit in
the ordinary course of business consistent with past practice;
(i) amend or propose to amend its Articles of
Incorporation or Bylaws;
(j) incur or commit to incur any individual capital
expenditure in excess of $5,000 or aggregate capital expenditures in excess of
$10,000;
(k) amend or terminate any material contract, agreement
or license to which it is a party except in the ordinary course of business;
(l) waive or release any material right or claim, except
in the ordinary course of business;
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(m) initiate any litigation or arbitration proceeding;
(n) accelerate, amend or change the period of
exercisability of any options or restricted stock granted to employees of
Corporation or authorize cash payments in exchange for any options granted under
any of such plans;
(o) compromise or otherwise settle or adjust any
assertion or claim of a deficiency in taxes (or interest thereon or penalties in
connection therewith), extend the statute of limitations with any tax authority
or file any pleading in court in any tax litigation or any appeal from an
asserted deficiency;
(p) change any of Corporation's accounting policies or
practices except as may be required by any modification or change in GAAP;
(q) change any of Corporation's personnel policies in any
material respect (except for changes contemplated by the Severance Plan);
(r) grant any person a power of attorney or similar
authority; or
(s) agree in writing or otherwise to take any of the
actions described in subsections (a) through (r) above, or any action which is
reasonably likely to make any of its representations or warranties contained in
this Agreement untrue or incorrect in any material respect on the date made (to
the extent so limited) or as of the Closing Date.
5.2 ACCESS TO INFORMATION. Until the Closing, Corporation will
allow Pathways and its agents free access upon reasonable notice and during
normal working hours to its files, books, records, and offices, including,
without limitation, any and all information relating to taxes, commitments,
contracts, leases, licenses, Corporation Intellectual Property Rights, personal
property and financial condition. Until the Closing, Corporation shall cause its
accountants to cooperate with Pathways and its agents in making available all
financial information reasonably requested, including, without limitation, the
right to examine all working papers pertaining to Corporation in the possession,
custody or control of such accountants, subject to the execution by Pathways of
a customary agreement with such accountants with respect to the use of such
working papers.
5.3 SHAREHOLDERS CONSENT. Corporation shall promptly after the
date hereof take all action necessary in accordance with Washington Law and its
Articles of Incorporation and Bylaws to solicit and obtain shareholder consent
and approval to consummate the transactions contemplated by this Agreement.
Corporation shall use commercially reasonable efforts to solicit such consent
and approval from the shareholders of Corporation at the earliest practicable
date and not later than April 12, 2000. The Board of Directors of Corporation
will recommend to the Corporation's shareholders that the transactions
contemplated by this Agreement be approved and will use commercially reasonable
efforts to solicit the approval of such matters by the Corporation's
shareholders. Corporation will provide to Pathways copies of all documents and
other information furnished to the shareholders of Corporation, if applicable,
in connection with such solicitation.
24
<PAGE>
5.4 REGULATORY APPROVALS. Prior to the Closing, Corporation will
execute and file, or join in the execution and filing of, any application or
other document that may be necessary in order to obtain the authorization,
approval or consent of any Governmental Entity that may be reasonably required
in connection with the consummation of the transactions contemplated by this
Agreement. Corporation will use commercially reasonable efforts to obtain or, as
applicable, to assist Pathways in obtaining all such authorizations, approvals
and consents.
5.5 SATISFACTION OF CONDITIONS PRECEDENT. Corporation will use
commercially reasonable efforts to satisfy or cause to be satisfied all the
conditions precedent that are set forth in Sections 9.1 and 2 and to cause the
transactions contemplated by this Agreement to be consummated, and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties which may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby.
5.6 OTHER NEGOTIATIONS. From and after the date of this Agreement
until the termination of this Agreement by its terms, Corporation shall not,
directly or indirectly through any officer, director, employee, representative
or agent of Corporation or otherwise, (i) solicit, initiate, or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, a proposal or offer for a merger, consolidation, share exchange, business
combination, sale of all or a material portion of assets, sale of shares of
capital stock (including without limitation by way of a tender offer) or similar
transactions involving Corporation other than the transactions contemplated by
this Agreement (any of the foregoing inquiries or proposals being referred to in
this Agreement as an "ACQUISITION PROPOSAL"), (ii) engage or participate in
negotiations or discussions concerning, or provide any information to any person
or entity relating to, any Acquisition Proposal, or (iii) agree to, enter into,
accept, approve or recommend any Acquisition Proposal.Shareholders and
Corporation ("Selling Parties"), jointly and severally, warrant that:
6 CONDITIONS PRECEDENT TO PATHWAYS' PERFORMANCE. The obligations
of Pathways to purchase the Shares under this Agreement are subject to the
satisfaction, at or before the closing, of all the conditions set out in this
Agreement. Pathways may waive any or all of these conditions in whole or in part
without prior notice; provided, however, that no such waiver of a condition will
constitute a waiver by Pathways of any of its other rights or remedies, at law
or in equity, if Shareholders or Corporation are in default of any of their
representations, warranties, or covenants under this Agreement.
6.1 ACCURACY OF SELLING PARTIES' WARRANTIES. Except as otherwise
permitted by this Agreement, all warranties by each of the Selling Parties in
this Agreement, or in any written statement that will be delivered to Pathways
by any of them under this Agreement, must be true on the closing date as though
made at this time.
6.2 PERFORMANCE BY SELLING PARTIES. Selling Parties must have
performed, satisfied, and complied with all covenants, agreements, and
conditions required by this agreement to be performed or complied with by them,
or any of them, by the closing date.
25
<PAGE>
6.3 NO MATERIAL ADVERSE CHANGE. During the period from the date of
this Agreement to the closing date, there will not have been any material
adverse change in the financial condition or the results of operations of the
Corporation, and Corporation will not have sustained any insured or uninsured
loss or damage to its assets that materially affects its ability to conduct a
material part of its business.
6.4 OPINION OF SELLING PARTIES' COUNSEL. Pathways will have
received from counsel for Selling Parties, an opinion dated the closing date, in
a form approved by counsel for Pathways, that:
6.4.1 Corporation is duly incorporated, validly existing,
and in good standing under the laws of the State of Washington, and each has all
necessary corporate power to own its properties as now owned and operate its
business as now operated.
6.4.2 The authorized capital stock of Corporation consists
of 100,000 shares of common stock, of which, based solely on a review of the
stock journal, stock ledger, and the stock books of the Corporation, 100,000
shares are issued and outstanding. All outstanding shares are validly issued,
fully paid, and nonassessable. To the best knowledge of counsel, there are no
outstanding subscriptions, options, rights, warrants, convertible securities, or
other agreements or commitments obligating Corporation to issue or transfer from
treasury any additional shares of its capital stock of any class.
6.4.3 This Agreement has been duly and validly authorized
and, when executed and delivered by the Selling Parties, will be valid, binding,
and enforceable against each of them in accordance with its terms, except as
limited by bankruptcy and insolvency laws and by other laws and equitable
principles affecting the rights of creditors generally.
6.4.4 There is no suit, action, arbitration, or legal,
administrative, or other proceeding or governmental investigation pending or
threatened against or affecting Corporation, Shareholders, or any of their
businesses or properties or financial or other condition.
6.4.5 The Shares to be issued and delivered to Pathways
under this Agreement will be, when delivered, validly issued, fully paid, and
nonassessable. The Shares have been issued in compliance with registration
requirements of federal and state securities laws, or are exempt from the
registration requirements of federal and state securities laws.
6.5 APPROVAL OF DOCUMENTATION. The form and substance of all
certificates, instruments, opinions, and other documents delivered to Pathways
under this Agreement will be satisfactory in all reasonable respects to Pathways
and its counsel.
7 CONDITIONS PRECEDENT TO SELLING PARTIES' PERFORMANCE. The
obligations of Shareholders to sell and transfer the Shares under this Agreement
are subject to the satisfaction, at or before the closing, of all the conditions
set out in this Agreement. Shareholders may waive any or all of these conditions
in whole or in part without prior notice; provided, however, that no such waiver
of a condition will constitute a waiver by Shareholders of any of their other
rights or
26
<PAGE>
remedies, at law or in equity, if Pathways is in default of any of its
representations, warranties, or covenants under this Agreement.
7.1 ACCURACY OF PATHWAYS' WARRANTIES. Except as otherwise
permitted by this Agreement, all warranties by Pathways in this Agreement, or in
any written statement that delivered by Pathways under this Agreement, must be
true on the closing date as though made at that time.
7.2 PERFORMANCE BY PATHWAYS. Pathways must have performed,
satisfied, and complied with all covenants, agreements, and conditions required
by this agreement to be performed or complied with by it by the closing date.
7.3 PATHWAYS' STOCK VALIDLY ISSUED. The shares of Pathways Common
Stock to be issued and delivered under this Agreement will be, when delivered,
validly issued, fully paid, and nonassessable.
7.4 PATHWAYS' CORPORATE APPROVAL. The board of directors of
Pathways will have duly authorized and approved the execution and delivery of
this Agreement and all corporate action necessary or proper to fulfill Pathways'
obligations to be performed under this Agreement on or before the closing date.
8 CLOSING. The transfer of the Shares by Shareholders to
Pathways ("Closing") will take place at the offices of Pathways, 14201 Northeast
200th Street, Woodinville, Washington 98072 at 10:00 a.m. local time, on April
19, 2000, or at such other time and place as the parties may agree to in writing
("Closing Date").
8.1 SELLING PARTIES' OBLIGATIONS AT CLOSING. At closing,
Shareholders and Corporation must deliver to Pathways the following instruments,
in form and substance satisfactory to Pathways and its counsel, the following:
8.1.1 A certificate or certificates representing the
Shares, registered in the name of Shareholders, duly endorsed by Shareholders
for transfer or accompanied by an assignment of the Shares duly executed by
Shareholders, with signatures guaranteed by a member of the New York Stock
Exchange or by a bank or trust company, and with all required documentary stock
transfer stamps affixed or accompanied by Shareholders' personal check for the
amount of these stamps. On submission of that certificate or certificates to
Corporation for transfer, Corporation will issue to Pathways a certificate
representing the Shares, registered in Pathways' name.
8.1.2 The stock books, stock ledgers, minute books, and
corporate seals of Corporation.
8.1.3 The opinion of counsel as provided in paragraph 6.5
of this Agreement.
8.1.4 Except as otherwise specified by Pathways, the
written resignations of all the officers and directors of Corporation.
27
<PAGE>
8.2. EFFECTIVE TIME OF SHARE EXCHANGE. Subject to the terms and
conditions of this Agreement and the plan of share exchange ("Plan of Share
Exchange") and articles of share exchange ("Articles of Share Exchange"), all
the outstanding shares of Corporation shall be exchanged for Pathways Common
Stock in accordance with Washington Law. The Plan of Share Exchange and Articles
of Share Exchange will be executed by the parties prior to the Closing Date.
Subject to the terms of this Agreement and the Plan of Share Exchange or
Articles of Share Exchange, on the Closing Date, the Plan of Share Exchange,
together with the Articles of Share Exchange shall be duly executed and filed
with the Washington Secretary of State. The share exchange contemplated by this
Agreement ("Share Exchange") shall be effective upon the filing of the Plan of
Share Exchange and the Articles of Share Exchange with the Washington Secretary
of State.
9. SELLING PARTIES' INDEMNITY. Shareholders and Corporation will
indemnify, defend, and hold harmless Pathways against and in respect of all
claims, demands, losses, costs, expenses, obligations, liabilities, damages,
recoveries, and deficiencies, including interest, penalties, and reasonable
attorneys' fees, that Pathways may incur or suffer, which arise, result from, or
relating to any breach of, or failure by Selling Parties to perform, any of
their representations, warranties, covenants, or agreements in this Agreement or
in any schedule, certificate, exhibit, or other instrument furnished or to be
furnished by Selling Parties under this Agreement.
10. MISCELLANEOUS.
10.1 GOVERNING LAWS. It is the intention of the parties hereto that
the internal laws of the State of Washington (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto.
10.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure to
the benefit of, the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
10.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
10.4 ENTIRE AGREEMENT. This Agreement, the exhibits hereto, the
documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied,
28
<PAGE>
written or oral, between the parties with respect hereto and thereto. The
express terms hereof control and supersede any course of performance or usage
of the trade inconsistent with any of the terms hereof.
10.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
10.6 AMENDMENT AND WAIVERS. Any term or provision of this Agreement
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
10.7 SURVIVAL OF AGREEMENTS. Except as set forth below in this
SECTION 10.7, all covenants, agreements, representations and warranties made
herein shall survive the consummation of the transactions contemplated hereby
notwithstanding any investigation of the parties hereto.
10.8 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
10.9 ATTORNEY FEES. Should suit be brought to enforce or interpret
any part of this Agreement, the prevailing party shall be entitled to recover,
as an element of the costs of suit and not as damages, reasonable attorney fees
to be fixed by the court (including without limitation, costs, expenses and fees
on any appeal). The prevailing party shall be the party entitled to recover its
costs of suit, regardless of whether such suit proceeds to final judgment. A
party not entitled to recover its costs shall not be entitled to recover
attorney fees. No sum for attorney fees shall be counted in calculating the
amount of a judgment for purposes of determining if a party is entitled to
recover costs or attorney fees.
10.10 NOTICES. Any notice provided for or permitted under this
Agreement will be treated as having been given when (a) delivered personally,
(b) sent by confirmed telex or telecopy, (c) sent by commercial overnight
courier with written verification of receipt, or (d) mailed postage prepaid by
certified or registered mail, return receipt requested, to the party to be
notified, at the address set forth below, or at such other place of which the
other party has been notified in accordance with the provisions of this SECTION
10.10.
Pathways: Mr. Robert W. Haller, Executive Vice President
The Pathways Group, Inc.
14201 N.E. 200th Street
Woodinville, Washington 98072
29
<PAGE>
Shareholders: Monte Strohl
13760-68th Avenue West
Edmonds, Washington 98026
Jay Potts
14030 12th Avenue N.E., #3D
Seattle, WA 98125
Gary Baker
16925 SW Tallac Way
Beaverton, OR 97007
Corporation: MS Digital, Inc.
13760-68th Avenue West
Edmonds, Washington 98026
Any notice provided in any other manner will be treated as having been received
only upon actual receipt of the party to be notified.
10.11 TIME. Time is of the essence of this Agreement.
10.12 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated
by the respective parties hereto and their attorneys and the language hereof
shall not be construed for or against any party. The titles and headings herein
are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
10.13 NO JOINT VENTURE. Nothing contained in this Agreement shall be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other party. No party shall hold itself out as having any authority
or relationship in contravention of this SECTION 10.
10.14 PRONOUNS. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
10.15 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
30
<PAGE>
10.16 ABSENCE OF THIRD-PARTY BENEFICIARY RIGHTS. No provisions of
this Agreement are intended, nor shall be interpreted, to provide or create any
third-party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, Shareholders, partner of any party hereto or any other
person or entity except employees and Shareholders specifically referred to
herein, and, except as so provided, all provisions hereof shall be personal
solely between the parties to this Agreement.
10.17 DISPUTE RESOLUTION. ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT, SHALL BE RESOLVED ONLY BY BINDING ARBITRATION,
CONDUCTED BY THE JUDICIAL ARBITRATION AND MEDIATION SERVICE (JAMS) (OR THEIR
SUCCESSOR AND IF NO SUCCESSOR, THEN BY THE AMERICAN ARBITRATION ASSOCIATION), IN
SEATTLE, WASHINGTON. WRITTEN NOTICE OF THE DEMAND FOR ARBITRATION SHALL BE
SERVED ON THE OTHER PARTY TO THIS AGREEMENT AND FILED WITH THE ARBITRATION
SERVICE. THE DEMAND FOR ARBITRATION SHALL BE MADE WITHIN A REASONABLE TIME AFTER
THE DISPUTE HAS ARISEN, AND IN NO EVENT SHALL IT BE MADE AFTER THE DATE UPON
WHICH IT WOULD HAVE BEEN BARRED BY THE TERMS OF THIS AGREEMENT OR APPLICABLE
LAW. EACH ARBITRATOR MUST BE EXPERIENCED IN THE SUBJECT MATTER OF THE
ARBITRATION. ARBITRATION SHALL BE COMPLETED NOT LATER THAN 180 DAYS FOLLOWING
ITS INITIATION. IN REACHING THEIR AWARD, THE ARBITRATORS SHALL FOLLOW AND BE
BOUND BY SUBSTANTIVE WASHINGTON STATE LAW, AS IF THEY WERE JUDGES SITTING IN A
WASHINGTON STATE COURT OF LAW. HOWEVER, ARBITRATORS SHALL IN NO MANNER AWARD
PUNITIVE DAMAGES (OR DAMAGES CALCULATED BY APPLYING A MULTIPLIER) OR DAMAGES FOR
EMOTIONAL DISTRESS. THE AWARD SHALL BE IN WRITING AND SHALL CONTAIN FINDINGS OF
FACT AND CONCLUSION OF LAW AND SHALL SET FORTH THE NATURE, AMOUNT AND MANNER OF
CALCULATION OF ALL DAMAGES. THE AWARD SHALL BE FINAL AND BINDING, AND JUDGMENT
MAY BE ENTERED UPON IT IN ANY COURT HAVING JURISDICTION. THIS PROVISION HAS BEEN
EXPRESSLY AGREED TO BY THE PARTIES WITH FULL UNDERSTANDING THAT IT ACTS TO WAIVE
THEIR RESPECTIVE CONSTITUTIONAL RIGHTS TO A TRIAL BY JUDGE OR JURY AND THEIR
RESPECTIVE RIGHTS TO PUNITIVE OR EMOTIONAL DISTRESS DAMAGES.
10.18 AUTHORITY TO SIGN. Each of the persons signing below on behalf
of any party hereby represents and warrants that he or she is signing with full
and complete authority to bind the party on whose behalf of whom he or she is
signing, to each and every term of this Agreement.
[SIGNATURE PAGE FOLLOWS.]
31
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first set forth above.
MS DIGITAL, INC., THE PATHWAYS GROUP, INC.
(a Washington corporation) (a Delaware corporation)
By: /s/ MONTE STROHL By: /s/ CAREY F. DALY, II
- ----------------------------------------- --------------------------
Chief Executive Officer Chief Executive Officer
SHAREHOLDERS
/s/ MONTE STROHL
- -----------------------------------------
Monte Strohl
/s/ JAY POTTS
- -----------------------------------------
Jay Potts
/s/ GARY BAKER
- -----------------------------------------
Gary Baker
32
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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1,703,907
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