As filed with the Securities and Exchange Commission on December 29, 1999.
File No. 000-28193
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-SB
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GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
LEGAL CLUB OF AMERICA CORPORATION
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(Name of Small Business Issuer in its Charter)
COLORADO 84-1174969
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(State or other jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
1601 N. HARRISON PKWY., SUITE 200
SUNRISE, FLORIDA 33323
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(Address of Principal Executive Offices) (Zip Code)
(954) 267-0920
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act: NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
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(Title of Class)
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LEGAL CLUB OF AMERICA CORPORATION
FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES
TABLE OF CONTENTS
PAGE
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PART I.........................................................................1
Item 1. Description of Business.............................................1
Item 2. Management's Discussion and Analysis or Plan of Operation...........6
Item 3. Description of Property.............................................8
Item 4. Security Ownership of Certain Beneficial Owners and Management......9
Item 5. Directors, Executive Officers, Promoters and Control Persons.......10
Item 6. Executive Compensation.............................................12
Item 7. Certain Relationships and Related Transactions.....................13
Item 8. Description of Securities..........................................13
PART II.......................................................................16
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters......................................16
Item 2. Legal Proceedings..................................................17
Item 3. Changes In and Disagreements With Accountants......................17
Item 4. Recent Sales of Unregistered Securities............................17
Item 5. Indemnification of Directors and Officers..........................18
PART F/S......................................................................19
Financial Statements.......................................................19
PART III......................................................................20
Index to Exhibits..........................................................20
Signatures.................................................................21
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We own or have the rights to certain tradenames and trademarks that we use in
conjunction with our services. This document also contains tradenames and
trademarks of other companies.
(i)
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This Registration Statement contains certain forward-looking
statements. These forward looking statements include statements regarding
marketing plans, capital and operations expenditures, results of operations,
potential utility and acceptance of our existing and proposed services, and the
need for, and availability of, additional financing. The forward-looking
statements included herein are based on current expectations and involve a
number of risks and uncertainties. These forward-looking statements are based on
assumptions regarding our business which involve judgments with respect to,
among other things, future economic and competitive conditions and future
regulatory and business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond our control. Although we believe
that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could prove inaccurate and, therefore, actual results may
differ materially from those set forth in the forward-looking statements. In
light of the significant uncertainties inherent in the forward-looking
information contained herein, the inclusion of such information should not be
regarded as any representation by us or any other person that our objectives or
plans will be achieved. Any forward-looking statement speaks only as of the date
on which such statement is made, and we do not undertake to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict all such factors. Further, we cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE HISTORY
And Justice For All, Inc., a Florida corporation, was incorporated in
the State of Florida on January 22, 1996. In that year, it acquired
substantially all of the assets of the Legal Club of America, Inc., a Florida
corporation. Bird-Honomichl, Inc., a Colorado corporation, was incorporated on
July 23, 1991. In October 1998, Bird-Honomichl acquired And Justice For All
through a merger in which And Justice For All became a wholly owned subsidiary
of Bird-Honomichl, which then changed its name to the Legal Club of America
Corporation ("Legal Club"). And Justice For All subsequently changed its name to
LegalClub.com, Inc. Currently, the registrant has three wholly owned
subsidiaries, LegalClub.com, Inc., National Association of Networked Attorneys,
Inc. and Legal Club Financial Corp.
BUSINESS OVERVIEW
We operate Legal Club of America, a national legal referral service
that provides our members referrals to a network of over 7,000 participating
attorneys in all 50 states. The attorneys provide a variety of free and deeply
discounted legal services. Since our inception in 1996, we have put in place a
variety of legal plans, a substantial internal infrastructure to administer
large volume enrollments and a diversified, national marketing capability,
including Web sites, to enroll individuals and small business owners on a
national scale. The Company has regional sales offices in Tampa, Chicago, New
York, Los Angeles, and Denver.
Legal Club's website, www.legalclub.com, features three distinct
environments, with over 3,000 links of interest, aimed at satisfying the legal
needs of the consumer, providing a vast resource of tools and services to the
legal professional as well as service and support for the authorized agents who
market the Company's Plans.
We pay commissions to our agents, screen, build and maintain the
attorney network and market legal plans to our members. Our members pay us a fee
on an annual or monthly basis, depending on the nature of their membership.
Monthly fees range from $1 to $24.95, depending on the type of membership. We
sometimes offer discounted rates to groups or organizations that offer
memberships in our club to their employees or members, as the case may be.
Membership in the club does not entitle members to any specific benefits other
than referral to a participating attorney. As of September 30, 1999, we had
approximately 550,000 members.
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Membership in one of our legal plans provides a member with referrals
to free and discounted legal services ($75/hour versus the national average of
$194 per hour), access to our national attorney network and/or assistance in
finding an attorney with a particular specialty. Upon enrollment, an attorney is
immediately assigned to our member based upon location, requested areas of law,
and language. We do not provide any legal services ourselves, nor do we make any
payments to, or receive any payments from, the participating attorneys. We also
do not underwrite, or provide, insurance. As such, we do not have the
limitations associated with legal insurance products. Any applicant who is able
to pay for a membership is accepted. We have no complicated forms to be
completed, no exclusions for pre-existing conditions, no waiting periods for
access to the services and no increases in premiums for over-use. Our members
have immediate access to our nationwide network of participating attorneys.
We screen attorneys prior to accepting them as participating attorneys
in our network. The attorneys must also agree to provide specified levels of
service, offer discounts to our members, and perform some routine legal services
without charge. Participating attorneys may establish their own screening
policies that may in some instances limit usage. While we monitor participating
attorneys to assure their compliance with our policies, we can not guarantee any
level of service. As of June 30, 1999, we had over 7,000 participating
attorneys. Our revenues from Legal Club of America for the fiscal years ended
June 30, 1999 and June 30, 1998 were $935,000 and $116,000, respectively.
Separate from our legal referral service, we are in the process of
designing and building an Internet based attorney directory known as NANA, the
National Association of Networked Attorneys. NANA is an Internet driven
corporation that houses a nationwide directory of attorneys for the 400,000
Americans that visit the Internet to obtain the services of an attorney each
month, and provides a variety of services for the legal professional. Attorneys
who wish to be listed on NANA will pay us a membership fee of approximately $35
a month, which will entitle them to a listing on our Internet directory, and
additional benefits, including Internet access and a personalized web page.
While NANA had, as of September 30, 1999, approximately 50 members, our
marketing efforts for this service are not scheduled to begin until January
2000. Each attorney that joins NANA, and is also a participating Legal Club
attorney, will be given an ELECTRONICALLY FAVORED listing, which will allow the
member attorney to float to the top of any criterion search they match.
OUR BUSINESS
LEGAL CLUB OF AMERICA
The following is a description of the legal plans currently marketed by
us (the "Legal Club Plans"):
INDIVIDUAL/FAMILY LEGAL PLAN. For $96 per year, the Individual Legal
Plan member receives referrals to attorneys who have agreed to provide seven
free services, including unlimited phone conversations, attorney review of
certain legal documents (six page maximum) and preparation of simple wills. The
individual receives a deeply discounted flat fee schedule for the most commonly
used legal services such as traffic defense ($89), Chapter 7 bankruptcy ($250),
simple divorce ($210) and real estate closings ($175). More importantly, the
member receives an extremely low hourly rate of just $75 for in or out of court
legal representation, as well as discounted contingency fees. This rate
represents a substantial savings when compared to the national average of $194
per hour for partner attorneys. The Individual Legal Plan covers the enrollee,
his or her spouse and any dependents 23 or younger.
SMALL BUSINESS LEGAL PLAN. For $299 per year, a small business owner
receives referrals to lawyers who have agreed to provide a number of free
services including ten initial collection letters per month, thirty-minute face
to face consultations for all new legal matters and review of up to five 10-page
documents each month. The cost of all other services are at a low hourly rate of
$89 for out of court representation and $109 for in court representation. There
is also a discount on all contingency-based legal matters.
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COMMERCIAL DRIVING LEGAL PLAN. For $360 per year, a commercial driver
receives referrals to lawyers who have agreed to provide the basic individual
plan as well as a number of additional non-legal benefits that are relevant to
the "on the road" lifestyle of a commercial driver. These benefits include
moving, non-moving and DOT violations, a UHP vision, dental and prescription
program, a Road America 24-hour roadside assistance program for commercial and
non-commercial vehicles, a $10,000 AD&D policy, emergency travel expense
reimbursement, ambulance service reimbursement, a bail bonds program, arrest
bond protection, an S.O.S. emergency evacuation program and discount on rental
cars and hotel stays.
ATTORNEY SELECTION PROCESS. To ensure that the attorney participating
in our Legal Club Plans meet and maintain our quality standards, we have
implemented an attorney selection and evaluation process. All attorneys must
have a Martindale-Hubbell law directory ethical standard of "V" (very high), and
either an "A" (very high to preeminent) or "B" (high to very high) legal ability
rating. Each attorney must maintain an active business license to practice law
in the state in which he or she practices, maintain good standing in his or her
respective bar association or licensing department, as applicable, maintain
professional liability insurance of at least the minimum amounts required by the
state in which he or she practices, and provide quarterly updates of his or her
personal practice information. We regularly request and receive reprimand
reports from the bar associations of every state. We also perform anonymous
professionalism testing of the attorneys in our network to ensure that they are
providing services that meet our standards. In an effort to ensure that we match
an appropriate and qualified attorney to each member, we categorize the
attorneys based on geographic location, substantive practice area, and foreign
language skills. If the needs of our members change or they are dissatisfied
with the attorney we have recommended to them, they are permitted to change
attorneys as often as they desire.
NATIONAL ASSOCIATION OF NETWORKED ATTORNEYS - NANA
We are in the process of designing and building NANA, an Internet based
attorney directory designed to provide full fee legal clients to attorneys who
are listed with us. In addition, NANA provides such attorneys with a password
protected intranet environment to interact with each other. In the intranet
environment, listed attorneys are able to perform criterion searches to find
other listed attorneys for business referrals. Free chat rooms and bulletin
boards are provided as a means to contact other attorneys, post questions, and
communicate special skills. NANA members receive a directory listing with a link
to a personalized web page that NANA creates and hosts for each attorney. This
web page features a photograph and all biographical and professional information
provided by the attorney. All NANA members also receive 100 hours per month of
free Internet access and unlimited E-mail, word processing and translation
capabilities.
NANA attorneys may choose to become participating attorneys in the
Legal Club. Those who do, receive a Gold Scale Membership listing. This means
that the name of that attorney will sort to the top of any criteria search
matching the attorney profile and that a Gold Scale insignia will appear next to
such attorney's listing in the NANA directory. There is no criteria for Gold
Scale membership other than participation in both NANA and the Legal Club.
Pursuant to our current business plan, and assuming that our capital
raising efforts are successful, we plan to initiate significant marketing
efforts for this service in January 2000.
MARKETING
We market our products through a combination of worksite enrollments,
Internet marketing through our Web site (www.legalclub.com), direct/affinity
marketing, infomercials and targeted advertising campaigns. In June 1999, we
entered into marketing agreements with Worksite Solutions, Inc., the worksite
marketing unit of AON Corporation and with Transamerica Assurance Company, the
worksite marketing unit of Transamerica Life Companies. Under these and similar
agreements with Willis Corroon, Century Business Systems and Trustmark/National
Worksite Benefits, the Legal Club Plans are offered by these companies as their
exclusive legal services benefits. These entities market benefit plans to
individuals and companies nationally, but may not have a legal services plan in
their portfolio of products. By forming alliances with them, we can benefit from
their existing
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relationships and marketing channels at a relatively low cost to us. In certain
cases, we are able to provide deep discounts to these organizations. We believe
that a legal services program is an attractive benefit option offered by
employers and is consistent with the growing national trend towards voluntary
benefit plans such as supplemental life, health, vision and dental coverage.
Typically, monthly payments are made by the members through automatic payroll
deductions.
Legal Club's Web site, www.legalclub.com, features three distinct
environments and houses a vast resource of tools and services, and over 3,000
links of interest, aimed at satisfying the legal needs of the consumer, the
legal professional and the authorized agents who market the Company's Plans. Our
Internet strategy is to provide a long-term solution for the delivery of
voluntary benefits to the workplace at a fraction of the cost of conventional
methods.
We recently initiated the PASSIVEPLUS Enrollment Process. Under this
method of enrollment, employees or members of an organization are enrolled in
the Legal Club for a free 90-day trial. Upon the expiration of the free trial
period, the member may cancel his or her membership at no cost. If the member
does not cancel his or her membership, it automatically renews and is paid
through automatic payroll deductions.
Affinity and direct marketers buy products and services in bulk from
providers and then offer them through direct marketing campaigns to members at
discounted rates. Many of Legal Club's 550,000 members were sold our Plans at a
reduced fee through direct marketing as part of the Company's first major
marketing program. Legal Club has developed strategic relationships with large
direct marketing companies, such as Protective Life Corporation and Coverdell &
Co., major banks, and affinity-based organizations, such as MemberWorks Inc. and
Purchase Power. Legal Club enables these direct marketing organizations to offer
the Company's plans to millions of credit card and bank customers in their
member databases.
In August 1998, we completed the production of a 30-minute television
infomercial, which has been broadcast nationally since that time. Interested
viewers are given a telephone number which connects them to a telemarketing
agency, from whom they can get additional information and sign up for our
services. We believe that approximately 35% of our gross revenues at this time
are from members who learned of our services by viewing the infomercial.
We are striving to establish relationships with a number of state bar
associations in an attempt to have them add NANA as one of the benefits offered
to their members. NANA also utilizes the Internet daily to communicate with over
500 legal news groups and is registered with various search engines.
THE INDUSTRY
According to the American Bar Association, more than 150 million
Americans are unable to afford the costs of basic legal assistance, primarily
because the average hourly rate for an attorney is about $194. According to the
American Bar Association , it receives a minimum of 115,000 phone calls per
month from individuals who are looking for qualified attorneys to represent
them. In order to accommodate this need for affordable, legal services, various
models have arisen. Legal service plans were first developed in the United
States in the late 1960's. Since then, there has been substantial growth in the
number of Americans entitled to receive various forms of legal services through
legal service plans. According to estimates developed by the National Resource
Center for Consumers of Legal Services, there were 4 million Americans entitled
to services through at least one legal service plan in 1981, 15 million in 1985,
58 million in 1990, 98 million in 1996 and 105 million in 1997.
Legal service plans are offered through various organizations and are
distinguishable based on various characteristics. These characteristics include
insurance vs. non insurance plans, whether there is a direct cost to the member,
whether there is a sponsor and, if so, whether there is a direct cost to the
sponsor, as well as the range and variety of services offered. According to the
National Resource Center for Consumers of Legal Services, the following are
examples of the most commonly used plans:
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o MEMBER PLANS. These generally provide limited benefits on an
automatic enrollment basis without any direct cost to the
individual user. Labor unions, elder hotlines and the National
Education Association are the largest sponsors of member
plans.
o EMPLOYMENT BASED PLANS. These are generally offered by medium
to large employers and can include legal referral and
consultation. Enrollment types can be automatic or voluntary
with varying costs to the member.
o MILITARY PLANS. These are automatic enrollment plans with no
cost to the member.
COMPETITION
Our primary competitors, which are insurance and member plans, are
Pre-Paid Legal Services, Inc., the Hyatt Legal Plans, the ARAG plans (formerly
known as Midwest Legal Plans), Law Phone, and the Signature Legal Plan. Pre-Paid
Legal Services, our largest competitor, is a publicly traded insurance company
that markets its products through a multi-level scheme, offering enumerated
services for designated annual payments.
The Hyatt and ARAG plans cover limited services for a limited number of
hours of service. The employee is responsible for paying for any additional time
expended at the attorney's regular hourly rates. Law Phone provides unlimited
telephone consultations for a fee of $10.00 per month. Limited in-person
visitation and additional discounted visits are also covered. The Signature
Legal Plan is also an insurance product with coverage that varies from state to
state.
While we compete with the various types of legal service providers
listed above, we feel that our service presents a number of important
competitive advantages to a potential member. There are no restrictions
regarding eligibility and no waiting period for access to the services. Once a
member, there are no limitations or exclusions based on pre-existing conditions,
and no increase in our membership fees as a result of a high volume of usage of
the services by the member. Since our services are not set up as an insurance
company, and because our revenues are based on initial and continuing membership
fees, increased usage by the members does not lower our revenues. Also, by
limiting our role to providing referral services, we believe that we materially
reduce our exposure to any liabilities that may arise from or as a result of
services provided by our participating attorneys.
REGULATION
INSURANCE REGULATION
We do not provide any portion of our membership fees to the attorneys
participating in the Legal Club network. We also do not receive any fees from
the attorneys for having referred the members to them. We do not insure our
customers against any risk. As a result, we believe that we are not subject to
regulation as an insurer. However, we have received a letter from the Florida
Department of Insurance stating its position that we should be regulated as a
legal expense insurer. Subsequently, we sought and received an opinion from the
Florida Legislative Joint Administrative Procedures Committee that we were
operating as a referral service only and not as an insurer. We have since
exchanged correspondence with the Florida Department of Insurance, but the
matter has not yet been resolved. This matter is currently subject to formal
administrative review. In the event this matter is not ultimately resolved in
our favor, and it is determined that we should be regulated as a legal expense
insurance provider, we will need to post a bond with the state and will be
required to maintain certain reserves. It is difficult for us to determine at
this time the ultimate costs that would be associated with a determination that
we must comply with insurance regulations. While we strongly believe that we do
not meet the regulatory definition of a legal expense insurer in the State of
Florida, we believe that being regulated in this manner, if it were to occur,
may have a material adverse impact on our financial condition.
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LEGAL REGULATION
Since we do not practice law or provide legal advice to our members, we
do not believe that we fall under the purview of regulations governing
attorneys. Nor do we believe that any of our services are in conflict with any
regulations affecting lawyers. We require our participating attorneys to comply
with applicable regulations and ethical codes and we perform monitoring
procedures to seek to ensure compliance.
EMPLOYEES
We currently have 47 full-time employees, of which 15 are in
operations, 13 are in management, 11 are in member services and 8 are in
administration. None of the employees belongs to a union. We believe that our
employee relationships are excellent.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The statements contained in this item, if not historical, are forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, and involve risks and uncertainties that could cause actual
results to differ materially from the financial results described in such
forward looking statements. These risks and uncertainties include, but are not
limited to, changes in regulations in states where we do business, the
effectiveness of the Company's marketing strategies to significantly grow
membership and the ability of the Company to manage operations effectively to
service the growth, its ability to recruit and retain key executives and
personnel concurrent with the growth in the membership base, and the ability of
the Company to obtain additional financing as required. The success of the
Company's business operations is also dependent on general competitive
conditions in the industry and changes in economic conditions. Further, any
forward looking statement or statements speak only as of the date on which such
statement was made, and the Company undertakes no obligation to update any
forward looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. Therefore, forward looking statements should not be relied
upon as a prediction of actual future results.
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
We reported a net loss of $1,004,000 or $0.05 per basic and diluted
common share, for the three months ended September 30, 1999, compared to a net
loss of $333,000 or $0.03 per basic and diluted common share for the comparable
period in 1998. The increase in net loss for the 1999 period is attributable to
the continued development of our infrastructure, as well as increased marketing
costs required to achieve membership growth.
Fee income from memberships for the three months ended September 30,
1999 was $755,000 compared to $98,000 for the comparable period in 1998, an
increase of 670%. The increase in fee income is primarily the result of
increased revenue associated with sales of Legal Club employee benefits through
employer groups as well as increased revenues generated from infomercial
placements.
The increase in fee income from memberships was offset by an even
larger increase in operating expenses, which totaled $1,757,000 and $403,000 for
the three months ended September 30, 1999 and 1998, respectively. The increase
in operating expenses were primarily the result of payroll and employee
benefits, which increased 211%, to $578,000 for the three months ended September
30, 1999 compared to $186,000 for the comparable period in 1998. This increase
was due to the hiring of administrative, technical, sales and management
personnel to market and service customers, develop operations, and manage our
business. Communications expenses were $456,000 for the three months ended
September 30, 1999 compared to $27,000 in 1998, a 1,589% increase. The increase
in communication expenses was a result of our increased infomercial television
placements as well as traffic and production costs associated with developing
the infomercials.
Other income, net, for the three months ended September 30, 1999 was a
$2,000 loss compared to a loss of $28,000 in 1998, an improvement of $26,000.
The improvement in other income, net is primarily the result of (1) a decrease
of $16,000 in interest expense in the current three months, and (2) a $10,000
increase in other income, primarily interest income.
YEARS ENDED JUNE 30, 1999 AND 1998
We reported a net loss of $2,842,000, or $0.18 per basic and diluted
common share, for the fiscal year ended June 30, 1999, compared to a net loss of
$1,323,000, or $0.18 per basic and diluted common share for the comparable
period in 1998. The increase in net loss for the 1999 period is attributable to
the continued development of our infrastructure, as well as increased marketing
costs required to achieve membership growth.
Fee income from memberships for the fiscal year ended June 30, 1999 was
$935,000 compared to $116,000 for the comparable period in 1998, an increase of
706%. The increase in fee income is primarily the result of increased revenues
generated from infomercial placements as well as increased revenue associated
with sales of Legal Club employee benefits through employer groups.
The increase in fee income from memberships was offset by an even
larger increase in operating expenses, which totaled $3,782,000 and $1,234,000
for the fiscal years ended June 30, 1999 and 1998, respectively. The increase in
operating expenses were primarily the result of (1) payroll and employee
benefits which were $1,353,000 for the fiscal year ended June 30, 1999 compared
to $268,000 for the comparable period in 1998, and (2) communications expenses
which were $1,398,000 for the fiscal year ended June 30, 1999 compared to
$232,000 for the same period in 1998. Payroll and employee benefits increased
$1,085,000, an increase of 405%, due to the hiring of administrative, technical,
sales and management personnel to market and service customers, develop
operations, and manage our business. Communications expenses increased
$1,166,000 or 503% as a result of our increased infomercial television
placements as well as production costs associated with developing the
infomercials.
Other income, net, for the fiscal year ended June 30, 1999 was $5,000
as compared to a loss of $205,000 for the comparable period in 1998, an
improvement of $210,000. The improvement in other income, net is primarily the
result of (1) a decrease of $75,000 of interest expense in the current fiscal
year, and (2) a decrease of $94,000 associated with a loss on disposition of
investments in 1998 as compared to no loss on disposition of investments in
1999.
We expect revenues for the quarter ending September 30, 1999 to be
considerably higher than the comparable quarter ended September 30, 1998.
However, it is likely that our expenses will grow commensurately in order to
generate and service the revenue growth. We do not believe there is any
seasonality associated with our business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1,200,000 for the three
months ended September 30, 1999, compared to net cash used in operating
activities of $301,000 for the comparable period in 1998. This increase of
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$899,000 in net cash used in operating activities resulted primarily from the
$671,000 increase in the net loss.
Cash flows used for investing activities increased $142,000 in the 1999
quarter compared to 1998. This was due to our acquisition of additional computer
equipment and furniture to equip employees with the capacity to service the
increased customer base. Management believes that approximately $250,000 of
additional computer equipment, software and leasehold improvements may be
required over the next twelve months in order to continue to enhance our
products and operations, as well as to develop Internet access to our services.
Based upon our current capital resources, we believe additional financing will
be required to purchase or lease the additional computers and leasehold
improvements as such purchases may not be able to be funded through cash flow
from current operations. Unless we can obtain additional financing, our ability
to enhance our products, services operations and Internet access may be
materially impaired.
Cash flows used for financing activities were $102,000 for the three
months ended September 30, 1999 compared to cash flows provided by financing
activities of $324,000 for the comparable period in 1998. This decrease was
primarily due to funds that were placed in escrow, associated with an office
space lease and equipment leases. We have incurred cumulative losses since
inception and continue to require additional capital to fund operations and
development. Management is planning to seek additional funds by December 31,
1999, through the issuance of common or preferred stock for cash, pursuant to
private placements. Management recognizes that we must generate additional
capital to fund operations; however, no assurances can be given that we will be
successful in generating additional capital. Should we fail to generate
additional capital, our ability to continue operations may be materially
impaired.
We currently manage the payment of our current liabilities and
obligations on a monthly basis as cash becomes available. The balance of cash
available at September 30, 1999 of $357,000 has been used in operations through
November 1999, and our current cash resources are limited as of December 17,
1999. Management is planning to seek additional funds necessary to operate for
the next twelve months during December 1999 by the issuance of common or
preferred stock for cash pursuant to private placements. Through December 17,
1999, approximately $500,000 has been obtained through these efforts. Unless we
are successful in our efforts to sell our stock, we believe that we may not be
able to continue operations for the next twelve months. There are no assurances
that we will be able to raise the required capital through the sale of our debt
or equity securities or that we will have access to other sources of capital on
terms that are acceptable to us.
YEAR 2000 COMPLIANCE
With the new millennium approaching, many institutions around the world
are reviewing and modifying their computer systems to ensure that they are Year
2000 compliant. Many existing computer systems and microprocessors with data
functions (including those in non-information technology equipment and systems)
use only two digits to identify a year in the date field with the assumption
that the first two digits of the year are always "19." Consequently, on January
1, 2000, computers that are not Year 2000 compliant may read the year as 1900,
and systems that calculate, compare or sort using the incorrect date may
malfunction.
We have conducted an assessment of the Year 2000 issue and the
potential effect it will have on us and our business. We have determined that we
will not be required to materially modify or replace our information and
non-information technology systems to properly recognize and utilize dates
beyond December 31, 1999. We presently believe that with modifications
previously made to existing software, conversions to new software and
replacement of some hardware, the Year 2000 issue will be satisfactorily
resolved in our own systems. However, even if these changes are successful,
failure of third parties to which we are financially or operationally linked to
address their own system problems could have a material adverse effect on us.
Furthermore, the investing and trading patterns of clients may be affected by
Year 2000 issues as clients become concerned about the Year 2000 issue and the
effect it
7
<PAGE>
will have on the U.S. and international stock markets and the securities
industry generally. Changes in these patterns may harm our business.
We continue to monitor and review the Year 2000 issue and, as
appropriate, modify or replace the software (and replace some hardware) in our
computer systems. We continue to monitor our own internal systems to prepare for
Year 2000 compliance. We have also initiated communications with
counter-parties, intermediaries and vendors with whom we have important
financial and operational relationships to determine the extent to which they
are vulnerable to the Year 2000 issue. We have not yet received sufficient
information from these parties about their remediation plans to predict the
outcome of their efforts.
We have recently completed a comprehensive upgrade of our computer
systems, which included Year 2000 testing and preparation. The upgrade cost us
approximately $200,000. We do not expect to incur any additional significant
costs relating to Year 2000 readiness. While most of our Year 2000 program has
been completed, we may use additional funds for continuing preparation efforts.
We cannot assure you that these estimates will be correct; actual results could
differ materially from our plans.
In the event of a failure of our systems, our systems are fully backed
up and we have the capability to be operational within 48 hours.
ITEM 3. DESCRIPTION OF PROPERTY
We rent approximately 14,186 square feet of office space in a building
in Sunrise, Florida. The lease is for a term of eighty-four (84) calendar
months, which commenced on July 1, 1999. The total payment for the duration of
the lease term is approximately $1,235,000. We also have five regional sales
offices located in Tampa, Los Angeles, Denver, Chicago and New York. There is
only one employee in each regional sales office at this time.
8
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information with respect to the beneficial
ownership of our capital Stock by (i) each of the directors of the Company, (ii)
each "named executive officer," (iii) each person known by the Company to be the
beneficial owner of five percent or more of each class of our voting securities,
and (iv) all executive officers and directors as a group, as of October 31,
1999. Unless otherwise indicated, the Company believes that the beneficial owner
has sole voting and investment power over such shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF DESIGNATED CLASS(1) OWNERSHIP OF CLASS(1)(2)
- ------------------------------------ ----------------------------------------- ------------------------
<S> <C> <C>
Brett Merl 2,353,555 shares common stock 10.5%
Legal Club of America Corp.
1601 N. Harrison Pkway. Bldg. A #200
Sunrise, FL 33323
Jason Krouse 700,519 shares common stock 3.1%
Legal Club of America Corp.
1601 N. Harrison Pkway. Bldg. A #200
Sunrise, FL 33323
A. Clinton Allen 350,000 shares common stock 1.6%
C. Allen & Co.
1280 Mass. Ave.
Cambridge, MA 02138
Ronald G. Agypt 125,000 shares common stock 0.6%
AON
400 N. Skokie Bldg., Suite 450
Northbrook, IL 60062
Matt Cohen 541,164 shares common stock 2.4%
Interactive Technologies.Com, Ltd.
11336 Wiles Road
Coral Springs, Florida 33076
Storie Partners L.P. 16,667 shares of Series A 7.5%
c/o Howard, Rice, Nemerovsky, Candy, Falk & Convertible Preferred Stock (3)
Rabkin
Three Embarcadero, 7th Floor
San Francisco, CA 94111-4065
All Executive Officers and Directors as a 4,070,238 shares common stock 16.1%
group (7 persons)
<FN>
- ---------------------
(1) Includes the amount of shares the beneficial owner has the right to
acquire within 60 days from options, warrants or similar rights.
(2) Calculation of total number of shares of outstanding common stock of the
corporation is made on a fully diluted basis, taking into account all
instruments convertible into common stock within 60 days, including the
Series A Convertible Preferred Stock.
(3) Holding consists of 16,667 shares of Series A Convertible Preferred Stock,
which are convertible into 1,666,770 shares of common stock. If converted,
these shares would represent 7.5% of the fully diluted common stock.
</FN>
</TABLE>
9
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and positions held with
respect to each Director and Executive Officer:
<TABLE>
<CAPTION>
NAME OF OFFICER/DIRECTOR AGE POSITIONS WITH COMPANY
------------------------ --- ----------------------
<S> <C> <C>
Brett Merl........................... 38 Chief Executive Officer and Chairman of the Board
Richard Campanaro.................... 57 President and Chief Operating Officer
Michael Samach....................... 45 Chief Financial Officer
Jason Krouse......................... 31 Executive Vice President of Sales and Director
A. Clinton Allen..................... 55 Director
Ronald G. Agypt...................... 43 Director
Matt Cohen........................... 41 Director
</TABLE>
BRETT MERL has served as our Chief Executive Officer and Chairman of
the Board since October 1999. From January 1999 to October 1999, he served as
our President, Chief Executive Officer and Director. From January 1997 to
January 1999, he served as our Chief Executive Officer. From February 1996 to
December 1996, he served in various capacities for the Company. From December
1989 to January 1996, Mr. Merl was Vice President of Bernstein Zimmerman
Financial, Inc. ("BZFI"), an insurance agency specializing in group benefits and
pension planning. BZFI is also a benefits coordinator for three South Florida
credit unions, offering financial services to credit union members and the
member corporations. Mr. Merl received a B.S. degree in Marketing from Long
Island University in 1993.
RICHARD CAMPANARO began serving as our President and Chief Operating
Officer in October 1999. From March 1996 to October 1999, he served as Chief
Operating Officer of Scibal Associates, Inc., a third party administration
company, and from March 1995 to March 1996, he acted as consultant for the
company. From March 1993 to March 1996, Mr. Campanaro served as Director and
consultant for Century Industries, Inc. Mr. Campanaro previously served as
president and chief executive officer of Tandem Financial Group, an insurance
company jointly owned by Merrill Lynch and Co. and Equitable Life Assurance Co.,
now part of Merrill Lynch Insurance Group.
MICHAEL SAMACH began serving as our Chief Financial Officer in
September 1999. From February 1999 to September 1999, he acted as an independent
financial consultant. From September 1998 to February 1999, Mr. Samach served as
the Chief Financial Officer of Equipnet, Inc., a medical network management
company. From January 1998 to August 1998, he served as the Chief Financial
Officer of CHCS, Inc., also a medical network management company. From January
1996 to November 1997, he served as the Chief Financial Officer and the Chief
Operating Officer of American Medical Healthcare, Inc., a start-up HMO. From May
1993 to January 1996, Mr. Samach served as the Finance Director of the Florida
Region for Foundation Health of Florida. Mr. Samach is a Certified Public
Accountant and holds an M.B.A. and an M.S. degree from the University of Miami.
He also holds a B.S. degree from Florida State University.
JASON KROUSE has served as our Executive Vice President of Sales, since
August 1998 and as a Director since December 1998. In 1997, Mr. Krouse was
employed by the law firm of Kahl and Associates and in 1996 was associated with
the law firm of Bob, Spier, Ciotelli. Mr. Krouse received a J.D. degree from
Nova Southern Shepard Broad Law Center in 1997 and received his B.S. degree in
marketing from Florida Atlantic University in 1990. Mr. Krouse sits on the board
of directors of the Mass Marketing Insurance Institute and the National
Association of Voluntary Enrollment Specialists.
10
<PAGE>
A. CLINTON ALLEN has served as a Director since 1998. Since 1987, Mr.
Allen has served as vice chairman of Psychemedics Corp. He also serves as a
director for The DeWolfe Companies, Swiss Army Brands, Steinway Musical
Response, USA and DCRI Corp. Mr. Allen was also the first outside director of
Blockbuster Entertainment Corp.
RONALD G. AGYPT has served as a Director and the Chairman of the
Compensation Committee since March 1999. Since January 1998, Mr. Agypt has been
the National Sales Manager for Worksite Solutions, a subsidiary of AON, with
which we have entered an agreement for them to market our services through their
worksite markets. Prior to serving in his current position, Mr. Agypt served in
various management capacities with AON during the previous 24 years.
MATT COHEN has served as a Director since September 1999. From July
1997 to August 1999, Mr. Cohen served as our Chief Financial Officer. From 1988
until July 1997, Mr. Cohen served as vice president and chief financial officer
of Standard Brands of America, a retailer of consumer electronics and
appliances. Mr. Cohen also serves on the Board of Directors of Interactive
Technologies.com Ltd. and UBuy.com
All directors of the Company hold office until the next annual meeting
of stockholders or until their successors are elected and qualified. As
compensation for attending the meetings of our board of directors non-employee
directors receive $2,500 per meeting. Our employee directors do not receive any
additional compensation for attending the meetings.
11
<PAGE>
ITEM 6 EXECUTIVE COMPENSATION
The following tables and notes present for the three years ended June
30, 1999, the compensation paid by the Company to the Company's chief executive
officer and the executive officer who received compensation of at least $100,000
in 1999, 1998 or 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ---------------------------------------
AWARDS PAYOUTS
-------------------------- ------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H) (I)
- ------------------- ------- ---------- ----------- ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brett Merl, 1999 $159,038 $50,000(1) $3,000 -- 82,090 -- $163
Chairman of the
Board and Chief
Executive Officer
- ----------------------------------------------------------------------------------------------------------------------
1998 58,413 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
1997 -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Matt Cohen(2) 1999 128,077 50,000 3,000 -- 67,164 -- --
- ----------------------------------------------------------------------------------------------------------------------
1998 90,796 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
1997 14,722 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
<FN>
- ------------------
(1) Bonus voluntarily deferred by employee.
(2) Matt Cohen was our Chief Financial Officer until September 1999. He has
been on the Board of Directors since 1997.
</FN>
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENTS
We have entered into an Employment Agreement with Richard Campanaro,
effective as of October 18, 1999, engaging him to serve as our President and
Chief Operating Officer. This Employment Agreement has a term of one year, with
an initial annual base salary of $180,000.
We have entered into an Employment Agreement with Brett Merl, effective
as of July 1, 1997, engaging him to serve as our Chief Executive Officer.
This Employment Agreement has a term of three years, with an initial annual base
salary of $125,000.
We have entered into an Employment Agreement with Michael Samach,
effective as of September 17, 1999, engaging him to serve as our Chief Financial
Officer. This Employment Agreement has a term of three years, with an initial
annual base salary of $135,000.
We have entered into an Employment Agreement with Jason Krouse dated
December 12, 1997, engaging him to serve as our Vice President of Sales. This
Employment Agreement has a term of five years, with an initial annual base
salary of $55,000 per year.
12
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Brett Merl and Jason Krouse subscribed for and were issued our common
stock in exchange for promissory notes from each officer in the approximate
amount of $132,000. The notes, together with the interest accrued thereon, are
due December 26, 2003.
Jason Krouse extended the Company a loan on October 27, 1999, in the
amount of $50,000, bearing interest at a rate of 7% per annum and maturing on
April 26, 2000.
We have entered into a Consulting Agreement effective February 16, 1999
with A.C. Allen & Company, an affiliate of A. Clinton Allen, one of our
directors. Pursuant to this Consulting Agreement, A.C. Allen & Company receives
compensation in the amount of $4,000 per month in exchange for providing
business consulting services.
We have entered into an Agreement with Matthew Cohen, our former Chief
Financial Officer and Brett Merl, our Chief Executive Officer, dated September
1999. Pursuant to this Agreement, among other things, Brett Merl has agreed to
assume certain outstanding obligations of Mr. Cohen under a promissory note to
the Company in the original principal amount of $132,000, in exchange for
receiving 700,000 shares of the Company's common stock from Mr. Cohen.
ITEM 8. DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common
stock, $.0001 par value, and 1,000,000 shares of preferred stock, $.0001 par
value. As of June 30, 1999, 18,539,726 shares of our common stock and 27,778
shares of our Series A Convertible Preferred Stock were outstanding. The
following statements do not purport to be complete and are qualified in their
entirety by reference to the detailed provisions of the Company's Articles of
Incorporation and Bylaws, which are exhibits to this Registration Statement.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to any preferential rights
of preferred stockholders, the holders of common stock are entitled to receive
dividends on a pro rata basis, if any, declared from time to time by the board
of directors out of legally available funds. In the event of our liquidation,
dissolution or winding up, subject to any preferential rights of preferred
stockholders, the holders of common stock are entitled to share on a pro rata
basis in all assets remaining after payment of liabilities. The common stock has
no preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority to issue the preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of any series, without further vote or action by the shareholders.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of our company without further action by the
shareholders and may adversely affect the voting and other rights of the holders
of common stock. The issuance of preferred stock with voting and conversion
rights may adversely affect the voting power of the holders of common stock,
including the loss of voting control to others.
13
<PAGE>
SERIES A CONVERTIBLE PREFERRED STOCK. HOLDERS OF OUR SERIES A
CONVERTIBLE PREFERRED STOCK HAVE THE FOLLOWING RIGHTS AND PREFERENCES AND ARE
SUBJECT TO THE FOLLOWING TERMS:
o The holders have a right to convert each share of their Series
A preferred stock, at any time, into one hundred shares of our
common stock, subject to certain adjustments;
o The holders are entitled to receive dividends as and if
declared by the board of directors on our common stock, and in
such amount that such holders would have received had they
converted their Series A preferred stock to common stock on
the record date;
o The holders have priority over the holders of the common stock
in the event of our liquidation, dissolution or winding up;
and
o The holders are entitled to vote, as a class with the holders
of our common stock, such number of votes as they would have
been entitled to had they converted their Series A preferred
stock to common stock on the record date.
We have a right to redeem some or all of the Series A preferred stock
at any time after January 31, 2002 at a price of $90 per share, plus all accrued
dividends, if any.
DIVIDEND POLICY
The Company has not paid any dividend to its shareholders for any class
of stock and does not anticipate paying any dividends in the foreseeable future.
STOCK OPTION PLAN
1997 STOCK OPTION PLAN. Our 1997 Stock Option Plan authorizes the award
of up to 2,000,000 shares of common stock in the form of stock options. As of
September 30, 1999, stock options to purchase approximately 596,209 shares of
common stock were outstanding under the plan. Accordingly, up to 1,403,791
shares of common stock are currently available for future awards under the plan.
The Company anticipates issuing options for an additional 800,000 shares in
connection with the employment agreements of Richard Campanaro and Michael
Samach, our new executive officers. The purpose of the plan is to enable us to
attract and retain qualified and competent employees and to enable such persons
to participate in our long-term success and growth by giving them an equity
interest in our company.
All directors, key employees, consultants and independent contractors
of our company are eligible to receive options pursuant to the plan. The
participants under the plan shall be selected from time to time by the board of
directors or, if constituted by the board of directors, by the compensation
committee, in its sole discretion. The plan is administered by the compensation
committee or such other committee of directors as the board shall designate.
Notwithstanding the foregoing, from and after the effective date of our filing
this registration statement, the plan must be administered by a committee which
shall consist of two or more directors who are "non-employee" directors within
the meaning of Rule 16b-3 under the Exchange Act and an "outside" director
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended.
The committee makes all decisions or determinations by either a
majority vote of its members present at a meeting or by the unanimous written
approval of its members. The committee may adopt, alter or repeal any
administrative rules, guidelines and practices for carrying out the purposes of
the plan. The committee has the right to determine, among other things, the
persons to whom awards are granted, the terms and conditions of any awards
granted, the number of shares of common stock covered by the awards, the
exercise price and the term thereof. Notwithstanding the foregoing, the number
of shares of common stock which may be subject to options granted to any
individual during any calendar year may not exceed 500,000.
14
<PAGE>
The exercise price, term and exercise period of each stock option shall
be fixed by the committee at the time of grant. Notwithstanding the fixed option
price, no incentive stock option shall (i) have an option price which is less
than 100% of the fair market value of the common stock on the date of the award
of the stock option, (ii) be exercisable more than ten years after the date such
incentive stock option is awarded, or (iii) be awarded more than ten years after
the plan is adopted by the board.
REGISTRATION RIGHTS
We have granted registration rights to some of our equity and debt
holders in connection with our financing activities.
WARRANTS
As of September 30, 1999, immediately exercisable warrants to purchase
1,050,000 shares of our common stock were outstanding. Some of the terms of the
outstanding warrants are as follows:
o 300,000 warrants are exercisable for $.90 per share and expire
on December 31, 2003;
o 50,000 warrants are exercisable for $.90 per share and expire
on December 31, 2003;
o 300,000 warrants are exercisable for $.90 per share and expire
on February 12, 2009;
o 300,000 warrants are exercisable for $2.00 per share and
expire on August 1, 2009;
o 100,000 warrants are exercisable for $2.00 per share and
expire on December 31, 2003;
The holders of the warrants have certain registration and conversion
rights.
TRANSFER AGENT
The Transfer Agent and Registrar for the common stock is Interstate
Transfer Company, 56 W. 400 South, Suite 260, Salt Lake City, Utah 84101. Their
telephone number is (801) 531-7860.
15
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The Company's Common Stock is traded on the NASD OTC Bulletin Board
under the symbol LEGL.
The following bid quotations have been reported for the period
beginning December 14, 1998, when the Company's common stock commenced trading
on the OTC Bulletin Board.
BID PRICES
--------------------------
PERIOD HIGH LOW
--------------------------------------- --------- --------
Quarter Ended September 30, 1999 $ 4 3/16 $ 2 5/8
Quarter Ended June 30, 1999 4 1/4 3 1/2
Quarter Ended March 31, 1999 6 1/2 2 3/4
Quarter Ended December 31, 1998 3 1/8 2 3/4
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission. Such quotes are not necessarily representative of
actual transactions or of the value of the Company's securities, and are in all
likelihood not based upon any recognized criteria of securities valuation as
used in the investment banking community.
As of September 30, 1999, there were 398 holders of record of the
Company's common stock and 18,539,726 shares issued and outstanding. As of the
same date, there were 3 holders of the Company's Series A Preferred Stock and
27,778 shares outstanding. Certain of the shares of common stock are held in
"street" name and may, therefore, be held by several beneficial owners.
Of the 18,539,726 shares of outstanding common stock, 17,539,726 shares
are "restricted" securities of the Company within the meaning of Rule 144(a)(3)
promulgated under the Securities Act of 1933, as amended. In general, under Rule
144, as currently in effect, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (in general, a
person who has a control relationship with the company) who has owned restricted
securities of common stock beneficially for at least one year is entitled to
sell, within any three-month period, that number of shares of a class of
securities that does not exceed the greater of (i) one percent (1%) of the
shares of that class then outstanding or, if the common stock is quoted on
NASDAQ, (ii) the average weekly trading volume of that class during the four
calendar weeks preceding such sale. A person who has not been an affiliate of
the company for at least the three months immediately preceding the sale and has
beneficially owned shares of common stock for at least two (2) years is entitled
to sell such shares under Rule 144 without regard to any of the limitations
described above.
No prediction can be made as to the effect, if any, that future sales
of shares of common stock or the availability of common stock for future sale
will have on the market price of the common stock prevailing from time-to-time.
Sales of substantial amounts of common stock on the public market could
adversely affect the prevailing market price of the common stock.
The Company has not paid any dividends to its shareholders for any
class of stock since current management joined the Company in 1996 and does not
anticipate paying any such dividends in the foreseeable future. The payment of
dividends may be made at the discretion of the Board of Directors of the Company
and will depend upon, among other things, the Company's operations, its capital
requirements, and its overall financial condition.
16
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
We have received a letter from the Florida Department of Insurance
stating its position that we should be regulated as a legal expense insurer.
Subsequently, we sought and received an opinion from the Florida Legislative
Joint Administrative Procedures Committee that we were operating as a referral
service only and not as an insurer. We have since exchanged correspondences with
the Florida Department of Insurance, but the matter has not yet been resolved.
This matter is currently subject to formal administrative review. In the event
this matter is not ultimately resolved in our favor, and it is determined that
we will be regulated as a legal expense insurance provider, we will need to post
a bond with the state and will be required to maintain certain reserves. It is
difficult for management to determine at this time the ultimate costs that would
be associated with a determination that we must comply with insurance
regulations. While we strongly believe that we do not meet the regulatory
definition of a legal service insurer in the State of Florida, we believe that
being regulated in this manner, if it were to occur, may have a material adverse
impact on our financial condition.
We filed an action styled LegalClub.com, Inc. v. Bernstein in August
1999 in the Broward County Circuit Court. This case presents a claim against
Howard S. Bernstein for the rescission of certain stock issuances we made to him
at the time of our formation, as well as a claim for slander. The rescission
claim relates to Mr. Bernstein's alleged failure to perform under the agreement
pursuant to which we issued shares to him. We are seeking to recover such
shares. The slander claims seek recovery for various damaging statements that we
believe Mr. Bernstein made to members of the investment banking community. Mr.
Bernstein has recently advised us that he intends to file various counterclaims
against us, and that he may seek to assert derivative claims as well. These
counterclaims and derivative claims all seek various forms of relief in respect
of the approximately $200,000 in salary and other compensation allegedly due
from us to Mr. Bernstein. We intend to investigate the alleged derivative
claims, and to vigorously defend the other counterclaims Mr. Bernstein may
raise. At the present time, it is too early in the litigation to assess with any
degree of certainty the likelihood of success of either our or Mr. Bernstein's
claims.
An action styled Merin, Hunter, Codman, Inc. v. Legal Club of America
Corp. was filed in September 1999, in the Broward County Circuit Court, in which
Merin, Hunder, Codman, Inc. is seeking to recover brokerage commissions
allegedly due to it in connection with our search for premises to lease as our
headquarters. We maintain that the subject brokerage agreement with this entity
was terminated and that no commissions are owed. At this time, Merin, Hunter,
Codman has not alleged the amount of its claim, stating only that the amount
exceeds $15,000, which is the jurisdictional requirement for the Court in this
action. It is too early in this litigation to determine the likelihood of
success on Merin, Hunter, Codman's claims.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
COMMON STOCK
During 1999, we sold 7,484,354 shares of our common stock. Of this
total issuance, 7,272,814 shares were issued in exchange for an aggregate
offering price of $2,124,000 and 211,540 shares were used to convert existing
long term debt payable and related accrued interest to various private investors
for a total consideration of $634,000. These securities were sold to private and
institutional investors in reliance on Rule 506 of rules and regulations
promulgated under the Securities Act of 1933, as amended.
During 1998, we sold 5,527,525 shares of our common stock. Of this
total issuance, 3,376,211 shares were issued in exchange for an aggregate
offering price of $769,000, 902,139 shares were issued as compensation for
services performed by our employees and external consultants for a total
consideration of $298,000, 1,200,000 shares were issued to our officers under
subscription agreements for a total consideration of $396,000, and 49,175 shares
were used to convert existing long term debt payable and related accrued
interest to various private investors
17
<PAGE>
for a total consideration of $116,000. These securities were sold to private and
institutional investors in reliance on Rule 506.
During 1997, we sold 5,077,847 shares of our common stock. Of this
total issuance, 378,000 shares were issued in exchange for an aggregate offering
price of $147,000, 4,479,847 shares were issued as compensation for services
performed by our employees and external consultants for a total consideration of
$119,000, and 220,000 shares were used to convert existing long term debt
payable and related accrued interest to various private investors for a total
consideration of $748,000. These securities were sold to private and
institutional investors in reliance on Rule 506.
SERIES A CONVERTIBLE PREFERRED STOCK
In February 1999, we sold 27,778 shares of our Series A Convertible
Preferred Stock, which are convertible into 2,777,800 shares of our common
stock. The aggregate offering price was $2,500,000. These securities were sold
to accredited private and institutional investors in reliance on Rule 506.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant has authority under Sections 7-109-102 and 7-109-107 of
the Colorado Business Corporation Act to indemnify its directors and officers to
the extent provided for in such statute. The Registrant's Articles of
Incorporation and Bylaws provide that the Registrant shall indemnify and may
insure its officers and directors to the fullest extent not prohibited by law.
The effect of such provision is to require the Company to indemnify the officers
and directors of the Company for any claim arising against such persons in their
official capacities if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. The Registrant also maintains a policy of
directors' and officers' liability insurance.
18
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1999
Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and June 30, 1999 F-1
Consolidated Statements of Operations for the Three Months
Ended September 30, 1999 and 1998 (Unaudited) F-2
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1999 and 1998 (Unaudited) F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) F-4 - F-6
INDEPENDENT AUDITORS' REPORT F-7
CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 1999
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-8
Consolidated Statements of Operations for the Years Ended
June 30, 1999 and 1998 F-9
Consolidated Statement of Stockholders' Equity (Deficit)
for the Years Ended June 30, 1999 and 1998 F-10
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999 and 1998 F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-12 - F-20
19
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and June 30, 1999
<TABLE>
<CAPTION>
September 30,
1999 June 30,
(Unaudited) 1999
------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 357,000 $ 1,801,000
Accounts receivable 194,000 -
Prepaid expenses 57,000 86,000
Advances and other 43,000 39,000
----------- -----------
TOTAL CURRENT ASSETS 651,000 1,926,000
PROPERTY AND EQUIPMENT, net 420,000 189,000
INTEREST DUE FROM SHAREHOLDERS 43,000 37,000
OTHER ASSETS 184,000 5,000
----------- -----------
TOTAL $ 1,298,000 $ 2,157,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 471,000 $ 451,000
Interest payable 172,000 163,000
Accounts payable and accrued liabilities 634,000 540,000
Deferred revenues 66,000 99,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,343,000 1,253,000
LONG-TERM DEBT, less current portion 213,000 158,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.0001 par value; 1,000,000 shares authorized;
40,000 shares designated Series A; issued and outstanding:
27,778 shares of Series A in September and June 1999 - -
Common stock, $0.0001 par value; 50,000,000 shares
authorized; shares issued and outstanding: 18,539,726 in
September and June 1999 2,000 2,000
Additional paid-in capital 8,199,000 8,199,000
Deficit (8,063,000) (7,059,000)
Stock subscription receivable (396,000) (396,000)
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT), NET (258,000) 746,000
----------- -----------
TOTAL $ 1,298,000 $ 2,157,000
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
F-1
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Membership fee income $ 755,000 $ 98,000
----------- -----------
OPERATING EXPENSES:
Payroll and employee benefits 578,000 186,000
Communications 456,000 27,000
Professional fees 175,000 46,000
Office, administrative, and general 484,000 134,000
Occupancy 49,000 7,000
Depreciation and amortization 15,000 3,000
----------- -----------
TOTAL OPERATING EXPENSES 1,757,000 403,000
----------- -----------
LOSS FROM OPERATIONS (1,002,000) (305,000)
----------- -----------
OTHER INCOME (EXPENSE):
Other income, net 16,000 6,000
Interest expense (18,000) (34,000)
----------- -----------
OTHER (EXPENSE), NET (2,000) (28,000)
----------- -----------
NET LOSS $(1,004,000) $ (333,000)
=========== ===========
LOSS PER COMMON SHARE:
Basic and diluted $ (0.05) $ (0.03)
=========== ===========
Weighted average common shares outstanding 18,539,726 11,229,884
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
F-2
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,004,000) $(333,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 15,000 3,000
Interest due from shareholders (6,000) (6,000)
Changes in certain assets and liabilities:
Accounts receivable (194,000) -
Prepaid expenses 29,000 11,000
Advances and other (4,000) 16,000
Interest payable 7,000 44,000
Accounts payable and accrued liabilities (10,000) (28,000)
Deferred revenues (33,000) (8,000)
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (1,200,000) (301,000)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchases of property and equipment (142,000) -
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital leases 125,000 -
Escrow deposits (177,000) -
Proceeds from long-term debt - 67,000
Repayments of long-term debt (50,000) (11,000)
Issuances of common stock - 268,000
----------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (102,000) 324,000
----------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (1,444,000) 23,000
CASH AND CASH EQUIVALENTS, beginning of period 1,801,000 20,000
----------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 357,000 $ 43,000
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 5,384 $ -
=========== =========
Income taxes $ - $ -
=========== =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended September 30, 1998, $54,000 and $27,000,
of debt and accrued interest payable, respectively, were converted to common
stock.
See notes to the consolidated financial statements.
F-3
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Legal Club of America Corporation resulted from the merger of And
Justice for All, Inc. (d/b/a Legal Club of America) and Bird-Honomichl,
Inc. on October 16, 1998. The financial information prior to the date of
the merger is that of And Justice for All, Inc. Legal Club of America
Corporation and its subsidiaries are collectively referred to as the
"Company".
The Company is a membership organization that provides a broad range
of services to its subscribers. The Company has established a network
of over 6,100 attorneys in all 50 states who have contracted with the
Company to provide to its subscribers both individuals and small
business owners, with a variety of free and deeply discounted legal
services. Membership provides a subscriber with access to the Company's
attorney network and/or assistance in finding an attorney with a
particular specialty. The assigned attorney is paid directly by the
subscriber. The Company receives fees for membership, pays commissions
to its agents, builds and maintains its attorney network, and markets
its plan to prospective new members.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial statements, and the applicable regulations of the
Securities and Exchange Commission. Accordingly, they do not include all
the information and footnotes required under generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring entries)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended September 30, 1999, is not necessarily
indicative of the results expected for the year ending June 30, 2000. See
"Going Concern Considerations", below.
GOING CONCERN CONSIDERATIONS
The Company's unaudited financial statements contemplate the
realization of assets and the settlement of liabilities and commitments in
the normal course of business. The Company has incurred cumulative losses
since inception, has funded operations through investor capital, and has
yet to generate meaningful revenues (as compared to its expenses) from its
primary operating activities. In addition, the Company is in default on
certain of its debt agreements. Management recognizes that the Company
must generate additional resources and attain profitable operations to
enable it to continue in business. Management is planning to seek
additional equity capital through the conversion of debt and also by the
issuance of common or preferred stock for cash pursuant to private
placements of equity securities. The realization of assets and
satisfaction of liabilities in the normal course of business is dependent
upon the Company's raising additional funds and ultimately reaching
profitable operations. However, no assurances can be given that the
Company will be successful in these activities. Should any of these events
not occur, the accompanying unaudited financial statements will be
materially affected.
REVENUE RECOGNITION AND CREDIT RISKS
Revenue is recognized in the period services are sold to its
members. Collected membership fees which are subject to refund are
recorded as deferred revenues. Uncollected membership fees are partially
allowanced as to their ultimate realization, as the predictability of
their collection is highly uncertain.
INCOME TAXES
All deferred taxes created by net operating losses are offset in
their entirety by a deferred tax asset valuation allowance.
STATEMENT OF COMPREHENSIVE INCOME
A statement of comprehensive income has not been included, per SFAS
No. 130, "Reporting Comprehensive Income", as the Company has no items of
other comprehensive income.
F-4
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RECLASSIFICATION
Certain amounts have been reclassified in the 1998 financial
statements to conform with 1999 presentation.
NOTE 2 - LONG-TERM DEBT
Long-term debt consists of the following at September 30 and June
30, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
(UNAUDITED)
----------------- -----------------
<S> <C> <C>
Term loans with various maturity dates through 1998. Interest rates range from
12% to 15% plus an additional interest payment of 20% of the principal amount at
maturity. Interest only is payable monthly during the term of the
loans. $ 216,000 $ 216,000
Term loans from a stockholder, principal plus accrued interest of 9% and
12% are payable at various maturity dates on or before August 2000. 83,000 83,000
Capital leases with terms from three to five years, with interest rates
ranging from 10% to 11% 122,000 -
Refinanced term loans during 1999 (see above):
/solid box/ Payable in monthly installments of $5,000, including interest at a
rate of 6%, through September 2000. 57,000 71,000
/solid box/ Payable in monthly installments of $12,250, including interest at a
rate of 8%, through March 2001. 206,000 239,000
----------------- -----------------
Total long-term debt 684,000 609,000
Less: Current portion 471,000 451,000
----------------- -----------------
Long-term debt, less current portion $ 213,000 $158,000
================= =================
</TABLE>
The total principal amount of term loans have been classified as
current since the Company is in default with respect to certain principal
and interest payments. Some of the term loans have been refinanced during
1999 and are presented separately under refinanced loans.
Interest expense for the three months ended September 30, 1999 and
1998 totaled $18,000 and $34,000, respectively.
F-5
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 3- COMMITMENTS AND CONTINGENCIES
LITIGATION
From time to time, the Company is exposed to claims, legal actions,
and regulatory actions in the normal course of business, some of which are
initiated by the Company. At September 30, 1999, management believes that
any such outstanding issues, except for the item below, will be resolved
without further impairing the financial condition of the Company in any
material respect.
The Company filed an action in August 1999 against Howard S.
Bernstein for rescission of the Company's issuance of stock to him at the
time of the Company's formation and for slander by Bernstein against the
Company. The rescission claims relate to Bernstein's failure to perform
under the agreement pursuant to which the Company issued shares to Mr.
Bernstein and seeks to recover the shares issued to Bernstein by the
Company. The slander claims seek recovery for various damaging statements
that the Company alleges Mr. Bernstein made to members of the investment
banking community. Bernstein has filed a counterclaim against the Company
for breach of contract, seeking monetary relief of approximately $300,000
for salary and other compensation allegedly due from the Company to
Bernstein. Management is uncertain as to the likelihood of success of the
Company's claims or Bernstein's claims; consequently, no accrual for any
loss or gain has been included in the accompanying financial statements.
NOTE 4- NET LOSS PER COMMON SHARE
For the three months ended September 30, 1999 and 1998, basic and
diluted weighted average common shares include only common shares
outstanding since any common share equivalents would be anti-dilutive. A
reconciliation of the number of common shares shown as outstanding in the
consolidated financial statements with the number of shares used in the
computation of weighted average common shares outstanding is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Common shares outstanding at September 30th 18,539,726 12,200,446
Effect of weighting - (970,562)
---------- -------------
Weighted average common shares outstanding 18,539,726 11,229,884
========== =============
</TABLE>
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Legal Club of America Corporation
We have audited the accompanying consolidated balance sheets of Legal Club of
America Corporation, Inc. and its subsidiaries (collectively, the "Company") as
of June 30, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 1999 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's accumulated deficit and
continuing losses from operations raise substantial doubt about its ability to
continue as a going concern. In addition, the Company is in default on certain
debt agreements. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Ahearn, Jasco + Company, P.A.
---------------------------------
AHEARN, JASCO + COMPANY, P.A.
Certified Public Accountants
Pompano Beach, Florida
October 28, 1999
F-7
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,801,000 $ 20,000
Prepaid expenses 86,000 15,000
Advances and other 39,000 16,000
----------- -----------
TOTAL CURRENT ASSETS 1,926,000 51,000
PROPERTY AND EQUIPMENT, net 189,000 27,000
INTEREST DUE FROM SHAREHOLDERS 37,000 13,000
OTHER ASSETS 5,000 5,000
----------- -----------
TOTAL $ 2,157,000 $ 96,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 451,000 $ 894,000
Interest payable 163,000 488,000
Accounts payable and accrued liabilities 540,000 274,000
Deferred revenues 99,000 13,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,253,000 1,669,000
----------- -----------
LONG-TERM DEBT, less current portion 158,000 97,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.0001 par value; 1,000,000 shares authorized;
40,000 shares designated Series A; issued and outstanding:
27,778 shares of Series A in 1999; none in 1998 -- --
Common stock, $0.0001 par value; 50,000,000 shares
authorized; shares issued and outstanding: 18,539,726 in
1999 and 11,055,372 in 1998 2,000 1,000
Additional paid-in capital 8,199,000 2,942,000
Deficit (7,059,000) (4,217,000)
Stock subscription receivable (396,000) (396,000)
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT), NET 746,000 (1,670,000)
----------- -----------
TOTAL $ 2,157,000 $ 96,000
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
F-8
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1999 1998
------------ ------------
REVENUES:
Membership fee income $ 935,000 $ 116,000
------------ ------------
OPERATING EXPENSES:
Payroll and employee benefits 1,353,000 268,000
Communications 1,398,000 232,000
Services performed for common stock -- 298,000
Professional fees 616,000 241,000
Office, administrative, and general 320,000 143,000
Occupancy 56,000 33,000
Equipment costs and depreciation 39,000 19,000
------------ ------------
TOTAL OPERATING EXPENSES 3,782,000 1,234,000
------------ ------------
LOSS FROM OPERATIONS (2,847,000) (1,118,000)
------------ ------------
OTHER INCOME (EXPENSE):
Other income, net 67,000 26,000
Loss on disposition of investments -- (94,000)
Interest expense (62,000) (137,000)
------------ ------------
OTHER INCOME (EXPENSE), NET 5,000 (205,000)
------------ ------------
NET LOSS $ (2,842,000) $ (1,323,000)
============ ============
LOSS PER COMMON SHARE:
Basic and diluted $ (0.18) $ (0.18)
============ ============
Weighted average common shares outstanding 15,784,768 7,354,386
============ ============
See notes to the consolidated financial statements.
F-9
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
=====================================================================================================================
COMMON SERIES A PREFERRED ADDITIONAL
COMMON STOCK, AT PREFERRED STOCK, AT PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' DEFICIT, July 1, 1997 5,527,847 $ 1,000 -- $ -- $ 1,363,000
Common stock issued for the conversion
of debt and accrued interest 49,175 -- -- -- 116,000
Stock issued pursuant to subscription
agreements 1,200,000 -- -- -- 396,000
Issuance of stock for cash 3,376,211 -- -- -- 769,000
Issuance of stock for services 902,139 -- -- -- 298,000
Net loss for the year ended June 30, 1998 -- -- -- -- --
----------- ----------- ----------- ------- -----------
STOCKHOLDERS' DEFICIT, June 30, 1998 11,055,372 1,000 -- -- 2,942,000
Common stock issued for the conversion
of debt and accrued interest 211,540 -- -- -- 634,000
Issuance of common stock for cash 7,272,814 1,000 -- -- 2,123,000
Issuance of preferred stock for cash -- -- 27,778 -- 2,500,000
Net loss for the year ended June 30, 1999 -- -- -- -- --
----------- ----------- ----------- ------- -----------
STOCKHOLDERS' EQUITY (DEFICIT),
June 30, 1999 18,539,726 $ 2,000 27,778 $ -- $ 8,199,000
=========== =========== =========== ======= ===========
<CAPTION>
===============================================================================================
STOCK STOCKHOLDERS'
SUBSCRIPTION EQUITY (DEFICIT),
DEFICIT RECEIVABLE NET
----------- ------------ -----------------
<S> <C> <C> <C>
STOCKHOLDERS' DEFICIT, July 1, 1997 $(2,894,000) $ -- $(1,530,000)
Common stock issued for the conversion
of debt and accrued interest -- -- 116,000
Stock issued pursuant to subscription
agreements -- (396,000) --
Issuance of stock for cash -- -- 769,000
Issuance of stock for services -- -- 298,000
Net loss for the year ended June 30, 1998 (1,323,000) -- (1,323,000)
----------- ----------- -----------
STOCKHOLDERS' DEFICIT, June 30, 1998 (4,217,000) (396,000) (1,670,000)
Common stock issued for the conversion
of debt and accrued interest -- -- 634,000
Issuance of common stock for cash -- -- 2,124,000
Issuance of preferred stock for cash -- -- 2,500,000
Net loss for the year ended June 30, 1999 (2,842,000) -- (2,842,000)
----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT),
June 30, 1999 $(7,059,000) $ (396,000) $ 746,000
=========== =========== ===========
</TABLE>
See notes to the consolidated financial statements.
F-10
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,842,000) $(1,323,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 26,000 20,000
Interest due from shareholders (24,000) (13,000)
Loss on disposition of investments -- 94,000
Services performed for common stock -- 298,000
Changes in certain assets and liabilities:
Prepaid expenses (71,000) (16,000)
Advances and other (23,000) (5,000)
Interest payable (49,000) 116,000
Accounts payable and accrued liabilities 266,000 (63,000)
Deferred revenues 86,000 13,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,631,000) (879,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY - Purchases
of property and equipment (188,000) (9,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 75,000 86,000
Repayments of long-term debt (99,000) (4,000)
Issuances of common and preferred stock 4,624,000 769,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,600,000 851,000
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,781,000 (37,000)
CASH AND CASH EQUIVALENTS, beginning of year 20,000 57,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,801,000 $ 20,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 45,000 $ 16,000
=========== ===========
Income taxes $ -- $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the years ended June 30, 1999 and 1998, $634,000 and $116,000,
respectively, of debt and accrued interest were converted to common stock.
During 1998: marketable securities were transferred to a creditor in
full satisfaction of a $240,000 obligation, 2) subscribed stock was issued for
promissory notes totaling $396,000, and 3) common stock with an assigned value
of $298,000 was issued in exchange for services rendered.
See notes to the consolidated financial statements.
F-11
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Legal Club of America Corporation resulted from the merger of And
Justice for All, Inc. (d/b/a Legal Club of America) and Bird-Honomichl, Inc. on
October 16, 1998 (see note 8). Bird-Honomichl, Inc. was incorporated in Colorado
on July 23, 1991. And Justice for All, Inc. was incorporated in Florida on
January 22, 1996. The operations of And Justice for All, Inc. commenced on
February 28, 1996; Bird-Honomichl, Inc. was a non-operating entity prior to the
merger. The financial information prior to the date of the merger is that of And
Justice for All, Inc.
The consolidated financial statements are presented following the
elimination of any intercompany balances and transactions. Legal Club of America
Corporation and its subsidiaries are collectively referred to as the "Company".
The Company is a membership organization that provides a broad range of
services to its subscribers. The Company has established a network of over 6,100
attorneys in all 50 states who have contracted to provide both individuals and
small business owners with a variety of free and deeply discounted legal
services. Membership provides a subscriber with access to the Company's attorney
network and/or assistance in finding an attorney with a particular specialty.
The assigned attorney is paid directly by the subscriber. The Company receives
fees for membership, pays commissions to its agents, builds and maintains its
attorney network, and markets its plan to prospective new members.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities 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.
GOING CONCERN CONSIDERATIONS
The Company's financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company has
incurred cumulative losses since inception, has funded operations through
investor capital, and has yet to generate meaningful revenues (as compared to
its expenses) from its primary operating activities. In addition, the Company is
in default on certain of its debt agreements. Management recognizes that the
Company must generate additional resources and attain profitable operations to
enable it to continue in business. Management is planning to obtain additional
equity capital through the conversion of debt and also by the issuance of common
stock for cash pursuant to equity offerings. The realization of assets and
satisfaction of liabilities in the normal course of business is dependent upon
the Company's raising additional equity capital and ultimately reaching
profitable operations. However, no assurances can be given that the Company will
be successful in these activities. Should any of these events not occur, the
accompanying financial statement will be materially affected.
REVENUE RECOGNITION AND CREDIT RISKS
Revenue is recognized in the period services are provided to its
members. Uncollected membership fees are fully allowanced as to their ultimate
realization, as the predictability of their collection is highly uncertain.
Collected membership fees which are subject to refund are recorded as deferred
revenues.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using
accelerated methods over the estimated useful lives of the assets. Expenditures
for routine maintenance and repairs are charged to expense as incurred.
F-12
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
The Company accounts for income taxes in accordance with the Statement
of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating loss
carryforwards, and tax credit carryforwards, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
NET LOSS PER COMMON SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share." SFAS 128
requires companies with complex capital structures or common stock equivalents
to present both basic and diluted earnings per share ("EPS") on the face of the
income statement. Basic EPS is calculated as income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted EPS is calculated using the "if converted" method for
common share equivalents such as convertible securities and options and
warrants.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments purchased
with an original maturity of three months or less. At times, cash balances may
be held at financial institutions in excess of federally insured limits.
ADVERTISING
The costs of advertising, promotion, and marketing programs are charged
to operations in the year incurred. Expenses for these programs totaled
$1,069,279 and $87,304 for the years ended June 30, 1999 and 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, receivables, and accounts payable and accrued liabilities are
reflected in the balance sheet at historical cost, which approximates fair value
because of the short-term maturity of those instruments.
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
SFAS No. 123 encourages, but does not require, companies to record compensation
plans at fair value. The Company has chosen, in accordance with the provision of
SFAS No. 123, to apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued Employees" (APB 25) for its stock plans. Under APB 25, if the
exercise price of the Company's stock options is less than the market price of
the underlying stock on the date of grant, the Company must recognize
compensation expense. SFAS No. 123 has been adopted for disclosure purposes only
and will not impact the Company's financial position, annual operating results,
or cash flows.
For transactions with other than employees in which services were
performed in exchange for stock, the transactions were recorded on the basis of
the fair value of the services received or the fair value of the equity
instrument issued, whichever was more readily measurable.
F-13
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RECLASSIFICATION
Certain amounts have been reclassified in the 1998 financial statements
to conform with the 1999 presentation.
STATEMENT OF COMPREHENSIVE INCOME
A statement of comprehensive income has not been included, per SFAS No.
130, "Reporting Comprehensive Income," as the Company has no items of other
comprehensive income.
NOTE 2 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following at June 30, 1999 and
1998:
1999 1998
-------- --------
Office equipment $ 34,000 $ 29,000
Computer equipment 78,000 4,000
Computer software 111,000 4,000
Leasehold improvements 2,000 --
-------- --------
Total cost 225,000 37,000
Less: Accumulated depreciation 36,000 10,000
-------- --------
Property and equipment, net $189,000 $ 27,000
======== ========
Depreciation expense totaled $26,000 and $7,000 for the years ended
June 30, 1999 and 1998, respectively.
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at June 30, 1999 and 1998
consist of the following:
1999 1998
-------- --------
Accounts payable $349,000 $226,000
Accrued payroll and related taxes 93,000 34,000
Accrued liabilities to related parties:
Accrued officers' salaries 94,000 --
Accrued interest -- 10,000
Other 4,000 4,000
-------- --------
Total $540,000 $274,000
======== ========
F-14
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Term loans with various maturity dates through 1998. Interest rates range from
12% to 15% plus an additional interest payment of 20% of the principal amount at
maturity. Interest only is payable monthly during the term of the loans. The
total principal amount has been classified as currently due since the Company is
in default with respect to certain principal and interest payments. Some of the
term loans have been refinanced during 1999 and are presented separately below $216,000 $879,000
Term loans from a stockholder, principal plus accrued interest of 9% and 12% are
payable at various maturity dates on or before August 2000 83,000 88,000
Refinanced term loans during 1999 (see above):
/bullet/ Payable in monthly installments of $5,000, including interest at a
rate of 6%, through September 2000 71,000 --
/bullet/ Payable in monthly installments of $12,250, including interest at
a rate of 8%, through March 2001 239,000 --
Other debt, repaid in 1999 -- 5,000
Unsecured term loans from stockholders, with interest at 8.5% to 9% -- 19,000
-------- --------
Total long-term debt 609,000 991,000
Less: Current portion 451,000 894,000
-------- --------
Long-term debt, less current portion $158,000 $ 97,000
======== ========
</TABLE>
Maturities of long-term debt subsequent to June 30, 1999 are as
follows: $451,000 in 2000 and $158,000 in 2001.
Interest expense for the years ended June 30, 1999 and 1998 totaled
$62,000 and $137,000, respectively.
NOTE 5 - INCOME TAXES
A summary of the provision for income taxes for the years ended June
30, 1999 and 1998 is as follows:
1999 1998
--------- ---------
Currently payable $ -- $ --
Deferred tax benefit (995,000) (456,000)
Less: Valuation allowance 995,000 456,000
--------- ---------
Provision for income taxes $ -- $ --
========= =========
F-15
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5 - INCOME TAXES
The Company's deferred tax asset consists of the following at June 30,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax asset:
Available federal and state net operating loss carryover $ 1,835,000 $ 840,000
Less: Valuation allowance (1,835,000) (840,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
There are no significant deferred tax liabilities. The Company has used
an estimated combined federal and state effective tax rate of 35% for all
deferred tax computations.
The Company has recorded a valuation allowance in accordance with the
provisions of SFAS No. 109 to reflect the estimated amount of deferred tax
assets that may not be realized. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible.
For income tax purposes, through its December 31, 1998 tax returns, the
Company has tax net operating loss carryovers ("NOL's") of approximately
$2,911,000, expiring at various dates through 2013. Tax NOL's after December 31,
1998 have not yet been computed. Certain provisions of the tax law may limit the
net operating loss carryforwards available for use in any given year in the
event of a significant change in ownership interest. There have already been
significant changes in stock ownership; however, management believes that an
ownership change has not yet occurred which would cause the net operating loss
carryover to be limited.
NOTE 6 - CAPITAL STOCK
The Company's authorized capital stock at June 30, 1999 consisted of
1,000,000 shares of preferred stock and 50,000,000 shares of common stock,
respectively, at a par value of $0.0001 per share. During the year ended June
30, 1999, the Company issued a total of 7,484,354 shares of its common stock
under equity investment agreements and debt-to-equity conversion agreements, and
for cash pursuant to a Reg. D private placement offering memorandum. During the
year ended June 30, 1998, the Company converted $76,000 of term loans assumed at
the time of acquisition that includes $21,000 of accrued interest and $40,000 of
other debt for 49,175 common shares. Also in 1998, the Company issued 4,278,350
common shares for various kinds of compensation and for private offerings
pursuant to Reg D.
During 1999, the Company amended its articles of incorporation to
authorize 1,000,000 preferred shares at a $0.0001 par value; 40,000 of these
preferred shares are designated as "Series A Convertible Preferred Stock".
Thereafter, the Company issued a total of 27,778 shares of its Series A
preferred stock for a cash payment of $2,500,000.
The board of directors has the authority to issue the preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of any series, without further vote or action by the shareholders.
The issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others.
F-16
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 6 - CAPITAL STOCK (continued)
Holders of the Series A Convertible Preferred Stock have the following
rights and preferences and are subject to the following terms:
The holders have a right to convert each share of their Series A
preferred stock, at any time, into one hundred shares of common stock, subject
to certain adjustments;
The holders are entitled to receive dividends as and if declared by the
board of directors on the common stock, and in such amount that such holders
would have received had they converted their Series A preferred stock to common
stock on the record date;
The holders have priority over the holders of the common stock in the
event of a liquidation, dissolution or winding up; and
The holders are entitled to vote, as a class with the holders of the
common stock, such number of votes as they would have been entitled to had they
converted their Series A preferred stock to common stock on the record date.
The Company has the right to redeem some or all of the Series A
preferred stock at any time after January 31, 2002 at a price of $90 per share,
plus all accrued dividends, if any.
NOTE 7 - STOCK OPTION PLAN AND WARRANTS
In 1997, the Company established a stock option plan (the "Plan") and
issued stock options to key employees and directors. The Plan expires on October
31, 2007. The Company has authorized and reserved 2,000,000 shares of its common
stock for this Plan. At the date of each option grant, the Board of Directors of
the Company has the sole discretion to set option terms, including whether the
option is an incentive option, the option price per share, and its duration.
Outstanding options until fully vested are contingent upon continued service.
SFAS No. 123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB 25 to present pro forma
disclosures of results of operations and earnings per share as if compensation
cost was measured at the date of grant based on the fair value of the award. The
fair value for these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following weighted-average
assumptions: a risk-free interest rate of 6%, no dividend yield, a volatility
factor of the expected market price of the Company's common stock of 94% in 1999
and 26% in 1998 and a weighted-average expected life of the option of eight
years in 1999 and nine years in 1998. The fair value per option was
approximately $0.95 at June 30, 1999 and $0.19 at June 30, 1998.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
net loss and net loss per share would have increased to the pro forma amounts
for the years ended June 30, 1999 and 1998, as follows:
F-17
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 7 - STOCK OPTION PLAN AND WARRANTS (continued)
1999 1998
------------- -------------
Net loss:
As reported $ (2,842,000) $ (1,323,000)
Pro forma (3,029,000) (1,339,000)
Net loss per share (basic and diluted)
As reported $ (0.18) $ (0.18)
Pro forma (0.19) (0.18)
The pro forma amounts may not be representative of the future effects
on reported net income and earnings per share that will result from the future
granting of stock options since future pro forma compensation expense may be
allocated over the periods in which options become exercisable and new option
awards may be granted each year.
The following table presents the Company's stock option activity for
1999 and 1998:
OPTIONED WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- -----------------
Outstanding at October 1, 1997 -- $ 0.00
Issued in 1998 275,000 0.33
------- --------
Options outstanding at June 30, 1998 275,000 0.33
Issued in 1999 120,000 0.33
Issued in 1999 15,000 4.00
Issued in 1999 167,523 4.19
------- --------
Options outstanding at June 30, 1999 577,523 0.46
======= ========
All of the options outstanding at June 30, 1999 and 1998 expire on
November 1, 2007. Of the options outstanding at June 30, 1999, 259,189 are
available for exercise by the option holder, including all 167,523 of the
options issued with an exercise price of $4.19.
WARRANTS
During fiscal 1999, warrants for 1,050,000 shares at an exercise price
varying from $0.90 to $2 per share were issued to non-employee investors as part
of their investment consideration. The warrants have contractual lives of four
to ten years.
NOTE 8 - MERGER
On October 16, 1998, the Board of Directors of And Justice for All,
Inc. ("AJFA") voted to authorize the purchase of 100% of the outstanding shares
of AJFA by a publicly-held entity named Bird-Honomichl, Inc. ("BHI"). To
complete the merger, BHI issued new shares of its common stock to the
shareholders of AJFA in exchange for all of the outstanding stock of AJFA.
Immediately subsequent to the merger, the shareholders of AJFA controlled
approximately 87.57% of BHI. As a result of this merger, the business of AJFA is
to be conducted within the legal entity, BHI. Prior to the merger, BHI was a
non-operating entity. At the date of the merger, BHI had no significant assets
or liabilities.
F-18
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8 - MERGER (continued)
Although BHI (renamed Legal Club of America Corporation) is the legal
surviving entity, for accounting purposes, the merger is treated as a purchase
business acquisition of BHI by AJFA (commonly called a reverse acquisition) and
a recapitalization of AJFA. AJFA is the acquirer for financial reporting
purposes because the former stockholders of AJFA received the larger portion of
the common stockholder interests and voting rights in the combined enterprise
when compared to the common stockholder interests and voting rights retained by
the former BHI stockholders. As a result of this accounting treatment, AJFA will
be recapitalized for financial reporting purposes to reflect the authorized
stock of the legal surviving entity.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company occupies its primary facility under a July 1999 operating
lease which expires in June 2006. The lease calls for monthly payments which
escalate to $17,000 at the end of the lease term. The Company is also
responsible for its pro-rata share of the operating costs of the building.
Future minimum lease payments for the above lease, as well as for other
operating leases, are as follows:
TWELVE MONTHS
ENDING JUNE 30,
- ---------------------
2000 $ 133,000
2001 172,000
2002 177,000
2003 182,000
2004 187,000
Thereafter 392,000
----------
$1,243,000
==========
Total rent expense was approximately $33,000 and $22,000 for the years
ended June 30, 1999 and 1998, respectively.
LITIGATION
From time to time, the Company is exposed to claims, legal actions, and
regulatory actions in the normal course of business, some of which are initiated
by the Company. At June 30, 1999, management believes that any such outstanding
issues, except for the item below, will be resolved without further impairing
the financial condition of the Company.
The Company filed an action in August 1999 against Howard S. Bernstein
for rescission of the Company's issuance of stock to him at the time of the
Company's formation and for slander by Bernstein against the Company. The
rescission claims relate to Bernstein's failure to perform under the agreement
pursuant to which the Company issued shares to Mr. Bernstein and seeks to
recover the shares issued to Bernstein by the Company. The slander claims seek
recovery for various damaging statements that the Company alleges Mr. Bernstein
made to members of the investment banking community. Bernstein has filed a
counterclaim against the Company for breach of contract, seeking monetary relief
of approximately $300,000 for salary and other compensation allegedly due from
the Company to Bernstein. Management is uncertain as to the likelihood of
success of the Company's claims or Bernstein's claims; consequently, no accrual
for any loss or gain has been included in the accompanying financial statements.
F-19
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 10 - RELATED PARTY TRANSACTIONS
In December 1997, the Company issued 1,200,000 shares of its common
stock to three existing shareholders in exchange for subscription agreements
totaling $396,000. The subscription agreements bear interest at 6%. Accrued
interest due from the shareholders amounted to $37,000 and $13,000,
respectively, at June 30, 1999 and 1998. Subsequent to June 30, 1999, the
subscription agreement of one of the shareholders was assumed by another
shareholder, along with the ownership of the common shares, and the accrued
interest obligation.
See Note 3 for a description of accrued liabilities owed to related
parties.
On October 28, 1998, two shareholders released the Company from its
obligations to pay them back salary totaling $375,000 which had been accrued
through June 30, 1998. As a result, the accrued salary was removed as a
liability as of June 30, 1998.
NOTE 11 - NET LOSS PER COMMON SHARE
For the years ended June 30, 1999 and 1998, basic and diluted weighted
average common shares include only common shares outstanding since any common
share equivalents would be anti-dilutive. A reconciliation of the number of
common shares shown as outstanding in the consolidated financial statements with
the number of shares used in the computation of weighted average common shares
outstanding is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Common shares outstanding at June 30th 18,539,726 11,055,372
Effect of weighting (2,754,958) (3,700,986)
----------- -----------
Weighted average common shares outstanding 15,784,768 7,354,386
=========== ===========
</TABLE>
NOTE 12 - PENSION PLAN
Effective April 15, 1999, the Company commenced a 401(k) profit sharing
plan covering substantially all employees gainfully employed as of April 15,
1999. Under the plan, employees are eligible to participate in the plan after
completion of three months of service and reaching 21 years of age or older. The
Company matches employee contributions at a rate of 25% of the contribution, up
to a maximum of 6% of the employee's salary. Company contributions to the plan
are vested over five years at a rate of 20% per year. Contributions by the
Company for the year ended June 30, 1999 totaled $1,000.
F-20
<PAGE>
PART III
INDEX TO EXHIBITS
- -----------------
EXHIBIT NO. DESCRIPTION
----------- -----------
(3)(a) Articles of Incorporation, as amended*
(3)(b) Bylaws*
(4)(a) 1997 Stock Option Plan*
(4)(b) Form of Warrants*
(10)(a) Media Placement Service Agreement with Frederiksen
Television, Inc.*
(10)(b) Campaign Management Services Agreement with
Frederiksen Television, Inc.*
(10)(c) Marketing Agreement with Protective Life Insurance
Corporation*
(10)(d) Lease dated June 8, 1999 with ACP Office I LLC*
(10)(e) Employment Agreement for Brett Merl*
(10)(f) Employment Agreement for Richard Campanaro*
(10)(g) Employment Agreement for Michael Samach*
(10)(h) Employment Agreement for Jason Krouse*
(10)(i) Agreement with Matt Cohen*
(21) Subsidiaries of the Registrant*
- ------------
* Previously filed with the Securities and Exchange Commission with the
Company's Form 10-SB filing dated November 18, 1999.
20
<PAGE>
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.
Dated: December 28, 1999
LEGAL CLUB OF AMERICA CORPORATION
By: /s/ BRETT MERL
---------------------------------------
Brett Merl, President
By: /s/ MICHAEL SAMACH
---------------------------------------
Michael Samach, Chief Financial Officer
(Principal Accounting Officer)
21
