<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 7, 2000
------------------------
THE PATHWAYS GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 000-24119 91-1617556
------------------------ ------------------------ ------------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
</TABLE>
14201 N.E. 200TH STREET, WOODINVILLE, WASHINGTON 98072
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
425.483.3411
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
--------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
MS DIGITAL, INC. On August 7, 2000, The Pathways Group, Inc. (the
"Company") acquired all of the capital stock of MS Digital, Inc. ("MS Digital")
in a stock-for-stock transaction in which the Company has issued a total of
2,425,000 shares of Common Stock. The Company issued the shares at the
equivalent of $1.25 per share. The Company has registered 1,225,000 of the
2,425,000 shares issued to the MS Digital Stockholders.
At the time of the acquisition, Monte Strohl, a director and the Company's
Senior Vice President, Marketing and Sales, was the majority shareholder of MS
Digital. Two other employees of the Company, Jay Potts and Gary Baker, were also
shareholders of MS Digital. The acquisition was approved by the disinterested
members of the Board of Directors of the Company.
The assets of MS Digital include, but are not limited to, (i) cash on hand,
(ii) accounts and accounts receivable, (iii) furniture and fixtures, equipment,
and inventory in all forms, and (iv) contracts and contract rights. These assets
are used in connection with MS Digital's business that specializes in customized
multi-media communications systems. The company intends to continue such use of
the assets of MS Digital.
SMART CARD SOLUTIONS, INC. On August 21, 2000, the Company acquired all of
the capital stock of Smart Card Solutions, Inc. ("Smart Card Solutions") a
privately-held technology services company based in Aspen, Colorado. Smart Card
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 Company issued an aggregate of
1,9000,000 shares of its Common Stock at the equivalent of $1.00 per share.
At the time of the acquisition, there was no relationship between Smart Card
Solutions and the stockholders of Smart Card Solutions on the one hand and the
Company or any of the Company's affiliates or any director or officer of the
Company or any associate of any such director or officer on the other hand.
The assets of Smart Card Solutions include, but are not limited to,
(i) cash on hand, (ii) advances to officers, (iii) furniture and fixtures and
equipment, and (iv) contracts and contract rights. These assets are used in
connection with Smart Card Solutions' business of information management systems
that facilitate point-of-sale ticketing, financial reporting and access control.
The Company intends to continue such use of the assets of Smart Card Solutions.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
<TABLE>
<S> <C>
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
MS DIGITAL.................................................. F-1
Independent Auditor's Report................................ F-1
Balance Sheets as of December 31, 1999 and 1998............. F-2
Statements of Income for the years ended December 31, 1999
and 1998.................................................... F-3
Statements of Changes in Owner's Equity, Partners' Capital
and Stockholders' Equity for the years ended December 31,
1998 and 1999............................................... F-4
Statements of cash flow for the years ended December 31,
1999 and 1998............................................... F-5
Notes to the financial statements........................... F-6
SMART CARD SOLUTIONS........................................ F-9
Independent Auditor's Report................................ F-9
Balance Sheets as of December 31, 1999 and 1998............. F-10
Statements of Loss for the year ended December 31, 1999 and
for the period from inception (June 16, 1998) to
December 31, 1998........................................... F-11
Statements of Stockholders' Equity (deficit) for the year
ended December 31, 1999 and the period from inception
(June 16, 1998) to December 31, 1998........................ F-12
Statements of cash flow for the year ended December 31, 1999
and for the period from inception (June 16, 1998) to
December 31, 1998........................................... F-13
Notes to the financial statements........................... F-14
(b) PRO FORMA FINANCIAL INFORMATION........................ P-1
Unaudited Pro Forma Financial Information................... P-1
Unaudited Pro Forma Condensed Balance Sheets as of June 30,
2000........................................................ P-2
Unaudited Pro Forma Condensed Statements of Operations for
the year ended December 31, 1999]........................... P-3
Unaudited Pro Forma Condensed Statements six months ended
June 30, 2000............................................... P-4
Notes....................................................... P-5
</TABLE>
<TABLE>
<S> <C>
(c) EXHIBITS.
Exhibit 10.1 Agreement of Purchase and Sale of Stock entered into in
connection with acquisition of MS Digital, Inc.
(Incorporated herein by reference to the exhibit contained
in the Company's Quarterly Report on Form 10Q for the
quarter ended March 31, 2000.)
Exhibit 10.2 Agreement of Purchase and Sale of Stock entered into in
connection with acquisition of Smart Card Solutions, Inc.
(Incorporated herein by reference to the exhibit contained
in the Company's Quarterly Report on Form 10Q for the
quarter ended March 31, 2000.)
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
MS Digital, Inc.
I have audited the accompanying balance sheets of MS Digital, Inc. as of
December 31, 1999 and 1998, and the related statements of income, owner's
capital, partners' capital and stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998. These statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audits.
Except as discussed in the following paragraph, I conducted my audits in
accordance with the generally accepted auditing standards. Those standards
require that I plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the management, as
well as evaluating the overall financial statement presentation. I believe that
my audits provide a reasonable basis for my opinion.
I was unable to observe the taking of the physical count of the Company's
inventory at December 31, 1999, nor was I able to satisfy myself as to the
quantity of physical inventory by alternative means. The valuation and method
used for the financial statements are described in Note D.
In my opinion, except for the effect of such adjustments, if any, as might
have been determined had I been able to observe the count of physical inventory,
the financial statements referred to above present fairly, in all material
respects, the financial position of MS Digital, Inc. as of December 31, 1999 and
1998 and the results of its operations and cash flows for the years ended
December 31, 1999 and 1998 in conformity with the generally accepted accounting
principles.
MARC LUMER & COMPANY
San Francisco, California
September 05, 2000
F-1
<PAGE>
MS DIGITAL, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $147,649 $ 2,542
Accounts receivable....................................... 3,148 20,913
Inventory................................................. 38,312 4,297
-------- --------
TOTAL CURRENT ASSETS.................................. 189,109 27,752
-------- --------
Equipment, at cost........................................ 14,221 14,221
Less: accumulated depreciation.......................... 4,677 2,184
-------- --------
Net equipment............................................. 9,544 12,037
-------- --------
Goodwill, net of amortization of $412..................... 5,763 --
TOTAL ASSETS.......................................... $204,416 $ 39,789
======== ========
LIABILITIES, OWNER'S EQUITY AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 7,366 $ 4,794
Note payable to related party............................. 133,538 --
-------- --------
TOTAL CURRENT LIABILITIES................................... 140,904 4,794
-------- --------
OWNER'S EQUITY.............................................. $ -- $ 34,995
STOCKHOLDERS' EQUITY
Common stock; no par value per share authorized, issued
and outstanding 100,000 shares.......................... 63,512 --
-------- --------
TOTAL OWNER'S AND STOCKHOLDERS' EQUITY...................... $ 63,512 $ 34,995
-------- --------
TOTAL LIABILITIES, OWNER'S EQUITY AND STOCKHOLDERS'
EQUITY.................................................... $204,416 $ 39,789
======== ========
</TABLE>
SEE NOTE A
See accompanying notes and accountant's report
F-2
<PAGE>
MS DIGITAL INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
REVENUES.................................................... $825,376 $206,268
COST OF REVENUES............................................ 432,037 73,436
-------- --------
GROSS PROFIT................................................ 393,339 132,832
-------- --------
OPERATING EXPENSES
Product development....................................... 80,000 43,200
Selling, general and administrative....................... 64,813 35,140
-------- --------
TOTAL OPERATING EXPENSES.................................... 144,813 78,340
-------- --------
OPERATING INCOME............................................ 248,526 54,492
OTHER INCOME................................................ 3,158 1,338
NET INCOME.................................................. $251,684 $ 55,830
======== ========
</TABLE>
SEE NOTE A
See accompanying notes and accountant's report
F-3
<PAGE>
MS DIGITAL, INC.
STATEMENTS OF CHANGES IN OWNER'S EQUITY, PARTNERS' CAPITAL
AND STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
STOCKHOLDERS'
EQUITY
OWNER'S PARTNERS' COMMON
EQUITY CAPITAL STOCK
--------- --------- -------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1998................................. $ 42,035 $ -- $ --
Additions:
Sole proprietor's cash contributions................... 166,031 -- --
Contribution of equipment at fair market value......... 10,871
Withdrawals:............................................. (239,772) -- --
Net Income:.............................................. 55,830 -- --
---------
BALANCE AT DECEMBER 31, 1998............................... 34,995 -- --
---------
BALANCE AT JANUARY 1, 1999................................. -- --
Additions:
Net assets contributed by sole proprietor.............. 34,995
Goodwill contributed................................... -- 6,175 --
Cash contributed by partner............................ 292,074
Contribution of work in progress for fair market
value.............................................. 10,345
Withdrawals:............................................. -- (531,761) --
Net income:.............................................. -- 251,684 --
---------
BALANCE AT DECEMBER 15, 1999............................... -- 63,512 --
---------
BALANCE AT DECEMBER 16, 1999............................... -- -- --
Common stock, no par value, authorized and issued 100,000
shares................................................. -- -- 63,512
--------- --------- -------
BALANCE AT DECEMBER 31, 1999............................... -- -- 63,512
========= ========= =======
</TABLE>
SEE NOTE A
See accompanying notes and accountant's report
F-4
<PAGE>
MS DIGITAL INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $251,684 $ 55,830
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................. 2,905 1,514
Net change in receivables and other current assets........ (16,250) (14,469)
Net change in accounts payable............................ 2,572 (1,898)
Issuance of capital for work in progress.................. 10,345
-------- --------
Net cash provided by operating activities................... 251,256 40,977
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions....................................... 292,074 166,031
Withdrawals by owner........................................ (531,761) (239,772)
Proceeds from note issued................................... 133,538
-------- --------
Net cash used in financing activities....................... (106,149) (73,741)
-------- --------
Increase (Decrease) in cash................................. 145,107 (32,764)
-------- --------
Cash at the beginning of the period......................... 2,542 35,306
Cash at the end of the period............................... $147,649 $ 2,542
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing and financing activities
Contribution of equipment by the owner.................... $ 10,871
Purchase of intangibles through issuance of capital....... $ 6,175
Contribution of inventory by partner...................... 10,345
</TABLE>
See Note A
See accompanying notes and accountant's report
F-5
<PAGE>
MS DIGITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A FORMATION OF THE COMPANY AND OPERATIONS
MS Digital was formed in 1994 and operated as a sole proprietorship through
December 31, 1998. On January 1,1999, the sole proprietor of MS Digital (the
"first general partner") and one other person (the "second general partner")
formed MS Digital, GP, a State of Washington general partnership. In connection
with the formation of this partnership, the parties agreed that the value of the
second general partner's contribution to MS Digital would be an increase in
value such that the value of the first general partner's contribution and
interest would be 85%, and the value of the second general partner's
contribution and interest would be 15%. The assets and liabilities transferred
to the partnership follow:
<TABLE>
<CAPTION>
FIRST GENERAL SECOND GENERAL
PARTNER PARTNER TOTAL
------------- -------------- --------
<S> <C> <C> <C>
Current assets............................ $27,752 $ -- $27,752
Property and equipment, net............... 12,037 -- 12,037
Goodwill.................................. -- 6,175 6,175
Liabilities............................... (4,794) (4,794)
------- ------ -------
Total..................................... $34,995 $6,175 $41,170
======= ====== =======
</TABLE>
The Partnership's net loss for January 1, 1999 through December 15, 1999 is
allocated to the partners' ownership interest percentage in accordance with the
Partnership Agreement.
On December 16, 1999, MS Digital was incorporated in the State of Washington
under the name MS Digital, Inc. (the "Company"). All of the assets and
liabilities of the partnership were transferred to MS Digital, Inc. in exchange
for common stock in the Company.
The Company has been in the business of providing communication solutions to
corporations, call centers and government entities. The Company provides
complete solutions, including initial project planning, vendor negotiations,
project implementation, installation, custom computer hardware, training and
support and service contracts. The primary solution is based on InfoChannel
multimedia authoring software. InfoChannel has been the main revenue-producing
product since the Company's inception.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash investments with maturity of three months or less
at the time of purchase to be cash equivalents.
F-6
<PAGE>
MS DIGITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE B SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over estimated useful lives of five to seven years.
INCOME TAXES
No provision for income taxes has been made for the years ended
December 31, 1999 and 1998 financial statements. Pursuant to applicable
regulation, all income or losses of the sole proprietorship and partnership are
reportable by the individuals directly to the taxing authorities. No income was
allocated or reported for the period from December 16, 1999 through
December 31, 1999, therefore no provision for income tax was made for this
period.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the company to credit risk,
consist principally of cash balances greater than $100,000 deposited with a
financial institution. The Company periodically reviews its cash policies and
believes any potential accounting loss to be minimal. The balances at
December 31, 1999 and 1998 in excess of the federal insured limit were $47,138
and $0, respectively.
REVENUE RECOGNITION
The Company recognizes revenue at the completion of each project.
NOTE C ALLOWANCE FOR DOUBTFUL ACCOUNTS
No provisions were made for doubtful accounts receivable as the balances at
December 31,1999 and December 31, 1998 were considered fully collectible.
NOTE D INVENTORY
Inventory includes both hardware and software held for resale. The inventory
is valued on the specific identification method. The value was reaffirmed in the
merger agreement. See Note I.
NOTE E PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Furniture and fixtures...................... $ 6,144 $ 6,144
Office equipment............................ 4,427 4,427
Computer equipment.......................... 3,350 3,350
------- -------
14,221 14,221
Less accumulated depreciation............... (2,184) (4,677)
TOTAL................................... $12,037 $ 9,544
======= =======
</TABLE>
F-7
<PAGE>
MS DIGITAL, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE E PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expenses for the years ended December 31, 1999 and 1998 were
$2,493 and $1,514, respectively.
NOTE F GOODWILL
In connection with the formation of the MS Digital partnership, the parties
agreed that the value of the second general partner's contribution to MS Digital
would be an increase in value such that the value of the first general partner's
contribution and interest would be 85%, and the value of the second general
partner's contribution and interest would be 15%. (SEE NOTE A). Such increase in
the second general partner's capital generated goodwill in the partnership.
Goodwill is being amortized on a straight-line basis over a period of 15 years.
The amortization expense for the year ended December 31, 1999 was $412.
NOTE G COMMITMENTS AND CONTINGENCIES
WARRANTY LIABILITIES
The Company offers one-year verbal warranties on all completed projects.
Based on prior experience no accrual was made for the year ended December 31,
1999.
PRODUCT AGREEMENT
In 1999, the Company made a verbal agreement with a vendor to pay $8,000 to
the vendor each time vendor's product was used by the Company. In 1999 the
Company paid $24,000 to the vendor under this agreement.
RENT AGREEMENT
In 1999, the Company entered into a verbal agreement with the second general
partner to make rental payments of $650 per month for production facilities
provided by the second general partner. Administrative office was provided by
the first general partner at no charge to the Company.
NOTE H RELATED PARTY TRANSACTIONS
In December 1999, the Company borrowed $144,511 from a Director of the
Company. The note had an interest rate of 5.74% and was payable on demand. At
December 31, 1999 the amount unpaid on this note was $133,538. Subsequent to the
date of the financial statement, the Company repaid the unpaid balance plus
accrued interest.
NOTE I SUBSEQUENT EVENTS
In April, 2000 an agreement of purchase and sale of stock was entered into
by The Pathways Group Inc., a Delaware corporation and the shareholders of the
Company. Under the terms of the agreement, the Company will sell all of the
outstanding stock of the Company in exchange for shares of Pathways Common Stock
in a stock-for-stock transaction intended to qualify as a tax-free
reorganization under the Internal Revenue Code section 368 (a)(1)(B).
F-8
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Smart Card Solutions, Inc.
I have audited the accompanying balance sheets of Smart Card
Solutions, Inc., a development stage company, as of December 31, 1999 and 1998,
and the related statements of loss, stockholders' equity and cash flows for the
year ended December 31, 1999 and for the period from June 16, 1998 (inception)
to December 31, 1998. These statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audits.
I conducted my audits in accordance with the generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In April, 2000, the Company's assets and liabilities, except for certain
payroll liabilities, were acquired. The Company ceased to operate after that
date. (See Note H)
In my opinion, except as above, the financial statements referred to above
present fairly, in all material respects, the financial position of Smart Card
Solutions, Inc. as of December 31, 1999 and 1998 and the results of its
operations and cash flows for the year ended December 31, 1999 and for the
period from June 16, 1998 (inception) to December 31, 1998 in conformity with
the generally accepted accounting principles.
MARC LUMER & COMPANY
San Francisco, California
September 26, 2000
F-9
<PAGE>
SMART CARD SOLUTIONS INC
( A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 81,656 $ 54,188
Advances to officers...................................... 5,000 97,500
Other..................................................... 6,960 3,375
---------- --------
TOTAL CURRENT ASSETS.................................. $ 93,616 $155,063
Property and equipment, at cost........................... 58,924 31,165
Less: accumulated depreciation............................ 13,465 2,143
---------- --------
Net equipment............................................. $ 45,459 $ 29,022
Software, net of amortization of $108,654 and $21,731 for
1999 and 1998, respectively............................. 325,960 412,883
TOTAL ASSETS.......................................... $ 465,035 $596,968
========== ========
LIABILITIES, OWNER'S EQUITY AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Payables
Trade................................................... $ 73,065 $ 28,780
Royalty................................................. 100,000 --
Related Party........................................... 501,654 109,542
---------- --------
$ 674,719 $138,322
Note payable--Current portion
Related Party........................................... -- 100,000
Other..................................................... 30,000 30,000
---------- --------
30,000 130,000
TOTAL CURRENT LIABILITIES................................... 704,719 268,322
---------- --------
LONG TERM LIABILITIES
Royalty payable........................................... 250,000 350,000
Less: Unamortized interest................................ (61,047) (97,739)
---------- --------
188,953 252,261
TOTAL LIABILITIES........................................... $ 893,672 $520,583
---------- --------
STOCKHOLDERS' EQUITY
Common stock; par value $0.001; 10,000,000 shares
authorized; issued and outstanding 2,400,000 shares..... $ 2,400 $ 2,400
Additional Paid in Capital................................ 937,600 237,600
Deficit accumulated in development stage.................. (1,205,022) (163,615)
---------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........................ $ (265,022) $ 76,385
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 628,650 $596,968
========== ========
163,615 --
</TABLE>
See accompanying notes to financial statements and accountant's report
F-10
<PAGE>
SMART CARD SOLUTIONS INC.
( A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (JUNE 16,1998) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998 CUMULATIVE
---- ---- ----------
<S> <C> <C> <C>
REVENUE.................................................. $ 25,000 $ 39,000 $ 64,000
COST OF REVENUE.......................................... (25,000) (23,400) (48,400)
----------- --------- -----------
GROSS PROFIT............................................. -- 15,600 15,600
OPERATING EXPENSES:
General and administrative............................. (1,205,148) (179,836) (1,384,984)
----------- --------- -----------
TOTAL OPERATING EXPENSE.................................. (1,205,148) (164,236) (1,369,384)
OTHER INCOME............................................. 126 621 747
NET LOSS................................................. $(1,205,022) $(163,615) $(1,359,284)
=========== ========= ===========
</TABLE>
See accompanying notes and accountant's report
F-11
<PAGE>
SMART CARD SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD FROM INCEPTION
(JUNE 16, 1998) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
COMMON ADDITIONAL DURING THE STOCKHOLDERS'
SHARES STOCK PAID-IN CAPITAL DEVELOPMENT STAGE EQUITY(DEFICIENCY)
--------- -------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
June 16, 1998 Inception
Issuance of common stock..... 2,400,000 $2,400 $237,600 $ -- $ 240,000
Net loss for the period...... (163,615) (163,615)
--------- ------ -------- ----------- -----------
Balances, December 31,1998... 2,400,000 $2,400 $237,600 $ (163,615) $ 76,385
Additional Capital
Contribution............... 700,000 700,000
Net loss for the period...... (1,205,022) (1,205,022)
--------- ------ -------- ----------- -----------
Balances, December 31,1999... 0 $ 0 $700,000 $(1,205,022) $ (505,022)
========= ====== ======== =========== ===========
</TABLE>
F-12
<PAGE>
SMART CARD SOLUTIONS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE PERIOD FROM INCEPTION (JUNE 16, 1998) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(1,205,022) $(163,615)
Adjustments to reconcile net loss to net cash used in
operating activites:
Depreciation and amortization........................... 98,245 23,874
Other current assets.................................... 88,915 (100,875)
Software.................................................. -- (434,614)
Net change in accounts payable............................ 44,285 28,780
Net change in other payables.............................. 328,804 361,803
Issuance of common stock for assets....................... -- 40,000
Issuance of common stock for services..................... -- 50,000
----------- ---------
Net cash used in operating activities..................... (644,773) (194,647)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets.................................. (27,759) (31,165)
----------- ---------
Net cash used in investing activities..................... (27,759) (31,165)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable--related party............................... -- 100,000
Note payable--other....................................... -- 30,000
Cash from issuance of stock............................... -- 150,000
Capital contributions..................................... 700,000
----------- ---------
Net cash from financing activities........................ 700,000 280,000
----------- ---------
Increase (Decrease) in cash............................... 27,468 54,188
Cash at the beginning of the period....................... 54,188 --
----------- ---------
Cash at the end of the period............................. $ 81,656 $ 54,188
=========== =========
</TABLE>
See accompanying notes and accountant's report
F-13
<PAGE>
SMART CARD SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A FORMATION OF THE COMPANY AND OPERATIONS
Smart Card Solutions, Inc. (the "Company"), a development stage company, was
incorporated on June 16, 1998 in the State of Colorado. The Company is a
business-to-business, technology-based solution provider. The Company maintains
ownership of its hardware, and integrated smart card and Internet technologies
to generate revenue from delivering services to its customers. Remote data
server and transaction processing operations are concentrated in the Company's
development and operations center in Denver, Colorado and Colorado Springs. The
Company also maintained an office in Aspen, Colorado for its operations until
March 29, 2000 (see Note H).
The Company's market focus is on campus style environments, where the
Company can use its technologies and expertise to provide a complete solution,
integrating point of sale, access control, rental, retail, food and beverage,
reservations, management reporting, accounting, and integrated financial
services. These middle market commercial areas include destination winter sports
and golf resorts, theater complexes, corporate and college campuses, cruise
lines, concerts, performing arts and sporting events.
NOTE B SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash investments with maturity of three months or less
at the time of purchase to be cash equivalents.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Software cost is the present
value of the contract liabilities under purchase agreement (SEE NOTE D).
Depreciation is computed on a straight-line basis over estimated useful lives of
five years. Amortization of software cost is computed on straight-line basis
over a five-year period. Depreciation for income tax purposes is computed using
accelerated methods.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Where a deferred tax
F-14
<PAGE>
SMART CARD SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE B SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
asset has been recognized, a valuation allowance is established if, based on
available evidence, it is more likely than not that the deferred tax asset will
not be realized.
The Company had net operating losses of $1,205,022 and $163,615 for the
years ended December 31, 1999 and 1998 respectively. No deferred tax assets have
been recognized for the year ended December 31, 1999.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the company to credit risk,
consist principally of cash balances greater than $100,000 deposited with a
financial institution. The Company periodically reviews its cash policies and
believes any potential accounting loss to be minimal.
REVENUE RECOGNITION
The Company recognizes revenue at the completion of each project.
NOTE C PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------
<S> <C> <C>
Computer equipment.......................... $ 4,040 $31,799
Automobile.................................. 27,125 27,125
------- -------
31,165 58,924
Less accumulated depreciation............... (2,143) (13,465)
------- -------
TOTAL................................... $29,022 $45,459
======= =======
</TABLE>
Depreciation expense for the year ended December 31, 1999 and 1998 were
$2,143 and $11,322, respectively.
NOTE D NOTE PAYABLE
CONTRACT LIABILITIES
On October 15, 1998, the Company entered into a purchase agreement with
System Design Group (SDG), a Wisconsin corporation to purchase all rights, title
and interests to certain assets of SDG. The Company agreed to pay SDG (4%) of
the net revenues up to a total of $500,000 as royalty payments. The Company
guaranteed SDG minimum payment of $150,000 as advances against royalty payments
and paid SDG $50,000 at the time of closing of the contract and two secured
promissory notes for $50,000 each payable on March 31, 1999 and July 31, 1999.
The interest rates on the promissory notes were 5% per annum. The Company also
agreed to deliver a stock certificate evidencing 400,000 shares of restricted
common stock having an estimated fair value of $0.10 per share at the closing of
the contract.
F-15
<PAGE>
SMART CARD SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE D NOTE PAYABLE (CONTINUED)
If the Company has not exercised its right to terminate its obligations
under this agreement, the Company has agreed to pay SDG $100,0000 prior to
December 31, 2000 to reduce the remaining balance of the royalty payments to
$250,000. The remaining balance of $250,000 shall be due in full on demand on
June 30,2002.
The present value of the payments for the purchase of the assets at the
closing of the agreement at an interest rate of 10% per annum compounded monthly
are summarized as follows:
<TABLE>
<CAPTION>
PRESENT VALUE INTEREST
------------- --------
<S> <C> <C>
Royalty payments at the closing of the contract....... $ 50,000 $ --
Royalty payments at March 31, 1999.................... 50,000 --
Royalty payments at July 31, 1999..................... 50,000 --
Royalty payments at December 31, 2000................. 80,240 19,760
Royalty payments at June 30, 2002..................... 164,374 85,626
-------- --------
$244,614 105,386
======== ========
</TABLE>
The total interest expense paid on the two secured promissory notes was
$4,048. The interest expense amortized for the years ended December 31, 1999 and
1998 were $36,692 and $7,647 respectively.
NOTE E COMMITMENTS AND CONTINGENCIES
In June 1998, the Company entered into a renewable annual lease agreement
for office space, which was renewed in June 1999. The Company also entered into
an agreement to lease the office space on a month-to-month term from SDG on
January 1, 1999 by paying SDG its out-of-pocket costs for the space. This
agreement was terminated in 1999.
The Company paid $8,125 for the period ended December 31, 1998 and $19,713
for the year ended December 31, 1999 under the annual lease agreement. The
Company paid $10,292 under the month-to-month lease agreement for the year ended
December 31, 1999.
NOTE F RELATED PARTY TRANSACTIONS
ADVANCES TO OFFICERS
The Company paid $97,500 to stockholders as advances, interest free. During
the year ended December 31, 1999, $92,500 was settled by charging to officers'
compensation and expenses.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements for services with the
stockholders of the Company and paid $674,576 to the stockholders as officers'
compensation for the year ended December 31, 1999.
F-16
<PAGE>
SMART CARD SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE F RELATED PARTY TRANSACTIONS (CONTINUED)
RENT AGREEMENT
The Company subleased, from the wholly-owned LLC of the Chairman of the
company, 4,000 square feet for their development office. The lease was
terminated in September 1999.
The Company paid $68,949 as rent expense to the Chairman's LLC, as landlord.
NOTE G STOCK OPTION AGREEMENT
In January 1999, the Company adopted the 1999 Stock Plan (the "Plan") under
which 500,000 shares of the Company's common stock was reserved for issuance
with respect to awards granted to officers and other key employees of the
Company. The Plan provides that the stock may be issued at a purchase price not
to be less than the fair market value per share of common stock at the time the
option was granted. The Plan is administered by the Executive Compensation
Committee.
NOTE H SUBSEQUENT EVENTS
In March 2000, under the Asset Acquisition and Liability Assumption
Agreement dated March 29, 2000, SmartCard Solutions Inc. transferred its
business and substantially all of its assets and liabilities to Smart Card
Solutions Acquisition Inc. for stock in SmartCard Solutions Acquisitions, Inc.
In April 2000 an agreement of purchase and sale of stock was entered into by
The Pathways Group Inc., a Delaware corporation and the shareholders of the
Company. Under the terms of the agreement, the Company will sell all of the
outstanding stock of the Company in exchange for shares of Pathways Common Stock
in a stock-for-stock transaction intended to qualify as a tax-free
reorganization under the Internal Revenue Code section 368 (a)(1)(B).
F-17
<PAGE>
PRO FORMA FINANCIAL INFORMATION
On April 6, 2000 Pathways entered into an agreement to purchase all of the
outstanding stock of Smart Card Solutions, Inc. The agreement was modified and
the purchase of Smart Card Solutions was completed on August 21, 2000 The
acquisition was recorded by Pathways using the purchase method of accounting
under APB Opinion No. 16. Pathways issued 1,900,000 shares of stock and assumed
liabilities of $527,966 resulting in an aggregated purchase price of $2,009,966
(Note 2).
On April 21, 2000 Pathways entered into an agreement to purchase all of the
outstanding common stock of MS Digital, Inc. The agreement was modified on
August 7, 2000 and the purchase of MS Digital, Inc. was completed on August 7,
2000 The acquisition was recorded by Pathways using the purchase method of
accounting under APB Opinion No. 16. Pathways issued 2,425,000 shares of stock
and assumed liabilities of $5,839 resulting in an aggregated purchase price of
$1,679,089 (Note 2).
The unaudited pro forma condensed balance sheet as of June 30, 2000 is based
on the indvidual balance sheets of Pathways, Smart Card Solutions, Inc and MS
Digital, Inc. after giving effect to the acquisitions of Smatcard
Soutions, Inc. and MS Digital as if they had occurred on June 30, 2000.
The unaudited pro forma condensed statements of operations are based on
individual historical results of operations of Pathways, Inc., SmartCard
Solutions, Inc. and MS Digital, Inc. for the year ended December 31, 1999 and
for the six months ended June 30, 2000, after giving effect to the acquisitions
of SmartCard Solutions, Inc. and MS Digital, Inc. as if they had occurred on
January 1, 1999.
The unaudited pro forma condensed balance sheet and statements of operations
should be read in conjunction with the historical financial statements and notes
thereto of Pathways, Inc. included in its 1999 annual report on Form 10-K and
its quarterly reports on Form 10-Q and SmartCard Solutions, Inc. and MS
Digital, Inc. financial statements included herein. The pro forma adjustments
and assumptions described in the accompanying notes to unaudited pro forma
condensed balance sheet and statements of operations are based on estimates,
evaluations, and other data currently available and are subject to revision. The
unaudited pro forma condensed balances sheet and statements of operations are
presented for illustrative purposes only and are not necessarily indicative of
the financial positions and results of operations that would have actually
occurred had the acquisitions of SmartCard Solutions, Inc. and MS Digital, Inc.
been effected on the dates assumed.
P-1
<PAGE>
THE PATHWAYS GROUP, INC., SMART CARD SOLUTIONS, INC. AND MS DIGITAL, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEETS
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
MS DIGITAL, SMARTCARD ADJUSTMENTS PRO FORMA
PATHWAYS, INC. INC. SOLUTIONS, INC. (NOTE 2) COMBINED
-------------- ------------ --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 239,560 852 113 $ 240,525
Accounts receivable.................... 66,638 67,945 20,000 154,583
Inventories............................ 391,288 0 0 391,288
Prepaid expenses and deposits.......... 814,234 0 1,960 816,194
Total current assets................. 1,511,720 68,797 22,073 1,602,590
Restricted cash.......................... 22,000 0 22,000
Software, net............................ 359,654 276,000 635,654
Property and equipment, net.............. 1,140,282 8,401 40,000 1,188,683
Software license......................... 1,000,000 0 1,000,000
Deposits and other assets................ 163,929 5,145 0 169,074
Goodwill and other intangibles........... 3,268,639 (a) 3,268,639
Total assets............................. $ 4,197,585 82,343 338,073 3,268,639 7,886,640
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks, current
maturities........................... $ 4,096,066 0 0 $ 4,096,066
Accounts payable....................... 1,572,800 5,839 322,966 1,901,605
Accrued expenses and deferred
revenue.............................. 289,126 0 289,126
Software license fee payable........... 700,000 0 700,000
Total current liabilities............ 6,657,992 5,839 322,966 6,986,797
Notes payable to banks, net of current
maturities............................. 19,397 205,000 224,397
Total liabilities.................... 6,677,389 5,839 527,966 7,211,194
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 none outstanding............ 0
Stockholders' equity:
Common stock, $.01 par value 50,000,000
shares authorized.................... 163,151 43,250 (b) 206,401
Common Stock Warrants from Financing... 563,135 563,135
Common Stock Warrants Issued as
Dividends............................ 57,758 57,758
Additional paid in capital............... 31,841,538 62,221 1,527,486 (1,589,707)(c) 34,953,538
Unearned compensation.................... (334,091) 0 3,112,000 (b) (334,091)
Retained earnings (Accumulated
deficit)............................... (34,771,295) 14,283 (1,717,379) 1,703,096 (c) (34,771,295)
Total stockholders' equity
(deficit).......................... (2,479,804) 76,504 (189,893) 3,268,639 675,446
Total liabilities and stockholders'
equity........................... $ 4,197,585 82,343 338,073 3,268,639 $ 7,886,640
</TABLE>
P-2
<PAGE>
THE PATHWAYS GROUP, INC., SMART CARD SOLUTIONS, INC. AND MS DIGITAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
PATHWAYS, MS DIGITAL, SMARTCARD ADJUSTMENTS PRO FORMA
INC. INC. SOLUTIONS, INC. (NOTE 2) COMBINED
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales, net................... $ 186,309 $825,376 $ 25,000 $ 1,036,685
Cost of goods sold........... 63,469 432,037 25,000 520,506
Write-off of inventories..... 132,000 0 0 132,000
Selling, general and
administrative expenses.... 7,142,012 61,908 1,085,172 8,289,092
Research and development..... 599,746 80,000 0 679,746
Amortization................. 766,877 412 108,654 1,772,320 (d) 2,648,263
Depreciation................. 484,899 2,493 11,322 (498,714)
----------- -------- ----------- ----------- ------------
Total operating expenses..... 9,189,003 576,850 1,230,148 1,772,320 12,768,321
Gain(loss) from operations... (9,002,694) 248,526 (1,205,148) (1,772,320) (11,731,636)
Interest income, net, Other
expenses................... 44,303 3,158 126 47,587
Net income(loss)............. $(8,958,391) 251,684 (1,205,022) (1,772,320) (11,684,049)
=========== ======== =========== =========== ============
Basic and diluted net loss
per share.................. $ (0.66) $ (0.65)
=========== ============
Shares used in per share
calculation................ 13,615,613 4,325,000 (f) 17,940,613
=========== =========== ============
</TABLE>
P-3
<PAGE>
THE PATHWAYS GROUP, INC., SMART CARD SOLUTIONS, INC. AND MS DIGITAL, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PATHWAYS, MS DIGITAL, SMARTCARD ADJUSTMENTS PRO FORMA
INC. INC. SOLUTIONS, INC. (NOTE 2) COMBINED
----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales, net..................... $ 97,492 $67,945 $ 17,800 $ 183,237
Cost of goods sold............. 68,100 48,509 15,000 131,609
Write-off of inventories
Selling, general and
administrative expenses...... 4,183,700 5,754 296,123 4,485,577
Research and development....... 465,474 465,474
Amortization................... 366,883 618 49,960 886,160 (e) 1,303,621
Depreciation................... 288,501 1,143 5,459 295,103
----------- ------- --------- ---------- -----------
Total operating expenses....... 5,372,658 56,024 366,542 886,160 6,681,384
Gain(loss) from operations..... (5,275,166) 11,921 (348,742) (886,160) (6,498,147)
Interest (expense) income,
net.......................... (45,909) 2,363 0 (43,546)
Net income(loss)............... $(5,321,075) 14,284 (348,742) (886,160) (6,541,693)
=========== ======= ========= ========== ===========
Basic and diluted net loss per
share........................ $ (0.34) $ (.33)
=========== ===========
Shares used in per share
calculation.................. 15,479,565 4,325,000 (f) 19,804,565
=========== ========== ===========
</TABLE>
P-4
<PAGE>
NOTE 1--BASIS OF PRESENTATION:
The unaudited pro forma condensed combined balance sheet has been prepared
to reflect the acquisitions of Smart Card Solutions, Inc. and MS Digital, Inc.
by The Pathways Group, Inc. as if the acquisitions had occurred on June 30,
2000.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1999 and for the six months ended June 30, 2000 have
been prepared to reflect the acquisitions of Smart Card Solutions, Inc. and MS
Digital, Inc. by The Pathways Group, Inc. as if the acquisition had occurred on
January 1, 1999.
There were no material differences in the accounting policies of Smart Card
Solutions, Inc., MS Digital, Inc. and The Pathways Group, Inc. for the periods
presented.
NOTE 2--PURCHASE ACCOUNTING AND PRO FORMA ADJUSTMENTS
PURCHASE PRICE
A summary of the purchase consideration is as follows:
<TABLE>
<CAPTION>
MS SMART CARD
DIGITAL SOLUTIONS
---------- ----------
<S> <C> <C>
Common stock................................................ $1,673,250 $1,482,000
Assumed liabilities and acquisition costs................... 5,839 527,966
---------- ----------
Total purchase consideration................................ $1,679,089 $2,009,966
</TABLE>
ALLOCATION OF PURCHASE PRICE
The allocation is preliminary and may be subject to further adjustments. The
total purchase price of $3,610,126 was allocated to the fair value of the assets
acquired as follows:
<TABLE>
<CAPTION>
MS SMART CARD AMORTIZATION
DIGITAL SOLUTIONS LIFE
---------- ---------- ------------
<S> <C> <C> <C>
Tangible assets.................................. $ 82,343 $ 62,073 5-7 years
Software......................................... 276,000 2 years
Goodwill and other intangibles................... 1,596,746 1,671,893 2 years
---------- ---------- ----------
Total............................................ $1,679,089 $2,009,966
</TABLE>
The pro forma adjustments of amortization of goodwill and other intangible
assets for the six months ended June 30, 2000 and the year ended December 31,
1999 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
---------------- -----------------
<S> <C> <C>
SmartCard Solutions, Inc............................. $486,973 $ 973,947
MS Digital, Inc...................................... 399,187 798,373
-------- ----------
$886,160 $1,772,320
</TABLE>
PRO FORMA NET LOSS PER SHARE
Basic and diluted pro forma net loss per share is computed using the
weighted average number of Pathways common shares outstanding during the period
plus shares of Pathways Common Stock issued in connection with acquisitions of
Smart Card Solutions, Inc. and MS Digital, Inc., excluding Pathways Common Stock
subject to repurchase. Pathways Common Stock issued in connection with the
P-5
<PAGE>
NOTE 2--PURCHASE ACCOUNTING AND PRO FORMA ADJUSTMENTS (CONTINUED)
acquisitions are assumed outstanding at the beginning of each of the periods.
The combined Company had a pro forma net loss for all periods presented herein;
therefore, none of the options and warrants outstanding during the periods
presented or issued in connection with this transaction were included in the
computation of pro forma dilutive earnings per share as they were antidilutive.
PRO FORMA ADJUSTMENTS
(a) To record goodwill and other intangible resulting from the acquisition
of MS Digital, Inc. and Smart Card Solutions, Inc. respectively.
(b) To record the issuance of common stock of The Pathways Group Inc. for
the acquisition of MS Digital, Inc. and Smart Card Solutions, Inc.
(c) To eliminate additional paid in capital and retained earnings of MS
Digital, Inc. and the additional paid in capital and accumulated deficit
of Smart Card Solutions, Inc.
(d) To record amortization of goodwill and other intangibles and additional
amortization of software for the year ended December 31, 1999.
(e) To record amortization of goodwill and other intangibles and additional
software amortization for the six months ended June 30, 2000.
(f) To adjust weighted average shares outstanding for shares issued in the
acquisitions of MS Digital, Inc. and Smart Card Solutions, Inc.
P-6
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
<TABLE>
<S> <C> <C>
THE PATHWAYS GROUP, INC.
By: /s/ CAREY F. DALY, II
-----------------------------------------
Carey F. Daly, II
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE BOARD
</TABLE>
Date: October 20, 2000
