As filed with the Securities and Exchange Commission on February 24, 2000
File No. 000-28193
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 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
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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...............................................................................11
Item 4. Security Ownership of Certain Beneficial Owners and Management........................................12
Item 5. Directors, Executive Officers, Promoters and Control Persons.........................................13
Item 6. Executive Compensation................................................................................15
Item 7. Certain Relationships and Related Transactions........................................................16
Item 8. Description of Securities.............................................................................16
PART II..........................................................................................................20
Item 1. Market Price of and Dividends on the Registrant's Common Equity and Other Shareholder Matters.........20
Item 2. Legal Proceedings.....................................................................................21
Item 3. Changes In and Disagreements With Accountants.........................................................21
Item 4. Recent Sales of Unregistered Securities...............................................................21
Item 5. Indemnification of Directors and Officers.............................................................22
PART F/S.........................................................................................................23
Financial Statements as of December 31, 1999 and 1998 (unaudited).............................................23
Financial Statements as of June 30, 1999 and 1998, and Independent Auditor's Report...........................23
PART III.........................................................................................................24
Index to Exhibits.............................................................................................24
Signatures....................................................................................................25
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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. Any
forward-looking statement speaks only as of the date on which such statement is
made. 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. 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.
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 and was previously engaged in business and marketing consulting,
but was an inactive public shell several years prior to the merger. 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 December 31, 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 for
a partner attorney of $210 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.
However, as further discussed in the Management's Discussion and Analysis, we
lost $2,482,000 for the fiscal year ended June 30, 1999, compared to a net loss
of $1,389,000 for the fiscal year ended June 30, 1998.
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. This network service will be
provided and administered by our wholly owned subsidiary of the same name. NANA
is an Internet driven service 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
Listed below are descriptions of the legal plans currently marketed by
us (the "Legal Club Plans"). The annual membership fees are paid to us in
exchange for the referrals to participating attorneys. The members pay the
discounted rates for services directly to the applicable attorney. We receive no
portion of the fees paid to the attorneys by our members and we pay no fees to
the enrolled attorneys.
INDIVIDUAL/FAMILY LEGAL PLAN. For a payment of $96 per year to us, 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 from the
participating attorneys 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 $210 per hour for partner attorneys and $151
per hour for associates. The Individual Legal Plan covers the enrollee, his or
her spouse and any dependents 23 or younger.
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SMALL BUSINESS LEGAL PLAN. For a payment of $299 per year to us, 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.
COMMERCIAL DRIVING LEGAL PLAN. For a payment of $360 per year to us, 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 legal assistance for members who are charged with moving,
non-moving and DOT violations, a vision, dental and prescription program
provided by United Health Programs of America, Inc, a 24-hour roadside
assistance program for commercial and non-commercial vehicles and emergency
travel expense reimbursement, provided by Road America Motor Club, a $10,000
AD&D policy provided by National Accident Insurance Underwriters, ambulance
service reimbursement, a bail bonds program and arrest bond protection provided
by A+ Bail Bonds, Inc., an S.O.S. emergency evacuation program provided by
S.O.S., Inc. and discounts on rental cars and hotel stays provided by Road
America Motor Club.
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.
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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 relationships and marketing channels at a relatively low cost to
us. Essentially, the sales forces of these entities have an added benefit they
can offer--our legal services--to bundle together with their portfolio of
employee benefit options. 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. The Company does not
receive any compensation pursuant to these agreements. However, the Company pays
commissions to certain agents or companies when our services are sold by them to
an employer group.
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(TM) 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 marketers, entities who market to affinity organizations, 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 (consisting of large groups of individuals who pay a fee to be
part of a large association), 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, many Americans are unable to
afford the costs of basic legal assistance, primarily because the average hourly
rate for a partner attorney is about $210. According to the
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American Bar Association, it receives a minimum of 550,000 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, published in their February 1998 Legal Plan
Letter ("Legal Plan Letter"), 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
Legal Plan Letter, the following are examples of the most commonly used plans:
/bullet/ 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.
/bullet/ 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.
/bullet/ MILITARY PLANS. These are automatic enrollment plans with no
cost to the member.
COMPETITION
The market for the Company's services is evolving and growing rapidly.
Competition can be expected to intensify as the market grows, technology further
develops and the need for legal services increases. There are generally no
significant barriers to entry. The Company believes that the principal
competitive factors for companies seeking to enter the industry are brand
recognition, ease of use and accessibility, range of services, price, quality
and reliability of services and strength of marketing and distribution channels.
The Company believes it competes successfully on most of these bases.
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. We believe we have a competitive
advantage over Pre-Paid because we believe our services are not insurance
products and thus not subject to insurance regulation. See "Regulation" below.
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.
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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.
Many of our current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, marketing and other resources than the Company. Such
competitors may be able to devote greater resources to the development,
promotion and sale of products and services which may adversely affect the
Company's business and financial results.
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. Even though the Florida Department of Insurance had
taken the position that we should be regulated as legal expense insurer, we
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 we
should be regulated in some manner, which if it were to occur, could have a
material adverse impact on our financial condition.
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. There is no fee sharing of any kind between us and the referral
attorney. Nor do we believe that any of our services are in conflict with any
regulations affecting lawyers. We have not, however, sought a legal opinion from
an attorney regarding whether our services are in conflict with any bar
association rules or regulations. We require our participating attorneys to
comply with applicable regulations and ethical codes and we perform monitoring
procedures to seek to ensure compliance.
The Florida Bar advised us in 1994 that we were subject to reporting
requirements as a private referral service under Rule 4-7.8 of the Rules
Regulating the Florida Bar. From 1994 through 1998 the Company filed all
quarterly reports as required. Early 1999, The Florida Bar removed the Company
from its list of private lawyer referral services at the urging of the Florida
Department of Insurance. Since that time, the Company has not been required by
the Florida Bar to file any reports.
EMPLOYEES
We have a total of 47 employees, all of whom are full time. They are
assigned as follows: 15 are in operations, 13 are in management, 11 are in
member services and 8 are in administration. None of the employees belong 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 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 we do business;
(b) the effectiveness of the Company's marketing strategies to
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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 the growth in the membership
base; (e) the ability of the Company to obtain additional financing as required;
(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.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
We reported a net loss of $1,189,000 or $0.06 per basic and diluted
common share, for the three months ended December 31, 1999, compared to a net
loss of $485,000 or $0.03 per basic and diluted common share for the comparable
period in 1998. For the six months ended December 31, 1999, we reported a net
loss of $2,194,000, or $0.12 per basic and diluted common share, compared to an
$818,000 net loss, or $0.06 per basic and diluted common share, for the same
period in 1998. The increase in net loss for the 1999 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 second quarter of 1999 amounted to
$502,000 compared with $282,000 during the same period in 1998, an increase of
78.0%. Membership revenue for the six months ended December 31, 1999, increased
230.8%, to $1,257,000, compared to $380,000 in 1998. The increase in membership
fee income in the three and six month periods of 1999 is primarily the result of
increased revenue associated with sales of Legal Club employee benefits through
employer groups. During the second quarter of 1999, membership revenue from
employer groups increased 777.8%, to $474,000, from $54,000 in the comparable
period of 1998. During this same period, revenues from infomercial placements
decreased $185,000 because this method of sales was discontinued in November
1999 as we revise the infomercial presentation to be more effective. Membership
revenue from employer groups increased to $950,000, or 755.9%, for the six
months ended December 31, 1999, compared with $111,000, in the same period in
1998.
The increase in fee income from memberships was offset by higher
operating expenses, which totaled $1,683,000 and $3,440,000 for the three and
six months ended December 31, 1999, respectively, compared with operating
expenses of $758,000 and $1,161,000, respectively, during the comparable periods
in 1998. The increase in operating expenses were primarily the result of higher
compensation and employee benefits, communication expenses, professional fees
and various administrative expenses.
Compensation and employee benefits increased 160.6% during the second
quarter of 1999, to $753,000 from $289,000 in the comparable quarter of 1998.
During the six months ended December 31, 1999, compensation and employee
benefits increased $857,000, or 180.4%, to $1,332,000 from $475,000 in 1998. The
increases during the 1999 three and six 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.
Communication costs were $291,000 during the three months ended
December 31, 1999, an increase of 17.8%, compared with $247,000 during the same
period in 1998. For the six month period of 1999, communication costs increased
$473,000, or 172.6%, to $747,000, compared with $274,000 in 1998. The increase
during the second quarter of 1999 was attributable to higher marketing and
public relations costs. The increase for the 1999 six month period was the
result of increased infomercial television placements as well as traffic and
production costs associated with developing the infomercials.
Professional fees increased 78.2% during the second quarter of 1999, to
$155,000 from $87,000 in the comparable quarter of 1998. During the six months
ended December 31, 1999, professional fees increased $197,000, or 148.1%, to
$330,000 from $133,000 in 1998. The increases reflected during the 1999 quarter
and six
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month period were due principally to higher legal fees and investment advisor
fees associated with public relations efforts to become a public company and our
private placement offerings in 1999.
General and administrative expenses amounted to $353,000 during the
three months ended December 31, 1999, an increase of 199.2%, compared with
$118,000 during the same period in 1998. For the six month period of 1999,
general and administrative expenses increased $586,000, or 233.5%, to $837,000,
compared with $251,000 in the same period in 1998. The increases for the quarter
and six months ended December 31, 1999, compared to the same periods in 1998,
related to higher printing and postage costs associated with the production and
mailing of our new member kits as well as increased telephone costs as we
expanded our customer service operations.
Other income, net, for the three months ended December 31, 1999
increased 11.1% to an $8,000 loss compared to a loss of $9,000 in 1998. For the
six month period of 1999 other income, net, increased $26,000, or 70.3% to a net
loss of $11,000, compared to a $37,000 loss during the same period in 1998. The
improvement in other income, net, is primarily the result of higher interest and
dividend income from invested cash and lower interest costs, as term loans
convert to common stock.
YEARS ENDED JUNE 30, 1999 AND 1998
We reported a net loss of $2,842,000, or $0.17 per basic and diluted
common share, for the fiscal year ended June 30, 1999, compared to a net loss of
$1,389,000, or $0.15 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. The loss of $0.17 per basic and
diluted common share increased only $0.02 in 1999 compared to 1998 although the
net losses were $1,453,000 higher. The increase of 7,138,577 in the weighted
average number of common shares for 1999, to 16,327,628, from 9,189,051 in 1998,
diluted the impact of the net loss in 1999, on a per share basis, by $0.14. The
increase in the weighted average number of shares in 1999 was the result of
shares issued during the year to raise additional capital and to complete the
merger during 1999.
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%. During 1999, membership revenue associated with sales of Legal Club
employee benefits through employer groups increased $364,000, or 313.8%, to
$480,000, from $116,000 in 1998. Revenues generated from infomercial placements,
a 1999 marketing effort, amounted to $457,000. There were no such revenues for
the fiscal year ended June 30, 1998.
The increase in fee income from memberships was offset by an even
larger increase in operating expenses, which totaled $3,782,000 and $1,300,000
for the fiscal years ended June 30, 1999 and 1998, respectively. The increase in
operating expenses were primarily the result of (1) compensation and employee
benefits which were $1,353,000 for the fiscal year ended June 30, 1999 compared
to $334,000 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. Compensation and employee benefits
increased $1,019,000, an increase of 305%, 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. Professional fee expenses were $616,000 for the year ended June
30, 1999 compared to $241,000 for the comparable period in 1998, an increase of
$375,000. This increase was due to more legal, accounting, investment advice and
public relations required as a public company in 1999 as compared to 1998, as
well as additional legal fees associated with the merger in 1999. Office,
administrative and general expenses were $320,000 for the year ended June 30,
1999 compared to $143,000 for the comparable period in 1998, an increase of
$177,000. This increase was due to additional expenditures for telephone costs,
supplies, and delivery activities required to administrate the increase in
business in 1999.
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
8
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
JUNE 30, 1999
Net cash used in operating activities was $2,631,000 for the year ended
June 30, 1999, compared to $879,000 for the comparable period in 1998. This
increase of $1,752,000 in net cash used in operating activities resulted
primarily from the $1,453,000 increase in the net loss year over year.
Cash flows used for investing activities increased $179,000 for the
year ended June 30, 1999 compared to the year ended June 30, 1998. This increase
was due to our acquisition of additional computer equipment and furniture to
equip employees with the capacity to service the increased customer base.
Cash flows provided by financing activities were $4,600,000 for the
year ended June 30, 1999 compared to $851,000 for the year ended June 30, 1998.
This increase was primarily due to issuances of common and preferred stock
during the year.
DECEMBER 31, 1999
Net cash used in operating activities was $1,827,000 for the six months
ended December 31, 1999, compared to $675,000 for the comparable period in 1998.
The increase of $1,152,000 in net cash used in operating activities resulted
primarily from a $1,376,000 increase in the net loss.
Cash flows used for investing activities increased $151,000 in 1999
compared to 1998. This was due to the acquisition of additional computer
equipment and furniture 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 provided by financing activities were $243,000 for the six
months ended December 31, 1999, compared to $712,000 for the same period in
1998. This decrease was primarily due the repayment of $100,000 of long-term
debt and $177,000 placed in escrow, associated with an office space lease and
equipment leases. During this period, equity securities were sold to generate
cash for operations and expansion. In November 1999, 250,000 shares of common
stock were sold in a private placement for $250,000, and 1,160 shares of Series
B convertible preferred stock were sold through a Reg D private placement
offering, for which we received $290,000. Additionally, during the six months
ended December 31, 1999, $115,000 of term loans, including accrued interest
payable of $50,000, were converted to common stock, under debt-to-equity
conversion agreements
Since inception we have incurred losses and continue to require
additional capital to fund operations and development. In January 2000, an
additional 11,000 shares of Series B convertible preferred stock were sold for
$2,750,000 through the private placement offering. 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.
9
<PAGE>
We currently manage the payment of our current liabilities and
obligations on a monthly basis as cash becomes available. As of February 14,
2000, there are available cash resources of approximately $2.2 million. Based on
the current success in raising capital from investors, the costs of operations
may increase as these funds are invested to enhance operations. We believe that
our current negative cash flow from operations is approximately $400,000 per
month.
The Company, if its business plan is successfully implemented, expects
to achieve profitability in the last quarter of 2000 by accelerating revenue
growth in excess of its expense growth. The operating and administrative
infrastructure to manage the growth of the Company is currently in place.
Management plans to increase marketing of its products in the workplace where
acceptance of legal worksite benefits is increasing, marketing products through
affinity groups to their members, and by direct marketing to individuals. The
marketing efforts of the Company are dependent upon its ability to fund such
efforts; however, there can be no assurance that the Company will reach
profitability without accessing additional capital resources. Management intends
to generate the necessary capital to operate for 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 to fund the
growth of the Company, 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.
On October 27, 1999, the Company obtained from a shareholder a $50,000
six-month term loan at a 7% annual interest rate. The loan and interest are due
and payable in April 2000. Although the Company has received from time to time
related party loans in the past, there is no assurance these shareholders would
be willing to make such loans in the future.
Two shareholders have subscriptions for a total of 396,000 shares of
the Company's common stock and it has recorded the receivable and accrued
interest, at 6% per year, in equity. The Company does not expect the
subscriptions receivable to be paid in the near future, although the
shareholders 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 of certain of its debt agreements.
The amount of term loans in default totals $151,000 and $216,000 at December 31
and June 30, 1999, respectively. These term loans 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.
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 dates
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 cannot say with any certainty that we will not
experience any Year 2000 problems in the future.
10
<PAGE>
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.
11
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information with respect to the beneficial
ownership of the 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 OWNERSHIP OF CLASS(1)(2)
CLASS(1)
- ------------------------------------ -------------------------------- ------------------------
<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, Convertible Preferred Stock(3)
Falk & 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)
</TABLE>
- ---------------------
(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.
12
<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.
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<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. From 1997 through 1998, Mr. Agypt served as a Vice President
of Worksite Solutions. From 1990 through 1997, Mr. Agypt served as a Vice
President and Divisional Manager of Combined Insurance Company of America, also
a subsidiary of AON.
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.
14
<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 $100,000
in 1999, 1998 or 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
- ------------------- ------- ------------------------------------ --------------------------------------- -------------
Annual Compensation Long-Term Compensation
------------------------------------ ---------------------------------------
Awards Payouts
-------------------------- ------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
(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 -- -- -- -- -- --
- ------------------- ------- ---------- ----------- ------------- ------------ ------------- ------------ -------------
</TABLE>
- -------------------
(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.
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 $125,000.
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.
15
<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 are a summary of certain terms of the capital stock 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.
16
<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:
/bullet/ 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;
/bullet/ 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;
/bullet/ The holders have priority over the holders of the common stock
in the event of our liquidation, dissolution or winding up;
and
/bullet/ 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.
17
<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
Concurrently with the purchase of approximately 22,222 shares of our
Series A Convertible Preferred Stock in February 1999, we granted registration
rights to the holders of such stock. At any time after the earlier of (i) the
date three years after the date of the stock purchase agreements or (ii) six
months after the consummation of the Company's initial public offering, holders
of the Series A Convertible Preferred Stock may require the Company to file a
registration statement under the Securities Act covering their shares (on an as
converted basis), if the expected aggregate offering price would exceed
$15,000,000 if the request is received prior to an initial public offering of
the Company or $10,000,000 if the request is received after an initial public
offering. The Company is not required to comply with the request for
registration on more than one occasion, if the Company has filed a registration
statement in connection with its initial public offering (and for a period of
180 days after such registration is declared effective) or if the Board
determines in good faith that such registration would be detrimental to the
Company.
When the Company is eligible to use a registration statement on Form
S-3 to register an offering of shares, holders of the Series A Convertible
Preferred Stock are entitled to include all or a portion of their shares,
provided the aggregate offering price is at least $2,000,000.
Holders of the Series A Convertible Preferred Stock also have
"piggyback" registration rights in which they are entitled to include their
shares in any registration statement filed by the Company. However, the managing
underwriter of any offering, if any, has the right to limit the number of
securities proposed to be included in the registration.
The expenses of one requested registration, all piggyback registrations
and all Form S-3 registrations are to be borne by the Company. Holders of the
Series A Convertible Preferred Stock will pay all underwriting discounts and
selling commissions applicable to the sale of their securities.
The Company has agreed to indemnify the holders of the Series A
Convertible Preferred Stock for any damages they may suffer from any untrue
statement or omission that the Company makes in a registration statement
covering their shares or for any violation by the Company of any state or
federal securities laws.
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:
/bullet/ 300,000 warrants are exercisable for $.90 per share and expire
on December 31, 2003;
/bullet/ 50,000 warrants are exercisable for $.90 per share and expire
on December 31, 2003;
/bullet/ 300,000 warrants are exercisable for $.90 per share and expire
on February 12, 2009;
/bullet/ 300,000 warrants are exercisable for $2.00 per share and
expire on August 1, 2009;
/bullet/ 100,000 warrants are exercisable for $2.00 per share and
expire on December 31, 2003;
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 exercise prices were arrived at through
arms-length negotiations with the warrant holders. The warrants have contractual
lives of four to ten years. Since these warrants were issued with exercise
prices at or above fair value, no book value was assigned to them at issuance.
18
<PAGE>
Holders of the warrants have "piggyback" registration rights in which
they are entitled to include their shares in any registration statement filed by
the Company, provided that aggregate number of shares to be registered in such
registration statement exceeds 10,000 shares. In addition, the managing
underwriter of any offering, if any, has the right to limit the number of shares
proposed to be included in the registration.
If, by December 31, 2000, the Company does not have an effective
registration statement outstanding that includes the warrant shares, and such
registration statement has not remained effective for at least 90 days prior to
the expiration date of the warrant (or 180 days if the registration statement is
on Form S-3), the holders of the warrants may convert the warrants into shares
of common stock.
The Company has granted the holder of certain warrants to purchase
300,000 shares of common stock registration rights and conversion rights
different than those described above. The terms of these warrants require the
Company to file a registration statement with respect to the warrant shares,
provided that such registration is not required prior to the earlier of (i)
December 31, 2001 or (ii) eighteen (18) months after the date the Company
becomes subject to the reporting requirements of the Exchange Act. The holder of
these warrants also has "piggyback" registration rights that are the same as
those of the other warrant holders described above. Finally, this warrant is
convertible into shares of common stock at any time at the option of the holder.
All expenses (other than underwriting discounts and sales commissions)
incurred by the Company in connection with any registration statement are to be
borne by the Company.
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.
19
<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 December 31, 1999 $4 1/4 $3 1/16
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
20
<PAGE>
depend upon, among other things, the Company's operations, its capital
requirements, and its overall financial condition.
ITEM 2. LEGAL PROCEEDINGS
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. Even though the Florida Department of Insurance had
taken the position that we should be regulated as legal expense insurer, we
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 we
should be regulated in some manner, which if it were to occur, could 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 filed counterclaims against us, seeking monetary relief of
approximately $200,000, plus attorneys' fees, for salary and other compensation
allegedly due from us to Mr. Bernstein. Mr. Bernstein has also advised us that
he intends to file an amended counterclaim seeking additional damages though he
has not yet done so. 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. We intend to vigorously prosecute our claims against Mr.
Bernstein and to vigorously defend against Mr. Bernstein's counterclaims.
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 the fiscal year ended June 30, 1999, we sold 5,649,689 shares of
our common stock. Of this total issuance, 5,438,149 shares were issued at an
average price per share of $0.39, 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 or $3.00 per share. 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.
21
<PAGE>
During the fiscal year ended June 30, 1998, we sold or issued 5,527,525
shares of our common stock. Of this total issuance, 3,376,211 shares were issued
at an average price per share of $0.23, 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 or
$0.33 per share; 1,200,000 shares were issued to our officers under subscription
agreements at $0.33 per share, 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 for a total consideration of $116,000 or
$2.36 per share. These securities were sold to private and institutional
investors in reliance on Rule 506.
During the period of our incorporation in January 1996, through June
30, 1997, we issued or sold 5,527,847 shares of our common stock. Of this total
issuance, 4,479,847 shares were issued as compensation for services performed by
our employees and external consultants for a total consideration of $119,000 or
$0.03 per share, 378,000 shares were issued at an average price per share of
$0.39, for an aggregate offering price of $147,000, and 220,000 shares were used
to convert existing long term debt payable and related accrued interest to
various private investors at $3.40 per share 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.
22
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 1999
Consolidated Balance Sheets as of December 31, 1999
(Unaudited) and June 30, 1999 F-1
Consolidated Statements of Operations for the Three and
Six Months Ended December 31, 1999 and 1998 (Unaudited) F-2
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1999 and 1998 (Unaudited) F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) F-4 - F-8
INDEPENDENT AUDITORS' REPORT F-9
CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 1999
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-10
Consolidated Statements of Operations for the Years Ended
June 30, 1999 and 1998 F-11
Consolidated Statement of Stockholders' Equity (Deficit)
for the Years Ended June 30, 1999 and 1998 F-12
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999 and 1998 F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-14 - F-23
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 June 30,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 66,000 $ 1,801,000
Accounts receivable 193,000 --
Prepaid expenses 48,000 86,000
Advances and other 26,000 39,000
----------- -----------
TOTAL CURRENT ASSETS 333,000 1,926,000
PROPERTY AND EQUIPMENT, net 410,000 189,000
OTHER ASSETS 186,000 5,000
----------- -----------
TOTAL $ 929,000 $ 2,120,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 763,000 $ 348,000
Current portion of long-term debt and capital leases 453,000 451,000
Interest payable 133,000 163,000
Accrued expenses and other liabilities 232,000 192,000
Deferred revenues 47,000 99,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,628,000 1,253,000
----------- -----------
NONCURENT LIABILITIES:
Capital leases 87,000 --
Long-term debt, less current portion 76,000 158,000
----------- -----------
TOTAL NONCURRENT LIABILITIES 163,000 158,000
----------- -----------
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 December and June 1999 -- --
26,000 shares designated Series B; issued and outstanding:
1,160 shares of Series B in December 1999 -- --
Common stock, $0.0001 par value; 50,000,000 shares
authorized; shares issued and outstanding: 18,834,960 in December 1999
and 18,539,726 in June 1999 2,000 2,000
Additional paid-in capital 9,008,000 8,374,000
Deficit (9,428,000) (7,234,000)
Stock subscriptions, including interest receivable (444,000) (433,000)
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT), NET (862,000) 709,000
----------- -----------
TOTAL $ 929,000 $ 2,120,000
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
F1
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ---------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Membership fee income $ 502,000 $ 282,000 $ 1,257,000 $ 380,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Compensation and employee benefits 753,000 289,000 1,332,000 475,000
Communications 291,000 247,000 747,000 274,000
Professional fees 155,000 87,000 330,000 133,000
Office, administrative, and general 353,000 118,000 837,000 251,000
Occupancy 105,000 14,000 153,000 22,000
Depreciation and amortization 26,000 3,000 41,000 6,000
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,683,000 758,000 3,440,000 1,161,000
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,181,000) (476,000) (2,183,000) (781,000)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income, net 8,000 6,000 24,000 12,000
Interest expense (16,000) (15,000) (35,000) (49,000)
------------ ------------ ------------ ------------
OTHER (EXPENSE), NET (8,000) (9,000) (11,000) (37,000)
------------ ------------ ------------ ------------
NET LOSS $ (1,189,000) $ (485,000) $ (2,194,000) $ (818,000)
============ ============ ============ ============
LOSS PER COMMON SHARE:
Basic and diluted $ (0.06) $ (0.03) $ (0.12) $ (0.06)
============ ============ ============ ============
Weighted average common shares outstanding 18,642,935 14,610,379 18,591,331 14,102,791
============ ============ ============ ============
</TABLE>
See notes to the consolidated financial statements.
F2
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,194,000) $ (818,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 41,000 6,000
Interest due on stock subscriptions (12,000) (12,000)
Services performed for common stock 38,000
Changes in certain assets and liabilities:
Accounts receivable (193,000) --
Prepaid expenses 37,000 11,000
Advances and other 9,000 7,000
Interest payable 20,000 59,000
Accounts payable and accrued liabilities 478,000 38,000
Deferred revenues (51,000) 34,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,827,000) (675,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchases of property and equipment (151,000) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Escrow deposits (177,000) --
Proceeds from long-term debt 50,000 75,000
Repayments of long-term debt (110,000) (13,000)
Issuances of Series B preferred stock 230,000 --
Issuances of common stock 250,000 650,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 243,000 712,000
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (1,735,000) 37,000
CASH AND CASH EQUIVALENTS, beginning of period 1,801,000 20,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 66,000 $ 57,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 14,000 $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital leases entered into to acquire computer equipment $ 132,000 $ --
Conversion of debt to common stock
Long-term debt 65,000 297,000
Accrued interest payable 50,000 159,000
Common stock issued as compensation to former employee
10,000 shares of common stock 38,000 --
Capital contributed by shareholder for release of liability 175,000
</TABLE>
See notes to the consolidated financial statements.
F3
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE PERIODS ENDED DECEMBER 31, 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 7,000 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. Operating
results for the three and six months ended December 31, 1999, is not
necessarily indicative of the results expected for the year ending June
30, 2000. The Company has received certain accounting comments from the
SEC in conjunction with the Company's Form 10-SB, Amendment #1, as filed
with the SEC on December 29, 1999. The Company is in the process of
responding to the comments, and has incorporated on these financial
statements recommended changes. However, the information presented herein
may be amended based on the results of the SEC review of this Form 10-SB
(Amendment #2). 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. At December 31, and June 30, 1999, the
Company's debt agreements in default amounted to $151,000 and $216,000,
respectively. 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 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 successful in
these activities. Should any of these events not occur, the accompanying
unaudited financial statement will be materially affected.
F4
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION AND CREDIT RISKS
In July 1999, the Company started service to a new customer
group, consisting of employers. 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
employers. 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 1998 financial
statements to conform with 1999 presentation.
NOTE 2 - LONG-TERM OBLIGATIONS
At December 31 and June 30, 1999, long-term debt and capital
leases consist of the following:
<TABLE>
<CAPTION>
December 31, 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% on the principal amount at
maturity. Interest only is payable monthly during the terms of the loans $151,000 $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% 116,000 --
Term loan from shareholder, principal plus accrued interest of 7%, payable
April 27, 2000 50,000 --
Refinanced term loans during 1999:
/bullet/ Payable in monthly installments of $5,000, including interest at a
rate of 6%, through September 2000 43,000 71,000
/bullet/ Payable in monthly installments of $12,250, including interest at
a rate of 8%, through March 2001 173,000 239,000
-------- --------
Total long-term obligations 616,000 609,000
Less: Current portion 453,000 451,000
-------- --------
Long-term obligations, less current portion $163,000 $158,000
======== ========
</TABLE>
F5
<PAGE>
NOTE 2 - LONG-TERM DEBT (continued)
The total principal amount of the term loans with maturity dates
through 1998, 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 six months ended December 31, 1999, terms notes
totaling $65,000, and accrued interest payable on such notes of $50,000
were converted to 36,423 shares of the Company's common stock. During the
same period in 1998, term notes and accrued interest payable of $297,000
and $159,000, respectively, were converted to 151,062 shares of the
Company's common stock
Interest expense for the three and six months ended December 31,
1999, totaled $16,000 and $35,000, respectively. Interest expense for the
three and six months ended December 31, 1998, amounted to $15,000 and
$49,000, respectively.
NOTE 3 - CAPITAL STOCK
During the six months ended December 31, 1999, 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 Stock" (Series B
stock). Through December 31, 1999, the Company sold, 1,160 shares of the
Series B stock through a private placement offering memorandum for
$290,000. There were approximately $31,000 of expenses associated with the
issuance. See Note 6.
Each share of Series B stock is convertible into one hundred
shares of common stock which entitles the holder to receive dividends, if
declared by the Company's Board of Directors on the common stock, and to
vote, 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 and have priority over the holders of common stock, but are
subordinated to holders 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 by the Company, who participated in the
Series B stock offering are entitled to receive a warrant to purchase an
amount of common stock equal to 10% of the common equivalent shares place
by the broker, at a per share price equal to 125% of the price paid by the
investors in the offering, in addition to a 10% fee. There are 116,000
warrants due to be issued associated with the Series B stock offering
through December 31, 1999 and $29,000 of fees to be paid.
During the six months ended December 31, 1999, the Company issued
250,000 shares of common stock for $250,000 cash, pursuant to a private
placement offering and 10,000 shares valued at $38,000 were issued, as
compensation to a former employee.
Terms notes totaling $65,000, and accrued interest payable on
such notes of $50,000 were converted to 36,423 shares of the Company's
common stock during the six months ended December 31, 1999. During the
same period in 1998, term notes and accrued interest payable of $297,000
and $159,000, respectively, were converted to 151,062 shares of the
Company's common stock
F6
<PAGE>
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 December 31, 1999, management
believes that any such outstanding issues, except for the Bernstein matter
discussed below, 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 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 the Company
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 filed counterclaims against the Company, seeking monetary
relief of approximately $200,000, plus attorneys' fees, for salary and
other compensation allegedly due from the Company to Mr. Bernstein. Mr.
Bernstein has also advised that he may file an amended counterclaim to
seek greater damages, although he has not filed such an amended
counterclaim. The Company intends to vigorously prosecute its claims
against Mr. Bernstein and to vigorously defend against Mr. Bernstein's
counterclaims. At the present time, it is too early in the litigation to
assess with any degree of certainty the likelihood of success of either
the Company's or Mr. Bernstein's claims; consequently, no accrual for any
loss or gain has been included in the accompanying financial statements.
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 the Company's
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 six months ended December 31, 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:
F7
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
----------------------------- -----------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Common shares outstanding 18,834,960 16,967,379 18,834,960 16,967,379
Effect of weighting (192,025) (2,356,640) (243,629) (2,864,588)
----------- ----------- ----------- ------------
Weighted average common shares
outstanding 18,642,935 14,610,739 18,591,331 14,102,791
=========== =========== =========== ============
</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 six months ended December 31, 1999
and 1998 include the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common stock options 658,790 83,333 520,656 83,333
Series A convertible preferred stk 2,777,800 -- 2,777,800 --
Series B convertible preferred stk 4,875,000 -- 2,437,500 --
Warrants relating to issuance of-
Common stock 1,050,000 -- 980,435 --
Series B preferred stock 19,500 -- 9,750 --
</TABLE>
NOTE 6 - SUBSEQUENT EVENT
In January 2000, the Company issued an additional 11,000
shares of the Series B stock through a private placement offering
memorandum for $2,750,000. There are 1,100,000 warrants due to be issued
associated with these additional Series B shares and $275,000 of fees to
be paid. See Note 3.
F8
<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
F9
<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
OTHER ASSETS 5,000 5,000
----------- -----------
TOTAL $ 2,120,000 $ 83,000
=========== ===========
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 540,000 449,000
Deferred revenues 99,000 13,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,253,000 1,844,000
----------- -----------
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 12,890,037 in 1998 2,000 1,000
Additional paid-in capital 8,374,000 2,942,000
Deficit (7,234,000) (4,392,000)
Stock subscriptions, including interest receivable (433,000) (409,000)
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT), NET 709,000 (1,858,000)
----------- -----------
TOTAL $ 2,120,000 $ 83,000
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
F10
<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 1,353,000 334,000
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 1,300,000
------------ ------------
LOSS FROM OPERATIONS (2,847,000) (1,184,000)
------------ ------------
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) $ (1,389,000)
============ ============
LOSS PER COMMON SHARE:
Basic and diluted $ (0.17) $ (0.15)
============ ============
Weighted average common shares outstanding 16,327,628 9,189,051
============ ============
See notes to the consolidated financial statements.
F11
<PAGE>
<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 7,362,512 $ 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
Accrued interest on subscription agreements
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 12,890,037 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 5,438,149 1,000 -- -- 2,123,000
Issuance of preferred stock for cash -- -- 27,778 -- 2,500,000
Capital contributed by shareholder (Note 10) 175,000
Accrued interest on subscription agreements
Net loss for the year ended June 30, 1999 -- -- -- -- --
---------- ----------- ------ ------ -----------
STOCKHOLDERS' EQUITY (DEFICIT),
June 30, 1999 18,539,726 $ 2,000 27,778 $ -- $ 8,374,000
========== =========== ====== ====== ===========
<CAPTION>
Stock Stockholders'
Subscription Equity (Deficit),
Deficit Receivable net
----------- ------------ ----------------
<S> <C> <C> <C>
STOCKHOLDERS' DEFICIT, July 1, 1997 $(3,003,000) $ -- $(1,639,000)
Common stock issued for the conversion
of debt and accrued interest -- -- 116,000
Stock issued pursuant to subscription
agreements -- (396,000) --
Accrued interest on subscription agreements (13,000) (13,000)
Issuance of stock for cash -- -- 769,000
Issuance of stock for services -- -- 298,000
Net loss for the year ended June 30, 1998 (1,389,000) -- (1,389,000)
----------- ----------- -----------
STOCKHOLDERS' DEFICIT, June 30, 1998 (4,392,000) (409,000) (1,858,000)
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
Capital contributed by shareholder (Note 10) 175,000
Accrued interest on subscription agreements (24,000) (24,000)
Net loss for the year ended June 30, 1999 (2,842,000) -- (2,842,000)
----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT),
June 30, 1999 $(7,234,000) $ (433,000) $ 709,000
=========== =========== ===========
</TABLE>
See notes to the consolidated financial statements.
F12
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,842,000) $(1,389,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 26,000 20,000
INTEREST DUE ON STOCK SUBSCRIPTIONS (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 3,000
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 $ -- $ --
=========== ===========
</TABLE>
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 1999: a shareholder contributed to the company a $175,000
obligation owed to him as capital.
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.
F13
<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 due from individuals 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.
F14
<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)
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.
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
F15
<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)
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.
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.
F16
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
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 94,000 175,000
Accrued interest -- 10,000
Other 4,000 4,000
-------- --------
Total $540,000 $449,000
======== ========
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following at June 30, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <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.
F17
<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
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) (486,000)
Less: Valuation allowance 995,000 486,000
--------- ---------
Provision for 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 $ 1,865,000 $ 870,000
Less: Valuation allowance (1,865,000) (870,000)
----------- -----------
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 5,649,689 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.
F18
<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)
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.
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.
F19
<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)
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:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net loss:
As reported $ (2,842,000) $ (1,389,000)
Pro forma (3,029,000) (1,405,000)
Net loss per share (basic and diluted)
As reported $ (0.17) $ (0.15)
Pro forma (0.19) (0.15)
</TABLE>
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:
<TABLE>
<CAPTION>
Optioned Weighted-Average
Shares Exercise Price
-------- ----------------
<S> <C> <C>
Outstanding at July 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
======= =====
</TABLE>
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. Since these warrants were issued
with exercise prices at or above fair value, no book value was assigned to
them at issuance.
F20
<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
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 assets or liabilities.
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.
Proforma information has not been presented for this merger, as
it would not be meaningful since BHI had no operations prior to the
merger. The shares outstanding of the Company, as well as other share and
per share amounts, have been restated to July 1, 1997 to reflect the
recapitalization as if a stock split had occurred at the beginning of the
year. Shares issued to the former shareholders of AJFA at the time of the
merger totaled 5,527,847. There were 1,834,665 shares of BHI outstanding
prior to the merger.
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.
F21
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES - (continued)
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.
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, with the balance due
from shareholders for the subscription obligation, including accrued
interest receivable, totaling $433,000 and $409,000, at June 30, 1999 and
1998, respectively. 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, A shareholderS contributed a $175,000
obligation due to him to the capital of the Company.
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:
See next page.
F22
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
NOTE 11 - NET LOSS PER COMMON SHARE - (continued)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Common shares outstanding at June 30th 18,539,726 12,890,037
Effect of weighting (2,212,098) (3,700,986)
----------- -----------
Weighted average common shares outstanding 16,327,628 9,189,051
=========== ===========
</TABLE>
For the year ended June 30, 1998, the number of shares of the
Company were restated to July 1, 1997, to reflect the number of shares
outstandig after the BHI merger recapitalization, as if a stocksplit had
occurred July 1, 1997.
Common share equivalents that could potentially dilute basic
earnings per share in the future, but were not included in the computation
of diluted earnings per share because of their antidilutive effect on net
loss per share for the years ended June 30, 1999 and 1998, include the
following:
1999 1998
--------- ---------
Common stock options 577,523 275,000
Series A convertible preferred stk 2,777,800 --
Warrants relating to issuance of-
Common stock 1,050,000 --
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.
F23
<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.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this Amendment No. 2 to Form 10-SB to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: February 24, 2000
LEGAL CLUB OF AMERICA CORPORATION
By: /s/ Brett Merl
---------------------------------------
Brett Merl, President
By: /s/ Michael Samach
---------------------------------------
Michael Samach, Chief Financial Officer
(Principal Accounting Officer)
