U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
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[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from ___________ to ____________
Commission file number: 000-28193
LEGAL CLUB OF AMERICA CORPORATION
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(Exact Name of Small Business Issuer as Specified in its Charter)
COLORADO 84-1174969
--------------------------------- ---------------------------------
(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)
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(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. Common Stock, $0.0001 Par Value,
19,196,594 shares outstanding as of October 31, 2000.
Transitional Small Business Disclosure Format
Yes No X
----- -----
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.........................................1
Consolidated Statements of Operations...............................2
Consolidated Statements of Cash Flows...............................3
Notes to Consolidated Financial Statements........................4-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9-11
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................12
Item 3. Default Upon Senior Securities.....................................12
Item 6. Exhibits and Reports on Form 8-K...................................12
Signatures.................................................................14
Exhibits...................................................................15
ii
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 AND JUNE 30, 2000
<TABLE>
<CAPTION>
September 30,
2000 June 30,
(Unaudited) 2000
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 295,000 $ 277,000
Restricted cash 110,000 177,000
Accounts receivable, net 238,000 197,000
Prepaid expenses 20,000 27,000
Advances and other assets 91,000 70,000
------------ ------------
TOTAL CURRENT ASSETS 754,000 748,000
PROPERTY AND EQUIPMENT, net 579,000 567,000
OTHER ASSETS 34,000 14,000
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TOTAL $ 1,367,000 $ 1,329,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,039,000 $ 667,000
Accrued compensation and related expenses 111,000 157,000
Current portion of long-term debt and capital leases 547,000 382,000
Interest payable 133,000 123,000
Accrued commissions on Series B preferred stock 194,000 194,000
Accrued legal settlement 73,000 80,000
Other accrued expenses and liabilities 177,000 113,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,274,000 1,716,000
------------ ------------
LONG-TERM DEBT AND CAPITAL LEASES, less current portion 96,000 108,000
------------ ------------
TOTAL LIABILITIES 2,370,000 1,824,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized;
40,000 shares designated Series A; 27,778, issued and outstanding - -
26,000 shares designated Series B; 12,160 issued and outstanding - -
Common stock, $0.0001 par value; 50,000,000 shares authorized;
19,196,594 shares issued and outstanding at September 30, 2000 and
19,011,594 at June 30, 2000 2,000 2,000
Additional paid-in capital 11,819,000 11,712,000
Deficit (12,362,000) (11,753,000)
Stock subscriptions, including interest receivable (462,000) (456,000)
------------ ------------
STOCKHOLDERS' DEFICIT, NET (1,003,000) (495,000)
------------ ------------
TOTAL $ 1,367,000 $ 1,329,000
============ ============
</TABLE>
See notes to the consolidated financial statements.
1
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LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (Unaudited)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUE:
Membership fee income $ 666,000 $ 755,000
OPERATING EXPENSES:
Compensation and employee benefits 572,000 578,000
Advertising and marketing 127,000 456,000
Professional fees 131,000 175,000
Office, administrative, and general 323,000 484,000
Occupancy 88,000 49,000
Depreciation and amortization 27,000 15,000
------------ ------------
TOTAL OPERATING EXPENSES 1,268,000 1,757,000
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LOSS FROM OPERATIONS (602,000) (1,002,000)
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OTHER INCOME (EXPENSE):
Other income 9,000 16,000
Interest expense (16,000) (18,000)
------------ ------------
OTHER, NET (7,000) (2,000)
------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (609,000) (1,004,000)
INCOME TAX BENEFIT - -
------------ ------------
NET LOSS $ (609,000) $ (1,004,000)
============ ============
LOSS PER COMMON SHARE:
Basic and diluted $ (0.03) $ (0.05)
============ ============
Weighted average common shares outstanding 19,013,605 18,539,726
============ ============
</TABLE>
See notes to the consolidated financial statements.
2
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LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (609,000) $(1,004,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for Doubtful Accounts 3,000 (33,000)
Depreciation and amortization 27,000 15,000
Interest due from shareholders (6,000) (6,000)
Changes in certain assets and liabilities:
Accounts receivable (44,000) (194,000)
Prepaid expenses 7,000 29,000
Advances and other assets (37,000) (4,000)
Accounts payable 372,000 44,000
Accrued compensation and related expenses (46,000) (70,000)
Interest payable 10,000 10,000
Other accrued expenses and other liabilities 57,000 13,000
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NET CASH USED IN OPERATING ACTIVITIES (266,000) (1,200,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of property and equipment (39,000) (17,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash 67,000 (177,000)
Proceeds from long-term debt 192,000 -
Repayments of long-term debt and capital leases (29,000) (50,000)
Issuances of common stock 93,000 -
----------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 323,000 (227,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,000 (1,444,000)
CASH AND CASH EQUIVALENTS, beginning of period 277,000 1,801,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 295,000 $ 357,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 6,000 $ 5,000
=========== ===========
Income taxes $ - $ -
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Convertible debt warrants $ 14,000 $ -
Capital leases entered into to acquire computer equipment - 125,000
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
LEGAL CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION. Legal Club of America Corporation and
its subsidiaries are collectively referred to as the "Company". The Company,
through its Legal Club of America subsidiary ("LCOA") offers memberships that
provide a broad range of services to its subscribers. LCOA has established a
network of over 12,000 attorneys in all 50 states, Puerto Rico, the US Virgin
Islands and Singapore, 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 LCOA's attorney network and /or
assistance in finding an attorney with a particular specialty. The assigned
attorney is paid directly by the subscriber. LCOA receives fees for membership,
pays commissions to its agents, builds and maintains its attorney network, and
markets its plan to prospective new members.
During the June 2000 quarter, the Company started marketing computer systems in
addition to its legal plans to augment its distribution channels and provide
additional benefits to employees at the worksite. During the quarter ended
September 30, 2000, the Company's subsidiary, Einstein Computer Corporation,
("Einstein") entered into agreements to procure, distribute and finance computer
systems, targeting people who do not own a personal computer. Participating work
site employees pay for the computer systems through automatic payroll deduction.
The packages offered allow the participating worksite employee to obtain a
computer system, including software, 24 hours/7 days a week technical support,
on site service and free internet access. Sales of this product did not begin
until the quarter ending December 31, 2000.
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 (SEC). 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. These statements should be read in conjunction
with the Company's Form 10-KSB for the year ended June 30, 2000, filed with the
SEC on September 28, 2000. The financial statements as of and for the periods
ended September 30, 2000 and 1999 are unaudited. The consolidated financial
statements for the period ended September 30, 2000 have been reviewed by an
independent public accountant pursuant to Item 310(b) of Regulation S-B and
following applicable standards for conducting such reviews, and the report of
the accountant is included as part of this filing. Operating results for the
three months ended September 30, 2000, are not necessarily indicative of the
results expected for the year ending June 30, 2001. See "Going Concern
Considerations", below.
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 sufficient revenues
from its operating activities to cover its expenses. In addition, the Company is
in default on certain of its debt agreements amounting to $217,000 at September
30, 2000. Management recognizes that the Company must generate additional
resources and attain profitable operations to enable it to continue in business.
Management plans to continue obtaining additional capital through the issuance
of common stock, preferred stock and debt pursuant to placements, and to obtain
operating capital through revenue growth. See Note 6 for activities occurring
subsequent to September 30, 2000. The realization of assets and satisfaction of
liabilities in the normal course of business is dependent upon the Company's
raising additional 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.
4
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SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
RESTRICTED CASH. The Company has escrow deposits of $110,000 as collateral on
outstanding letters of credit, which are renewed annually, relating to the
Company's office space lease and equipment leases. The escrow deposits have been
classified on the balance sheet as restricted cash.
REVENUE RECOGNITION AND CREDIT RISKS - LCOA. Revenue from services provided to
employees at work-sites is recognized in the period services are provided to the
employees in these groups. A reserve is provided for management's estimate of
uncollectible fees from employees. Revenues from all other customer-based
services are recognized in the period the services are provided. The Company
fully reserves for uncollected membership fees, as the predictability of their
collection is highly uncertain. Revenue recognition for collected membership
fees which are subject to refund is deferred until the refund period lapses.
INCOME TAXES. All deferred taxes created by net operating losses are offset in
their entirety by a deferred tax asset valuation allowance.
RECLASSIFICATION. Certain amounts have been reclassified in the 1999 financial
statements to conform with the 2000 presentation.
NOTE 2 - LONG-TERM OBLIGATIONS
At September 30, and June 30 2000, long-term debt and capital leases consist of
the following:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------ ------------
<S> <C> <C>
Term loans with various maturity dates through 1998. Interest rates $ 127,000 $ 127,000
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 terms of the loans
Term loans from a shareholder with interest rates of 9% and 12%,
with maturity dates on or before July 2000 46,000 46,000
Capital leases with terms from three to five years, with imputed
interest rates ranging from 9% to 22% 142,000 153,000
Term loan from a shareholder bearing interest at 7%, due April 2000 44,000 45,000
Convertible notes at a stated interest coupon rate of 25%, due
September 2001 182,000 -
Term loans refinanced during 1999:
Payable in monthly installments of $5,000, including interest at
a rate of 6%, through September 2000 8,000 13,000
Payable in monthly installments of $12,250, including interest at
a rate of 8%, through March 2001 94,000 106,000
------------ ------------
Total long-term obligations 643,000 490,000
Less: Current portion 547,000 382,000
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Long-term obligations, less current portion $ 96,000 $ 108,000
============ ============
</TABLE>
5
<PAGE>
During the three months ended September 30, 2000, the Company issued unsecured
Convertible Notes in a private placement to accredited investors. The notes have
a fair value of $192,000, a stated coupon rate of 25% and mature in one year,
with interest due at maturity. At maturity, the holder will have the option to
convert the outstanding balance of the principal and interest, into shares of
the Company's common stock at $0.50 per share. The Company issued five-year
warrants to the note holders, for no additional consideration, to acquire one
share of the Company's common stock for each $2.00 invested in the Convertible
Notes, at an exercise price of $0.50 per share. The value assigned for
accounting purposes to the 96,000 warrants issued was $10,000. This amount has
been included in additional paid-in capital and as a reduction of the recorded
value of the Convertible Notes, with the $10,000 to be accreted to interest
expense over the term of the notes.
The total principal amount of Term Loans is due within one year or is in default
with respect to certain principal and interest payments and accordingly all has
been classified as current. Some Term Loans were refinanced during the year
ended June 30, 1999 and are presented separately under refinanced loans.
Interest expense for the three months ended September 30, 2000 and 1999 totaled
$16,000 and $18,000, respectively.
NOTE 3 - CAPITAL STOCK
COMMON STOCK
During the three months ended September 30, 2000, the Company issued 185,000
shares of common stock for $93,000, or $0.50 per share, in a private placement
to an accredited investor.
CONVERTIBLE DEBT
In September 2000, the Company raised $192,000 through a private placement of
Convertible Notes and warrants to accredited investors (see Note 2). Upon
maturity, the notes and accrued interest are convertible into common shares at
$0.50 per share. Additionally, the Company issued five-year warrants to the note
holders, for no additional consideration, to acquire one share of the Company's
common stock for each $2.00 invested in the Convertible Notes, or 96,000
warrants, at an exercise price of $0.50 per share. The fair value of the
Company's common stock at the date of issuance of the convertible debt was below
$0.50 per share. Brokers authorized by the Company, who participated in the
private placement of Convertible Notes, are entitled to receive warrants to
purchase 10% of the common stock underlying the notes placed by the broker, or
38,400 warrants, at $0.50 per share, in addition to a fee of 10% of the proceeds
raised.
WARRANTS
In August 2000, the Company issued to marketing partners, warrants to purchase
200,000 shares of common stock with exercise prices varying from $1.00 to $3.00
per share. The warrants have contractual lives of one to six years and the
exercise of the warrants is contingent on sales targets. The fair value of the
Company's common stock at the date of issuance of the warrants was below the
exercise price.
NOTE 4 - NET LOSS PER COMMON SHARE
For the three months ended September 30, 2000 and 1999, 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:
6
<PAGE>
2000 1999
----------- -----------
Common shares outstanding 19,196,594 18,539,726
Effect of weighting (182,989) -
----------- -----------
Weighted average common
shares outstanding 19,013,605 18,539,726
=========== ===========
Common stock equivalents that would dilute basic earnings per share in the
future, but were not included in the computation of diluted earnings per share
because of their anti-dilutive effect on net losses incurred during the three
months ended September 30, 2000 and 1999 include the following:
2000 1999
-------------- --------------
Common stock options 887,523 577,523
Series A convertible preferred stock. 2,777,800 2,777,800
Series B convertible preferred stock 1,216,000 -
Warrants relating to issuance of-
Common stock 1,050,000 1,050,000
Series B preferred 395,600 -
Convertible notes 134,400 -
Other 550,000 -
NOTE 5 - COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
At September 30, 2000, the Company had letters of credit totaling $110,000,
relating to the Company's office space lease and equipment leases. The letters
of credit are collateralized by deposits held in escrow at a financial
institution, and have one-year renewable terms. Management does not expect that
any claims will be made against these financial instruments and therefore
expects no material losses to result from these off-balance-sheet instruments.
LEGAL PROCEEDINGS
The Company filed an action styled LegalClub.com, Inc. v. Bernstein in August
1999 in the Broward County Circuit Court. This action involved the Company's
claims to rescind certain stock issuance's to Bernstein, and claims for slander
and various filed and threatened counterclaims from Mr. Bernstein for alleged
back compensation and other matters. After preliminary proceedings in the case,
the parties entered into a stipulated settlement in April 2000. The settlement
requires payments to Mr. Bernstein of $100,000 in cash, paid in April 2000, and
$80,000 on deferred terms, imposes certain restrictions on the timing of Mr.
Bernstein's sales of Company's stock, and provides that the parties will refrain
from disparaging comments concerning each other. Recently, a dispute arouse
regarding one of the deferred payments, and under the terms of the settlement,
Bernstein received a default judgment for $400,000 against the Company. The
Company intends to vigorously contest this judgment, and has sought and obtained
a hearing on its motion to vacate the same in November 2000.
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. Management believes that any such outstanding issues will be
resolved without further impairing the financial condition of the Company.
NOTE 6 - SUBSEQUENT EVENTS
The Company recently launched Einstein. Einstein, leverages the Company's
distribution network of independent agents by marketing personal computer
systems to employees at the worksite using payroll deduction as the
7
<PAGE>
initial purchase and financing arrangement. During the quarter ended September
30, 2000, Einstein entered into agreements to procure, distribute and finance
computer systems; however, sales of this product did not begin until the quarter
ending December 31, 2000. Subsequent to September 30, 2000, the Company executed
vendor and financing agreements with Gateway, Inc. which provide vendor
financing of personal computers to Einstein with terms and conditions parallel
to the Company's extension of credit to employees at the worksite. Approximately
2000 personal computers and related components are expected to be sold under
this arrangement; however, new financing arrangements are currently being
negotiated to externally finance the computer systems, at no recourse to the
Company.
In 1997, the Company established a stock option plan (the "Plan") to issue
qualified stock options and incentive stock options to key employees and
directors. The Company authorized and reserved 2,000,000 shares of its common
stock for this Plan. In October 2000, the Compensation Committee of the Board of
Directors approved an amendment to the Plan to increase to 4,000,000, the number
of authorized and reserved shares of the Company's common stock. On November 8,
2000, the Compensation Committee of the Board of Directors approved a grant for
1,620,000 options. Options under this grant were given to all full-time
employees of the Company who had completed one year of service. These options
vest over three years and expire not more than 10 years from the date of grant.
Options are issued at prices not less than the market value of the common stock
at date of grant. Outstanding options, until fully vested, are contingent upon
continued service.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported a net loss of $609,000 or $0.03 per basic and diluted
common share, for the three months ended September 30, 2000, compared to a net
loss of $1,004,000 or $0.05 per basic and diluted common share in 1999. The
decrease in net loss in the September 2000 quarter is attributable to a
reduction in operating costs of $489,000 or $0.025 on a per share basis.
Membership revenue during the three months ended September 30, 2000 was $666,000
compared with $755,000 during the same period in 1999, a decrease of 11.8%.
Revenues derived from direct marketing and affinity sales increased 52.5% to
$479,000 for the three months ended September 30, 2000, from $314,000 in the
same period in 1999. Revenues associated with sales of Legal Club benefits from
employer groups increased 26.4%, to $187,000 for the three months ended
September 30, 2000, from $148,000 in the same period in 1999. This increase was
offset in part by a $293,000 decline in infomercial sales as the Company
discontinued this marketing channel in November 1999.
Operating expenses totaled $1,268,000 for the three months ended September 30,
2000, compared with $1,757,000 during the comparable period in 1999. The
decrease in operating expenses primarily reflects the cost reduction initiatives
put in place by management during the September 2000 quarter, as well as
reduction in airtime costs associated with infomercial commercials.
Compensation and employee benefits decreased $6,000, or 1.0%, to $572,000,
during the September 2000 quarter, compared with the same period in 1999. This
decrease was comprised of a $112,000 decrease in consultant costs, partially
offset by an increase of $83,000 in compensation costs, as management, technical
and sales personnel were hired during the last three quarters of fiscal year
June 2000. In addition, there was $22,000 related to higher costs associated
with improved employee benefits.
Advertising and marketing costs were $127,000 during three months ended
September 30, 2000, a 72.1% decrease compared with $456,000 during the
comparable period in 1999. The decrease during 2000 was attributable to a
$383,000 decrease in infomercial television placements and production costs
associated with developing the infomercials, as the Company discontinued this
marketing effort in November 1999.
Professional fees decreased $44,000, or 25.1%, during the September 2000
quarter, to $131,000 from $175,000 in 1999. This decrease primarily reflects a
$17,000 reduction in financial advisor fees, a $7,000 decrease in transfer agent
fees, and a decline in legal costs of $13,000 for the quarter ended September
2000.
General and administrative expenses were $323,000 during the three months ended
September 30, 2000, a decrease of 33.3%, compared with $484,000 during the same
period in 1999. The decrease in fiscal year 2000, compared with 1999 was due to
lower (1) commissions costs (2) fulfillment and printing costs and (3) travel
expenses. Commissions paid to agents decreased $77,000, or 73.0% as a result of
the cessation of infomercial associated activities in November 1999. Fulfillment
and printing costs decreased $33,000, due to lower production and other costs
associated with enrollment kits provided to new members. The decrease in travel
expense was attributable to the efforts in 1999 required to train new brokers
and agents, as well as travel attributable to capital raises effectuated during
1999
Occupancy expenses increased $39,000, or 79.6%, to $88,000, during the September
2000 quarter from $49,000 during the comparable period in 1999 due to higher
office space costs. This is primarily due to the effect of a full quarter's rent
expense during the quarter ended September 30, 2000 compared to the same period
in 1999, as the Company moved to its new headquarters in Sunrise, Florida during
August 1999.
Depreciation and amortization expenses amounted to $27,000 in 2000, compared
with $15,000 for the comparable period in 1999, a 80.0% increase. As a result of
the increase in the infrastructure required to service the customer base growth
during the past fiscal year, the Company purchased office furniture and
equipment and entered into capital leases for office and computer equipment.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $266,000 for the quarter ended
September 30, 2000, compared with $1,200,000 for the comparable period in 1999.
The $934,000 decrease in net cash used in operating activities resulted
primarily from a $395,000 decrease in the net loss, an increase of $328,000 in
accounts payable, and a smaller increase in accounts receivable compared with
1999. The increase in accounts payable was due to the timing of payments to
vendors. As of September 30, 1999 the Company accrued $194,000 of accounts
receivable compared to $44,000 during the same period in 2000. Cash flows used
for investing activities increased $22,000 in 2000 compared to 1999. This was
due to the acquisition of additional software and investment in leasehold
improvements.
Cash flows provided by financing activities were $323,000 for the three months
ended September 30, 2000, compared to use of funds of $227,000 for the same
period in 1999. During the September 2000 quarter the Company (1) issued
$192,000 of convertible notes, (2) sold 185,000 shares of common stock for
$93,000 (3) lowered collateral on outstanding letters of credit $67,000 and (4)
repaid $29,000 of long-term debt. During 1999 the Company placed in escrow
$177,000 as collateral on outstanding letters of credit, which are renewed
annually, relating to the Company's office space lease and equipment leases and
repaid $50,000 of long-term debt.
The Company has incurred losses since its inception, and it continues to require
additional capital to fund operations and development. In September 2000, the
Company raised $192,000 through a private placement of convertible notes. The
notes have a stated coupon rate of 25% per annum, maturing in one year. Upon
maturity, the notes and accrued interest are convertible into common shares at
$0.50 per share. During the September quarter the Company sold 185,000 shares of
common stock to an accredited private investor for $93,000, or $0.50 per share.
See Notes 2 and 3 to the Consolidated Financial Statements.
The Company recently launched Einstein Computer Corporation ("Einstein").
Einstein, leverages the Company's distribution network of independent agents by
marketing personal computer systems to employees at the worksite using payroll
deduction as the consumer payment methodology. During the quarter ended
September 30, 2000, Einstein entered into agreements to procure, distribute and
finance computer systems; however, sales of this product did not begin until the
quarter ending December 31, 2000. Subsequent to September 30, 2000, the Company
executed vendor and financing agreements with Gateway, Inc. which provide vendor
financing of personal computers to Einstein with terms and conditions parallel
to the Company's extension of credit to employees at the worksite. Approximately
2000 personal computers and related components are expected to be sold under
this arrangement; however, new financing arrangements are currently being
negotiated to externally finance the computer systems, at no recourse to the
Company.
Management intends to generate the necessary capital to operate for the next
twelve months by achieving break even cash flow from operations and subsequent
profitability, and if required, selling common or preferred shares or
convertible debt to qualified investors in private placements. During the
quarter ended September 2000, the Company reduced its losses and shifted its
source of revenues away from infomercials to direct marketing and worksite
sales, compared to 1999. The Company will focus on increasing its revenues
through sales in the direct marketing segment, worksites, as well as new sales
in its Einstein division, while decreasing costs where applicable. Unless the
Company is successful in its efforts to achieve break even and subsequent
profitability and raising capital through private investors, management believes
that the Company may not be able to continue operations for the next twelve
months. The Company has put a plan into effect to achieve profitability in
fiscal year 2001; however, there are no assurances that the Company will be able
to successfully achieve the plan.
On October 27, 1999, the Company obtained a $50,000 six-month term loan at a 7%
annual interest rate from Jason Krouse, the Company's Executive Vice President
of Sales. The loan and interest were due and payable in April 2000. At September
30, 2000, the amount outstanding on this loan was $44,000. Although the Company
has received from time to time related party loans in the past, there is no
assurance that shareholders would be willing to make such loans in the future.
Brett Merl, the Company's Chairman of the Board and Chief Executive Officer and
Jason Krouse, the Company's Executive Vice President of Sales, have
subscriptions for a total of 396,000 shares of common stock. The Company has
recorded the receivable and related accrued interest, at 6% per year, in equity.
The Company does not expect the
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subscriptions receivable to be paid in the near future, although Mr. Merl and
Mr. Krouse have indicated the notes will be satisfied. Accrued interest on these
notes is expected to be satisfied when the notes are satisfied.
The Company is in default of certain of its debt agreements. The amount of debt
in default totaled $217,000 at September 30, 2000. These debt agreements have
various maturities from 1998 through April 2000. Principal and accrued interest,
at annual rates ranging from 7% to 15%, and on term loans, an additional
interest payment equal to 20% of the principal amount, are currently in default.
Management will continue its attempt to convert the remaining $127,000 principal
amount of term loans to common stock, at terms and conditions, mutually agreed
upon by the debt holder and the Company. However, there is no assurance that the
Company will be able to continue converting the term loans at terms and
conditions that will be mutually acceptable. Should debt holders be able to
accelerate repayment of amounts in default, there is no assurance that the
Company could pay such amounts without adversely impacting operations.
FORWARD LOOKING STATEMENTS
The statements contained in this item, if not historical, are forward looking
statements 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 the following
factors: (a) changes in regulations in states where the Company does business,
and the outcome of the pending proceedings in Florida courts regarding the
insurance regulations of the State of Florida; (b) the effectiveness of the
Company's marketing strategies to significantly grow membership and launch its
new personal computer business; (c) the ability to of the Company to manage
operations effectively to service the growth; (d) the Company's ability to
recruit and retain key executives and personnel concurrent with the growth in
the membership base; (e) the ability of the Company to obtain additional
financing as required, and in particular, obtaining third party financing for
the Company's Einstein Computer subsidiary's operations; (f) general competitive
conditions in the industry; (g) rapid technological changes, including the
evolution of the Internet, and (h) changes in economic conditions. Therefore,
forward-looking statements should not be relied upon as a prediction of actual
future results.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to Part I, Item 1, Note 5, incorporated herein by reference, for a
discussion of legal proceedings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company continues to be in default of certain of its term loan
agreements. Refer to Part I, Item 1, Note 2, incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed
No. 10 - Gateway Authorized Reseller Agreement
No. 10a - Note and Security Agreement
No. 10b - Security Agreement
No. 10c - Guaranty
No. 11 - Statement re Computation of Per Share Earnings. See Note 4
to the accompanying financial statements.
No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter September
30, 2000.
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INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of
Legal Club of America Corporation
We have reviewed the accompanying consolidated balance sheet of Legal Club of
America Corporation and its subsidiaries (the "Company") as of September 30,
2000, and the related consolidated statements of operations and cash flows for
the three-month period then ended. These financial statements are the
responsibility of the management of the Company.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying September 30, 2000 consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
/s/ Ahearn, Jasco + Company, P.A.
AHEARN, JASCO + COMPANY, P.A.
Certified Public Accountants
Pompano Beach, Florida
November 13, 2000
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 14, 2000
LEGAL CLUB OF AMERICA CORPORATION
By: /s/ Brett Merl
----------------------------------------
Brett Merl, Chairman and Chief Executive
Officer
By: /s/ Michael Samach
----------------------------------------
Michael Samach, Chief Financial Officer
(Principal Accounting Officer)
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