U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
------------
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ___________ to ____________
Commission file number: 000-28193
LEGAL CLUB OF AMERICA CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
COLORADO 84-1174969
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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)
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(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
State the number of share outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. Common Stock, $0.0001 Par Value,
18,834,960 shares outstanding as of April 27, 2000
Transitional Small Business Disclosure Format
Yes [ ] No [X]
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.......................................1
Consolidated Statements of Operations.............................2
Consolidated Statements of Cash Flows.............................3
Notes to Consolidated Financial Statements........................4
Item 2. Management's Discussion and Analysis or Plan of Operations........9
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................12
Item 2. Changes in Securities and Use of Proceeds........................12
Item 3. Defaults Upon Senior Securities..................................12
Item 6. Exhibits and Reports on Form 8-K.................................12
Signatures...............................................................13
Exhibits.................................................................14
(i)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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.
1
<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 14,323,549 18,591,331 13,047,834
============ ============ ============ ============
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE>
LEGAL CLUB OF AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
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.
3
<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. 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.
4
<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 employees at the work site. Revenue from this service
is recognized in the period services are provided to the employees in
these groups. A reserve is provided for management's estimate of
uncollectible fees from employees. Revenues from all other customer based
services are recognized in the period the services are provided. The
Company fully reserves for uncollected membership fees, as the
predictability of their collection is highly uncertain. Collected
membership fees which are subject to refund are recorded as deferred
revenues.
INCOME TAXES
All deferred taxes created by net operating losses are offset in
their entirety by a deferred tax asset valuation allowance.
RECLASSIFICATION
Certain amounts have been reclassified in the 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>
5
<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
6
<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 action
involved the Company's claims to rescind certain stock issuances to
Bernstein, and claims for slander, and various filed and threatened
counterclaims from Mr. Bernstein for alleged back compensation and other
matters. After preliminary proceedings in the case, the parties entered
into a stipulated settlement in April 2000. The settlement requires
payments to Mr. Bernstein of $100,000 in cash, paid in April 2000, and
$80,000 on deferred terms, imposes certain restrictions on the timing of
Mr. Bernstein's sales of the Company's stock, and provides that the
parties will refrain form disparaging comments concerning each other.
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:
7
<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) (2,643,830) (243,629) (3,919,545)
----------- ----------- ----------- ------------
Weighted average common shares
outstanding 18,642,935 14,323,549 18,591,331 13,047,834
=========== =========== =========== ============
</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.
8
<PAGE>
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 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
9
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
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.
10
<PAGE>
We currently manage the payment of our current liabilities and
obligations on a monthly basis as cash becomes available. As of April 27, 2000,
there are available cash resources of over $1.0 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 March 2001 quarter 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 Jason Krouse, the
Company's Executive Vice President of Sales, a $50,000 six-month term loan at a
7% annual interest rate. The loan and accrued interest are presently due.
Although the Company has received from time to time related party loans in the
past, there is no assurance that shareholders would be willing to make such
loans in the future.
Brett Merl, the Company's Chairman of the Board and Chief Executive
Officer and Jason Krouse, the Company's Executive Vice President of Sales, have
subscriptions for a total of 396,000 shares of the common stock. The Company has
recorded the receivable and related accrued interest, at 6% per year, in equity.
The Company does not expect the subscriptions receivable to be paid in the near
future, although Mr. Merl and Mr. Krouse have indicated the notes will be
satisfied. Accrued interest on these notes is expected to be satisfied when the
notes are satisfied.
The Company is currently in default of certain of its debt agreements.
The amount of term loans in default at December 31, 1999 totaled $151,000. 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.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Part I, Item 1, Note 4, incorporated herein by reference, for a
discussion of legal proceedings relating to Mr. Bernstein.
Item 2. Changes in Securities and Use of Proceeds
Refer to Part II, Item 4. Sale of Unregistered Securities of Form 10-SB,
Amendment 3, filed with the Securities and Exchange Commission on March 14,
2000, incorporated herein by reference, for a discussion of the sale of
unregistered Series B Convertible Preferred Stock. Proceeds from the sale of
these securities are being used by the Company for operations.
Item 3. Defaults Upon Senior Securities
The Company continues to be in default of certain of its term loan
agreements, as fully discussed in Form 10-SB, Amendment 3, filed with the
Securities and Exchange Commission on March 14, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed
No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter
ended December 31, 1999.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 2, 2000
LEGAL CLUB OF AMERICA CORPORATION
By: /S/ BRETT MERL
-----------------------------------------
Brett Merl, Chairman and Chief Executive
Officer
By: /S/ MICHAEL SAMACH
----------------------------------------
Michael Samach, Chief Financial Officer
(Principal Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET
AND THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 1080403
<NAME> LEGAL CLUB OF AMERICA CORP.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 66,000
<SECURITIES> 0
<RECEIVABLES> 193,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,000
<PP&E> 487,000
<DEPRECIATION> 77,000
<TOTAL-ASSETS> 929,000
<CURRENT-LIABILITIES> 1,628,000
<BONDS> 163,000<F1>
0
0
<COMMON> 2,000
<OTHER-SE> (864,000)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 929,000
<SALES> 1,257,000
<TOTAL-REVENUES> 1,257,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,440,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,000
<INCOME-PRETAX> (2,194,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,194,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,194,000)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1> Includes capital leases totaling $87,000
<F2> Includes subscriptions receivable of $444,000
</FN>
</TABLE>
