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As Filed With the Securities and Exchange Commission on April 15, 1999
Registration No. 0-25159
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - SB
Amendment No. 1
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 20
Description of Property 23
Principal Shareholders 24
Management 25
Executive Compensation 29
Certain Relationships and Related Transactions 33
Description of Securities 35
Certain Market Information 38
Legal Proceedings 39
Recent Sales of Unregistered Securities 39
Indemnification of Directors and Officers 42
Changes in and Disagreements with Accountants 43
Financial Statements Index 44
Exhibit Index 59
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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 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
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, LION, Inc., formerly known as Infosystems, Inc., did
business as Mortgage Information Systems, Inc. ("MISI") from 1991 to 1995 and as
Lenders Interactive Online Network ("LION") 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.
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.
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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 and 400 per month by the fourth quarter of 1998.
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. During 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.
A registration statement under the Securities Exchange Act of 1934
("Exchange Act") is required when an issuer has total assets exceeding
$10,000,000 and more than 500 shareholders of record. The Company does not
currently meet the threshold asset requirement, and this Form 10-SB is being
filed on a voluntary basis. However, the Company's common stock trades on the
OTC Bulletin Board under the symbol "PLNM." Under current rules for OTC Bulletin
Board eligibility, the Company must be a reporting company under the Exchange
Act by March 2000, or it will not be eligible for quotation. Upon clearing SEC
comments on this Form 10-SB, the Company will satisfy OTC Bulletin Board
eligibility requirements. This registration statement was also filed to ensure
current public information is made available to the Company's shareholders and
the investment community on a timely basis and to facilitate compliance with
various state blue sky requirements. Although the Company's Exchange Act filing
obligations may be suspended at the election of the Company if certain threshold
requirements are not met for three consecutive fiscal years, it is the present
intention of the Company to continue to voluntarily file reports under the
Exchange Act. In the event there is no trading market for the Company's
securities, the Company reserves the right to terminate its filing obligations,
if eligible.
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.
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[FINANCIAL MARKET INVESTORS DIAGRAM]
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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 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
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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 $240,000), 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
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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.
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
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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.
The first targeted market for this retail priced database is the
professional real estate community. LION entered into an agreement with the
Middle Tennessee Multiple Listing Service in November 1998. This launch is
viewed by LION as a test market of the new product. Results are inconclusive
at this time, therefore, the
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Company has not determined whether the same service will be offered to other
real estate multiple listing services nationwide. It is anticipated the retail
version of LION's database may be offered to other real estate multiple listing
services and 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
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.
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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 broker
states, with similar agreements pending in three other states. 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 was 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 1998 and 1997, the Company did not incur costs related to
research and development activities.
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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,
Fannie Mae and a local Southern California firm. To the Company's knowledge,
none of these have met with significant commercial success. The Fannie Mae 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.
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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 December 31, 1998, the Company had 57 full-time associates, which
included 25 commissioned marketing associates. The Company's future success will
depend, in part, on its ability to continue to attract, 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."
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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.
NO ASSURANCE OF PROFITABILITY
The Company is experiencing increased revenues but had not reached
profitability as of December 31, 1998. During 1998, the Company had a net loss
of $1,227,718, and had net losses in 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.
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
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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 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
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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.
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.
Warrants with expiration dates in 1998 totaled 3,204,083 shares of the
Company's common stock or $1,602,042 in potential funds to the Company. Of that
total, the Company received $1,343,490 of funds on the exercise of warrants
representing 2,686,980 shares of common stock. Warrants that expired during 1998
represented 517,103 shares or $258,552 in funds not received. The value of
warrants not exercised represented 16.1% of the total value of warrants that
were due in 1998.
Warrants with expiration dates in 1999 total 3,425,876 shares of common
stock representing potential funds of $1,712,938. Warrants with expiration dates
in 2000 total 3,671,332 shares of common stock representing potential funds of
$1,785,518. The Company anticipates that the timing and amount of warrants
exercised during 1999 should be adequate to meet its needs for capital through
December 31, 1999.
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
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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. 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,
principally by means of the development of its core business through the growth
and development of its broker subscriber base, the addition of regional lenders
and affiliates, and by entering into strategic alliances with third-parties. See
"Business--Sales and Marketing." 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
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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.
At this time the Company has no defined time frame for any of its
potential expansion plans. 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
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations.
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.
RESULTS OF OPERATIONS
During 1998 the Company continued to experience significant growth in
its core products and services due to the on-going development of its base of
subscribing mortgage brokers and participating lenders. The Company's expansion
has been based on an organized and aggressive plan by region throughout the
United States. During 1999 the Company intends to take full advantage of the
synergy that is now becoming more apparent in order to solidify and expand its
market share.
REVENUES
Revenues increased to $1,856,000 from $892,000 for the years ended
December 31, 1998 and 1997, respectively. This represents an increase of
approximately $964,000 or 108%. Total revenues of $1,856,000 for the year ended
December 31,1998 were comprised of mortgage broker fees of $1,245,000 or 67.0%,
lender fees of $392,000 or 21.1%, ad banner revenues of $137,000 or 7.4%,
broadcast fax fees for $96,000 or 5.2% and all other fees and discounts for
$(14,000) or (.7)%. Total revenues of $892,000 for the year ended December 31,
1997 were comprised of broker fees of $441,000 or 49.5%, lender fees of $259,000
or 29.0%, ad banner revenues of $34,000 or 3.8%, broadcast fax fees of 157,000
or 17.6% and all other fees of $1,000 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.
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Marketing and administrative expenses increased to $1,234,000 from $678,000 for
the years ended December 31, 1998 and 1997, respectively. This represents an
increase of $556,000 or 82.1%. Marketing and administrative expenses were 66.5%
and 76.0% of revenues for the years ended December 31, 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 and facilities requirements. 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 $1,575,000 from
$1,224,000 for the years ended December 31, 1998 and 1997, respectively. This
represents an increase of $351,000 or 28.7%. Salaries and payroll tax expenses
were 84.9% and 137.2% of revenues for the years ended December 31, 1998 and
1997, respectively. 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. The Company has grown to 57
associates at December 31, 1998 from a total of 33 associates at December 31,
1997. Most of the growth has been in the areas of sales, customer service, daily
database updating, and web site and internal information systems development.
Salaries and payroll taxes include a one-time charge to compensation expense of
$412,930 for the year ended December 31, 1998. 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 $81,000 from
$51,000 for the years ended December 31, 1998 and 1997, respectively. This
represents an increase of $30,000 or 58.8%. Depreciation and amortization
expenses were 4.4% and 5.7% of revenues for the years ended December 31, 1998
and 1997, 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. The Company expects
these capital expenditure requirements to continue to grow in the future in
order to provide its products and services in both a timely and efficient
manner.
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 $204,000 from $103,000 for the years ended
December 31, 1998 and 1997, respectively. This represents an increase of
$101,000. The increase was primarily due to $104,000 of additional interest
resulting from the conversion of convertible debentures to common stock of the
Company and $43,000 of additional interest resulting from outstanding
convertible debentures at December 31, 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 December 31, 1998 and 1997, respectively. The Company anticipates
convertible debentures and related party debt to be paid off in full during
1999.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and
capital expenditure requirements through private placements, exercise of stock
warrants related to its private placements, issuance of convertible debentures
and borrowings from related parties and others. As a result, the Company has
successfully increased its cash and cash equivalents to $567,000 at December 31,
1998 from $105,000 at the beginning of 1998.
Net cash used in operating activities was approximately $749,000 in
1998 compared to $751,000 in 1997. During 1999 the Company anticipates the
monthly loss from operations to decrease steadily. This improvement will be
created by continued growth in LION's broker subscription services, increased
lender participation, a switch to regional ad banner advertising on LION's web
sites greatly increasing the number of available advertising slots and increased
web site development for LION's broker and lender customers.
Accounts receivable of the Company totaled $145,000 at December 31,
1998. Of this balance, accounts receivable greater than 90 days old totaled
approximately $6,800. Subsequent payments on the 90 day balance totaled
approximately $3,700 through mid-March 1999. Accounts receivable of the Company
totaled $136,000 at December 31, 1997. Of this balance accounts receivable
greater than 90 days old totaled approximately $16,000. Subsequent payments on
the 90 day balance totaled approximately $12,000. No customer balances exceed 10
percent of total receivables in either 1998 or 1997.
Net cash used in investing activities increased to $144,000 for the
year December 31, 1998 from $70,000 for the year ended December 31, 1997. The
increases were for the purchase of property and equipment. The company
anticipates similar capital expenditure requirements during 1999.
Net cash provided by financing activities increased to $1,355,000 for
the year ended December 31, 1998 from $906,000 for the year ended December 31,
1997. The increase was due primarily to the exercising of warrants related to
previous private placements. During 1998 the Company reduced related party debt,
other notes payable and convertible debentures from $1,009,000 at December 31,
1997 to $111,000 at December 31, 1998. The remaining $111,000 is comprised of
related party debt totaling $26,000 which will be paid off in the first quarter
of 1999 and convertible debt totaling $85,000 which will more than likely be
converted to common stock of the Company during the third quarter of 1999.
At December 31, 1998 the Company anticipates future funding of
operations and capital expenditure requirements to be adequately covered by
existing cash reserves and the exercise of stock warrants and stock options.
During 1999 warrants representing 3,425,876 shares of the Company's common stock
totaling $1,712,938 will reach their expiration dates. The Company anticipates a
high percentage of these warrants to be exercised. This assumption is based on
warrants exercised during 1998. Of the warrants expiring during 1998, which
represented 3,204,083 shares of the Company's common stock totaling $1,602,042,
only $258,522 or 16% were allowed to expire by the warrant holders. While the
exercise of warrants by themselves should be adequate to meet the Company's
funding requirements, stock options will be expiring during 1999 representing
3,677,000 shares or $1,137,500. It is anticipated that very few of these stock
options will be allowed to expire by the option holders. For additional
information on funding from operations, warrants and stock options, see Notes B,
K and L 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
22
<PAGE> 23
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 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
("Y2K") 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 has completed a thorough and extensive review of all
systems and has found them to be Y2K compliant. The monitoring for Y2K
compliance is also an on-going process for any new systems development performed
or contemplated by the Company. The areas of continual review include, but are
not limited to, all software developed for internal use (the Company develops no
software for external use), its operating systems and its databases. The
Company's systems do not interface at this time with any third party systems. If
they do interface at some point in time in the future, the Company will require
that the third party be Y2K compliant. The Company has purchased software for
internal use from outside suppliers who have certified that they are Y2K
compliant. To date, the Company's cost to ascertain and to maintain Y2K
compliance has been minimal. No increased cost exposure is anticipated at this
time.
However, significant uncertainty exists concerning the potential costs
and effects associated with Y2K compliance outside of the Company's control.
Since the Company is reliant on the Internet as the source to provide its suite
of products and services, the real concern is whether the Internet itself will
fail. This would have a material adverse affect on the Company's business,
results of operations and financial condition.
The Company has not yet developed a contingency plan to operate in the
event that any critical systems are not Y2K compliant, or if failure of vendors,
suppliers or third party systems have a material effect on the Company.
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
23
<PAGE> 24
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 annual base rent is $77,088 or $6,424 per month.
The Company also leases approximately 5,500 square feet of space in
Spokane, Washington to support its sales and marketing efforts. This is an
operating lease that expires December 31, 2001. The annual base rent in 1999
will be $57,000 or $4,750 per month. The monthly payment increases to $5,250 on
January 1, 2000 and to $5,750 on January 1, 2001.
The Company believes that its current facilities are adequate and
suitable for their current use, and that additional facilities will be
available, when needed, upon commercially reasonable terms. The Company also
believes that all of its leased space and all property maintained within are
adequately insured.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership as of December 31, 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.
<TABLE>
<CAPTION>
Shares
Name and Address(1) Beneficially Percentage
Of Beneficial Owner Owned(2) of Shares
- ------------------- ------------ ----------
<S> <C> <C>
Allen C. Ringer 3,680,529(3) 13.9%
Sam Ringer 2,831,974(4) 10.9%
Joe Ringer 2,832,535(5) 10.9%
Billy Anders, Sr. 2,340,242(6) 9.0%
Alan S. Dernbach 332,000(7) 1.3%
John A. McMillan 290,000(8) 1.2%
Kurt Springman 129,600(9) *
Jacob L. Smith 80,000(10) *
Larry H. Dale 150,000(11) *
All Officers and Directors 12,666,880 40.7%
As a Group (9 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.
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<PAGE> 25
(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 1,927,529 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 396,140 shares
underlying warrants granted but not yet exercised. The address of Mr. Anders is
2010 S. Overbluff Ct., Spokane, WA 99203.
(7) Includes 65,000 shares underlying stock options and 40,000 shares underlying
warrants granted but not yet exercised.
(8) Includes 50,000 shares underlying stock options and 120,000 shares
underlying warrants granted but not yet exercised. The address of Mr. McMillan
is 500 Pine Street, Seattle, WA 98101.
(9) Includes 15,000 shares underlying stock options and 30,000 shares underlying
warrants granted but not yet exercised.
(10) Includes 65,000 shares underlying stock options granted but not yet
exercised. The address of Mr. Smith is 3800 Ft. Bellingham Rd., Bellingham, WA
98225.
(11) Includes 50,000 shares underlying stock options and 50,000 shares
underlying warrants granted but not yet exercised. The address of Mr. Dale is
2521 Juniper Court, Golden, Colorado 80401.
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 December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Name(1) Age Position
------- --- --------
<S> <C> <C>
Allen C. Ringer 59 President, Chief Executive Officer, Director
Sam Ringer 38 Director
Joe Ringer 36 Director
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Name(1) Age Position
------- --- --------
<S> <C> <C>
Billy Anders, Sr. 55 Chairman of the Board
Alan S. Dernbach 47 Director, Chief Financial Officer
Kurt Springman 38 Director
Jacob L. Smith 59 Director
Larry H. Dale 53 Director
John A. McMillan 67 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. There are no other familial relations
among the officers and directors of the Company. 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, 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
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<PAGE> 27
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.
Larry H. Dale has been a director of the Company since December 1998.
Mr. Dale is a Managing Director of Newman & Associates, Inc., a wholly owned
subsidiary of GMAC Commercial Mortgage ("GMACCM") and a leading investment
banking firm specializing in financing affordable rental housing. Mr. Dale is
also Chairman of the Board of the National Equity Fund and is on the Boards of
the National Center for Lead-Safe Housing, the Community Preservation and
Development Corporation, the Denver Enterprise Foundation and the National
Housing Conference. From July 1987 to January 1997, Mr. Dale was a Senior Vice
President of Fannie Mae. From 1991 to 1996, Mr. Dale was the Executive Director
of Fannie Mae's National Housing Impact Division and a member of Fannie Mae's
Operating Committee. Mr. Dale is also a former Deputy to the Assistant Secretary
for Housing/FHA Commissioner. He held this position from 1979 to 1981, and was
responsible for HUD's multifamily housing activities during this period. Mr.
Dale holds a Bachelor of Science from Cornell University and a Masters of Public
Administration form the Maxwell School, Syracuse University.
John A. McMillan has been a director of the Company since January 1999.
Mr. McMillan is a Director and member of the Executive Committee of the Board of
Directors for Nordstrom, Inc. Mr. McMillan has been associated with Nordstrom
for 40 years and has served as a member of the office of chief executive officer
since 1971. Mr. McMillan's business and civic affiliations include sitting on
the Board of Directors for Vision Youth (Chairman), Follet Company, Seattle
YMCA, Seattle Foundation, ZION Preparatory Academy Capitol Campaign
27
<PAGE> 28
(Chairman), Crista Ministries, World Concern, Urban Enterprise Council
(Chairman), Bob Walsh Enterprises, Global Partnerships, Catholic Fund, and
Seattle Pacific University.
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. 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
28
<PAGE> 29
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 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 years ended
December 31, 1998 and 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 the fiscal years
disclosed below.
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) 1998 $60,000 - - -
President and CEO
1997 - $3,405(2) 236,593(2) 236,593(2)
</TABLE>
29
<PAGE> 30
(1) Mr. Ringer's compensation was paid to him by the Company through American
Management and Consulting, Inc., a consulting firm, of which Mr. Ringer is Chief
Executive Officer and President. See "Certain Transactions and Related
Transactions." As of December 31, 1998, the aggregate value of all shares
beneficially owned by Mr. Ringer was $2,990,430, valued at $.8125 per share, the
closing price of the Company's common stock on the OTC Bulletin Board on that
date.
(2) In January 1998, Mr. Ringer purchased 144,000 shares of common stock and
144,000 warrants, exercisable at $.50 per share, in exchange for 1997 deferred
compensation of $36,000. In addition, Mr. Ringer purchased 92,593 shares of
common stock and 92,594 warrants, exercisable at $.50 per share, in exchange for
interest earned of $23,148 on deferred compensation and loans to the Company.
Interest earned and paid in cash during 1997 to Mr. Ringer related to deferred
compensation and loans to the Company totaled $3,405.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to the Named Officer during the fiscal
years ended December 31, 1998 and 1997.
30
<PAGE> 31
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information with respect to the Named
Officer regarding the exercise of options or warrants during the fiscal year
ended December 31, 1998 and unexercised options or warrants held as of December
31, 1998. No stock appreciation rights were exercised during 1998 or were
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying In-the-Money
Shares Unexercised Options/Warrants Options/Warrants
Acquired on Value at Fiscal Year-End (#) at Fiscal Year-End ($)
Exercise Realized ------------------------------- --------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen Ringer (1)
Options - - 1,000,000 - $562,500 -
Warrants 83,500 $31,312 740,164 - $231,301 -
</TABLE>
(1) Includes 740,164 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 was ratified by the shareholders at the December 18, 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.
Current factors considered by the Plan Administrators in granting stock
options under the discretionary option grant program include, but are not
limited to the following: grants made to employees and executive
31
<PAGE> 32
officers upon initial employment; grants upon promotion to a new, higher level
position that entails increased responsibility and accountability, in connection
with the execution of a new employment agreement; and/or when all previously
granted stock options have either fully vested or are within twelve months of
full vesting. With respect to independent consultants and advisors, options may
be granted in lieu of cash fees as consideration to achieve specified
milestones. Typically grants to employees are made in connection with the
negotiation of the individual's initial salary level, and range between 10,000
to 50,000 options. Using these factors, the Company's managers, under the
direction of the Chief Executive Officer, recommend the number of options to be
granted and present this recommendation to the Plan Administrators for review
and approval. Management may make recommendations that deviate from the
historical guidelines where they deem it appropriate. Options are granted at not
less than the current market value as of the date of grant, and typically vest
over a five-year period. In some instances a graduated range of exercise prices
will be established. In these circumstances the Company has used a formula of
50% of the total granted options at the market value at the time of grant, 25%
at 150% of market value and 25% at 200% of market value.
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, 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 December 31, 1998, the Company had
granted options to purchase an aggregate of 9,415,000 shares of common stock, of
which 7,127,500 were outstanding at December 31, 1998. Of the options granted,
4,295,000 were issued to directors of the Company, of which 4,195,000 were
outstanding at December 31, 1998.
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<PAGE> 33
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. AMC's fees are $5,000 per month. During 1998, the
Company paid AMC $60,000 for services rendered. The Company also receives
marketing and sales consulting services from Billy Anders, Sr., Chairman of the
Board. Mr. Anders' fees are $6,000 per month. During 1998, the Company paid him
$66,863 for services rendered. In addition, the Company receives administrative
and clerical services from Marilyn Ringer, wife of the Company's President and
CEO. Mrs. Ringer was paid $31,550 and $13,395 for the years ended December 31,
1998 and 1997, respectively, for services rendered.
From time to time, 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. At December 31, 1997 the
company owed this group a combined total of $538,162. With respect to AMC, the
Company owed $149,041, which was comprised of $36,000 of deferred compensation
and $113,041 of loans and interest. In January of 1998 the $149,041 was paid off
through the issuance of 596,164 shares of the Company's common stock at $.25 per
share and warrants representing 596,164 shares exercisable at $.50 per share.
Sam Ringer was owed $161,613, which was comprised of $103,722 of deferred
compensation and interest and $57,891 of loans to the Company. In January of
1998 the Company paid off the $103,722 of deferred compensation and interest by
the issuance of 414,888 shares of the Company's common stock at $.25 per share
and warrants representing 414,888 shares exercisable at $.50 per share. The
loans of $57,891 were paid off in cash in June 1998. Joe Ringer was owed
$121,449, which was comprised of $104,142 of deferred compensation and interest
and $17,307 of loans to the Company. In January of 1998 the Company paid off the
$104,142 of deferred compensation and interest by the issuance of 416,568 shares
of the Company's common stock at $.25 per share and warrants representing
416,568 shares exercisable at $.50 per share. The loans of $17,307 were paid off
in cash in June 1998. Shadda Lee was owed $106,059, which was comprised of
$47,720 of deferred compensation and interest and $57,891 of loans and interest
to the Company. In January of 1998 the Company paid off $90,672 of this balance
through the issuance of 362,689 shares of the Company's common stock at $.25 per
share and warrants representing 362,689 shares exercisable at $.50 per share.
The remaining $15,387 of debt was paid off in cash throughout the first six
months of 1998. At December 31, 1998 the Company owed a total of $26,188 which
was comprised of $13,094 each to Sam and Joe Ringer for deferred compensation
and interest. In January of 1999 this debt was paid off in full through a cash
payout. Each of the loans made by members of the Ringer family described above
in this paragraph was payable on demand together with 12% interest.
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
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<PAGE> 34
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 the end of 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 are fully vested at 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. Of the 1,800,000 shares, 25,000 shares at
$.75 per share were granted in October 1998 and are fully vested. Compensation
expense of $16,825 was recognized during the year ended December 31, 1998. Under
the consulting agreement Mr. Baskin received cash compensation of $79,797 and
$74,850 in 1998 and 1997, respectively.
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 December 31, 1998, Allen Ringer, Sam Ringer and Joe Ringer
beneficially owned approximately 13.9%, 10.9% and 10.9%, respectively, for
aggregate holdings of approximately 35.7%, 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 40.1% of the outstanding shares. As a result, these shareholders
may be able to control or significantly influence all matters requiring
shareholder approval, including the election of the Company's directors and
approval of significant corporate transactions. See "Principal Shareholders."
As of December 31, 1998, the Company had granted options to purchase an
aggregate of 9,415,000 shares of common stock, of which 7,127,500 were
outstanding at December 31, 1998. Of the options granted, 4,295,000 were issued
to directors of the Company, of which 4,195,000 were outstanding at December 31,
1998.
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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 December 31, 1998, there were 24,671,355 shares of common stock
outstanding which were held of record by 685 stockholders. Stock options and
warrants for an aggregate of 7,127,500 and 7,097,208 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 December 31, 1998, 200,591 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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<PAGE> 36
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 3,425,876 of the warrants are scheduled to
expire at various times during 1999, and the balance of 3,671,332 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 has authorized 5,000,000 shares of preferred stock,
$.001 par value per share, of which no shares have been issued or are
outstanding. The preferred stock may be issued from time to time in one or more
series. The Company's Board of Directors 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
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<PAGE> 37
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 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 1.0625 0.6875 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 685 record holders of the Company's common stock as of
December 31, 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.
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<PAGE> 38
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 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
December 31, 1998, a substantial majority of the 24,671,355 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, 18,154,706 were issued on or before
December 31, 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 December 31, 1998,
there were outstanding stock options to purchase an aggregate of 7,127,500
shares of common stock at exercise prices ranging from $.01 to $3.00 per share,
and warrants to purchase 7,097,208 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
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<PAGE> 39
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, 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 January 1996 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
sophisticated 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. The
Company issued the shares and warrants in reliance upon the
exemption from registration under Section 4(2) of the
Securities Act in reliance on Rule 506 promulgated thereunder.
The recipients of securities represented that their intentions
were to acquire the securities for investment purposes only,
and not with a view to sell, or for sale in connection with
any resale or distribution. Appropriate legends were affixed
to the share certificates and warrants issued in the
transactions, and have been and will be affixed to the
certificates evidencing the shares underlying the warrants.
The
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<PAGE> 40
offering was made without the use of any general solicitation
or advertising. All recipients had access to all material
information concerning the Company.
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
sophisticated 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. The Company issued the
shares and warrants in reliance upon the exemption from
registration under Section 4(2) of the Securities Act in
reliance on Rule 506 promulgated thereunder. The recipients of
securities represented their intentions to acquire the
securities for investment only and not with a view to, or for
sale in connection with, any resale or distribution.
Appropriate legends were affixed to the share certificates and
warrants issued in the transactions, and have been and will be
affixed to the certificates evidencing the shares underlying
the warrants. The offering was made without the use of any
general solicitation or advertising. All recipients had access
to all material information concerning the Company.
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. The investors were sophisticated
purchasers. The Company issued the shares in reliance upon the
exemption from registration under Section 4(2) of the
Securities Act. The recipients of securities represented their
intentions to acquire the securities for investment only, and
not with a view to sell, or for sale in connection with any
resale or distribution. Appropriate legends were affixed to
the share certificates issued in the transactions. The
offering was made without the use of any general solicitation
or advertising. All recipients had access to all material
information concerning the Company.
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. The Company did not consider the
grants of the shares to be sales under the Securities Act
because no consideration was received by 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. The investors were accredited
or sophisticated purchasers. The Company issued the shares in
reliance upon the exemption from registration under Section
4(2) of the Securities Act. The recipients of securities
represented their intentions to acquire the securities for
investment only, and not with a view to sell, or for sale in
connection with any resale or distribution. Appropriate
legends were affixed to the share certificates issued in the
transactions. The offering was made without the use of any
general solicitation or advertising. All recipients had access
to all material information concerning the Company.
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<PAGE> 41
6. During the period from June to August 1997, the Company sold a
principal amount of $231,000 of convertible debentures to 9
accredited or sophisticated 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. The Company issued the
debentures in reliance upon the exemption from registration
under Section 4(2) of the Securities Act in reliance on Rule
506 promulgated thereunder. The recipients of securities
represented their intentions to acquire the securities for
investment only, and not with a view to sell, or for sale in
connection with any resale or distribution. Appropriate
legends were affixed to the debenture certificates issued in
the transactions, and have been and will be affixed to the
certificates evidencing the shares underlying the debentures.
The offering was made without the use of any general
solicitation or advertising. All recipients had access to all
material information concerning the Company.
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. The Company did not consider the
grants of the shares to be sales under the Securities Act
because no consideration was received by 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. The
Company did not consider the grants of the shares to be sales
under the Securities Act because no consideration was received
by 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. The investors were
accredited or sophisticated purchasers. The Company issued the
shares in reliance upon the exemption from registration under
Section 4(2) of the Securities Act. The recipients of
securities represented their intentions to acquire the
securities for investment only, and not with a view to sell,
or for sale in connection with any resale or distribution.
Appropriate legends were affixed to the share certificates
issued in the transactions. The offering was made without the
use of any general solicitation or advertising. All recipients
had access to all material information concerning the Company.
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. The
issuance was deemed exempt in reliance upon the exemption from
registration under Section 3(a)(9). No commission or other
remuneration was paid in connection with the exchange.
Alternatively, the shares were issued in reliance upon the
exemption from registration under Section 4(2) of the
Securities Act. The investors were accredited or sophisticated
purchasers. The recipients of securities represented their
intentions to acquire the securities for investment only, and
not with a view to sell, or for sale in connection with any
resale or distribution. Appropriate legends were affixed to
the certificates issued in the transactions. The offering was
made without the use of any general solicitation or
advertising. All recipients had access to all material
information concerning the Company.
41
<PAGE> 42
11. During the period from May to December 1998, the Company sold
an aggregate of 2,670,980 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
$1,306,740. The investors were accredited or sophisticated
purchasers. The Company issued the shares in reliance upon the
exemption from registration under Section 4(2) of the
Securities Act. The recipients of securities represented their
intentions to acquire the securities for investment only, and
not with a view to sell, or for sale in connection with any
resale or distribution. Appropriate legends were affixed to
the share certificates issued in the transactions. The
offering was made without the use of any general solicitation
or advertising. All recipients had access to all material
information concerning the Company.
12. During the period from July to December 1998, the Company sold
an aggregate of 402,500 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 $35,625 and notes receivable of $207,812
The investors were accredited or sophisticated purchasers. The
Company issued the shares in reliance upon the exemption from
registration under Section 4(2) of the Securities Act. The
recipients of securities represented their intentions to
acquire the securities for investment only, and not with a
view to sell, or for sale in connection with any resale or
distribution. Appropriate legends were affixed to the share
certificates issued in the transactions. The offering was made
without the use of any general solicitation or advertising.
All recipients had access to all material information
concerning 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 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
42
<PAGE> 43
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,
1998, 1997 and 1996. The shareholders ratified the selection of Grant Thornton
LLP at the Company's annual meeting held December 18, 1998. 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.
43
<PAGE> 44
FINANCIAL STATEMENTS INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 45
Financial Statements
Consolidated Balance Sheets 46
Consolidated Statements of Operations 47
Consolidated Statement of Stockholders' Equity 48
Consolidated Statements of Cash Flows 49
Notes to Consolidated Financial Statements 50
</TABLE>
44
<PAGE> 45
PLENUM COMMUNICATIONS, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1998 and 1997
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, 1998 and 1997, 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 these 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, 1998 and 1997, and the
consolidated results of its operations and their consolidated cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Seattle, Washington
March 2, 1999
45
<PAGE> 46
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 566,767 $ 104,604
Accounts receivable, less allowance for doubtful accounts
of $23,350 and $15,000 in 1998 and 1997, respectively 121,302 120,928
Prepaid expenses and other 12,705 45,048
----------- -----------
Total current assets 700,774 270,580
PROPERTY AND EQUIPMENT - AT COST, net 212,179 149,298
OTHER ASSETS 6,351 --
----------- -----------
$ 919,304 $ 419,878
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 45,016 $ 34,398
Accrued liabilities 183,626 89,202
Deferred revenue 97,828 52,409
Related party payables 26,188 590,376
Notes payable -- 181,480
Convertible debentures 85,032 --
----------- -----------
Total current liabilities 437,690 947,865
CONVERTIBLE DEBENTURES -- 237,455
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $.001 per share; authorized
5,000,000 shares; none outstanding -- --
Common stock - authorized, 50,000,000 shares of $.001 par value; 24,671,355 and
18,154,706 shares issued and outstanding in 1998 and 1997, respectively 24,671 18,155
Treasury stock held, 700 shares -- (350)
Additional contributed capital 5,879,970 3,204,250
Notes receivable from stockholders (207,812) --
Accumulated deficit (5,215,215) (3,987,497)
----------- -----------
481,614 (765,442)
----------- -----------
$ 919,304 $ 419,878
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
46
<PAGE> 47
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 1,856,336 $ 892,288
Expenses
Marketing and administrative 1,234,236 677,610
Salaries and payroll taxes 1,575,393 1,224,488
Depreciation and amortization 81,013 51,007
----------- -----------
2,890,642 1,953,105
----------- -----------
Operating loss (1,034,306) (1,060,817)
Other income (expense)
Interest expense (203,604) (102,980)
Interest income 10,192 --
----------- -----------
NET LOSS $(1,227,718) $(1,163,797)
=========== ===========
Loss per common share $ (.06) $ (.07)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
47
<PAGE> 48
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Treasury Contributed
Shares Amount Stock Capital
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 16,078,172 $ 16,078 $ (350) $ 2,328,622
Issuance of common stock in conjunction with a Private Placement 1,872,084 1,872 -- 411,790
Offering
Issuance of common stock for consulting and marketing services 196,000 196 -- 48,804
received
Issuance of stock options for 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
Issuance of common stock in conjunction with a Private Placement 577,000 577 -- 143,673
Offering
Issuance of common stock in conjunction with exercise of warrants 2,670,980 2,671 -- 1,304,069
Issuance of common stock in conjunction with exercise of stock 402,500 402 -- 243,035
options
Issuance of common stock for consulting and marketing services 12,000 12 -- 2,988
received
Issuance of stock options for consulting services received -- -- -- 26,957
Issuance of common stock for drawings 1,600 2 -- 398
Issuance of common stock for related party debt 1,790,309 1,790 -- 445,787
Issuance of common stock for notes payable 730,429 730 -- 202,651
Issuance of common stock for conversion of debentures 331,831 332 -- 306,162
Notes receivable from stockholders -- -- -- --
Retirement of treasury stock -- -- 350 --
Net loss for the year -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 24,671,355 $ 24,671 $ -- $ 5,879,970
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
from Accumulated
Stockholders Deficit Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1997 $ -- $ (2,823,700) $ (479,350)
Issuance of common stock in conjunction with a Private Placement -- -- 413,662
Offering
Issuance of common stock for consulting and marketing services -- -- 49,000
received
Issuance of stock options for 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)
Issuance of common stock in conjunction with a Private Placement -- -- 144,250
Offering
Issuance of common stock in conjunction with exercise of warrants -- -- 1,306,740
Issuance of common stock in conjunction with exercise of stock -- -- 243,437
options
Issuance of common stock for consulting and marketing services -- -- 3,000
received
Issuance of stock options for consulting services received -- -- 26,957
Issuance of common stock for drawings -- -- 400
Issuance of common stock for related party debt -- -- 447,577
Issuance of common stock for notes payable -- -- 203,381
Issuance of common stock for conversion of debentures -- -- 306,494
Notes receivable from stockholders (207,812) -- (207,812)
Retirement of treasury stock -- -- 350
Net loss for the year -- (1,227,718) (1,227,718)
------------ ------------ ------------
Balance at December 31, 1998 $ (207,812) $ (5,215,215) $ 481,614
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
48
<PAGE> 49
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents 1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,227,718) $(1,163,797)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 81,013 51,007
Interest earned on notes receivable (6,351) --
Interest expense on notes payable 30,401 15,160
Interest expense on convertible debentures 160,633 12,753
Common stock and stock options issued for services received 29,957 461,930
Common stock issued for drawings 400 2,113
Retirement of treasury stock 350 --
Changes in assets and liabilities
Accounts receivable (374) (76,806)
Prepaid expenses and other 32,343 (34,254)
Deferred revenue 45,419 52,010
Accounts payable 10,618 (14,445)
Accrued liabilities 94,424 (56,306)
----------- -----------
Net cash used in operating activities (748,885) (750,635)
Cash flows from investing activities
Purchase of property and equipment (143,894) (69,724)
----------- -----------
Net cash used in investing activities (143,894) (69,724)
Cash flows from financing activities
Payments on notes payable (8,500) (26,664)
(Payments) proceeds from convertible debentures (6,562) 224,702
(Payments) proceeds from related party payables (116,611) 119,922
Proceeds from issuance of common stock and exercise of stock options 179,875 413,662
Proceeds from exercise of warrants 1,306,740 --
Proceeds from borrowings under notes payable -- 173,882
----------- -----------
Net cash provided by financing activities 1,354,942 905,504
----------- -----------
Net increase in cash and cash equivalents 462,163 85,145
Cash and cash equivalents at beginning of period 104,604 19,459
----------- -----------
Cash and cash equivalents at end of period $ 566,767 $ 104,604
=========== ===========
</TABLE>
Supplemental cash flow information and non-cash investing and financing
activities (note M)
The accompanying notes are an integral part of these statement.
49
<PAGE> 50
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
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. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter.
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
50
<PAGE> 51
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES __ Continued
6. 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.
7. Loss Per Common Share
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). Loss per share is based on the average number of
shares outstanding during each period and income available to common
stockholders. The weighted average number of common shares outstanding was
22,190,181 and 16,367,112 for the years ended December 31, 1998 and 1997,
respectively. The computation for loss per common share assuming dilution for
the years ended December 31, 1998 and 1997 was anti-dilutive; and therefore, is
not included.
8. Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $69,700 and $24,200 for the years ended December 31, 1998 and
1997, respectively.
NOTE B - MANAGEMENT PLANS
A major objective of the Company is to increase its market share with its core
products and services. In addition, the Company is focusing efforts on new
product development and expansion. Management believes that funding from
operations and the exercise of warrants and stock options during 1999 should be
adequate to meet its working capital and capital expenditure requirements. These
funding sources have enabled the Company to increase its cash and cash
equivalents from $104,604 at the beginning of 1998 to $566,767 at December 31,
1998. The Company also reduced related party debt, other notes payable and
convertible debentures from $1,009,311 at the beginning of 1998 to $111,220 at
December 31, 1998. During 1999, warrants representing 3,425,876 shares of the
Company's common stock totaling $1,712,938 will reach their expiration dates.
The Company anticipates a high percentage of these warrants will be exercised.
This assumption is based on warrants exercised during 1998. Of the warrants
expiring during 1998 representing 3,204,083 shares totaling $1,602,042, only
517,103 shares or 16% were allowed to expire by the warrant holders. Management
believes these plans provide for continuance of operations through December 31,
1999. However, there can be no assurance that the company will be able to obtain
sufficient additional funding, or be successful in its future operations.
51
<PAGE> 52
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE C - PROPERTY AND EQUIPMENT - AT COST
Property and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Computer equipment $360,042 $257,607
Computer software 166,325 164,743
Equipment 52,021 22,834
Leasehold improvements 10,690 --
Equipment under capital lease 11,720 11,720
-------- --------
600,798 456,904
Less accumulated depreciation and amortization 388,619 307,606
-------- --------
$212,179 $149,298
======== ========
</TABLE>
NOTE D - NOTES RECEIVABLE FROM STOCKHOLDERS
At December 31, 1998, the Company has notes receivable from stockholders
totaling $207,812 resulting from the exercise of stock options. Interest is
accrued at 10% annually. The notes and accrued interest are due on dates ranging
from March 1 to April 1, 2000. The underlying stock certificates are held by the
Company as collateral.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Salaries $ 68,129 $ 34,324
Payroll taxes 45,036 14,115
Vacation 33,223 10,214
Other 37,238 30,549
-------- --------
$183,626 $ 89,202
======== ========
</TABLE>
52
<PAGE> 53
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE F - CONVERTIBLE DEBENTURES
The Company had convertible debentures totaling $85,032 and $237,455 at December
31, 1998 and 1997, respectively, including accrued interest of $49,032 and
$12,455, respectively. Maturity dates range from July 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
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 December 31, 1998 includes $42,516
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 as of December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Accounts payable $ -- $ 90,585
Salaries payable, including interest at 12% 26,188 283,135
Notes payable, including interest
at 12%, due on demand -- 216,656
-------- --------
$ 26,188 $590,376
======== ========
</TABLE>
During 1998, management elected to reduce the amount of outstanding related
party debt by cash payments of $142,799 and the issuance of 1,790,309 shares of
the Company's common stock totaling $447,577. Interest expense incurred under
related party agreements totaled $4,906 and $49,810 for the years ended December
31, 1998 and 1997, respectively.
53
<PAGE> 54
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE H - NOTES PAYABLE
The Company had unsecured demand notes totaling $181,480 at December 31, 1997.
The notes are due on demand and accrue interest at 12% annually. During 1998,
notes payable totaling $182,607 were converted into 730,429 shares of the
Company's common stock. Interest expense incurred under notes payable agreements
totaled $30,401 and $15,160 for the years ended December 31, 1998 and 1997,
respectively. For the year ended December 31, 1998, 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 - 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 years ended December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Tax benefit at statutory rate $ 417,400 $ 395,700
Valuation allowance (417,400) (392,000)
Other -- (3,700)
--------- ---------
Total $ -- $ --
========= =========
</TABLE>
The components of deferred taxes are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax asset:
Liabilities not timely paid $ 10,800 $ 3,500
Depreciation -- 3,800
Allowance for doubtful accounts 7,900 5,100
Net operating loss carryforward 1,317,500 985,900
Goodwill -- 43,400
----------- -----------
1,336,200 1,041,700
Deferred tax liability:
Depreciation (9,000) --
Valuation allowance (1,327,200) (1,041,700)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
54
<PAGE> 55
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE I - INCOME TAXES - Continued
The Company has established a valuation allowance of $1,327,200 and $1,041,700
as of December 31, 1998 and 1997, respectively, due to the uncertainty of future
realization of the deferred tax assets. The valuation allowance was increased by
$285,500 and $392,000 during the years ended December 31, 1998 and 1997,
respectively. At December 31, 1998, the Company had net operating loss
carryforwards for federal income tax reporting purposes of approximately
$3,875,000 available to offset future income which expire in 2004 through 2018.
Utilization of these carryforwards are dependent on future taxable income and
could further be limited due to a change of control in the Company's ownership
as defined by the Internal Revenue Code 382.
NOTE J - 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 December 2001.
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999 $ 134,100
2000 140,100
2001 107,500
----------
Total minimum payments required $ 381,700
==========
</TABLE>
The leases provide for payment of taxes and other expenses by the Company. Rent
expense for leased facilities totaled approximately $118,900 and $91,100 for the
years ended December 31, 1998 and 1997, 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 are fully vested at December 31, 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. Of the
800,000 shares at $.75 per share, 25,000 shares were granted in October 1998 and
are fully vested. Compensation expense of $16,825 was recognized during the year
ended December 31, 1998. The remaining options will be granted upon the
occurrence of certain events and will vest from January 1999 through December
2001.
55
<PAGE> 56
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE K - WARRANTS
The Company had the following warrants outstanding to purchase common shares as
of December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <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 $0.50, expiring through 1998 -- 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
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 3,425,876 3,210,876
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 200,591 --
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 3,470,741 429,000
--------- ---------
Total 7,097,208 6,958,959
========= =========
</TABLE>
NOTE L - STOCK OPTIONS
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 five-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 for the years ended December 31. 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
1998: expected volatility ranging from 140.59% to 156.05%; risk free interest
rate of 6.50%; expected lives ranging from 2 to 5 years; and a zero percent
dividend yield. The following weighted average assumptions were 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.
56
<PAGE> 57
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE L - STOCK OPTIONS - Continued
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net loss:
As reported $ (1,227,718) $ (1,163,797)
Pro forma $ (1,456,746) $ (1,352,473)
Net loss per common share:
As reported $ (.06) $ (.07)
Pro forma $ (.07) $ (.08)
</TABLE>
A summary of the Company's stock option plan's activity is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Weighted Weighted
average average
Stock options Shares exercise price Shares exercise price
- -------------------------------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 6,195,000 $.43 5,535,000 $.40
Granted 1,820,000 .54 1,985,000 .61
Forfeited or exercised (887,500) .57 (1,325,000) .56
---------- ---- ---------- ----
Outstanding at end of year 7,127,500 $.44 6,195,000 $.43
========== ==== ========== ====
Options exercisable at end of year 6,181,705 $.39 5,598,875 $.42
========== ==== ========== ====
Weighted-average fair value of options
granted during the year $.64 $.10
==== ====
</TABLE>
The following is a summary of stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------------------------
Number Weighted-average remaining Number of options
Exercise price outstanding contractual life exercisable
- ------------------------------------ ----------- -------------------------- -----------------
<S> <C> <C> <C>
$.01 - $.25 4,257,500 1.71 years 4,135,312
$.26 - $.50 905,000 2.26 years 771,062
$.51 - $.75 562,500 3.68 years 324,018
$.76 - $1.00 1,327,500 3.66 years 941,938
$1.01 - $3.00 75,000 4.46 years 9,375
</TABLE>
57
<PAGE> 58
Plenum Communications, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND
FINANCING ACTIVITIES
Supplemental disclosure of cash flow information and non-cash investing and
financing activities is as follows for December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 22,966 $ 60,426
Non-cash investing and financing activities
Assets acquired under capital leases $ -- $ 11,720
Exercise of stock options by note receivable $207,812 $ --
Related party debt converted to common stock $447,577 $ --
Debentures converted to common stock $306,494 $ --
Note 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
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Specimen Common Stock Certificate (1)
10.1 1998 Stock Option Plan with Form of Option Agreement (1)
10.2 Consulting Agreement with H. Baskin (1)
10.3 Premises Lease Agreement (Mercer Island Property) dated as of
June 30, 1998 (1)
10.4 Premises Lease Agreement (Spokane Property) dated as of
May 1, 1998
16.1 Letter on change in certifying accountant from Thomas J. Harris
CPA related to this registration statement
21.1 LION, Inc., a Washington corporation is the sole subsidiary
of the Company (1)
- -----------------------
(1) Incorporated by reference to the same Exhibit numbers to the Company's
Registration Statement on Form 10-SB as filed with the Securities and
Exchange Commission on December 10, 1998, File No. 0-25159.
61
<PAGE> 1
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 , 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
1
<PAGE> 2
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 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.
2
<PAGE> 3
(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.
(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.
3
<PAGE> 4
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 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
4
<PAGE> 5
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. 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:__________________________________
Robert J. Tyson Allen Ringer
5
<PAGE> 1
EXHIBIT 16.1
THOMAS J. HARRIS C.P.A.
3901 Stone Way North, Ste. 202
Seattle, WA 98103
March 17, 1999
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir/Madam:
We have read the section entitled "Changes in and Disagreements with
Accountants" included in the Form 10-SB of Plenum Communications, Inc. filed
with the Security and Exchange Commission on December 10, 1999, as amended, and
are in agreement with the statements contained therein.
Very truly yours,
THOMAS J. HARRIS C.P.A.
By: /s/ THOMAS J. HARRIS C.P.A.
