U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
------------
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 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
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Issuer's Telephone Number)
- --------------------------------------------------------------------------------
(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 the latest practicable date. Common Stock, $0.0001 Par Value,
18,859,261 shares outstanding as of May 8, 2000.
Transitional Small Business Disclosure Format
Yes [ ] No [X]
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
PAGE
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 or Plan of Operations.......9-12
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................13
Item 2. Changes in Securities and Use of proceeds..........................13
Item 3. Defaults Upon Senior Securities....................................13
Item 6. Exhibits and Reports on Form 8-K...................................13
Signatures.................................................................15
Exhibits..................................................................16
(i)
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2000 June 30,
(Unaudited) 1999
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,367,000 $ 1,801,000
Restricted cash 177,000 -
Accounts receivable 257,000 -
Prepaid expenses 30,000 86,000
Advances and other 16,000 39,000
------------ ------------
TOTAL CURRENT ASSETS 1,847,000 1,926,000
PROPERTY AND EQUIPMENT, net 508,000 189,000
OTHER ASSETS 15,000 5,000
------------ ------------
TOTAL $ 2,370,000 $ 2,120,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 529,000 $ 348,000
Current portion of long-term debt and capital leases 458,000 451,000
Interest payable 122,000 163,000
Accrued commissions on Series B preferred stock 194,000 -
Accrued legal settlement (Note 4) 180,000 -
Other accrued expenses and liabilities 219,000 192,000
Deferred revenues 47,000 99,000
------------ ------------
TOTAL CURRENT LIABILITIES 1,749,000 1,253,000
------------ ------------
LONG TERM DEBT AND CAPITAL LEASES, LESS CURRENT PORTION 118,000 158,000
------------ ------------
TOTAL LIABILITIES 1,867,000 1,411,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
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 March 2000 and June 1999 - -
26,000 shares designated Series B; issued and outstanding:
12,160 shares of Series B in March 2000 - -
Common stock, $0.0001 par value; 50,000,000 shares
authorized; shares issued and outstanding: 18,854,261 in March 2000
and 18,539,726 in June 1999 2,000 2,000
Additional paid-in capital 11,710,000 8,374,000
Deficit (10,759,000) (7,234,000)
Stock subscriptions, including interest receivable (450,000) (433,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 503,000 709,000
------------ ------------
TOTAL $ 2,370,000 $ 2,120,000
============ ============
</TABLE>
See notes to the consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Membership fee income $ 388,000 $ 293,000 $ 1,644,000 $ 673,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Compensation and employee benefits 841,000 267,000 2,173,000 676,000
Advertising and Marketing 177,000 212,000 924,000 486,000
Professional fees 117,000 318,000 447,000 451,000
Office, administrative, and general 298,000 178,000 1,134,000 430,000
Legal settlement 180,000 - 180,000 -
Occupancy 90,000 14,000 244,000 35,000
Depreciation and amortization 36,000 4,000 76,000 10,000
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,739,000 993,000 5,178,000 2,088,000
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,351,000) (700,000) (3,534,000) (1,415,000)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income 37,000 21,000 61,000 33,000
Interest expense (17,000) (19,000) (52,000) (68,000)
------------ ------------ ------------ ------------
OTHER, NET 20,000 2,000 9,000 (35,000)
------------ ------------ ------------ ------------
NET LOSS $ (1,331,000) $ (698,000) $ (3,525,000) $ (1,450,000)
============ ============ ============ ============
LOSS PER COMMON SHARE:
Basic and diluted $ (0.07) $ (0.04) $ (0.19) $ (0.10)
============ ============ ============ ============
Weighted average common shares outstanding 18,834,430 17,253,284 18,815,068 14,439,455
============ ============ ============ ============
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
March 31, March 31,
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,525,000)$ (1,450,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 76,000 10,000
Interest due on stock subscriptions (17,000) (18,000)
Services performed for common stock 115,000 -
Legal settlement with former employee 180,000 -
Changes in certain assets and liabilities:
Accounts receivable (257,000) -
Prepaid expenses 56,000 (88,000)
Advances, and other assets 13,000 (8,000)
Interest payable 26,000 67,000
Commissions on Series B preferred stock 194,000 -
Accounts payable and accrued liabilities 2,000 (85,000)
Deferred revenues (52,000) 59,000
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (3,189,000) (1,513,000)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchases of property and equipment (236,000) (45,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Escrow deposits (177,000) -
Proceeds from long-term debt 50,000 75,000
Repayments of long-term debt (172,000) (52,000)
Issuances of Series A preferred stock - 2,500,000
Issuances of Series B preferred stock 3,040,000 -
Issuances of common stock 250,000 2,068,000
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,991,000 4,591,000
-------------- --------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (434,000) 3,033,000
CASH AND CASH EQUIVALENTS, beginning of period 1,801,000 20,000
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 1,367,000 $ 3,053,000
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 26,000 $ -
============== ==============
Income taxes $ - $ -
============== ==============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital leases entered into to acquire computer equipment $ 179,000 $ -
Conversion of debt to common stock
Long-term debt 90,000 365,000
Accrued interest payable 67,000 205,000
Common stock issued as compensation to employees and consultants
88,512 shares of common stock 115,000 -
Capital contributed by shareholder for release of liability - 175,000
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIODS ENDED MARCH 31, 2000 AND 1999
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 10,000 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 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-SB,
Amendment 3, filed with the SEC on March 14, 2000. The financial statements
as of and for the periods ended March 31, 2000 and 1999 are unaudited. The
consolidated financial statements for the period ended March 31, 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 and nine months ended March 31,
2000, are 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 amounting to $127,000 and $216,000,
respectively, at March 31, 2000 and June 30, 1999. Management recognizes
that the Company must generate additional resources and attain profitable
operations to enable it to continue in business. Management is planning to
convert debt to equity and to obtain additional equity capital through the
issuance of common stock and preferred stock for cash pursuant to equity
offerings (see Notes 2 and 3). 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
4
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
successful in these activities. Should any of these events not occur, the
accompanying unaudited financial statement will be materially affected.
RESTRICTED CASH
The Company has escrow deposits of $177,000 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
In July 1999, the Company started service to a new customer
group, consisting of employees at the work site. Revenue from this service
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. Collected
membership fees which are subject to refund are recorded as deferred
revenues.
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 to 2000 presentation.
NOTE 2 - LONG-TERM OBLIGATIONS
At March 31, 2000 and June 30, 1999, long-term debt and capital
leases consist of the following:
SEE NEXT PAGE
5
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<TABLE>
<CAPTION>
NOTE 2 - LONG-TERM OBLIGATIONS (continued)
March 31, June 30,
2000 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% on the principal amount at
maturity. Interest only is payable monthly during the terms of
the loans $ 127,000 $ 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. 68,000 83,000
Capital leases with terms from three to five years, with imputed interest 160,000 -
rates ranging from 10% to 11%
Term loan from a shareholder, principal plus accrued interest of 7%, payable 50,000 -
April 27, 2000
Refinanced term loans during 1999 (see above):
|X| Payable in monthly installments of $5,000, including interest at a
rate of 6%, through September 2000. 30,000 71,000
|X| Payable in monthly installments of $12,250, including interest at
a rate of 8%, through March 2001. 141,000 239,000
------------ -------------
Total long-term obligations 576,000 609,000
Less: Current portion 458,000 451,000
------------ -------------
Long-term obligations, less current portion $ 118,000 $ 158,000
============ =============
</TABLE>
The total principal amounts 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 were refinanced during 1999
and are presented separately under refinanced loans.
During the nine months ended March 31, 2000, term notes totaling
$90,000, and accrued interest payable on such notes of $67,000 were
converted to 49,910 shares of the Company's common stock. During the same
period in 1998, term notes and accrued interest payable of $365,000 and
$205,000, respectively, were converted to 208,063 shares of the Company's
common stock
Interest expense for the three and nine months ended March 31,
2000, totaled $17,000 and $52,000, respectively. Interest expense for the
three and nine months ended March 31, 1999, amounted to $19,000 and
$68,000, respectively.
NOTE 3- CAPITAL STOCK
During the nine months ended March 31, 2000, the Company
designated 26,000 shares of its authorized 1,000,000 preferred shares with
a par value of $0.0001 as "Series B Convertible Preferred
6
<PAGE>
NOTE 3- CAPITAL STOCK (continued)
Stock" (Series B stock). Through March 31, 2000, the Company sold 12,160
shares of the Series B stock through a private placement offering
memorandum for gross proceeds of $3,040,000. There was approximately
$225,000 of expenses and commissions associated with the issuance.
Each share of Series B stock is convertible into one hundred
shares of common stock. The Series B stock entitles the holder to receive
dividends, if declared by the Company's Board of Directors on the common
stock, and to vote, in each case as if the Series B stock had been
converted to common stock on the record date. The Series B stock holders
have a liquidation preference of $250 per share over the holders of common
stock, but this preference is junior to the preference of the Company's
Series A Convertible Preferred Stock. All Series B stock converts to
common stock in 2002, if not previously converted by the holders.
Brokers authorized to participate in the Series B stock offering
are entitled to receive a 10% fee and warrants to purchase 10% of the
common equivalent shares placed by the broker, at a per share price equal
to 125% of the price paid by the investors in the offering. At March 31,
2000, there are 395,600 warrants due to be issued and $194,000 of fees to
be paid in connection with the Series B stock offering.
During the nine months ended March 31, 2000, the Company issued
250,000 shares of common stock for $250,000 cash pursuant to a Reg. D
private placement offering, and 88,512 shares valued at $115, 000 were
issued as compensation to current and former employees and consultants.
Terms notes totaling $90,000, and accrued interest payable on
such notes of $67,000 were converted to 49,910 shares of the Company's
common stock during the nine months ended March 31, 2000. During the same
period in fiscal 1999, term notes and accrued interest payable of $365,000
and $205,000, respectively, were converted to 208,063 shares of the
Company's common stock.
NOTE 4- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
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 May 8, 2000, management believes
that any such outstanding issues will be resolved without further
impairing the financial condition of the Company.
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 issuances 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. The Company
has accrued these amounts as of March 31, 2000.
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, Hunter, Codman Inc. is seeking to recover brokerage
commissions allegedly due to it in connection with the Company's
7
<PAGE>
NOTE 4- COMMITMENTS AND CONTINGENCIES (continued)
search for premises to lease as its headquarters. The Company maintains
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.
The Company had received a letter from the Florida Department of
Insurance stating that the Company should be regulated as a legal expense
insurer. The Company contested this position and recently received a
favorable order from the State of Florida Division of Administrative
Hearings stating that our Company, as currently conducting business, is
not subject to regulation by the Department of Insurance as a legal
expense insurer. The determination in Florida does not preclude any other
state or government agency from taking the position that the Company
should be regulated in such manner, which it were to occur, could have a
material adverse impact on our financial condition.
NOTE 5- NET LOSS PER COMMON SHARE
For the three and nine months ended March 31, 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:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
------------------------------------ --------------------------------------
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Common shares outstanding 18,854,261 17,624,380 18,854,261 17,624,380
Effect of weighting (19,831) (371,096) (39,193) (3,184,925)
----------------- ----------------- ------------------ ------------------
Weighted average common shares
outstanding 18,834,430 17,253,284 18,815,068 14,439,455
================= ================= ================== ==================
</TABLE>
Weighted average 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 and nine months ended March 31, 2000 and 1999
include the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- --------------------------------------
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Common stock options 807,189 84,128 614,773 83,278
Series A convertible preferred stk. 2,777,800 - 2,777,800 -
Series B convertible preferred stk. 1,216,000 - 405,964 -
Warrants relating to issuance of-
Common stock 1,050,000 1,050,000 1,050,000 448,592
Series B preferred stock 395,600 - 136,489 -
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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. Therefore, forward-looking statements should not be
relied upon as a prediction of actual future results.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
We reported a net loss of $1,331,000 or $0.07 per basic and diluted
common share, for the three months ended March 31, 2000, compared to a net loss
of $698,000 or $0.04 per basic and diluted common share for the comparable
period in 1999. For the nine months ended March 31, 2000, we reported a net loss
of $3,525,000, or $0.19 per basic and diluted common share, compared to a
$1,450,000 net loss, or $0.10 per basic and diluted common share, for the same
period in 1999. The increase in net loss for the 2000 periods is attributable to
the continued development of our infrastructure, as well as increased marketing
costs required to achieve membership growth.
Membership revenue during the third fiscal quarter of 2000 amounted to
$388,000 compared with $293,000 during the same period in 1999, an increase of
32.4%. Membership revenue for the nine months ended March 31, 2000, increased
144.3%, to $1,644,000 from $673,000 in 1999. The increase in membership fee
income in the three and nine month periods of 2000, is primarily the result of
increased revenue associated with sales of Legal Club employee benefits through
employer groups. During the third fiscal quarter of 2000, membership revenue
from employer groups increased $249,000, to $383,000 from $134,000 in the
comparable period of 1999. During this same period, revenues from infomercial
placements decreased to $5,000 in 2000 compared to $134,000 in 1999, because
this method of sales was discontinued in November 1999.
The increase in fee income from memberships was offset by higher
operating expenses, which totaled $1,739,000 and $5,178,000 for the three and
nine months ended March 31, 2000, respectively, compared with operating expenses
of $993,000 and $2,088,000, respectively, during the comparable periods in 1999.
The increase in operating expenses were primarily the result of higher
compensation and employee benefits, advertising and marketing expenses,
professional fees and various administrative expenses.
Compensation and employee benefits increased 215.0% during the third
fiscal quarter of 2000, to $841,000 from $267,000 in the comparable quarter of
1999. During the nine months ended March 31, 2000, compensation and employee
benefits increased 221.5%, to $2,173,000 from $676,000 in 1999. The increases
during the 2000 three and nine month periods was primarily related to the hiring
of administrative, technical, sales and management personnel to market and
service customers, develop operations, and manage our business. During April
2000, the Company hired a new Information Technology officer with a background
in web-based commerce as well as the development of core systems for other
enterprises. Additionally, the Company increased its network of attorneys to
over 10,000 by April 2000. Management believes the administrative employees and
infrastructure are currently in place that will allow the Company to manage
increased volume and growth.
Advertising and marketing costs were $177,000 during the three months
ended March 31, 2000, a decrease of 16.5%, compared with $212,000 during the
same period in 1999. For the nine-month period of 2000, advertising and
marketing costs increased $438,000, or 90.1%, to $924,000, compared with
$486,000 in 1999. The decrease during the third fiscal quarter of 2000 was
attributable to lower infomercial costs.
9
<PAGE>
The increase for the 2000 nine month period was the result of increased
infomercial television placements as well as traffic and production costs
associated with developing the infomercials prior to November 1999.
Professional fees decreased 63.2% during the March 2000 quarter, to
$117,000 from $318,000 in the comparable quarter of 1999. During the nine months
ended March 31, 2000, professional fees decreased $4,000, or 0.9%, to $447,000
from $451,000 in 1999. The decreases reflected during the 2000 quarter and nine
month period were due principally to decreased activity relating to legal
matters and investment advice matters associated with public relations efforts
to become a public company, and lower costs associated with capital raising
efforts in 2000, compared to the same period in 1999.
Office general and administrative expenses amounted to $298,000 during
the three months ended March 31, 2000, an increase of 67.4% compared with
$178,000 during the same period in 1999. For the nine-month period of 2000,
office general and administrative expenses increased $704,000, or 163.7%, to
$1,134,000, compared with $430,000 in the same period in 1999. The increases for
the quarter and nine months ended March 31, 2000, compared to the same periods
in 1999, due to higher printing and postage costs associated to the production
and mailing of our new member kits, as well as increased telephone costs as we
expanded our customer service operations. Additionally, during the quarter ended
March 31, 2000, the Company accrued $180,000 for a legal settlement with a
shareholder.
During the three months ended March 31, 2000, other income (expense),
net, increased to $20,000 compared to $2,000 in 1999. For the nine-month period
of 2000 it increased to $9,000 income, compared to a $35,000 loss during the
same period in 1999. This improvement is primarily the result of higher interest
and dividend income from invested cash and lower interest costs, as term loans
convert to common stock.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $3,189,000 for the nine
months ended March 31, 2000, compared to $1,513,000 for the comparable period in
1999. The increase of $1,676,000 in net cash used in operating activities
resulted primarily from a $2,075,000 increase in the net loss.
Cash flows used for investing activities increased $191,000 in 2000
compared to 1999. This was due to the acquisition of additional computer
equipment and furniture to equip employees with the capacity to service the
increased customer base. Management believes that approximately $300,000 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, and to introduce new products and 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 provided by financing activities was $2,991,000 for the nine
months ended March 31, 2000 compared to $4,591,000 for the same period in 1999.
This decrease was primarily due a $1,818,000 decrease in sales of common stock,
a $2,500,000 decrease in sales of Series A preferred stock, repayment of
$172,000 of long-term debt and $177,000 placed in escrow, associated with an
office space lease and equipment leases. During the nine months ended March 31,
2000, the following private placements were made pursuant to exemptions provided
under Regulation D promulgated under the Securities Act of 1933, as amended, to
generate cash for operations and expansion: (a) 250,000 shares of common stock
were sold for $250,000, and (b) 12,160 shares of Series B convertible preferred
stock were sold for gross proceeds of $3,040,000. Additionally, during the nine
months ended March 31, 2000, $90,000 of term loans, including accrued interest
payable of $67,000, was converted to common stock, under debt-to-equity
conversion agreements.
10
<PAGE>
Since inception we have incurred losses and continue to require
additional capital to fund operations and development. Management recognizes
that it must generate additional capital to fund operations and it will continue
to pursue raising additional equity capital through the issuance of common or
preferred stock, pursuant to equity offerings. 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. As of May 12, 2000,
there are available cash resources of over $600,000, after the payment of
$100,000 pursuant to a legal settlement. We believe that our current cash flow
use is approximately $400,000 per month.
Based on the successful implementation of our business plan, we expect
to achieve profitability in the quarter ending March 31, 2001 by accelerating
revenue growth in excess of our expense growth. Management plans to increase
marketing of our products in the workplace where acceptance of legal worksite
benefits is increasing, increase the marketing of our products through affinity
groups to their members, and by direct marketing to individuals. Additionally,
we plan to expand our current services by marketing computers to employees at
the employee's work-site using payroll deduction as the payment method. (see
"RECENT EVENTS", below). The Company's marketing efforts require additional
capital, and the Company will likely not reach profitability without additional
capital. Management intends to generate the necessary capital to operate over
the next twelve months by selling our common and preferred shares to qualified
investors in a private placement. Unless we are successful in our efforts to
sell our stock, we may not be able to continue operations over 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.
On October 27, 1999, the Company obtained from Jason Krouse, the
Company's Executive Vice President of Sales a $50,000 six-month term loan at a
7% annual interest rate. The loan and accrued interest are presently due.
Although the company has received related party loans on occasion in the past,
there is no assurance that shareholders or employees 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 the common stock. The Company has
recorded the receivable and related accrued interest, at 6% per year, in equity.
The Company does not expect the 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 currently in default under certain of its debt
agreements. The amount of term loans in default at March 31, 2000 totaled
$127,000. These term loan have various maturities through 1998. The principal,
accrued interest, at annual rates ranging from 12% to 15%, and an additional
interest payment equal to 20% of the principal amount are currently in default.
Management will continue its attempt to convert the remaining 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 debt at terms and conditions that will be mutually
acceptable. Should the debt holder be able to accelerate repayment of amounts in
default, there is no assurance that the Company could pay such amounts without
adversely impacting operations.
RECENT EVENTS
The Company plans to augment its distribution channels and provide
additional benefits to employees at the work site by marketing computer systems
in addition to its legal plans. The Company's newly form and wholly-owned
subsidiary, Einstein Computer Corporation, ("Einstein") is entering into
agreements to procure, distribute and externally finance computer systems,
targeting people who do not yet
11
<PAGE>
own a home computer. Participating work site employees will pay for the computer
systems through automatic payroll deduction. The packages we plan to offer would
allow the participating work site employee, for approximately $8.00 per week
($33.95 per month), to obtain a computer system, including software,
24hours/7days a week technical support, on site service and free internet
access. The Company is arranging for third party financing of the computer to
the employee. It is expected such financing will be underwritten by a third
party finance company, which will buy the contract from Einstein without
recourse to the Company.
The Company expects to launch this new product initiative during the
fiscal quarter ending June 30, 2000.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-QSB, including statements contained
herein under the captions "Management Discussion and Analysis or Plan of
Operations" and "Recent Events", constitute "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievement of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Such factors include, but are not limited to the following factors: (a)
changes in regulations in states where we do business; (b) the effectiveness of
the Company's marketing strategies to significantly grow membership; (c) the
ability to of the Company to manage operations effectively to service the
growth; (d) its ability to recruit and retain key executives and personnel
concurrent with its growth; (e) the ability of the Company to obtain additional
financing as required; (f) its effectiveness in developing and marketing new
products; (g) its ability to adjust to changes in technology, including the
evolution of the Internet and (h) changes in economic conditions.
YEAR 2000 COMPLIANCE
We were aware of the issues associated with the programming code in
existing computer systems as the year 2000 approached. We conducted an
assessment of the Year 2000 issue and determined that we would not be required
to make material modifications or replacements of our information and
non-information technology systems to properly recognize and utilize dated
beyond December 31, 1999, especially in light of the fact that we had recently
completed a comprehensive upgrade of our computer systems, which included Year
2000 testing and preparation. The upgrade cost us approximately $200,000.
Since January 1, 2000 we have experienced no disruptions in our systems
or those of third parties to whom we are financially or operationally linked, or
other computer related problems as a result of processing dates beyond 1999.
While we do not expect to incur any significant costs in the future related to
the Year 2000 issue, we can not say with any certainty that we will not
experience any Year 2000 problems in the future.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Part I, Item 1, Note 4, incorporated herein by reference, for a
discussion of legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
Refer to Part II, Item 4. Sale of Unregistered Securities of Form 10-SB,
Amendment 3, filed with the Securities and Exchange Commission on March 14,
2000, incorporated herein by reference, for a discussion of the sale of
unregistered Series B Convertible Preferred Stock and Common Stock. Proceeds
from the sale of these securities are being used by the Company for
operations.
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 11 - Statement re Computation of Per Share Earnings. See
Note 5 to the accompanying financial statements.
No. 21 - Subsidiaries of Registrant
No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
March 31, 2000.
13
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders 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 March 31, 2000,
and the related consolidated statements of operations and cash flows for the
three month and nine month periods 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 March 31, 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
May 15, 2000
14
<PAGE>
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: May 17, 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)
15
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
COMPANY NAME STATE OF INCORPORATION
Einstein Computer Corporation Florida
Legal Club.com, Inc. (f/k/a And Justice for All) Florida
Legal Club Financial Corp. Florida
National Association of Networked Attorneys, Inc. Florida
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Operations, the Consolidated Balance Sheet and the
Notes to Consolidated Financial Statements, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001080403
<NAME> Legal Club of America Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 1,367,000
<SECURITIES> 177,000 <F1>
<RECEIVABLES> 257,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,847,000
<PP&E> 620,000
<DEPRECIATION> 112,000
<TOTAL-ASSETS> 2,370,000
<CURRENT-LIABILITIES> 1,749,000
<BONDS> 118,000 <F2>
0
0
<COMMON> 2,000
<OTHER-SE> 501,000 <F3>
<TOTAL-LIABILITY-AND-EQUITY> 2,370,000
<SALES> 1,644,000
<TOTAL-REVENUES> 1,644,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,178,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,000
<INCOME-PRETAX> (3,525,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,525,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,525,000)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
<FN>
<F1> Restricted cash. Refer to Note 1 to the Consolidated Financial
Statements.
<F2> Consists of capital leases.
<F3> Includes subscriptions receivable of $450,000.
</FN>
</TABLE>
