<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under section 13 or 15 (d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 1999
OR
/ / Transition report under section 13 or 15 (d) of the Securities Exchange Act
of 1934 for the transition period from _______________ to _______________
Commission file number 0-25159
-------
PLENUM COMMUNICATIONS, INC.
(Name of Small Business Issuer in its charter)
Minnesota 91-1524747
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3003 - 80th Avenue SE, Mercer Island, WA 98040
(Address of principal executive offices) (Zip code)
(206) 236-1995
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ( X ) No ( )
As of May 10, 1999, approximately 25,434,147 shares of the Company's common
stock were outstanding.
1
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Plenum Communications, Inc. and Subsidiary
Form 10-QSB
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 1999 (unaudited) and
December 31, 1998 3
Consolidated Statements of Operations for the three months ended March 31,
1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended March 31,
1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Plenum Communications, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 551,024 $ 566,767
Accounts receivable, less allowance for doubtful accounts of $18,408
and $23,350 in 1999 and 1998, respectively 144,931 121,302
Prepaid expenses and other 85,479 12,705
----------- -----------
Total current assets 781,434 700,774
PROPERTY AND EQUIPMENT - AT COST, net 337,676 212,179
OTHER ASSETS - 6,351
----------- -----------
$ 1,119,110 $ 919,304
----------- -----------
----------- -----------
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 133,088 $ 45,016
Accrued liabilities 267,936 183,626
Deferred revenue 129,024 97,828
Related party payables - 26,188
Convertible debentures 131,188 85,032
----------- -----------
Total current liabilities 661,236 437,690
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
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; 25,387,947
and 24,671,355 shares issued and outstanding in 1999
and 1998, respectively 25,388 24,671
Additional contributed capital 6,211,696 5,879,970
Notes receivable from stockholders (220,312) (207,812)
Accumulated deficit (5,558,898) (5,215,215)
----------- -----------
457,874 481,614
----------- -----------
$ 1,119,110 $ 919,304
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
3
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Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues $ 710,278 $ 330,121
Expenses
Marketing and administrative 383,777 224,474
Salaries and payroll taxes 605,726 289,288
Depreciation and amortization 27,344 16,349
----------- -----------
1,016,847 530,111
----------- -----------
Operating loss (306,569) (199,990)
Other income (expense)
Interest expense (46,345) (17,844)
Interest income 9,231 1,154
----------- -----------
NET LOSS $ (343,683) $ (216,680)
----------- -----------
----------- -----------
Loss per common share $ (.01) $ (.01)
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
4
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Plenum Communications, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $(343,683) $(216,680)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 27,344 16,349
Interest expense on notes payable - 4,195
Interest expense on convertible debentures 46,156 6,354
Common stock and stock options issued for services received 44,795 156
Changes in assets and liabilities
Accounts receivable (23,629) (1,672)
Prepaid expenses and other (66,423) 39,711
Deferred revenue 31,196 33,341
Accounts payable 88,072 7,660
Accrued liabilities 35,310 17,332
--------- ---------
Net cash used in operating activities (160,862) (93,254)
Cash flows from investing activities
Capitalized software development costs (70,817) -
Purchase of property and equipment (33,024) (27,045)
--------- ---------
Net cash used in investing activities (103,841) (27,045)
Cash flows from financing activities
Payments on notes payable - (8,500)
Payments on convertible debentures - (3,340)
(Payments) proceeds from related party payables (26,188) 5,725
Proceeds from issuance of common stock and exercise of stock options 26,250 144,250
Proceeds from exercise of warrants 248,898 -
--------- ---------
Net cash provided by financing activities 248,960 138,135
--------- ---------
Net (decrease) increase in cash and cash equivalents (15,743) 17,836
Cash and cash equivalents at beginning of period 566,767 104,604
--------- ---------
Cash and cash equivalents at end of period $ 551,024 $ 122,440
--------- ---------
--------- ---------
Supplemental non-cash investing and financing activities:
Exercise of stock options by notes receivable $ 12,500 $ -
Related party debt converted to common stock $ - $ 447,577
Debentures converted to common stock $ - $ 40,821
Notes payable converted to common stock $ - $ 30,619
Accrued liability on capitalized software costs $ 49,000 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
5
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Plenum Communications, Inc. and Subsidiary
Form 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements and related notes are
presented as permitted by Form 10-QSB, and do not contain certain information
included in the Company's audited consolidated financial statements and notes
for the fiscal year ended December 31, 1998. The information furnished
reflects, in the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results of the
interim periods presented. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 1999. The accompanying unaudited consolidated
financial statements and related notes should be read in conjunction with the
audited consolidated financial statements and the Form 10-KSB of Plenum
Communications, Inc. and its subsidiary (the "Company") and notes thereto,
for its fiscal year ended December 31, 1998.
NOTE 2. LOSS PER 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 25,068,256 and 20,437,152 for the three months ended March 31, 1999 and
1998, respectively. The computation for loss per common share assuming
dilution for the three-months ended March 31, 1999 and 1998 was
anti-dilutive, and therefore, is not included.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
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 included elsewhere in this document.
OVERVIEW
The Company's operating subsidiary, LION, Inc. ("LION"), provides wholesale
mortgage rate, fee and program information to over 4,500 mortgage brokers
nationwide via the Internet. The LION database is updated daily with new
information from over 425 participating lenders and is available to mortgage
brokers through LION's password protected, membership-based Internet service.
This service is the primary source of revenue for the Company. Additional
revenue sources are derived from the development, maintenance and hosting of
wholesale lender and mortgage broker home pages as well as ad banner
advertisements on the LION Web site. Currently LION is the nation's leader in
the development of Web sites for wholesale lenders and is number three in the
development of Web sites for mortgage brokers.
LION has built its business by helping its customers succeed in every phase
of the residential mortgage lending process. This process begins with a
borrower, is facilitated by a broker, underwritten by a wholesale lender,
securitized by government sponsored entities ("GSEs") or large aggregators,
and sold to investors on Wall Street.
LION has expert knowledge about the needs and relationships between mortgage
brokers and wholesale lenders. This knowledge has enabled LION to develop
tools and large electronic databases that ultimately allow mortgage brokers
to better serve their customers.
In addition to the core business of providing electronic information to
mortgage brokers and lenders, LION has entered into an agreement with Fannie
Mae, the largest GSE in the U.S. The agreement calls for LION to develop an
Internet path into Fannie Mae's automatic underwriting ("AU") system.
Industry experts believe that AU is the wave of the future. AU extracts key
data from an electronic submission of an application for a residential
mortgage loan ("1003"), compares key parts of this information to a large
database, and arrives at an underwriting decision almost instantaneously.
Mortgage brokers currently submit approximately 46,000 AU transactions per
month into the Fannie Mae system. Through the use of the Internet, LION will
provide a better, more efficient path for this process. This improved process
will result in faster closings for borrowers, and it will give mortgage
brokers the ability to close more loans.
RESULTS OF OPERATIONS
REVENUES
Revenues increased to $710,278 from $330,121 for the three months ended March
31, 1999 and 1998, respectively. This represents an increase of $380,157 or
115%. Total revenues of $710,278 for the three months ended March 31,1999
were comprised of mortgage broker fees of approximately $520,000 or 73%,
lender fees of approximately $136,000 or 19%, ad banner revenues of
approximately $33,000 or 5%, broadcast fax fees of approximately $24,000 or
3% and all other fees and discounts of approximately $(3,000). Total revenues
of $330,121 for the three months ended March 31, 1998 were comprised of
broker fees of approximately $206,000 or 62%, lender fees of approximately
$81,000 or 25%, ad banner revenues of approximately $27,000 or 8%, broadcast
fax fees of approximately $20,000 or 6% and all other fees and discounts of
approximately $(4,000). The increase in revenues is the result of the
on-going development of the Company's growing base of subscribing mortgage
brokers and participating lenders
7
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by region throughout the United States. The Company has aggressively expanded
its sales force to take advantage of the continued increase in demand for its
products and services.
MARKETING AND ADMINISTRATIVE EXPENSES
Marketing and administrative expenses are comprised of marketing and
advertising costs, outside consulting services, telecommunications expenses
and other marketing and administrative related expenses. Marketing and
administrative expenses increased to $383,777 from $224,474 for the three
months ended March 31, 1999 and 1998, respectively. This represents an
increase of 159,303 or 71%. Marketing and administrative expenses were 54%
and 68% of revenues for the three months ended March 31, 1999 and 1998,
respectively. The increase in costs was due primarily to an increase in
management consulting services for strategic planning, accounting and legal
expenses supporting increased external reporting requirements with the SEC
and investors, and most importantly, investment in systems and processes in
order to provide value added products and services in the future. The Company
anticipates marketing costs to grow in absolute dollars as it continues to
increase market share with LION's products and services throughout the United
States. Also, the Company will continue to invest its resources in new
systems and processes to deliver its value added products and services.
SALARIES AND PAYROLL TAXES
Salaries and payroll tax expenses increased to $605,726 from $289,288 for the
three months ended March 31, 1999 and 1998, respectively. This represents an
increase of $316,438 or 109%. Salaries and payroll tax expenses were 85% and
88% of revenues for the three months ended March 31, 1999 and 1998,
respectively. Growth in salaries and payroll taxes has been directly related
to the development and support of the Company's growing base of mortgage
broker subscribers and participating lenders. The Company has grown to 67
associates at March 31, 1999 from a total of 40 associates at March 31, 1998.
Most of the growth has been in the areas of sales, customer service, finance,
web site development and software engineering. The Company anticipates
salaries and payroll expenses will grow in absolute dollars as it continues
to increase market share and develop its systems and processes to deliver its
value added products and services.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased to $27,344 from $16,349 for
the three months ended March 31, 1999 and 1998, respectively. This represents
an increase of $10,995 or 67%. Depreciation and amortization expenses were 4%
and 5% of revenues for the three months ended March 31, 1999 and 1998,
respectively. The increase was due primarily to the purchase of
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 value added products and services
in both a timely and efficient manner.
INTEREST EXPENSE
Interest expense is comprised primarily of interest on convertible debentures
for the three months ended March 31, 1999 and interest on convertible
debentures, related party debt and notes payable for the three months ended
March 31, 1998. All applicable debt accrued interest at 12%. Interest expense
of approximately $46,000 for the three months ended March 31, 1999 is
primarily attributed to terms in the two outstanding convertible debenture
agreements that allows triple the number of shares to be purchased at the
date of conversion to common stock if the convertible debentures are held
longer than 547 days but less than 730 days. This tripling affect is recorded
as interest expense. The two debentures mature in July and August of 1999.
8
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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 accumulated cash and cash equivalents of approximately $551,000
at March 31, 1999.
Net cash used in operating activities was approximately $161,000 during the
three months ended March 31, 1999 compared to approximately $93,000 during
the three months ended March 31, 1998. The increase in net cash used in
operating activities of approximately $68,000 was due to efforts to develop
the Company's overall strategic plan and assignment of additional resources
to the development of systems and processes to deliver its value added
products and services.
Net cash used in investing activities increased to approximately $104,000 for
the three months ended March 31, 1999 from approximately $27,000 for the
three months ended March 31, 1998. Activity in the current quarter is
comprised of approximately $71,000 of capitalized software development costs
and approximately $33,000 of purchased property and equipment. The company
anticipates a similar trend in capital expenditure requirements during the
remainder of 1999.
Net cash provided by financing activities increased to approximately $249,000
from approximately $138,000 for the three months ended March 31, 1999 and
1998, respectively. The increase was due primarily to the exercising of
warrants related to previous private placements and the exercise of stock
options. During the current quarter, the Company paid off the remaining
related party debt of approximately $26,000.
At March 31, 1999 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 the
next three quarters of 1999, warrants representing 2,928,864 shares of the
Company's common stock totaling $1,464,432 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 the next three quarters of 1999 representing 3,567,500 shares
or $1,110,000. It is anticipated that very few of these stock options will be
allowed to expire by the option holders.
YEAR 2000 COMPLIANCE
The Company has completed a thorough and extensive review of all computer
information systems and related software applications and has found them to
be year 2000 ("Y2K") compliant. The monitoring for Y2K compliance is an
on-going process for any new systems development performed or contemplated by
the Company. The Company's systems do not interface at this time with any
third party systems. If this is necessary in the future, the Company will
require the third party to 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 vendor, supplier
or third party systems have a material effect on the Company.
9
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FORWARD-LOOKING STATEMENTS
This Form 10-QSB includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934. All statements that look forward in time or include anything
other than statements of historical fact included in the preceding discussion
regarding the Company's financial position, business strategy and plans of
management for future operations are forward-looking statements. Such
statements are based upon the beliefs of, and information currently available
to, the Company's management, and involve risks and uncertainties that may
affect the Company's actual results of operations. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
be correct. Those risks and uncertainties are discussed in more detail in the
Company's Form 10-KSB filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended.
10
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 1999, outstanding warrants were exercised
by 14 existing shareholders for 561,592 common shares. Total cash
consideration received was $248,898. The issuances of common stock to
investors upon exercise of warrants were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public
offering. 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 recipients of securities
in each such transaction had pre-existing relationships with the Company. The
offering was made without the use of any general solicitation or advertising.
All recipients had access to all material information concerning the Company.
During the quarter ended March 31, 1999, stock options were exercised by 8
participants for a total of 155,000 common shares. Cash consideration was
received from 3 of the participants in the total amount of $26,250 for
105,000 shares at an exercise price of $.25 per share. Promissory notes were
received from 5 participants in the total amount of $12,500 for 50,000 shares
at an exercise price of $.25 per share. The promissory notes accrue interest
at 10% per annum and are due between June 30 and September 9, 1999. The
issuances of common stock upon exercise of the stock options were deemed to
be exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act as transactions by an issuer not involving any
public offering. 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 recipients of securities
in each such transaction had pre-existing relationships with the Company. The
offering was made without the use of any general solicitation or advertising.
All recipients had access to all material information concerning the Company.
Pursuant to the Company's 1998 Stock Option Plan, the Company granted stock
options to 18 employees at various dates from January 1 to March 31, 1999.
These stock options were comprised of 355,000 shares of common stock, expire
5 years from the date of grant, begin vesting in equal quarterly increments
from years 2 to 5 and have exercise prices, based on the market price at the
date of grant, ranging from $.82 to $2.42. During the quarter ended March 31,
1999, the Company also granted stock options to two contractors for services
received. These options 60,000 shares of common stock, expire over a range of
one and one-half to 4 years from the date of grant, vest upon the completion
of the related services provided and have exercise prices ranging from $.92
to $1.00 per share. The granting of stock options did not require
registration under the Securities Act, or an exemption therefrom, since the
grants did not involve a "sale" as the term is used in Section 2(3) of the
Securities Act.
ITEM 5. OTHER INFORMATION
On April 28, 1999, LION, Inc., the Company's subsidiary, hired Ritchie
Campbell as its Chief Operating Officer. Mr. Campbell has broad managerial
and executive experience with technical expertise in financial markets,
mergers and acquisitions, and strategic planning. He earned a BA in Business
Administration from the University of Washington, and an MBA in Finance and a
Ph.D. in Business and Applied Economics from the Wharton Graduate School of
Business at the University of Pennsylvania. Most recently Mr. Campbell was
the CEO of a private Alaskan company, Kootznoowoo, Inc., with holdings in
timber, aviation and computer software training. In addition to these duties,
Mr. Campbell was a board member (serving on the executive committee) of
Taquan Air Service, Inc., a trustee of the Kootznoowoo Permanent Settlement
Trust, and an executive director of its Cultural and Educational
11
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Foundation. Earlier in his career Mr. Campbell taught corporate finance at
the University of Washington's Graduate School of Business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits to Part II:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31,
1999.
12
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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
13
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EXHIBIT INDEX
27.1 Financial Data Schedule March 31, 1999
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
THE FORM 10-QSB FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 551,024
<SECURITIES> 0
<RECEIVABLES> 163,339
<ALLOWANCES> 18,408
<INVENTORY> 0
<CURRENT-ASSETS> 781,434
<PP&E> 753,639
<DEPRECIATION> 415,963
<TOTAL-ASSETS> 1,119,110
<CURRENT-LIABILITIES> 661,236
<BONDS> 0
0
0
<COMMON> 25,388
<OTHER-SE> 432,486
<TOTAL-LIABILITY-AND-EQUITY> 1,119,110
<SALES> 710,278
<TOTAL-REVENUES> 710,278
<CGS> 0
<TOTAL-COSTS> 1,016,847
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,345
<INCOME-PRETAX> (343,683)
<INCOME-TAX> 0
<INCOME-CONTINUING> (343,683)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (343,683)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
