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As Filed With the Securities and Exchange Commission on December __, 1998
Registration No.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
PLENUM COMMUNICATIONS, INC.
(Name of Small Business Issuer in its charter)
MINNESOTA 91-1524747
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
PLENUM COMMUNICATIONS, INC.
3003 80TH AVENUE S.E.
MERCER ISLAND, WA 98040
(206) 236-1995
(Address, including zip code and telephone number, including
area code, of issuer's principal executive offices)
Securities to be registered
pursuant to Section 12(b) of the Act:
NONE
Securities to be registered
pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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TABLE OF CONTENTS
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Page No.
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Description of Business 3
Management's Discussion and Analysis 18
Description of Property 24
Principal Shareholders 24
Management 26
Executive Compensation 29
Certain Relationships and Related Transactions 31
Description of Securities 33
Certain Market Information 35
Legal Proceedings 37
Recent Sales of Unregistered Securities 37
Indemnification of Directors and Officers 38
Changes in and Disagreements with Accountants 39
Financial Statements Index 40
Exhibit Index 61
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PLENUM COMMUNICATIONS, INC.
FORM 10 REGISTRATION STATEMENT
BUSINESS
Plenum Communications, Inc. ("Plenum" or "Company"), through its
operating subsidiary LION, Inc. ("LION"), is engaged in providing wholesale
mortgage rate, fee and program information over the Internet to mortgage brokers
through a password-protected, subscription-based website (www.lioninc.com). The
information provided by LION to mortgage brokers is updated at least daily.
Plenum is using the Internet to change the way residential mortgage brokers and
wholesale lenders have historically done business.* Unless otherwise noted,
references to the Company relate to Plenum Communications, Inc. and its
subsidiary LION, collectively.
THIS REGISTRATION STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS (IDENTIFIED WITH
AN ASTERISK "*") THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE SECTION ENTITLED "BUSINESS--RISK FACTORS" AND ELSEWHERE IN THIS
REGISTRATION STATEMENT. IN ADDITION TO THE OTHER INFORMATION IN THIS DOCUMENT,
ANY PROSPECTIVE INVESTOR IN SECURITIES OF THE COMPANY SHOULD CAREFULLY CONSIDER
THE SUBSECTION ENTITLED "BUSINESS--RISK FACTORS" IN EVALUATING THE COMPANY AND
ITS BUSINESS.
BACKGROUND INFORMATION
During 1991, the Company first offered a basic dial-in version of its
current service in the local Seattle, Washington area, organizing a subsidiary,
Infosystems, Inc. for this purpose. The business was operated under the name
Mortgage Information Systems, Inc. ("MISI"), and was launched to provide a
solution to the frustrating inefficiency of trying to keep up with wholesale
lenders' loan programs and daily rate changes using a pile of faxes that arrived
at a mortgage broker's office each morning. Because MISI operated over regular
phone lines, brokers outside the Seattle area incurred long distance charges
making the service uneconomical.
The advent of the Internet, with its flat monthly access rates,
removed the long distance cost as a barrier and created the opportunity to
expand nationwide. In 1995 the Company obtained the name Lenders Interactive
Online Network ("LION") and rewrote its software to enable its service to be
delivered over the Internet. By late 1995 an early Internet version of the LION
service was made available in Washington, Oregon and California. At that time
few brokers had Internet access. By mid 1996, a small telemarketing sales force
of three persons was adding about 20 new broker subscribers to LION per month.
During the second half of 1996, further enhancements were made to the LION
software and the service was expanded to other western states.
As the Company expanded its markets, and as the use of the Internet
steadily increased among the general population and among mortgage brokers,
brokers began signing up for LION at an accelerating rate. During the first half
of 1996, LION was adding approximately 20 new customers per month, increasing to
over 100 new subscribers per month by the end of 1996. The rate of new
subscriptions continued to rise during 1997, and exceeded 300 per month for the
first time in February 1998.
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in "Business--Risk
Factors," and elsewhere in this registration statement.
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Because lenders and their rates vary across the country, expanding
the Company's service nationally required the opening of new databases with
relevant data for each major market. By the first quarter of 1998, LION had made
its service available in 22 of the largest markets in the nation and was
effectively in front of over 75% of its target market. There were approximately
3,400 subscribers as of September 30, 1998.
The Company was founded in Minnesota in 1972 as Combined Enterprises,
Inc., changed its name to Assign, Inc. in 1987, and was reorganized into its
current structure in February 1989, by means of a change of control acquisition.
In March 1989 the name of the Company was changed to Mortgage Brokers Network,
Inc., and to Plenum Communications, Inc. in October 1991. The Company's
wholly-owned subsidiary, Infosystems, Inc., did business as Lenders Interactive
Online Network for three years before changing its name to LION, Inc. in 1998.
The Company's principal executive offices are located at 3003 80th Avenue SE,
Mercer Island, WA 98040, and its telephone number is (206) 236-1995.
INDUSTRY INFORMATION
RESIDENTIAL MORTGAGE INDUSTRY STRUCTURE
The diagram below shows a simplified view of the residential mortgage
industry in the United States. Consumers who want to purchase homes or refinance
the mortgage on their existing homes can obtain a loan through a retail lender
who deals directly with the public, or through a mortgage broker who places the
loan with one of many wholesale lenders. Both retail and wholesale lenders
typically package the loans they originate and sell them in the financial
markets.
FINANCIAL MARKET INVESTORS
Institutions and individuals who invest in mortgage securities
MORTGAGE LOAN SECURITIES
Government Sponsored Entities ("GSE's", i.e. Fannie Mae, Freddie Mac) and
Conduits (such as INMC [Countrywide], GE Capital, ICI RFC [GM]) who purchase
and/or package mortgage loans and issue securities backed by those loans. The
GSE's purchase "conforming loans" (defined as those that meet their purchase
requirements), the Conduits purchase "non-conforming loans."
RETAIL LENDERS
Lenders, typically banks or mortgage companies, who have their own house loan
officers and loan processors to deal directly with the consumers.
WHOLESALE LENDERS
Lenders who do not deal directly with the consumer. Instead,
they operate through independent mortgage brokers.
INDUSTRY AFFILIATES
Companies that perform services necessary to complete mortgage loans, such as
Title Companies, Mortgage Insurance Companies, Realtors, Attorneys, Escrow
Companies.
MORTGAGE BROKERS
Individuals or companies that deal directly with consumers to advise and
assist them in obtaining mortgages from wholesale lenders.
CONSUMER
Typically an individual or couple either purchasing a home or
seeking to refinance a home they currently own.
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Hybrids. While the diagram on the preceding page shows the parties as
separate and distinct, in practice there are many hybrid players. Some lenders
have both wholesale and retail operations, dealing with the public through their
own branches and offices but at the same time offering "wholesale rates" to
mortgage brokers. There are also companies that act much like brokers in that
they deal directly with the public and may deal with multiple lenders, but who
arrange lines of credit that enable them to approve, close and fund loans, and
then "sell" the loans after closing. They tend to be referred to as "mortgage
bankers", although this term is used more generally to apply to anyone who works
for a lender.
GSEs. The government sponsored entities ("GSEs"), Fannie Mae and
Freddie Mac, play a significant role in defining LION's business in that they
are the major purchasers of loans. Consequently, they set the rules and
guidelines for what has become known as "conforming loans," i.e. those loans
meeting GSE criteria for purchase. While the non-conforming segment is growing
as a percentage of total loans, conforming loans currently remain the majority
of loans closed, and it is the conforming loan programs that are the basis of
LION's key product, Loan Search, as explained below.
CUSTOMER BASE
The three shaded boxes in the above schematic diagram, mortgage
brokers, wholesale lenders and industry affiliates, constitute LION's principal
subscriber base, and therefore the Company's primary sources of revenue. * Each
is discussed below in more detail.
Mortgage Brokers. A 1994 study conducted for the National Association
of Mortgage Brokers ("NAMB") concluded that there were approximately 23,000
mortgage brokerage firms in the country as of December 31, 1994. The study
indicated that the figures were conservative, and that the actual number of
firms is likely to be higher. Data from both states that require both the
brokerage firm and the individual loan officers to be licensed, and the 1994
NAMB study, indicate that, on average, there are 6-7 loan officers per firm.
Assuming 23,000 firms and an average of 6-7 loan officers per firm, a total
market of 150,000 loan officers appears to be a conservative estimate of the
total market.
Mortgage brokerage firms include many sole practitioners and small
firms and a limited number of large firms. With the exception of a handful of
large firms who have 50-100 loan officers in one location, even the very large
firms tend to be spread out geographically, with no more than 10-25 loan
officers in a single office. In addition, many brokers associated with a firm
operate much like sole practitioners, paying a percentage of their commission in
return for use of the office facilities, advertising, and access to lenders with
whom the firm is approved to do business. Some work from their homes.
There has been a growing trend toward consolidation in the industry
through franchises and, more commonly, "net branch" arrangements. Under these
arrangements the central office handles compliance and administrative issues and
provides a brand name and professional marketing materials, allowing the small
brokerage operation to focus on dealing with clients. The Company believes this
trend favors LION because these firms tend to actively look for ways to use
technology to increase efficiency.*
Retail lenders have their own staff of loan officers and loan
processors to deal with the consumer. When they quote mortgage rates, they quote
a "retail" rate that includes a fee up front which is intended to include enough
to cover the cost of supporting this staff. The fee is referred to as "points",
with each point equaling 1% of the loan amount. In contrast, wholesale lenders
do not incur these staffing costs, since they rely on brokers to
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in "Business--Risk
Factors," and elsewhere in this registration statement.
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interface with the consumer. Hence, they quote a "wholesale" rate, which tends
to be about 1-1.5 points less than the retail rate. This allows the mortgage
broker to "mark up" the loan by that amount as its fee and still compete with
the retail lenders. For instance, the retail rate might be 8% with two points,
but the wholesale rate might be 8% with one point. The mortgage broker shows his
client 8% with two points, paying one point to the lender and keeping one point
as his fee.
Brokers vary in how they decide how much to mark up the loan. Some
use a flat amount for most loans, such as 1%. Others may consider such factors
as loan size, price sensitivity of the client, difficulty of placing the loan,
and/or the extent to which price competitiveness is or is not part of their
strategy.
Brokers typically deal with a number of lenders. Most brokers report
that they concentrate most of their business with a few lenders, typically about
five, although they may be "approved" to do business with 20-30 or more, and may
receive daily rate information from 50 or more. One of the reasons they
typically concentrate their business with a few lenders is that keeping up with
lender program and pricing changes through daily faxes is so inefficient that,
as a practical matter, they can only monitor 3-5 lenders on a regular basis.
Rates are important to the broker for two reasons. First, to varying
degrees, their customer may be price sensitive. The broker needs to be
competitive relative to the retail lenders and other brokers. Second, the rate
can affect the amount of fee the broker earns. In some cases, if the broker
knows a customer is satisfied by a particular interest rate, the broker's fee
can be increased if a wholesale rate can be found that is lower than the one
which originally served as the basis for the quote. Alternatively, if a broker
cannot find a low enough rate, the broker's fee may have to be cut either to
compete with another loan the customer has been offered, or to bring the loan
down to a rate that will allow the customer to qualify.
Some brokers are very "price sensitive." They aggressively shop
lenders for price, and price will be the major factor in deciding which lender
to select for a given loan. In most cases they will choose from the lenders with
whom they are approved. Occasionally, if they find an attractive rate from a
lender with whom they are not currently approved, they will try to become
approved in order to place a particular loan. However, seeking a new lender
relationship in the midst of a loan placement is risky, because the loan may be
delayed or may not close at all as a result of the time required to obtain
approval and the possibility of not being approved.
The typical mortgage brokerage firm receives faxes each morning from
anywhere from 5 to as many as 50 or more lenders. Sometimes the most often used
faxes are posted on a wall or copied and distributed throughout the office. Many
are simply piled up or even discarded. When the broker provides a quote for a
particular client, he will check the faxes to determine the current rates for
the kind of program the client has requested or the broker is suggesting. For
many common conforming loans, every conforming lender offers the program and
brokers will typically check only their usual lenders. For loans that are done
by conforming lenders but are not as common, with issues making clients marginal
candidates for a conforming lender, or for loans that clearly are
non-conforming, brokers often have to consult the remaining fax information or
call lenders which provide a solution for the particular situation. Because each
lender's rate sheet is formatted differently from the others, finding programs
on rate sheets with which the loan officer is unfamiliar is time consuming.
Historically, the process of checking rates and fees and choosing a
lender has been a manual and inefficient one. LION's service is designed to make
this process dramatically more efficient, and to give the broker the best
opportunity to be competitive. Some rate information is now available elsewhere
on the Internet, but the Company believes the LION website is currently the only
place where all of the key indicators relevant to mortgage brokers appear
together in one, easily readable format.
Wholesale Lenders. LION's lender customers are primarily "wholesale"
mortgage lenders, who operate through independent mortgage brokers. The mortgage
brokers work directly with the consumer seeking a mortgage loan, gather the
documentation needed to complete the application, and submit the application to
the
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lender for approval. If the loan is approved, the lender then funds the mortgage
at closing. Some of the wholesale lenders also have a separate "retail"
operation that works directly with the customer. In some cases, that retail
operation can operate as a broker and place loans with other wholesale lenders.
The wholesale lenders market to brokers by attending state and national broker
association trade shows, having their sales reps call on brokers, advertising in
trade publications, and by direct mail and direct broadcast fax solicitation.
In any given market, typically 50-75% of the wholesale lenders, and
probably a larger percentage of the loan volume, are either national or large
regional lenders who operate in many states. The remaining lenders are local or
limited to a few markets.
Lenders are further segmented into "conforming" and "non-conforming"
(also known as "sub prime"). Strictly defined, a "conforming loan" is one that
meets the requirements set by Fannie Mae and Freddie Mac for loans these GSEs
will purchase from lenders. Conforming loans must meet GSE criteria for loan
size, credit standing of the borrower, borrower income relative to the loan
payment, loan amount to value of property, type of property, and with respect to
specific documentation required to prove they meet these requirements.
Conforming lenders deal primarily in conforming loans, but will also
offer programs for loans that meet most of these requirements but fail to meet
one or two. For instance, many will offer programs for "jumbo" loans, those that
exceed the maximum loan size for conforming loans (currently $227,150), and many
will accept less rigorous documentation. The lenders cannot sell these loans to
the GSEs . They can either keep these loans in their own portfolios or sell them
to entities other than the GSEs such as conduits who do purchase loans that have
these characteristics.
"Non-conforming lenders" deal in loans that do not meet the
requirements for purchase by the GSEs. These lenders work with borrowers who
have had some level of credit problems in the past (known as "A minus, B, C or
D" rated credit), with borrowers whose ratio of loan payment to income is higher
than allowed under conforming rules, or who may be purchasing a property type
that is not permitted under conforming rules, such as a log home or certain
condominiums. These non-conforming loans are considered to be higher risk, and
therefore command higher fees or rates.
Each lender typically offers many "programs." A program is a loan
with a particular set of terms. For example, typically there will be some
30-year fixed rate programs, some 15-year fixed rate programs, and some
adjustable rate mortgage ("ARM") programs. The rates and terms for each of these
may vary by size of loan, kind of property, credit rating of the customer, loan
amount compared to property value, and other factors. The many combinations of
these variables result in lenders typically having 13-18 different programs, and
some having up to 50 programs, that they offer to the brokers. Furthermore, each
program typically has a "matrix", or array of rates available depending upon the
points the borrower pays. For instance, a 30 year fixed rate program might be
priced at 7% if the borrower pays one point up front, but at 6-3/4% if he pays
two points up front. The pricing matrix may also have standard amounts by which
the stated fees or rates increase or decrease based on certain factors. For
instance, for condominium loans, 1/4 point might be added to the fee; or for
loans over $125,000, 1/8 might be subtracted.
Industry Affiliates. Another potential market consists of companies
who sell services or advertising to lenders, brokers, or consumers seeking
mortgage loans. These companies, particularly the industry-specific ones who
tend to advertise in the industry print media to mortgage brokers or lenders,
are potential advertisers on the LION website. Examples include title insurance
companies, credit reporting agencies, escrow service companies, flood insurance
companies, mortgage insurance companies, appraisers, origination software
companies, mortgage associations, training companies, and other general vendors
to small businesses, such as cell phone companies, business insurance agencies,
pager companies, copier companies and general computer hardware and software
companies.
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SERVICES AND PRODUCTS
MORTGAGE BROKER PRODUCTS
The LION service is available to mortgage brokers over the Internet
at www.lioninc.com. Monthly broker subscription fees are the Company's largest
source of revenue, and are expected to be the predominate source of revenue in
the foreseeable future. *
The LION subscription service includes the following main features:
LOAN SEARCH. "Loan Search" is the single most important feature of
the LION system. Instead of wading though a pile of rate sheets and
manually adding or subtracting adjustments, mortgage brokers simply
pull up the LION website on their personal computer and fill out a
simple form. They enter into the form any of up to 50 conforming
credit loan variables that describe the program they are interested
in locating for the client. Loan Search then conducts a search of the
programs in the LION database that fit the criteria that were entered
and provides a list of the suitable programs, ordered by rate,
showing the lender, the rate, and other key characteristics. This
feature is the foundation of the LION service, the key time saver for
the broker, and the primary reason most brokers subscribe.
LOAN~LINK. Non-conforming loans do not fit as readily into a search
format as conforming loans because lenders are not consistent in what
they view as A-, B, C or D credit ratings. Therefore, instead of a
loan search, LION offers a service called "Loan~Link" for brokers who
do non-conforming loans. With Loan~Link, brokers fill out a form
containing basic borrower and transaction criteria. They then select
the lenders to whom they would like to send this information. LION
sends the completed form by email or by fax to the lenders selected
by the broker. The lenders who are interested in the transaction
respond back to the broker.
DAILY MARKET COMMENTARY. This is a concise but comprehensive review
of the prior day's and early morning rate activity, events and
upcoming economic indicator reports with commentary about
implications for the mortgage market. The summary is created early
each morning by condensing information from a variety of periodicals
and online service reports. Some subscribers purchase the LION
service solely to have access to this feature.
15-MINUTE KEY RATE UPDATES. The 15-Minute Financial Market Snapshot
is currently the only place where you can find all of the key
financial market indicators that are most relevant to the mortgage
industry concisely presented in one clear chart, updated every 15
minutes.
RATESHEETS ON DEMAND AND DOCUMENTS ON DEMAND. Brokers can pull up
lender ratesheets and other documents, view them on the screen,
download them to their PC to print, or have them sent directly to
their fax machine.
Brokers have two choices when purchasing LION. They may choose an
individual subscription for just one user; or a corporate account suitable for
multiple users. The corporate account is discounted at increasing percentages in
proportion to the number of users. To date most LION customers are individual
subscribers.
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in "Business--Risk
Factors," and elsewhere in this registration statement.
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The Company is currently unable to prevent a user from sharing their
password with another. However, there are two ways in which LION can potentially
detect unauthorized use, one of which at least prevents broad abuse. The primary
method is monitoring the number of "hits" by password. An average user will have
about 100 website hits per month. The heaviest individual users will typically
not exceed 300 hits in a month. When numbers consistently above that are
detected, the subscriber receives a call from a LION sales rep informing the
subscriber that based on the usage, it appears that the password has been
compromised. The password is then changed, which typically resolves the problem.
The Company is also flagged when a customer submits a Loan~Link
lender request and asks that the lender response be directed to someone other
than the customer of record. In this case, the third party is informed that only
the owner of the password is authorized to use the service, but that LION stands
willing to provide the third party with its own individual subscription.
An alternative source of revenue for LION is derived from developing
Internet homepages for brokers. This is a secondary product which generates
modest incremental revenue.
LENDER PRODUCTS
Lender Homepages. After broker subscription fees, lender homepage
fees are the next largest source of revenue. The Company believes that in order
to have a Loan Search product that can replace faxed ratesheets and a product
that brokers view as useful and of high quality, Loan Search must contain most
of the lenders in the market. Accordingly, lenders are allowed to post up to ten
(10) loan programs in Loan Search at no cost. Some lenders are content just to
have the exposure of ten programs at no cost. Others see LION as presenting a
marketing opportunity to a desirable segment of the broker market, and wish to
maximize their exposure by either creating an Internet homepage or linking to
their pre-existing homepage. These lenders pay monthly fees, and a setup fee for
creation of a homepage or for any features they want added to their homepage.
LION has created websites for a number of lender wholesalers in the
country. A LION generated homepage will typically include a mission statement of
the lender, rolodex of contacts, ratesheets, a Loan Search that contains only
its own programs, documents and forms needed to submit loans, and a section of
current announcements or program promotional material.
A button leading to the lender's homepage appears next to the
lender's name in the program details section of Loan Search, in the lender list
in Loan~Link, and in the LION rolodex. Rotating banners on various LION pages
also give additional links to lender homepages.
Lenders with pre-existing homepages have the same access to LION
customers as if their homepage had been created by LION. Additionally, they can
select any of the LION features, like Loan Search, and have it added to their
homepage.
Access to LION as a subscriber also has value to a lender. Lenders
frequently do "market surveys" to see how their rates compare to other lenders.
With LION, they simply do a search to see how they stack up against other
lenders. For a monthly flat fee, LION offers to lenders a "package" consisting
of posting the lender's ratesheet in its Ratesheets on Demand product, and login
and password access to the LION system.
RETAIL PRODUCTS
The mortgage broker and mortgage lender products described above
feature electronic posting and access of wholesale mortgage rates and fees. The
Company has recently released a retail version of its loan search capacity
wherein a mark up is added to the wholesale rate information.
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The first targeted market for this retail priced database is the
professional real estate community. LION has entered into an agreement with the
Middle Tennessee Multiple Listing Service to launch this product into their
market in November 1998. This launch is viewed by LION as a test market of the
new product. In the event things go well with the Tennessee test, the same
service will be offered to other real estate multiple listing services
nationwide. It is anticipated the retail version of LION's database offered to
real estate multiple listing services may evolve into another retail version
that will be offered to the general population at a future date.
BANNER ADVERTISING
The current LION system has 15 rectangular banner locations that are
available as advertising spots. These can be linked to a homepage or other
marketing material. A monthly fee is charged for these sites, the amount of
which depends upon the frequency of the page hits and the location on the page.
Purchasers of LION advertising have included major lenders, industry affiliates
selling services to brokers, and Fannie Mae. As page hits rise with the growing
subscriber base, the value of the banner ads is expected to rise
proportionately.*
SALES AND MARKETING
Of LION's principal subscriber base, consisting of mortgage brokers,
wholesale lenders and industry affiliates, mortgage brokers currently constitute
the largest source of revenue and the Company believes they represent the
largest potential source of future revenues.* As the broker subscriber base
grows, it is expected that the lenders and affiliates seeking access to that
broker base will follow. Consequently, most of the marketing effort is devoted
to the broker group. LION seeks to focus its marketing efforts or increase its
visibility to this group in a number of ways:
TELEMARKETING. LION maintains a telephone sales force in two
telemarketing offices, one at the corporate offices in Mercer Island
and another in Spokane, Washington. The sales staff is compensated on
a commission basis after an initial three-month internship. Sales
reps make telephone solicitations, handle inbound phone inquiries and
contact brokers who register for the Company's service from the LION
website.
TRADE SHOWS. The larger state mortgage broker associations conduct
annual conventions or trade shows which include a schedule of
speakers and/or workshops, and an exhibition hall where lenders and
industry affiliates promote their products from booths. At many of
these shows LION has been presented as a speaker or panelist on
topics related to mortgage technology or the Internet.
TRADE JOURNALS ADVERTISING AND ARTICLES. There are about a dozen
publications aimed at the mortgage industry, of which three focus
most narrowly on mortgage brokers and provide the broadest coverage
of that segment, Origination News, Mortgage Originator, and Mortgage
Press. The first two are national publications with approximately
19,000 and 9,000 subscribers respectively. Mortgage Press publishes a
state association periodical for 25 states, and distributes the
issues at no cost very broadly to an estimated audience of over
200,000. Starting in September and October 1997, LION began a
year-long program of quarter to half-page ads in each publication. In
addition, senior managers of the Company have contributed articles on
the use of the Internet by brokers and lenders to industry trade
journals such as Secondary Marketing Executive, Mortgage Press and
Mortgage Matters.
PRESS RELEASES AND OTHER PRESS COVERAGE. The Company issues press
releases on product introductions and changes, upon entering new
states with a database, and upon achieving certain milestones, such
as
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in "Business--Risk
Factors," and elsewhere in this registration statement.
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receiving 600,000 hits per month on its websites. These appear
without cost in various industry trade journals. LION has also been
the subject of published reviews of mortgage technology products,
quoted in trade journals and been the subject of articles written
about the Company.
SPEAKING ENGAGEMENTS. Representatives of the Company from time to
time speak at other industry functions not connected to broker trade
shows. As the Company has become increasingly known for its Internet
expertise, the significance of these engagements has grown. As an
example, in November 1997 the Company's National Sales Manager was
asked by the Mortgage Bankers Association to organize and lead a
panel discussion on wholesale lender webpages at the MBA's annual
Mortgage Technology Conference for Senior Executives.
BROADCAST FAX ADVERTISING. Mortgage brokers are particularly
accustomed to receiving solicitations by fax in the form of daily
ratesheet distributions by lenders. The Company has developed a
series of broadcast fax advertisements for the mortgage broker
industry.
LENDER REFERRALS. A number of the lenders for whom LION has made
websites have been actively promoting their websites to their
approved brokers.
STATE ASSOCIATION MARKETING AGREEMENTS. LION has entered into
agreements with the state mortgage broker associations in five major
broker states, California, Colorado, Illinois, Maryland and New York.
The agreements vary, but generally LION receives membership lists of
broker contacts, speaking engagements and some form of official
recognition or endorsement in return either for paying to the
association a percentage of LION revenues received from state
members, or for offering members a discount on their LION
subscriptions, and in some cases for maintaining an association
website.
DATA FEED TO ORIGINATION SOFTWARE COMPANIES. In certain cases, LION
enables its loan program data information to feed directly to the
LION member via the member's processing software. Any third party
agreements with the processing software vendor will provide LION with
a mechanism to market to the vendor's customer. The four largest
processing software vendors combined represent approximately 23,000
broker companies. It is estimated that each of these companies
average between 5 and 7 broker sales reps. This functionality will be
released in the 4th quarter of 1998 via an agreement with BYTE
Software, a processing software vendor in the local Seattle, WA area.
As a result, the LION service will be displayed to those entities
currently using the third party software, provided they also
subscribe to LION's services.
LISTING WITH SEARCH ENGINES. As is common with Internet sites, LION
has arranged to be listed in all of the major "search engines." The
LION URL appears as a search result if the user enters key words such
as "mortgage" or "wholesale mortgage rates." A significant number of
brokers, who subscribe to the Company's services, report finding the
site while "surfing the Net."
NON-MEMBER SECTION AND ONLINE REGISTRATION. Most of the features of
the LION site are password protected, however a new broker visiting
the website without yet having a password is able to visit selected
non-member sites. The visitor is guided through various features,
illustrated with "screen captures" of Loan Search and Loan~Link, with
explanations of the LION service, testimonials of current
subscribers, and a form that allows the broker to register online.
RESEARCH AND DEVELOPMENT
During the nine-month period ended September 30, 1998, and the years
ended December 31, 1997 and 1996, the Company did not incur costs related to
research and development activities.
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<PAGE> 12
COMPETITION
The market for Internet-based services and products is relatively
new, intensely competitive, rapidly evolving and subject to rapid technological
change. There are no substantial barriers to initial entry, and the Company
expects competition to persist, intensify and increase in the future.
The Company is aware of certain attempts to develop a searchable
database of wholesale loan programs, for example those developed by Alltel, FNMA
and a local Southern California firm. To the Company's knowledge, none of these
have met with significant commercial success. The FNMA loan search program has
been discontinued. One company offers a "bidding room" service, by which lenders
can bid on loans packaged by mortgage brokers. It is unclear whether this
service will become popular or whether it will be a competitive service to LION.
With limited exception, the primary competition continues to be the traditional
faxed ratesheet.
The Company believes that the need for the participation of a
significant majority of lenders in order to make a quality product for brokers
creates a barrier to entry for new competitors. Although the need for lender
participation was an obstacle to the Company's initial marketing efforts, LION
now has over 300 participating lenders. Management anticipates that new
competitors will face significant ramp-up times in making a competitive product
successful, and believes the Company will remain in a good competitive position
as long it continues to maintain the quality of its product and its
relationships with lenders, brokers and state associations.* To the extent
competitors emerge, the Company intends to compete on the basis of product
performance, product features, quality, reliability, price and its unique
knowledge and experience in the mortgage broker industry.
Nevertheless, potential competitors include large industry players
with longer operating histories, substantially greater market presence and name
recognition, larger installed customer bases and significantly greater
financial, technical and marketing resources than the Company. In addition, the
Company believes that new competitors, or those with the ability to bundle
services and products with Internet connectivity services could enter the
Company's market, resulting in even greater competition for the Company. The
Company's ability to compete successfully will depend, in large part, on its
ability to continually enhance and improve its existing products and services,
to adapt its products and services to the needs of its customers and potential
customers, to successfully develop and market new products, and to continually
improve its operating efficiencies and lower costs. There can be no assurance
that the Company will be able to compete successfully, that competitors will not
develop technologies or products that render the Company's products obsolete or
less marketable, or that the Company will be able to successfully enhance its
products, develop new products or lower costs, when and as needed. Increased
competition, price or otherwise, could result in erosion of the Company's market
share, and may require price reductions and increased spending on marketing and
product development. Increasing competition for the Company's services could
have a material adverse effect on the Company's business, operating results and
financial condition.
With respect to its business of developing homepages for wholesale
lenders, the competition includes a broad universe of website makers. Because
developing homepages is an ancillary business for LION, providing modest
incremental revenue from an existing customer base, a competitive challenge in
this area is not expected to have a material adverse effect on the Company's
business. However, to the Company's knowledge, LION is the only firm
specializing in creating wholesale lender homepages. Websites created by LION
include 20 of the country's top 25 wholesale lenders, ranked by total dollar
amount of their funded loans. LION is able to offer the lender links to its Loan
Search program, which already contains the lender's updated ratesheet
information and access to a mortgage broker audience.
- ------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in "Business--Risk
Factors," and elsewhere in this registration statement.
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<PAGE> 13
GOVERNMENT REGULATIONS
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet. However, due to the increasing popularity of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. There can be no assurance
that the enactment of laws affecting telecommunications will not decrease the
growth of the Internet, which in turn could decrease the demand for the
Company's products and services, increase the cost of doing business, or
otherwise have an adverse effect on the Company's business, operating results or
financial condition. Moreover, the applicability to the Internet of existing
laws governing issues such as property ownership, libel and personal privacy is
uncertain. The Company cannot predict the impact, if any, that future regulation
or regulatory changes might have on its business.
PROPRIETARY RIGHTS
The Company relies on a combination of copyright and trademark laws,
trade secrets, software security measures, license agreements and nondisclosure
agreements to protect its proprietary technology and software products. The
Company has a variety of registered Internet domain names. The Company currently
has no federally registered trademarks or service marks, nor is it the owner or
assignee of any domestic or foreign patents. There are no trademark or service
mark applications or patent applications pending. The Company cannot be certain
that others will not develop substantially equivalent or superseding proprietary
technology, or that equivalent products will not be marketed in competition with
the Company's products, thereby substantially reducing the value of the
Company's proprietary rights. Furthermore, there can be no assurance that any
confidentiality agreements between the Company and its employees or any license
agreements with its customers will provide meaningful protection for the
Company's proprietary information in the event of any unauthorized use or
disclosure of such proprietary information.
Although the Company believes that its trademarks and proprietary
technology do not and will not infringe patents or violate proprietary rights of
others, it is possible that its trademark and proprietary rights may not be
valid or that infringement of existing or future patents, trademarks or
proprietary rights of others may occur. In the event the Company's products
infringe proprietary rights of others, the Company may be required to modify the
design of its products, change the name of its products or obtain a license.
There can be no assurance that the Company will be able to do so in a timely
manner, upon acceptable terms and conditions, or at all. The failure to do any
of the foregoing could have a material effect upon the Company. In addition,
there can be no assurance that the Company will have the financial or other
resources necessary to enforce or defend a patent infringement or proprietary
rights violation action. Moreover, if the Company's products infringe patents,
trademarks or proprietary rights of others, the Company could, under certain
circumstances, become liable for damages, which could have a material adverse
effect on the Company.
SUBSIDIARY
The Company conducts its operations through its wholly-owned
subsidiary, LION, Inc. LION employs personnel, markets, operates, maintains and
provides the technical and creative services for the Company's products and
services.
EMPLOYEES
As of September 30, 1998, the Company had 50 full-time associates,
which included 22 commissioned marketing associates. The Company's future
success will depend, in part, on its ability to continue to attract,
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<PAGE> 14
retain and motivate highly qualified technical and management personnel,
particularly highly skilled technical engineers involved in new product
development, for whom competition is intense. From time to time, the Company may
employ independent consultants or contractors to support its research and
development, marketing, sales and support and administrative organizations. The
Company's employees are not represented by any collective bargaining unit, and
the Company has never experienced a work stoppage. The Company believes its
relations with its employees are good. See "Risk Factors--Ability to Manage
Growth."
RISK FACTORS
The following factors, among others, should be considered carefully
in evaluating the forward-looking statements made by the Company in this
registration statement and in evaluating the Company's business before making a
decision concerning the purchase of its securities.
PRODUCT QUALITY AND DEVELOPMENT
In order for LION to be perceived as a viable replacement for the
current manual and paper methods of monitoring rates and fees and contacting
lenders, the service must provide accurate and timely information on a
consistent basis, particularly in the Loan Search database. Other measures of
quality include the construction of each new database so it has sufficient
lender participation, continuing Loan~Link follow up to assure high response
rates from lenders, and timely posting of lender ratesheets. These services need
to be maintained at high levels for maximum market penetration. To date, LION's
quality control procedures in each of these quality areas have been successful,
and management intends to continue the process of refining them on an ongoing
basis.
The principal amount of the Company's future revenues in the near
term is expected to be derived from the sale of services to the mortgage
brokerage industry. Additional fees are expected to be generated from website
development, and from the sale of advertising services and other products
through its websites. The Company's success is dependent on continued end-user
acceptance of the Company's services and products, as well as the Company's
ability to design, develop, test and support new services, products and
enhancements on a timely basis that meet changing customer needs and respond to
technological developments and emerging industry standards. There can be no
assurance that the Company will continue to maintain adequate quality control
procedures, develop and market new products and enhancements that meet changing
customer needs, or respond to technological developments and emerging industry
standards.
DEPENDENCE ON THE INTERNET; RISK OF TECHNOLOGICAL CHANGE
Although the performance of the Company's products and services is
critical to the Company's reputation, the Company is dependent on the Internet
and third-parties for access to its products and services, such as Internet
service providers, Internet backbone providers and Web browsers. Users may
experience difficulties due to system failures unrelated to the Company's
systems, products and services. The occasional Internet disruptions which occur
for brief time periods have not created a problem for the Company's services. If
the Internet were to become regularly unavailable for many hours at a time, or
its ability to handle traffic loads deteriorate enough to cause frequent
unavailability or very slow response times, there would be less traffic to the
Company's website and the perception of the quality of the LION product could
suffer. To date, the Internet has proven highly resilient and responsive to
rapid growth in its use, and many of the world's telecommunications, software
and hardware companies are continually investing in capacity and improvements.
Furthermore, the Company's current products and services are designed
around certain standards, including, for example, security standards, and
current and future sales of the Company's products and services may be dependent
on some industry standards. There may be additional costs of unknown proportions
in meeting and complying with software standards. In addition, there can be no
assurance that the Company will
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<PAGE> 15
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and enhancements, or
that its new products and enhancements will adequately meet the requirements of
the marketplace and achieve market acceptance. As the Internet develops, it is
possible that incompatibility or lack of appropriate features could impact the
Company's business.
Sales of the Company's products are expected to depend in large part
upon a robust industry and infrastructure for providing Internet access and
carrying the rapidly increasing Internet traffic. Certain critical issues
concerning the commercial use of the Internet (including capacity to handle
projected increases in traffic, security, reliability, cost, ease of use,
access, and quality of service) remain unresolved and may impact the growth of
Internet use. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, such as a
reliable network backbone or timely development of complementary products, such
as high speed modems. Because global commerce and on-line exchange of
information on the Internet and other similar open wide area networks are new
and evolving, it is difficult to predict with any assurance whether the
infrastructure or complementary products necessary to make the Internet a viable
commercial marketplace will continue to be developed, or if developed, that the
Internet will remain a viable commercial marketplace. In addition, the
widespread adoption of new Internet or telecommuting technologies or standards,
could require substantial expenditures by the Company to modify or adapt its
products and services. In this case, the new Internet or telecommuting services
or enhancements offered by the Company could contain design flaws or other
defects. Although the Company expects to be responsive to changes in the
Internet or technology, there can be no assurance that the Company will be
successful in achieving widespread acceptance of its services before competitors
offer products and services with speed and performance equal or greater than the
Company's current offerings. The growth or change of the Internet, or adoption
of new technologies could have a materially adverse affect on the Company's
business, operating results and financial condition.
DEPENDENCE ON MORTGAGE BROKERS AND MORTGAGE BROKERAGE INDUSTRY
LION's most critical customer is the mortgage broker. Customer
agreements are short-term and renewable. There can be no assurance, however,
that these subscribers will continue to participate in the LION program, or that
the Company will be able to attract new mortgage brokers at rates sufficient to
maintain a stable or growing revenue base. Furthermore, market acceptance of the
Company's products and services by the mortgage broker community is currently
substantially dependent upon adoption and use of the Internet for commerce and
communications. The use of the Internet by those individuals and enterprises
which have historically relied upon faxed ratesheet information, generally
requires the acceptance of a new way of conducting business and exchanging
information. Ultimately, there can be no assurance that the market for the
Company's products and services will continue to develop as expected. If the
mortgage broker market develops more slowly than expected or becomes saturated
with competitors, or if the Company's products and services do not continue to
achieve market acceptance, the Company's business operating results and
financial conditions may be materially adversely affected.
During the last 15 years, the mortgage brokerage industry has grown
from infancy to capturing more than half of the mortgage origination market, and
the current trend shows continued gains. While there are no clear threats that
would cause one to conclude today that the industry will not continue to thrive,
the health of the industry is important to LION's future, and there are
potential risks. These include potential lawsuits over broker and wholesale
lender compensation systems, increased regulation that may add costs or limit
profitability, and possible changes in how consumers obtain mortgages, possibly
driven by technology or by efforts to standardize and automate the mortgage
process. Any of these may reduce the overall share of the market handled by
mortgage brokers, which could materially adversely affect the Company's
business.
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<PAGE> 16
NO ASSURANCE OF PROFITABILITY
The Company is experiencing increased revenues but had not reached
profitability as of September 30, 1998. During the first nine months of 1998,
the Company had a net loss of $903,504, and had net losses in each of the prior
fiscal years. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in new and rapidly
evolving markets. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract, retain and motivate
qualified persons, and continue to upgrade its technologies and commercialize
products and services incorporating such technologies. There can be no assurance
that the Company will be successful in addressing these risks or that the
Company can be operated profitably, which depends on many factors, including the
success of the Company's marketing program, the control of expense levels and
the success of the Company's business activities.
POSSIBLE UNDERCAPITALIZATION AND NEED FOR FUTURE FINANCING
The Company anticipates that a significant portion of its near-term
capital resources will be provided through the exercise of outstanding warrants
issued in prior securities offerings, which are exercisable at prices ranging
from $.25 to $.50. The perceived value of these warrants at any given time is
related to the market price of the Company's common shares, which trade over the
counter through the OTC Bulletin Board. If the Company is unable to obtain
anticipated financing through the exercise of warrants, there can be no
assurance that the Company will be able to successfully implement its business
plan or meet its working capital requirements. In addition, the Company may
experience rapid growth and may require additional funds to expand its
operations or enlarge its organization. While the Company intends to explore a
number of options in order to secure alternative financing in the event this
anticipated financing is not obtained or is insufficient, there can be no
assurance that additional financing will be available when needed or on terms
favorable to the Company.
DEPENDENCE ON MANAGEMENT AND CHIEF ENGINEER
Shareholders of the Company are fully dependent on management to
conduct the Company's business. Success of the business depends on the skills
and efforts of management and, to a large extent, on the active participation of
the Company's executive officers and key employees. With respect to the
Company's proprietary software, while partial backup has been provided by the
three other full-time company engineers, currently there are portions of the
database management and development that rely solely on Sam Ringer, who is the
author of the LION software. The Company is in the process of creating the
engineering redundancy that will reduce the reliance on one individual, but has
not completed this task. Furthermore, the Company has not entered into
employment agreements with these officers and significant employees. The Company
provides stock options, which currently serve to retain and motivate key
employees. However, the inability to attract, retain and motivate qualified
engineers or other skilled employees could adversely affect Company business.
SYSTEMS BACKUP; SECURITY RISKS
The Company has in place comprehensive data tape backup procedures
for its operational and administrative databases. The Company's replication
software provides a high level of hardware backup for the database by
duplicating the database across several powerful PCs. To provide additional
security, LION in 1998 contracted to move the servers to a separate protected
environment. Later, the Company intends to add a duplicate remote location that
would provide the ability to survive a natural disaster or other event so severe
that it could penetrate the protected environment. However, the Company is
dependent on hardware and other equipment and services used for its system
database. Despite protective measures, the system could be vulnerable to damage
from floods, fire, earthquakes, power loss, telecommunications failures,
break-ins and similar events.
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<PAGE> 17
There can be no assurance that a system failure would not adversely affect the
success of the Company's products and services.
Despite the implementation of security measures, the Company's
systems may be vulnerable to unauthorized access, computer viruses and other
disruptive problems. The Company could experience interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. Unauthorized access might lead to interruptions,
delays or cessation in service to subscribers or deter potential subscribers.
Although the Company intends to implement industry-standard security measures,
these measures have been circumvented in the past, and there can be no assurance
that measures adopted by the Company will not be circumvented in the future.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to the Company's subscribers,
which could have a materially adverse affect on the Company's business,
operating results and financial condition.
COMPETITION
As discussed above, the market for Internet-based services and
products is relatively new, intensely competitive, rapidly evolving and subject
to rapid technological change. There are no substantial barriers to initial
entry, and the Company expects competition to persist, intensify and increase in
the future. The Company believes that the more market penetration LION achieves,
the higher the barrier to entry will become for anyone contemplating a similar
system. However, there can be no assurance that competitors will not develop
technologies or products that render the Company's products obsolete or less
marketable, that the Company will be able to compete successfully, that the
Company will be able to successfully enhance its products, or develop new
products or lower costs, when and as needed.
LACK OF DIVERSIFICATION
The Company does not intend to invest at this time in any other
assets, businesses, or securities other than what is described in this
registration statement. The Company will be subject to the risks associated with
lack of diversification.
PROPOSED EXPANSION AND ABILITY TO MANAGE GROWTH
The Company intends to expand its current level of operations.
Expansion of the Company's operations will be dependent upon, among other
things, its ability to: (i) achieve significant market acceptance for the
Company's products and services; (ii) hire and retain skilled management,
marketing, technical and other personnel; (iii) successfully manage growth, if
any (including monitoring operations, controlling costs, and maintaining
effective quality controls); and, (iv) obtain adequate financing when needed.
The Company's prospects for future growth will be largely dependent upon its
ability to achieve significant penetration of its products and technologies in
targeted mortgage broker markets, to successfully market its concepts, to
develop and commercialize applications of its technologies for the market and to
enter into strategic alliances with third-parties in connection with the
exploitation of its technologies. The Company could also seek to expand its
operations through acquisitions; although the Company has no current intention,
agreements, understandings or commitments and is not engaged in any negotiations
to acquire any company.
The Company's proposed expansion may result in new and increased
responsibilities for management personnel and may place a increased strain upon
the Company's management, operating, software, financial systems, and resources.
To compete effectively and to accommodate growth, if any, the Company may be
required to continue to implement and to improve its management, operating and
financial systems, procedures and controls on a timely basis and to expand,
train, motivate and manage its employees. There can be no
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<PAGE> 18
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in the preceding
"Risk Factors" section that are not historical or current facts deal with
potential future circumstances and developments. The discussion of these matters
and subject areas is qualified by the inherent risks and uncertainties
surrounding future expectations generally, and also may materially differ from
the Company's actual future experience involving any one or more of these
matters or subject areas. The Company has attempted to identify, in context,
certain of the factors that it currently believes may cause actual future
experience and results to differ from its current expectations regarding the
relevant matter or subject area. The operation and results of the Company's
Internet business also may be subject to the effect of other risks and
uncertainties in addition to the relevant qualifying factors identified in the
"Risk Factors" section, including but not limited to:
o The availability of adequate quantities of system infrastructure
and subscriber equipment and components to meet the Company's
service deployment, marketing plans and customer demand, the
success of efforts to improve and satisfactorily address issues
relating to information transmission and system performance;
o The ability to achieve market penetration and average subscriber
revenue levels sufficient to provide financial viability to the
Company's business;
o The quality and price of similar or comparable Internet services
offered or to be offered by the Company's competitors.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this document.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this document.
OVERVIEW
LION was founded as a dial-in service in the local Seattle market in
1991 under the name MISI (Mortgage Information Systems, Inc.). MISI was created
as an alternative to the frustrating inefficiency that mortgage brokers went
through while trying to keep up with wholesale lenders' loan programs and daily
rate changes using a high volume of faxes that arrived at their offices each
morning. One of the first tools that was designed by MISI was "Loan Search".
"Loan Search" allowed subscribing brokers to dial into the MISI system, enter
data that defined the kind of loan they were seeking and immediately see a list
of lenders who offered that loan, along with their rates for that day.
Because MISI operated over regular phone lines, rather than the
Internet, a broker in the local area code accessed the service with no phone
charge but a broker outside the area incurred long distance charges. The long
distance charge made the service uneconomical outside the local Seattle area.
Therefore, MISI was limited to being a small local business. The advent of the
Internet, with its low flat monthly access rate, removed the long distance cost
as a barrier and created the opportunity to take the service nationwide. In
1995, the Company obtained the name Lenders Interactive Online Network (LION)
and rewrote the MISI software to enable it to be delivered over the Internet.
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<PAGE> 19
Marketing of an early, incomplete version of the Internet based LION
service began in late 1995 in Washington, Oregon and California. At that time
few brokers had Internet access. By mid 1996, a small telemarketing sales force
of three was adding about 20 new broker subscribers to LION per month. In the
second half of 1996 the Company completed more of the software that makes up the
LION service of today, began more aggressive marketing, and started to expand to
other western states. At the same time, the popularity of the Internet was
growing, and more and more brokers were embracing it. By the end of 1996 LION
was adding over 100 new subscribers per month, compared to 20 at mid year. In
1997 the Company continued to enhance the functionality of the site, added sales
staff, increased the marketing efforts with broadcast fax and print
advertisements, and expanded geographically. As of September 30, 1998, the
Company had over 3400 subscribers. The following table summarizes additional
statistics about LION:
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ----------------
1998 1997 1997 1996
----- ----- ----- ----
<S> <C> <C> <C> <C>
Total broker subscribers 3,424 1,516 1,947 716
Wholesale lender websites 68 47 50 35
Regions served in U.S. 31 13 14 6
LION sales associates 22 11 13 6
Total LION associates 50 26 33 19
</TABLE>
RESULTS OF OPERATIONS
The following table summarizes the results of operations for the
Company:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 1,271,033 $ 597,493 $ 892,288 $ 438,248
Expenses
Marketing and administrative 853,261 447,176 677,610 820,604
Salaries and payroll taxes 1,067,033 868,899 1,224,488 495,137
Depreciation and amortization 55,953 35,918 51,007 53,891
Other -- -- -- 147,500
Loss on investment -- -- -- 73,389
----------- ----------- ----------- -----------
1,976,247 1,351,993 1,953,105 1,590,521
----------- ----------- ----------- -----------
Operating loss (705,214) (754,500) (1,060,817) (1,152,273)
Interest expense (201,875) (70,728) (102,980) (27,520)
Interest income 3,585 -- -- --
----------- ----------- ----------- -----------
Net Loss $ (903,504) $ (825,228) $(1,163,797) $(1,179,793)
=========== =========== =========== ===========
</TABLE>
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<PAGE> 20
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
Revenues increased to $1,271,000 from $597,000 for the nine months
ended September 30, 1998 and 1997, respectively. This represents an increase of
$674,000 or 113%. Total revenues of $1,271,000 for the nine months ended
September 30,1998 were comprised of mortgage broker fees for $836,000 or 66%,
lender fees for $283,000 or 22%, ad banner revenues for $98,000 or 8%, broadcast
fax fees for $67,000 or 5% and all other fees and discounts for $(13,000) or
(1)%. Total revenues of $597,000 for the nine months ended September 30,1997
were comprised of broker fees for $277,000 or 46%, lender fees for $182,000 or
30%, ad banner revenues for $19,000 or 3%, broadcast fax fees for 117,000 or 20%
and all other fees and discounts for $2,000 or 1%. The increase in revenues was
due mostly to the on-going development of the Company's growing base of
subscribing mortgage brokers and participating lenders by region throughout the
United States. The Company has aggressively expanded its sales force to take
advantage of the new demand for its products and services. While broadcast fax
revenues will continue to be a smaller part of total revenues, the Company will
continue to emphasize growth in its broker, lender and ad banner revenues as its
core products and services.
MARKETING AND ADMINISTRATIVE EXPENSES
Marketing and administrative expenses are comprised of marketing and
advertising costs, outside consulting services, telecommunications expenses and
other marketing and administrative related expenses. Marketing and
administrative expenses increased to $853,000 from $447,000 for the nine months
ended September 30, 1998 and 1997, respectively. This represents an increase of
$406,000 or 91%. Marketing and administrative expenses were 67% and 75% of
revenues for the nine months ended September 30, 1998 and 1997, respectively.
The increase in these costs was due primarily to advertising of LION's products
and services in trade journals and publications, management consulting services,
accounting and legal expenses related to becoming a "reporting" company with the
SEC, investor relations, growth in internal and external telecommunications
infrastructure and costs related to increased occupancy. The Company anticipates
marketing and administrative costs to grow in absolute dollars as it continues
to increase market share with LION's products and services throughout the United
States.
SALARIES AND PAYROLL TAXES
Salaries and payroll tax expenses increased to $1,067,000 from
$869,000 for the nine months ended September 30, 1998 and 1997, respectively.
This represents an increase of $198,000 or 23%. Salaries and payroll tax
expenses were 84% and 145% of revenues for the nine months ended September 30,
1998 and 1997, respectively. The company has grown to 50 associates at September
30, 1998 from a total of 26 associates at September 30, 1997. Most of the growth
has been in the areas of sales and sales support, daily database updating and
web site development. Growth in salaries and payroll taxes has been directly
related to development and support of the company's growing base of mortgage
broker subscribers and participating lenders. In addition salaries and payroll
taxes includes a one-time charge to compensation expense of $310,000 for the
nine month period ended September 30, 1997. This charge related to stock options
granted to a consultant for services rendered. The Company anticipates salaries
and payroll expenses will grow as it continues to increase market share.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $56,000 from
$36,000 for the nine months ended September 30, 1998 and 1997, respectively.
This represents an increase of $20,000 or 56%. Depreciation and amortization
expenses were 4% and 6% of revenues for the nine months ended September 30, 1998
and 1997,
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<PAGE> 21
respectively. The increase was due mostly to telecommunications equipment and
computer hardware needed to expand and improve the Company's telecommunications
and computer systems infrastructure.
INTEREST EXPENSE
Interest expense is comprised mostly of interest on convertible
debentures, related party debt and notes payable all accruing interest at 12%.
Net interest expense increased to $202,000 from $71,000 for the nine months
ended September 30, 1998 and 1997, respectively. This represents an increase of
$131,000. The increase was primarily due to $103,000 of additional interest
resulting from the conversion of convertible debentures to common stock of the
Company and $41,000 of additional interest resulting from outstanding
convertible debentures at September 30, 1998. This additional interest expense
was due to terms in the convertible debenture agreements that allows double the
number of shares to be purchased if the convertible debentures were held longer
than 365 days but less than 547 days. The increase was offset by the reduction
of convertible debentures, related party debt and notes payable to $111,000 from
$1,009,000 at September 30, 1998 and 1997, respectively. The Company anticipates
convertible debentures, related party debt and notes payable to continue to
decrease in the future.
YEAR ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Revenues increased to $892,000 from $438,000 for 1997 and 1996,
respectively. This represents an increase of $454,000 or 104%. Total revenues of
$892,000 for 1997 were comprised primarily of mortgage broker fees for $441,000
or 49%, lender fees for $258,000 or 29%, ad banner revenues for $34,000 or 4%
and broadcast fax fees for $157,000 or 18%. Total revenues of $438,000 for 1996
were comprised primarily of broker fees for $166,000 or 38%, lender fees for
$137,000 or 31% and broadcast fax fees for $133,000 or 30%. The increase in
revenues was due to (a) the Company's geographic expansion across the United
States made possible by the conversion of its software from a dial-in service to
a nationally available Internet service and (b) the steady penetration and
growth of the base of subscribing mortgage brokers and participating lenders in
each region in which the Company offers its service. Factors contributing to
this steady growth have included increasing and refining the Company's marketing
programs, increasing the telephone sales force who make outbound marketing
calls, rising referrals from existing broker subscribers and increasing levels
of "online registrations" by mortgage brokers on the LION site.
MARKETING AND ADMINISTRATIVE EXPENSES
Marketing and administrative expenses are comprised of marketing and
advertising costs, outside consulting services, telecommunications expenses and
other marketing and administrative related expenses. Marketing and
administrative expenses decreased to $678,000 from $821,000 for 1997 and 1996,
respectively. This represents a decrease of $(143,000) or (17)%. Marketing and
administrative expenses were 76% and 187% of revenues for 1997 and 1996,
respectively. The decrease in these costs was due primarily to a reduction in
marketing, accounting and administrative consulting expenses and investor
relations costs during 1996 that did not occur at the same levels in 1997. The
Company anticipates marketing and administrative costs to grow in absolute
dollars as it continues to increase market share with LION's products and
services throughout the United States.
SALARIES AND PAYROLL TAXES
Salaries and payroll tax expenses increased to $1,224,000 from
$495,000 for 1997 and 1996, respectively. This represents an increase of
$729,000 or 147%. Salaries and payroll tax expenses were 137% and 113% of
revenues for 1997 and 1996, respectively. The Company has grown to 33 associates
at December
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<PAGE> 22
31, 1997 from a total of 19 associates at December 31, 1996. For the same period
in the previous year, the Company grew to 19 associates at December 31, 1996
from a total of 14 associates at December 31, 1995. Most of the growth has been
in the areas of management, sales and daily database updating. Growth in
salaries and payroll taxes has been directly related to development and support
of the company's growing base of mortgage broker subscribers and participating
lenders. In addition the increase in salaries and payroll taxes includes a
one-time charge to compensation expense of $412,930 for 1997. This charge
related to stock options granted to a consultant for services rendered. The
Company anticipates salaries and payroll expenses to grow as it continues to go
after more market share.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased to $51,000 from
$54,000 for 1997 and 1996, respectively. This represents a decrease of $(3,000)
or (6)%. Depreciation and amortization expenses were 6% and 12% of revenues for
1997 and 1996, respectively. The decrease was due to the addition of property
and equipment totaling $81,000 and $47,000 for 1997 and 1996, respectively,
offset by $20,000 of depreciation expense that was recorded in 1996 that did not
reoccur in 1997 due to the underlying assets being fully depreciated.
OTHER
In 1996, the Company determined that there had been an impairment in
the carrying value of its investment in Cybernet as a result of the software
becoming obsolete. Management determined that the impairment loss required the
write-off of the remaining unamortized balance of goodwill which totaled
$147,500.
LOSS ON INVESTMENT
In 1996, the Company entered into a purchase and sale agreement with
a related party to assume its investment in a corporation known as Vision and
Techniques, Inc. (V&T). The Company had loaned V&T $73,389 for operations. The
Company determined that it no longer could support V&T's operations and agreed
to sell its rights and interests to the related party for $10 and assumption of
outstanding liabilities. In the event that the related party realizes any
financial consideration from V&T, then the Company will be reimbursed its
investment of $73,389 plus accrued interest at 7% per annum.
INTEREST EXPENSE
Interest expense is comprised mostly of interest on convertible
debentures, related party debt and notes payable all accruing interest at 12%.
Interest expense increased to $103,000 from $28,000 for 1997 and 1996,
respectively. This represents an increase of $75,000 or 274%. This was due to
the underlying debt used to finance the operations of the Company increasing to
$1,009,000 from $490,000 for 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and
purchase of property and equipment primarily through private placements,
exercise of stock warrants related to its private placements, issuance of
convertible debentures, borrowings from related parties and others, and
generation of cash from operations. As of September 30, 1998, the Company had
approximately $168,000 in cash and cash equivalents.
Net cash used in operating activities increased to $570,000 for the
nine months ended September 30, 1998 from $408,000 for the nine months ended
September 30, 1997. The increase in net cash used resulted primarily from an
increase in net losses and growth in accounts receivable. This was offset by a
decrease in
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<PAGE> 23
prepaid expenses and other assets, growth in deferred revenue resulting from
prepayments by customers for 3 and 6 month subscription periods, and finally, an
increase in both accounts payable and accrued liabilities.
Net cash used in operating activities increased to $749,000 for 1997
from $740,000 for 1996. The increase in net cash used resulted primarily from an
increase in accounts receivable and prepaid expenses and other assets combined
with a decrease in accounts payable and accrued liabilities which were offset by
a decrease in net losses combined with an increase in deferred revenues.
Net cash used in investing activities increased to $84,000 for the
nine months ended September 30, 1998 from $54,000 for the nine months ended
September 30, 1997 and increased to $70,000 for 1997 from $50,000 for 1996. The
increases were primarily from the purchase of property and equipment.
Net cash provided by financing activities increased to $720,000 for
the nine months ended September 30, 1998 from $466,000 for the nine months ended
September 30, 1997. The increase was due primarily to a private placement of the
Company's stock and the exercising of stock options totaling $174,000 and the
exercising of warrants related to previous private placements totaling $672,000.
Net payments on notes payable, convertible debentures and related party debt
totaled $124,000.
Net cash provided by financing activities increased to $904,000 for
1997 from $797,000 for 1996. The net cash provided by financing activity in 1997
was primarily from the issuance of convertible debentures and common stock
totaling $225,000 and $414,000, respectively, and proceeds from related party
debt and notes payable totaling $120,000 and $174,000, respectively. This was
offset by payments on long-term capital leases and notes payable. The net cash
provided by financing activity in 1996 was primarily from proceeds from related
party debt and notes payable totaling $386,000 and $19,000, respectively, and
the issuance of common stock totaling $392,000.
At September 30, 1998 the Company anticipates future funding needs to
be adequately covered by operations and the exercise of warrants relating to
past private placements. At some time in the future, stock options issued to
employees will become another source of funding for the company. For additional
information on funding from operations, warrants and stock options, see Notes B,
L and M of Notes to Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general purpose financial statements. This statement requires that an enterprise
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The statement is effective for
fiscal years beginning after December 15, 1997. The Company believes the
adoption of SFAS No. 130 will have no significant impact on the Company's
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments
of an Enterprise and Related Information" (SFAS 131) which establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes the related disclosures
about products and services, geographic areas, and major customers. Provisions
of SFAS 131 are effective for fiscal
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<PAGE> 24
years beginning after December 15, 1997. The Company believes that adoption of
SFAS 131 will have no significant impact on the Company's consolidated financial
statements.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming
code in existing computer systems as the year 2000 approaches. The "year 2000
problem" is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or fail. The Company is
in the process of working with its software vendors to ensure that the software
that the company has licensed and will be licensing from third parties will
operate properly in the year 2000 and beyond. In addition, the Company is
working with its external suppliers and service providers to ensure that they
and their systems will be able to support the Company's needs and, where
necessary, inter-operate with the Company's server and networking hardware and
software infrastructure in preparation for the year 2000. Management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be year 2000
compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any year 2000 compliance. Any year 2000
compliance problems of either the Company, its customers or vendors could have a
material adverse effect on the Company's business, results of operations and
financial condition.
DESCRIPTION OF PROPERTY
The Company's executive offices are located in Mercer Island,
Washington, where the Company currently leases approximately 3,500 square feet.
The Company leases this space under an operating lease that expires on June 30,
2001. The lease provides that, after giving written request not less than three
months prior to the end of the term and obtaining written consent of lessor, the
lease will continue on a month-to-month tenancy until terminated in accordance
with Washington law. The Company has the right to use this space for its
computer information services and related business uses. The Company also uses
approximately 2,700 square feet of space in Spokane, Washington. The Spokane
lease expires December 31, 1998. The Company is currently negotiating a three
year extension. The Company believes that its current facilities are adequate
and are suitable for their current use, and that suitable additional facilities
will be available, when needed, upon commercially reasonable terms.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership as of September 30, 1998 of the Company's common stock by
(a) each person known by the Company to be a beneficial owner of more than five
percent of the outstanding common stock of the Company, (b) each director of the
Company, and (c) all directors and executive officers of the Company as a group.
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<PAGE> 25
<TABLE>
<CAPTION>
Name and Address(1) Shares Percentage
of Beneficial Owner Beneficially Owned(2) of Shares
- ------------------- --------------------- ----------
<S> <C> <C>
Allen C. Ringer 3,764,029(3) 14.9%
Sam Ringer 2,831,974(4) 11.5%
Joe Ringer 2,832,535(5) 11.5%
Billy Anders, Sr 2,390,242(6) 9.6%
Alan S. Dernbach 317,000(7) 1.3%
Kurt Springman 114,600(8) *
Jacob L. Smith 65,000(9) *
All Officers and Directors 12,315,380 41.3%
as a Group (7 persons)
</TABLE>
- -------------------------
* Less than one percent.
(1) Except as noted below, the business address of Mr. Ringer and all other
directors and executive officers is 3003 80th Ave. S.E., Mercer Island, WA
98040.
(2) Pursuant to applicable rules of the Securities and Exchange Commission,
"beneficial ownership" as used in this table means the sole or shared power to
vote shares (voting power) or the sole or shared power to dispose of shares
(investment power). Unless otherwise indicated the named individual has sole
voting and investment power with respect to the shares shown as beneficially
owned. In addition, a person is deemed the beneficial owner of those securities
not outstanding which are subject to options, warrants, rights or conversion
privileges if that person has the right to acquire beneficial ownership within
sixty days.
(3) Includes 1,000,000 shares underlying stock options granted but not yet
exercised. Mr. Ringer is deemed the beneficially owner of the 2,011,029 shares
of the Company's stock beneficially owned by American Management and Consulting
Inc. because of his power to vote and dispose of those shares. Excludes 632,278
shares beneficially owned by Dutchman Irrevocable Trust, of which his wife
Marilyn K. Ringer is trustee, and 10,000 shares underlying stock options owned
by his wife, as to which Mr. Ringer disclaims beneficial ownership.
(4) Includes 1,000,000 shares underlying stock options and 414,888 shares
underlying warrants granted but not yet exercised.
(5) Includes 1,000,000 shares underlying stock options and 416,568 shares
underlying warrants granted but not yet exercised.
(6) Includes 1,000,000 shares underlying stock options and 471,140 shares
underlying warrants granted but not yet exercised. The address of Mr. Anders is
2010 S. Overbluff Ct., Spokane, WA 99203.
(7) Includes 50,000 shares underlying stock options and 150,000 shares
underlying warrants granted but not yet exercised.
(8) Includes 30,000 shares underlying warrants granted but not yet exercised.
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<PAGE> 26
(9) Includes 50,000 shares underlying stock options of which Mr. Smith has the
right to acquire beneficial ownership within sixty days. The address of Mr.
Smith is 3800 Ft. Bellingham Rd., Bellingham, WA 98225.
MANAGEMENT
Management of the Company is vested in its Board of Directors and
officers. The directors are elected by the shareholders. The officers of the
Company hold office at the discretion of the Board of Directors. There currently
are seven directors.
The Board of Directors and executive officers of the Company and
their respective ages as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Name(1) Age Position
------- --- --------
<S> <C> <C>
Allen C. Ringer 58 President, Chief Executive Officer, Director
Sam Ringer 38 Director
Joe Ringer 36 Director
Billy Anders, Sr. 55 Chairman of the Board
Alan S. Dernbach 47 Director, Chief Financial Officer
Kurt Springman 37 Director
Jacob L. Smith 59 Director
</TABLE>
Following is a discussion of the business background of each director
and executive officer. Sam Ringer and Joe Ringer are full-time employees of the
Company, and are sons of Allen Ringer. The other directors and executive
officers devote only such time as may be necessary to the Company's business and
affairs.
Allen Ringer has served as President and CEO of Plenum since 1989.
Mr. Ringer is also the founder and President of PlenTech Electronics, Inc. a
company listed on the Vancouver Stock Exchange; and he serves as a director of
its subsidiary, Consolidated Electronics, Inc., a Spokane manufacturing and
marketing firm serving primarily the utility and processing industries. From
1978 to 1986 Mr. Ringer operated United Farm Agency, a real estate brokerage
firm in Colville, Washington. From 1987 to February 1990, Mr. Ringer managed the
operations of Mortgage Brokers Network, Inc., an electronic mortgage brokerage
company which originated mortgage loan applications.
Sam Ringer has been a director of the Company since 1989. He has
served as President of LION since 1997 and during the period from 1991 through
1995. Sam Ringer was co-founder, co-architect and author of the LION software.
He received his training as a computer engineer and programmer in Spokane, WA at
Spokane Falls Community College and Gonzaga University. Prior to his tenure with
the Company, Sam served for two years as a mortgage broker at Mornet Mortgage, a
Seattle mortgage brokerage firm.
Joe Ringer has served as a director of the Company since 1989. He is
the other co-founder of LION, and has served as Executive Vice President since
1995. He is responsible for Company operations, including oversight of the data
entry, web development, network management and quality control. In addition, he
is responsible for a number of marketing functions, including ad banner sales,
press releases, writing the Daily Market Commentary that appears on the LION
site, articles for submission to trade journals, certain lender homepage sales
and negotiation with potential industry partners. Prior to co-founding LION, Joe
worked for three years at Mornet Mortgage in virtually every position of the
mortgage brokerage firm, including operations, as a mortgage broker and in the
management of the business.
Billy Anders, Sr. joined the Company as a member of the Board of
Directors in 1995 and has served as Chairman since January 1997. Mr. Anders
served as the President of the Mars Hotel Corporation in Spokane,
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<PAGE> 27
Washington, from 1994 to 1997, and was Chairman of the board of directors of
Pacific Marine & Steel, Inc. in La Jolla, California, in 1995 and 1996. He was a
member of the board of directors of Output Technology, Spokane, Washington from
1989 through 1993, and served as its President and CEO during 1992 and 1993. Mr.
Anders was President and CEO and served as Chairman of the board of directors of
Soricon Corporation, Boulder, Colorado, from 1986 through 1991. He also served
as a business consultant and inaugural member of the board of directors of
International Pacific, Inc., Spokane, Washington, from 1986 to 1992. From 1983
through 1986 he was Senior Vice-President and General Manager of Key Tronic
Corporation, Spokane, Washington. Mr. Anders spent 16 years from 1967 through
1983 with the IBM Corporation in several cities in various key management
positions. He was Director of Field Operations in the General Systems Division
of IBM in 1980. Mr. Anders graduated from Southern University, Baton Rouge,
Louisiana, in 1964 where he completed the Advanced R.O.T.C. program and was
commissioned as a 2nd Lieutenant in the U.S. Army.
Alan S. Dernbach has been a director of the Company since 1997, and
has served as Chief Financial Officer since November 1998. Mr. Dernbach has over
17 years of senior financial and administrative experience with technology
oriented companies. Since 1993 he has been the principal owner of Engineered
Control Systems, Inc., a private company providing low voltage systems
integration to public facilities and Fortune 500 customers. During the period
from 1983 to 1993, he served as Vice President of Finance and Chief Financial
Officer for three Spokane, WA technology firms: Output Technology, Inc. from
1972 to 1993, Pyrotek, Inc. from 1990 to 1992 and Key Tronic Corporation from
1983 to 1990. Before entering private industry, Mr. Dernbach had five years of
accounting experience with Peat, Marwick & Main in Portland, Oregon. Mr.
Dernbach received a BBA degree in accounting from Gonzaga University in 1972,
and has been a CPA since 1974.
Kurt Springman has been a director of the Company since 1997. Since
1996, Mr. Springman has been Compaq Computer Corporation's (formerly Digital
Equipment Corporation) Senior Marketing Consultant for the Enterprise Solution
Center for Windows in Bellevue, WA. From 1991 to 1996, he was the principal
owner and CEO of Prestige Events, Inc., a firm specializing in high tech event
marketing. Customers of Prestige included major names like Microsoft, Intel,
Digital, and Paul Allen Group. From 1985 to 1991, he served with Merrill Lynch
Securities and JP Morgan in New York as an Associate Officer where he was
involved in creating and trading jumbo mortgage pools and derivative products,
and structuring real estate and corporate financings. From 1983 to 1986, Mr.
Springman was a CPA with Peat Marwick - KMPG in Denver, Colorado. He is an
elected Councilmember of the City of Bellevue (term 1996-1999), and well known
in the Washington Software Alliance. Mr. Springman received an MS degree in
accounting from the University of Denver in 1983, and an MBA in Finance from New
York University in 1987.
Jacob Smith has been a director of the Company since June 1998. Mr.
Smith has practiced business law in Washington State for the last thirty-three
years. Mr. Smith received a B.S. degree in Chemical Engineering from the
University of Washington in 1962. He received a J.D. law degree from Willamette
University Law School in Salem Oregon in 1965.
SIGNIFICANT EMPLOYEES AND CONSULTANTS
The Company employs several administrative, technical, sales and
support personnel who perform various day-to-day tasks and conduct operations of
LION. None of these employees are under a non-competition agreement, nor covered
by key-man life insurance. In addition, the Company has from time to time
utilized consultants to assist in the development of its business plan and
operations. The inability to attract, retain and motivate additional skilled
employees or consultants, or the termination of certain significant employees,
or termination of several employees as a group, could have a material adverse
affect on the Company. The following individuals are significant employees or
consultants of the Company:
Steve Thomson, 46, has served as Controller since joining LION in
March 1998. From 1995 to 1998, as a consultant he worked with a number of
software and Internet related companies including Sierra On-Line, Inc.
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<PAGE> 28
and N2H2, Inc. From 1988 to 1995, Mr. Thomson served as Controller and Division
Manager with Vanier, a $130 million subsidiary of American Business Products.
From 1979 to 1986, he was a public accountant with Price Waterhouse. Mr. Thomson
received a B.A. degree in Business Administration from the University of
Washington in 1976, and has been a CPA since 1981.
Paul Eckert, 38, has served as National Sales Manager of LION since
1997, after joining the Company in 1995 as Lender Sales Manager. Prior to
joining the Company, Mr. Eckert held sales management positions in the mortgage
industry with North American Mortgage Company, Columbia First Service, Inc. and
General Electric Mortgage Insurance Company of Bellevue, Washington. Mr. Eckert
received a B.A. degree from Winona State University in 1984.
John Pilley, 58, has served as Manager of Software Development and
Maintenance of LION since 1994. During the period from 1989 to 1994 Mr. Pilley
designed software management and operating systems for various companies as a
consultant. From 1988 to 1989 he was Chief Operating Officer for Wismer Martin.
Prior to joining the private sector, Mr. Pilley had a 21-year military career,
leaving with the rank of Colonel. Mr. Pilley taught at the U.S. Naval Academy,
served two tours in Vietnam as a Marine pilot and was the officer in charge of a
$500 million project to computerize the entire Naval and Marine Corp. aviation
maintenance system. He earned a bachelors degree in mathematics from Vanderbilt
University in 1961 and received a Masters Degree in Math and Computer Science
from the Naval Postgraduate School in 1970.
Ed Hallda, 32, joined LION as Director of Internet Services in
February 1997. From 1984 to 1990 he served in the Navy as an Electronics
Technician, gaining experience troubleshooting complex computerized weapon
control systems. From 1991 to 1997, Mr. Hallda was a Senior Technician and
Computer Specialist with Vitro, Inc. From 1992 to 1997, he designed custom
software applications for the U.S. Navy as a consultant, graphical presentations
using video conferencing, and designed database-aware Intranet systems and
Internet sites.
Howard Baskin, 48, is a management consultant from Tampa, Florida,
who began working with LION in June 1996. During the period from January 1997 to
July 1998, Mr. Baskin relocated to Seattle and served as Managing Executive of
LION under a consulting agreement. He orchestrated LION's national expansion and
advised the management team in strategic and operating decisions. He has agreed
to continue to advise the Company through January 15, 1999 on a part-time basis,
focusing on strategic alliances and product development. Mr. Baskin obtained an
MBA from Harvard Business School in 1980, and a law degree from the University
of Miami in 1978. Since 1991 he has worked with early stage and fast-growing
companies seeking to manage growth and improve profitability. From 1980 to 1991,
Mr. Baskin was employed by Citicorp in various assignments, the last of which
was Director of Strategic Planning for the $20 billion asset Commercial Real
Estate Division.
BOARD COMMITTEES
The standing committees of the Board of Directors of the Company are
the Audit Committee and the Compensation Committee. The Audit Committee,
established in May 1998, will be responsible for reviewing the results and scope
of audits and other services provided by the Company's independent auditors, and
the fees for related services performed during the year. The Audit Committee
also recommends to the Board of Directors the firm to be appointed as
independent auditors. At times, the Audit Committee may meet with
representatives of the Company's independent auditors without any officers or
employees of the Company present. The Compensation Committee, established in
October 1998, will make recommendations concerning retirement and benefit plans,
concerning the salaries and incentive compensation of executive personnel,
employees of, and consultants to, the Company, and will administer the Company's
1998 Stock Option Plan.
DIRECTOR COMPENSATION
Except for grants of stock options and reimbursement of expenses,
directors of the Company generally do not receive compensation for services
rendered as a director. The Company does not compensate its directors
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<PAGE> 29
for committee participation or for performing special assignments for the Board
of Directors. Directors who are not officers or employees of the Company receive
as an initial retainer options to purchase 50,000 shares of common stock,
exercisable at not less than the fair market value of the Company's common stock
on the day of grant. Thereafter, under the Company's 1998 Stock Incentive Plan,
non-employee directors will receive automatic option grants each year to
purchase 15,000 shares of common stock upon their reelection at the annual
meeting of shareholders. See "Management--1998 Stock Incentive Plan."
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or earned for
services rendered to the Company in all capacities during the year ended
December 31, 1997 to the Company's President and Chief Executive Officer (the
"Named Officer"). No other executive officer received total annual salary, bonus
and other compensation in excess of $100,000 in that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- ---------------------------------
SECURITIES
UNDERLYING
OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY OTHER STOCK AWARDS WARRANTS
- --------------------------- ---- ------ ----- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allen Ringer(1) 1997 $3,405 - 288,000(2) 288,000
President and CEO
</TABLE>
- ------------------
(1) Mr. Ringer's compensation was paid to him on behalf of American Management
and Consulting, Inc., a consulting firm, of which Mr. Ringer is Chief Executive
Officer and President. See "Certain Transactions and Related Transactions."
(2) In April 1997, Mr. Ringer purchased 144,000 shares of common stock and
144,000 warrants, exercisable at $.50 per share, in exchange for 1996 deferred
compensation of $36,000. In January 1998, Mr. Ringer purchased an additional
144,000 shares of common stock and 144,000 warrants, exercisable at $.50 per
share, in exchange for 1997 deferred compensation of $36,000. As of December 31,
1997, the aggregate value of all shares beneficially owned by Mr. Ringer was
$903,367, valued at $.24, the closing price of the Company's common stock on the
OTC Bulletin Board on that date. The shares purchased in 1998 include stock
beneficially owned by American Management and Consulting Inc.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to the Named Officer during the fiscal
year ended December 31, 1997.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information with respect to the Named
Officer regarding the exercise of options or warrants during the 1997 fiscal
year and unexercised options or warrants held as of the end of the 1997 fiscal
year. No stock appreciation rights were exercised during 1997 or were
outstanding at the end of 1997.
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<PAGE> 30
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS OPTIONS
SHARES REALIZED AT FISCAL YEAR-END(#) AT FISCAL YEAR-END ($)
ACQUIRED VALUE -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen Ringer(1) -- - - - -
Options 1,000,000
Warrants 907,164
</TABLE>
(1) Includes 907,164 warrants owned by American Management and Consulting, Inc.,
a consulting firm, of which Mr. Ringer is Chief Executive Officer and President,
and deemed the beneficial owner because of his power to vote and dispose of
those securities.
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan ("1998 Plan") is intended to
serve as an equity incentive program for management, qualified employees,
non-employee members of the Board of Directors, and independent advisors or
consultants. The 1998 Plan became effective on October 30, 1998 upon adoption by
the Board of Directors, and has been recommended for approval of shareholders at
the December 1998 annual meeting. Under the 1998 Plan, the total number of
shares of common stock reserved for issuance is 15,000,000, which may be
Incentive Stock Options ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or nonqualified stock options.
The 1998 Plan contains two separate components: (i) a discretionary
option grant program under which eligible individuals in the Company's employ or
service (including officers and other employees, non-employee Board members and
independent advisors or consultants) may, at the discretion of the Plan
Administrator, be granted options to purchase shares of common stock; and (ii)
an automatic option grant program under which option grants will automatically
be made at periodic intervals to eligible non-employee Board members to purchase
shares of Common Stock at an exercise price equal to their fair market value on
the grant date.
The discretionary option grant program will be administered by the
Board of Directors or a committee of two or more members of the Board. Plan
administrators have sole authority to prescribe the form, content and status of
options to be granted, select the eligible recipients, determine the timing of
option grants, determine the number of shares subject to each grant, the
exercise price, vesting schedule, and term for which any option will remain
outstanding. The Board of Directors have the authority to correct any defect,
supply any omission or reconcile any inconsistency in the Plan, determine the
terms and restrictions on all restricted option awards granted under the Plan,
and in general, to construe and interpret any provision of the 1998 Plan or of
any option granted thereunder. The administration of the automatic option grant
program will be self-executing in accordance with the provisions of the 1998
Plan.
The exercise price for outstanding option grants under the 1998 Plan
may be paid in cash or, upon approval of the Plan administrators, in shares of
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day cashless exercise program or a reduction in
the amount of any Company liability to the optionee. In addition, the Plan
administrator may provide financial assistance to one or more optionees in the
exercise of their outstanding options by allowing the individuals to deliver a
full-recourse, interest-bearing promissory note in payment of the exercise price
and any associated withholding taxes incurred in connection with the exercise.
Under the automatic option grant program, immediately after each
annual meeting of shareholders, each elected non-employee director of the
Company shall automatically be granted a nonqualified stock option to purchase
15,000 shares of common stock for each year included in the term for which such
he or she was elected,
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provided that individual has not previously received an option grant from the
Company in connection with his or her Board service which remains unvested.
Under the 1998 Plan, no stock option can be granted for a period
longer than ten years or for a period longer than five years for ISOs granted to
optionees possessing more than 10% of the total combined voting power of all
classes of stock of the Company. Following the effective date of any
registration of the Company's securities under the Exchange Act, the per share
exercise price for any option granted may not be less than the fair market value
of the Company's securities on the grant date. Unless extended by the Plan
administrators until a date not later than the expiration date of the option,
the right to exercise an option terminates thirty days after the termination of
an optionee's employment, contractual or director relationship with the Company.
If the optionee dies or is disabled, the option will remain exercisable for a
period of one year after the termination of employment or relationship with the
Company.
At the sole discretion of the Plan administrators, options granted
under the 1998 Plan may contain resale provisions pursuant to which the
purchaser of the common stock issued upon exercise of the option may be limited
to sales of common stock in an amount which may not exceed 250,000 shares during
any three-month period.
The 1998 Plan includes options granted by the Company prior to its
effective date, in accordance with the effective date of grant and other terms
of each agreement with option holders. As of September 30, 1998, the Company had
granted options to purchase an aggregate of 9,050,000 shares of common stock, of
which 6,977,500 were issued under the 1998 Stock Option Plan and were
outstanding as of September 30, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has previously entered into certain transactions with
various parties, which had, at the time of the transaction, a material direct or
indirect relationship with the Company, its officers, directors, or principal
shareholders, their respective affiliates, or other persons associated with the
foregoing, as set forth below.
American Management and Consulting Inc. ("AMC") is a consulting firm
of which Allen Ringer serves as President and CEO. The Company receives
management consulting services from AMC, marketing and sales consulting services
from Billy Anders, Sr., Chairman of the Board, and administrative and clerical
consulting services from Marilyn Ringer, wife of the Company's president and
CEO. At September 30, 1998 the monthly consulting fee paid by the Company is
$5,000 for AMC, $6,000 for Billy Anders, Sr. and $1,800 for Mrs. Ringer. For the
nine months ended September 30, 1998, AMC, Billy Anders, Sr. and Mrs. Ringer
were paid cash compensation totaling $45,000, $48,830 and $18,700, respectively.
During 1997 the Company paid the same group cash compensation totaling $0, $0
and $13,395, respectively.
From time to time, each of AMC and members of Allen Ringer's family,
including children Sam Ringer, Joe Ringer and Shadda Lee, have deferred salaries
and made working capital advances and loans to the Company. As of December 31,
1997, the outstanding amounts, including principal and interest accrued thereon,
owed to AMC, Sam Ringer, Joe Ringer and Shadda Lee for deferred wages and
advances to the Company were approximately $149,041, $161,613, $121,449 and
$106,059 respectively. The aggregate related party payables at December 31,
1997, included $90,585 in credit cards payable, $283,135 of salaries payable,
including interest at 12%, and $216,656 in long term notes payable, including
interest at 12%. During January 1998, AMC purchased 452,164 shares of common
stock and 452,164 warrants, exercisable at $.50 per share, in exchange for a
reduction of principal and interest of $113,041 due AMC. During 1997 and 1998,
AMC purchased an aggregate of 288,000 shares and 288,000 warrants, exercisable
at $.50 per share, in exchange for $72,000 of uncompensated services rendered
the Company during the years 1996 and 1997. In January 1998, Sam Ringer
purchased 414,888 shares of common stock and 414,888 warrants, exercisable at
$.50 per share, in exchange for a reduction of principal and interest of
$103,722. In January 1998, Joe Ringer purchased 416,568 shares of common stock
and 416,568 warrants, exercisable at $.50 per share, in exchange for a reduction
of principal and interest of
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$104,142. In January 1998, Shadda Lee purchased 362,689 shares of common stock
and 362,689 warrants, exercisable at $.50 per share, in exchange for a reduction
of principal and interest of $90,672.
In 1996, the Company entered into a purchase and sale agreement with
AMC to assume its investment in a corporate entity known as Visions and
Techniques, Inc. ("VT"). The Company loaned VT $73,389 for operations, with
$50,000 of the loans convertible into a 25% interest in VT. The Company
determined that it could not support the operations of VT, and sold the rights
and interests to AMC for $10 and assumption of outstanding liabilities. In the
event that AMC receives any financial consideration from VT, the Company will be
reimbursed its investment of $73,389 plus accrued interest at 7% per annum. The
loss on the investment was recorded in the Company's 1996 financial statements.
In June 1996 the Company engaged Howard Baskin, a management
consultant, to help the Company grow its customer and revenue base and expand
nationally. See "Management--Significant Employees and Consultants." At the time
Mr. Baskin began working with the Company, LION was adding broker subscribers at
approximately 20 per month. By the end of 1996 this number had increased to over
100 per month. In January 1997, the Company entered into a consulting agreement
with Mr. Baskin under which he agreed to temporarily relocate to Seattle and
advise the Company on a full-time basis. From January 1997 through July 1998 he
served as "Managing Executive" of LION under the consulting agreement, advising
management on strategic and operating decisions. During that period of time new
monthly broker subscriptions continued to increase to over 400 per month. In
August 1998, Mr. Baskin returned to Florida. He has agreed to continue to serve
as an advisor to the Company on a part time basis through January 15, 1999.
In consideration for his services, the consulting agreement entered
into in January 1997 originally provided for incentive compensation under a
formula that would have created a cash bonus in the high six figures to low
seven figures upon achieving certain financial targets. In March 1998 the
consulting agreement was amended to replace this substantial potential cash
obligation by an option to purchase 700,000 shares of the Company's common stock
exercisable at $.01, which will be fully vested on December 31, 1998.
Compensation expense of $412,930 related to these options was recognized by the
Company during the year ended December 31, 1997. The consulting agreement also
provides for certain other options to purchase 1,800,000 shares of the Company's
common stock at prices ranging from $.75 to $3.00 which are to be granted
contingent upon the occurrence of certain events. Under the consulting agreement
Mr. Baskin received cash compensation of $74,850 in 1997 and $79,797 during the
first nine months of 1998.
In consideration for his consulting services rendered to the Company,
1,000,000 options exercisable at prices ranging from $.50 to $1.00 were issued
in July 1997 to Billy Anders, Sr., a director of the Company. During September
1998, the Company sold 62,500 shares of common stock to Mr. Anders, in
connection with the exercise of outstanding options for cash consideration of
$15,625. In addition, the Company sold 62,500 shares of common stock to Mr.
Anders at a purchase price of $.50 and 125,000 shares of common stock at a
purchase price of $1.00 in connection with the exercise of outstanding options.
The aggregate purchase price of $156,250 was payable by promissory note with
principal balance, together with interest at the rate of 10% per annum, due on
or before March 1, 2000. The 187,500 shares of common stock purchased by the
promissory note were pledged to the Company as collateral until the note is paid
in full. Mr. Anders is associated as a registered representative with Craig &
Associates, Inc., an NASD member broker-dealer. During the period from January
1996 to March 1998, the Company utilized Craig & Associates to assist in the
sales of three discrete offerings of securities. See "Recent Sales of
Unregistered Securities." Placement agent fees were paid to Craig & Associates
in connection with these sales, consisting of 7% of the of the offering price of
the units sold, plus warrants exercisable at $.25 per share with an aggregate
offering price equaling 7% of the price of the units sold.
At September 30, 1998, Allen Ringer, Sam Ringer and Joe Ringer
beneficially owned approximately 14.9%, 11.5% and 11.5%, respectively, for
aggregate holdings of approximately 37.9%, of the outstanding shares of common
stock of the Company (assuming exercise of their outstanding stock options and
not the options granted to Company employees and service providers). As a group,
the present executive officers and directors of the Company beneficially owned
approximately 41.3% of the outstanding shares. As a result, these shareholders
may be able to control or significantly influence all matters requiring
shareholder approval,
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including the election of the Company's directors and approval of significant
corporate transactions. See "Principal Shareholders."
As of September 30, 1998, the Company had granted options to purchase
an aggregate of 9,050,000 shares of common stock, of which have 6,977,500 were
outstanding at September 30, 1998. Of the options granted, 4,150,000 were issued
to directors of the Company, of which 4,050,000 were outstanding at September
30, 1998.
The Company may be subject to various conflicts of interest arising
out of the relationship of the Company, its Board of Directors, affiliates and
the common shareholders. If conflicts do arise they will not be resolved through
arms length negotiations but through the exercise of management's judgment
consistent with its fiduciary responsibility to the shareholders and the
Company's objectives and policies. The directors will minimize and resolve
conflicts by putting their fiduciary responsibility to the shareholders ahead of
personal interests. Certain directors of the Company will only devote so much of
their time to the business of the Company as in their judgment is reasonably
required and must decide how to allocate their time and services among the
Company and other entities with which they are involved.
The Company intends that all future transactions, including loans,
between the Company and its officers, directors, principal stockholders and
their affiliates will be approved by a disinterested majority of the Board of
Directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's articles of incorporation authorize the issuance of up
to fifty million (50,000,000) shares of common stock, $.001 par value per share.
Each share has the same rights, privileges and preferences. Holders of the
shares of common stock have no preemptive rights to acquire additional shares or
other subscription rights. The shares of common stock are not subject to
redemption provisions or future calls by the Company. All outstanding shares of
common stock are fully paid and nonassessable.
The holders of shares of common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of shareholders.
They are not entitled to cumulate their votes for the purpose of electing
directors of the Company. Holders of common stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of
legally available funds.
In the event of liquidation, dissolution, or winding-up of the
Company, either voluntarily or involuntarily, the holders of the outstanding
shares of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and satisfaction of preferential rights and have no
rights to convert their common stock into any other securities.
As of September 30, 1998, there were 23,302,455 shares of common
stock outstanding which were held of record by 647 stockholders. Stock options
and warrants for an aggregate of 6,977,500 and 8,797,387 shares of common stock,
respectively, were also outstanding. No registration rights have been granted
with respect to the Company's shares of common stock outstanding.
WARRANTS
In certain private placements conducted between 1995 and 1998, the
Company offered units, each unit consisting of one share of common stock and one
warrant. The warrants were exercisable for a period of two years from the date
of subscription. Of the outstanding warrants at September 30, 1998, 204,591 were
issued at an exercise price of $.25 per share and the remainder at $.50 per
share. The warrants are not subject to redemption by the Company.
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The expiration date of certain of the warrants was extended by the
Board of Directors during 1997. Unless extended by the Company in its
discretion, an aggregate total of 1,871,003 of the warrants are scheduled to
expire during the fourth quarter of 1998, 3,178,876 at various times during
1999, and the balance of 3,747,508 on or before July 2000. In the event a holder
of warrants fails to exercise the warrants prior to their expiration, the
warrants will expire and the holder thereof will have no further rights with
respect to the warrants.
The outstanding warrants held by existing warrant holders were issued
and sold by the Company in reliance on exemptions from the registration
provisions of the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act. Similarly, the shares of common
stock issuable upon exercise of the warrants will be "restricted securities,"
unless the Company obtains effectiveness of a registration statement covering
the shares of common stock issuable upon exercise of the warrants. The Company
has no obligation to warrant holders to register the underlying shares of common
stock.
A holder of warrants does not have any rights, privileges or
liabilities as a stockholder of the Company prior to exercise of the warrants.
The Company intends to keep available a sufficient number of authorized shares
of common stock to permit exercise of the warrants. There is no assurance that
the market price of the Company's common stock will exceed the exercise price of
the Warrants at any time during the exercise period.
PREFERRED STOCK
The Company's articles of incorporation do not currently authorize
the issuance of preferred stock, although directors of the Company reserve the
right to recommend to shareholders an authorizing resolution in the future. If
preferred stock is authorized, it is anticipated that the Company's Board of
Directors would have authority to determine the price, rights, preferences,
privileges and restrictions thereof, including voting rights, without any
further vote or action by the Company's shareholders. The voting and other
rights of the holders of common stock could be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no current plans to authorize or issue any shares of preferred
stock.
TRANSFER AGENT
TranSecurities International, Inc. is transfer agent and registrar
for the Company's common stock.
ANTITAKEOVER PROVISIONS OF MINNESOTA LAW
The Company does not believe it is subject to the control share
acquisition statute of the Minnesota Business Corporations Act ("MBCA") Section
302A.671, which establishes various disclosure and shareholder approval
requirements to be met by individuals or companies attempting a takeover of an
"issuing public corporation" For purposes of MBCA, an "issuing public
corporation" is a corporation having 50 shareholders, and which has its
principal place of business or substantial assets located in Minnesota.
Similarly, by not meeting the definition of "issuing public corporation," the
Company is also not subject to the business combination statute of MBCA Section
302.673, intended primarily to deter highly leveraged takeover bids which
propose to use the target's assets as collateral for the offeror's debt
financing or to liquidate the target to satisfy financing obligations.
Other provisions in the MBCA relate to takeovers, and address a
corporation's use of golden parachutes, greenmail and the standard of conduct of
the board of directors in connection with the consideration of takeover
proposals. The MBCA contains a provision which prohibits a publicly-held
corporation from entering into or amending agreements (commonly referred to as
"golden parachutes") that increase current or future compensation of any officer
or director during any tender offer or request or invitation for tenders. The
MBCA also contains a provision which limits the ability of a corporation to
repurchase shares at a price above market value (commonly referred to as
"greenmail"). The statute provides that a publicly-held corporation is
prohibited from purchasing or agreeing to purchase any shares from a person who
beneficially owns more than five percent
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of the voting power of the corporation if the shares had been beneficially owned
by that person for less than two years, and if the purchase price would exceed
the market value of those shares. However, such a purchase will not violate the
statute if the purchase is approved at a meeting of the shareholders by a
majority of the voting power of all shares entitled to vote or if the
corporation's offer is made at an equal value per share to all holders of shares
of the class or series and to all holders of any class or series into which the
securities may be converted.
The MBCA authorizes the board of directors, in considering the best
interests of the corporation with respect to a proposed acquisition of an
interest in the corporation, to consider the interest of the corporation's
employees, customers, suppliers and creditors, the economy of the state and
nation, community and social considerations and the long-term as well as
short-term interests of the corporation and its shareholders, including the
possibility that these interests may be best served by the continued
independence of the corporation.
CERTAIN MARKET INFORMATION
The Company's common stock trades on the OTC Bulletin Board under the symbol
"PLNM." The range of high and low bid prices for the Company's common stock for
each quarter during the two most recent fiscal years and the nine months ended
September 30, 1998, is as follows:
QUARTERLY COMMON STOCK PRICE RANGES(1)
<TABLE>
<CAPTION>
QUARTER 1998 1997 1996
------------------------ ------------------------ ------------------------
HIGH LOW HIGH LOW HIGH LOW
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1ST $ 0.6563 $ 0.2200 $ 0.1875 $ 0.0938 $ 0.4063 $ 0.1875
2ND 2.7188 0.5000 0.2500 0.1250 0.3750 0.2183
3RD 1.9375 0.6250 0.2500 0.1563 0.2813 0.2183
4TH -- -- 0.2500 0.1700 0.2500 0.1563
</TABLE>
(1) This table reflects the range of high and low bid prices for the Company's
common stock during the indicated periods, as published by the OTC Bulletin
Board. The quotations merely reflect the prices at which transactions were
proposed, and do not necessarily represent actual transactions. Prices do not
include retail markup, markdown or commissions.
There were approximately 647 record holders of the Company's common stock as of
September 30, 1998.
DIVIDENDS POLICY
The Company has not paid dividends on its common stock since its
inception. Dividends on common stock are within the discretion of the Board of
Directors and are payable from profits or capital legally available for that
purpose. It is the current policy of the Company to retain any future earnings
to finance the operations and growth of its business. Accordingly, the Company
does not anticipate paying any dividends on common stock in the foreseeable
future.
SHARES ELIGIBLE FOR FUTURE SALE
In general, Rule 144 under the 1933 Act provides that securities may
be sold if there is current public information available regarding the Company
and the securities have been held at least one year. Rule 144 also includes
restrictions on the amount of securities sold, the manner of sale and requires
notice to be filed with the SEC. Under Rule 144 a minimum of one year must
elapse between the later of the date of the acquisition of the securities from
the issuer or from an affiliate of the issuer, and any resale under the Rule. If
a one-year period has elapsed since the date the securities were acquired, the
amount of restricted securities that may be sold for the
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account of any person within any three-month period, including a person who is
an affiliate of the Company, may not exceed the greater of 1% of the then
outstanding shares of common stock of the Company or the average weekly trading
volume in the over-the-counter market during the four calendar weeks preceding
the date on which notice of sale is filed with the SEC. If a two-year period has
elapsed since the date the securities were acquired from the issuer or from an
affiliate of the issuer, a seller who is not an affiliate of the Company at any
time during the three months preceding a sale is entitled to sell the shares
without regard to volume limitations, manner of sale provisions or notice
requirements.
Shares Eligible for Future Sale May Adversely Affect the Market. As
of September 30, 1998, a substantial majority of the 23,302,455 outstanding
shares of common stock held by existing shareholders were issued and sold by the
Company in private transactions in reliance on exemptions from the registration
provisions of the Securities Act and are restricted securities within the
meaning of Rule 144 under the Securities Act. Of the outstanding shares,
including shares held by affiliates, 16,303,622 were issued on or before
September 30, 1997, and may be currently eligible for resale in the open market,
if any, in compliance with Rule 144. The sale in the public market of these
shares of restricted common stock under Rule 144 may depress prevailing market
prices of the common stock.
Effect of Outstanding Options and Warrants. As of September 30, 1998,
there were outstanding stock options to purchase an aggregate of 6,977,500
shares of common stock at exercise prices ranging from $.01 to $3.00 per share,
and warrants to purchase 8,797,387 shares of common stock at exercise prices
ranging from $.25 to $.50. The options are subject to a restriction whereby
option holders have agreed to not sell or otherwise transfer or dispose of
shares of the Company's common stock issued upon exercise of options in an
amount which shall exceed 250,000 shares during any three-month period. See
"Principal Stockholders" and "Description of Capital Stock." The exercise of
these outstanding options and warrants will dilute the percentage ownership of
the Company's stockholders, and any sales in the public market of shares of
common stock underlying such securities may adversely affect prevailing market
prices for the common stock. Furthermore, the terms upon which the Company will
be able to obtain additional equity capital may be adversely affected since the
holders of these outstanding securities can be expected to exercise their
respective rights therein at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in such securities.
No Assurance of Established Public Trading Market. Although the
common stock of the Company trades on the OTC Bulletin Board, there can be no
assurance that a regular trading market for the securities will be sustained.
The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter market
which provides significantly less liquidity than The Nasdaq Stock Market. Quotes
for stocks included on the OTC Bulletin Board are not listed in the financial
sections of newspapers as are those for The Nasdaq Stock Market. Therefore,
prices for securities traded solely on the OTC Bulletin Board may be difficult
to obtain and holders of common stock may be unable to resell their securities
at or near their original offering price or at any price. Furthermore, the NASD
and SEC have proposed certain changes to the OTC Bulletin Board, which if and
when implemented will affect both issuers and market makers. The effect on the
Bulletin Board can not be determined at this time. In the event the Company's
securities are not included on the OTC Bulletin Board and do not qualify for
Nasdaq, quotes for the securities may be included in the "pink sheets" for the
over-the-counter market.
"Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Securities and Exchange Commission (the "SEC")
has adopted regulations which generally define "penny stock" to be any equity
security that is not traded on a national securities exchange or Nasdaq and that
has a market price of less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. As long as the Company's
securities are trading at less than $5.00 per security on the OTC Bulletin
Board, the Company's securities are subject to rules that impose additional
sales practice requirements on broker-dealers who sell these securities to
persons other than established customers and accredited investors (generally,
investors with a net worth in excess of $1,000,000 or an individual annual
income exceeding $200,000, or,
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together with the investor's spouse, a joint income of $300,000). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require, among other things, the delivery, prior to the transaction, of a
risk disclosure document mandated by the Commission relating to the penny stock
market and the risks associated therewith. The broker-dealer must also disclose
the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
penny stock rules may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of shareholders of the Company
to sell their securities in the secondary market.
LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no legal actions
pending, threatened or contemplated against the Company.
RECENT SALES OF UNREGISTERED SECURITIES
Since July 1995 the Company has issued and sold the following
securities:
1. During the period from January 1996 to December 1996, the Company
sold an aggregate of 1,569,766 units, each unit consisting of one
share of common stock and one $.50 warrant, at a purchase price
of $.25 per unit to approximately 24 persons, including 18
accredited and 6 nonaccredited purchasers. The aggregate purchase
price was $392,442. Certain of the units were sold by Craig &
Associates, Inc. as placement agent, for which fees were paid
representing 7% of the offering price of the units sold, plus
warrants exercisable at $.25 per share with an aggregate offering
price equaling 7% of the price of the units sold.
2. During the period from September 1997 to March 1998, the Company
sold an aggregate of 2,449,084 units, each unit consisting of one
share of common stock and one $.50 warrant, at a purchase price
of $.25 per unit to approximately 56 persons, including 47
accredited and 9 nonaccredited purchasers. The aggregate purchase
price was $612,271. Placement agent fees of $54,359 were paid to
Craig & Associates in connection with these sales, plus 218,616
warrants exercisable at $.25 per share.
3. During the period from February to September 1996, the Company
sold an aggregate of 195,680 shares of common stock at a purchase
price of $0.25 per share to five persons for consulting services
rendered the Company, for an aggregate purchase price of $48,920.
4. During the period from May to November 1996, the Company granted
an aggregate of 11,300 shares of common stock to 59 individuals
in connection with trade shows, marketing and promotional
activities. No consideration was paid the Company for these
shares.
5. During the period from January to October 1997, the Company sold
an aggregate of 196,000 shares of common stock at a purchase
price of $0.25 per share to three persons for consulting services
rendered the Company or for deferred salaries, for an aggregate
purchase price of $49,000. In May 1998, the Company sold an
aggregate of 12,000 shares of common stock at a purchase price of
$0.25 per share to one person for deferred compensation of
$3,000.
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<PAGE> 38
6. During the period from June to August 1997, the Company sold a
principal amount of $231,000 of convertible debentures to 9
persons. The debentures, together with accrued and unpaid
interest thereon, are payable two years after their issue date
unless previously converted. Interest on the debentures accrues
at the rate of 12% per annum, compounded semi-annually. The
debentures are convertible commencing 180 days after the date of
issue. Placement agent fees were paid to Craig & Associates in
connection with these sales, consisting of 7% of the aggregate
purchase price, plus 7% of the purchase price in warrants
exercisable at $.25 per share.
7. During the period from March to November 1997, the Company
granted an aggregate of 8,450 shares of common stock to 43
individuals in connection with trade shows, marketing and
promotional activities. No consideration was paid the Company for
these shares.
8. During May and June 1998, the Company granted an aggregate of
1,600 shares of common stock to 8 individuals in connection with
trade shows, marketing and promotional activities. No
consideration was paid the Company for these shares.
9. During the period from January to May 1998, the Company sold an
aggregate of 2,520,738 shares of common stock at a purchase price
of $.25 per share to 9 persons in connection with the repayment
of certain indebtedness, which included $630,184 in related party
debt and notes payable.
10. During the period from January to July 1998, the Company sold an
aggregate of 331,831 shares of common stock valued at prices
ranging from $.27 to $.1.71 per share to 7 persons in connection
with the conversion of outstanding debentures.
11. During the period from May to September 1998, the Company sold an
aggregate of 1,402,080 shares of common stock at purchase prices
ranging from $.25 to $.50 per share to existing shareholders of
the Company in connection with the exercise of outstanding
warrants, for an aggregate purchase price of $672,290.
12. During the period from July to September 1998, the Company sold
an aggregate of 302,500 shares of common stock at purchase prices
ranging from $.25 to $1.00 per share to three persons in
connection with the exercise of outstanding options, for cash
consideration of $29,376 and notes receivable of $156,250.
The issuances described above were deemed to be exempt from
registration under the Act in reliance on Section 4(2) of such Act as
transactions by an issuer not involving any public offering. The issuances
described above in items (1), (2) and (6) were deemed to be exempt from
registration under the Securities Act in reliance on Rule 506 promulgated
thereunder. In these three offerings, the Company sold the securities issued
thereunder to an aggregate total of 25 nonaccredited investors. In addition, the
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution, and appropriate legends were affixed to the
share certificates and warrants issued in the transactions. The offerings were
made without the use of any general solicitation or advertising. All recipients
had adequate access, through their relationships with the Company, to
information about the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Unless modified either in the articles or in the bylaws of a
corporation, the Minnesota Business Corporations Act generally provides for
mandatory indemnification of a person acting in an official capacity on behalf
of the corporation if the person acted in good faith, received no improper
personal benefit, acted in a
-38-
<PAGE> 39
manner the person reasonably believed to be in or not opposed to the best
interest of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe that the conduct was unlawful. Neither the Company's
articles of incorporation nor its bylaws currently contain provisions providing
for modification of the mandatory indemnification provisions of Minnesota law
relating to its officers and directors.
The Minnesota Business Corporations Act further provides that, if the
articles of incorporation so provide, the personal liability of a director for
breach of fiduciary duty as a director may be eliminated or limited, but that
the articles may not limit or eliminate such liability for (a) any breach of the
director's duty of loyalty to the corporation or its shareholders, (b) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (c) the payment of unlawful dividends, stock repurchases or
redemptions, (d) any transaction in which the director received an improper
personal benefit, (e) certain violations of the Minnesota securities laws, and
(f) any act or omission occurring prior to the date when the provision in the
articles eliminating or limiting liability becomes effective. The articles of
incorporation of the Company do not currently contain provisions by which the
personal liability of its officers and directors would be eliminated or limited.
The Company's bylaws provide that neither the Company, its Directors nor its
officers will be in any way liable to the shareholders where legal counsel has
been relied upon in a matter.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against liabilities
under the Securities Act (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities of the
Company, the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of the issue.
As of September 30, 1998, there was no pending litigation or
proceeding involving a director, officer, employee or agent of the Company where
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for
indemnification.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Effective May 1, 1998, the Board of Directors selected Grant Thornton
LLP as its independent accountants for the fiscal years ending December 31, 1997
and 1996. The Company will ask its shareholders at its next annual meeting to
ratify its selection of independent accountants. Tom Harris CPA has audited the
Company's financial statements annually since fiscal 1991. The former accountant
was dismissed in favor of the new appointment. The reports of the former
accountant for prior fiscal years have not contained an adverse opinion or
disclaimer of opinion, nor were they modified as to uncertainty, audit scope or
accounting principles. There were no disagreements with the former accountant on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
-39-
<PAGE> 40
FINANCIAL STATEMENTS INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Certified Public Accountants 41
Financial Statements
Consolidated Balance Sheets 42
Consolidated Statements of Operations 43
Consolidated Statement of Stockholders' Equity 44
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial Statements 47
</TABLE>
-40-
<PAGE> 41
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Board of Directors
Plenum Communications, Inc.
We have audited the accompanying consolidated balance sheets of Plenum
Communications, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Plenum
Communications, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
Seattle, Washington
July 17, 1998
-41-
<PAGE> 42
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------------
1998 1997 1996
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 167,931 $ 101,604 $ 16,459
Certificate of deposit 3,000 3,000 3,000
Accounts receivable, less allowance for doubtful accounts of
$20,696, $15,000 and $21,482 in 1998, 1997 and 1996,
respectively 178,356 120,928 44,122
Prepaid expenses and other 24,879 45,048 10,794
----------- ----------- -----------
Total current assets 374,166 270,580 74,375
PROPERTY AND EQUIPMENT - AT COST, net (notes A4, C and I)
177,158 149,298 118,861
OTHER ASSETS 1,336 -- --
----------- ----------- -----------
$ 552,660 $ 419,878 $ 193,236
=========== =========== ===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 69,243 $ 34,398 $ 48,843
Accrued liabilities (note E) 121,364 79,136 133,788
Current maturity of capital lease obligation 2,305 1,654 --
Deferred revenue 98,398 52,409 399
Related party payables (note G) 28,438 590,376 470,454
Notes payable (note H) -- 181,480 19,102
Convertible debentures (note F) 82,532 -- --
----------- ----------- -----------
Total current liabilities 402,280 939,453 672,586
LONG-TERM CAPITAL LEASE OBLIGATION, less current maturities (note I)
6,149 8,412 --
CONVERTIBLE DEBENTURES (note F) -- 237,455 --
COMMITMENTS AND CONTINGENCIES (notes K, L and M) -- -- --
STOCKHOLDERS' EQUITY (DEFICIT) (notes B, L and M)
Common stock - authorized, 50,000,000 shares of $.001 par
value; 23,302,455, 18,154,706 and 16,078,172 shares
issued and outstanding in 1998, 1997 and 1996,
respectively 23,302 18,155 16,078
Treasury stock held, 700 shares (350) (350) (350)
Additional contributed capital 5,168,530 3,204,250 2,328,622
Note receivable from stockholder (note D) (156,250) -- --
Accumulated deficit (4,891,001) (3,987,497) (2,823,700)
----------- ----------- -----------
144,231 (765,442) (479,350)
----------- ----------- -----------
$ 552,660 $ 419,878 $ 193,236
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-42-
<PAGE> 43
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
--------------------------- ---------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 1,271,033 $ 597,493 $ 892,288 $ 438,248
Expenses
Marketing and administrative 853,261 447,176 677,610 820,604
Salaries and payroll taxes 1,067,033 868,899 1,224,488 495,137
Depreciation and amortization 55,953 35,918 51,007 53,891
Other (note A6) -- -- -- 147,500
Loss on investment (note G) -- -- -- 73,389
----------- ----------- ----------- -----------
1,976,247 1,351,993 1,953,105 1,590,521
----------- ----------- ----------- -----------
Operating loss (705,214) (754,500) (1,060,817) (1,152,273)
Other expense
Interest expense (201,875) (70,728) (102,980) (27,520)
Interest income 3,585 -- -- --
----------- ----------- ----------- -----------
NET LOSS (note J) $ (903,504) $ (825,228) $(1,163,797) $(1,179,793)
=========== =========== =========== ===========
Loss per common share (note A8) $ (.04) $ (.05) $ (.07) $ (.07)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-43-
<PAGE> 44
<TABLE>
<CAPTION>
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1996 and Nine Months Ended September 30, 1998 (unaudited)
Common Stock Additional
---------------------- Treasury Contributed
Shares Amount Stock Capital
---------- ------- --------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 14,301,426 $14,301 $ (350) $1,886,213
Issuance of common stock in conjunction with
a Private Placement Offering 1,569,766 1,570 -- 390,872
Issuance of common stock for consulting and
marketing services received 195,680 196 -- 48,724
Issuance of common stock for drawings 11,300 11 -- 2,813
Net loss for the year -- -- -- --
---------- ------- --------- ----------
Balance at December 31, 1996 16,078,172 16,078 (350) 2,328,622
Issuance of common stock in conjunction with
a Private Placement Offering, net of $54,359
of offering costs incurred 1,872,084 1,872 -- 411,790
Issuance of common stock for consulting
and marketing services received 196,000 196 -- 48,804
Issuance of stock options for consulting
services received
-- -- -- 412,930
Issuance of common stock for drawings 8,450 9 -- 2,104
Net loss for the year -- -- -- --
---------- ------- --------- ----------
Balance at December 31, 1997 18,154,706 18,155 (350) 3,204,250
</TABLE>
<TABLE>
<CAPTION>
Note
Receivable
from Accumulated
Stockholder deficit Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1, 1996 $ - $(1,643,907) $ 256,257
Issuance of common stock in conjunction with
a Private Placement Offering - -- 392,442
Issuance of common stock for consulting and
marketing services received - -- 48,920
Issuance of common stock for drawings - -- 2,824
Net loss for the year - (1,179,793) (1,179,793)
----------- ----------- -----------
Balance at December 31, 1996 - (2,823,700) (479,350)
Issuance of common stock in conjunction with
a Private Placement Offering, net of $54,359
of offering costs incurred - -- 413,662
Issuance of common stock for consulting
and marketing services received - -- 49,000
Issuance of stock options for consulting
services received
- -- 412,930
Issuance of common stock for drawings - -- 2,113
Net loss for the year - (1,163,797) (1,163,797)
----------- ----------- -----------
Balance at December 31, 1997 - (3,987,497) (765,442)
</TABLE>
Continued
-44-
<PAGE> 45
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Years ended December 31, 1997 and 1996 and Nine Months Ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Note
Common Stock Additional Receivable
----------------------- Treasury Contributed from
Shares Amount Stock Capital Stockholder
---------- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock in conjunction with
a Private Placement Offering (unaudited) 577,000 577 -- 143,673 --
Issuance of common stock in conjunction with
exercise of warrants (unaudited) 1,402,080 1,402 -- 670,888 --
Issuance of common stock in conjunction with
exercise of stock options (unaudited) 302,500 302 -- 185,324 --
Issuance of common stock for consulting and
marketing services received (unaudited) 12,000 12 -- 2,988 --
Issuance of stock options for consulting
services received (unaudited) -- -- -- 6,411 --
Issuance of common stock for drawings
(unaudited) 1,600 2 -- 398 --
Issuance of common stock for related party
debt (unaudited) 1,790,309 1,790 -- 445,786 --
Issuance of common stock for notes payable
(unaudited) 730,429 730 -- 202,651 --
Issuance of common stock for conversion of
debentures (unaudited) 331,831 332 -- 306,162 --
Note receivable from stockholder (unaudited) -- -- -- -- (156,250)
Net loss for the year (unaudited) -- -- -- -- --
---------- ------- ----- ---------- ---------
Balance at September 30, 1998 (unaudited) 23,302,455 $23,302 $(350) $5,168,530 $(156,250)
========== ======= ===== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
deficit Total
----------- ---------
<S> <C> <C>
Issuance of common stock in conjunction with
a Private Placement Offering (unaudited) -- 144,250
Issuance of common stock in conjunction with
exercise of warrants (unaudited) -- 672,290
Issuance of common stock in conjunction with
exercise of stock options (unaudited) -- 185,626
Issuance of common stock for consulting and
marketing services received (unaudited) -- 3,000
Issuance of stock options for consulting
services received (unaudited) -- 6,411
Issuance of common stock for drawings
(unaudited) -- 400
Issuance of common stock for related party
debt (unaudited) -- 447,576
Issuance of common stock for notes payable
(unaudited) -- 203,381
Issuance of common stock for conversion of
debentures (unaudited) -- 306,494
Note receivable from stockholder (unaudited) -- (156,250)
Net loss for the year (unaudited) (903,504) (903,504)
----------- ---------
Balance at September 30, 1998 (unaudited) $(4,891,001) $ 144,231
=========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
-45-
<PAGE> 46
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------------- ---------------------------
1998 1997 1997 1996
--------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net loss $(903,504) $(825,228) $(1,163,797) $(1,179,793)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 55,953 35,918 51,007 53,891
Interest income on note receivable (1,336) -- -- --
Interest expense on notes payable 24,973 9,240 15,160 880
Interest expense on convertible debentures 158,133 5,797 12,753 --
Loss on impairment of goodwill -- -- -- 147,500
Loss on investment -- -- -- 73,389
Common stock and stock options issued for
services received 9,411 357,696 461,930 48,920
Common stock issued for drawings 400 863 2,113 2,824
Changes in assets and liabilities
Accounts receivable (57,428) (45,228) (76,806) (69)
Prepaid expenses and other assets 20,169 (16,326) (34,254) (6,616)
Deferred revenue 45,989 21,776 52,010 (11,180)
Accounts payable 34,845 32,676 (14,445) 33,942
Accrued liabilities 42,228 14,413 (54,652) 95,988
--------- --------- ----------- -----------
Net cash used in operating activities (570,167) (408,403) (748,981) (740,324)
Cash flows from investing activities
Purchase of property and equipment (83,814) (54,370) (69,724) (46,961)
Purchase of certificate of deposit -- -- -- (3,000)
--------- --------- ----------- -----------
Net cash used in investing activities (83,814) (54,370) (69,724) (49,961)
Cash flows from financing activities
Payments on long-term capital lease obligations (1,612) (1,138) (1,654) --
Payments on notes payable (3,072) (22,971) (26,664) --
(Payments) proceeds from convertible debentures (6,562) 228,590 224,702 --
(Payments) proceeds from related parties (114,361) 85,780 119,922 385,932
Proceeds from issuance of common stock and exercise
of stock options 173,625 7,500 413,662 392,442
Proceeds from exercise of warrants 672,290 -- -- --
Proceeds from borrowings under notes payable -- 168,064 173,882 18,222
--------- --------- ----------- -----------
Net cash provided by financing activities 720,308 465,825 903,850 796,596
--------- --------- ----------- -----------
Net increase in cash 66,327 3,052 85,145 6,311
Cash at beginning of period 101,604 16,459 16,459 10,148
--------- --------- ----------- -----------
Cash at end of period $ 167,931 $ 19,511 $ 101,604 $ 16,459
========= ========= =========== ===========
Supplemental disclosure of cash flow information (note N)
Non-cash investing and financing activities (note N)
</TABLE>
The accompanying notes are an integral part of these statements.
-46-
<PAGE> 47
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Plenum Communications, Inc. (the Company), a Minnesota corporation, does
business through its wholly owned subsidiary, LION, Inc., formerly known as
Infosystems, Inc., a Washington corporation. LION provides its subscribers,
principally mortgage brokers and agents, electronic access to a database of
mortgage offerings by a multitude of lenders throughout the United States.
A summary of significant accounting polices consistently applied in the
preparation of the accompanying consolidated financial statements follows.
1. Principles of Consolidation
The financial statements include the accounts of the Company and its wholly
owned subsidiary. All significant intercompany balances and transactions have
been eliminated.
2. Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
3. Revenue Recognition
Subscription and service fees are recognized as revenue over the respective
subscription periods or at the time the services are provided.
4. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives, principally on a straight-line basis. Estimated service
lives of property and equipment range from three to five years.
5. Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the 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.
-47-
<PAGE> 48
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES -- Continued
6. Goodwill
In 1995, the Company acquired all of the assets of Cybernet Systems, Inc.
(Cybernet), a software developer. In 1996, the Company determined that there had
been an impairment in the carrying value of its investment in Cybernet as a
result of the software becoming obsolete. Management determined that the
impairment loss required the write-off of the remaining unamortized balance of
goodwill which totaled $147,500. The impairment loss is reported in other
operating expenses in the Consolidated Statements of Operations.
7. Fair Value of Financial Instruments
In accordance with the requirements of "Statement of Financial Accounting
Standards No. 107 - Disclosure About Fair Value of Financial Instruments", the
following methods and assumptions were used to estimate the fair value of each
class of financial instruments.
o Notes Payable - The carrying amount approximates fair value because of
their short-term nature.
o Related Party Payables and Convertible Debentures - It was not
practicable to estimate the fair value due to the specific nature of
the payables and debentures.
8. Loss Per Common Share
For the year ended December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" which established
standards for computing and presenting earnings per share (EPS). This statement
simplified the standards for computing earnings per share previously found in
APB Opinion No. 15, Earnings per Share", and makes them comparable to
international EPS standards. In accordance with SFAS No. 128, all prior-period
EPS data has been restated to conform with the provisions of the statement.
Earnings (loss) per share are based on the average number of shares outstanding
during each period and income available to common stockholders. Earnings (loss)
per share assuming dilution are based on the assumption that outstanding stock
options and warrants were exercised. The weighted average number of common
shares outstanding was 21,463,755 and 16,210,911 for the nine months ended
September 30, 1998 and 1997, respectively, and 16,367,112 and 15,099,425 for the
years ended December 31, 1997 and 1996, respectively. The computation for loss
per common share assuming dilution for the nine months ended September 30, 1998
and 1997 and for the years ended December 31, 1997 and 1996 was anti-dilutive;
and therefore, is not included.
-48-
<PAGE> 49
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES -- Continued
9. Unaudited Interim Statements
In the opinion of management, the unaudited interim financial statements as of
September 30, 1998 and for the nine months ended September 30, 1998 and 1997
include all adjustments, consisting only of those of a normal recurring nature,
necessary to present fairly the Company's financial position as of September 30,
1998 and the results of its operations and cash flows for the nine months ended
September 30, 1998 and 1997. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of results to be expected for
the full year.
10. Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $54,000 and $10,000 for the nine months ended September 30, 1998
and 1997, respectively, and $24,000 and $12,500 for the year ended December 31,
1997 and 1996, respectively.
NOTE B - MANAGEMENT PLANS
The Company believes that it has made significant progress in achieving
financial stability. The Company also anticipates raising between $1,000,000 and
$1,200,000 from the exercise of its outstanding warrants during 1998 and has
raised approximately $672,000 (unaudited) through the first nine months of 1998.
During the first nine months of 1998, the Company also received $144,000
(unaudited) from the completion of a private placement and $29,000 (unaudited)
from the exercise of stock options. Management believes that the Company will
generate positive cash flow during the second quarter of 1999. Additionally, the
Company is adding new customers on an accelerated basis. Finally, management is
investigating new markets and strategic alliances to generate additional
revenues. Management believes these plans provide for continuance of operations
through December 31, 1998. However, there can be no assurance that the Company
will be able to obtain sufficient additional funding, or be successful in its
future operations.
-49-
<PAGE> 50
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE C - PROPERTY AND EQUIPMENT - AT COST
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------
1998 1997 1996
------------- -------- --------
(unaudited)
<S> <C> <C> <C>
Computer equipment $317,289 $257,607 $198,132
Computer software 165,457 164,743 159,660
Equipment 46,252 22,834 17,669
Equipment under capital lease 11,720 11,720 --
-------- -------- --------
540,718 456,904 375,461
Less accumulated depreciation
and amortization 363,560 307,606 256,600
-------- -------- --------
$177,158 $149,298 $118,861
======== ======== ========
</TABLE>
NOTE D - NOTE RECEIVABLE FROM STOCKHOLDER
At September 30, 1998, the Company has a note receivable from a stockholder and
board member totaling $157,586 including accrued interest of $1,336 resulting
from the exercise of stock options. Interest is accrued at 10% annually. The
note and accrued interest are due on or before March 1, 2000. The underlying
stock certificates are held by the Company as collateral.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------
1998 1997 1996
------------- -------- --------
(unaudited)
<S> <C> <C> <C>
Salaries $ 54,462 $ 34,324 $ 17,300
Payroll taxes 27,933 14,115 70,619
Penalties and interest -- -- 22,952
Vacation 28,214 10,214 7,069
Other 10,755 20,483 15,848
-------- -------- --------
$121,364 $ 79,136 $133,788
======== ======== ========
</TABLE>
-50-
<PAGE> 51
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE F - CONVERTIBLE DEBENTURES
At September 30, 1998 and December 31, 1997, the Company had convertible
debentures totaling $82,532 and $237,455, respectively, including accrued
interest of $46,532 and $12,455, respectively, with maturity dates ranging from
June 1999 through August 1999. Interest is compounded and accrued semi-annually
at a rate of 12% and may be paid monthly at the option of the holder. The
agreement allows the registered owner to convert the outstanding balance, both
principal and accrued interest, into shares of the Company's common stock. The
shares are convertible as follows: 1) at a credit equal to the principal plus
any accrued interest after 180 days but before the end of the 365th day; 2) at a
credit equal to the principal plus any accrued interest times a factor of two
after 365 days but before the end of the 547th day; 3) at a credit equal to the
principal plus any accrued interest times a factor of three after 547 days but
before the end of the 730th day; and 4) at a credit equal to the principal plus
any accrued interest times a factor of four at maturity. Prior to December 31,
1997, no debentures had been converted into shares of the Company's common
stock. During the nine month period ended September 30, 1998, $306,494 of
principal and accrued interest was converted into shares of the Company's common
stock. Of this amount $103,534 represented additional interest expense resulting
from conversion after 365 days but before the 547th day. In addition, accrued
interest at September 30, 1998 includes $41,266 resulting from outstanding
convertible debentures held longer than 365 days but less than 547 days.
NOTE G - RELATED PARTY PAYABLES
Related party payables consist of the following:
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------
1998 1997 1996
------------- -------- --------
(unaudited)
<S> <C> <C> <C>
Accounts payable $ -- $ 90,585 $136,212
Salaries payable, including
interest at 12% 26,524 283,135 166,455
Notes payable, including interest
at 12%, due on demand 1,914 216,656 167,787
-------- -------- --------
$ 28,438 $590,376 $470,454
======== ======== ========
</TABLE>
During the first nine months of 1998, management elected to reduce the amount of
outstanding related party debt by cash payments of $142,800 and the issuance of
1,790,309 shares of the Company's common stock totaling $447,576. Interest
expense incurred under related party agreements totaled $5,833 and $30,610 for
the nine months ended September 30, 1998 and 1997, respectively, and $49,810 and
$25,164 for the years ended December 31, 1997 and 1996, respectively.
In 1996, the Company entered into a purchase and sale agreement with a related
party to assume its investment in a corporation known as Visions and Techniques,
Inc. (V&T). The Company had loaned V&T $73,389 for operations. $50,000 of the
loans are convertible into a 25% interest of V&T. The
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<PAGE> 52
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE G - RELATED PARTY PAYABLES -- Continued
Company determined that it no longer could support V&T's operations and agreed
to sell its rights and interests to the related party for $10 and assumption of
outstanding liabilities. In the event that the related party realizes any
financial consideration from V&T, then the Company will be reimbursed its
investment of $73,389 plus accrued interest at 7% per annum. The loss on the
investment is recorded in operating expenses in the Consolidated Statements of
Operations for 1996.
NOTE H - NOTES PAYABLE
The company has unsecured demand notes totaling $0, $181,480 and $19,102 at
September 30, 1998 and December 31, 1997 and 1996, respectively. The notes are
due on demand and accrue interest at 12% annually. Interest expense incurred
under notes payable agreements totaled $24,973 and $9,240 for the nine months
ended September 30, 1998 and 1997, respectively, and $15,160 and $880 for the
years ended December 31, 1997 and 1996, respectively. During the nine months
ended September 30, 1998, notes payable totaling $182,607 were converted into
730,429 shares of the Company's common stock. Additional interest expense
totaling $20,774 was incurred due to the private placement cost of $.25 per
share being less than the market price per share at the time of conversion.
NOTE I - LONG-TERM CAPITAL LEASE OBLIGATION
The Company leases office equipment under a lease classified as a capital lease.
Following is a schedule by years of future minimum payments under the capital
lease together with the present value, calculated at the Company's incremental
borrowing rate at the inception of the lease:
<TABLE>
<CAPTION>
Year ending September 30, December 31,
------------- ------------
(unaudited)
<S> <C> <C>
1998 $ - $ 2,900
1999 2,900 2,900
2000 2,900 2,900
2001 2,900 2,900
2002 959 233
----- ------
Total minimum lease payments 9,659 11,833
Less amount representing interest (1,205) (1,767)
------- ------
Present value of long-term
obligation under capital lease $8,454 $10,066
====== =======
Current portion $2,305 $ 1,654
Long-term portion 6,149 8,412
------ ------
$8,454 $10,066
====== ======
</TABLE>
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<PAGE> 53
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE J - INCOME TAXES
The Company accounts for income taxes on the liability method, as provided by
Statement of Financial Accounting Standards 109, Accounting for Income Taxes
(SFAS 109).
The income tax provision reconciled to the tax computed at the statutory federal
rate was as follows for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Tax benefit at statutory rate $ 395,700 $ 401,000
Valuation allowance (392,000) (401,000)
Other (3,700) --
--------- ---------
Total $ -- $ --
========= =========
</TABLE>
The components of deferred taxes are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Deferred tax asset:
Liabilities not timely paid $ 3,500 $ 1,900
Depreciation 3,800 15,800
Allowance for doubtful accounts 5,100 7,300
Net operating loss carryforward 985,900 577,900
Goodwill 43,400 46,800
Valuation allowance (1,041,700) (649,700)
----------- ---------
$ - $ -
=========== =========
</TABLE>
The Company has established a valuation allowance of approximately $1,041,700
and $649,700 as of December 31, 1997 and 1996, respectively, due to the
uncertainty of future utilization. The valuation allowance was increased by
$392,000 and $341,000 during the years ended December 31, 1997 and 1996,
respectively. At December 31, 1997, the Company had net operating loss
carryforwards for federal income tax reporting purposes of approximately
$2,899,000 available to offset future income which expire in 2004 through 2012.
-53-
<PAGE> 54
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE K - COMMITMENTS AND CONTINGENCIES
1. Leases
The Company conducts a portion of its operations in leased facilities classified
as operating leases and under month-to-month agreements. The following is a
schedule by years of approximate minimum rental payments under such operating
leases, which expire at various dates through June 2001.
<TABLE>
<CAPTION>
Year ending September 30, December 31,
----------- ------------- ------------
(unaudited)
<S> <C> <C>
1998 $ - $ 94,300
1999 86,800 77,100
2000 77,100 77,100
2001 57,800 38,500
------- -------
Total minimum payments required $221,700 $287,000
======= =======
</TABLE>
The leases provide for payment of taxes and other expenses by the Company. Rent
expense for leased facilities totaled approximately $86,700 and $63,600 for the
nine months ended September 30, 1998 and 1997, respectively, and $91,100 and
$65,200 for the years ended December 31, 1997 and 1996, respectively.
2. Consulting Agreement
The Company has an Incentive Compensation Plan with a key consultant which
provides the option to purchase shares of common stock of the Company. The
purchase price of these optioned shares is as follows: 700,000 shares at $.01
per share, 800,000 shares at $.75 per share, 500,000 shares at $1.50 per share,
and 500,000 shares at $3.00 per share. The 700,000 shares at $.01 per share were
granted in February 1998 and will fully vest by the end of 1998. Compensation
expense of $412,930 was recognized during the year ended December 31, 1997
related to these options based upon the services performed in 1997. The
remaining options will be granted upon the occurrence of certain events and will
vest from January 1999 through December 2001.
-54-
<PAGE> 55
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE L - WARRANTS
The Company had the following warrants outstanding to purchase common shares.
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------
1998 1997 1996
------------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Warrants issued in conjunction with the Private
Placement whereby one warrant entitles the
holder to purchase one share of common stock at
a grant price of $0.25, expiring through 1997 -- -- 371,200
Warrants issued in conjunction with the Private
Placement whereby one warrant entitles the
holder to purchase one share of common stock at
a grant price of $0.50, expiring through 1998 1,871,003 3,204,083 3,204,083
Warrants issued in conjunction with the Private
Placement whereby one warrant entitles the
holder to purchase one share of common stock at
a grant price of $0.25, expiring through 1999 -- 115,000 115,000
Warrants issued in conjunction with the Private
Placement whereby one warrant entitles the
holder to purchase one share of common stock at
a grant price of $0.50, expiring through 1999 3,178,876 3,210,876 1,264,767
Warrants issued in conjunction with the Private
Placement whereby one warrant entitles the
holder to purchase one share of common stock at
a grant price of $0.25, expiring through 2000 204,591 -- --
Warrants issued in conjunction with the Private
Placement whereby one warrant entitles the
holder to purchase one share of common stock at
a grant price of $0.50, expiring through 2000 3,542,917 429,000 261,000
--------- --------- ---------
Total 8,797,387 6,958,959 5,216,050
========= ========= =========
</TABLE>
-55-
<PAGE> 56
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE M - STOCK OPTIONS
The fair value of option grants is estimated using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
fiscal year 1997: expected volatility of 111.72%; risk free interest rate of
6.50%; expected lives ranging from 1 to 3 years; and a zero percent dividend
yield. The following weighted average assumptions were used for grants in fiscal
year 1996: expected volatility of 152.02%; risk free interest rate of 6.50%;
expected lives ranging from two to five years; and a zero percent dividend
yield.
The Company has a stock option plan accounted for under APB Opinion No. 25 and
related Interpretations. The plan allows the Company to grant options to
employees for up to 50,000 shares of common stock per employee. Options
currently outstanding vest over a two to four-year period. The options are
exercisable at not less than the market value of the Company's common stock on
the date of grant. Accordingly, no compensation cost has been recognized for the
plan. Had compensation cost for the plan been determined based on the fair value
of the options at the grant dates consistent with the method required by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), the Company's net loss would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------------------
1998 1997 1996
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Net loss:
As reported $ (903,504) $ (1,163,797) $ (1,179,793)
Pro forma $ (973,588) $ (1,352,473) $ (1,280,140)
Net loss per common share:
As reported $ (.04) $ (.07) $ (.08)
Pro forma $ (.05) $ (.08) $ (.08)
</TABLE>
-56-
<PAGE> 57
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE M - STOCK OPTIONS -- Continued
A summary of the Company's stock option plan's activity is as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 December 31, 1996
----------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
STOCK OPTIONS Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 6,195,000 $.40 5,535,000 $.40 5,450,000 $.39
Granted 1,455,000 .48 1,985,000 .61 160,000 .66
Forfeited or exercised (672,500) .53 (1,325,000) .56 (75,000) .25
---------- ---- ---------- ---- ---------- ----
Outstanding at end of year 6,977,500 $.43 6,195,000 $.43 5,535,000 $.40
========== ==== ========== ==== ========== ====
Options exercisable at end of year
5,947,603 $.37 5,598,875 $.42 4,775,250 $.37
========== ==== ========== ==== ========== ====
Weighted-average fair value of
options granted during the year $.64 $.10 $.29
==== ==== ====
</TABLE>
The following is a summary of stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------------
Weighted-average
Number remaining Number of
Exercise price Outstanding contractual life options exercisable
- -------------- ----------- ---------------- -------------------
<S> <C> <C> <C>
$ .25 3,976,250 2.07 years 3,755,125
.50 906,250 1.53 years 781,250
.75 300,000 2.67 years 250,000
1.00 1,012,500 1.51 years 812,500
</TABLE>
-57-
<PAGE> 58
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (unaudited) and December 31, 1997 and 1996
NOTE N - SUPPLEMENTAL CASH FLOW AND NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental disclosure of cash flow information and non-cash investing and
financing activities is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
------------------------------ -------------------------
1998 1997 1997 1996
------------ ------------- ------------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 32,645 $ 26,774 $ 60,426 $21,701
============ ============= ============= =======
Non-cash investing and financing activities:
Assets acquired under capital leases $ -- $ 11,720 $ 11,720 $ --
Exercise of stock options by note receivable 156,250 -- -- --
Related party debt converted to common stock 447,577 -- -- --
Debentures converted to common stock 306,494 -- -- --
Notes payable converted to common stock 203,381 -- -- --
</TABLE>
-58-
<PAGE> 59
EXHIBIT INDEX
See "Exhibit Index" on p. 61
-59-
<PAGE> 60
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
PLENUM COMMUNICATIONS, INC.
(Registrant)
Date: By: /s/ Allen Ringer
----------------------------------------
Allen Ringer
President and Chief Executive Officer
-60-
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Restated Articles of Incorporation
3.2 Bylaws
4.1 Specimen Common Stock Certificate
10.1 1998 Stock Option Plan with Form of Option Agreement
10.2 Consulting Agreement with H. Baskin
10.3 Premises Lease Agreement (Mercer Island Property) dated as of
June 30, 1998
10.4 Premises Lease Agreement (Spokane Property) dated as of
May 1, 1998
21.1 LION, Inc., a Washington corporation is the sole subsidiary
of the Company
</TABLE>
-61-
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
PLENUM COMMUNICATIONS, INC.
A MINNESOTA CORPORATION
PLENUM COMMUNICATIONS, INC. herein restates its articles of incorporation
pursuant to Subsection 5 of Section 302A.135 of the Minnesota Statutes.
ARTICLE I.
NAME
1.1 The name of the Corporation shall be PLENUM COMMUNICATIONS, INC.
ARTICLE II.
REGISTERED OFFICE AND AGENT
2.1 The registered office of the Corporation in the State of
Minnesota shall be in c/o CT Corporation System Inc. located at 405 Second Ave.
S., Minneapolis, Minnesota 55401. The registered agent of the Corporation is CT
Corporation System Inc.
ARTICLE III.
DURATION
3.1 The duration of this Corporation shall be perpetual.
ARTICLE IV.
PURPOSES AND POWERS
The purposes and powers of the Corporation are:
4.1 General business purpose.
4.2 To develop, manufacture, trade and deal in and with goods and
services of any kind and nature whatsoever, to acquire the assets, tangible or
intangible, of any proprietorship, partnership or corporation, and to assume, in
whole or in part, the liabilities or obligations of any such proprietorship,
1
<PAGE> 2
partnership or corporation; to acquire mining leases, options, interest in real
estate, mining claims, patents and similar interests; to conduct drilling and
exploration activities for the discovery and evaluation of mineral ore
properties; to mine, mill, smelt and process mineral ore; to acquire mills,
equipment, property, both real and personal, to carry out these purposes.
4.3 To borrow money and issue, sell, or pledge bonds, promissory
notes, bills of exchange, debentures, and other securities and obligations, and
evidences of indebtedness, payable at specified time or times, or payable upon
the happening of a specified event or events, whether secured by a mortgage,
pledge, or otherwise, or unsecured.
4.4 To purchase, hold, sell, and transfer shares of the capital
stock, bonds, and other obligations of this Corporation from time to time to
such extent, in such manner and upon such terms as its Board of Directors may
determine.
4.5 To subscribe for, purchase, or otherwise acquire, and hold with
the same rights of ownership therein, including the right to vote, as may be
permitted to natural persons, the shares, bonds, and obligations of any
corporation organized under the laws of any state or the Federal government.
4.6 To have and exercise all powers incident and necessary to effect
all the purposes of the Corporation, including the acquisition, retention,
improvement, selling, dealing in and exercising all rights of ownership over any
and all kinds of personal and real property whatsoever and wheresoever situated.
4.7 To have and exercise all the powers, rights and privileges now or
hereafter conferred by the laws of the State of Minnesota, and to do all things
set forth in these Articles to the same extent as natural persons might do.
4.8 The foregoing purposes and powers shall be construed liberally
and shall in no way be limited or restricted by reference to or inference from
the enumeration of specific powers or any other clause or paragraph of these
Articles.
ARTICLE V.
STATED CAPITAL
5.1 The minimum amount of stated capital with which the Corporation
will commence business is One Thousand ($1,000) dollars.
ARTICLE VI.
CAPITAL STOCK
6.1 Authorized Capital Stock - The Corporation is authorized to issue
55,000,000 shares of its capital stock, which shall be divided into two classes
known as Common Stock and Preferred Stock, respectively. No capital stock, after
the amount of the subscription price or par value has been paid, is subject to
assessment to pay the debts of the Corporation.
2
<PAGE> 3
The total number of shares of Common Stock which the Corporation is
authorized to issue is 50,000,000 with par value of $0.001 per share. The total
number of shares of Preferred Stock which the Corporation is authorized to issue
is 5,000,000 with a par value of $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of the Corporation is hereby authorized, within
the limitations and restrictions prescribed by law or stated in these Articles
of Incorporation, to provide for the issuance of Preferred Stock in series and
(i) to establish from time to time the number of shares to be included in each
such series; (ii) to fix the voting powers, designations, powers, preferences
and relative, participating, optional or other rights of the shares of each such
series and the qualifications, limitations or restrictions thereof, including
but not limited to, the fixing or alteration of the dividend rights, dividend
rate, conversion rights, conversion rates, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
and the liquidation preferences of any wholly unissued series of shares of
Preferred Stock; and (iii) to increase or decrease the number of shares of any
series subsequent to the issue of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
6.2 Voting Rights - Each holder of record of the common stock of the
Corporation shall be entitled to one (1) vote for each share of common stock
held by him at each meeting of the shareholders and in respect to any matter on
which the shareholders have a right to vote. The right to vote shall be subject
to the provisions of the by-laws of the Corporation in effect from time to time
with respect to closing the transfer books and fixing a record date for the
determination of shareholders entitled to vote. Cumulative voting for directors
is not permitted.
6.3 Pre-emptive Rights - The shareholders of the Corporation shall
not have the pre-emptive right of subscription to any shares of common stock of
the Corporation to be allotted or sold, or hereafter authorized, or any
obligations or securities exchangeable for or convertible into stock of the
Corporation of any class, including capital stock of the Corporation which has
not yet been authorized.
6.4 Stock Rights and Options - The Board of Directors shall have the
power to create and issue rights, warrants, or options entitling the holders
thereof to purchase from the Corporation any shares of its capital stock or any
class or series, upon such terms and conditions and at such times and prices as
the Board of Directors may provide, which terms and conditions shall be
incorporated in an instrument or instruments evidencing such rights.
6.5 Dividends - The holders of the common stock shall be entitled to
receive, when and as declared by the Board of Directors, out of earnings or
surplus, legally available therefor, dividends, payable either in cash, in
property, or in shares of the capital stock of the Corporation.
6.6 Board of Directors' Powers - The common stock may be allotted as
and when the Board of Directors shall determine, and pursuant to the laws of the
State of Minnesota, the Board of Directors shall have the power to fix or alter,
from time to time, in respect to shares then unallotted, any or all of the
following: Dividend rate; redemption price; the liquidation price; the
conversion rights and the sinking or purchase fund rights of shares of any
class, or of any series of any class, or the number of shares constituting any
series of any class.
3
<PAGE> 4
ARTICLE VII.
DIRECTORS
7.1 The names and post office addresses of each member of the current
Board of Directors, who shall serve until the next annual meeting of the
shareholders or until their successors shall be elected and qualified are as
follows:
Billy Anders
S. 2010 Overbluff Ct.
Spokane, WA 99203
Allen Ringer
1235 N. Post, Suite #207
Spokane, WA 99201
Sam Ringer
P.O. Box 1639
Mercer Island, WA 98040
Joseph Ringer
P.O. Box 1639
Mercer Island, WA 98040
Alan S. Dernbach
P.O. Box 1639
Mercer Island, WA 98040
Kurt Springman
P.O. Box 1639
Mercer Island, WA 98040
Jacob L. Smith
P.O. Box 1639
Mercer Island, WA 98040
7.2 The Board of Directors is expressly authorized to make and alter
bylaws of this Corporation subject to the power of the shareholders to adopt,
amend or repeal the bylaws; provided, the Board of Directors shall not adopt,
amend, or repeal a bylaw fixing a quorum for meetings of shareholders,
prescribing procedures for removing directors or filling vacancies in the board,
or fixing the number of directors or their classifications, qualifications, or
terms of office, but may adopt or amend a bylaw to increase the number of
directors.
4
<PAGE> 5
ARTICLE VIII.
VOLUNTARY TRANSFER OF CORPORATE ASSETS
8.1 A majority of all the shareholders entitled to vote at any duly
constituted meeting of the shareholders shall have the power to authorize the
Board of Directors to sell, lease, exchange or otherwise dispose of all or
substantially all of the property and assets of this Corporation, including its
good will, upon such terms and conditions and for such consideration as the
Board of Directors deems advisable; to adopt or reject an agreement of
consolidation or merger; provided, however, that notice of such proposal shall
have been mailed to each shareholder entitled to vote at such meeting at least
ten (10) days prior to such meeting, or the written consent of such shareholder
is given to such action as provided by statute.
ARTICLE IX.
AMENDMENT OF ARTICLES
9.1 A majority of all shareholders entitled to vote at any duly
constituted meeting of the shareholders shall have the power to amend, alter or
repeal the Articles of Incorporation to the extent and the manner prescribed by
the laws of the State of Minnesota.
DATED: .
------------------------------------
- -----------------------------------------------
LAURITZ O. FALK, Secretary
5
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
PLENUM COMMUNICATIONS, INC.
A MINNESOTA CORPORATION
1.0 OFFICES
1.1 The principal executive offices of Plenum Communications, Inc.
(the "Company") shall be located at 3003 80th Avenue S.E., Mercer Island, WA
98040. The resident office of the Company in the State of Minnesota shall be in
c/o CT Corporation System Inc. located at 405 Second Ave. S., Minneapolis,
Minnesota 55401. The Company may establish other offices either within or
without the State of Minnesota, at such place or places as the Board of
Directors may from time to time appoint or the business of the Company may
require.
2.0 BOARD OF DIRECTORS
2.1 General Powers and Duties. Subject to the provisions of the
Minnesota Business Corporations Act and any limitations in the Articles of
Incorporation or these Bylaws relating to action required to be approved by the
stockholders or by the outstanding shares, the business and affairs of the
Company shall be managed and all corporate powers shall be exercised by or under
the direction of the Board of Directors. The Board of Directors may elect any
member of the Board as Chairman. He shall, if present, preside at all meetings
of the Board of Directors. He shall have other powers and duties as the Board
prescribes, but shall not be considered an officer of the Company by virtue of
his duties as Chairman.
2.2 Number, Tenure and Qualifications. The Board of Directors shall
consist of not less than three (3) directors nor more than nine (9) directors,
the exact number of directors to be determined from time to time solely by
resolution adopted by the Board of Directors. The size of the Board of Directors
may at any time be increased or decreased by the Directors or by the
shareholders at any regular or special meeting provided that no decrease shall
have the effect of shortening the term of any incumbent Director except as
otherwise provided in these Bylaws. Directors shall be elected at the annual
meeting of shareholders, and except as provided below in this section, the term
of office of each Director shall be until the next annual meeting of
shareholders and the election and qualification of his successor. Any
directorship to be filled by reason of an increase in the number of Directors
may be filled by the Board of directors for a term of office continuing only
until the next election of Directors, or by shareholders for the term of office
associated with the class to which Directors are elected. Directors need not be
shareholders of the Company or residents of the State of Minnesota.
If there are three or more directors, the Board of Directors may be
divided into three classes, Class I, Class II, and Class III, which shall be as
nearly equal in number as possible. Each Director shall serve for a term ending
on the date of the third annual meeting following the annual meeting at which
the Director was elected; provided that each initial Director in Class I shall
hold office until the first annual meeting of shareholders; each initial
Director in Class II shall hold office until the second annual meeting of
shareholders, and each initial director in Class III shall hold office until the
third annual
1
<PAGE> 2
meeting of shareholders. Not withstanding the foregoing provisions, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation or removal.
2.3 Regular Meetings. A regular meeting of the Board of Directors
shall be held without notice other than the notice given by these Bylaws
immediately after and at the same place as the annual meeting of shareholders.
Additional regular meetings shall be held at the principal office of the Company
in the absence of any designation in the resolution.
2.4 Special Meetings. Special meetings of the Board of Directors for
any purpose or purposes may be called by or at the request of the President,
Chairman of the Board, or any two directors, and shall be held at the principal
place of business of the Company or at any other place as the Directors may
determine.
2.5 Action of Directors by Communications Equipment. Any regular or
special meeting of the Directors may be called and held over telephone or other
electronic means, and communication from a Director by telephone or other
electronic means constitutes attendance at the meeting so held.
2.6 Notice. Notice of any special meeting shall be given at least
forty-eight (48) hours before the time fixed for the meeting, by written or oral
notice delivered personally or mailed to each Director at his business address,
by facsimile, by telegram, or by teletype, wire or wireless equipment which
transmits a facsimile of the notice. If mailed, the notice shall be deemed to be
delivered when deposited in the United States mail with postage prepaid, not
less than five (5) days prior to the commencement of the above stated notice
period. If notice is given by telegram, the notice shall be deemed to be
delivered when the telegram is delivered to the telegraph company. Any Director
may waive notice of any meeting. The attendance of a Director at a meeting shall
constitute a waiver of notice of the meeting, except where a Director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
Board of Directors need be specified in the notice or waiver of notice of the
meeting.
2.7 Quorum. Except as otherwise required by law, a majority of the
number of Directors fixed by these Bylaws, or as amended, shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors,
but if less than a majority is present at a meeting, a majority of the Directors
present may adjourn the meeting from time to time without further notice. At an
adjourned meeting at which a quorum is present or represented, any business may
be transacted that might have been transacted at the meeting as originally
notified. The Directors present at the duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
Directors to leave less than a quorum, if any action taken is approved by at
least a majority of the remaining Directors.
2.8 Board Decisions. The act of the majority of the Directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors. However, an actual majority shall be required for:
(a) Recommending to the shareholders an amendment to the Articles of
Incorporation;
(b) Adopting a plan of merger or consolidation;
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(c) Recommending to the shareholders the sale, lease, exchange,
mortgage, pledge, or other disposition of all or substantially all the property
and assets of the Company other than in the usual and regular course of its
business;
(d) Recommending to the shareholders a voluntary dissolution of the
Company or a revocation of the Company;
(e) Amending the Bylaws of the Company.
(f) Filling vacancies on the Board of Directors;
(g) Authorizing or approving reacquisition of shares, except
according to a formula or method prescribed by the Board of Directors;
(h) Authorizing or approving the issuance or sale or contract for
sale of shares, or determine the designation and relative rights, preferences
and limitations of a class or series of shares, except that the Board of
Directors may authorize a committee to do so within the limits specifically
prescribed by the Board of Directors.
2.9 Vacancies. Any vacancy occurring in the Board of Directors
including one created by an increase in the number of Directors shall be filled
by the affirmative vote of a majority of the remaining Directors though less
than a quorum of the Board of Directors, or by a sole remaining Director. A
Director elected to fill a vacancy not created by an increase in the number of
Directors shall be elected for the unexpired term of his predecessor in office.
A Director elected to fill a vacancy created by an increase in the number of
directors shall be elected for a term of office continuing until the next
election of Directors.
2.10 Board Action By Written Consent Without A Meeting. Unless
otherwise restricted by the Articles of Incorporation or these Bylaws, any
action required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing is filed with the minutes of proceedings of the board or committee.
Written consents representing actions taken by the Board of Directors or
committee may be executed by telex, telecopy or other facsimile transmission,
and such facsimile shall be valid and binding to the same extent as if it were
an original.
2.11 Compensation. Unless otherwise restricted by the Articles of
Incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of the Directors or reimburse the Directors for their
expenses, if any, of attendance at each meeting of the Board of Directors, and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as Director. No such payment shall preclude any Director from
serving the Company in any other capacity and receiving compensation therefor.
2.12 Presumption of Assent. A Director who is present at a meeting of
the Board of Directors at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment of the meeting or shall forward his dissent by registered
mail to the secretary of the Company immediately after the adjournment of the
meeting. The right to dissent shall not apply to a Director who voted in favor
of the action.
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2.13 Approval of Loans to Officers. The Company may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the Company or of its subsidiary, including any officer or employee who is a
director of the Company or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Company. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Company. Nothing in this section contained shall be deemed to deny
limit or restrict the powers of guaranty or warranty of the Company at common
law or under any statute.
2.14 Executive Committee. By resolution passed by a majority of the
entire Board of Directors, the Board of Directors may designate one (1) or more
committees, each committee to consist of one (1) or more Directors to constitute
an executive committee to the extent provided in the resolution and shall have
and may exercise all the authority of the Board of Directors in the management
of the Company, but no such committee shall have the power or authority to :
(a) Recommend to the shareholders the amendment to the Articles of
Incorporation;
(b) Adopt a plan of merger or consolidation;
(c) Recommend to the shareholders the sale, lease, exchange,
mortgage, pledge, or other disposition of all or substantially all the property
and assets of the Company otherwise than in the usual and regular course of its
business;
(d) Recommend to the shareholders a voluntary dissolution of the
Company or a revocation of the Company;
(e) Amend the Bylaws of the Company.
(f) Fill vacancies on the Board of Directors;
(g) Authorize or approve reacquisition of shares, except according to
a formula or method prescribed by the Board of Directors;
(h) Authorize or approve the issuance or sale or contract for sale of
shares, or determine the designation and relative rights, preferences and
limitations of a class or series of shares, except that the Board of Directors
may authorize a committee to do so within the limits specifically prescribed by
the Board of Directors;
(i) Take any action expressly required by the Minnesota Business
Corporations Act to be submitted to shareholders of the Company for approval.
2.15 Standards of Conduct for Directors. A Director shall discharge
the duties of a Director, including the duties as a member of a committee, in
good faith, with the care an ordinarily prudent person in a like position would
exercise under similar circumstances and in a manner the Director reasonably
believes to be in the best interests of the Company.
In discharging the duties of a Director, a Director is entitled to
rely in good faith upon information, opinions, reports or statements including
financial statements and other financial data, if
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prepared or presented by (1) one or more officers or employees of the Company
whom the Director reasonably believes to be reliable and competent in the
matters presented; (2) legal counsel, public accountants or other persons as to
matters the Director reasonably believes are within the person's professional or
expert competence; or (3) a committee of the Board of Directors of which the
Director is not a member if the Director reasonably believes the committee
merits confidence.
A Director is not liable for any action taken as a Director, or any
failure to take any action, if the Director performed the duties of the
Director's office in compliance with these Bylaws.
3.0 SHAREHOLDERS
3.1 Annual Meeting. The annual meeting of the shareholders of the
Company shall be held on such date, time, and place, either within or without
the State of Minnesota, as may be designated by resolution of the Board of
Directors each year. At the meeting, directors shall be elected and any other
proper business may be transacted.
3.2 Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
(a) the chief executive officer; (b) the chief financial officer; (c) two or
more directors; or (d) at the request of the holders of not less than ten
percent or more of the voting power of all shares entitled to vote, except that
a special meeting for the purpose of considering any action to directly or
indirectly facilitate or effect a business combination, including any action to
change or otherwise affect the composition of the board of directors for that
purpose, must be called by 25 percent or more of the voting power of all shares
entitled to vote.
3.3 Place of Meeting. The Board of Directors may designate any place
within or outside of the State of Minnesota as the place of meeting for any
annual meeting or for any special meeting called by the Board of Directors. A
special meeting called by or at the demand of a shareholder or shareholders
pursuant to paragraph 3.2 shall be held in the county where the principal
executive office of the Company is located.
3.4 Notice of Meeting. Written or printed notice stating the place,
day, and hour of the meeting and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
(10) nor more than sixty (60) days, except as otherwise required by statute,
before the date of the meeting, either personally or by mail, by or at the
direction of the President, Secretary, or the officer or persons calling the
meeting, to each shareholder of record entitled to vote at the meeting. If
mailed, the notice shall be deemed to be delivered when deposited in the United
States mail with postage prepaid, addressed to the shareholder at his address as
it appears on the stock transfer books of the Company. Any shareholder may waive
notice of any meeting by written notice signed by him or his duly authorized
attorney-in-fact, either before or after the meeting.
3.5 Record Date. For the purpose of determining the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty (60) days nor less than ten (10) days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day preceding the date of
notice, or if notice is waived, at the close of business on the day preceding
the date of the meeting. Written notice of any meeting of
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shareholders, if mailed, is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the Company. An affidavit of the Secretary or an Assistant Secretary
of the Company shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. A determination of shareholders of record entitled to
notice of or to vote at a meeting of shareholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
For the purpose of determining the shareholders entitled to consent
to any corporate action of the Company in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than ten (10) days after the
date upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining shareholders entitled to consent to corporate action
of the Company in writing without a meeting, when no prior action by the Board
of Directors is required under Minnesota law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Company. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required under Minnesota
law, the record date for determining which shareholders are entitled to consent
to corporate action of the Company in writing without a meeting shall be at the
close of business on the day on which the Board of Directors adopts a resolution
taking such prior action.
For the purpose of determining the shareholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which date shall be not more that sixty (60) days prior to such action. If
no record date is fixed, the record date for determining shareholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
3.6 Quorum. Forty percent (40%) of the outstanding shares of the
Company entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. If less than forty percent (40%) of the
outstanding shares is represented at a meeting, then either (a) the Chairman of
the meeting or (b) a majority of the shares so represented may adjourn the
meeting from time to time without further notice. At the adjourned meeting at
which a quorum is present or represented, any business may be transacted that
might have been transacted at the meeting as originally notified. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on the subject matter shall be the act of the shareholders.
3.7 Proxies. At all meetings of shareholders, a shareholder may vote
by proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. The proxy shall be filed with the Secretary of the Company
before or at the time of the meeting. Any solicitation of proxies by the
Directors or management of the Company shall be made by mailing the proxies by
certified mail or providing them to the shareholder in an alternative acceptable
manner at least not less than ten (10) days nor more than sixty (60) days before
the date of the meeting for which the proxies are solicited. Each shareholder as
of the record date shall receive a proxy. Proxies shall describe the location
and purpose of the meeting and the matter or business for which the proxy is
solicited. No proxy shall be valid after the
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expiration of eleven (11) months from the date of its creation, unless otherwise
permitted by the Minnesota Business Corporations Act.
3.8 Voting of Shares. Subject to the provisions of any applicable
law, each outstanding share entitled to vote shall be entitled to one vote on
each matter submitted to a vote at a meeting of the shareholders. No shareholder
shall be entitled to cumulate his votes for election of directors.
3.9 Consent to Action. Any action which may be taken at a meeting of
the shareholders may be taken without a meeting if a consent in writing setting
forth the action so taken is signed in original, facsimile or counterpart form
by shareholders holding all of the voting power.
3.10 Action of Shareholders by Communications Equipment. Shareholders
may participate in a meeting of shareholders by means of telephonic device by
means of which all persons participating in the meeting can hear each other at
the same time, and participation by these means shall constitute presence in
person at a meeting.
3.11 Shareholder's Right of Inspection. Any shareholder, in person or
by attorney or other agent, upon written demand under oath stating the purpose
thereof, has the right during usual hours for business to inspect for any proper
purpose the Company's stock ledger, a list of its shareholders, and its other
books and records and to make copies or extracts therefrom.
4.0 OFFICERS
4.1 Number. The officers of the Company shall be a Chief Executive
Officer, President, none, one or more Vice Presidents (the number of Vice
Presidents to be determined by the Board of Directors), a Secretary, a Chief
Financial Officer, a Controller and a Treasurer each of whom shall be elected by
the Board of Directors. Other officers and assistant officers as may be deemed
necessary may be elected or appointed by the Board of Directors. Any two or more
offices may be held by the same person.
Each officer has the authority and shall perform the duties set forth
in these Bylaws or, to the extent consistent with these Bylaws, the duties
prescribed by the Board of Directors or by direction of an officer authorized by
the Board of Directors to prescribe the duties of other officers.
4.2 Election and Term of Office. The officers of the Company to be
elected by the Board of Directors shall be elected annually at the first meeting
of the Board of Directors held after each annual meeting of the shareholders. If
the election of officers is not held at the meeting, the election shall be held
as soon thereafter as is convenient. Each officer shall hold office until his
successor has been duly elected and qualifies or until his death or until he
resigns or is removed in the manner provided by these Bylaws.
4.3 Removal. Any officer or agent elected or appointed by the Board
of Directors may be removed by the Board of Directors whenever in its judgment
the best interests of the Company would be served by that removal, but the
removal shall be without prejudice to the contractual rights, if any, of the
person so removed.
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4.4 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or otherwise, may be filled by the Board of Directors
for the unexpired portion of the term in the manner prescribed by these Bylaws
for the regular election or appointment of such office.
4.5 Standards of Conduct for Officers. An officer with discretionary
authority shall discharge the duties of an officer under that authority in good
faith, with the care an ordinarily prudent person in a like position would
exercise under similar circumstances, and in a manner the officer reasonably
believes to be in the best interests of the Company.
In discharging the duties of an officer, an officer is entitled to
rely in good faith upon information, opinions, reports or statements including
financial statements and other financial data, if prepared or presented by (1)
an officer or employee of the Company whom the officer reasonably believes to be
reliable and competent in the matters presented or legal counsel, public
accountants or other persons as to matters the officer reasonably believes are
within the professional or expert competence of such legal counsel, public
accountants or other persons who have been selected with reasonable care by or
on behalf of the Company.
An officer is not acting in good faith if the officer has knowledge
concerning the matter in question that makes reliance otherwise permitted by
these bylaws unwarranted.
An officer is not liable for any action taken as an officer, or any
failure to take any action, if the officer performed the duties of the office in
compliance with these bylaws.
If any certificate or report made or public notice given by an
officer of the Company shall be false or fraudulent in any material
representation, any officer knowingly and intentionally signing the same shall
be jointly and severally and personally liable to any person who has become a
creditor or stockholder of the Company upon the faith of any such material
representation therein to the amount of the debt contracted upon the faith
thereof if not paid when due, or the damage sustained by any purchaser of or
subscriber to its stock upon the faith thereof.
The liability imposed by this section shall exist in all cases where
the contents of any such certificate, report or notice of any material
representation therein shall have been communicated either directly or
indirectly to the person so becoming a creditor or stockholder and he became
such creditor or stockholder upon the faith thereof.
4.6 Powers and Duties of the Chief Executive Officer. The Chief
Executive Officer shall preside at all meetings of the shareholders and in the
absence of the Chairman of the Board, at all meetings of the Board of Directors.
He shall have ultimate responsibility and authority for management including but
not limited to, the power to appoint committees, officers, agents or employees
from time to time as he may, in his discretion, decide is appropriate to assist
in the conduct of the affairs of the Company. He shall enforce these Bylaws and
generally shall supervise and control the business, affairs and property of the
Company. He shall have general and active supervision over the Company's
officers and may sign, execute and deliver in the name of the Company corporate
documents, instruments, powers of attorney, contracts, bonds and other
obligations.
4.7 Powers and Duties of the President. The President shall have the
authority and perform such duties as the Board of Directors authorizes or
directs. If no Chief Executive Officer has been appointed, or in the event of
the death of the Chief Executive Officer or his or her inability to act, the
President shall perform the duties of the Chief Executive Officer, except as may
be limited by resolution
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of the Board, with all the powers of, and subject to all of the restrictions
upon, the Chief Executive Officer.
4.8. Duties of the Vice President(s). The Vice President(s) shall
have the authority and perform duties as the Board of Directors or Chief
Executive Officer may authorize or direct.
4.9 Duties of the Secretary. The Secretary shall subscribe the
minutes of all meetings of the shareholders and the Board of Directors. He shall
mail notices to the shareholders and the Directors of the Company of the holding
of any meeting as prescribed by these Bylaws. If the Company has a seal, the
secretary shall be the custodian of the seal and shall affix it to minutes,
notices or other instruments executed by the Company as required. He shall have
the authority and perform other duties as the Board of Directors or Chief
Executive Officer may authorize or direct.
4.10 Duties of the Assistant Secretary. The Assistant Secretary, in
the event of the appointment of an assistant secretary by the Board of
Directors, shall, in the Secretary's absence or in the case of the Secretary's
inability to act or in case it shall be inconvenient for the Secretary to so
act, perform the duties of the secretary as may be necessary. He shall have the
authority and perform other duties as the Board of Directors or Chief Executive
Officer may authorize or direct.
4.11 Duties of the Chief Financial Officer. The Chief Financial
Officer for the Company shall have charge of and be responsible for all funds
and securities belonging to the Company and shall keep and deposit the funds for
and on behalf of the Company in a bank or banks to be designated by the Board of
Directors. In the absence of a designation he may select the bank or banks in
which to deposit the funds. He shall have the authority and perform other duties
as the Board of Directors or Chief Executive Officer may authorize or direct.
4.12 Duties of the Controller. The Controller for the Company shall
be charged with certain duties in relation to the fiscal affairs of the Company,
principally to examine and audit the accounts, to keep records, and report the
financial situation from time to time. He shall have the authority and perform
other duties as the Board of Directors may authorize or direct.
4.13 Duties of the Treasurer. The Treasurer shall have the authority
and perform such duties as the Board of Directors authorize or direct.
4.14 Subordinate Officers and General Managers. The Board of
Directors may create subordinate offices and employ subordinate officers or
agents as it from time to time deems expedient and may fix the compensation of
the officers or agents and define their powers and duties, provided the powers
and duties do not constitute a delegation of the authority as is reposed in the
Directors by law, which shall be exercised and performed exclusively by them.
The Board of Directors shall also have the power to appoint a General Manager,
who shall hold office at the pleasure of the Board. The Board of Directors shall
have the power to delegate to the General Manager the executive power and
authority as it may deem necessary to facilitate the handling and management of
the Company's property and interests.
4.15 Salaries. The salaries of the officers shall be fixed from time
to time by the Board of Directors, and no officer shall be prevented from
receiving a salary by reason of the fact that he is also a Director of the
Company.
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5.0 CONTRACTS, CORPORATE FUNDS, LOANS, CHECKS AND DEPOSITS
5.1 Contracts. Without limiting any powers elsewhere granted by these
Bylaws to the President or other officer of the Company, the Board of Directors
may authorize any officer or officers, agent or agents, to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the Company, and the authority may be general or confined to specific instances.
5.2 Corporate Funds. All funds of the Company shall be under the
supervision of the Board of Directors and shall be handled and disposed of in
the manner and by the officers or agents of the Company as provided in these
Bylaws or as the Board of Directors may authorize by proper resolutions from
time to time.
5.3 Loans. No loans shall be contracted on behalf of the Company and
no evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the Board of Directors. The authority may be general or confined
to specific instances.
5.4 Checks, Drafts, or Orders. All checks, drafts, or other orders
for the payment of money, notes, or other evidence of indebtedness issued in the
name of the Company shall be signed by an officer or officers, agent or agents
of the Company and in a manner as shall from time to time be determined by
resolution of the Board of Directors.
5.5 Deposits. All funds of the Company not otherwise employed shall
be deposited from time to time to the credit of the Company in banks, trust
companies, or other depositories as the Board of Directors may in its discretion
select.
6.0 CERTIFICATES FOR SHARES; TRANSFERS
6.1 Certificates for Shares. Certificates representing shares of the
Company shall be in a form as shall be determined by the Board of Directors. The
certificates shall be signed by the President or a Vice President, if any. If
the Company has more than one shareholder, the certificate shall also be signed
by the Treasurer, the Secretary or an Assistant Secretary. All certificates for
shares shall be consecutively numbered or otherwise identified. The name and
address of the person to whom the shares represented by the certificates are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books to the Company. All certificates surrendered to the Company
for transfer shall be canceled and no new certificate shall be issued until the
former certificate for a like number of shares shall have been surrendered and
canceled, except that in case of a lost, destroyed, or mutilated certificate a
new one may be issued on the terms and indemnity to the Company as the Board of
Directors may prescribe.
6.2 Registrar. The registrar is the person designated by the Company
to keep official shareholder records, including names and addresses of
shareholders and number of shares owned. The registrar may hold one or more
offices or no offices of the Company.
6.3 Transfer of Shares. Transfer of shares of the Company shall be
made in the manner specified in the Uniform Commercial Code. The Company shall
maintain stock transfer books, and any transfer shall be registered only on
request and surrender of the stock certificate representing the transferred
shares, duly endorsed. The Company shall have the absolute right to recognize as
the owner of any shares of stock issued by it, the person or persons in whose
name the certificate representing the
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shares stands according to the books of the Company for all proper Company
purposes, including the voting of the shares represented by the certificate at a
regular or special meeting of shareholders, and the issuance and payment of
dividends on the shares.
6.4 Shares of Another Corporation. Shares owned by the Company in
another corporation, domestic or foreign, may be voted by an officer, agent or
proxy as the Board of Directors may determine or, in the absence of a
determination, by the President of the Company.
6.5 Subscriptions. Subscriptions to the shares shall be paid at times
and in installments as the Board of Directors may determine. The Board of
Directors may adopt resolutions prescribing penalties for default on
subscription agreements.
7.0 FISCAL YEAR
7.1 The fiscal year of the Company is the calendar year unless
otherwise changed by the Board of Directors. The Board of Directors may change
the fiscal year of the Company from time to time.
8.0 DIVIDENDS
8.1 Subject to the restrictions of the Minnesota Business
Corporations Act, the Board of Directors may from time to time declare, and the
Company may pay, dividends on its outstanding shares in the manner and on the
terms and conditions provided by law and its Articles of Incorporation.
9.0 SEAL
9.1 The Board of Directors may adopt a corporate seal, which shall be
circular in form and shall have inscribed on it the name of the Company, the
year incorporated, the state of incorporation and the words "corporate seal."
The seal shall be stamped or affixed to documents as may be prescribed by law or
by the Board of Directors.
10.0 CONFLICT OF INTEREST
10.1 No contract or other transaction between the Company and one or
more of its Directors or any other corporation, firm, association or entity in
which one or more of its Directors are directors, officers or legal
representatives or are financially interested, shall be either void or voidable
because of the relationship or interest or because the Director or Directors are
present at the meeting of the Board of Directors or a committee of Directors
which authorizes, approves or ratifies a contract or transaction, if:
(a) The material facts of a relationship or interest are fully
disclosed or known to the shareholders and the contract or
transaction is approved in good faith by (i) the holders of
two-thirds of the voting power of the shares entitled to vote which
are owned by persons other than the interested director or directors;
(b) The material facts of a relationship or interest are fully
disclosed or known to the Board of Directors or committee which in
good faith authorizes, approves or ratifies the
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contract or transaction by a vote or consent sufficient for the
purpose, however the interested director or directors shall not be
counted in determining the presence of a quorum and shall not vote;
or
(c) The contract or transaction is, and the person asserting the
validity of the contract or transaction sustains the burden of
establishing that the contract or transaction is, fair and reasonable
as to the Company at the time it is authorized, approved, and
ratified by the Board of Directors, committee designated by the Board
of Directors, or the shareholders.
11.0 NOTICE AND CONSENT
11.1 Waiver of Notice. Whenever any notice is required to be given to
any shareholder or Director of the Company under the provisions of these Bylaws,
the Articles of Incorporation, or by law, a waiver in writing, signed in
original, facsimile or counterpart by the person or persons entitled to notice,
whether before or after the time stated in the notice, shall be deemed
equivalent to the giving of a notice. Any shareholder or Director may waive
notice of any meeting by a notice signed by him or his duly authorized attorney,
either before or after the meeting. Attendance of a shareholder or Director of
the Company at a meeting shall constitute waiver of notice of a meeting except
where a shareholder or Director attends a meeting for the express purpose of
objecting to the transaction of any business because the meeting is not lawfully
called or adjourned.
11.2 Consent to Action. Any action which may be taken at a meeting of
the shareholders, may be taken without a meeting if a consent in writing setting
forth the action so taken is signed in original, facsimile or counterpart by
shareholders holding all of the voting power. Any action which may be taken at a
meeting of the Board of Directors may be taken without a meeting if written
consent is signed by all members of the Board or Directors entitled to vote on
the action. The consent shall have the same force and effect as a unanimous vote
of the shareholders or Directors. Notice requirements of these Bylaws which
apply to meetings of shareholders and Directors are deemed waived by all
Directors and shareholders if a Consent to Action is signed in lieu of holding
an actual meeting.
12.0 RESTRICTIONS ON TRANSFER
12.1 Transfer of shares. No securities of this Company or
certificates representing the securities shall be transferred in violation of
any law or of any restriction on transfer set forth in the Articles of
Incorporation or amendments to the Articles, or the Bylaws; or contained in any
buy/sell agreements, right of first refusal, or other agreement restricting a
transfer which has been executed by the Company, or filed with the Secretary of
the Company and signed by the parties to the agreement. The Company shall not be
bound by any restrictions not so filed and noted.
12.2 Restrictive Legend. The Company and any party to any agreement
shall have the right to have a restrictive legend imprinted upon any of the
certificates and any certificates issued in replacement or exchange or with
respect to them.
13.0 AMENDMENTS
13.1 The power to alter, amend or repeal the Articles of
Incorporation is vested exclusively in the shareholders and must be approved by
a majority vote of all classes of shareholders having the right
12
<PAGE> 13
to vote. The Board of Directors may submit to the shareholders a recommendation
to alter, amend or repeal the Bylaws or to adopt new Bylaws.
13.2 To the fullest extent possible under Minnesota law, the power to
alter, amend or repeal the Bylaws is vested in the Board of Directors. Changes
in and additions to the Bylaws by the Board of Directors shall be reported to
the shareholders at their next regular or special meeting, and shall be subject
to the approval or disapproval of the shareholders at the meeting. If no action
to amend or repeal bylaws is then taken by the shareholders on a change in or
addition to the Bylaws, the change or addition shall be deemed to be fully
approved and ratified by the shareholders. The board shall not adopt, amend, or
repeal a bylaw fixing a quorum for meetings of shareholders, prescribing
procedures for removing directors or filling vacancies in the board, or fixing
the number of directors or their classifications, qualifications, or terms of
office, but may adopt or amend a bylaw to increase the number of directors.
14.0 INDEMNIFICATION AND LIABILITY
14.1 Indemnification of Directors. The Company shall indemnify
officers and Directors to the fullest extent possible under Minnesota law,
against expenses (including attorney's fees), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the Company. For purposes of this section, a "director" or "officer" of the
Company includes any person (a) who is or was a director or officer of the
corporation, (b) who is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, or (c) who was a director or officer of a corporation which
was a predecessor corporation of the Company or of another enterprise at the
request of such predecessor corporation.
14.2 Neither the Company, its Directors nor its officers will be in
any way liable to the shareholders where legal counsel has been relied upon in a
matter.
14.3 Indemnification of Others. The Company shall have the power, to
the maximum extent and in the manner permitted by the Minnesota Business
Corporations Act, to indemnify each of its employees and agents (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the Company. For purposes of this section, an "employee"
or "agent" of the Company (other than a director or officer) includes any person
(a) who is or was an employee or agent of the Company, (b) who is or was serving
at the request of the Company as an employee or agent of another corporation
partnership, joint venture, trust or other enterprise, or (c) who was an
employee or agent of a Company which was a predecessor corporation of the
Company or of another enterprise at the request of such predecessor corporation.
14.4 Other Rights. The indemnification provided by these Bylaws shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any bylaws, agreement, vote of shareholders, or disinterested
directors or otherwise, both as to action in his or her official capacity and as
to action in another capacity while holding such office, and shall continue as
to any person who ceased to be director, trustee, officer, employee or agent,
and shall inure to the benefit of the heirs, executors and administrators of
such person.
14.5 Insurance. The Company may purchase and maintain insurance on
behalf of any person who is or was a director, officer or acted in any other
capacity as an agent of the Company, or is or was
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<PAGE> 14
serving at the request of the Company as a director, officer or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in a such
capacity or arising out of his or her status as such, whether or not the Company
would have the power to indemnify him or her against such liability under the
provisions of this section.
CERTIFICATION AS TO THE BYLAWS OF THE COMPANY
I, the undersigned, being the Secretary of the Company do hereby
certify the foregoing to be the Bylaws of the Company.
- ----------------------------------------------
L.O. Falk, Secretary
14
<PAGE> 1
EXHIBIT 4.1
SPECIMEN COMMON STOCK CERTIFICATE
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
CUSIP NO. 728089 10 2
NUMBER SHARES
SPECIMEN SPECIMEN
PLENUM COMMUNICATIONS, INC.
50,000,000 AUTHORIZED SHARES $.001 PAR VALUE NON-ASSESSABLE
THIS CERTIFIES THAT
IS THE REGISTERED HOLDER OF
SHARES OF
PLENUM COMMUNICATIONS, INC.
transferable on the books of the Corporation in person or by duly
authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is no valid until countersigned by the
Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
CORPORATE
SEAL
SECRETARY PRESIDENT
<PAGE> 2
COUNTERSIGNED AND REGISTERED
TranSecurities International, Inc.
2510 No. Pine Road, Suite 202
Spokane, Wash 99206
1-509-927-1255
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT. ________ Custodian ____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
Survivorship and not as tenants Act. ___________________________
In common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________ hereby sell, assign and transfer unto
PLEASE INSERT SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------
- -------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
- --------------------------------------------------------------------------------
________________________________________________________________________ Shares
of the capital stock represented by the within certificate and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------
------------------------------------------------------------------------
NOTICE: SIGNATURE MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE
OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY
A BANK, BROKER OR ANY OTHER ELIGIBLE GUARANTOR INSTITUTION THAT
IS AUTHORIZED TO DO SO UNDER THE SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM (STAMP) UNDER RULES PROMULGATED BY THE U.S.
SECURITIES AND EXCHANGE COMMISSION.
2
<PAGE> 1
EXHIBIT 10.1
1998 STOCK OPTION PLAN WITH FORM OF OPTION AGREEMENT
PLENUM COMMUNICATIONS, INC.
1998 STOCK OPTION PLAN
This 1998 Stock Option Plan ("Plan") provides for the grant of
options to acquire shares of common stock, .001 par value ("Common Stock") of
PLENUM COMMUNICATIONS, INC., a Minnesota corporation ("Company"). Stock options
granted under this Plan are referred to in this Plan as "Options." Options that
qualify under Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), are referred to in this Plan as "Incentive Stock Options." Options
granted under this Plan that do not qualify under Section 422 of the Code are
referred to as "Nonqualified Stock Options."
1.0 PURPOSES
1.1 The purposes of this Plan are (i) to retain the services of a
management team, qualified employees of the Company and non-employee advisors or
consultants as the Plan Administrators shall select in accordance with this
Plan; (ii) to retain the services of valued non-employee directors pursuant to
Section 5.15 below; (iii) to provide these persons with an opportunity to obtain
or increase a proprietary interest in the Company, to provide incentives for
effective service and high-level performance, to strengthen their incentive to
achieve the objectives of the shareholders of the Company; and (iv) to serve as
an aid and inducement in the hiring or recruitment of new employees,
consultants, non-employee directors and other persons needed for future
operations and growth of the Company. Employees, non-employee advisors and
consultants are referred to in this Plan as "Service Providers."
2.0 ADMINISTRATION
2.1 This Plan shall be administered by, or in accordance with the
recommendation of, the Board of Directors of the Company ("Board"). The Board
may, in its discretion, establish a committee composed of two or more members of
the Board to administer this Plan ("Committee") which may be an executive,
compensation or other committee, including a separate committee especially
created for this purpose. The Committee shall have the powers and authority as
the Board may delegate to it, including the power and authority to interpret any
provision of this Plan or of any Option. The members of the Committee shall
serve at the discretion of the Board. The Board, and/or the Committee if one has
been established by the Board, are referred to in this Plan as the "Plan
Administrators."
2.2 Following registration of any of the Company's securities under
Section 12 of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
the Plan Administrators shall not take any action which is not in full
compliance with the exemption from Section 16(b) of the Exchange Act provided by
Rule 16b-3, as amended, or any successor rule or rules, and any other rules or
regulations of the Securities and Exchange Commission, a national exchange, the
Nasdaq Stock Market, the NASD Bulletin Board, or any other applicable regulatory
authorities, and any such action shall be void and of no effect.
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<PAGE> 2
2.3 Except as limited by Section 5.15 below, and subject to the
provisions of this Plan, and with a view to effecting its purpose, the Plan
Administrators shall have sole authority, in their absolute discretion, to (i)
construe and interpret this Plan; (ii) define the terms used in this Plan; (iii)
prescribe, amend and rescind rules and regulations relating to this Plan; (iv)
correct any defect, supply any omission or reconcile any inconsistency in this
Plan; (v) select the Service Providers to whom Options shall be granted under
this Plan and whether the Option is an Incentive Stock Option or a Nonqualified
Stock Option; (vi) determine the time or times at which Options shall be granted
under this Plan; (vii) determine the number of shares of Common Stock subject to
each Option, the exercise price of each Option, the duration of each Option and
the times at which each Option shall become exercisable; (viii) determine all
other terms and conditions of Options; (ix) approve the forms of agreement to be
used under the Plan; (x) to determine the "Fair Market Value", as defined in
Section 2.4 below; (xi) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by the Option shall have declined since the date the Option was granted; (xii)
to institute a program whereby outstanding options are surrendered in exchange
for options with a lower exercise price; (xiii) to provide financial assistance
to Optionees in the exercise of their outstanding options by allowing the
individuals to deliver a full-recourse, interest-bearing promissory note in
payment of the exercise price and any associated withholding taxes incurred in
connection with the exercise; (xiv) to allow Optionees to satisfy withholding
tax obligations by electing to have the Company withhold from the shares of
Common Stock to be issued upon exercise of an Option that number of shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by an
Optionee to have shares withheld for this purpose shall be made in such form and
under such conditions as the Plan Administrators may deem necessary or
advisable; (xiv) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option previously granted by the
Plan Administrators; and (xv) make all other determinations necessary or
advisable for the administration of this Plan. All decisions, determinations and
interpretations made by the Plan Administrators shall be binding and conclusive
on all participants in this Plan and on their legal representatives, heirs and
beneficiaries. None of the Plan Administrators shall be liable for any action
taken or determination made in good faith with respect to the Plan or any grant.
2.4 "Fair Market Value" shall be deemed to be, as of any date, the
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, or if the principal market for
the Common Stock is the over-the-counter market, including without
limitation Nasdaq NMS or Nasdaq SmallCap of the Nasdaq Stock Market,
as the case may be, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported)
as quoted on such exchange or system for the last market trading day
immediately preceding the date of determination, as reported in The
Wall Street Journal or such other source as the Administrator deems
reliable. If the principal market for the Common Stock is the NASD
Electronic Bulletin Board or other over-the-counter market other than
Nasdaq NMS or Nasdaq SmallCap of the Nasdaq Stock Market, its Fair
Market Value shall be the mean between the closing bid and asked
quotations for the Common Stock for the 20 trading days last
preceding the date of conversion.
(ii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
2
<PAGE> 3
3.0 ELIGIBILITY
3.1 Incentive Stock Options may be granted to any individual who, at
the time the Option is granted, is an employee of the Company or any parent,
subsidiary or other corporation permitted by the Code, including employees who
are directors of the Company ("Employees"). Nonqualified Stock Options may be
granted to Service Providers as the Plan Administrators shall select, and to
non-employee directors of the Company pursuant to the formula set forth in
Section 5.15 below. Options may be granted in substitution for outstanding
Options of another corporation in connection with the merger, consolidation,
acquisition of property or stock or other reorganization between such other
corporation and the Company or any subsidiary of the Company. Options also may
be granted in exchange for outstanding Options. Any person to whom an Option is
granted under this Plan is referred to as an "Optionee."
4.0 NUMBER OF SHARES AVAILABLE
4.1 The Plan Administrators are authorized to grant Options to
acquire up to a total of Fifteen Million (15,000,000) shares of the Company's
authorized but unissued, or reacquired, Common Stock. The number of shares with
respect to which Options may be granted hereunder is subject to adjustment as
set forth below in Section 5.14. If any outstanding Option expires or is
terminated for any reason, the shares of Common Stock allocable to the
unexercised portion of such Option may again be subject to an Option to the same
Optionee or to a different person eligible under this Plan.
5.0 TERMS AND CONDITIONS OF OPTIONS
5.1 Each Option granted under this Plan shall be evidenced by a
written agreement approved by the Plan Administrators ("Agreement"). Agreements
may contain such additional provisions, not inconsistent with this Plan, as the
Plan Administrators in their discretion may deem advisable. All Options also
shall comply with the following requirements.
5.2 Number of Shares and Type of Option. Each Agreement shall state
the number of shares of Common Stock to which it pertains and designate whether
the Option is intended to be an Incentive Stock Option or a Nonqualified Stock
Option. In the absence of action or designation to the contrary by the Plan
Administrators in connection with the grant of an Option, all Options shall be
Nonqualified Stock Options. The aggregate Fair Market Value, determined at the
Date of Grant, as defined below, of the stock with respect to which Incentive
Stock Options are exercisable for the first time by the Optionee during any
calendar year, granted under this Plan and all other Incentive Stock Option
plans of the Company, a related corporation or a predecessor corporation, shall
not exceed $100,000, or such other limit as may be prescribed by the Code as it
may be amended from time to time. Any Option which exceeds the annual limit
shall not be void but rather shall be a Nonqualified Stock Option.
5.3 Date of Grant. Each Agreement shall state the date the Plan
Administrators have deemed to be the effective date of the Option for purposes
of, and in accordance with, this Plan ("Date of Grant").
5.4 Option Price. Each Agreement shall state the price per share of
Common Stock at which it is exercisable. The exercise price shall be fixed by
the Plan Administrators at whatever price the Plan
3
<PAGE> 4
Administrators may determine in the exercise of its sole discretion; provided,
that the per share exercise price for any Option granted following the effective
date of registration of any of the Company's securities under the Exchange Act
shall not be less than the Fair Market Value per share of the Common Stock at
the Date of Grant as determined by the Plan Administrators in good faith;
provided further, that with respect to Incentive Stock Options granted to
greater than 10 percent shareholders of the Company, as determined with
reference to Section 424(d) of the Code, the exercise price per share shall not
be less than 110 percent of the Fair Market Value per share of the Common Stock
at the Date of Grant; and, provided further, that Incentive Stock Options
granted in substitution for outstanding Options of another corporation in
connection with the merger, consolidation, acquisition of property or stock or
other reorganization involving such other corporation and the Company or any
subsidiary of the Company may be granted with an exercise price equal to the
exercise price for the substituted Option of the other corporation, subject to
any adjustment consistent with the terms of the transaction pursuant to which
the substitution is to occur.
5.5 Duration of Options. At the time of the grant of the Option, the
Plan Administrators shall designate, subject to paragraph 5.8 below, the
expiration date of the Option, which date shall not be later than 10 years from
the Date of Grant; provided, that the expiration date of any Incentive Stock
Option granted to a greater-than-10 percent shareholder of the Company (as
determined with reference to Section 424(d) of the Code) shall not be later than
five years from the Date of Grant. In the absence of action to the contrary by
the Plan Administrators in connection with the grant of a particular Option, and
except in the case of Incentive Stock Options as described above, all Options
granted under this Plan shall expire 10 years from the Date of Grant.
5.6 Vesting Schedule. No Option shall be exercisable until it has
vested. The vesting schedule for each Option shall be specified by the Plan
Administrators at the time of grant of the Option; provided, that if no vesting
schedule is specified at the time of grant or in the Agreement, the entire
Option shall vest according to the following schedule:
<TABLE>
<CAPTION>
NUMBER OF YEARS PERCENTAGE OF TOTAL OPTION
FOLLOWING DATE OF GRANT TO BE EXERCISABLE
<S> <C>
1 25%
2 50%
3 75%
4 100%
</TABLE>
5.7 Acceleration of Vesting. The vesting of one or more outstanding
Options may be accelerated by the Plan Administrators at such times and in such
amounts as it shall determine in its sole discretion. The vesting of Options
also shall be accelerated under the circumstances described below in Section
5.14.
5.8 Term of Option.
5.8.1 Vested Options shall terminate, to the extent not previously
exercised, upon the occurrence of the first of the following events: (i) the
expiration of the Option, as designated by the Plan Administrators; (ii) the
expiration of 30 days from the date of an Optionee's termination of employment,
contractual or director relationship with the Company or any Related Corporation
for any reason whatsoever other than death or Disability, as defined below,
unless, in the case of a Nonqualified Stock Option, the exercise period is
otherwise defined by terms of an agreement with Optionee entered into prior to
the effective date of the Plan, or the exercise period is extended by the Plan
Administrators until
4
<PAGE> 5
a date not later than the expiration date of the Option; or (iii) the expiration
of one year from (A) the date of death of the Optionee or (B) cessation of an
Optionee's employment, contractual or director relationship with the Company or
any Related Corporation by reason of Disability (as defined below) unless, in
the case of a Nonqualified Stock Option, the exercise period is extended by the
Plan Administrators until a date not later than the expiration date of the
Option. If an Optionee's employment, contractual or director relationship with
the Company or any Related Corporation is terminated by death, any Option held
by the Optionee shall be exercisable only by the person or persons to whom such
Optionee's rights under such Option shall pass by the Optionee's will or by the
laws of descent and distribution of the state or county of the Optionee's
domicile at the time of death. "Disability" shall mean that a person is unable
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or that has lasted or can be expected to last for a continuous period of
not less than 12 months. The Plan Administrators shall determine whether an
Optionee has incurred a Disability on the basis of medical evidence acceptable
to the Plan Administrators. Upon making a determination of Disability, the
Committee shall, for purposes of the Plan, determine the date of an Optionee's
termination of employment, contractual or director relationship.
5.8.2 Unless accelerated as set forth above, unvested Options shall
terminate immediately upon termination of Optionee's employment, contractual or
director relationship with the Company or any Related Corporation for any reason
whatsoever, including death or Disability. If, in the case of an Incentive Stock
Option, an Optionee's relationship with the Company changes (e.g., from an
employee to a non-employee, such as a consultant, or a non-employee director),
such change shall not necessarily constitute a termination of an Optionee's
contractual relationship with the Company but rather the Optionee's Incentive
Stock Option shall automatically be converted into a Nonqualified Stock Option.
For purposes of this Plan, transfer of employment between or among the Company
and/or any Related Corporation shall not be deemed to constitute a termination
of employment with the Company or any Related Corporation. For purposes of this
subsection with respect to Incentive Stock Options, employment shall be deemed
to continue while the Optionee is on military leave, sick leave or other bona
fide leave of absence as determined by the Plan Administrators. The foregoing
notwithstanding, employment shall not be deemed to continue beyond the first 90
days of such leave, unless the Optionee's re-employment rights are guaranteed by
statute or by contract.
5.8.3 Unvested Options shall terminate immediately upon any material
breach, as determined by the Plan Administrators, by Optionee of any employment,
non-competition, non-disclosure or similar agreement by and between the Company
and Optionee.
5.9 Exercise of Options. Options shall be exercisable, either all or
in part, at any time after vesting, until the Option terminates for any reason
set forth under this Plan, unless the exercise period is extended by the Plan
Administrators until a date not later than the expiration date of the Option. If
less than all of the shares included in the vested portion of any Option are
purchased, the remainder may be purchased at any subsequent time prior to the
expiration of the Option term. No portion of any Option for less than ten
thousand (10,000) shares, as adjusted pursuant to Section 5.14 below, may be
exercised; provided, that if the vested portion of any Option is less than ten
thousand (10,000) shares, it may be exercised with respect to all shares for
which it is vested. Only whole shares may be issued pursuant to an Option, and
to the extent that an Option covers less than one share, it is unexercisable.
Options or portions thereof may be exercised by giving written notice to the
Company, which notice shall specify the number of shares to be purchased, and be
accompanied by payment in the amount of the aggregate exercise price for the
Common Stock so purchased, which payment shall be in the form specified in this
Plan. The Company shall not be obligated to issue, transfer or deliver a
certificate of Common Stock to
5
<PAGE> 6
any Optionee, or to his personal representative, until the aggregate exercise
price has been paid for all shares for which the Option shall have been
exercised and adequate provision has been made by the Optionee for satisfaction
of any tax withholding obligations associated with such exercise. During the
lifetime of an Optionee, Options are exercisable only by the Optionee.
5.10 Payment upon Exercise of Option. Upon the exercise of any
Option, the aggregate exercise price shall be paid to the Company in cash or by
certified or cashier's check. In addition, upon approval of the Plan
Administrators, an Optionee may pay for all or any portion of the aggregate
exercise price by (i) delivering to the Company shares of Common Stock
previously held by Optionee which have been owned by Optionee for more than six
(6) months on the date of surrender; (ii) having shares withheld from the amount
of shares of Common Stock to be received by the Optionee; (iii) delivery of an
irrevocable subscription agreement obligating the Optionee to take and pay for
the shares of Common Stock to be purchased within eighteen months of the date of
exercise, to be accompanied by a full-recourse, interest-bearing promissory note
in payment of the exercise price and any associated withholding taxes incurred
in connection with the exercise; (iv) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan; (v) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement; or (vi)
such other consideration and method of payment for the issuance of shares to the
extent permitted by Applicable Laws. The shares of Common Stock received or
withheld by the Company as payment for shares of Common Stock purchased upon the
exercise of Options shall have a Fair Market Value at the date of exercise (as
determined by the Plan Administrators) equal to the aggregate exercise price (or
portion thereof) to be paid by the Optionee upon such exercise.
5.11 Rights as a Shareholder. An Optionee shall have no rights as a
shareholder with respect to any shares covered by an Option until such Optionee
becomes a record holder of the shares, irrespective of whether such Optionee has
given notice of exercise. Subject to the provisions of Section 5.14 of this
Plan, no rights shall accrue to an Optionee and no adjustments shall be made on
account of dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights declared on, or created in, the
Common Stock for which the record date is prior to the date the Optionee becomes
a record holder of the shares of Common Stock covered by the Option,
irrespective of whether such Optionee has given notice of exercise.
5.12 Transfer of Option. Options granted under this Plan and the
rights and privileges conferred by this Plan may not be transferred, assigned,
pledged or hypothecated in any manner, whether by operation of law or otherwise,
other than by will or by applicable laws of descent and distribution or, with
respect to Nonqualified Stock Options, pursuant to a domestic relations order,
and shall not be subject to execution, attachment or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any
Option or of any right or privilege conferred by this Plan contrary to the
provisions hereof, or upon the sale, levy or any attachment or similar process
upon the rights and privileges conferred by this Plan, such Option shall
thereupon terminate and become null and void.
5.13 Securities Regulation and Tax Withholding.
5.13.1 Shares shall not be issued with respect to an Option unless
the exercise of such Option and the issuance and delivery of such shares shall
comply with all relevant provisions of law, including, without limitation, any
applicable state securities laws, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations thereunder and the requirements of any
stock exchange upon
6
<PAGE> 7
which such shares may then be listed. The issuance shall be further subject to
the approval of counsel for the Company with respect to such compliance,
including the availability of an exemption from registration for the issuance
and sale of such shares. The inability of the Company to obtain from any
regulatory body the authority deemed by the Company to be necessary for the
lawful issuance and sale of any shares under this Plan, or the unavailability of
an exemption from registration for the issuance and sale of any shares under
this Plan, shall relieve the Company of any liability with respect to the
non-issuance or sale of such shares.
5.13.2 As a condition to the exercise of an Option, in order to
comply with federal or state securities laws the Plan Administrators may require
the Optionee to represent and warrant in writing at the time of such exercise
that the shares are being purchased only for investment and without any
then-present intention to sell or distribute such shares. At the option of the
Plan Administrators, a stop-transfer order against such shares may be placed on
the stock books and records of the Company, and a legend indicating that the
stock may not be pledged, sold or otherwise transferred unless an opinion of
counsel is provided stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on the certificates representing
such shares in order to assure an exemption from registration. The Plan
Administrators also may require such other documentation as may from time to
time be necessary to comply with federal and state securities laws. THE COMPANY
HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF OPTIONS OR THE SHARES OF STOCK
ISSUABLE UPON THE EXERCISE OF OPTIONS.
5.13.3 As a condition to the exercise of any Option granted under
this Plan, the Optionee shall make such arrangements as the Plan Administrators
may require for the satisfaction of any federal, state or local withholding tax
obligations that may arise in connection with such exercise. Alternatively, the
Plan Administrators may provide that a Grantee may elect, to the extent
permitted or required by law, to have the Company deduct federal, state and
local taxes of any kind required by law to be withheld upon such exercise from
any payment of any kind due to the Grantee. Without limitation, at the
discretion of the Plan Administrators, the withholding obligation may be
satisfied by the withholding or delivery of shares of Common Stock.
5.13.4 The issuance, transfer or delivery of certificates of Common
Stock pursuant to the exercise of Options may be delayed, at the discretion of
the Plan Administrators, until the Plan Administrators are satisfied that the
applicable requirements of the federal and state securities laws and the
withholding provisions of the Code have been met.
5.14 Stock Dividend, Reorganization or Liquidation.
5.14.1 If (i) the Company shall at any time be involved in a
transaction described in Section 424(a) of the Code (or any successor provision)
or any "corporate transaction" described in the regulations thereunder; (ii) the
Company shall declare a dividend payable in, or shall subdivide or combine, its
Common Stock or (iii) any other event with substantially the same effect shall
occur, the Plan Administrators shall, with respect to each outstanding Option,
proportionately adjust the number of shares of Common Stock and/or the exercise
price per share so as to preserve the rights of the Optionee substantially
proportionate to the rights of the Optionee prior to such event, and to the
extent that such action shall include an increase or decrease in the number of
shares of Common Stock subject to outstanding Options, the number of shares
available under Section 4.0 of this Plan shall automatically be increased or
decreased, as the case may be, proportionately, without further action on the
part of the Plan Administrators, the Company or the Company's shareholders.
7
<PAGE> 8
5.14.2 If the Company is liquidated or dissolved, the Plan
Administrators shall allow the holders of any outstanding Options to exercise
all or any part of the unvested portion of the Options held by them; provided,
however, that such Options must be exercised prior to the effective date of such
liquidation or dissolution. If the Option holders do not exercise their Options
prior to such effective date, each outstanding Option shall terminate as of the
effective date of the liquidation or dissolution.
5.14.3 The foregoing adjustments in the shares subject to Options
shall be made by the Plan Administrators, or by any successor administrator of
this Plan, or by the applicable terms of any assumption or substitution
document.
5.14.4 The grant of an Option shall not affect in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes of its capital or business structure, to merge, consolidate or
dissolve, to liquidate or to sell or transfer all or any part of its business or
assets.
5.15 Option Grants to Non-Employee Directors.
5.15.1 Automatic Grants. Upon the initial appointment of a
Non-Employee Director, as defined below, the Plan Administrators are authorized
to grant initial Options ("Initial Options") to each Non-Employee Director in
such amounts and upon such terms, provisions and vesting schedule as determined
in the sole discretion of the Plan Administrators. After the Initial Options are
fully vested, or in the event no Initial Options are granted to a Non-Employee
Director, Options shall be granted to Non-Employee Directors under the terms and
conditions of this Section 5.15 of this Plan. Unless the number of shares
available under Section 4.0 of this Plan shall have been decreased to less than
50,000, immediately after each annual meeting of shareholders at which he or she
is elected a director, each Non-Employee Director, as defined below, of the
Company shall automatically be granted a Nonqualified Stock Option to purchase
15,000 shares of Common Stock for each year included in the term for which such
he or she was elected a director at such meeting; provided, however, that if a
director is appointed to fill a vacancy in the Company's Board of Directors, a
Non-Employee Director shall be granted a Nonqualified Stock Option to purchase
that number of shares of Common Stock equal to 15,000 multiplied by a fraction,
the numerator of which shall be equal to the number of months from the date of
his or her appointment until the next regularly scheduled annual meeting of
shareholders at which directors are to be elected (as determined by the
Company's bylaws and rounded to the nearest whole number) and the denominator of
which shall be twelve (12). "Non-Employee Director" shall have the meaning set
forth in Rule 16b-3 under the Exchange Act as such rule is in effect on the date
this Plan is approved by the shareholders of the Company, as it may be amended
from time to time, or any successor rule or rules.
5.15.2 Option Price. The option price for the Options granted under
Section 5.15 shall be not less than one hundred percent (100%) of the Fair
Market Value of the shares of Common Stock on the Date of Grant, as determined
by the Plan Administrators in good faith in accordance with the definition set
forth in Section 2.4 of this Plan. Each such Option shall have a four-year term
from the Date of Grant, unless earlier terminated pursuant to Section 5.8.
5.15.3 Vesting Schedule. No Option shall be exercisable by a
Non-Employee Director until it has vested. For Options granted in connection
with the election of a director at an annual meeting of shareholders, each
Option shall vest as to 15,000 shares of Common Stock for each year of service
as a director on each anniversary date of the annual meeting. For Options
granted in connection with the appointment of a director, each Option shall vest
as to 15,000 shares of Common Stock for each year of service as a director on
each anniversary date of such appointment.
8
<PAGE> 9
5.16 Common Stock Repurchase Rights
5.16.1 Repurchase Option. At the sole discretion of the Plan
Administrators, each Option granted under this Plan may contain repurchase
provisions pursuant to which, after exercise of the Option, the Company is
granted an irrevocable, exclusive option ("Repurchase Option") to purchase from
Optionee the Common Stock issued upon exercise of the Option. If the Plan
Administrators determine that Options granted under the Plan will be subject to
a Repurchase Option, Service Providers shall be notified by the Plan
Administrators of the terms, conditions and restrictions of the Repurchase
Option by means of a Restricted Stock Purchase Agreement, and Options shall be
accepted by Service Providers by execution of a Restricted Stock Purchase
Agreement in the form determined by the Plan Administrators. Unless the Plan
Administrators determine otherwise, the Restricted Stock Purchase Agreement
shall grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's service with the Company for any
reason (including death or disability).
5.16.2 Purchase Price and Duration. The purchase price for shares of
Common Stock repurchased pursuant to the Restricted Stock Purchase Agreement
shall be the original price per share paid by the purchaser, plus an amount
equal to any federal or state income tax liability incurred by purchaser upon
exercise of a Nonqualified Stock Option. The purchase price may be paid by
cancellation of any indebtedness of the purchaser to the Company. The Repurchase
Option shall lapse after one year following the date of exercise, unless the
repurchase period is shortened in accordance with a schedule determined by the
Plan Administrators.
5.16.3 Escrow of Shares. The Restricted Stock Purchase Agreement may
also provide that the shares of Common Stock be delivered and deposited with an
escrow holder designated by the Company until such time as the Repurchase Option
expires.
5.16.4 Other Provisions. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion.
5.16.5 Rights as a Shareholder. Once the Option is exercised and
unless and until the Repurchase Option is exercised by the Company, the
purchaser shall have the rights equivalent to those of a shareholder, and shall
be a shareholder when his or her purchase is entered upon the records of the
duly authorized transfer agent of the Company.
5.17 Common Stock Resale Restrictions
5.17.1 Resale Restrictions. At the sole discretion of the Plan
Administrators, each Option granted under this Plan may contain resale
provisions pursuant to which, after exercise of the Option, the purchaser of the
Common Stock issued upon exercise of the Option shall be limited to sales of
Common Stock sold for the account of the purchaser or an affiliate of the
purchaser in an amount which shall not exceed 250,000 shares of Common Stock
during any three-month period.
5.17.2 Duration. The Resale Restriction may continue for as long as
the purchaser beneficially owns the Common Stock issued upon exercise of the
Option, unless the Resale Restriction is shortened in accordance with a schedule
determined by the Plan Administrators.
9
<PAGE> 10
6.0 EFFECTIVE DATE; TERM
6.1 This Plan shall be effective as of October 30, 1998. The Plan
shall include all options granted by Plan Administrators prior to the effective
date of the Plan, in accordance with the effective Date of Grant and other terms
of each agreement with Optionee. Incentive Stock Options may be granted by the
Plan Administrators from time to time thereafter until October 30, 2003.
Nonqualified Stock Options may be granted until this Plan is terminated by the
Board in its sole discretion. Termination of this Plan shall not terminate any
Option granted prior to such termination. Any Incentive Stock Options granted by
the Plan Administrators prior to the approval of this Plan by a majority of the
shareholders of the Company shall be granted subject to ratification of this
Plan by the shareholders of the Company within 12 months after this Plan is
adopted by the Board, and if shareholder ratification is not obtained, each and
every Incentive Stock Option shall become a Nonqualified Stock Option.
7.0 NO OBLIGATIONS TO EXERCISE OPTION
7.1 The grant of an Option shall impose no obligation upon the
Optionee to exercise such Option.
8.0 NO RIGHT TO OPTIONS OR TO EMPLOYMENT, CONTRACTUAL OR DIRECTOR
RELATIONSHIP
8.1 Except as provided in Section 5.15 above, whether or not any
Options are to be granted under this Plan shall be exclusively within the
discretion of the Plan Administrators, and nothing contained in this Plan shall
be construed as giving any person or Service Provider any right to participate
under this Plan. The grant of an Option shall in no way constitute any form of
agreement or understanding binding on the Company or any Related Corporation,
express or implied, that the Company or any Related Corporation will employ,
contract with, or use any efforts to cause to continue service as a director by,
an Optionee for any length of time.
9.0 APPLICATION OF FUNDS
9.1 The proceeds received by the Company from the sale of Common
Stock issued upon the exercise of Options shall be used for general corporate
purposes, unless otherwise directed by the Board.
10.0 INDEMNIFICATION OF PLAN ADMINISTRATOR
10.1 In addition to all other rights of indemnification they may have
as members of the Board, members of the Plan Administrators shall be indemnified
by the Company for all reasonable expenses and liabilities of any type or
nature, including attorneys' fees, incurred in connection with any action, suit
or proceeding to which they or any of them are a party by reason of, or in
connection with, this Plan or any Option granted under this Plan, and against
all amounts paid by them in settlement thereof, provided that such settlement is
approved by independent legal counsel selected by the Company, except to the
extent that such expenses relate to matters for which it is adjudged that such
Plan Administrators member is liable for willful misconduct; provided, that
within 15 days after the institution of any such action, suit or proceeding, the
Plan Administrator member involved therein shall, in writing, notify the
10
<PAGE> 11
Company of such action, suit or proceeding, so that the Company may have the
opportunity to make appropriate arrangements to prosecute or defend the same.
11.0 AMENDMENT OF PLAN
11.1 Except as otherwise provided above in Section 5.15, the Plan
Administrators may, at any time, modify, amend or terminate this Plan and
Options granted under this Plan; provided, that no amendment with respect to an
outstanding Option shall be made over the objection of the Optionee thereof; and
provided further, that if required in order to keep the Plan in full compliance
with the exemption from Section 16(b) of the Exchange Act provided by Rule
16b-3, as amended, or any successor rule or rules, or any other rules or
regulations of the Securities and Exchange Commission, a national exchange, the
Nasdaq Stock Market, the NASD Bulletin Board, or other regulatory authorities,
amendments to this Plan shall be subject to approval by the Company's
shareholders in compliance with the requirements of any such rules or
regulations.
Without limiting the generality of the foregoing, the Plan
Administrators may modify grants to persons who are eligible to receive Options
under this Plan who are foreign nationals or employed outside the United States
to recognize differences in local law, tax policy or custom.
Date Approved by Board of Directors of Company: October 30, 1998
Plenum Communications, Inc.
------------------------------------
by:
Corporate Secretary
11
<PAGE> 12
PLENUM COMMUNICATIONS, INC.
STOCK OPTION AGREEMENT
NEITHER THIS OPTION NOR THE UNDERLYING SHARES OF COMMON STOCK HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"). THIS
OPTION OR THE UNDERLYING COMMON SHARES MAY NOT BE SOLD OR TRANSFERRED UNLESS:
(i) THERE IS AN EFFECTIVE REGISTRATION COVERING THE OPTION OR SHARES, AS THE
CASE MAY BE, UNDER THE SECURITIES ACT AND APPLICABLE STATES SECURITIES LAWS;
(ii) THE COMPANY FIRST RECEIVES A LETTER FROM AN ATTORNEY, ACCEPTABLE TO THE
BOARD OF DIRECTORS OR ITS AGENTS, STATING THAT IN THE OPINION OF THE ATTORNEY
THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND
APPLICABLE STATES SECURITIES LAWS; OR, (iii) THE TRANSFER IS MADE PURSUANT TO
RULE 144 UNDER THE SECURITIES ACT.
BETWEEN:
("Optionee")
AND
Plenum Communications, Inc. ("Company")
a Minnesota corporation
1.0 RECITALS
1.1 The Company has adopted the 1998 Stock Option Plan ("Plan"),
incorporated herein by reference, that provides for the grant of options to
purchase shares of Common Stock ("Shares") of the Company. Unless otherwise
defined in this Agreement, the terms defined in the Plan shall have the same
defined meanings in this Agreement.
2.0 NOTICE OF GRANT
2.1 Optionee has been granted an option to purchase Shares of the
Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
GRANT NUMBER:
-------------------------
DATE OF GRANT:
-------------------------
VESTING COMMENCEMENT DATE:
-------------------------
EXERCISE PRICE PER SHARE:
-------------------------
TOTAL NUMBER OF SHARES GRANTED:
-------------------------
TOTAL EXERCISE PRICE: $
-------------------------
12
<PAGE> 13
TYPE OF OPTION: ___ Incentive Stock Option
___ Nonqualified Stock Option
EXPIRATION DATE:
-------------------------
VESTING SCHEDULE: This Option may be exercised, in whole or in part,
in accordance with the following schedule: 25% of the Shares subject to the
Option shall immediately vest and be exercisable after two (2) years following
the date of grant, 50% of the Shares subject to the Option shall be fully vested
and be exercisable after three (3) years following the date of grant, 75% of the
Shares subject to the Option shall be fully vested and be exercisable after four
(4) years following the date of grant, and 100% of the Shares subject to the
Option shall be fully vested and be exercisable after five (5) years following
the date of grant.
TERMINATION PERIOD: This Option may be exercised for 30 days after
Optionee ceases to be a Service Provider. Upon the death or Disability of the
Optionee, this Option may be exercised for such longer period as provided in the
Plan. In no event shall this Option be exercised later than the Expiration Date
as provided above.
3.0 GRANT OF OPTION
3.1 Subject to the terms and conditions of the Plan and of this
Agreement, the Plan Administrators of the Company grant to the Optionee named
above an option ("Option") to purchase the number of Shares, as set forth above
in Section 2.0 entitled "Notice of Grant", at the exercise price per share set
forth above in Notice of Grant ("Exercise Price"). Subject to any mutual
amendments of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Agreement, the terms
and conditions of the Plan shall prevail.
3.2 If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonqualified Stock Option ("NQO").
4.0 EXERCISE OF OPTION
4.1 Right to Exercise. This Option is exercisable during its term in
accordance with the Vesting Schedule set forth above in the Notice of Grant and
the applicable provisions of the Plan and this Option Agreement.
4.2 Method of Exercise. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A ("Exercise Notice"), which
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised ("Exercised Shares"), and such other
representations and agreements as may be required by the Company pursuant to the
provisions of the Plan. The Exercise Notice shall be completed by the Optionee
and delivered to the Company. The Exercise Notice shall be accompanied by
payment of the aggregate Exercise Price as to all Exercised
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<PAGE> 14
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of the fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
5.0 COMPLIANCE WITH APPLICABLE LAW
5.1 No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with applicable state or federal law,
including securities laws, corporate laws, the Code or any stock exchange or
quotation system. If the Plan Administrators at any time determine that
registration or qualification of the Shares or the Option under state or federal
law, or the consent approval of any governmental regulatory body is necessary or
desirable, then the Option may not be exercised, in whole or in part, until such
registration, qualification, consent, or approval shall have been effected or
obtained free of any conditions not acceptable to the Plan Administrators.
Assuming compliance, for income tax purposes the Exercised Shares shall be
considered transferred to the Optionee on the date the Option is exercised with
respect to such Exercised Shares.
5.2 If required by the Company at the time of any exercise of the
Option in order to comply with federal or state securities laws, as a condition
to such exercise, the Employee shall enter into an agreement with the Company in
form satisfactory to counsel for the Company by which the Employee: (i) shall
represent that the Shares are being acquired for the Employee's own account for
investment and not with a view to, or for sale in connection with, any resale or
distribution of such Shares; and, (ii) shall agree that if the Employee should
decide to sell, transfer, or otherwise dispose of any such Shares, the Employee
may do so only if the Shares are registered under the Securities Act and the
relevant state securities law, unless, in the opinion of counsel for the
Company, such registration is not required, or the transfer is pursuant to the
Securities and Exchange Commission Rule 144.
6.0 METHOD OF PAYMENT
6.1 Payment of the aggregate Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) certified or cashier's check;
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(d) with the Plan Administrator's consent, surrender of other Shares
which (i) in the case of Shares acquired upon exercise of an option, have been
owned by the Optionee for more than six (6) months on the date of surrender, and
(ii) have a Fair Market Value on the date of surrender equal to the aggregate
Exercise Price of the Exercised Shares; or
(e) with the Plan Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form approved by Plan Administrators, in the
amount of the aggregate Exercise Price of the Exercised Shares and any
associated withholding taxes incurred in connection with the exercise, together
with the execution and delivery by the Optionee of a Security Agreement in the
form approved by Plan Administrators. The Note shall bear interest at the
"applicable federal rate" prescribed under the Code and its regulations at time
of purchase, and shall be secured by a pledge of the Shares purchased by the
Note pursuant to the Security Agreement.
14
<PAGE> 15
7.0 NON-TRANSFERABILITY OF OPTION
7.1 This Option may not be transferred in any manner otherwise than
by will or by the laws of descent or distribution and may be exercised during
the lifetime of Optionee only by the Optionee. The terms of the Plan and this
Agreement shall be binding upon the executors, administrators, heirs, successors
and assigns of Optionee.
8.0 TERM OF OPTION
8.1 This Option may be exercised only within the term set forth above
in the Notice of Grant, and may be exercised during that term only in accordance
with the Plan and the terms of this Option Agreement.
9.0 TAX CONSEQUENCES
Some of the federal tax consequences relating to this Option, as of
the date of this Option, are set forth below. THIS SUMMARY IS INCOMPLETE, AND
THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT
A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
9.1 Exercising the Option.
9.1.1 Nonqualified Stock Option. The Optionee may incur regular
federal income tax liability upon exercise of a NQO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required to
withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if these withholding amounts are not
delivered at the time of exercise.
9.1.2 Incentive Stock Option. If this Option qualifies as an ISO, the
Optionee will have no regular federal income tax liability upon its exercise,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over their aggregate Exercise Price will be treated as an
adjustment to alternative minimum taxable income for federal tax purposes and
may subject the Optionee to alternative minimum tax in the year of exercise. In
the event that the Optionee ceases to be an Employee but remains a Service
Provider, any Incentive Stock Option of the Optionee that remains unexercised
shall cease to qualify as an Incentive Stock Option and will be treated for tax
purposes as a Nonqualified Stock Option on the date three (3) months and one (1)
day following this change of status.
9.2 Disposition of Shares.
9.2.1 NQO. If the Optionee holds NQO Shares for at least one year,
except for that portion treated as compensation income at the time of exercise,
any gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes.
9.2.2 ISO. If the Optionee holds ISO Shares for at least one year
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after
15
<PAGE> 16
exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (i) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (ii) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
9.3 Notice of Disqualifying Disposition of ISO Shares. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of the disposition. The Optionee agrees that he or she may be subject
to income tax withholding by the Company on the compensation income recognized
from such early disposition of ISO Shares by payment in cash or out of the
current earnings paid to the Optionee.
10.0 RESALE RESTRICTIONS
10.1 Optionee acknowledges and agrees that Optionee, together with
Optionee's affiliates and donees, will not sell or otherwise transfer or dispose
of Shares of the Company issued upon exercise of this Option in an amount which
shall exceed 250,000 Shares during any three-month period. Shares which are bona
fide pledged, when sold by the pledgee, or by a purchaser, after a default in
the obligation secured by the pledge shall be deemed to be excluded from this
limitation.
10.2 Optionee acknowledges and agrees that whatever period determined
appropriate by the Company, underwriter, or federal and state regulatory
officials including, but not limited to, the Securities and Exchange Commission,
National Association of Securities Dealers and NASDAQ, following the effective
date of a registration statement of the Company covering common stock (or other
securities) of the Company to be sold on its behalf in an underwriting, Optionee
will not sell or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) Shares of the Company held by Optionee at any time
during such period except securities included in that registration.
10.3 Optionee acknowledges and agrees that if for purposes of a
registration statement of the Company the underwriter or federal or state
regulatory officials fix a specific Common Stock or Option lockup period, such
fixed lockup period shall apply to Optionee under this Agreement.
11.0 NO GUARANTEE OF CONTINUED SERVICE
11.1 Optionee acknowledges and agrees that the vesting of shares
pursuant to the vesting schedule set forth in this Agreement is earned only by
continuing as a Service Provider at the will of the Company, and not through the
act of being hired, being granted an option or purchasing shares under this
Agreement. Optionee further acknowledges and agrees that this Agreement, the
transactions contemplated and the vesting schedule set forth in it do not
constitute an express or implied promise of continued engagement as a Service
Provider for the vesting period, for any period, or at all, and shall not
interfere with Optionee's right or the Company's right to terminate Optionee's
relationship as a Service Provider at any time, with or without cause.
16
<PAGE> 17
12.0 SIGNATURES
Dated ,1998
-----------------------
PLENUM COMMUNICATIONS, INC.
By:
---------------------------------------
Allen Ringer, President
Optionee acknowledges and represents that he or she has received a copy of the
Plan, has reviewed the Plan and this Agreement in their entirety, is familiar
with its and fully understands its terms and provisions. Optionee accepts this
Option subject to all the terms and provisions of the Plan and this Agreement.
Optionee has had an opportunity to obtain the advice of counsel prior to
executing this Agreement. Optionee agrees to accept as binding, conclusive and
final all decisions or interpretations of the Plan Administrators upon any
questions arising under the Plan and Agreement. Optionee further agrees to
notify the Company upon any change in the residence address indicated on the
first page of this Agreement.
Dated: ,1998
------------------------
OPTIONEE:
- -----------------------------------
Signature
- -----------------------------------
Print Name
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and approves the terms
and conditions of the Plan and this Agreement. In consideration of the Company's
granting his or her spouse the right to purchase Shares as set forth in the Plan
and this Agreement, the undersigned agrees to be irrevocably bound by the terms
and conditions of the Plan and this Option Agreement and further agrees that any
community property interest shall be similarly bound. The undersigned hereby
appoints the undersigned's spouse as attorney-in-fact for the undersigned with
respect to any amendment or exercise of rights under the Plan or this Agreement.
- -----------------------------------
Spouse of Optionee
17
<PAGE> 18
EXHIBIT A
1998 STOCK PLAN
EXERCISE NOTICE
TO: PLENUM COMMUNICATIONS, INC.
Attention: Corporate Secretary
1.0 Exercise of Option. Effective as of today, ________________,
199__, the undersigned ("Purchaser") hereby elects to purchase ______________
shares ("Shares") of the Common Stock of Plenum Communications, Inc.("Company")
pursuant to the 1998 Stock Option Plan ("Plan") and the Stock Option Agreement
dated __________,1998 ("Agreement"). Purchaser herewith delivers to the Company
the full purchase price for the Shares of $_____________, as required by the
Agreement.
2.0 Representations of Purchaser. Purchaser acknowledges that
Purchaser has received, read and understood the Plan and the Agreement and
agrees to abide by and be bound by their terms and conditions.
3.0 Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Shares,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date of issuance, except as provided in the Plan.
4.0 Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
Submitted by: Accepted by:
PURCHASER: PLENUM COMMUNICATIONS, INC.
- ---------------------------------- ----------------------------------
Signature By
- ---------------------------------- ----------------------------------
Print Name Its
Address: Address:
- ---------------------------------- 3003 80th Avenue SE
- ---------------------------------- Mercer Island, WA 98040
- ----------------------------------
Date Received:
18
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED
CONSULTANT AGREEMENT
This AMENDED AND RESTATED CONSULTANT AGREEMENT (the "Agreement") is
made effective as of this 15th day of July, 1998, by and between Howard Baskin,
an independent contractor having a principal place of business at 2923 Gandy
Blvd., Tampa, FL 33611 ("Consultant"), and Plenum Communications, Inc., a
Minnesota corporation having its principal office at 3003 80th Ave. S.E., Mercer
Island, WA 98040 ("Company"), and supersedes and replaces in its entirety that
certain Consultant Agreement among Consultant, Company and InfoSystems, Inc., a
Washington corporation, dated as of the 2nd day of January, 1997 and all prior
amendments thereto.
In consideration of the agreement of the parties to continue their
current relationship on different terms and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:
1. TERM OF THE AGREEMENT. This Agreement shall terminate on January
15, 1999, unless earlier terminated according to the terms and conditions herein
(the "Term"). The Term may be extended by mutual agreement of the parties hereto
in writing. In the event the Term is extended, all other terms and conditions of
the Agreement shall continue in full force and effect during each and every
extension period.
2. SCOPE OF SERVICES.
2.1 RESPONSIBILITIES. Consultant will provide such consulting
services to the Company or its affiliates or subsidiaries as Consultant and the
Company may agree upon in writing from time to time (the "Services"). The
Services may include the following, and such other services as Consultant and
the Company may agree upon from time to time in writing, provided, however, that
Consultant shall be under no requirement to agree to perform any Services except
in his sole discretion and may discontinue any Services at any time in his sole
discretion:
a. Strategic planning.
b. Product Development.
c. Act as an intermediary between the Company and third parties in
negotiating contracts or other business arrangements with such third parties.
d. Assisting the Company in promoting its relationship with
industry trade associations or other industry participants.
During the period from August 16, 1998 through January 15, 1999, the
parties agree that Consultant will be available on a limited basis only,
primarily for facilitating or supporting the Company in negotiating and
structuring transactions with FNMA and with Myers Internet Services, and for
questions related to any consulting work performed by Consultant for the Company
and any of its affiliates or subsidiaries prior to August 16, 1998.
1
<PAGE> 2
2.2 RIGHT TO CONTROL EFFORTS. While Consultant may confer with the
Company's management to coordinate and organize his efforts, Consultant retains
the right to control the manner, method and means by which all work is performed
on behalf of the Company and any of its affiliates and subsidiaries.
2.3 EXCLUDED SERVICES. The Company and Consultant agree that the
following services and activities shall be outside the scope of this Agreement.
Consultant will not be responsible for, or asked to perform, the following
services and activities, the responsibility for which will remain entirely with
the Company's management:
a. monitoring the Company's or any of its affiliates' or
subsidiaries' compliance with any applicable laws or regulations, whether
federal, state or local;
b. soliciting investment capital, including but not limited to
investment in the Company or its affiliates or subsidiaries;
c. decisions with regard to hiring and terminating employees;
d. identifying sources for funding of any cash flow deficits of
the Company or any of its affiliates or subsidiaries;
e. signing checks on behalf of the Company or any of its
affiliates or subsidiaries; and
f. managing any accounts payable of the Company or its affiliates
or subsidiaries.
2.4 EXPANSION OR REDUCTION OF SERVICES. The nature and scope of
the Services to be performed by Consultant pursuant to this Agreement may be:
a. expanded from time to time by mutual written agreement of the
parties hereto;
b. reduced from time to time at the Company's discretion,
provided, that the Company shall provide ten (10) days' advance notice of such
reduction of Services in writing to Consultant; or
c. reduced from time to time at the Consultant's discretion in
accordance with Section 2.1.
2.5 OBJECTION TO CONSULTANT'S ACTIVITIES. If the Company's
management believes that Consultant is performing activities that are outside
the scope of the Services, the Company may object to such activities in writing
and Consultant will discontinue the activities in question promptly upon receipt
of such notice. The Company must notify the Consultant within seven (7) business
days from the date upon which the Company becomes aware or should have been
aware of such Consultant activities. Any failure to so notify Consultant shall
be deemed to be an acceptance and approval of such activities.
3. COMPENSATION. Consultant's compensation for performance of his
duties under this Agreement shall have two elements, a consulting fee (the
"Fee") and an Incentive Compensation (the "IC").
2
<PAGE> 3
3.1 CONSULTING FEE. The Fee will be Two Thousand and No/100
Dollars ($2000) per week through August 16, 1998. Invoices will be submitted by
Consultant to the Company bi-monthly, and paid within seven (7) days of
submission. After August 16, 1998, the Fee, if any, will be as agreed by the
parties in writing as reflected in an Addendum in substantially the form
attached hereto as Exhibit 1.
3.2 INCENTIVE COMPENSATION. Consultant shall receive as IC (and
did receive on February 15, 1998) options to purchase shares of common stock of
the Company, in the form attached hereto as Exhibit 2 (the "Option Agreement"),
with the number of shares, exercise price, vesting date and expiry date as
described in Schedule A attached hereto, provided, however, that if the
Agreement is terminated by any party for any reason, then in addition to the
options vested according to Schedule A prior to the termination date, additional
shares shall vest pro rata through the date of termination. The number of
additional shares that will vest upon termination of this Agreement shall be
calculated by multiplying the number of shares that would have vested on the
next vesting date according to Schedule A by the percentage calculated by
dividing the number of days between the beginning of the three month period
prior to the next vesting date according to Schedule A and the date of
termination by the total number of days in the three month period prior to the
next vesting date. After August 16, 1998, the IC may be amended as agreed by the
parties in writing as reflected in an Addendum in substantially the form
attached hereto as Exhibit 1, provided, however, that no such amendment shall
decrease the number of options that are vested on or prior to the date of such
amendment.
a. Upon termination or expiration of this Agreement, the
number of options that are vested shall remain exercisable by Consultant until
February 15, 2003, provided, however, that in the event of Consultant's untimely
death, his heirs, beneficiaries or descendants will have one year from the date
of Consultant's death to exercise the options.
b. If the Company takes any actions that would make any
options issued by the Company to any person exercisable for free trading shares
rather than exercisable for shares issued as "restricted securities," the
Company will include Consultant's options provided for in the Option Agreement
in any such actions. If any such action requires reissuing Consultant's options
or replacing Consultant's Option Agreement with another document evidencing the
options, the replacement document evidencing the options will be consistent with
the terms of this Agreement and the attached Exhibit 2 in the sole judgment of
Consultant. If any of the options provided for in this Agreement are exercised
at a time when the Company may legally issue free trading shares upon such
exercise, the Company must do so and must issue the shares without any
restrictive legend. Consultant has the right to require the Company to confirm
in writing whether it will issue free trading shares immediately prior to
Consultant's exercise of any option. The Company agrees that it will respond to
such a request by Consultant within one business day.
c. Consultant agrees that upon exercise of his options, the
shares issued pursuant to the options will be subject to the volume limitations
on resale of restricted securities set forth in Rule 144 promulgated by the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, and that he will comply with such limitations even after one year
following the exercise of the option; provided, that if any of the Company's
then current or former officers or directors are permitted at any time to sell a
greater number of shares, then Consultant will be permitted to sell an equally
greater number of shares.
d. Upon exercise of any options, Consultant will be deemed to
be a shareholder of the Company as of the close of business on the date on which
he delivers his notice of exercise to the
3
<PAGE> 4
Company. The Company agrees that it will issue and deliver to Consultant by
overnight courier a certificate for shares upon Consultant's exercise of an
option within five (5) days of such exercise.
e. Consultant and the Company agree and stipulate that the
terms contained in this Section 3.2 are fair and reasonably necessary for the
protection of Consultant's legitimate business interests.
3.3 EXPENSE REIMBURSEMENT. The Company shall reimburse Consultant
for all out-of-pocket expenses incurred in the performance of his duties as
Consultant under this Agreement, including but not limited to meals, travel and
hotel expenses, mail, fax and phone charges, and any other incidental expenses
within seven (7) days of submission of an invoice listing the above-mentioned
expenses by Consultant.
3.4 PAYMENT OF CONSULTANT INVOICES CONSTITUTES ACKNOWLEDGMENT.
Payment of invoices submitted by Consultant shall constitute acknowledgment and
confirmation by the Company that Consultant has performed the Services under
this Agreement in a satisfactory manner in all respects through the date of each
invoice.
4. INDEPENDENT CONTRACTOR.
4.1 PERFORMANCE OF DUTIES. Consultant and the Company agree that
Consultant is hired by the Company as an independent contractor, and nothing in
this Agreement shall be deemed to create an association, partnership, joint
venture, or relationship of principal and agent, or employer and employee
between the parties hereto or any affiliates or subsidiaries thereof, or to
provide either party with the right, power or authority, whether express or
implied, to create any such duty or obligation on behalf of the other party. The
Company acknowledges and agrees that the manner, means or method by which
Consultant performs the Services pursuant to this Agreement shall be solely
within Consultant's control, subject to the terms and conditions of this
Agreement. The Company shall be entitled only to direct Consultant with respect
to the elements of the Services or tasks to be performed by Consultant and the
results to be derived by the Company, and to review and assess the performance
of such Services by Consultant for the limited purposes of ensuring that such
Services have been performed and confirming that the results obtained are
satisfactory to the Company.
4.2 BENEFITS AND TAXES. Consultant agrees that because he is an
independent contractor and not an employee of the Company, its affiliates or
subsidiaries, the Company will not withhold any sums payable under this
Agreement in order to pay Federal or state taxes or FICA or FUTA payment
obligations with respect to fees or other compensation paid to Consultant under
this Agreement, all of which obligations shall be the sole responsibility of
Consultant. Consultant also agrees that as an independent contractor he shall
not receive any of the usual and customary employee benefits that the Company
may provide from time to time to employees such as medical and dental coverage,
disability insurance, or other fringe benefits.
4.3 CONSULTANT'S REPRESENTATIONS AND WARRANTIES. Consultant
represents and warrants that Consultant is free to enter into this Agreement, to
perform work for the Company under this Agreement, and that Consultant has no
obligations, employment, or business arrangements that conflict or are
inconsistent with the Company's interests or Consultant's obligations under this
Agreement. Consultant agrees to advise the Company's management of Consultant's
position with respect to any activity, employment, or business transaction
contemplated by Consultant that may conflict or appear to conflict with the
Company's interests.
4
<PAGE> 5
4.4 REFERENCES TO CONSULTANT. The Company agrees that it will not
represent or permit the representation to any third party that Consultant is an
officer, director, employee or affiliate of the Company or any of its affiliates
or subsidiaries. The Company agrees that it shall refer to Consultant only as a
"Consultant to Management" and, when referring to Consultant, will accurately
describe the scope of Services under this Agreement to all third parties.
5. LODGING AND TRANSPORTATION. The Company will provide lodging in
Seattle to Consultant either by (i) paying the rent under the lease at 4554 84th
Avenue SE, Mercer Island, WA; (ii) by assuming the lease as sole Lessee for the
above-mentioned premises; or (iii) by making other housing arrangements
acceptable to Consultant. In addition, the Company shall advance all expenses of
Consultant's return to Tampa after August 15, 1998, advance or reimburse
Consultant for expenses for shipping of an automobile and household goods to
Seattle and back to Tampa, Florida.
6. TERMINATION. On or after August 16, 1998, either party may
terminate this Agreement by written notice to the other party. Termination is
effective upon receipt of such notice.
6.1 NON-COMPETE. In the event of termination of this Agreement,
Consultant shall not, without consent of the Company, be employed by or provide
consulting services to any company nor any third party that provides mortgage
rate information to mortgage brokers over the Internet for a period of two years
from the date of termination.
7. LIMITATION OF LIABILITY AND REMEDIES.
7.1 LIABILITY LIMITATION. NOTWITHSTANDING ANYTHING TO THE CONTRARY
HEREIN, IN NO EVENT SHALL CONSULTANT BE LIABLE TO THE COMPANY OR ANY OF ITS
AFFILIATES OR SUBSIDIARIES FOR ANY INCIDENTAL, INDIRECT, SPECIAL, CONSEQUENTIAL
OR EXEMPLARY DAMAGES, LOST PROFITS, LOST SALES OR ANTICIPATED ORDERS, DAMAGES
FOR LOSS OF GOODWILL, OR ON ACCOUNT OF ANY EXPENDITURES, INVESTMENTS, LEASES OR
COMMITMENTS MADE BY A PARTY RELATING TO ANY CONSULTING OR GENERAL MANAGEMENT
SERVICES PROVIDED BY CONSULTANT UNDER THIS AGREEMENT, EVEN IF A PARTY WAS
INFORMED OR KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES OR
LOSS, EXCEPT FOR (a) DAMAGES OR LOSSES ARISING FROM CONSULTANT'S WILLFUL
MISCONDUCT OR GROSS NEGLIGENCE; (b) DAMAGES TO TANGIBLE PERSONAL PROPERTY; OR
(c) PERSONAL INJURY. THIS LIMITATION APPLIES REGARDLESS OF WHETHER SUCH DAMAGE,
CLAIM OR LOSS IS SOUGHT BASED ON BREACH OF CONTRACT, BREACH OF WARRANTY,
NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATION, OR ANY OTHER LEGAL OR EQUITABLE
THEORY.
8. INDEMNITY.
8.1 Consultant shall not be liable, responsible or accountable in
monetary damages or otherwise to the Company or any of its affiliates or
subsidiaries for any act or omission performed by Consultant in good faith
pursuant to the authority granted to Consultant by this Agreement or any
previous agreement between the parties or in accordance the provisions of any
such agreement, and in a manner reasonably believed by Consultant to be within
the scope of the authority granted to Consultant and in the best interests of
the Company or its affiliates or subsidiaries; provided, that such act or
omission does not constitute fraud, misconduct, bad faith or gross negligence.
The Company shall
5
<PAGE> 6
indemnify, defend and hold harmless Consultant from and against any and all
suits, actions, claims, losses, liabilities, judgments, awards, expenses and
costs (including but not limited to legal fees and expenses incurred without the
filing of a judicial action) arising or relating to Services provided by
Consultant on behalf of the Company or any of its affiliates or subsidiaries and
any of their directors, officers, employees, successors, and authorized assigns,
or acts undertaken in furtherance of the Company's interests prior to, on or
after the effective date of this Agreement.
8.2 The Company shall, at its own expense, defend any legal
proceedings arising out of the foregoing; provided that Consultant shall have
the exclusive right to control the defense of all such claims, litigation or
other proceedings, and that Consultant shall have the sole right to select his
own legal defense counsel. The Company may, at its expense, engage legal counsel
to participate in any such claims, litigation or other proceedings and
Consultant and Consultant's legal counsel shall cooperate fully with the Company
or Company's legal counsel. Notwithstanding any other provisions of this
Agreement, in no event: (i) shall the Company settle any such claims, litigation
or proceedings without Consultant's prior written consent; nor (ii) shall
Consultant have any liability or be responsible under this Section 8.2 for any
indemnifiable loss which arises from the Services or any part thereof provided
by Consultant which was not either done by Consultant or an agent or contractor
of Consultant, or expressly approved in writing by Consultant.
8.3 Any indemnification required to be made by the Company shall
be made promptly following the fixing of the liability, loss, damage, cost or
expense incurred or suffered by a final judgment of any court, settlement,
contract or otherwise. In addition, the Company shall advance funds to
Consultant for legal expenses and other costs incurred as a result of a legal
action brought against Consultant only if: (i) the legal action relates to the
performance of duties or services by Consultant on behalf of the Company or any
of its affiliates or subsidiaries; (ii) the legal action is initiated by a party
other than the Company's management; and (iii) Consultant undertakes to repay
the advanced funds to the Company if it is determined that Consultant is not
entitled to indemnification pursuant to the terms of this Agreement.
9. MISCELLANEOUS PROVISIONS.
9.1 FORCE MAJEURE. Consultant shall not be liable to the Company
for failure or delay of performance of any obligations under this Agreement
where such failure or delay shall have been wholly or principally caused by acts
or events beyond his control, including but not limited to acts of God, acts of
civil or military authority, fire, floods, earthquakes or other natural
disasters, wars, riots, strikes, applicable law or regulation imposed after the
effective date of this Agreement, lock-outs, communication link failures,
computer viruses and third-party software or hardware failures or defects.
9.2 SURVIVAL. The obligations contained in Sections 3.2, 6.1, 7
and 8 shall survive the termination or expiration of this Agreement. In
addition, the termination or expiration of this Agreement shall not affect any
of the rights or obligations of either party arising prior to or at the time of
the termination or expiration of this Agreement or which may arise by any event
causing the termination of this Agreement.
9.3 ATTORNEY FEES. In the event a party shall be required to bring
any action to enforce any of the provisions of this Agreement, or shall be
required to defend any action brought by any other party with respect to this
Agreement, the prevailing party in such action shall be entitled to reasonable
attorneys' fees, in addition to costs and necessary disbursements. "Action"
shall include an
6
<PAGE> 7
arbitration proceeding and shall include attorneys fees incurred without the
necessity of commencing a lawsuit or of participating in arbitration.
9.4 NO ASSIGNMENT. No party hereto may assign or transfer this
Agreement or any performance rights or obligations hereunder, in whole or in
part, by any party without prior written consent of the other parties.
9.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington, except that
body of law relating to choice of law.
9.6 COMPLETE AGREEMENT. This Agreement, together with its
Exhibits, Schedules and Appendices, contains the entire agreement of the parties
with respect to the subject matter herein, and no other previous agreement,
statement or promise made by either party to this Agreement that is not
contained in this Agreement, together with its Exhibits, Schedules and
Appendices, shall be binding or valid. In the event of any inconsistency between
this Agreement and the option agreement attached hereto as Exhibit 2, the terms
of this Agreement shall control. Any amendment to this Agreement with respect to
the terms of Consultant's options referred to herein shall be deemed to be an
amendment to the option agreement attached hereto as Exhibit 2.
9.7 ARBITRATION. All disputes, breaches, or controversies arising
out of or under this Agreement which cannot be settled by agreement of the
parties shall be submitted to arbitration by a single arbitrator mutually
selected by the parties. In the event the parties are unable to agree on a
choice of arbitrator, American Arbitration Association ("AAA") will provide a
list of three available panel members and each party may strike one; the
remaining person will serve as the arbitrator, or alternatively the parties may
request the Presiding Judge of King County Superior Court to appoint or select
an arbitrator.
Such arbitrator shall have knowledge and experience of management
incentive compensation systems. The arbitrator selected shall not be related to
or affiliated with either party. The arbitration shall be conducted under AAA
rules to be heard in King County, Washington, under the rules then in force, or
such other rules or venue agreed upon by the parties, at a place and time
mutually convenient to the parties. All arbitrations must be commenced within
two (2) months of the time when the dispute, breach or controversy arose, or
when the parties had reason to know of its existence. If an arbitration is not
commenced within such two month period, then the requirements of this Section
9.7 will no longer apply and either party may, at its election, begin an action
in litigation. The prevailing party in any dispute, breach or controversy shall
be reimbursed all of its reasonable costs, including reasonable attorney's fees
by the other party. The arbitrator may, at a minimum, hear summary motions, make
such procedural rulings as he or she may deem appropriate, and resolve all
questions of fact or law. The arbitrator may make monetary awards consistent
with the terms of this Agreement and award commercially reasonable interest
thereon. The arbitrator has the authority to award reasonable attorneys' fees,
arbitrator's fees, costs and other reasonable expenses to the prevailing party
in the dispute or as the arbitrator determines is just and equitable, provided
each party to the dispute must pay its own witness fees. The decision of the
arbitrator shall be in accordance with the terms and conditions of this
Agreement and shall be binding upon the two parties and non-appealable, and the
parties shall comply with said decision in good faith. The parties hereby agree
and shall instruct the arbitrator to expedite the arbitration process. Either
party may apply to any court with proper jurisdiction for enforcement of the
arbitration decision.
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<PAGE> 8
Consultant acknowledges that he has carefully read this arbitration
agreement and understands it, and is entering into the Agreement voluntarily
after a reasonable period of time to consider it and review it with personal
legal counsel. Consultant also acknowledges he may be giving up the opportunity
to bring claims before a court or jury, and does so in order to gain the
benefits of a speedy, impartial and cost-effective resolution procedure.
9.8 AMENDMENTS. The terms and provisions of this Agreement shall
not be waived, changed, modified, or amended, unless set forth in writing and
duly executed by or on behalf of both parties. Notwithstanding the foregoing,
the parties hereto reserve the right to amend this Agreement, including all
schedules and exhibits attached hereto, by mutual consent in writing.
9.9 HEADINGS/CAPTIONS. The headings and captions contained in this
Agreement are for convenience and reference purposes only and do not in any way
modify, interpret, construe or affect the intent of the parties or the meaning
or interpretation of this Agreement.
9.10 COUNTERPARTS. This document may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute the same document, whether or not all parties execute
each counterpart.
9.11 SEVERABILITY. Wherever possible each term and provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any term or provision of this Agreement shall be
prohibited by or invalid under any such law, such term or provision shall be
limited to the minimum extent necessary to render the same valid or shall be
excised from this Agreement, as the circumstances require, and this Agreement
shall be construed as if said term or provision had been incorporated herein as
so limited, or as if said term or provision had not been included herein, as the
case may be, and enforced to the maximum extent permitted by law. In the event
any agreements or covenants of this Agreement are held to be over-broad as
written, such agreements or covenants shall be deemed to be amended to narrow
their application to the extent necessary to make the agreements or covenants
enforceable according to applicable law. All provisions, terms, agreements and
covenants contained herein are severable, and in the event any of them shall be
held to be invalid by any competent court or arbitrator and incapable of
reformation, this Agreement shall be interpreted as if such invalid provisions,
terms, agreements or covenants were not contained herein.
9.12 NOTICE. All notices and demands hereunder to any party shall
be in writing and shall be served by personal delivery, or by registered or
certified mail, return receipt requested, and shall be deemed complete upon
receipt. If receipt of such notice or demand is refused or a party has changed
his or its address without informing the other, the notice shall be deemed to
have been given and received upon the seventh (7th) day following the date upon
which it is first postmarked.
If to Consultant:
Mr. Howard Baskin
2923 Gandy Blvd.
Tampa, FL 33611
With a required copy to Consultant's legal counsel as follows:
Graham & James LLP/Riddell Williams P.S.
1001 Fourth Avenue Plaza, Suite 4500
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<PAGE> 9
Seattle, WA 98154-1065
Attention: Laura Puckett
If to the Company:
Mr. Allen C. Ringer, President
Plenum Communications, Inc.
3003 - 80th Ave S.E.
Mercer Island, WA 98040
With a copy to the Company's legal counsel as follows:
L.O. Falk, Esq.
15700 E. Euclid Avenue, S3
Spokane, WA 99216
Any party may change its address for purposes of this paragraph by
giving notice of such change of address to the other party in the manner herein
provided for giving notice.
9.13 NO THIRD PARTY RIGHTS. Nothing in this Agreement shall be
construed as conferring a benefit upon third parties, nor is it intended that
any provision shall be for the benefit of any third party.
9.14 PRESUMPTION. This Agreement or any portion thereof shall not
be construed against any party due to the fact that the Agreement or portion
thereof was drafted by said party.
9.15 SUCCESSORS AND ASSIGNS. Subject to the terms and conditions
hereof, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, administrators,
successors, and assigns, to the extent any assignment is provided for and
permitted hereunder.
9.16 LATE FEES/NONPAYMENT PENALTIES. In the event that any payment
or payments due to Consultant under this Agreement are not paid to Consultant in
accordance with the terms and conditions of this Agreement, in whole or in part,
and Consultant is required to resort to legal action to collect such payment,
interest shall accrue on the unpaid amount at the rate of twelve (12) percent
per annum from the date such unpaid compensation becomes due under the terms of
this Agreement until full payment of same. For purposes of this Section 9.16,
"legal action" shall include, but not be limited to, mediation, arbitration or
other non-judicial proceedings.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first set forth above.
SIGNATURES OF THE PARTIES
- ------------------------------- ----------------------------------
Allen C. Ringer Howard Baskin
President Consultant
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<PAGE> 10
Plenum Communications, Inc.
The undersigned hereby agrees to the above Amended and Restated Consultant
Agreement, which, among other provisions, removes the undersigned as a party to
the Agreement.
LION, Inc., formerly known as
Infosystems, Inc.
- -----------------------------
Sam Ringer
President
LION, Inc.
10
<PAGE> 11
SCHEDULE A
<TABLE>
<CAPTION>
# of Shares Exercise Price Vesting On Expiry Date
- -------------------------------------------------------------------------
<S> <C> <C> <C>
300,000 $0.01 02/15/98 02/15/03
187,000 $0.01 05/15/98 02/15/03
187,000 $0.01 08/15/98 02/15/03
26,000 $0.01 11/15/98 02/15/03
161,000 $0.75 11/15/98 02/15/03
187,000 $0.75 02/15/99 02/15/03
187,000 $0.75 05/15/99 02/15/03
187,000 $0.75 08/15/99 02/15/03
78,000 $0.75 11/15/99 02/15/03
109,000 $1.50 11/15/99 02/15/03
187,000 $1.50 02/15/00 02/15/03
187,000 $1.50 05/15/00 02/15/03
17,000 $1.50 08/15/00 02/15/03
175,000 $3.00 08/15/00 02/15/03
187,000 $3.00 11/15/00 02/15/03
143,000 $3.00 02/15/01 02/15/03
</TABLE>
11
<PAGE> 12
EXHIBIT 1
ADDENDUM NO. __ TO AMENDED AND RESTATED CONSULTANT AGREEMENT
This Addendum No. __ amends the Amended and Restated Consultant Agreement dated
July __, 1998 by and between Howard Baskin and Plenum Communications, Inc., as
amended to date.
Dated: ______________________
1. Amendment to Consulting Fee
The Consulting Fee provided for in Section 3.1 shall amended to be $_________
per week for the period ____________________ through _______________________.
2. Amendment to Vesting Dates
Schedule A is hereby amended and replaced with the attached Schedule __.
- -------------------------------
Allen C. Ringer
President
Plenum Communications, Inc.
- -------------------------------
Howard Baskin
Consultant
12
<PAGE> 13
ADDENDUM NO. 2 TO AMENDED AND RESTATED CONSULTANT AGREEMENT
This Addendum No. 2 amends the Amended and Restated Consultant Agreement dated
July 15, 1998 by and between Howard Baskin and Plenum Communications, Inc., as
amended to date.
Dated: ______________________
1. Amendment to Consulting Fee
The Consulting Fee provided for in Section 3.1 shall amended to be $ 0.00 per
week for the period August 16, 1998 through January 15, 1999.
2. Amendment to Vesting Dates
Schedule A is hereby amended and replaced with the attached Schedule C.
- ------------------------------
Allen C. Ringer
President
Plenum Communications, Inc.
- -------------------------------
Howard Baskin
Consultant
13
<PAGE> 14
SCHEDULE C
Options granted February 15, 1998:
<TABLE>
<CAPTION>
# of Shares Exercise Price Vesting On Expiry Date
- ----------------------------------------------------------
<S> <C> <C> <C>
300,000 $0.01 02/15/98 02/15/03
187,000 $0.01 05/15/98 02/15/03
187,000 $0.01 08/15/98 02/15/03
26,000 $0.01 12/31/98 02/15/03
</TABLE>
Options to be granted contingent upon the following events:
In the event that LION and Consultant enter into an employment agreement under
which Consultant becomes an employee of LION on or after January 1, 1999, the
following employee options will be granted. The vesting dates in the schedule
below assume that such employment agreement is entered into as of January 1,
1999. If such employment agreement is entered into effective as of a date later
than January 1, 1999, the vesting dates in the schedule below shall be adjusted
by adding to them the number of days between January 1, 1999 and the date as of
which the employment agreement is effective.
<TABLE>
<CAPTION>
# of Shares Exercise Price Vesting On Expiry Date
- ------------------------------------------------------------------
<S> <C> <C> <C>
161,000 $0.75 03/31/99 02/15/03
187,000 $0.75 06/30/99 02/15/03
187,000 $0.75 09/30/99 02/15/03
187,000 $0.75 12/31/99 02/15/03
78,000 $0.75 03/31/00 02/15/03
109,000 $1.50 06/30/00 02/15/03
187,000 $1.50 09/30/00 02/15/03
187,000 $1.50 12/31/00 02/15/03
17,000 $1.50 03/31/01 02/15/03
175,000 $3.00 06/30/01 02/15/03
187,000 $3.00 09/30/01 02/15/03
138,000 $3.00 12/31/01 02/15/03
</TABLE>
Provided, however, that in the event that LION signs an agreement or agreements,
of the kind described below or of any kind if there is no description, with one
or more of the following third parties, a number of options on the schedule
above that would have vested after 12/31/98, in the order that they appear in
the schedule, equal to the number next to the name of the third party below will
vest on the date each such agreement is signed instead of the vesting date on
the schedule above.
<TABLE>
<S> <C>
FNMA 25,000
Myers Internet Services - purchase or merger 25,000
Netscape 50,000
</TABLE>
Initials: AR _____ HB _____
14
<PAGE> 1
EXHIBIT 10.3
LEASE
THIS LEASE made this 30th day of June, 1998, by and between Ruth Li
and, ("Lessor"), and Plenum Communications, Inc. and its subsidiary company,
LION, Inc. a Minnesota and Washington corporation respectively and ALLEN RINGER,
("Lessee").
WITNESSETH
1. LEASED PREMISES. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, upon the terms and conditions hereinafter set forth that
certain leasehold space located at 3003 and 3011 80th Avenue SE, Mercer Island,
Washington ("Upstairs"), together the "Premises", more particularly described
and shown in Exhibit "A" attached hereto. For purposes of any rental adjustments
which may be made, the agreed floor area of the space located at 3003 is 1,904
square feet and the space located at 301l is 1,600 square feet, for a total of
3,504 square feet.
2. TERM. The term of this lease shall be for a period of Three (3)
years, commencing on July 1, 1998 and ending as of midnight, June 30, 2001.
3. RENT. Lessee covenants and agrees to pay Lessor in advance without
notice, demand or offset, the monthly sum of $6,424.00. These rents shall be
paid on the First (1st) day of every month for the term of this Lease. Rent for
any fractional calendar month at the beginning or end of the term shall be
prorated based on a 30-day month and a 360-day year.
4. LEASE DEPOSIT. As partial consideration for the execution of this
Lease, Lessee has paid to Lessor the sum of Nine Thousand Forty-four Dollars
($9,044.00), receipt of which is hereby acknowledged. If Lessee shall have fully
and faithfully complied with all of the covenants, agreements, terms, and
conditions of this Lease, said amount shall be repaid by Lessor to Lessee within
thirty days after the expiration or prior termination of this Lease; but
otherwise said payment shall belong to Lessor as part of the consideration for
the execution of this Lease.
5. USE. Lessee agrees that Lessee will use and occupy the Leased
Premises for office space for its computer information service staff and related
businesses only, and for no other purpose without the prior written consent of
Lessor. Lessee shall not use or permit the Leased Premises or any part thereof
to be used for any purpose in violation of any municipal, county, state,
federal, or other governmental law, ordinance, rule or regulation.
6. MAINTENANCE AND UTILITIES.
6.1 Lessor shall, subject to normal wear and tear, maintain and keep in
good repair the foundations, exterior walls, roof and other structural portions
of the Building, and shall maintain the electrical, plumbing, heating and
ventilating equipment in the Building, except such portions thereof as may be
specially installed for or by Lessee. Lessor shall pay the charges for
electricity, water and sewer, subject to the provisions of Paragraph 6.3 below.
6.2 Lessee, upon occupancy of the Leased Premises, shall be deemed to
have inspected the Leased Premises and accepted the Leased Premises in their
then existing condition. Lessee shall at its expense
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maintain the interior of the Leased Premises at all times in good condition and
repair, all in accordance with the laws of the State of Washington and all
health, fire, police, and other ordinances, regulations and directives of
governmental agencies having jurisdiction over such matters. Lessee shall commit
no waste of any kind in or about the Leased Premises or the Building, and Lessee
shall pay for all damage to the Building, as well as damage to tenants or
occupants thereof, caused by Lessee's or its agents', contractors', licensees'
or employees' misuse or neglect of the Leased Premises or the Building or their
respective apparatus or appurtenances. At the expiration of the term hereof,
Lessee shall surrender the Leased Premises, together with all keys, to Lessor in
good condition, normal wear and tear and damage by tire or other casualty
excepted. Lessee shall pay all charges for garbage removal and janitorial
services, if desired.
6.3 If Lessee shall require any telephone installation, or electrical
capacity over and above currently available equipment, Lessee shall notify
Lessor 30 days prior, in writing, and obtain Lessor's written permission before
making any alterations or additions and, if approved, all changes or additions
shall be paid for in full by Lessee. If, because of heavy computer use, the
electrical charges shall increase over previous charges, Lessee will pay the
additional monthly electrical charges over and above the agreed upon rent.
7. TENANT IMPROVEMENTS.
7.1 Lessee intends to make no tenant improvements or alterations to the
Leased Premises. If Lessee decides to make any improvements or alterations they
shall not be made without first obtaining Lessor's written approval of the plans
and specifications for the improvements and obtaining the requisite building
permit, if any, from the city of Mercer Island.
7.2 All expenses incurred for labor and materials and for any other
costs shall be paid in full by Lessee and Lessor shall not have any
liability therefor.
7.3 Lessee shall indemnify and hold Lessor harmless from any claim,
demand, Suit, judgment or award which arises out of or on account of
the design or construction of tenant improvements, for all claims for
labor and materials and from any injury, or claim of injury occurring
during or because of the construction of the tenant improvements.
8. ALTERATIONS. Lessee shall not make any alterations, additions or
improvements in or to the Leased Premises without first obtaining the written
consent of Lessor. All such alterations, additions and improvements shall be at
the sole cost and expense of Lessee, shall be done by Licensed contractors and
pursuant to plans and specifications approved by Lessor, and shall become the
Property of Lessor without obligation to pay therefor. Approved alterations
shall remain in and be surrendered with the Leased Premises as a part thereof at
the termination of this Lease, without disturbance, molestation or injury.
Special alterations, usable only by the Lessee, may be required to be removed by
Lessor upon termination of said Lease as a condition for their approval. In such
event, all expenses to restore said space to its original condition shall be
borne by Lessee.
9. ASSIGNMENT, TRANSFER OR SUBLEASE. Lessee shall not assign or transfer
this Lease or any interest therein, nor sublet any portion of the Leased
Premises nor shall this Lease or any interest thereunder be assignable or
transferable by operation of law, without first obtaining the written consent of
Lessor, which shall not be unreasonably withheld. In the event consent is
granted, Lessor reserves the right to adjust the rent for the remaining term of
this Lease to the prevailing market rents at the time such
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<PAGE> 3
approval is granted. Any assignment of this Lease shall not relieve Lessee of
its duties, liabilities and obligation hereunder.
10. ACCESS. Lessee will allow and does hereby grant Lessor and Lessor's
agents the right of free access at all reasonable times to the Leased Premises
for the purpose of inspection or making repairs, additions or alterations to the
Leased Premises or any property owned by or under control of Lessor; provided,
that the foregoing shall not be construed to obligate Lessor to make any
repairs, additions or alterations thereto other than those obligations defined
in Paragraph 6 of this Lease document. Lessor may retain a pass key to said
Leased Premises in connection with the foregoing right of access.
11. DEFAULT.
11.1 Any vacation or abandonment of the Leased Premises for a Continuous period
in excess of ten (10) days or any failure to pay any Base Rent, Operating Cost,
or Additional Taxes as and when due, or any failure to perform or comply
strictly with any covenant, condition, or representation made under this Lease
(including any exhibits), shall constitute a default hereunder by Lessee. Lessee
shall have a period of three (3) days from the date of receipt of written notice
from Lessor within which to cure any default in the payment of Base Rent,
Operating Costs, or Additional Taxes. Lessee shall have a period often (10) days
from the date of written notice from Lessor within which to cure any other
default under this Lease.
11.2 The appointment of a receiver to take possession of all or
substantially all of the assets of Lessee, or an assignment of Lessee
for the benefit of creditors, or any action taken or suffered by
Lessee under any insolvency, bankruptcy, reorganization, moratorium,
or other debtor relief act or statute, whether now existing or
subsequently amended or enacted, shall also constitute a default
under this Lease by Lessee.
11.3 Failure of Lessor to insist upon strict performance of or
compliance with any of the covenants, conditions, or representations
of this Lease, or to exercise any remedy or option conferred by this
Lease, shall be construed neither as waiver nor a relinquishment of
that covenant, condition, representation, remedy, or option, but the
same shall be and remain in full force and effect.
12. REMEDIES.
12.1 Upon the occurrence of a default by Lessee, Lessor shall have the
following rights and remedies (all of which shall be cumulative and not
exclusive) in addition to all other rights or remedies available to Lessor at
law or in equity:
12.1.1 Base Rent, Operating Cost, or Additional Taxes that
are delinquent more than five (5) days shall bear interest
at the Seattle-First National Bank prime rate plus 5%, or
at the maximum rate permitted in the State of Washington,
whichever is greater, from the original due date until
paid.
12.1.2 Upon any default by Lessee under this Lease, Lessor
at its option may immediately declare Lessee's rights under
this Lease terminated, may re-enter and repossess itself of
the Leased Premises as of its former estate (using any
reasonable force that may be necessary to remove any
persons or property), and/or may take any other action
permitted by this Lease upon a default by Lessee. If, upon
the re-entry of Lessor, any personal property of Lessee or
others remains in or upon the Leased Premises,
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<PAGE> 4
Lessor may, in its sole discretion remove that personal
property and place the same in a public warehouse or
storage, at the expense and risk of the owners of the
property, and Lessee shall reimburse Lessor for any
reasonable expenses incurred by Lessor in connection with
this removal and/or storage.
12.2 Notwithstanding anything to the contrary contained in this Lease,
if any act of default occurs, Lessor, as an alternative remedy to those
specifically stated above, may require that this Lease continue in lull force
and effect and may enforce all its rights and remedies under this Lease,
including, without limitation, the rights to recover Base Rent, Operating Costs,
Additional Taxes, and any other sum payable by Lessee to Lessor under this Lease
as they become due, for so long as Lessor does not terminate Lessee's right to
possession of the Leased Premises, Acts of maintenance or preservation, efforts
to re-let the Leased Premises, including any re-letting for the account of
Lessee, or the appointment of a receiver upon Lessor's initiative to protect its
interest under this Lease shall not constitute a termination of Lessee's right
to possession. If Lessor re-lets the Leased Premises for the account of Lessee,
Lessee shall pay to Lessor each month during the balance of the term of this
Lease the following sums: (a) any rent deficiency arising from the re-letting of
the Leased Premises at a lesser rent than that agreed upon in this Lease for
Base Rent, Operating Costs, and Additional Taxes; (b) the cost of renovating or
improving the Leased Premises for any new tenant; and (c) any other costs or
expenses incurred by Lessor in re-letting the Leased Premises, including real
estate commissions.
13. RISK. All personal property of any kind or description whatsoever in
the Leased Premises shall be at the Lessee's sole risk and the Lessor shall not
be liable for any damage done to or loss of such personal property or damage or
loss suffered by the business or occupation of the Lessee arising from any acts
or neglect of co-tenants or other occupants of the Building, or of the Lessor or
the employees of the Lessor, or of any other persons, or from bursting,
overflowing or leaking of water from roof or sewer pipes or from the heating or
plumbing fixtures or from electric wires, or from gas, or odors, or caused in
any other manner whatsoever, except in the case of willful neglect on the part
of the Lessor.
14. INDEMNIFICATION AND INSURANCE. Lessee shall indemnify and hold Lessor
harmless from all loss, damage, liability or expense resulting from any injury
to any person or any loss or damage to any property caused to or resulting from
any negligent act or omission of Lessee or any officer, agent, employee, guest,
invitee, or visitor of Lessee in or about the Leased Premises or the Building.
Lessor shall not be liable for any loss or damage to person or property
sustained by Lessee, or other persons, which may be caused by the Complex, or
improvements in the Complex or the Leased Premises, or any appurtenances
thereto, by any other cause of whatsoever nature, unless caused by the gross
negligence or willful misconduct of Lessor. Lessee shall, at its own expense,
maintain comprehensive general liability insurance with an insurance company
acceptable to Lessor with such limits as may be acceptable to Lessor, but in no
event less than $250,000.00/$500,000.00 for general liability and $100,000.00
for property damage. Lessee shall provide Lessor with a Certificate of Insurance
bearing an endorsement that the policy names Lessor as an additional insured.
The policy shall not be cancelled without thirty (30) days prior written notice
to Lessor.
15. CASUALTY. In the event the Leased Premises or the Building in which
the Leased Premises are situated is destroyed or damaged by fire, earthquake or
other casualty to the extent that are they are untenantable in whole or in part,
then Lessor may, at Lessor's option, proceed with reasonable diligence to
rebuild and restore the Leased Premises or such part thereof as may be injured
as aforesaid, provided that within thirty (30) days after such destruction or
damage, Lessor shall, in writing, notify Lessee of Lessor's intention to do so,
and during the period of such rebuilding and restoration, the rent shall be
abated in the same ratio as that portion of the Leased Premises rendered for the
time being unfit for
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<PAGE> 5
occupancy shall bear to the whole of the Leased Premises. If Lessor shall fail
to notify Lessee, as aforesaid, then this Lease shall, at the expiration of the
time for the giving of notice as herein provided, be deemed terminated, and all
rights of either party eliminated.
16. SUBORDINATION. This Lease is subject to and is hereby subordinated to
a first lien in favor of any institutional lender or other entity who ultimately
holds the first mortgage on the above described property, together with other
liens as may be deemed necessary by Lessor. Lessee agrees to execute at no
expense to Lessor, any instrument that may be deemed necessary or desirable by
the Lessor to further effect the subordination of this Lease to such liens.
17. ESTOPPEL CERTIFICATE. Lessee will upon ten (10) days prior written
request by Lessor, execute, acknowledge and deliver to Lessor a statement in
writing executed by Lessee certifying that this Lease is unmodified and in full
force and effect (or, if there have been modifications, that this Lease is in
full force and effect as modified, and setting forth such modifications) and the
dates to which the rent has been paid, and either stating that to the knowledge
of the Lessee of such certificate no default exists hereunder or specifying each
such default of which the Lessee may have knowledge. It is intended that any
such statement by Lessee may be relied upon by any prospective purchaser or
mortgagee of Lessor.
18. SERVICES. Lessor shall maintain the public and common areas outside
the building in good order and condition except for damages occasioned by the
act or neglect of Lessee, its agents, contractors, invitees, or employees.
Lessor shall not be liable to Lessee for any loss or damage caused by or
resulting from any variation, interruption or any failure of said services due
to any cause whatsoever. No temporary interruption or failure of such services
incident to the making of repairs, alterations, or improvements due to accident
or strike or conditions or events not under Lessor's reasonable control shall be
deemed as an eviction of Lessee or relieve Lessee from any of Lessee's
obligations hereunder.
19. WAIVER OF SUBROGATION. Lessee and Lessor hereby mutually release each
other from liability and waive all right of recovery against each other for any
loss from perils insured against under their respective fire insurance policies,
including any extended coverage and endorsements thereto, provided, however,
that this paragraph shall be inapplicable if it would have the effect, but only
to the extent that it would have the effect, of invalidating any insurance
coverage of Lessor or Lessee.
20. RENTAL ADJUSTMENTS.
20.1 Commencing on July 1st, 1999 and on July 1st of each year
thereafter, the Base Rent shall be adjusted to reflect any increase
in the Consumer Price Index, All Urban [CPI-U] for the Seattle,
Washington, Metropolitan area, as prepared by the United States
Department of Labor. For such purposes, a comparison of the published
index for the period ending most nearly on July 1st of each such year
will be made with the index published one year earlier.
20.2 Commencing on July 1, 1999 and for the balance of the Lease
Term, Lessee shall pay as additional rent the amount by which the
real estate taxes, LID payments and insurance premiums exceed those
charges incurred by Lessor during calendar year 1998 ("Base Year")
prorated for the Leased Premises by square footage ("Operating
Adjustment"). For purposes of this paragraph, the parties agree the
Leased Premises represent Fifty Percent (50%) of the total area of
the Building.
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<PAGE> 6
20.2.1 At least thirty (30) days prior to the
Commencement of the Second and Subsequent years
of the lease term, Lessor shall furnish Lessee a
written statement of the estimated operating
costs for the coming year, and a calculation of
rental adjustment due from the Lessee. That
amount shall be equal to one-twelfth (1/12) of
the Lessee's proportionate share of the amount,
if any, by which the estimated operating costs
exceed the Base Rent, which shall be added to the
monthly Base Rent payable by Lessee under this
Lease for each month during the coming year.
20.2.2 Within ninety (90) days after the close of each
year of this Lease, Lessor shall deliver to
Lessee a written statement setting forth the
actual operating costs during the preceding
Operating Year. If the actual Operating Costs for
any Operating Year exceed the estimated Operating
Costs paid by Lessee to Lessor pursuant to
Paragraph 20.2.1 for that Operating Year (or, in
the case of the Operating Year in which this
Lease commences, the Base Amount), Lessee shall
pay the amount of the excess to Lessor as
additional rent within thirty (30) days after
Lessee receives the written statement from
Lessor. If the statement shows actual Operating
Costs to be less than the amount paid by Lessee
to Lessor pursuant to Paragraph 20.2, then the
amount of the overpayment shall be paid Lessor to
Lessee within thirty (30) days following the date
of the statement, so long as all other
obligations of Lessee to Lessor are current. For
purposes of calculating the rental adjustment
pursuant to this paragraph, the actual Operating
Costs shall be deemed never to be below the Base
Amount and shall never serve to reduce the Base
Rent in Paragraph 3.
21. SIGNS AND ADVERTISING. Lessee shall not erect or install or otherwise
utilize signs, lights, symbols, canopies, awnings, window coverings or other
advertising or decorative matter on the windows, walls and exterior doors, or
otherwise visible from the exterior of the Leased Premises without first
submitting its plans to Lessor, obtaining Lessor's written approval thereof and
obtaining approval of the City of Mercer Island. Lessor shall have the right to
adopt reasonable rules, regulations and policies relating to the style and type
of said advertising and decorative matter which may be used by the tenants,
including Lessee, in the Building, and may change or amend such rules and
regulations from time to time as in its discretion it deems advisable. Lessee
agrees to abide by such rules, regulations and policies. At the termination of
this Lease, all such signs, lights, window coverings, symbols, canopies, awnings
or other advertising or decorative matter attached to or painted by Lessee upon
the Leased Premises, whether on the exterior or interior thereof, shall be
removed by Lessee at its own expense, and Lessee shall immediately repair any
damage or injury to the Leased Premises, and correct any unsightly condition,
caused by the maintenance and removal of said signs, etc.
22. PARKING. Lessee shall have Eleven (11) reserved parking spaces which
shall be so designated (9 spaces upstairs and 2 spaces downstairs). Lessee
acknowledges and understands that other parking spaces may be assigned or rented
to tenants or others from time to time on a "reserved" basis and on such other
terms and conditions as may be determined by Lessor. Only automobiles and
pick-up trucks shall be allowed to park. The driveways, walkways on parking lots
and parking spaces shall be subject to such rules and regulations as may be
issued from time to time by Lessor.
23. RULES AND REGULATIONS. No smoking is allowed inside the Leased
Premises or any other part of the Building at any time.
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24. NOTICES. All notices under this Lease shall be in writing and
delivered in person or sent by registered or certified mail to Lessor at the
same place rent payments are made, and to Lessee at the Leased Premises, or such
addresses as may hereafter be designated by either party in writing. Notices
mailed as aforesaid shall be deemed given on the date of such mailing.
25. ATTORNEY'S FEES. In the event suit is brought for the recovery of
rent due under the provisions of this Lease, or for breach of any other
conditions or covenants contained herein, the prevailing party shall receive
reasonable attorney's fees, and all costs incurred. This agreement shall be
governed by and construed in accordance with the laws of the State of Washington
without regard to principles of conflict of laws.
26. HOLDING OVER. Lessee may hold over after the expiration of the term
of this Lease only after submitting a request in writing three (3) months prior
to termination of this Lease and obtaining the written consent of Lessor. If
Lessee holds over with Lessor's written consent, such tenancy shall be for an
indefinite period of time on a month-to-month tenancy, which tenancy may be
terminated as provided by the laws of the State of Washington. During such
tenancy, Lessee agrees to pay Lessor a rate of rental equal to one and one-half
(1-1/2) times the rent set forth herein, unless a different rate is agreed upon,
and to be bound by all of the terms, covenants, and conditions as herein
specified, so far as applicable.
27. NON-WAIVER. Neither the acceptance of rent nor any other act or
omission of Lessor after the happening of any event shall operate as a waiver of
any past or future violation, and any such acceptance of rent shall not stop
Lessor from promptly exercising any other option, right or remedy that it may
have under any term or provision of this Lease.
28. ENTIRE AGREEMENT. There are no verbal or other agreements that modify
or affect this Lease. This Lease supersedes any and all prior agreements
executed by or on behalf of the parties hereto regarding the Leased Premises,
and neither Lessor nor Lessee shall be bound by any understanding, agreement,
promise, representation, or stipulation, expressed or implied, not specified
herein.
29. TIME. Time is of the essence of this Lease.
30. QUIET ENJOYMENT. Lessor covenants to control its activities and
personnel such that if and so long as Lessee pays the rent and performs the
covenants contained in this Lease, Lessee shall hold and enjoy the Leased
Premises peaceably and quietly, subject to the provisions of this Lease.
31. EMINENT DOMAIN.
31.1 If all or any part of the Leased Premises shall be taken as a result
of the exercise of the power of eminent domain, or any transfer in lieu of the
exercise of the power of eminent domain, this Lease shall terminate as to the
part so taken as of the date of the date of taking, provided that if Lessor, in
its discretion, elects to rebuild or replace any part of the Leased Premises
affected by the taking, then during the period of the rebuilding or replacement,
the taking shall be treated as temporary taking as to the part of the Leased
Premises to be rebuilt or replaced and shall be governed by the terms of
paragraph 31.2 below.
31.2 In the event of any taking, Lessor shall be entitled to any and
all compensation or awards which may be paid or made in connection
with the taking of any interest whatsoever in the Leased Premises or
the Center. Lessee shall have no claim against Lessor for the value
of any
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unexpired term of this Lease or otherwise and shall have no right to
participate or share in any compensation awarded in connection with
the taking.
32. SEVERABILITY. If any provision of this Lease or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provisions to
other persons or circumstance shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
33. EXHIBITS AND RIDERS. The following Exhibits and Riders are attached
to and by this reference made a part of this Lease.
Exhibit A. Floor Plan of Leased Premises within Building
Exhibit B. Legal Description
34. PERSONAL GUARANTEE. The party(s) who signs this lease as Lessee
hereby personally guarantees the performance and payment of all obligations
contained herein.
35. TERMINATION OF PRIOR LEASE & TRANSFER OF DEPOSITS.
35.1 This Lease Agreement terminates and replaces the parties'
prior Lease dated, for reference purposes, August 29th,
1997, with respect to the "Upstairs" portion of the demised
premises.
35.2 The August 29th, 1997 Lease shall remain in effect, with
regard to Lessee's occupancy of the "Downstairs" portion of
the premises as described in said Lease, through its
termination date of October 31st, 1998.
35.3 Lessee acknowledges that the deposit held by Lessor under
the August 29th, 1997 Lease has been transferred in its
entirety to this Lease Agreement, and no portion of such
deposit shall be applicable to the remaining rents owed by
Lessee under the August 29th, 1997 Lease Agreement.
Notwithstanding the foregoing, any breach of the August
29th, 1997 Lease Agreement by Lessee shall constitute a
breach of this Lease Agreement.
36. ABATEMENT OF RENT FOR JULY 1998. As additional consideration of
Lessee's execution of this Lease Agreement, and in consideration of Lessee's
execution of this Lease Agreement without necessity of Lessor's provision of any
additional tenant improvements, Lessor has agreed to abate rents in the amount
of $1,955.00 (One Thousand Nine Hundred Fifty-five Dollars) for the 1,600 square
feet space located at 3011 80th Avenue SE, which would otherwise be payable by
Lessee under this Lease Agreement for the month of July, 1998.
LESSOR:
- --------------------------------
RuthLi
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LESSEE:
PLENUM COMMUNICATIONS, INC. a Minnesota corporation, and its subsidiary, LION,
INC., a Washington corporation
By:
-------------------------------- ----------------------------------
Allen Ringer, President, ALLEN RINGER
Plenum Communications, Inc.
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 1st day of July, 1998, before me, a
Notary Public in and for the State of Washington, duly commissioned and sworn,
personally came ALLEN RINGER, to me known to be the individual described in and
who executed the within instrument, and acknowledged that he signed the same as
his free and voluntary act and deed for the uses and purposes therein mentioned.
WITNESS MY HAND and official seal the day and year in this
certificate first above written.
/s/ S.D. Bungert
------------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Mercer Island
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 30th day of June, 1998, before me, a
Notary Public in and for the State of Washington, duly commissioned and sworn,
personally came RUTH LI, to me known to be the individual described in and who
executed the within instrument, and acknowledged that he signed the same as his
free and voluntary act and deed for the uses and purposes therein mentioned.
WITNESS MY HAND and official seal the day and year in this
certificate first above written.
/s/ Melvin Bradley
-----------------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Seattle
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Exhibit 10.4
OFFICE RENTAL AGREEMENT
THIS Office Rental Agreement is made and entered into as of this 1st
day of May, 1998, by and between, Robert J. Tyson (hereinafter referred to as
Lessor), and InfoSystems Inc. d.b.a. as Lenders Interactive Online Network
(LION), (hereinafter referred to as Lessee).
WITNESSETH:
1. PREMISES. The Lessor does hereby lease to Lessee, and Lessee does
hereby lease from Lessor, those certain premises situated in the City of
Spokane, County of Spokane, State of Washington, described as follows:
Office space shown on Exhibit "A" consisting of approximately 2,000 square feet
net rentable area, in the Stonemark Office Building, located at North 1235 Post
Street, Spokane Washington 99201.
The Premises are located on the following property:
Lots One (1), Two (2), Three (3), Eleven (11), Twelve (12) and
Thirteen (13), Block Twenty-five (25), STRATTON'S ADDITION, all being
situated in the City of Spokane, County of Spokane, State of
Washington.
2. TERM. The term of this Lease shall be eight (8) months, commencing
on the 1st day of May, 1998, and terminating on the 31st day of December, 1998.
3. RENT. The Lessee shall pay the monthly rent in advance and without
notice starting May 1, 1998 and on the first day of each subsequent calendar
month during the term of this Lease. The monthly rent shall be the sum of:
$1,750.00 from May 1st, 1998 to July 31st, 1998
$2,000.00 from August 1st, 1998 to October 31st, 1998
$2,500.00 from November 1st, 1998 to December 31st, 1998
In the event the monthly rent is not paid within five (5) days of its
due date, then there shall be due in addition to the monthly rent, a late charge
calculated at ten percent (10%) of the delinquent monthly rent.
4. IMPROVEMENTS. Lessee accepts the premises in their present
condition on an "as is" basis as of the commencement date of this Lease. Lessor
shall not be required to make any improvements whatsoever to the premises.
Lessee shall be responsible for the installation and cost to install all
communication and/or computer equipment, wiring and related expenses and
indemnify the Lessor for any charges therefore.
5. USE. The Lessee will use and occupy said premises for professional
offices and related purposes, and for no other purpose. Lessee agrees that in
the operation of the business to be conducted on said premises and in any
occupancy thereof the Lessee shall comply with all the laws, rules and
regulations of the government of the United States, State of Washington, County
of Spokane, and City of Spokane, and will do nothing volitional to increase the
insurance rates on the building. Lessee agrees not to use any machinery or
equipment in the leased premises which might be injurious to the building or
which might cause unreasonable noise or vibration, which would be objectionable
to other tenants. Upon termination of the Lease, Lessee shall quit and surrender
the leased premises in as good a state and
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condition as reasonable use of wear and tear thereof will permit, damage by the
elements or fire excepted.
6. ALTERATIONS AND FIXTURES. Lessee agrees to make no alterations of
the leased premises without Lessor's written consent. Lessor's written consent
for alterations by Lessee shall not be unreasonably withheld or delayed. For the
purpose of this Lease, alterations shall be defined to mean any addition or
modification of the leased premises. Any alterations to the leased premises
shall be made at Lessee's expense. Alterations shall become the property of
Lessor at the termination of the Lease. Upon termination of the Lease, Lessee
shall have the right to remove all movable improvements, furnishings, and trade
fixtures placed therein by Lessee which can be removed without material injury
to the premises and will repair any damage to the premises occasioned by such
removal.
7. LIABILITY. Lessee agrees to indemnify Lessor against and save
Lessor harmless from all demands or claims, of whatsoever nature, and all
reasonable expenses incurred in or resisting the same, for injury to person,
loss of life, or investigating damage to property occurring on the leased
premises or any common areas of the building either arising out of Lessee's use
and occupancy, or due to the act or neglect of Lessee, its agents or employees.
Lessee shall maintain liability insurance on the premises in an amount not less
than One Million and no/100 Dollars ($1,000,000.00), single limit liability.
8. SUBLETTING AND ASSIGNMENTS. Lessee shall not sublet all or any
portion of the space leased pursuant to this Office Rental Agreement.
9. WAIVER OF SUBROGATION. Lessor and Lessee each mutually release the
other from every right, claim, and demand which may hereafter arise in favor of
either arising out of or in connection with any loss occasioned by fire and such
other perils as are included in the provisions of the normal extended coverage
clause of fire insurance policies, and do hereby waive all rights of subrogation
in favor of insurance carriers arising out of any such losses and sustained by
either the Lessor or the Lessee in or to the premises or any property therein.
Lessee shall insure its furniture, fixtures and equipment for 100% of the
replacement value thereof.
10. NOTICES. All notices to be given by the parties hereto shall be
in writing and may either be served personally or may be deposited in the United
States mail, postage prepaid, by either registered or certified mail, and if to
be given to Lessor, may be addressed to Lessor at South 8904 Rose Road, Medical
Lake, Washington 99022, or if to be given Lessee, may be addressed to Lessee at
3003 80th Avenue Southeast, Mercer Island, WA 98040.
11. SERVICES AND UTILITIES. As long as Lessee is not in default under
any of the terms, covenants, conditions, provisions or agreements of this lease
and Lessee continues to occupy the property, Lessor shall:
(a) Provide manual or automatic elevator facilities on generally
accepted business days from 5:00 a.m. to 9:00 p.m. and on Saturdays
from 8:00 a.m. to 5:00 p.m., and have one elevator available at all
other times.
(b) Provide to the premises, during the time specified in
Paragraph (a) hereof (and at other times for a reasonable additional
charge to be fixed by Lessor), heating ventilation, and air
conditioning (HAEC), when in the judgment of Lessee it may be
required for the comfortable occupancy of premises for general office
purposes.
(c) Furnish to the premises, during the times specified in
Paragraph (a) hereof, sufficient electric current for lighting for
general office use and the operation of copiers, computers, computer
support equipment, and related office machines.
(d) Furnish water for sinks, drinking fountains and restrooms
provided by Lessor.
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(e) Provide janitorial services for the premises, three days per
week, including, but not limited to, refuse removal, dusting,
vacuuming, window washing, as required, together with refuse removal,
in order to keep the premises clean and in order, provided the same
are used exclusively as offices, and are kept reasonably in order by
Lessee.
(f) Lessee agrees to cooperate fully at all times with Lessor,
and to abide by all regulations and requirements which Lessor may
prescribe for the proper functioning and protection of the building
HVAC, electrical and plumbing systems.
(g) Lessor reserves the right to reduce, interrupt or cease
service of the heating, air conditioning, ventilation, elevator,
plumbing, and electric systems, when necessary, by reason of
accident, emergency or governmental regulations, or for repairs,
alterations or improvements which, in the judgement of Lessor are
desirable or necessary to be made, until said repairs, alterations or
improvements shall have been completed. Lessor shall have no
responsibility for liability for any temporary failure to supply
elevator facilities, plumbing, ventilating, air conditioning or
electric services, when prevented from restoring the same by strike,
lockout or accident, or by any cause whatever beyond Lessor's
reasonable control, or by laws, rules, orders, ordinances,
directions, regulations or requirements of any federal, state county
or municipal authority; provided, however Lessor shall proceed to
diligently complete such repairs, alterations and improvements, and,
except when the same must be dealt with immediately due to imminent
hazard or emergency, such repairs, alterations and improvements shall
be done at a time reasonably convenient to Lessee and shall not
unreasonably interfere with Lessee's use and enjoyment of the
premises.
12. ACCESS AND REPAIRS. Lessor's agents shall have free access at any
reasonable time, after notice to the Lessee, for the purpose of inspection, or
of making repairs, additions or alterations to the leased premises or any
property owned by or under the control of the Lessor. When making such
inspections, repairs or alterations, Lessor shall not unreasonably interfere
with Lessee's use and enjoyment of the premises. Lessor shall maintain in good
condition the structural and exterior components of the office building. Lessor
shall repair and replace, when necessary, light fixtures (including replacement
of bulbs and fluorescent tubes) and shall maintain in good condition and repair
draperies, carpeting, windows, plumbing and the electrical systems. However,
Lessor shall not be obligated to repair or replace any fixtures or equipment
installed by Lessee, and Lessor shall not be obligated to make any repair or
replacement occasioned by any act or omission of the Lessee, its employees,
agents, invitee or licensees. The Lessor shall have ten (l0) days after written
notice from Lessee to commence maintenance and repairs to the leased premises,
except that Lessor shall perform its obligations immediately if the nature of
the problem presents a hazard or emergency.
13. DEFAULT. In the event of default by the Lessee in the performance
of any of its covenants herein contained, and if such default is not cured
within ten (10) days, for a default involving failure to pay rent or thirty (30)
days for other default, after written notice to Lessee, Lessor shall have the
right to re-enter the demised premises and sublet the whole or any part thereof
for the account of the Lessee, upon such terms and conditions as Lessor may deem
proper, or in the alternative, Lessor may re-enter the premises and terminate
this Lease. Provided, however, no re-entry by the Lessor shall be deemed a
termination of this Lease until Lessor has given written notice to Lessee
exercising its right to terminate this lease.
14. ATTORNEY'S FEES. In the event of any action at law or inequity
between Lessor and Lessee to enforce any of the provisions, rights, or
obligations hereunder, the unsuccessful party to such litigation agrees to pay
to the successful party all costs and expenses, including reasonable attorney's
fees incurred therein by the successful party, and if such successful party
shall recover judgment in any such
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action or proceeding, such costs and expenses and attorney's fees shall be
included in and as a part of such judgment.
15. NO WAIVER OF COVENANTS. Time is and shall be of the essence of
this agreement and of each and every part thereof, and any waiver by the Lessor
of any breach of the Lessee shall not be construed or considered to be a waiver
of any future similar breach nor of any other breach hereof. None of the
covenants, terms, or conditions of this Lease required to be performed by Lessee
shall be in any manner altered, waived, modified or abandoned except by written
instrument duly signed and delivered by Lessor.
16. HOLDING OVER. If Lessee, with the consent, express or implied, of
the Lessor, shall hold over after the expiration of the term of this Lease, the
Lessee shall remain bound by all the terms, conditions, and agreements hereof,
except the rent shall be increased and the tenancy shall be from month to month.
17. HEIR AND ASSIGNS. The rights, liabilities, and remedies provided
for herein shall extend to their heirs, legal representatives successors and, so
far as the terms of this Lease permit, assigns of the parties hereto; and the
words "Lessor" and "Lessee" and their accompanying verbs or pronouns, however
used in this Lease, shall apply equally to all persons, firms or corporations
which may be or become parties hereto.
18. RULES. Lessee agrees to abide by the reasonable rules and
regulations governing the building which are not inconsistent with Lessee's use
and which may be made by Lessor from time to time, and will use all reasonable
methods to induce customers, clients and all persons invited by Lessee into said
building to observe the same.
19. TAXES. The rent to be paid is exclusive of any sales tax,
business and occupation tax, or any taxes based on rents. Should any taxes based
on rents apply, or be enacted during the term of this Lease, the rent shall be
increased by a like amount.
20. CONDEMNATION.
a) "Condemnation" means (1) the exercise of any governmental power,
whether by legal proceedings or otherwise, by a condemnor; and (2) a
voluntary sale or transfer by a Landlord to any condemnor, either
under threat of condemnation or while legal proceedings for
condemnation are pending.
b) "Date of Taking" means the date condemnor has the right to
possession of the property being condemned.
c) "Award" means all compensation, sums or anything of value awarded,
paid or received on condemnation.
d) "Condemnor" means any public or quasi-public authority, or private
corporation or individual, having the power of condemnation
If during the term or during the period of time between the execution
of this Lease and the date the term commences, there is any taking of all or any
part of the leased premises, other improvements or land of all or any part of
the premises are a part, or any interest in this Lease by condemnation, the
rights and obligations of the parties shall be determined as provided in the
following paragraphs. If the premises are totally taken by condemnation, this
Lease shall terminate on the day of taking. If only a portion of the premises is
taken by condemnation, this Lease shall remain in effect except, that Lessee can
elect to terminate this Lease if the remaining portion of the building or other
improvements or the parking area that is part of the premises is rendered
unsuitable for Lessee's continued use of the premises.
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If Lessee elects to terminate this Lease, Lessee must exercise its rights to
terminate pursuant to this paragraph by giving notice to Lessor within thirty
(30) days after the nature and the extent of the taking have been finally
determined. If Lessee elects to terminate this Lease as provided in this
paragraph, Lessee also shall notify Lessor of the date of termination, which
date shall not be earlier than thirty (30) days nor later than ninety (90) days
after Lessee has notified Lessor of its election to terminate; except that this
Lease shall terminate on the date of taking if the date of taking falls on a
date before the date of termination as designated by Lessee. If Lessee does not
terminate this Lease within the thirty (30) day period, this Lease shall
continue in full force and effect, except that minimum monthly rental shall be
reduced as provided by the following paragraph. If any portion of the premises
is taken by condemnation and this Lease remains in full force and effect, on the
date of taking, the minimum monthly rental shall be reduced by an amount that is
in the same ratio to minimum monthly rent as the value of the area of the
portion of the premises taken bears to the total value of the premises
immediately before the date of taking. Lessor shall be entitled to all awards
paid in respect of condemnation of the premises, and Lessee shall have no claim
to any portion thereof.
21. SEVERABILITY. Any provision contained in this Lease Agreement
which is prohibited or unenforceable shall be ineffective to the extent of such
prohibition and unenforceable without invalidating the remainder thereof.
22. EXPANSION.If during the term of this Lease the Lessee requires
additional office space they will notify the Lessor in writing, Lessor will
provide extra space if available. The rental rate of the additional space will
be fourteen dollars and seventy-five cents ($14.75) per square foot per year.
The square foot of each addition space is identified on attachment "A".
23. PARKING. Lessee shall have the free use of eleven (11)
non-assigned parking spaces in the parking lot, which is adjacent to the leased
premises. Lessee shall respect the rights of the other tenants in the building
in which the leased premises are located and others who rent parking spaces to
use the parking lot adjacent to the building.
IN WITNESS WHEREOF the parties hereto have executed this Lease the
day and year first above written.
LESSOR: LESSEE:
Robert J. Tyson Allen Ringer
By: By:
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Robert J. Tyson Allen Ringer
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