<PAGE>
Filed Pursuant to Rule 424B4
File No. 333-81107
PROSPECTUS
- -------------------------------------------------------------------------------
3,980,000 Shares
[LOGO] Loislaw.com, Inc.
Common Stock
- -------------------------------------------------------------------------------
Loislaw.com, Inc. is offering 3,900,000 shares of common stock and Douglas W.
Parker, Sr. is offering 80,000 shares of common stock in an initial public
offering. Prior to this offering, there has been no public market for
Loislaw.com's common stock. The shares of Loislaw.com will be quoted in the
Nasdaq National Market under the symbol "LOIS".
Loislaw.com provides legal and related information to lawyers and law firms
over the Internet and on CD-ROM.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price................................. $14.00 $55,720,000
Underwriting discounts and commissions................ $0.98 $3,900,400
Proceeds, before expenses, to Loislaw.com............. $13.02 $50,778,000
Proceeds to Douglas W. Parker, Sr. ................... $13.02 $1,041,600
</TABLE>
See "Risk Factors" on pages 9 to 16 for factors that you should consider
before investing in the shares of Loislaw.com.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
- -------------------------------------------------------------------------------
The underwriters may purchase up to 597,000 additional shares from Loislaw.com
at the public offering price, less underwriting discounts and commissions.
Delivery and payment for the shares will be on October 5, 1999.
Prudential Securities
U.S. Bancorp Piper Jaffray
Dain Rauscher Wessels
a division of Dain
Rauscher Incorporated
PrudentialSecurities.com
September 29, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 9
Forward-Looking Statements........... 17
Use of Proceeds...................... 18
Dividend Policy...................... 18
Dilution............................. 19
Capitalization....................... 20
Selected Financial Data.............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................ 33
Management.......................... 45
Certain Transactions................ 54
Principal and Selling Stockholders.. 55
Description of Capital Stock........ 57
Shares Eligible for Future Sale..... 59
Underwriting........................ 61
Legal Matters....................... 62
Experts............................. 62
Available Information............... 63
Index to Financial Statements....... F-1
</TABLE>
- -------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any jurisdiction where the offer or
sale is not permitted. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front
cover of this prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully.
Loislaw.com
Loislaw.com provides comprehensive, affordable and easy-to-use legal and
related information to lawyers and law firms over the Internet and on CD-ROM.
We offer more than 1,300 databases that we estimate to contain over 5.5 million
documents. These databases consist of federal and state law, continuing legal
education materials and other legal information. We believe this is the largest
collection of legal databases in hypertext mark-up language, or HTML, the
standard format language used on the Internet. We offer powerful and intuitive
search tools designed to make our information easily accessible and valuable to
our users. Through LOIS LawWatch, we provide personalized, intelligent-
searching software programs that automatically and continuously search our web
site and notify our users when new documents match their search criteria. Our
news feeds provide over 100,000 news articles a month from more than 400
domestic and international sources. Our legal information is available through
our web site at loislaw.com for an annual subscription price.
We have historically targeted our marketing efforts to small law firms that
have fewer than 20 lawyers. Small law firms typically require legal information
for the states in which they practice, while large law firms typically require
legal information for all 50 states. Currently, we provide statutes,
regulations and rules of court for all state and federal jurisdictions. We also
provide comprehensive court decisions for the U.S. Supreme Court dating back to
1899 and all federal circuit courts of appeal dating back to 1971. In addition,
with the completion of databases for 14 new states during the first eight
months of 1999, we currently provide comprehensive legal information for 34 of
the 50 states. The lawyers in these 34 states represent over 88% of the total
number of practicing lawyers in small U.S. law firms. We intend to complete our
state law databases for all 50 states by December 31, 1999. Upon completion of
these databases, we plan to aggressively market to additional small law firms,
large law firms and legal departments of corporations.
Since we launched our web site in 1996, our web-based products have
represented an increasing percentage of our sales. We expect this trend to
continue as we sell more web-based products to existing customers and gain new
customers. As a result of this trend, we have de-emphasized our CD-ROM products
in recent periods by implementing a focused marketing and sales effort for our
web-based products. Since July 1999, we have offered new subscriptions only for
our web-based products. If requested, we deliver CD-ROM discs for the costs of
shipping and handling to subscribers of our web-based products. During the
month of July 1999, there were more than 2.2 million searches on our web site
compared to 225,000 during July 1998. At June 30, 1999, we had a total of 7,844
customers of which 3,132 purchased our web-based products. The percentage of
customers that renewed their subscriptions to our products was 89.3% in 1998.
We generated revenues of $5.0 million in 1998 and $2.8 million in the six
months ended June 30, 1999, and incurred a net loss of $6.6 million in 1998 and
$7.6 million in the six months ended June 30, 1999. Through June 30, 1999, our
accumulated deficit totaled $19.5 million.
Our Market
The market for web-based and other on-line legal, tax and public record
information is large and growing. According to Simba Information, Inc.'s
Web/Online Services 1998-2002: Market Analysis & Forecast, the market for web-
based and other on-line legal, tax and public record information was $1.7
billion in 1998 and is projected to grow to $2.7 billion in 2002. We cannot
assure you that this projected growth will be achieved.
We believe that the following are the key drivers of growth in the market
for web-based and other on-line legal information:
.An increase in the number of lawyers;
.An increase in litigation; and
.The growth of the Internet.
4
<PAGE>
Our Strategy
Our objective is to become the leading Internet destination for lawyers, law
students, business people and consumers who need legal and related information.
We developed our core products to serve the research needs of lawyers. As we
expand our product offerings, we plan to address additional needs of lawyers
and offer legal information in a format designed to meet the needs of
consumers. To achieve our business objectives, we plan to do the following:
. Continue to market aggressively to small law firms to expand our small
law firm customer base;
. Complete our state law databases for all 50 states by December 31, 1999,
at which time we intend to aggressively market our products to large law
firms and legal departments of corporations;
. Continue to build the depth and breadth of our databases through internal
development and by licensing and acquiring information from third
parties;
. Continue to promote brand awareness through expansion of our direct sales
force, reliable product offerings, excellent customer service and
effective marketing and promotion;
. Continue to forge alliances with state and national bar associations,
continuing legal education associations and court systems; and
. Develop a new web site linked to our loislaw.com web site that will offer
legal and related information to consumers.
Our History and Offices
Loislaw.com was incorporated in Arkansas as Law Office Information Systems,
Inc. on October 13, 1987 and reincorporated in Delaware on June 18, 1999. Our
principal executive offices are located at 105 North 28th Street, Van Buren,
Arkansas 72956 and our telephone number is (501) 471-5581. Our web site address
is www.loislaw.com. The information contained on our web site is not a part of
this prospectus.
Intellectual Property
We have obtained federal trademark registrations for LOIS PROFESSIONAL
LIBRARY(R), N-line(R), PITA(R) and THE TECHNOLOGY COMPANY WITH A LAW DEGREE(R),
and have pending trademark applications for LOIS SM and the LOIS logo SM. We
have also obtained copyright registrations for the following proprietary
software programs: PITA(R), CaseBase: The Arkansas Reports, and Law Office
Information Systems: Master Menu Systems. Other trademarks and trade names in
this prospectus are the property of other owners.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Shares offered by Loislaw.com................ 3,900,000 shares
Shares offered by Douglas W. Parker, Sr. .... 80,000 shares
Total shares outstanding after this
offering.................................... 20,939,524 shares
Use of proceeds by Loislaw.com............... For debt reduction, redemption of
preferred stock, continued development
of legal databases, expansion of
marketing and sales activities,
potential acquisitions and other general
corporate purposes.
Nasdaq National Market symbol................ LOIS
</TABLE>
The common stock to be outstanding after the offering is based on the shares
outstanding as of September 29, 1999 and does not include the following:
. 1,500,000 shares of common stock reserved for issuance under our
employee stock option plan, of which options to purchase 869,622 shares
are currently outstanding, including options covering 286,500 shares
granted on the date of this prospectus at the initial public offering
price;
. 320,000 shares of common stock reserved for issuance under our stock
option plan for non-employee directors, including 120,000 shares covered
by options granted, subject to approval of the plan by our stockholders,
on the date of this prospectus with exercise prices equal to the initial
public offering price;
. 300,000 shares reserved for issuance under our employee stock purchase
plan; and
. 35,536 shares reserved for issuance upon the exercise of outstanding
warrants.
Unless otherwise indicated, all information contained in this prospectus:
. reflects a two-for-one stock split effected on July 23, 1999;
. reflects the conversion of Series A convertible preferred stock and
Series C convertible preferred stock into common stock, which will occur
immediately upon the completion of this offering; and
. does not reflect the issuance of 597,000 shares subject to the
underwriters' over-allotment option.
Risk Factors
You should consider the risk factors before investing in Loislaw.com's
common stock, and the impact of various events that could adversely affect our
business.
6
<PAGE>
Summary Financial Data
The summary financial data set forth below should be read in conjunction
with Loislaw.com's financial statements and notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Web-based products..... $ 28 $ 208 $ 842 $ 272 $ 1,171
CD-ROM products........ 1,855 3,157 3,182 1,516 1,621
Other(1)............... -- -- 1,000 353 --
------- ------- ------- ------- -------
Total revenues.......... 1,883 3,365 5,024 2,141 2,792
------- ------- ------- ------- -------
Total operating
expenses............... 5,238 5,547 10,142 4,457 9,066
------- ------- ------- ------- -------
Loss from operations.... (3,355) (2,182) (5,118) (2,316) (6,274)
Other income (expense).. (249) (461) (1,507) (642) (1,303)
------- ------- ------- ------- -------
Loss before income taxes
....................... (3,604) (2,643) (6,625) (2,958) (7,577)
Income tax benefit...... (52) -- -- -- --
------- ------- ------- ------- -------
Net loss................ (3,552) (2,643) (6,625) (2,958) (7,577)
Accrued preferred stock
dividends and accretion
on redeemable preferred
stock and common stock
warrants............... -- (34) (500) (211) (462)
------- ------- ------- ------- -------
Net loss applicable to
common stock........... $(3,552) $(2,677) $(7,125) $(3,169) $(8,039)
======= ======= ======= ======= =======
Net loss per share--
basic and diluted...... $ (0.50) $ (0.37) $ (0.99) $ (0.44) $ (0.95)
======= ======= ======= ======= =======
Weighted average common
shares outstanding--
basic and diluted...... 7,057 7,163 7,222 7,180 8,424
======= ======= ======= ======= =======
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
---------------- ----------------
1997 1998 1998 1999
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data (unaudited):
Web-based new sales(2)........... $ 485 $ 1,985 $ 733 $ 1,780
CD-ROM new sales(2).............. 2,370 2,081 1,088 514
------- ------- ------- -------
Total new sales(2).............. $ 2,855 $ 4,066 $ 1,821 $ 2,294
======= ======= ======= =======
</TABLE>
- --------
(1) Other revenues in 1998 were from producing customized databases for a third
party.
(2) New sales represent the total payments to be received by us over the lives
of the subscription contracts from all new product sales to our new and
existing customers during the period. New sales do not include renewals of
existing subscriptions to our products.
7
<PAGE>
The Pro Forma column included in the Balance Sheet Data adjusts the numbers
in the Actual column to give effect to:
. the conversion of 931,044 shares of Series A convertible preferred stock
and 2,495,697 shares of Series C convertible preferred stock into
6,853,482 shares of common stock immediately upon completion of this
offering; and
. the elimination of the redemption features on 2,113,232 shares of common
stock and outstanding warrants for the purchase of 35,536 shares of
common stock.
The Pro Forma As Adjusted column included in the Balance Sheet Data adjusts
the numbers in the Actual column to give effect to the pro forma adjustments
described in the preceding paragraph and:
. net proceeds from the sale of 3,900,000 shares of common stock at the
public offering price of $14.00 per share by us in this offering after
deducting the underwriting discounts and commissions and estimated
offering expenses;
. our application of $4.9 million to redeem 439,589 shares of Series B
redeemable preferred stock and accrued dividends on that stock and $14.6
million to repay outstanding debt with a portion of the net proceeds of
this offering;
. the loss on extinguishment of debt attributable to the write-off of
deferred loan costs in the amount of $4.0 million as a result of
repaying the related debt; and
. the payment of $250,000 to Dublind Partners, Inc. for financial advisory
services.
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data (unaudited):
Cash and cash equivalents................. $ 3,275 $ 3,275 $ 33,456
Working capital (deficit)................. (15,543) (15,543) 29,195
Total assets.............................. 30,089 30,089 56,525
Total debt (including capital lease
obligations)............................. 14,586 14,586 29
Deferred revenues......................... 4,006 4,006 4,006
Redeemable equity securities.............. 25,324 4,940 --
Total stockholders' equity (deficit)...... (18,307) 2,077 47,737
</TABLE>
8
<PAGE>
RISK FACTORS
You should consider carefully the following risk factors in addition to the
other information set forth in this prospectus before purchasing shares of
common stock of Loislaw.com. Each of these risk factors could adversely affect
our business, operating results and financial condition as well as adversely
affect the value of an investment in our common stock.
Risks Particular to Loislaw.com
We have operated at a loss in recent periods and may not become profitable
in the future.
We had net operating losses of $3.6 million in 1996, $2.6 million in 1997,
$6.6 million in 1998 and $7.6 million in the six months ended June 30, 1999.
These losses have resulted principally from expenses related to database costs
and selling and marketing costs incurred with the introduction of our new
products in the various state markets. We expect operating losses and negative
cash flows to continue for the foreseeable future as we continue to incur
significant operating expenses and make capital investments in our business. We
may never generate sufficient revenues to achieve profitability. Even if we do
become profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis. At June 30, 1999, we had an accumulated deficit of
$19.5 million.
The competition in our industry is intense, our principal competitors have
significantly greater resources than we do, and this competition may cause
us to lose customers and prevent us from attracting new customers.
The market for electronic legal information is currently dominated by LEXIS-
NEXIS, which is owned by Reed-Elsevier, and West Group, a division of The
Thomson Corporation. These competitors are both large, well-established
companies. They offer databases that are similar to or in some cases larger
than the databases that we offer. While we have provided legal information
since 1987, LEXIS-NEXIS has been in operation for over 25 years and West Group
has been in operation for over 100 years. Our competitors also have greater
name recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. This may enable them to undertake
more extensive marketing campaigns, to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than we can.
LEXIS-NEXIS and West Group have significant penetration in the large law firm
market, a market in which we intend to compete. Also, both LEXIS-NEXIS and West
Group maintain web sites that offer access to their legal databases. Although
all of our legal information is in hypertext markup language, which is the
standard format language used on the Internet, LEXIS-NEXIS and West Group are
in the process of converting their legal information into hypertext mark-up
language, which may enable them to better serve their customers.
In addition, we compete with other companies that offer fee-based access to
selected legal databases over the Internet. These companies may be more
successful than we may be in capturing market share.
Our quarterly results of operations may fluctuate due to the factors listed
below. These fluctuations could result in a lower price for our common
stock.
Our quarterly results may be affected by factors that are beyond our
control, including:
. introduction of new products or pricing programs by our competitors;
. difficulties in managing growth;
. technical difficulties or system downtime affecting our web-based
products;
. variations in spending patterns by lawyers;
. other business interruptions;
9
<PAGE>
. increases in selling and marketing expenses, as well as other operating
expenses;
. Year 2000 problems with our technology or the technology of third parties
with which we do business;
. the amount and timing of costs associated with the development and
introduction of new database products;
. economic conditions specific to the Internet or to the legal profession,
as well as general economic conditions; and
. costs and risks associated with potential acquisitions.
In addition, a substantial portion of our expenses, including most product
development and selling and marketing expenses, must be incurred in advance of
revenue generation. If our projected revenue does not meet our expectations,
then our operating profit, if any, may fall short of our expectations. Further,
we may change our pricing strategy for our products due to the rapidly evolving
market for electronic legal information, and this may affect our quarterly
results.
Any one or more of these factors could affect our business, financial
condition and results of operations, and this makes the prediction of results
of operations on a quarterly basis unreliable. As a result, we believe that
period-to-period comparisons of our historical results of operations are not
necessarily meaningful and that you should not rely on them as an indication of
future performance. Also, due to these and other factors, it is possible that
our quarterly results of operations may be below the expectations of public
market analysts and investors. This could adversely affect the price of our
common stock.
We may require additional capital in the future which may not be available
to us.
We may need to raise additional funds through public or private debt or
equity financing. Adequate funds may not be available when needed or may not be
available on favorable terms. If we raise additional funds by issuing equity
securities, dilution to existing stockholders may result. If funding is
insufficient at any time in the future, we may be unable to develop or enhance
our products or services, take advantage of business opportunities or respond
to competitive pressures, any of which could harm our business. Our future
capital requirements depend upon many factors, including, but not limited to:
.our costs to develop our legal databases;
.the rate at which we expand our operations;
.the extent to which we develop and upgrade our technology;
.the occurrence, timing, size and success of any acquisitions; and
.the response of competitors to our product or service offerings.
We could be exposed to legal liability for inaccuracies in the information
we provide because lawyers rely on the integrity of our databases when
conducting their legal research.
Although we perform extensive quality control tests on information we
include in our legal databases, we cannot achieve 100% accuracy. We may be
subject to claims by our customers based on negligence or other theories
relating to the legal information we distribute. These types of claims could be
time-consuming and expensive to defend and could result in the diversion of our
management's time and attention. We maintain business liability insurance and
provide no express or implied warranties to our customers, but our insurance
and our contracts with customers may not fully protect us against these types
of claims.
10
<PAGE>
Rapid growth in our business due to an increase in the number of customers
subscribing to our web-based products could strain our operational and
financial resources causing us to lose customers and increase our operating
expenses.
Since we began delivering our legal information databases over the Internet
in July 1996, we have experienced rapid growth in our operations. This growth
has placed a strain on our operational and financial resources. Any increase in
the volume of users of our computer system could strain the capacity of our
software or hardware, which could lead to slower response times or system
failures. Any future growth may require us, among other things, to:
. expand and upgrade our hardware and software systems;
. expand and improve our operational and financial procedures, systems and
controls;
. improve our financial and management information systems;
. expand, train and manage a larger workforce; and
. improve the coordination among our technical, sales and marketing,
financial, accounting and management personnel.
We cannot assure you that our personnel, systems and controls will be
adequate to support future growth. Our inability to manage growth effectively
or to maintain the quality of our products and services could cause us to lose
customers and could materially increase our operating expenses.
If we do not increase awareness of our brand name, our ability to reach new
customers will be limited.
Our future success will depend, in part, on our ability to increase
awareness of our brand name and our loislaw.com web site. In order to do so, we
must succeed in our marketing efforts, provide high-quality products and
services and increase traffic to our web site. We intend to increase our
marketing budget substantially as part of our brand-building efforts. If our
marketing efforts are unsuccessful or if we cannot increase our brand
awareness, we may not be able to attract new customers and increase our
revenues.
The large law firm market is currently dominated by West Group and LEXIS-
NEXIS, and we have very little experience in marketing our products to
large law firms, corporate legal departments and consumer markets, and thus
our inability to penetrate these markets could impede our growth.
Substantially all of our revenues to date have been generated by sales of
our products to small law firms having 20 or fewer lawyers. Our business
strategy calls for increased sales to large law firms and legal departments of
corporations and the development of a consumer-oriented web site. The large law
firm market for electronic legal information is dominated, and is likely to be
dominated for the near future, by West Group and LEXIS-NEXIS, our two principal
competitors. Moreover, we have little experience designing products and serving
the needs of large law firms, legal departments of corporations or consumers.
In addition, our failure to complete our comprehensive state law databases for
all 50 states by December 31, 1999 could have a material adverse effect on our
ability to penetrate the large law firm and corporate legal department markets.
Our inability to market our products to large law firms, legal departments of
corporations or consumers successfully could impede our growth.
The loss of our relationships with courts and legislatures that provide us
with court decisions, statutes and other legal information within hours of
being released could adversely affect our business by increasing the time
and expense required to convert legal information.
We maintain databases consisting of court decisions, statutes, regulations,
acts, administrative decisions and other legal information that has been
provided to us by various courts and legislatures. We have formal agreements
with some, but not all, of these data providers. Our ability to maintain our
relationships with courts
11
<PAGE>
and legislatures and to build new relationships with additional data providers
is critical to the success of our business. If we were not able to obtain data
directly from courts and legislatures, we would have to obtain it in printed
format from alternate sources, which would significantly increase the time and
expense required to convert the information into the format we use for our
products. We obtain data from most courts and legislatures free of charge or at
nominal costs. If any of them began to charge us significant fees for providing
court decisions, statutes and other data, our costs of data acquisition could
increase significantly. Also, certain materials that are not in the public
domain, including the copyrightable portions of compilations of public domain
materials, may not be available or may require us to pay significant license
fees. The loss of any relationships with data providers, or any significant
increase in data acquisition costs, could materially increase our operating
expenses.
System failures could be harmful to our reputation by interrupting our
ability to provide services through our web site.
The continued and uninterrupted performance of our computer system is
critical to our success. Any system failure that causes interruptions in our
ability to deliver our products to our customers, including failures that
affect our ability to collect information from our data providers, could reduce
customer satisfaction and, if sustained or repeated, would reduce the
attractiveness of our products. We also face the risk of a security breach of
our computer system which could disrupt the distribution of our legal
information. The number of visits to our web site has been increasing, and we
have had to purchase additional computer equipment to handle the increased
traffic. Further increases in traffic on our web site could strain our systems
and increase the likelihood of system failures.
Damage to our computer system could delay or prevent delivery of our
products and result in the loss of our customers.
Our operations are dependent on our ability to protect our computer system
against damage from computer viruses, fire, power loss, telecommunications
failures, vandalism and other malicious acts, and similar unexpected adverse
events. In addition, a failure of our telecommunication providers to provide
the data communications capacity in the time frame required by us for any
reason could cause interruptions in the delivery of our products. Substantially
all of our computer and communications hardware is located at a single facility
in Van Buren, Arkansas, and the loss of this hardware or the data it contains
would cause us not to be able to operate our business for a substantial period
of time. Unanticipated problems could interrupt or delay access to our web-
based products. Although we carry general liability insurance, our insurance
may not cover any claims by dissatisfied subscribers or may not be adequate to
indemnify us for any liability we may incur if we are sued. Any system failure,
security breach or other damage could interrupt or delay our operations, damage
our reputation and cause us to lose customers.
Our reliance on foreign data converters to convert large amounts of printed
legal material into electronic format creates risks of business
interruption due to the unpredictable nature of international business
transactions.
We rely on third parties with operations in India, the Republic of the
Philippines and The People's Republic of China to convert some of our printed
materials into electronic format, which we then edit and code into our legal
databases. Our ability to expand our product offerings depends upon the
simultaneous expansion of our legal databases. Any interruption or termination
of our arrangements with third-party data converters could result in increased
costs to us or a slow-down in our expansion and product introduction plans
while we locate alternative sources for the data conversion or increase our own
conversion capabilities. There are numerous risks related to our business with
foreign companies, including the adoption of laws and changes in political and
economic conditions that could restrict or eliminate our ability to do business
in these countries.
We depend heavily on our management team, which has little experience
working together or managing a public company.
Our success depends, to a significant extent, upon the efforts and abilities
of Kyle D. Parker, our Chairman of the Board and Chief Executive Officer, Mark
O. Beyland, our President and Chief Financial Officer, and
12
<PAGE>
other members of senior management. Loss of their services could materially and
adversely affect our business, results of operations and financial condition.
In addition, the rapid growth of our operations has strained our managerial
resources. Until Mr. Beyland joined Loislaw.com in May 1999, Mr. Parker also
performed the duties of president and chief financial officer. The short period
of time that our senior officers have worked together, or their inability to
work successfully together, may adversely affect our ability to manage growth.
Moreover, none of our officers has ever been a senior executive of a public
company. Our management team may not be able to manage future growth, if any,
or the demands of successfully operating a public company.
There is intense competition for qualified computer technicians,
programmers and sales and marketing personnel, and our failure to attract
and retain these people could affect our ability to respond to rapid
technological change and to increase our sales.
Our future success also depends upon our ability to attract and retain
qualified computer programmers, other technical personnel and sales and
marketing personnel. Competition for talented personnel, particularly technical
personnel, is intense. This competition could increase the costs of hiring and
retaining personnel. We do not have employment agreements with any of our
employees, other than Mr. Parker and Mr. Beyland. We may not be able to
attract, retain and adequately motivate our personnel or to integrate new
personnel into our operations successfully.
If our software becomes defective, it could be costly for us to correct.
Complex software such as the software we develop for our products may
contain errors or defects, especially when first implemented, that may be
costly to correct. Defects or errors also could result in downtime and our
business could suffer significantly from potential adverse customer reaction,
negative publicity and harm to our reputation.
We may not be able to protect our proprietary technology, including our
coding software, and we may infringe the proprietary rights of others.
Our services are highly dependent upon proprietary technology, including,
for example, our proprietary coding software which allows us to mark certain
information contained in our databases to enable users to search our databases.
We rely on contracts, confidentiality agreements and copyright, trademark and
trade secrecy laws to protect our proprietary rights in our technology. We have
also obtained several trademark registrations for our various product names.
These measures may not be adequate to protect our proprietary technology. Our
competitors or potential competitors may independently develop technologies
that are substantially equivalent or superior to our technology. We have
developed many of our software programs in-house, including our proprietary
coding software. These programs interact with and perform numerous functions
similar to software available from third parties. Therefore, although we do not
believe we infringe any proprietary rights, we could be subject to claims that
our technology infringes the proprietary rights of third parties. These claims,
even if without merit, could subject us to costly litigation and could divert
the time and attention of our technical and management teams.
Potential difficulties caused by Year 2000 problems may decrease use of
Internet services, may cause harm to our reputation and may adversely
affect our revenues.
Our business could be adversely affected if the systems on which we depend
to conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties and computers, software,
telephone systems and other equipment used internally. If any of our
significant hardware or software systems are not Year 2000 compliant, our web
site could be unavailable and we would not be able to deliver products to our
customers over the Internet. Many third parties with which our computer systems
interact have not responded to our inquiries about their Year 2000 compliance.
Any failure by us to address our Year 2000 compliance issues successfully, or
of our suppliers and other third parties with which we conduct
13
<PAGE>
business to address their Year 2000 issues successfully, could cause harm to
our reputation, result in the loss of customers and adversely affect our
revenues.
Our business strategy includes acquiring complementary businesses. However,
we may be unable to make attractive acquisitions or integrate acquired
companies, and our inability to do so may disrupt our business.
Our business strategy calls for acquisitions of businesses or technologies
that complement our current business. We cannot assure you that we will be able
to identify attractive acquisition opportunities. Even if we do identify
attractive candidates, we cannot assure you that we will be able to complete
the acquisition of them on commercially acceptable terms. If we acquire another
business, we could have difficulty integrating its operations, systems,
management and other personnel and technology with our own. These difficulties
could disrupt our ongoing business, distract our management and employees,
increase our expenses and adversely affect our results of operations. Even if
these difficulties could be overcome, we cannot assure you that the anticipated
benefits of any acquisition would be realized. In addition, we may incur debt
or issue equity securities to pay for any future acquisitions. The issuance of
equity securities could be dilutive to our existing stockholders.
Risks Related to Our Industry
The market for web-based legal information is new and rapidly evolving, and
we may not be able to accurately predict and respond to market
developments, which could prevent our products from being accepted.
The market for web-based distribution of electronic legal information has
only recently begun to develop and is rapidly evolving. This makes it difficult
to predict demand and market acceptance for our products as well as an
appropriate pricing strategy for our products. We cannot guarantee that the
market for our products will grow, that our products will become widely
accepted or that our pricing strategy will be successful. If the market for our
products does not develop as quickly as we expect, if our products are not
accepted by customers or if our pricing strategy is not successful, our future
revenues will be adversely affected.
Availability of free information from Internet portal companies may lessen
the demand for our products because we charge subscription fees for our
products.
We compete with Internet portal companies that offer free access to
government-sponsored sites that provide some of the same information that we
provide. These companies often expect to achieve high enough usage to allow
them to achieve profitability by selling advertising on their sites.
Substantial amounts of free legal information is also available over the
Internet and from other sources, such as courts and other government agencies.
This free information may lessen the demand for our products.
If we do not respond to rapid technological change and evolving industry
standards in the web-based legal information market, we will be at a
competitive disadvantage and we could lose potential customers to our
competitors.
The market for web-based products and services is characterized by rapid
technological developments, evolving industry standards, changing customer
demands and frequent introductions of new products, services and enhancements.
As a result, our success depends upon our ability to improve the performance,
content and reliability of our products in response to both evolving demands of
the legal community and competitive product offerings. We cannot assure you
that we will be able to do so successfully or that any enhancements or new
products that we introduce will gain acceptance in the marketplace. If we are
not successful or if our products are not accepted, we could lose potential
customers to our competitors.
14
<PAGE>
A downturn in the legal industry could cause our revenues to decrease.
Our business depends on the continued demand for legal information in
electronic format. Therefore, any downturn in business for the legal profession
could cause our revenues to decrease, which would adversely affect our results
of operations.
Sales of our web-based products are tied to the adequacy of the Internet
infrastructure and the continued growth and commercial viability of the
Internet. The failure of the Internet to grow or remain a viable commercial
medium could harm our growth.
Our success depends in large part on the maintenance of the Internet
infrastructure as a reliable network backbone that provides adequate speed,
data capacity and security. Our success also depends on the timely development
of products, such as high-speed modems, that enable reliable Internet access
and services. The Internet may continue to experience significant growth in the
number of users, frequency of use and amount of data transmitted. The Internet
infrastructure may not be able to support the demands placed on it and the
performance or reliability of the Internet may be adversely affected by this
continued growth. In addition, the Internet could lose its commercial viability
if the number of people who use the Internet does not continue to grow. A
number of factors, including unreliable service or concerns about security,
could impede this growth. The infrastructure or complementary products and
services necessary to maintain the Internet as a viable commercial medium may
not be developed, and the Internet may not continue to be a viable commercial
medium for us.
If the government adopts regulation that charges Internet access fees or
imposes taxes on subscriptions to our web-based products, our operating
expenses will increase.
Currently there are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may
be adopted that address issues such as pricing and the characteristics of
products and services. In addition, several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet and on-
line service providers in a manner similar to long-distance telephone carriers
and to impose access fees on them. This could increase the cost of transmitting
data over the Internet. Finally, state tax laws and regulations relating to the
provision of products and services over the Internet are still developing. A
few states have tried to impose taxes on products and services provided over
the Internet. If additional states try to do so, our operating costs may
increase and we may not be able to increase the price that we charge for our
products to cover these costs. Any new laws or regulations or new
interpretations of existing laws and regulations relating to the Internet could
increase our operating expenses and adversely affect our results of operations.
Risks Related to This Offering
If you purchase shares of Loislaw.com in this offering, you will suffer
immediate and substantial dilution of $11.72 per share.
You will experience an immediate and substantial dilution of $11.72 per
share in the pro forma net tangible book value per share of common stock from
the initial public offering price. Based on the initial public offering price
of $14.00 per share of common stock, our pro forma net tangible book value as
of June 30, 1999, after giving effect to this offering, is $2.28 per share. See
"Dilution" on page 19 for more detailed information about the dilution that you
will incur.
After this offering existing stockholders will continue to control
Loislaw.com.
Following this offering, Kyle D. Parker, Mark O. Beyland, Capital Resource
Lenders III, L.P., CRP Investment Partners III, LLC, Sandler Capital Partners
IV, L.P., Sandler Capital Partners IV, FTE, L.P., Exeter Capital Partners IV,
L.P., Rowland Moriarty and Dublind Partners Inc. will beneficially own 76.0% of
our outstanding common stock (74.0% if the underwriters' over-allotment option
is exercised in full). If these persons acted together, they would have
sufficient voting power to control the outcome of corporate actions
15
<PAGE>
submitted to the stockholders for approval and to control the management and
affairs of the company. In addition, our existing stockholders have agreed
under an Amended and Restated Stockholders' Agreement dated May 25, 1999 that
for so long as each of (a) Capital Resource Lenders III, L.P. and (b) Sandler
Capital Partners IV, L.P. and Sandler Capital Partners IV, FTE, L.P. own at
least 10% of the common stock of Loislaw.com, they will vote their shares of
common stock in favor of the election to our Board of Directors of one
representative designated by Capital Resource Lenders III, L.P. and one
representative designated by the Sandler parties.
The shares that you purchase in this offering might not trade at or above
the initial public offering price.
The public offering price for the common stock has been determined by
negotiations among us, the selling stockholder and the underwriters. While our
common stock will be quoted in the Nasdaq National Market, we do not know the
extent to which investor interest in Loislaw.com will lead to the development
of a trading market for the common stock or how the common stock will trade in
the future. As a result, you may not be able to resell your shares at or above
the initial public offering price.
The price at which our common stock will trade depends upon a number of
factors, including our historical and anticipated operating results and general
market and economic conditions, some of which are beyond our control. Factors
such as fluctuations in our financial and operating results and developments
affecting us and the markets or industry in which we compete could also cause
the market price of our common stock to fluctuate substantially. In addition,
the stock market, and technology stocks in particular, have from time to time
experienced extreme price and volume fluctuations. These market fluctuations
may adversely affect the market price of our common stock.
A large number of shares of our stock is eligible for future sale, and the
sale of these shares may cause the price of our common stock to drop.
After this offering, we will have outstanding 20,939,524 shares of common
stock, 21,536,524 shares if the underwriters' over-allotment option is
exercised in full. This includes the 3,900,000 shares we are selling in this
offering, 4,497,000 shares if the underwriters' over-allotment option is
exercised in full, which may be resold in the public market immediately without
restrictions under the Securities Act, except for any shares purchased by
"affiliates" of Loislaw.com (as defined in Rule 144 under the Securities Act).
The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that they could occur.
These factors could also make it more difficult to raise funds through future
offerings of common stock. See "Shares Eligible for Future Sale" on pages 59-60
for more information regarding lock-up agreements and registration rights.
Our management has broad discretion over the use of the net proceeds from
this offering and may allocate these net proceeds in ways in which you do
not agree.
A significant portion of the anticipated net proceeds to Loislaw.com from
this offering has not been designated for specific uses. Accordingly,
management will have broad discretion with respect to the use of these funds.
Our charter and the Delaware General Corporation Law may inhibit a
takeover, which may limit the price that certain investors might be willing
to pay for our common stock.
Our certificate of incorporation and bylaws contain provisions that may make
it more difficult for a third party to acquire Loislaw.com, or may discourage
acquisition bids for Loislaw.com and could limit the price that investors might
be willing to pay in the future for shares of our common stock. For example, we
have a classified Board of Directors, and after the completion of this offering
and the conversion of the Series A convertible preferred stock and the Series C
convertible preferred stock into common stock, and after the redemption of the
Series B redeemable preferred stock, the Board will have the authority to issue
up to 10,000,000 additional shares of preferred stock and to fix the rights,
preferences, privileges and restrictions of those shares without any further
vote or action by the stockholders.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions including, among other things:
. General economic and business conditions, both nationally and in our
markets;
. Assumed growth in usage of the Internet;
. Assumed growth in the number of lawyers;
. Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
. The impact of Year 2000 problems;
. Anticipated trends in our business;
. Existing and future regulations affecting our business;
. Our acquisition opportunities; and
. Other risk factors set forth under "Risk Factors" on pages 9-16 in this
prospectus.
In addition, in this prospectus, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to Loislaw.com, our business or our management, are
intended to identify forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-
looking statements.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to Loislaw.com from the sale of common stock by us in this
offering are approximately $49,928,000 ($57,700,940 if the underwriters
exercise their over-allotment option in full), after deducting underwriting
discounts and commissions and estimated offering expenses of $850,000. We
intend to use these net proceeds for the following purposes:
. to repay approximately $10.0 million of principal on three senior
subordinated notes issued by us to Capital Resource Lenders III, L.P.,
CRP Investment Partners III, L.P. and Rowland Moriarty. These notes bear
interest at a rate of 12.5% per year and are due November 30, 2003,
unless accelerated upon the occurrence of any one of several events;
. to pay approximately $4.9 million to redeem the 439,589 shares of
Series B redeemable preferred stock plus accrued dividends held by
Melissa Parker. For more information about the Series B redeemable
preferred stock, see "Certain Transactions" on page 54;
. to repay an aggregate of $4.6 million outstanding under notes and lines
of credit with Fleet National Bank, N.A. Amounts outstanding under the
notes and lines of credit bear interest at an annual rate of prime plus
1.5%;
. to pay $250,000 to Dublind Partners, Inc. for financial advisory
services; and
. the remainder of the net proceeds may be used for development of a
consumer web site and our legal databases and expansion of our marketing
and sales activities.
We have broad discretion regarding the use of some of the proceeds to us
from this offering. We intend to use the remaining net proceeds for general
corporate purposes, including working capital. We may also use a portion of the
net proceeds to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. While we discuss potential
acquisitions and investments from time to time, we currently have no
commitments or agreements for any such acquisitions or investments.
Pending these uses, we may invest the net proceeds temporarily in short-
term, investment grade, interest-bearing securities or guaranteed obligations
of the U.S. government. We will not receive any proceeds from the sale of
common stock by the selling stockholder.
DIVIDEND POLICY
We have not declared or paid and do not anticipate declaring or paying any
dividends on our common stock in the near future. Any future payment of
dividends will be at the discretion of our Board of Directors and will depend
on then-existing conditions, including our financial condition, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors as our Board of Directors deems relevant. Moreover, our
credit agreement with Fleet National Bank, N.A., prohibits us from declaring
any dividend on any class of our stock, including the common stock.
18
<PAGE>
DILUTION
Purchasers of the common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the common stock
from the initial public offering price. Pro forma net tangible book value per
share represents the amount of the total tangible assets less total liabilities
of Loislaw.com, divided by the number of shares of common stock outstanding on
a pro forma basis after giving effect to the conversion of all outstanding
shares of convertible preferred stock and the elimination of the redemption
features on 2,113,232 shares of common stock and outstanding warrants for the
purchase of 35,536 shares of common stock. At June 30, 1999, Loislaw.com had a
pro forma net tangible book value of $2,076,787 or $0.12 per share of common
stock. After giving effect to the sale of 3,900,000 shares of common stock
offered by Loislaw.com at the initial public offering price of $14.00 per share
and after the deduction of underwriting discounts and commissions and estimated
offering expenses payable by us, the pro forma net tangible book value of
Loislaw.com at June 30, 1999 would have been $2.28 per share. This represents
an immediate increase in net tangible book value of $2.16 per share to existing
stockholders and an immediate and substantial dilution of $11.72 per share to
new investors purchasing common stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price................................. $14.00
Pro forma net tangible book value as of June 30, 1999....... $0.12
Increase attributable to new investors...................... 2.16
-----
Pro forma net tangible book value after this offering......... 2.28
------
Dilution in pro forma net tangible book value to new
investors.................................................... $11.72
======
</TABLE>
The following table summarizes, on the pro forma basis set forth above as of
June 30, 1999, the differences between existing stockholders and new investors
in this offering with respect to the number of shares of common stock purchased
from us, the total consideration paid and the average consideration paid per
share (before the deduction of underwriting discounts and commissions and
offering expenses payable by us):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 17,039,524 81.4% $18,451,621 25.3% $ 1.08
New investors............... 3,900,000 18.6% $54,600,000 74.7% $14.00
---------- ----- ----------- -----
Total..................... 20,939,524 100.0% $73,051,621 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of the options or warrants
outstanding on June 30, 1999 to purchase an additional 618,658 shares of common
stock at a weighted average exercise price of $2.65 per share. To the extent
that these options or warrants are exercised, there will be further dilution to
new stockholders in the net tangible book value of their shares. For more
information about outstanding options granted by Loislaw.com, see "Management--
Equity Plans" on pages 51-52. In addition, the second table does not reflect
the sale of 80,000 shares by the selling stockholder in this offering. This
sale will reduce the shares held by existing stockholders to 81.0% of the total
shares of common stock to be outstanding after this offering, and will increase
the number of shares to be purchased by the new stockholders to 19.0% of the
total shares of common stock to be outstanding after this offering. Finally,
the number of shares disclosed for existing stockholders includes 6,853,482
shares of common stock expected to be issued immediately upon the completion of
this offering upon conversion of the outstanding Series A convertible preferred
stock and Series C convertible preferred stock. For more information regarding
the number of shares held by existing stockholders, see "Principal and Selling
Stockholders" on pages 55-56.
19
<PAGE>
CAPITALIZATION
The following table displays our Actual, Pro Forma and Pro Forma As Adjusted
capitalization as of June 30, 1999. Capitalization consists of debt, including
the current portion, redeemable equity securities and stockholders' equity
(deficit). Our Pro Forma capitalization reflects:
. the conversion of 931,044 shares of Series A convertible preferred stock
and 2,495,697 shares of Series C convertible preferred stock into
6,853,482 shares of common stock immediately upon completion of this
offering; and
. the elimination of the redemption features on 2,113,232 shares of common
stock and outstanding warrants for the purchase of 35,536 shares of
common stock.
Our Pro Forma As Adjusted capitalization reflects the Pro Forma adjustments
described in the previous paragraph and the following:
. the net proceeds from the sale of 3,900,000 shares of common stock at
the public offering price of $14.00 per share in this offering after
deducting the underwriting discounts and commissions and estimated
offering expenses;
. our application of $4.9 million to redeem 439,589 shares of Series B
redeemable preferred stock and accrued dividends on this stock and $14.6
million to repay outstanding debt with a portion of the net proceeds of
this offering;
. the loss on extinguishment of debt attributable to the write-off of
deferred loan costs in the amount of $4.0 million as a result of
repaying the related debt; and
. the payment of $250,000 to Dublind Partners, Inc. for financial advisory
services.
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(unaudited, in thousands)
<S> <C> <C> <C>
Debt, including current portion:
12.5% Senior Subordinated Notes............... $ 9,989 $ 9,989 $ --
Notes payable................................. 4,568 4,568 --
Capital lease obligation...................... 29 29 29
-------- -------- --------
Total debt.................................. 14,586 14,586 29
-------- -------- --------
Redeemable equity securities:
Series A convertible preferred................ 2,772 -- --
Series B redeemable preferred, including
accrued dividends............................ 4,940 4,940 --
Series C convertible preferred................ 13,876 -- --
Common stock.................................. 3,674 -- --
Common stock warrants......................... 62 -- --
-------- -------- --------
Total redeemable equity securities.......... 25,324 4,940 --
-------- -------- --------
Stockholders' equity (deficit)(1):
Common stock, $.001 par value; 50,000,000
shares authorized; 8,082,810 shares issued
and 17,049,524 and 20,949,524 shares issued
pro forma and pro forma as adjusted,
respectively................................. 8 17 21
Additional paid-in capital.................... 1,169 21,544 71,218
Accumulated deficit........................... (19,468) (19,468) (23,486)
Treasury stock at cost, 10,000 common
shares....................................... (16) (16) (16)
-------- -------- --------
Total stockholders' equity (deficit)........ (18,307) 2,077 47,737
-------- -------- --------
Total capitalization........................ $ 21,603 $ 21,603 $ 47,766
======== ======== ========
</TABLE>
- --------
(1) Excludes the following:
. 1,500,000 shares of common stock reserved for issuance under our
employee stock option plan, of which options to purchase 869,622 shares
are currently outstanding, including options covering 286,500 shares
granted on the date of this prospectus at the initial price to the
public;
. 320,000 shares of common stock reserved for issuance under our stock
option plan for nonemployee directors, including options covering
120,000 shares granted, subject to approval of the plan by our
stockholders, on the date of this prospectus with exercise prices equal
to the offering price;
. 300,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
. 35,536 shares reserved for issuance upon the exercise of outstanding
warrants.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our financial statements and notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing elsewhere
in this prospectus. The Statement of Operations Data for the years ended
December 31, 1996, 1997 and 1998, and the Balance Sheet Data as of December 31,
1997 and 1998, have been derived from our audited financial statements and
notes appearing elsewhere in this prospectus. The Balance Sheet Data as of
December 31, 1996, has been derived from our audited balance sheet that does
not appear in this prospectus. The Statement of Operations Data and Balance
Sheet Data as of and for the years ended December 31, 1994 and 1995 have been
derived from our unaudited financial statements that do not appear in this
prospectus. The Statement of Operations Data and Balance Sheet Data as of and
for the six-month periods ended June 30, 1998 and 1999 are derived from
unaudited financial statements appearing elsewhere in this prospectus. In the
opinion of management, all unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our financial position and results of operations for the
periods presented. The historical results are not necessarily indicative of the
operating results to be expected in the future.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------------ ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------- ------- ------- ------- -------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Web-based products.... $ -- $ -- $ 28 $ 208 $ 842 $ 272 $ 1,171
CD-ROM products....... 93 1,742 1,855 3,157 3,182 1,516 1,621
Other(1).............. 1,381 -- -- -- 1,000 353 --
------ ------- ------- ------- ------- ------- -------
Total revenues...... 1,474 1,742 1,883 3,365 5,024 2,141 2,792
------ ------- ------- ------- ------- ------- -------
Operating expenses:
Database costs........ 405 1,152 1,459 1,563 2,624 1,016 2,704
Costs of other
revenues............. 600 -- -- -- 393 147 --
Selling and
marketing............ 208 935 2,153 2,363 4,607 1,903 4,321
General and
administrative....... 301 569 1,525 1,535 1,977 1,023 1,708
Product development... 27 133 101 86 541 368 333
------ ------- ------- ------- ------- ------- -------
Total operating
expenses........... 1,541 2,789 5,238 5,547 10,142 4,457 9,066
------ ------- ------- ------- ------- ------- -------
Loss from operations.... (67) (1,047) (3,355) (2,182) (5,118) (2,316) (6,274)
------ ------- ------- ------- ------- ------- -------
Other income (expense):
Interest expense,
net.................. 13 (69) (251) (455) (1,549) (643) (1,308)
Other, net............ (74) 5 2 (6) 42 1 5
------ ------- ------- ------- ------- ------- -------
(61) (64) (249) (461) (1,507) (642) (1,303)
------ ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (128) (1,111) (3,604) (2,643) (6,625) (2,958) (7,577)
Income tax benefit...... (47) (339) (52) -- -- -- --
------ ------- ------- ------- ------- ------- -------
Net loss................ (81) (772) (3,552) (2,643) (6,625) (2,958) (7,577)
Accrued preferred stock
dividends and accretion
on redeemable preferred
stock and common stock
warrants .............. -- -- -- (34) (500) (211) (462)
------ ------- ------- ------- ------- ------- -------
Net loss applicable to
common stock........... $ (81) $ (772) $(3,552) $(2,677) $(7,125) $(3,169) $(8,039)
====== ======= ======= ======= ======= ======= =======
Net loss per share--
basic and diluted...... $(0.01) $ (0.11) $ (0.50) $ (0.37) $ (0.99) $ (0.44) $ (0.95)
====== ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding--
basic and diluted...... 7,000 7,000 7,057 7,163 7,222 7,180 8,424
====== ======= ======= ======= ======= ======= =======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June
December 31, 30,
------------- -------------
1997 1998 1998 1999
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Other Data (unaudited):
Web-based new sales(2).............................. $ 485 $1,985 $ 733 $1,780
CD-ROM new sales(2)................................. 2,370 2,081 1,088 514
------ ------ ------ ------
Total new sales(2)................................ $2,855 $4,066 $1,821 $2,294
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
------------------------------------------ June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------- ------- -------- -----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 40 $ 318 $ 102 $ 3,233 $ 99 $ 3,275
Working capital
(deficit).............. (37) (629) (3,397) (514) (4,751) (15,543)
Total assets............ 2,344 3,794 6,004 16,298 19,213 30,089
Total debt (including
capital lease
obligations)........... 116 1,744 3,963 4,107 12,273 14,586
Deferred revenues....... -- 157 1,754 3,522 3,928 4,006
Redeemable equity
securities............. -- -- -- 11,216 11,720 25,324
Total stockholders'
equity (deficit)....... 1,793 1,021 (2,231) (4,758) (11,900) (18,307)
</TABLE>
- --------
(1) Other revenues in 1994 represent payments received from a legal publishing
company that had exclusive marketing rights to our products. Other revenues
in 1998 were from producing customized databases for a third party.
(2) New sales represent the total payments to be received by us over the lives
of the subscription contracts from all new product sales to our new and
existing customers during the period. New sales do not include renewals of
existing subscriptions to our products.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Financial Data" and the accompanying financial statements and
related notes included elsewhere in this prospectus. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
but not limited to those set forth under "Risk Factors" and included elsewhere
in this prospectus.
Overview
Loislaw.com provides comprehensive, affordable and easy-to-use legal and
related information to lawyers and law firms over the Internet and on CD-ROM.
We offer more than 1,300 databases that we estimate to contain over 5.5 million
documents. These databases consist of federal and state law, continuing legal
education materials and other legal information.
Since our inception in 1987, and our release of the first known
comprehensive legal research CD-ROM in 1989, we have concentrated on producing
high quality, comprehensive coverage of state and federal legal information.
Our first CD-ROM product contained legal information for Arkansas, and we have
added legal databases each year since then. From August 1991 to July 1994, we
had an exclusive marketing agreement with Thomson Legal Publishing Company.
Substantially all of our other revenues of $1.4 million in 1994 represent
payments made to us by Thomson in connection with this agreement. This
agreement was terminated by mutual consent in 1994. In August 1994, we began
marketing our own CD-ROM products. At that time, we had 42 databases containing
legal information for five states.
We generate revenues from the sale of web-based products and CD-ROM
products. Sales of web-based products and CD-ROM products consist primarily of
fixed annual subscription fees. The list price for unlimited Internet access to
substantially all federal and state law databases that we offer is $1,176 per
seat per year. This product offers our customers access to 1,072 databases
comprised of acts, statutes, regulations and court decisions. It does not
include administrative rules and regulations databases for Delaware, Hawaii,
Maine, Mississippi, New Hampshire, Rhode Island, Vermont and Wyoming that we
license from a third party and that may be specifically subscribed to by our
customers at an additional cost of $3,600. To date, no customers have
subscribed to these additional databases. The list price for unlimited Internet
access to substantially all state law for one state is $690 per seat per year.
We do not charge any additional costs for multiple users of a seat. For
example, a law firm with three lawyers may purchase only one seat and allow all
three lawyers to share this seat for no additional cost; however, in this
example only one lawyer may use the product at a time. Our pricing strategy
with respect to our web-based products may change as a result of our evolving
market. Continuing legal education and bar materials are available for purchase
at an additional charge.
Historically we have offered CD-ROM products at annual subscription prices
ranging from $300 to $690 per state or federal jurisdiction. In recent periods,
we have de-emphasized our CD-ROM products by implementing a focused marketing
and sales effort for our web-based products. Since July 1999, we have offered
new subscriptions only for our web-based products. If requested, we deliver CD-
ROM discs for the costs of shipping and handling to subscribers of our web-
based products. Some revenue from CD-ROM sales will continue as we fulfill
obligations to our current CD-ROM customers. Revenues from CD-ROM products also
include a small amount of revenue from one-time sales of bar association
publications. We will continue to make these one-time CD-ROM sales.
The migration of our customers to our web-based products will increase our
average revenue per customer if most customers purchase unlimited Internet
access for substantially all of our databases. It will also decrease our
average cost per customer if fewer customers use our CD-ROM products. This is
because we currently provide our CD-ROM customers with updated discs every 90
days and because CD-ROM products typically require significantly more customer
and technical support due to the reinstallation of updated CD-ROM discs and
issues with customer hardware configuration changes.
23
<PAGE>
Upon the sale of a new subscription, the total amount of the subscription
fee is accounted for as deferred revenue. Revenues from subscription sales are
then recognized and charged against deferred revenue on a monthly basis over
the subscription period, which is typically one year. Subscription fees are
paid up front in cash or on a monthly basis by electronic funds transfer.
Since revenues from the sales of our products are primarily recognized over
the subscription period, we use new sales as a performance measure to monitor
the growth of our business and the effectiveness of our sales personnel and
marketing programs. New sales represent the total payments to be received by us
over the lives of the subscription contracts from all new product sales to our
new and existing customers during the period. New sales do not include renewals
of existing subscriptions to our products.
During 1995, 1996 and 1997, substantially all of our new sales were sales of
CD-ROM products. We launched our web site, loislaw.com, in July 1996 and began
selling subscriptions to our web-based products in October 1996. Since then, we
have experienced a significant shift in the mix of new sales. In 1997, web-
based products produced 17.0% of new sales and CD-ROM products produced 83.0%
of new sales. In 1998, web-based products produced 48.8% of new sales and CD-
ROM products produced 51.2% of new sales. For the six months ended June 30,
1999, web-based products generated 77.6% of new sales, while CD-ROM products
fell to 22.4% of new sales. Since July 1999, we have sold new subscriptions
only for our web-based products, and our web-based products will represent
substantially all of our new sales and revenues in future periods. Internet
searches have also increased rapidly. During the month of July 1999, there were
more than 2.2 million searches on our web site compared to 225,000 during July
1998.
Database costs consist primarily of database production costs that support
both our web-based products and our CD-ROM products. Since January 1, 1996, we
have spent more than $22 million on the production of our databases. Database
production costs represent amounts incurred for data acquisition and
conversion, editing, coding and quality control of legal information, related
salaries and benefits, facilities cost allocation and related expenses
associated with computers for data processing. We capitalize costs, other than
overhead allocations, related to the production of databases. Court decisions
establish legal precedent that is valid until the decision is reversed by the
court or overruled by a higher court. Many court decisions are never reversed
or overruled. Therefore, court decisions, particularly those of the U.S. and
state supreme courts, have significant value for long periods of time or
indefinitely. We amortize our court decision databases over 20 years. Databases
containing statutes and regulations, which are constantly being changed, have a
much more limited useful life. Consequently, we amortize these costs over two
years. We expense as incurred database maintenance and updating costs.
As of June 30, 1999, we had unamortized deferred loan costs of $4.0 million.
These deferred loan costs relate to debt that we plan to pay off with the net
proceeds from this offering. In the period that the debt is paid off, the
related deferred loan costs will be expensed and accounted for as an
extraordinary item.
Results of Operations
Comparison of Results for the Six Months Ended June 30, 1999 and 1998
Revenues. Total revenues increased 30.4% to $2.8 million for the six months
ended June 30, 1999 from $2.1 million for the six months ended June 30, 1998.
Revenues from web-based products increased 330.5% to $1.2 million for the six
months ended June 30, 1999 from $272,000 for the six months ended June 30,
1998. We believe the increase in revenues from web-based products was due
primarily to the increase in the number of legal databases we offered to 1,187
at June 30, 1999 from 342 at June 30, 1998, an increase in marketing efforts
and the expansion of our sales staff. We expect that this trend will continue
and that web-based product revenues will represent substantially all of our
total revenues in future periods. Our total number of customers increased 23.3%
to 7,844 at June 30, 1999 from 6,362 at June 30, 1998. Revenues from CD-ROM
products increased 7.0% to $1.6 million for the six months ended June 30, 1999
from $1.5 million for the six months ended June 30, 1998. This increase was
less than the increase in web-based product revenues due to the migration of
some CD-ROM customers to our web-based products and to the high percentage of
new sales generated by web-based products. Other revenues of $353,000 and costs
of other revenues of $147,000 in the first six months of 1998 related to a
customized database project that was started and completed in 1998.
24
<PAGE>
Database Costs. Total database costs increased 166.2% to $2.7 million for
the six months ended June 30, 1999 from $1.0 million for the six months ended
June 30, 1998. The increase in the costs in the first six months of 1999
compared to the first six months of 1998 is attributable to increased
amortization and updating costs as a result of having more databases.
Selling and Marketing Expense. Selling and marketing expense increased
127.1% to $4.3 million for the six months ended June 30, 1999 from $1.9 million
for the six months ended June 30, 1998. This was principally due to a 113.6%
increase in compensation and commission expenses associated with an increase in
the number of sales and marketing personnel to 183 at June 30, 1999 from 66 at
June 30, 1998. Selling and marketing expense consists primarily of:
. employee salaries and benefits for marketing and customer support
personnel;
. sales commissions paid to our sales force;
. advertising expenses;
. the cost of direct marketing promotional materials; and
. facilities cost allocation and related expenses.
We pay sales commissions upon receipt of an initial subscription payment
after subscription agreements are signed. We record commissions as prepaid
commissions and amortize them ratably over the term of the contract, typically
one year, as we recognize the associated revenues. We do not pay commissions on
renewals of subscriptions. We expense all other selling and marketing costs as
incurred.
General and Administrative Expense. General and administrative expense
increased 66.9% to $1.7 million for the six months ended June 30, 1999 from
$1.0 million for the six months ended June 30, 1998. This increase resulted
primarily from an increase in our number of administrative employees to 50 at
June 30, 1999 from 19 at June 30, 1998 and executive recruiting and relocation
costs of approximately $174,000 in the first six months of 1999. General and
administrative expense consists primarily of employee salaries and benefits,
facilities cost allocation and related expenses associated with our management,
finance, human resources, management information systems and administrative
groups.
Product Development Expense. Product development expense decreased 9.5% to
$333,000 for the six months ended June 30, 1999 from $368,000 for the six
months ended June 30, 1998. This decrease was due to a decrease in recruiting
costs incurred to hire personnel to perform product development functions.
Product development expense consists primarily of employee salaries and
benefits, facilities cost allocation and expenses related to the development
and enhancement of core software supporting our products. Product development
expense does not include the cost of acquiring or converting the data that we
include in our databases.
Interest Expense, Net. Interest expense, net of interest income, increased
103.4% to $1.3 million for the six months ended June 30, 1999 from $643,000 for
the six months ended June 30, 1998. This increase was due primarily to an
increase in borrowings to support the rapid expansion of database production
and the related increase in selling and marketing efforts. Interest expense
included amortization of deferred loan costs of $396,000 for the six months
ended June 30, 1999 and $335,000 for the six months ended June 30, 1998.
Comparison of Results for the Years Ended December 31, 1998 and December 31,
1997
Revenues. Total revenues increased 49.3% to $5.0 million in 1998 from $3.4
million in 1997. Revenues from web-based products increased 304.2% to $842,000
in 1998 from $208,000 in 1997. The increase in web-
25
<PAGE>
based revenues was due in part to an increase in the number of legal databases
we offered to 517 at December 31, 1998 from 323 at December 31, 1997, expanded
sales and marketing efforts and the migration of some CD-ROM customers to our
web-based products. Total customers increased 18.4% to 6,976 at December 31,
1998 from 5,894 at December 31, 1997. Revenues from CD-ROM products remained
relatively flat at $3.2 million in 1998 and in 1997. Other revenues of $1.0
million and costs of other revenues of $393,000 in 1998 resulted from a
customized database development project for a publishing company that was
started and completed in 1998. We earned no revenue from customized database
development projects in 1997.
Database Costs. Total database costs increased 67.8% to $2.6 million in 1998
from $1.6 million in 1997. The increase in costs for 1998 compared to 1997 is
attributable to increased overhead costs as a result of our production of more
databases and increased updating costs as a result of having more databases to
maintain.
Selling and Marketing Expense. Selling and marketing expense increased 94.9%
to $4.6 million in 1998 from $2.4 million in 1997. This increase was
principally due to a 21.9% increase in sales commissions due to increased
product sales and a 124.0% increase in compensation expense associated with an
increase in the number of sales and marketing personnel to 87 at December 31,
1998 from 44 at December 31, 1997.
General and Administrative Expense. General and administrative expense
increased 28.8% to $2.0 million in 1998 from $1.5 million in 1997. This
increase primarily resulted from an increase in the number of employees
performing general and administrative functions to 28 at December 31, 1998 from
13 at December 31, 1997.
Product Development Expense. Product development expense increased 525.5% to
$541,000 in 1998 from $86,000 in 1997. The increase was primarily due to
$304,000 paid to third party consultants for product enhancements.
Interest Expense, Net. Interest expense, net of interest income, increased
240.7% to $1.5 million in 1998 from $455,000 in 1997. The increase was due
primarily to an increase in borrowings to support the rapid expansion of
database production and the related increase in selling and marketing efforts.
Interest expense included amortization of deferred loan costs of $680,000 in
1998 and $48,000 in 1997.
Comparison of Results for the Years Ended December 31, 1997 and December 31,
1996
Revenues. Total revenues increased 78.7% to $3.4 million in 1997 from $1.9
million in 1996. Revenues from web-based products increased to $208,000 in 1997
from $28,000 in 1996. We launched our loislaw.com web site in July 1996 and
began selling subscriptions to our web-based products in October 1996. Revenues
from CD-ROM products increased 70.2% to $3.2 million in 1997 from $1.9 million
in 1996. The increase in total revenues was due in part to a significant
increase in the number of legal databases we offered. At December 31, 1997, we
had 323 databases, compared to 223 at December 31, 1996. In addition, the total
number of customers increased to 5,894 at December 31, 1997 from 4,686 at
December 31, 1996.
Database Costs. Total database costs increased 7.1% to $1.6 million in 1997
from $1.5 million in 1996. The increase in database costs is attributable to
our production of more databases.
Selling and Marketing Expense. Selling and marketing expense increased 9.8%
to $2.4 million in 1997 from $2.2 million in 1996. This increase was
principally due to an increase in sales commissions due to increased product
sales and an increase in compensation expense associated with an increase in
the number of sales and marketing personnel. Prior to June 1996, we outsourced
selling and marketing to a third party.
General and Administrative Expense. General and administrative expense
remained relatively unchanged at $1.5 million in 1997 and in 1996. Bad debt
expense declined from $525,000 in 1996 to $94,000 in 1997 due
26
<PAGE>
primarily to the transfer of our sales, billing and collection functions from
third parties to in-house personnel in June 1996. This was offset by $41,000 of
consulting fees paid for the development of our enterprise systems, an increase
in the number of employees performing general and administrative functions and
the $160,000 settlement of a lawsuit regarding the ownership of equity
securities of Loislaw.com with a third party to which we outsourced
administrative tasks.
Product Development Expense. Product development expense decreased 14.4% to
$86,000 in 1997 from $101,000 in 1996. Product development expense was minimal
in both years as efforts were focused primarily on production of databases in
both 1996 and 1997.
Interest Expense, Net. Interest expense, net of interest income, increased
81.2% to $455,000 in 1997 from $251,000 in 1996. The increase was due primarily
to an increase in borrowings to support the rapid expansion of database
production and the related increase in selling and marketing efforts. Interest
expense included amortization of deferred loan costs of $48,000 in 1997.
Quarterly Results of Operations and Other Data
The following Statement of Operations Data table sets forth a summary of our
unaudited quarterly operating results for each of the six quarters in the 18-
month period ended June 30, 1999. This information has been derived from
unaudited interim financial statements that, in the opinion of management, have
been prepared on a basis consistent with the financial statements appearing
elsewhere in this prospectus and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of this
information when read in conjunction with our financial statements and notes.
Our operating results and other data for any quarter do not necessarily
indicate what the results for any future period may be.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(unaudited, in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Web-based products..... $ 115 $ 157 $ 257 $ 313 $ 474 $ 697
CD-ROM products........ 737 778 801 866 837 784
Other.................. 117 236 255 392 -- --
------- ------- ------- ------- ------- -------
Total revenues....... 969 1,171 1,313 1,571 1,311 1,481
------- ------- ------- ------- ------- -------
Operating expenses:
Database costs......... 503 512 711 898 1,135 1,569
Costs of other
revenues.............. 46 101 102 144 -- --
Selling and marketing.. 801 1,102 1,270 1,434 1,740 2,581
General and
administrative........ 568 455 418 536 772 936
Product development.... 154 214 105 68 215 118
------- ------- ------- ------- ------- -------
Total
operating expenses.. 2,072 2,384 2,606 3,080 3,862 5,204
------- ------- ------- ------- ------- -------
Loss from operations..... (1,103) (1,213) (1,293) (1,509) (2,551) (3,723)
Other income (expense)... (278) (364) (410) (455) (593) (710)
------- ------- ------- ------- ------- -------
Net loss................. $(1,381) $(1,577) $(1,703) $(1,964) $(3,144) $(4,433)
======= ======= ======= ======= ======= =======
Other Data:
Web-based new sales(1)... $ 181 $ 552 $ 444 $ 808 $ 608 $ 1,172
CD-ROM new sales(1)...... 462 626 593 400 256 258
------- ------- ------- ------- ------- -------
Total new sales(1)... $ 643 $ 1,178 $ 1,037 $ 1,208 $ 864 $ 1,430
======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) New sales represent the total payments to be received by us over the lives
of the subscription contracts from all new product sales to our new and
existing customers during the period. New sales do not include renewals of
existing subscriptions to our products.
27
<PAGE>
Our quarterly revenues and results of operations have fluctuated
significantly in the past, and we expect them to continue to fluctuate
significantly in the future. Other revenues in all four quarters of 1998
resulted from a customized database development project for a publishing
company that was started and completed in 1998. Quarterly results from
operations are significant to investors because they illustrate recent changes
and trends in our business. For example, the quarterly revenue information
illustrates a transition from CD-ROM products to web-based products. Likewise,
the quarterly results show that total revenues declined for the quarter ended
March 31, 1999 because of the lapse of our customized database development
revenue. Causes of quarterly fluctuations have included and may include, among
other factors:
. introduction of new products or pricing programs by our competitors;
. difficulties in managing growth;
. technical difficulties or system downtime affecting our web-based
products;
. other business interruptions;
. changes in pricing strategy;
. increases in selling and marketing expenses, as well as other operating
expenses;
. Year 2000 problems with our technology or the technology of third parties
with which we do business;
. amount and timing of the costs associated with the development and
introduction of new database products;
. economic conditions specific to the Internet or to the legal profession,
as well as general economic conditions; and
. costs and risks associated with potential acquisitions.
Our quarterly operating results have also been subject to seasonal
fluctuations. Our results are affected by the spending patterns of small law
firms, which constitute our primary customers. These timing variations can
cause our revenues to fall short of our expectations and have an adverse effect
on our operating results.
In addition, we must incur a substantial portion of our expenses, including
product development and selling and marketing expenses, in advance of revenue
generation. If our projected revenue does not meet our expectations, then our
operating profit (loss) is likely to fall even shorter of our expectations.
Liquidity and Capital Resources
We have used substantial amounts of cash in the growth of our company.
Operating activities provided $349,000 in cash during 1996. Operating
activities used cash of $1.7 million in 1997, $5.0 million in 1998, and $5.9
million in the six months ended June 30, 1999, primarily resulting from our net
losses, reduced by depreciation and amortization during those periods. We
expect to continue to incur significant database production costs for the
foreseeable future. The continued amortization of production costs of new
databases is expected to generate losses for 1999 through the end of 2000.
Investing activities used cash of $3.0 million in 1996, $2.1 million in
1997, $6.2 million in 1998 and $7.6 million during the six months ended June
30, 1999. In 1996 and 1997, the primary use of cash was the payment of our
database production costs, which were capitalized. In 1998, $4.8 million of
these expenditures was for the payment of our database production costs, which
we capitalized, and $1.2 million was for property and equipment purchased to
support the growth of our business. In the first six months of 1999, $5.7
million of these expenditures was for the payment of our database production
costs, which we capitalized, and $1.7 million of these expenditures was for
property and equipment purchased to support the growth of our business.
28
<PAGE>
To finance our operations and continued expansion we have obtained
additional capital through private placements of debt and equity and from
related party and bank financing. Total financing, net of repayments, was
approximately $2.4 million in 1996, $6.9 million in 1997, $8.1 million in 1998
and $16.7 million during the six months ended June 30, 1999, which included
financing from a private placement of common stock and convertible preferred
stock in the amount of $15.0 million.
During the final six months of 1999, we are obligated to pay $1.2 million to
a third party for data conversion services. During the final six months of
1999, we anticipate spending significant amounts for data conversion costs in
connection with updating existing and acquiring new databases, for the purchase
of property and equipment and in connection with the development of a second
site fully equivalent to our live web site. We believe available borrowings
under our bank credit facility, cash generated by operations and the proceeds
of this offering will be adequate to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
As part of our growth strategy, we may consider acquiring companies or
businesses, and any acquisition could significantly increase our cash
requirements. We are not currently involved in any negotiations relating to any
acquisition. An acquisition, or any other increase in our anticipated cash
requirements, could require us to obtain additional financing. We cannot assure
you that additional financing would be available to us or, if available, that
we would be able to obtain it on terms we considered satisfactory. If we raise
capital through the issuance of additional equity securities, you may suffer
additional dilution in the value of the common stock you purchase in this
offering.
Our credit agreement with Fleet National Bank dated August 20, 1998, as
amended, establishes the following:
. a working capital revolving line of credit in the maximum principal
amount of $2.5 million;
. an equipment line of credit in the maximum principal amount of $1.0
million that converted to a term note on June 1, 1999;
. a second equipment line of credit in the maximum principal amount of
$1.5 million that will convert to a term note on June 1, 2000; and
. a line of credit to finance the production of our databases in the
maximum principal amount of $7.0 million that converted to a term note
on April 30, 1999.
Each of these lines bears interest at a floating rate equal to a specified
percentage above the bank's prime rate. We must pay a commitment fee with
respect to the revolving line of credit in the amount of $6,250 per fiscal
quarter. In addition, the Fleet credit facility contains restrictive covenants
that obligate us to maintain financial ratios and that, without the prior
written consent of the bank, generally prohibit us from incurring indebtedness
or declaring or paying dividends or other distributions. At December 31, 1998
and March 31, 1999 we were in default under the credit facility for failing to
meet financial covenants. In May 1999 the bank waived the default of these
covenants. On June 30, 1999 we were in default under our quick ratio covenant,
however, the bank waived this default and any future defaults that may occur
regarding this quick ratio covenant until March 31, 2000. We expect to incur
significant database production costs for the foreseeable future. Consequently,
we may need to obtain additional funds in order to prevent a future default. As
of June 30, 1999, we had outstanding borrowings under the credit facility as
follows:
. $994,000 under the term note for equipment costs;
. $292,500 under the second equipment line; and
. $3.3 million under the term note for database production costs.
All borrowings under the credit facility are secured by a pledge of most of
our assets.
Net Operating Loss
Since 1994, we have incurred significant net losses. Through June 30, 1999,
our accumulated deficit totaled $19.5 million. At December 31, 1998, we had net
operating loss carry-forwards of approximately $17.3
29
<PAGE>
million for federal income tax purposes that begin to expire in 2010 and state
net operating loss carry-forwards of approximately $19.0 million that begin to
expire in 2000. We cannot assure you that we will have income, if any, that is
sufficient to allow us to use these loss carry-forwards.
Year 2000 Disclosure
The Year 2000 issue is the result of computer programs being written using
two rather than four digits to define the applicable year. The arrival of the
year 2000 poses a unique worldwide challenge to the ability of systems to
recognize the date change from December 31, 1999 to January 1, 2000. The Year
2000 issue could result in system failures or miscalculations causing
disruptions of operations. Among other things, our customers may temporarily be
unable to access our databases or we may be unable to engage in other normal
business activities. For purposes of this discussion, the terms "computer
equipment" and "software" include systems that are commonly thought of as
information technology systems, including accounting, data processing, data
conversion and telephone/PBX systems, as well as systems that are not commonly
thought of as information technology systems, such as heating and air
conditioning systems, fax machines, or other miscellaneous systems. Both
information technology and non-information technology systems may contain
embedded technology, which complicates our identification, assessment,
remediation and testing efforts.
We have taken various steps intended to ensure that our computer equipment
and software will function properly on January 1, 2000 and thereafter. We have
completed assessments of our information technology systems and our non-
information technology systems, which consist primarily of minor office
equipment. Based upon our identification and assessment of our information
technology systems, we have replaced or modified computer equipment and
software, as necessary, including our telephone/PBX system. Based upon our
identification and assessment of our non-information technology systems, we
have not identified any equipment or software requiring replacement or
modification. In addition, in the ordinary course of replacing computer
equipment and software, we only purchase replacement parts that manufacturers
represent are Year 2000 compliant. Using both internal and external resources
to identify and assess needed Year 2000 remediation, we currently anticipate
that our Year 2000 identification, assessment, remediation and testing efforts,
which began in August 1997, will be completed by November 1999, and that these
efforts will be completed prior to any currently anticipated impact on our
computer equipment and software. At August 31, 1999, we had completed
approximately 90 percent of our Year 2000 initiatives and the remaining ones
are in process and we expect to complete them on or about November 1, 1999.
Specifically, we completed our analysis of and corrected Year 2000 problems
associated with our main computer system which includes our application servers
that run our programs and our data servers that house our data. With respect to
the desktop and individual work stations of our employees, we have completed
our analysis of Year 2000 problems and have begun to replace defective
hardware. We expect to complete this process by November 1, 1999.
Our programs are not dependent on computer time and date stamps. Instead,
our programs store references to times and dates internally in data files that
are able to recognize four-character dates including the year 2000. This will
enable our customers to perform searches and display search results even if
their personal computers only recognize two-character dates.
We have mailed letters to our overseas data convertors to determine the
extent to which their information technology and non-information technology
systems are vulnerable to Year 2000 issues. Based on their responses, we
believe that these data converters' software and computers are year 2000
compliant. We do not believe that there are any Year 2000 issues with respect
to the electronic data we receive from our third party data providers. We
typically receive the data in both electronic and printed form and believe that
if a Year 2000 issue should arise with respect to the electronic data, we could
convert the same data from printed form with minimal delay.
In addition, we have completed our survey of third party data vendors, and
all of our major vendors have provided Year 2000 compliance statements. We have
contacted 307 of our 309 secondary vendors. Three hundred five of these vendors
indicate that they are Year 2000 compliant.
30
<PAGE>
We believe the total cost of our Year 2000 identification, assessment,
remediation and testing efforts, as well as costs we expect to incur with
respect to Year 2000 issues of our third party information technology vendors,
will not exceed $200,000, which will be funded from operating cash flows. All
of this amount relates to analysis, repair or replacement of existing software,
upgrades of existing software, or evaluation of information received from
significant vendors, service providers or customers. This amount represents
approximately 6.0% of our total actual and anticipated information technology
expenditures for fiscal 1999. As of August 31, 1999, we had incurred costs of
approximately $35,000 related to our Year 2000 program. Other non-Year 2000
information technology efforts have not been materially delayed or impacted by
Year 2000 projects. We believe that the Year 2000 issue will not pose
significant operational problems for us. However, if we do not properly
identify all Year 2000 issues, do not successfully complete remediation and
testing with respect to problems that we identify, or do not do so in a timely
manner, we cannot assure you that the Year 2000 issue will not materially
adversely affect our relationships with customers, vendors or others.
Additionally, we cannot assure you that the Year 2000 issues of other entities
will not have a material adverse impact on our systems or business.
We have begun, but not yet completed, a comprehensive analysis of the
operational problems and costs that would be reasonably likely to result from
our failure and the failure of our data converters, vendors and service
providers to achieve Year 2000 compliance on a timely basis. We have not yet
developed a contingency plan for dealing with the most reasonably likely worst
case scenario, and we have not yet clearly identified the worst case scenario.
We plan to complete the worst case scenario analysis and contingency planning
by November 1, 1999.
We do not plan to engage an independent expert to evaluate our Year 2000
identification, assessment, remediation and testing efforts. However, the firm
that provided installation, training and other services in connection with our
new accounting and sales force management software has reviewed Year 2000
issues related to that software. A number of problems have been identified and
have been corrected.
The costs of our Year 2000 identification, assessment, remediation and
testing efforts and the dates on which we believe we will complete those
efforts are based upon our management's best estimates, which were made using
numerous assumptions regarding future events, including the continued
availability of resources, third-party remediation plans and other factors. We
cannot assure you that these estimates will prove to be accurate and actual
results could differ materially from those we currently anticipate. Specific
factors that could cause material differences include, but are not limited to,
the availability and cost of personnel trained in Year 2000 issues, the ability
to locate and correct all relevant computer codes, and the ability to identify,
assess, remediate and test all embedded technology and similar uncertainties.
Recently Issued Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when these costs should be capitalized. We do not expect SOP 98-
1, which is effective for Loislaw.com for our fiscal year ending December 31,
1999, to have a material effect on our financial condition or results of
operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." Start-up activities are defined broadly as those one-time
activities relating to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SOP 98-5, the cost of start-up activities
31
<PAGE>
should be expensed as incurred. SOP 98-5 is effective for Loislaw.com for our
fiscal year ending December 31, 1999, and we do not expect its adoption to have
a material effect on our financial condition or results of operations.
Quantitative and Qualitative Disclosures About Market Risk
We do not engage in commodity futures trading or hedging activities and do
not enter into derivative financial instrument transactions for trading or
other speculative purposes. We also do not engage in transactions in foreign
currencies or in interest rate swap transactions that could expose us to market
risk.
We are subject to some interest rate risk in connection with our bank credit
facility. This facility permits us to borrow up to $12.0 million, consisting of
up to $2.5 million under a secured working capital revolving line of credit, up
to $2.5 million under two secured equipment lines of credit and up to $7.0
million under a secured line of credit to develop our databases. All amounts
that we borrow under the credit facility bear interest at floating rates. At
June 30, 1999, the outstanding principal balance under the credit facility was
$4.6 million, and during 1998 the average outstanding principal balance was
$2.9 million.
32
<PAGE>
BUSINESS
Overview
Loislaw.com provides comprehensive, affordable and easy-to-use legal and
related information to lawyers and law firms over the Internet and on CD-ROM.
We offer more than 1,300 databases that we estimate to contain over 5.5 million
documents. These databases consist of federal and state law, continuing legal
education materials and other legal information. We believe this is the largest
collection of legal databases in hypertext mark-up language, or HTML, the
standard format language used on the Internet. We offer powerful and intuitive
search tools designed to make our information easily accessible and valuable to
our users. Through LOIS LawWatch, we provide personalized, intelligent-
searching software programs that automatically and continuously search our web
site and notify our users when new documents match their search criteria. Our
news feeds provide more than 100,000 news articles a month from more than 400
domestic and international sources. Our legal information is available through
our web site at loislaw.com for an annual subscription price.
At June 30, 1999, we had a total of 7,844 customers, of which 3,132
purchased our web-based products. The percentage of customers that renewed
their subscriptions to our products was 89.3% in 1998. We have historically
targeted our sales to small law firms with fewer than 20 lawyers. Currently, we
provide statutes, regulations and rules of court for all state and federal
jurisdictions. We also provide comprehensive court decisions for the U.S.
Supreme Court dating back to 1899 and all federal circuit courts of appeal
dating back to 1971. In addition, with the completion of databases for 14 new
states during the first eight months of 1999, we currently provide
comprehensive legal information for 34 of the 50 states. The lawyers in these
34 states represent over 88% of the total number of practicing lawyers in small
U.S. law firms. Small firms typically require legal information for the states
in which they practice, while large law firms typically require legal
information for all 50 states. We intend to complete our state law databases
for all 50 states by December 31, 1999. Upon completion of these databases, we
plan to aggressively market to additional small law firms, large law firms and
legal departments of corporations.
Our objective is to become the leading Internet destination for lawyers, law
students, business people and consumers who need legal and related information.
We developed our core products to serve the research needs of lawyers. As we
expand our product offerings, we plan to address additional needs of lawyers
and offer legal information in a format designed to meet the needs of
consumers.
Industry Overview
The market for web-based and other on-line legal, tax and public record
information is large and growing. According to Simba Information, Inc.'s
Web/Online Services 1998-2002: Market Analysis & Forecast, the market for web-
based and other on-line legal, tax and public record information was $1.7
billion in 1998 and is projected to grow to $2.7 billion in 2002. We cannot
assure you that this projected growth will be achieved.
We believe that the following are the key drivers of growth in the market
for web-based and other on-line legal information:
. An increase in the number of lawyers;
. An increase in litigation; and
. The growth of the Internet.
33
<PAGE>
Users of legal information include lawyers, law students, business people
and consumers. Lawyers are the largest users of legal information. According to
Veronis Suhler & Associates in its October 1998 Communications Industry
Forecast, there were projected to be approximately 980,000 lawyers in the
United States at December 31, 1998, and this number is projected to grow to
1,065,000 in 2002. We cannot assure you that the number of lawyers will grow to
this projected amount.
In recent years the number of lawsuits has increased. According to a report
by the National Center for State Courts, from 1984 to 1997 the number of civil
lawsuits grew by 28% and criminal caseloads increased by 55% in the state court
systems.
The explosive growth of the Internet is rapidly transforming the market for
legal information. The Internet is an increasingly significant medium for
collecting, manipulating and distributing information. This growth is being
driven by, among other things, the increased use of personal computers and
modems, lower cost access to the Internet, increased awareness of the Internet
and more compelling interactive content available on the Internet. These
factors are also fueling the growth of Internet use in law firms. According to
a February 1998 survey by the American Bar Association, nearly 99% of large law
firms surveyed had Internet access.
Increasingly, Internet use has penetrated small law firms with fewer than 20
lawyers, which we believe represent approximately 55% of all lawyers in the
U.S. According to the February 1998 American Bar Association survey, nearly 80%
of small law firms surveyed had Internet access and 37% of small law firms
without Internet access planned to obtain it in 1998. Although Internet access
at small law firms has increased, many lawyers at small law firms continue to
rely on books and reference guides for their legal research needs. Books and
reference guides are inefficient, cumbersome and sometimes not updated in a
timely manner to reflect changes in the law. Moreover, the capital investment
required to acquire a printed law library is substantial, and prohibitive for
many small law firms. As a result, lawyers in small law firms often must travel
to local law libraries to conduct legal research. Electronic legal information
has emerged as an alternative to printed legal information because it can be
more rapidly updated, more easily stored and more quickly searched than printed
legal information.
The dominant providers of electronic legal information have been LEXIS-NEXIS
and West Group. Until recently, they have provided their information through
closed networks accessed through a dial-up modem. These traditional electronic
legal information providers built their network infrastructures based upon
mainframe computer systems. Recently, these traditional providers have offered
an Internet gateway to their closed systems. However, we believe the source
information in their legal databases is generally not organized in HTML, the
standard format language used on the Internet. Databases that are not organized
in HTML or another Internet-based language are not designed to provide full
functionality and ease of use over the Internet. In addition, we believe these
traditional electronic legal information providers' infrastructures, computer
systems, business models and distribution methods have resulted in pricing that
has traditionally made their products too expensive for many small firms.
Currently, there are other providers of legal information on the Internet.
However, we believe that most of them do not provide comprehensive and current
legal information required by lawyers and business professionals. Most legal
Internet sites act as portals to free legal information that is on government-
sponsored sites. These legal sites are simply aggregators of information, which
often is not edited or reviewed to ensure the integrity of the information.
Furthermore, the information may not be in a format that allows researchers to
complete tasks in a timely manner. While some of this information may be an
improvement over law books, it generally does not match the functionality of
traditional electronic legal databases.
Traditional electronic legal information providers, book publishers and
Internet portal companies do not adequately meet the information needs of many
legal professionals in today's highly litigious and competitive legal
environment. We believe there is a significant opportunity to provide
comprehensive, affordable and easy-to-use web-based legal information to meet
the needs of law firms, corporations and other consumers of legal information.
34
<PAGE>
The Loislaw.com Solution
Through our web site, loislaw.com, we provide comprehensive, affordable and
easy-to-use legal information to lawyers and law firms over the Internet. We
believe that we were the first company to provide this comprehensive
information over the Internet and that we have the largest collection of
databases of federal and state law organized in HTML. We offer an attractive
alternative to law firms, legal departments of corporations, government bodies
and law schools that previously could only choose between law books and
expensive electronic legal information.
Internet Delivery Model
Our Internet delivery model allows us to provide easily accessible legal
information in a user-friendly format. To access our legal information, a
subscriber needs only an Internet connection. Our databases are based on
standard Internet technology and our customers need no additional installation
or systems support and have full access to the databases at all times and from
anywhere via the Internet.
Price
Access to our loislaw.com web site is available at an affordable fixed
annual subscription price. Our fixed- price model encourages lawyers to use our
web site as needed without concern for additional charges. Subscribers pay a
fixed annual subscription price of $1,176 per seat per year and receive access
to acts, statutes, regulations, court decisions and attorney general opinions.
Access to these databases does not include eight special databases comprised of
state regulations that we license from a third party and that may be
specifically subscribed to by our customers at an additional cost of $3,600.
Advanced Functionality
Our loislaw.com web site provides advanced functionality. For example, we
provide:
. simultaneous searching of multiple databases using sophisticated search
technology that supports both traditional and plain language searches;
. the ability to save multiple searches for an indefinite period of time;
. summaries of documents produced by a search that gives a user the ability
to determine the relevance of the search results prior to reviewing the
full text;
. automatic notification by email of new information matching the user's
specified search criteria;
. HTML formatting, which permits hyperlinking, cutting-and-pasting and
printing;
. pop-up abilities, which permit simultaneous review of original and
hyperlinked documents; and
. complete multi-media tutorials.
Breadth of Information
We have more than 1,300 databases that we estimate to contain over 5.5
million documents. These databases consist of federal and state law, continuing
legal education materials and other legal information. We provide statutes,
regulations and rules of court for all state and federal jurisdictions. We
currently provide comprehensive court decisions for the U.S. Supreme Court, all
federal circuit courts of appeal and 34 states, as well as a limited number of
court decisions for the remaining 16 states. Over 88% of lawyers in small U.S.
law firms practice in states in which we have comprehensive legal databases. We
expect to provide comprehensive court decisions for all 50 states by December
31, 1999 and for bankruptcy courts, tax courts and selected federal district
courts by the second quarter of 2000. Through Loislaw.com news feeds, we also
provide access
35
<PAGE>
to more than 100,000 news articles per month extracted from more than 400
domestic and international sources of legal, business, financial, health,
technology and political news.
Timeliness
Our infrastructure and relationships with data providers enable us to meet
or exceed the industry standards in timeliness. We have relationships with over
400 governmental entities and independent publishers from whom we receive court
decisions, statutes, regulations, acts and administrative decisions. We have
over 200 employees in our production department who process this legal
information and make it available on our web site. We are usually able to make
newly-released legal information available on our web site within 24 hours
after we receive it in electronic format and within 72 hours after we receive
it in print.
Accuracy
We maintain databases consisting of court decisions, statutes, regulations,
acts and administrative decisions that we have tested to a 99.995% rate of
accuracy. We believe this rate is comparable to the accuracy rates of our
principal competitors and is substantially better than the typical accuracy
rates of many legal web sites accessed through Internet portal companies. To
achieve our accuracy standards, we follow a strict quality control process
involving 56 testing procedures.
Strategy
Our goal is to gain a significant share of the market for web-based and
other on-line legal information and to become the leading Internet destination
for legal and related information. The key elements of our strategy include:
. Expand Current Loislaw.com Customer Base. We believe that substantially
all of our existing customer base consists of small law firms. We
believe this segment of the market is underserved by traditional
electronic legal information providers and, as a result, we intend to
continue to market aggressively to small law firms to expand our small
firm customer base. We believe there are substantial opportunities to
expand our presence in this underserved segment through completion of
databases in new states, increased sales to our current customer base,
aggressive marketing to potential new customers and conversion of our
CD-ROM customers to web-based customers.
. Aggressively Market Products to Large Law Firms and Legal Departments of
Corporations. After we complete our state law databases for all 50
states, we intend to aggressively market our products to large law firms
and legal departments of corporations. We have not focused our marketing
efforts on these potential customers to date because they generally
require access to comprehensive court decisions for all 50 states. We
expect to complete databases of comprehensive court decisions for all 50
states by December 31, 1999. We believe our ability to provide
comprehensive, affordable and easy-to-use legal information will present
an attractive alternative or complement to information currently
purchased from traditional providers of legal information.
. Expand Content and Features. We intend to continue to build the depth
and breadth of our databases through internal development and by
licensing and acquiring information from third parties. For example, in
addition to completing the state law databases for the remaining 16
states by December 31, 1999, we intend to add tax court and bankruptcy
court and selected federal district court decisions by the second
quarter of 2000. In addition to expanding content, we intend to expand
features available through our web site and are currently developing
personalized database management capabilities and tools for personalized
customer homepages.
. Build Brand Awareness. We believe it is critical to continue to build
brand awareness in order to market our products to large law firms and
legal departments of corporations as well as to our
36
<PAGE>
existing small law firm customer base. We intend to continue to promote
brand awareness through expansion of our direct sales force, reliable
product offerings, excellent customer service and effective marketing
and promotion. Further, in an effort to increase law student awareness
of Loislaw.com, we instituted a program of introducing our products to
law librarians at law schools across the U.S. Currently, we provide law
librarians at law schools free training as well as access to our web-
based products for a nominal charge. We have entered into similar
relationships with many state bar associations and continuing legal
education associations offering lawyers who are members of these
associations the opportunity to learn about and try our products at
reduced rates. We intend to pursue relationships with additional state
bar associations and continuing legal education organizations.
. Form Strategic Alliances and Make Acquisitions. We intend to continue to
forge alliances with state and national bar associations, continuing
legal education associations and court systems. Moreover, we may seek
additional information sources, distribution channels or technology
through selective acquisitions or strategic alliances. We have recently
entered into a letter of intent that contemplates a cooperative
marketing arrangement with ChoicePoint Inc., a leading provider of
public records information. See "Strategic Alliance" on page 42 for more
information about this proposed arrangement.
. Enter the Consumer Market. We are currently developing a new web site
linked to our loislaw.com web site that will offer legal information and
related information to nonlawyers. We intend to leverage the content on
our current web site, together with our experience in the legal market,
to enter this new market. We expect that this new web site will include
news feeds, selected legal information from our current web site and
legal forms. In addition, the web site may include attorney referrals,
an ask-an-attorney service and other services.
Products
Loislaw.com Web Site
Our web site offers Internet access to federal and state law, continuing
legal education materials, current news feeds and other legal information. We
have more than 1,300 databases that we estimate to contain over 5.5 million
documents.
Our customers access our website with a user identification number and a
password that we provide when they subscribe to our web-based products.
Customers search our databases by typing in search words. Search results are
first presented to a customer in a summary form and if a customer decides to
see the full document, he or she simply selects this option on the screen.
. Federal Law. The following table sets forth the content of our federal
law databases. In addition, by the second quarter of 2000 we intend to
offer bankruptcy court, tax court and selected federal district court
decisions.
Description of Federal Law Databases
---------------------------------------------------------
U.S. Reports (official court decisions of the U.S.
Supreme Court) 1899-present
U.S. Constitution
U.S. Code (federal statutory law)
U.S. Code of Federal Regulations and Federal Register
U.S. Federal Reports (official court decisions of all
13 U.S. Circuit Courts of Appeal) 1971-present
Rules of the U.S. Supreme Court
37
<PAGE>
. State Law. We currently offer comprehensive state law databases for 34
states and intend to complete the databases for the remaining 16 states
by December 31, 1999. Over 88% of the total number of practicing lawyers
in small U.S. firms practice in states in which we have comprehensive
state law databases. A comprehensive state law database provides all
statutes, regulations, acts and court rules, appellate court decisions
as well as at least 45 years of court decisions. The map and table below
depict the states for which we provide comprehensive state law databases
and the years in which they were completed.
[Map of the United States with shaded states corresponding to the 34 states in
which the Company has comprehensive state law databases. The shaded states are
the same as the states listed in the table following the map.]
<TABLE>
<CAPTION>
Comprehensive State Legal Information Coverage
- --------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999 (1)
<S> <C> <C> <C> <C> <C>
-------------- --------- -------------- ------------- -------- ------------
Arkansas Georgia Massachusetts Kansas Arizona Alabama
Colorado Missouri Oklahoma New Hampshire Florida California
Connecticut Wisconsin South Carolina Rhode Island Indiana Delaware
Louisiana New York Idaho
Nebraska Texas Illinois
North Carolina Maryland
Michigan
Nevada
New Jersey
Ohio
Pennsylvania
Tennessee
Virginia
Washington
</TABLE>
(1) Represents coverage through September 29, 1999.
38
<PAGE>
. Continuing Legal Education. Under cooperative marketing alliances with
state bar associations and continuing legal education associations, we
provide continuing legal education and bar materials to lawyers in over
10 states. We provide 312 databases related to the continuing legal
education programs administered by these groups.
. Loislaw.com News Feeds. Our web site provides news feeds of more than
100,000 news articles per month from more than 400 domestic and
international sources of legal, business, financial, health, technology
and political news. The news feeds can be filtered to reflect the user's
personal search criteria or interests. Ninety days of news is stored in
our servers and can be searched by the user.
A subscription to the products we offer on our web site includes the
following features and benefits:
. LOIS LawWatch. Our web site provides personalized, intelligent-searching
software programs that automatically and continuously search our federal
and state law databases and news feeds. LOIS LawWatch delivers results
of these searches to users by email or by saving search results on
users' personalized homepages on our web site. LOIS LawWatch is in an
easy-to-use format with on-screen tutorials to guide users in
establishing ongoing, personalized search instructions.
. Advanced Functionality. We offer intuitive search tools designed to make
our information easily accessible and valuable to our users. Users may
search for information in any combination of multiple jurisdictions
simultaneously and may do so simply by entering a string of words.
Moreover, all of our data is hyperlinked to enable the user to retrieve
a second document and view it simultaneously with the initial document.
Loislaw.com also offers a time clock to assist lawyers in timekeeping as
well as a citation checking service that allows a user, among other
things, to confirm that a court decision has not been overruled.
. Exceptional Service. Our web site is user friendly, offering tips and
navigational instructions on each page. In addition, we provide our
subscribers with 24-hour customer telephone and email support and
provide company field sales representatives who assist customers with
training.
We sell our web-based products through annual subscriptions. Unlimited
Internet access to substantially all federal and state law databases lists for
$1,176 per seat per year. Unlimited Internet access to substantially all state
law for one state lists for $690 per seat per year. Continuing legal education
and bar materials are available for purchase at an additional charge.
CD-ROM Products
Prior to our introduction of the loislaw.com web site in 1996, we
distributed federal and state law databases exclusively on CD-ROM. We sold new
subscriptions to our CD-ROM products until July 1999. While we no longer sell
new CD-ROM subscriptions, we expect to continue to produce CD-ROMs in order to
offer to our customers a supplemental source when Internet access may not be
available to them. We also expect to continue to make one-time sales of bar
association publications on CD-ROM.
Production of Databases
Our customers require access to highly accurate, searchable and up-to-date
legal databases. Accordingly, the process of producing our databases is
critical to our success.
We generally receive all statutes, court decisions, regulations, acts and
rules directly from official sources within each jurisdiction. We receive this
information in both print and electronic form. We have entered into
relationships with official sources in each jurisdiction where we provide legal
information. In some jurisdictions we have written agreements formalizing our
relationships and in other jurisdictions that do not require a written
agreement we do not have a written agreement.
39
<PAGE>
The charges for access to legal information varies from agreement to
agreement. For example, a number of our official sources charge us a nominal
fee for delivery of the legal information. Other official sources charge us
annual amounts and a percentage of sales. In addition, other official sources
charge us a "per email" or "per megabyte" charge. With respect to our news
feeds database, we have entered into an agreement with a third party provider
and we are charged a monthly fee. We convert legal information into standard
generalized mark-up language, or SGML, and hypertext mark-up language, or HTML,
to make it easy for users to search our legal databases. By using HTML and SGML
programming languages we require fewer lines of code than mainframe computer
languages and thereby reduce our costs.
When we initially establish a database of legal information, we typically
must convert large amounts of historical information from printed text to
electronic form. We have converted substantial portions of this data pursuant
to agreements with Pacific Data Conversion Corp. operating from The People's
Republic of China, Digital Publishing International Ltd. operating from the
Republic of the Phillipines, and Infocon operating from India. We pay these
companies based on the number of characters converted, the accuracy of the
converted data and the timeliness of the conversion. Our agreement with Pacific
Data Corporation was for a term of six months and has now expired; however, we
are currently negotiating an extension of this agreement. Our contract with
Digital Publishing International Ltd. is for a term of 18 months ending in
December 1999. Our agreement with Infocon continues for an unspecified period
of time. After the information is converted to electronic format, it is
forwarded to us for further processing. All of our historical court decisions,
approximately 40% of our new statutes and 40% of our new regulations are
converted by these third party converters. The balance of this information is
converted by us.
We continually update our databases by adding new court decisions, statutes,
regulations and other legal information. We receive this new information in
both electronic and printed format. For information delivered to us in printed
format, we scan the printed text on imaging equipment, convert it to an
electronic format and run software programs to identify and correct errors.
With respect to both electronic data converted overseas and electronic data
received or converted by us, we perform extensive quality control and editing
functions including:
. spell checks;
. translation of information into SGML and HTML;
. input of page numbers, carriage returns and line feeds, reference lines
and other information; and
. assembly of the information into logical blocks.
After the editing process, our paralegals code the information using up to 30
different codes, such as parties' names, dates and judges' names, to provide
fields for accurately searching the information in each database.
To complete this process, we perform both automated and manual quality
control tests to assure that we have completed the imaging/scanning, editing
and coding processes successfully. We compile and index the information and
then submit it to a final, more stringent, quality control test. If the
information does not satisfy our accuracy standards, we send the information
back to editing or coding to restart the entire process. If the information
passes the second quality control test, we place it on our Internet server.
This quality control process includes 56 testing procedures and results in data
that we have tested to an accuracy rate of 99.995%.
40
<PAGE>
The following graphic depicts these database production processes:
[Graph containing six horizontal rows of boxes with arrows pointing downward
from each box (other than the box on the bottom row) to a box below it. The
top row contains one box with text: "Receive Print from Data Providers." The
arrow from this box points downward to a box in the second row (which is the
third box from the left, of three total), which contains text: "Convert Print
to Electronic Data." The other two boxes on the second row (from left to
right) contain text: "Receive Electronic Data From Third Party Converters" and
"Receive Electronic Data From Data Providers." There is an arrow pointing
downward from each box on this row to the single box on the third row, which
contains text: "Editing." There is an arrow pointing downward from this box to
the single box in the fourth row, which contains text: "Coding." There is an
arrow pointing downward from this box to the single box in the fifth row,
which contains text: "Quality Assurance." There is an arrow pointing downward
from this box to the single box in the sixth row, which contains text
"Completed Databases."]
We have committed significant resources to establish our production
capabilities and processes. At June 30, 1999, our production staff included
142 converters and editors, 37 coders and 36 quality assurance specialists. As
a result, we usually are able to make updated legal information available to
our Internet users within 24 hours of receipt in electronic format and within
72 hours of receipt in paper format.
We have been producing data since 1989. From January 1, 1996 through June
30, 1999, we spent over $22 million on database production, including costs of
converting, editing, coding and quality control.
Product Development
In addition to enhancing content, we conduct product development efforts
focused on continuously improving the search capabilities, tools and
applications available at our loislaw.com web site. At June 30, 1999, we had
five employees devoted to product development. We will continue to add new
features to our products, such as searchable tables of contents and personal
email, that will make our web site easier and more enjoyable to use.
We intend to offer subscribers to our loislaw.com web site the ability to
convert word processing, billing and other electronic files into personal
databases stored at our web site. These databases may include all types of
documents, such as briefs, motions, interrogatories, memoranda, contracts,
correspondence and other forms, and will be searchable in the same manner as
our legal databases. Access to the personal databases will be password-
protected and can be shared among, for example, a law firm and specific
clients or co-counsel.
We are currently developing a consumer web site. This web site will be free
of charge and will offer, among other products, limited access to some of our
existing databases. We are developing a consumer web site because we believe
that we can provide consumers with access to legal information that will
include a
41
<PAGE>
subset of our current legal databases. We expect to derive revenue from this
consumer site from multiple sources that may include referral fees,
subscription-based access to our complete legal databases and advertising
revenues. We have no experience in offering our products to non-lawyers and
recognize that we face many challenges with the development of this consumer
site.
Strategic Alliance
On September 7, 1999, we entered into a letter of intent that contemplates a
cooperative marketing arrangement between us and ChoicePoint Inc., a leading
provider of public records information. The arrangement would enable our
customers to obtain, through our web site, public records information and other
services currently available at CDB4web.com, a web site operated by a
subsidiary of ChoicePoint. Similarly, it would enable ChoicePoint's customers
to access our legal information. It would also provide for joint marketing
efforts to government agencies, corporations and large law firms that may need
both ChoicePoint's public records information and our legal information.
We believe that this proposed arrangement with ChoicePoint should improve
our ability to obtain customers in the government, corporate and large law firm
markets. We also intend to make it clear to customers who access our legal
information through a ChoicePoint web site that the source of the information
is Loislaw.com. Therefore, our relationship with ChoicePoint should also
improve our brand awareness in our targeted markets and among other visitors to
ChoicePoint's web site.
We are currently negotiating a definitive agreement with ChoicePoint. That
agreement will set forth the details of our proposed arrangements, including
the manner in which each party will receive payment for its products and
services. We cannot assure you that we will be able to enter into a definitive
agreement with ChoicePoint or that we will be able to reach agreement on all
the matters described above if we do enter into an agreement.
Sales and Marketing
We sell our products through a sales force that as of June 30, 1999 included
105 company field sales representatives based in 31 states and 65 inside sales
representatives. Our sales force is compensated with a base salary plus a
commission. In addition, we have a marketing department that at June 30, 1999
consisted of 13 people responsible for direct mail, advertising and cooperative
marketing programs.
We also market our products by seeking endorsements from organizations that
are likely to influence lawyers' purchasing decisions. We offer our products
for a nominal per-student charge to law schools and to state bar associations
and courts. Eleven state bar associations and continuing legal education
organizations have agreed to promote our products. We provide free access to
our products to the supreme courts of 15 states and to the Supreme Court of the
United States. We also develop relationships with individual leaders of the
legal community in cities throughout the country, as we believe recommendations
of respected peers and mentors significantly influence many lawyers' purchasing
decisions.
After we complete our state law databases for all 50 states we intend to
hire additional sales professionals and to aggressively market our products to
large law firms and legal departments of corporations.
Customers
At June 30, 1999, we had a total of 7,844 customers of which 3,132 purchased
our web-based products. At December 31, 1998, we had a total of 6,976 customers
of which 1,841 purchased our web-based products. A customer represents a single
account, which in many cases includes subscriptions for multiple seats or
concurrent users. Substantially all of our customers are law firms having fewer
than 20 lawyers.
42
<PAGE>
Customer Support
We provide telephone and email support for our clients 24 hours a day, 365
days a year. Our customer service employees assist customers with preparing
searches and our technical support employees assist customers with technical
issues. At June 30, 1999, we had 10 customer service employees and 25 technical
support employees. In addition, our field sales representatives provide on-site
support.
Web Site Hardware and Software Design
We currently host our loislaw.com web site at our office in Van Buren,
Arkansas. We have designed our web site hardware and software to be flexible,
scalable and reliable. Our web site operates using Verity searching software,
Microsoft NT Operating System software and Novell Networking software that runs
on Hewlett-Packard servers. Our databases and searching software are designed
to run on more than one operating system.
Our web site hardware and software is designed to be able to expand easily
by adding additional servers. We currently have two information servers that we
use to maintain identical versions of our legal information. Each information
server is connected to three search servers that use the Verity database
searching software to process search queries. Upon initial conversion of a
legal database, the Verity software catalogues the information contained in the
database. When a user searches for information on our web site, the Verity
software assists in the retrieval of search results by identifying the search
request in the catalogued information. We employ multiple servers that have
technology that enables them to share incoming user requests so that no single
server is overloaded. We believe our servers have sufficient capacity to
support our planned growth over the next 12 months.
We currently have backup systems in place to protect our data and we intend
to create additional backup systems. Our legal databases are backed up on
temporary tapes each night and backed up on permanent tapes once a week. The
weekly backup tapes are kept in a safety deposit box at a local commercial
bank. We currently have enough battery power to operate our web site for one
hour if there is a power outage at our facility. In addition, we are in the
process of installing a power generator that should be operational in the next
several months. We are also currently analyzing alternatives for a second site
fully equivalent to our live web site. This second web site would be fully
operational and could completely replace the operations of our existing web
site, if necessary.
Monitoring of the web site is a continuous process. Monitoring software
watches for key service problems of the various servers and reports to our
Information Systems staff by email and pager if any of the servers stop
responding. Additional software is in place to analyze server activity to
profile the performance and usage of the web site.
Trademarks and Copyrights
We have obtained federal trademark registrations for LOIS PROFESSIONAL
LIBRARY(R), N-line(R), PITA(R) and THE TECHNOLOGY COMPANY WITH A LAW DEGREE(R),
and have pending trademark applications for LOIS SM and the LOIS logo SM. We
use the service mark LOIS LAWWATCH SM and claim common law service mark rights
in this mark. We have also obtained copyright registrations for the following
proprietary software programs: PITA(R), CaseBase: The Arkansas Reports, and Law
Office Information Systems: Master Menu Systems. Other trademarks and trade
names in this prospectus are the property of other owners.
Competition
The market for electronic legal information is intensely competitive.
Historically, this market has been dominated by West Group, a division of The
Thomson Corporation, and LEXIS-NEXIS, which is owned by Reed-Elsevier. While we
have been in the legal information business since 1987, West Group has been in
the
43
<PAGE>
business over 100 years and LEXIS-NEXIS over 25 years. In addition to longer
operating histories, our competitors have greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. For more information about our competitors, see "Risk
Factors--The competition in our industry is intense, our principal competitors
have significantly greater resources than we do, and this competition may cause
us to lose customers and prevent us from attracting new customers" on page 9.
The principal competitive factors in our industry are:
. price;
. quality and accuracy of data;
. comprehensiveness of data;
. ease of use;
. support and training required; and
. performance characteristics of the database.
As a new entrant in a market dominated by these two major corporations, we
are in the position of having to ease customer concerns over accuracy and
reliability. Furthermore, our products are not as comprehensive as those of
LEXIS-NEXIS or West Group because we do not provide any form of legal treatises
or law review articles, or many of the other types of analysis and specialized
legal information that they provide. Further, we currently do not provide
comprehensive court decisions for all 50 states or federal district court
decisions, and for those court decision databases we do offer we provide
substantially fewer historical court decisions than offered by LEXIS-NEXIS and
West Group in many of their comparable databases.
We also compete with a few smaller Internet portal companies that offer free
access to government- sponsored sites that provide some of the same information
that we provide. A few offer fee-based access to selected legal databases. We
do not believe that any of these companies are comparable to Loislaw.com with
respect to breadth and depth of coverage, reliability and quality of data or
sophistication of functionality.
Employees
We had 488 full-time employees at June 30, 1999, including five in product
development, 105 in field sales, 65 in inside sales, 13 in marketing, 179 in
converting and production, 36 in quality assurance, 25 in technical support, 16
in management information systems, 10 in customer service, 14 in finance and 20
in administration. Our employees are not represented by any collective
bargaining organization. We have never experienced a work stoppage and we
believe that our relationships with our employees are good.
Facilities
Our corporate headquarters are located in a 36,200 square foot leased
facility in Van Buren, Arkansas, under a lease expiring in May 2004, with two
five-year renewals at the option of Loislaw.com. The lessor of our headquarters
is the Parker Law Firm, an entity owned by Kyle D. Parker and Douglas W.
Parker, Sr. We believe that these facilities and additional or alternative
space available to us will be adequate to meet our needs for the foreseeable
future.
Litigation
Loislaw.com is not a party to any material litigation.
44
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to the executive
officers and directors of Loislaw.com as of September 29, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Kyle D. Parker(1)....... 42 Chief Executive Officer and Chairman of the Board
Mark O. Beyland(2)...... 49 President, Chief Financial Officer and Director
W. Clark Wigley......... 47 Vice President of Business Development
Reves W. Dillon, Jr. ... 45 Vice President of Operations
Michael E. Romanies..... 36 Vice President of Marketing
Randell L. Sisemore..... 37 Vice President of Finance
Jay Scott Thompson...... 41 Chief Technology Officer
Pamela G. Rogers........ 39 Controller
Douglas W. Parker,
Sr. ................... 74 Secretary
Robert C. Ammerman(1)... 45 Director
D. Randy Laney(2)....... 45 Director
Hannah C. Stone(1)(2)... 34 Director
</TABLE>
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Kyle D. Parker founded Loislaw.com in 1987 and has served as Chief Executive
Officer and Chairman of the Board since that time. Mr. Parker also served as
President of Loislaw.com from 1987 to May 1999. Since 1985 Mr. Parker has been
a partner at the Parker Law Firm in Fort Smith, Arkansas. Mr. Parker served on
the Legal Automation Committee of the Arkansas Bar Association and the American
Association of Law Librarian's Task Force on Citation Formats. Mr. Parker holds
a J.D., with highest honors, from Franklin Pierce Law Center and a B.A., cum
laude, from Arkansas Tech University. Mr. Parker is the son of Douglas W.
Parker, Sr.
Mark O. Beyland joined Loislaw.com as President, Chief Financial Officer and
a director in May 1999. Mr. Beyland served as President and Chief Executive
Officer of Reed Technology and Information Services, Inc., a subsidiary of
Reed-Elsevier, from September 1993 to March 1998. Mr. Beyland holds a B.S. in
Business from Ohio State University and an M.B.A. from the University of
Dayton.
W. Clark Wigley joined Loislaw.com as Chief Operating Officer in February
1995 and became Vice President of Business Development in April 1998. Prior to
joining Loislaw.com, Mr. Wigley served as Vice President at Barclays Law
Publishers in California, a legal publishing company, from 1993 to February
1995. From 1990 to 1993, Mr. Wigley was a Vice President and a general manager
at Thomson Electronic Publishing, a division of Thomson Legal Publishing, a
legal publishing company. Mr. Wigley holds a B.S. and an M.S. in Engineering
from Lehigh University and an M.B.A. from U.C.L.A.
Reves W. Dillon, Jr. joined Loislaw.com as a scanning and editing operator
in September 1989. Mr. Dillon served as Director of Production from May 1994 to
November 1997 and served as Chief Operations Officer from November 1997 to May
1999. Mr. Dillon became Vice President of Operations in May 1999. Mr. Dillon
has over 25 years of experience serving in production and management capacities
in various industries.
Michael E. Romanies joined Loislaw.com as Vice President of Marketing in
July 1999. Mr. Romanies served as Vice President of Marketing and Sales at
NETsilicon Inc., a hardware and software supplier, from August 1998 to June
1999. He also served as Vice President at Number Nine Visual Technology, a
manufacturer and supplier of graphic chips and cards, from October 1996 to
August 1998, and President of World Color Press New Media, a multimedia
development company, from November 1995 to September 1996.
45
<PAGE>
In addition, he served as Vice President at Reed Technology and Information
Services, Inc. from January 1987 to November 1995. Mr. Romanies holds a B.S. in
Electrical Engineering from Wilkes University.
Randell L. Sisemore joined Loislaw.com as Vice President of Finance in
September 1999. Prior to joining Loislaw.com, Mr. Sisemore served as Treasurer
of USA Truck, Inc., a publicly traded truckload motor carrier, from October
1993 to September 1999. Mr. Sisemore holds a B.S.B.A. in accounting from the
University of Arkansas and is a certified public accountant.
Jay Scott Thompson joined Loislaw.com in April 1992 as Assistant MIS
Director. Mr. Thompson served as Director of Information Systems from February
1995 to November 1998. Mr. Thompson became Chief Technology Officer in December
1998. Mr. Thompson has over 15 years of experience in the electronics industry.
Pamela G. Rogers joined Loislaw.com as Controller in October 1997. Prior to
joining Loislaw.com, Ms. Rogers served as Controller for Stapleton Corporation,
a manufacturing company, from March 1997 to October 1997. Ms. Rogers also
served as Controller for Exsorbet Administration, Inc., an environmental
remediation company, from January 1996 to February 1997, Controller for
Consolidated Environmental Services, Inc., an environmental consulting company,
from January 1995 to January 1996 and Vice President of Client Services for LSI
Financial Group, a loan and lease servicing company, from June 1991 to October
1994. Ms. Rogers holds a B.A. in Accounting from the University of Central
Arkansas and is a certified public accountant.
Douglas W. Parker, Sr. has served as Secretary of Loislaw.com since October
1987. He served as a director and Treasurer of Loislaw.com from October 1987 to
June 1999. Mr. Parker practiced law at the Parker Law Firm for over 36 years.
Mr. Parker is the father of Kyle D. Parker. Mr. Parker holds a B.S. from the
University of Arkansas and an L.L.B. from LaSalle University.
Robert C. Ammerman has served as a director of Loislaw.com since November
1997. Since 1987 Mr. Ammerman has served as Treasurer of Capital Resource
Management, Inc., a private capital investment firm, and as general partner of
several private capital funds affiliated with Capital Resource Management. Mr.
Ammerman holds a B.A. and an M.S. from Carnegie Mellon University.
D. Randy Laney has served as a director of Loislaw.com since June 1999.
Since October 1998 Mr. Laney has served as Chief Executive Officer, President
and Chairman of BAV Software, Inc., a web-enabled supply chain software
development company. From August 1995 to October 1998, Mr. Laney served as a
partner of Bentonville Associates Ventures, LLC, a financial and business
consulting company. In addition, Mr. Laney was employed by Wal-Mart Corporation
from 1970 to 1993 and served as Vice President of Finance and Treasurer for a
portion of that time. He holds a B.S. and a J.D. from the University of
Arkansas.
Hannah C. Stone has served as a director of Loislaw.com since June 1999. In
1993, Ms. Stone joined Sandler Capital Management, a private capital investment
firm, and she is a general partner of various partnerships associated with
Sandler Capital Management. She holds a B.A. from Stanford University and an
M.B.A. from Harvard Business School. She is also a director of Millbrook Press.
Election of Officers and Directors
The executive officers of Loislaw.com are elected by the Board of Directors
on an annual basis and serve until their successors are duly elected and
qualified. Under an Amended and Restated Stockholders' Agreement dated as of
May 25, 1999, as long as each of (a) Capital Resource Lenders III, L.P. and (b)
Sandler Capital Partners IV, L.P. and Sandler Capital Partners IV, FTE, L.P.,
collectively, hold at least 10% of the outstanding shares of our common stock,
our existing stockholders have agreed to vote their shares to elect one
representative of Capital Resource Lenders III, L.P. and one representative of
the Sandler parties to our Board of Directors. Mr. Ammerman will continue as a
director and Ms. Stone was selected as a director of Loislaw.com in connection
with this agreement. For more information regarding the Amended and Restated
Stockholders Agreement, see "Management--Compensation Committee Interlocks and
Insider Participation" on pages 48-49.
46
<PAGE>
Board Composition
The Board of Directors of Loislaw.com is divided into three classes. The
Board currently consists of one Class I director (Ms. Stone), two Class II
directors (Messrs. Laney and Ammerman) and two Class III directors (Messrs.
Parker and Beyland). At each annual meeting of stockholders, a class of
directors will be elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the Class I director,
Class II directors and Class III directors will expire upon the election and
qualification of successor directors at the annual meetings of stockholders to
be held during calendar years 2000, 2001 and 2002, respectively.
Committees of the Board of Directors
The Board of Directors has appointed a compensation committee consisting of
Messrs. Ammerman and Parker and Ms. Stone. The compensation committee reviews
and evaluates the compensation and benefits of all officers of Loislaw.com,
reviews general policy matters relating to compensation and benefits of
Loislaw.com employees and makes recommendations concerning these matters to the
Board of Directors. The compensation committee also administers our 1996 Stock
Option Plan. For more information about our 1996 Stock Option Plan, see "--
Equity Plans" on pages 51-52.
The Board of Directors has also appointed an audit committee consisting of
Messrs. Laney and Beyland and Ms. Stone. The audit committee reviews, with our
independent auditors, the scope and timing of the auditors' services, the
auditors' report on our financial statements following completion of their
audit, and our policies and procedures with respect to internal accounting and
financial controls. In addition, the audit committee will make annual
recommendations to the Board of Directors for the appointment of independent
auditors for the ensuing year.
Compensation of Directors
We pay each nonemployee director an annual fee of $10,000 and reimburse each
director for reasonable expenses incurred in attending Board meetings. In
addition, directors who are not officers or employees of Loislaw.com are
eligible to receive options under our stock option plan for nonemployee
directors.
Nonemployee Directors Stock Option Plan. The Board of Directors adopted the
Nonqualified Stock Option Plan for Nonemployee Directors on July 22, 1999, and
we expect to submit it to our stockholders for approval at our annual meeting
in 2000. This plan provides for the issuance of a maximum of 320,000 shares of
common stock. For more information regarding the Nonqualified Stock Option Plan
for Nonemployee Directors, see "--Equity Plans" on page 52.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is comprised of Messrs. Parker and Ammerman and
Ms. Stone. Mr. Parker is an executive officer of Loislaw.com and is the trustee
of the Parker Trust, which is a principal stockholder of Loislaw.com.
Ms. Melissa A. Parker, Mr. Parker's sister-in-law, also loaned Loislaw.com a
total of $4,000,000, which has subsequently been converted into Series B
redeemable preferred stock.
Series A convertible preferred stock. On November 24, 1997, we entered into
a Senior Subordinated Note and Securities Purchase Agreement with Capital
Resource Lenders III, L.P. Under the terms of this agreement, we sold
$3 million of Series A convertible preferred stock and issued a warrant for the
right to purchase 1,944,586 shares of Loislaw.com common stock at $0.005 per
share to Capital Resource Lenders III, L.P. In connection with this sale, we
entered into a Stockholders' Agreement and a Registration Rights Agreement.
Both of these agreements were amended and restated on May 25, 1999 and are
described below.
Series C convertible preferred stock. On May 25, 1999, we sold 2,495,697
shares of Series C convertible preferred stock to a limited number of investors
for a total of $14.5 million. The names of the investors and the
47
<PAGE>
number of shares purchased by them for $5.81 per share are set forth below:
<TABLE>
<CAPTION>
Name of Investor Number of Shares
---------------- ----------------
<S> <C>
Capital Resource Lenders III, L.P. ....................... 857,509
Sandler Capital Partners IV, L.P. ........................ 793,680
Sandler Capital Partners IV, FTE, L.P. ................... 325,080
Mark O. Beyland........................................... 129,088
Exeter Capital Partners IV, L.P........................... 390,340
</TABLE>
Capital Resource Lenders III, L.P. is one of the holders of our Series A
convertible preferred stock, and it purchased its portion of the Series C
convertible preferred stock by converting notes issued to it by us with a total
outstanding principal balance of $5 million. Capital Resource Lenders III and
its affiliate, CRP Investment Partners III, also have guaranteed a portion of
our lines of credit with our bank. Mark O. Beyland is our President and Chief
Financial Officer.
Amended and Restated Registration Rights Agreement. On May 25, 1999, we
entered into an Amended and Restated Registration Rights Agreement with our
stockholders. This agreement gives Capital Resource Lenders III, L.P., CRP
Investment Partners III, LLC, Mark O. Beyland, Sandler Capital Partners IV,
L.P., Sandler Capital Partners IV, FTE, L.P., Exeter Capital Partners IV, L.P.,
transferees of Dublind Partners, Inc. and Rowland T. Moriarty the right to
require us to use our best efforts to register under the Securities Act all or
any part of the shares of our common stock that they own. This right is subject
to limitations and conditions, including that we will not be required to effect
a registration:
. more than one time for the former holders of the Series A convertible
preferred stock;
. more than one time for the former holders of the Series C convertible
preferred stock; and
. if the reasonably anticipated total price of the offering to the public
will not exceed $5 million.
Additionally, if we propose to register common stock under the Securities
Act, the above stockholders as well as Charles J. Lindsay, George P. Lindsay,
Charles M. Dubroff, Nester J. Olivier and Dublind Partners, Inc., may have the
right to request the inclusion of their shares of common stock in the
registration. Finally, all former holders of Series A convertible preferred
stock and Series C convertible preferred stock have the right to request any
number of registrations on Form S-3, subject to limitations and conditions,
including that the reasonably anticipated total price to the public must exceed
$500,000.
We have agreed to pay the expenses of the registrations described above.
These costs include filing fees, printing expenses, and $10,000 in fees of
legal counsel for the selling stockholders. The selling stockholders will pay
any underwriting discounts and commissions associated with the sale of their
securities.
We have agreed that in the event of any registration of securities under the
Amended and Restated Registration Rights Agreement, we will indemnify the
selling stockholders against Securities Act liabilities incurred in connection
with the registration.
Subject to some limitations and conditions, the registration rights held by
these selling stockholders may be transferred with their securities.
Rowland T. Moriarty is a holder of Series A convertible preferred stock, a
warrant holder and, on occasion, a marketing consultant to us. He also has
guaranteed a portion of our lines of credit with our bank.
Amended and Restated Stockholders' Agreement. On May 25, 1999, we and our
existing stockholders entered into an Amended and Restated Stockholders'
Agreement. After the completion of this offering, this agreement will continue
to provide that the existing stockholders will vote their shares to elect to
the Board of Directors of Loislaw.com one person designated by each of (a)
Capital Resource Lenders III, L.P. and (b) Sandler Capital Partners IV, L.P.
and Sandler Capital Partners IV, FTE, L.P., collectively, so long as they each
hold at least 10% of our outstanding shares of common stock. In addition, these
stockholders, as well as the Parker Trust, will have co-sale rights entitling
them to include shares of their stock in the following sales:
48
<PAGE>
. the sale of a control block of securities of Loislaw.com; or
. the sale of shares of Loislaw.com by any party to the stockholders'
agreement to a designated competitor of Loislaw.com.
The existence of this co-sale right could allow these stockholders to sell
their shares of stock at a premium over the fair market value of the common
stock and could transfer control of Loislaw.com.
Finally, all stockholders that are parties to this agreement have transfer
restrictions on their shares of capital stock of Loislaw.com in the event that
they attempt to sell their stock in a control block sale or a private sale to a
designated competitor.
Loans from our stockholders. We have borrowed money from Capital Resource
Lenders III, L.P., CRP Investment Partners III, LLC and Rowland T. Moriarty and
have executed several senior subordinated notes, which as of June 30, 1999 had
a combined outstanding principal balance of $9,989,434. These notes accrue
interest at a rate of 12.5% per annum and are due on November 30, 2003.
Interest on these notes is payable quarterly in arrears on the last business
day of March, June, September and December of each year. These notes are
subject to the terms and conditions of a Senior Subordinated Note and
Securities Agreement, dated as of November 24, 1997, as subsequently amended.
We intend to repay these notes upon completion of this offering.
1997 Subordinated Debt
<TABLE>
<CAPTION>
Interest
Amount We Borrowed Paid Amount We Owed
Stockholder During 1997 During 1997 at Year End
- ----------- ------------------ ----------- ----------------
<S> <C> <C> <C>
Capital Resource Lenders III,
L.P. ........................ $4,000,000 $52,778 $4,000,000
On November 24, 1997, we granted Capital Resource Lenders III a warrant to
purchase 1,944,586 shares of our common stock as part of the consideration for
the loan described above.
1998 Subordinated Debt
<CAPTION>
Interest
Amount We Borrowed Paid Amount We Owed
Stockholder During 1998 During 1998 at Year End
- ----------- ------------------ ----------- ----------------
<S> <C> <C> <C>
Capital Resource Lenders III,
L.P. ........................ $3,933,847 $591,101 $7,867,693
CRP Investment Partners III,
LLC ......................... 4,615 692 9,231
Rowland Moriarty ............. 61,538 9,225 123,076
On January 1, 1998, Capital Resource Lenders III assigned $4,616 of the
principal of the $4,000,000 note to CRP Investment Partners III and $61,538 of
the principal of the $4,000,000 note to Rowland Moriarty.
1999 Subordinated Debt
<CAPTION>
Interest
Paid and
Principal
Amount We Borrowed Repaid Amount We Owed
Stockholder During 1999 During 1999 at June 30, 1999
- ----------- ------------------ ----------- ----------------
<S> <C> <C> <C>
Capital Resource Lenders III,
L.P. ........................ $1,966,924 $831,943 $9,824,051
CRP Investment Partners III,
LLC ......................... 2,308 964 11,539
Rowland Moriarty ............. 30,768 12,852 153,844
</TABLE>
On February 9, 1999, we granted Capital Resource Lenders III, CRP Investment
Partners III and Rowland Moriarty warrants to purchase a total of 204,182
shares of our common stock in connection with a limited guaranty of our credit
agreement with Fleet National Bank provided by these parties. The amount we
repaid to Capital Resource Lenders III on May 19, 1999 includes a $10,566
reduction of principal in connection with the exercise of warrants. In all
other periods, we only paid interest due on the loans.
49
<PAGE>
1999 Convertible Debt
<TABLE>
<CAPTION>
Amount Converted
into Shares of Amount of Interest
Amount We Borrowed Series C Convertible We Paid on
Stockholder During 1999 Stock During 1999 May 25, 1999
- ----------- ------------------ -------------------- ------------------
<S> <C> <C> <C>
Capital Resource Lenders
III, L.P. ............. $5,000,000 $4,982,127 $89,931
</TABLE>
On May 25, 1999, the notes described in the table above were converted into
857,509 shares of Series C convertible preferred stock, which will convert into
1,715,018 shares common stock upon the completion of this offering.
Three of our Board members are affiliated with our significant
stockholders. The persons named below are members of our Board of Directors and
are also affiliated with certain of our stockholders.
<TABLE>
<CAPTION>
Entity with Whom
Name of Board Member Board Member is Affiliated Relationship with Entity
-------------------- -------------------------- ------------------------
<C> <S> <C>
Robert C. Ammerman Capital Resource Partners III, Managing Member
LLC, the general partner of
Capital Resource Lenders III,
L.P.
CRP Investment Partners III, LLC Managing Member
Hannah C. Stone Sandler Capital Management, an Managing Director
affiliate of Sandler Capital
Partners IV, L.P. and Sandler
Capital Partners IV, FTE, L.P.
Kyle D. Parker The Parker Trust Trustee
</TABLE>
The other three managing members of Capital Resource Partners with whom Mr.
Ammerman shares voting and dispositive power with respect to shares held by
Capital Resource Lenders are Mr. Fred C. Danforth, Mr. Stephen M. Jenks and Mr.
Alexander S. McGrath. Messrs. Danforth, Jenks and McGrath are also the only
other managing members of CRP Investment Partners. Investment decisions are
determined by a majority vote.
The persons who share voting and dispositive power with respect to the
shares held by Sandler Capital Partners IV, L.P. and Sandler Capital Partners
IV, FTE, L.P. are Mr. Harvey Sandler, Mr. John Kornreich and Mr. Michael
Marocco.
Lease with the Parker Law Firm. We lease our principal executive office and
operations facility in Van Buren, Arkansas from the Parker Law Firm, of which
Douglas W. Parker, Sr. and Kyle D. Parker are partners. The lease provides for
a five-year term expiring in May 2004 with two five-year renewals at the option
of Loislaw.com. Monthly payments under the lease were increased to $14,100 in
May 1999 as a result of expansion of space under the lease. During 1996, 1997
and 1998, we paid $49,834, $49,834 and $65,984, respectively, under this lease.
Executive Compensation
Summary Compensation
The following table sets forth the compensation that we paid for the fiscal
year ended December 31, 1998 to our Chief Executive Officer and the one other
executive officer of Loislaw.com whose compensation exceeded the threshold for
inclusion in the table:
Summary Compensation Table for Last Fiscal Year
<TABLE>
<CAPTION>
Annual Compensation
---------------------------
Other Annual
Name and Principal Position Salary Bonus Compensation
--------------------------- -------- ----- ------------
<S> <C> <C> <C>
Kyle D. Parker, Chief Executive Officer.......... $153,905 $ -- $ --
W. Clark Wigley, Vice President of Business
Development..................................... 144,000 -- 6,000(1)
</TABLE>
- --------
(1) Consists of a car allowance of $500 per month.
50
<PAGE>
Employment Agreements
We have entered into the following employment agreements with our Chairman
and Chief Executive Officer and our President and Chief Financial Officer:
<TABLE>
<CAPTION>
Officer Term Base Salary Position
------- ------------------- ----------- -------------------------------------
<S> <C> <C> <C>
Kyle D. Parker.......... June 1999-June 2002 $225,000 Chairman and Chief Executive Officer
Mark O. Beyland......... June 1999-June 2002 $175,000 President and Chief Financial Officer
</TABLE>
The employment agreements of Messrs. Parker and Beyland entitle each of them
to participate in any bonus or employee benefit plans or arrangements from time
to time in effect. If we terminate the employment of Mr. Parker or Mr. Beyland
without "cause," as defined in the agreements, Mr. Parker or Mr. Beyland will
be entitled to receive payments equal to one year's annual salary. If the
termination of their employment is in connection with a change of control of
Loislaw.com, Mr. Parker and Mr. Beyland each will be entitled to receive a
lump-sum payment equal to two times his annual salary plus bonuses and
continuing coverage under our medical plan for one year. Under the employment
agreements, Messrs. Parker and Beyland each agree not to engage, directly or
indirectly, in activities in competition with Loislaw.com either as an
employee, employer, consultant, agent, principal, partner, stockholder,
corporate officer, director, or in any other capacity during the term of the
employment agreement and for 12 months after termination of his employment, if
the termination occurs during the term of the agreement.
Equity Plans
1996 Stock Option Plan. The Board of Directors and our stockholders adopted
the Loislaw.com 1996 Stock Option Plan on June 17, 1996. On August 31, 1999,
the Board of Directors adopted, and on September 28, 1999 our stockholders
approved, Amendment No. 1 to the 1996 Plan. We have reserved 1,500,000 shares
of common stock for issuance under the 1996 Plan, as amended, to employees and
consultants. The 1996 Plan provides for the grant of options that are intended
to qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and options not intended to qualify
as incentive stock options. Incentive stock options may be granted only to
employees of Loislaw.com. The maximum number of shares with respect to which
awards may be granted to any employee under the 1996 Plan may not exceed
200,000 shares of common stock during any calendar year.
The Board of Directors, or a committee to which the Board has delegated
authority, administers the 1996 Plan. Options granted under the 1996 Plan are
not transferable or assignable other than by will or the laws of descent and
distribution and may be exercised during the grantee's lifetime only by the
grantee. Subject to the provisions of the 1996 Plan, the Board of Directors or
the committee appointed by the Board has the authority to select the
individuals to whom options may be granted and determine the terms of each
award, including the number of shares of common stock subject to any option,
the exercise date and the vesting requirements. Payment of the exercise price
may be made in cash or by shares of common stock valued at the fair market
value on the date of exercise or by a combination of those methods of payment.
If we merge with or into another corporation or sell all or substantially
all our assets, each outstanding option under the 1996 Plan will automatically
vest and become fully exercisable if the successor corporation does not assume
or provide for the substitution of each outstanding option.
To date, we have granted stock options to purchase a total of 869,622 shares
of common stock under the 1996 Plan including the options described in the
following paragraph. We have not granted any options under the 1996 Plan to any
of the officers named in the Summary Compensation Table.
On May 25, 1999, in connection with our hiring of Mark O. Beyland to serve
as our President and Chief Financial Officer, we granted him stock options
under the 1996 Plan covering a total of 441,454 shares of our common stock at
an exercise price of $2.91. One-half of these options vested on the date of
grant and the remaining options vest in equal monthly installments over the
following 24 months. We have granted Michael
51
<PAGE>
Romanies stock options under the 1996 Plan to purchase 100,000 shares at an
exercise price equal to the initial public offering price. Twenty percent of
these options will vest on the date of grant and the remaining options will
vest in approximately equal monthly installments over the following 39 months.
In addition we have granted to 18 of our employees under the 1996 Plan
incentive stock options to purchase a total of 186,500 shares at an exercise
price equal to the initial public offering price. Twenty-five percent of each
of these options will vest one year from the date of the grant, and the
remaining options will vest in approximately equal monthly installments over
the following 36 months.
Employee Stock Purchase Plan. Our Board of Directors adopted the Employee
Stock Purchase Plan on September 24, 1999, and our stockholders approved the
plan on September 28, 1999. The employee stock purchase plan provides for the
purchase by employees of a maximum of 300,000 shares of common stock after the
completion of this offering. Shares purchased under the plan may be newly
issued shares of common stock or treasury shares.
A committee of three or more employees appointed by the Board of Directors
will administer the employee stock purchase plan. All of our full-time
employees who have been employed by us for more than six months on or before
the first day of any payment period and whose customary employment is more than
20 hours per week will be eligible to participate in the employee stock
purchase plan. Employees who would own 5% or more of the total combined voting
power or value of our stock immediately after the grant will not be eligible to
participate in the employee stock purchase plan. To participate in the employee
stock purchase plan, an employee must authorize us to deduct not less than one
percent nor more than ten percent from his or her pay during six-month payment
periods. The first payment period will commence immediately upon registration
of Loislaw.com's common stock under the Exchange Act and will end on April 30,
2000. Thereafter, the payment periods will commence on each May 1 and November
1 and end on the following April 30 and October 31, respectively, of each year,
but in no case will an employee be entitled to purchase in any one payment
period a number of shares that has a fair market value (determined at the
beginning of the period) of more than $12,500. The purchase price for the stock
that employees are entitled to purchase in any payment period is equal to the
lesser of 90% of the fair market value of the common stock at the beginning of
the payment period and 90% of the fair market value of the common stock at the
end of the payment period. If an employee is not a participant on the last day
of the payment period, the employee will not be entitled to purchase any shares
for that period, and the amount of his or her accumulated payroll deductions
will be refunded. An employee's rights under the employee stock purchase plan
will terminate upon his or her voluntary withdrawal from the plan at any time
or upon termination of his or her employment.
Nonqualified Stock Option Plan for Nonemployee Directors. The Board of
Directors adopted the Nonqualified Stock Option Plan for Nonemployee Directors
on July 22, 1999. The nonemployee directors plan provides for the issuance of a
maximum of 320,000 shares of common stock. We expect to submit the nonemployee
directors plan to our stockholders for approval at our annual meeting in 2000.
The nonemployee directors plan is administered by a committee of employee
directors, which approved a grant of options to each nonemployee director to
purchase 40,000 shares of common stock at an exercise price equal to the
initial public offering price of the common stock in this offering. Subject to
the director's continued membership on the Board and the approval of the plan
by our stockholders, each option will vest in annual increments of 25%
beginning one year from the date of grant. Directors, including new members
elected to the Board of Directors after the completion of this offering, may be
granted options at the discretion of the committee of the Board administering
the plan. All options granted to nonemployee directors will be nonstatutory
options with an exercise price equal to 100% of the fair market value of common
stock on the date of grant.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan.
Employees must complete 12 months of service before they are eligible to
participate. Employees may contribute a percentage of their pre-tax
compensation and Loislaw.com may, in its discretion from year-to-year, make
matching and profit sharing contributions to the retirement plan. Amounts
contributed by Loislaw.com vest over six years.
52
<PAGE>
Limitation of Liability and Indemnification of Officers and Directors
Our certificate of incorporation and by-laws provide that our directors and
officers will be indemnified by us to the fullest extent authorized by Delaware
law, as it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with their service for or on
behalf of Loislaw.com. In addition, our certificate of incorporation provides
that our directors will not be personally liable for monetary damages to us or
our stockholders for breaches of their fiduciary duty as directors, unless they
violated their duty of loyalty to us or our stockholders, acted in bad faith,
knowingly or intentionally violated the law, authorized illegal dividends or
redemptions or derived an improper personal benefit from their action as
directors. Further, we have entered into indemnification agreements with each
of our officers and directors in which we have agreed to indemnify them in
addition to the indemnification provided for in our certificate of
incorporation and by-laws. These agreements indemnify our directors and
officers for expenses (including attorneys' fees and associated legal
expenses), judgments, fines and amounts paid in settlement, actually and
reasonably incurred by them in connection with services as a director or
officer of Loislaw.com. In order to receive the indemnification, the director
or officer must have acted in good faith and in a manner which he or she
reasonably believed to be in or not opposed to the best interests of
Loislaw.com or, with respect to any criminal proceeding, must have had
reasonable cause to believe that his or her conduct was lawful. We also
maintain insurance that insures our directors and officers against specified
losses and that insures us against specific obligations to indemnify our
directors and officers. We believe these provisions and agreements are
necessary to attract and retain qualified directors and officers.
53
<PAGE>
CERTAIN TRANSACTIONS
We sold Series A convertible preferred stock to Capital Resource Lenders
III, L.P. For information relating to the sale of Series A convertible
preferred stock see "Management--Compensation Committee Interlocks and Insider
Participation" on page 47.
We have outstanding shares of Series B redeemable preferred stock that we
will redeem. On November 1, 1995, we borrowed $2.0 million from Melissa A.
Parker, sister-in-law of Kyle D. Parker and daughter-in-law of Douglas W.
Parker, Sr. Further, we borrowed additional funds from Mrs. Parker and as of
June 30, 1997 the outstanding principal balance borrowed was $4.0 million. In
November 1997, the $4.0 million loan plus accrued interest in the amount of
$395,891 was converted into 439,589 shares of Series B redeemable preferred
stock. These shares earn dividends at a rate of 7.735% per year and dividends
are paid as and when declared by the Board. We intend to redeem these shares of
Series B redeemable preferred stock upon the completion of this offering.
In May 1999 we sold shares of Series C convertible preferred stock and
common stock to a limited number of investors. For more information relating to
the sale of Series C convertible preferred stock see "Management--Compensation
Committee Interlocks and Insider Participation" on pages 47-48. In addition, on
May 25, 1999 we sold 172,118 shares of common stock to Dublind Partners, Inc.
at $2.91 per share.
We entered into a registration rights agreement that requires us to register
shares held by our existing stockholders for resale. For information relating
to the terms of this Amended and Restated Registration Rights Agreement see
"Management--Compensation Committee Interlocks and Insider Trading" on page 48.
We entered into a stockholders agreement that grants special rights to our
existing stockholders. For information relating to the terms of the Amended and
Restated Stockholders' Agreement see "Management--Compensation Interlocks and
Insider Trading" on pages 48-49.
We paid advisory fees to an affiliate of one of our stockholders. On
February 5, 1999, Loislaw.com renewed a letter agreement with Dublind Partners,
Inc. and Dublind Securities, Inc. under which the Dublind entities provided to
us financial advisory services relating to private financings and our initial
public offering. Under the original letter agreement, we issued a warrant to
Dublind Investments LLC on November 24, 1997 for the right to purchase 730,692
shares of common stock at $0.005 per share for advisory services relating to
the Series A convertible preferred stock financing. We paid Dublind Investments
LLC, an affiliate of Dublind Partners, Inc. and Dublind Securities, Inc.,
$475,000 on May 25, 1999 in connection with their services in our Series C
convertible preferred stock financing. Upon the closing of this initial public
offering of our common stock, we will also pay to Dublind a fee of $250,000 in
exchange for financial advisory services provided to us.
We have borrowed money from some of our stockholders. For information
relating to our loans from stockholders see "Management--Compensation Committee
Interlocks and Insider Participation" on pages 49-50.
Three of our Board members are affiliated with our significant
stockholders. For information relating to our Board members' affiliations with
our stockholders see "Management--Compensation Committee Interlocks and Insider
Trading" on page 50.
We lease our offices from the Parker Law Firm. For information relating to
our lease see "Management--Compensation Committee Interlocks and Insider
Participation" on page 50.
All future transactions will be approved by a majority of our disinterested
directors. All future transactions, including loans, between us and our
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested directors of the Board of Directors, and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
54
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Loislaw.com's common stock as of September 29, 1999 and as
adjusted to reflect the completion of this offering by:
. each of our directors;
. each named executive officer listed in the Summary Compensation Table;
. all directors and executive officers of Loislaw.com as a group; and
. each person who is known by us to own beneficially more than five percent
of the outstanding shares of the common stock (including the selling
stockholder).
Unless otherwise indicated:
. each person or entity named in the table has sole voting power and
investment power (or shares the power with his or her spouse) with
respect to all shares of capital stock listed as beneficially owned by
the person or entity; and
. the address of each beneficial owner is c/o Loislaw.com, Inc., 105 North
28th Street, Van Buren, Arkansas 72956.
The number of shares of common stock outstanding used in calculating the
percentage for each person listed includes the shares of common stock
underlying options held by the person that are exercisable within 60 days of
September 29, 1999, but excludes shares of common stock underlying options or
warrants held by any other person. Percentage of beneficial ownership is based
on 17,039,524 shares of common stock outstanding as of September 29, 1999,
after giving effect to the conversion of the convertible preferred stock, and
20,939,524 shares of common stock outstanding after completion of this
offering.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to the Offering After the Offering
-------------------------Shares -----------------------
Name of Beneficial Owner Number Percent Offered Number Percent
- ------------------------ ------------- ------------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Kyle D. Parker,
Trustee(1).............. 6,710,000 39.4% -- 6,710,000 32.0%
W. Clark Wigley(1)(2).... 280,000 1.6 -- 280,000 1.3
Mark O. Beyland(3)....... 534,084 3.1 -- 534,084 2.5
Robert C. Ammerman(4).... 5,664,170 33.2 -- 5,664,170 27.1
Hannah C. Stone(5)....... 2,237,520 13.1 -- 2,237,520 10.7
D. Randy Laney........... -- -- -- -- --
Capital Resource Lenders
III, L.P.(4)............ 5,664,170 33.2 -- 5,664,170 27.1
Sandler Capital Partners
IV, L.P.(5)............. 2,237,520 13.1 -- 2,237,520 10.7
Sandler Capital Partners
IV, FTE, L.P.(5)........ 2,237,520 13.1 -- 2,237,520 10.7
Douglas W. Parker,
Sr.(1)(6)............... 1,559,600 9.2 80,000 1,479,600 7.1
All directors and
executive officers as a
group
(12 persons)............ 15,301,568 88.0 80,000 15,221,568 71.5
</TABLE>
- --------
(1) Kyle D. Parker is the trustee of the Parker Trust. Under the terms of the
trust, Mr. Parker has sole voting power of all of the shares held of record
by the trustee and he is the beneficiary of 3,119,200 shares. Douglas W.
Parker, Sr. is the beneficiary of 1,479,600 shares and Melissa Parker is
the beneficiary of 1,559,600 shares. Further, W. Clark Wigley has been
granted an option by the trust to purchase 280,000 shares, and another
employee of Loislaw.com beneficially owns 271,600 shares held of record by
the trust. Kyle D. Parker holds a right of first refusal to purchase the
271,600 shares beneficially owned by the employee upon the employee's
resignation, termination, incapacity or death. Kyle D. Parker disclaims
beneficial ownership of the shares held by the Parker Trust, except to the
extent of his pecuniary interest in those shares.
55
<PAGE>
(2) Consists of an option to purchase 280,000 shares of common stock from the
Parker Trust that is fully vested.
(3) Includes 275,908 shares subject to options held by Mr. Beyland that are
presently exercisable or will be exercisable within 60 days.
(4) Consists of the following:
. 2,113,232 shares of common stock held of record by Capital Resource
Lenders III, L.P., 1,831,292 shares of common stock that it will acquire
upon conversion of Series A convertible preferred stock and 1,715,018
shares of common stock that it will acquire upon conversion of Series C
convertible preferred stock; and
. 2,148 shares of common stock that CRP Investment Partners III, LLC will
acquire upon the conversion of Series A convertible preferred stock and
2,480 shares of common stock covered by a warrant held by it.
Mr. Ammerman is a managing member of Capital Resource Partners III, LLC,
which is the general partner of Capital Resource Lenders III, L.P. Capital
Resource Partners III, LLC has sole voting and investment power with
respect to the shares held of record by Capital Resource Lenders III, L.P.
Mr. Ammerman is also a managing member of CRP Investment Partners III, LLC.
Mr. Ammerman shares with three other managing members the voting and
investment power with respect to the shares beneficially owned by CRP
Investment Partners III, LLC. Mr. Ammerman disclaims beneficial ownership
of all shares owned by these entities, except to the extent of his
pecuniary interest in those shares. The address for Mr. Ammerman, Capital
Resource Lenders III, L.P. and CRP Investment Partners III, LLC is 85
Merrimac Street, Suite 200, Boston, Massachusetts 02114.
(5) Consists of 1,587,360 shares of common stock that Sandler Capital Partners
IV, L.P. will acquire upon the conversion of Series C convertible preferred
stock and 650,160 shares of common stock that Sandler Capital Partners IV,
FTE, L.P. will acquire upon the conversion of Series C convertible
preferred stock. Ms. Stone is a Managing Director of Sandler Capital
Management, a general partnership, which is the general partner of Sandler
Capital Partners IV, L.P and Sandler Capital Partners IV, FTE, L.P. Ms.
Stone shares voting and investment power with respect to the shares held of
record by Sandler Capital Partners IV, L.P. and Sandler Capital Partners
IV, FTE, L.P. with several other managing directors. Ms. Stone disclaims
beneficial ownership of these shares, except to the extent of her pecuniary
interest therein. The address for Ms. Stone, Sandler Capital Partners IV,
L.P. and Sandler Capital Partners IV, FTE, L.P. is 767 Fifth Avenue, 45th
Floor, New York, New York 10153.
(6) Consists of 80,000 shares held of record by Mr. Parker and 1,479,600 shares
held of record by the Parker Trust of which Mr. Parker is the beneficiary.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.001 par value, and 10,000,000 shares of preferred stock, $0.001 par value.
Common Stock
As of September 29, 1999, there were 10,186,042 shares of common stock
outstanding. Based upon the number of shares outstanding as of that date and
giving effect to the issuance of 6,853,482 shares of common stock upon the
conversion of the Series A convertible preferred stock and the Series C
convertible preferred stock and to the completion of this offering, there will
be 20,939,524 shares of common stock outstanding. Upon conversion, the shares
of Series A convertible preferred stock and Series C convertible preferred
stock will cease to be outstanding and will assume the status of authorized but
unissued shares of preferred stock without designation.
The holders of common stock are entitled to one vote for each share of
common stock held on all matters voted upon by stockholders, including the
election of directors. Subject to the rights of any then-outstanding shares of
preferred stock, the holders of the common stock are entitled to dividends as
may be declared in the discretion of the Board of Directors out of funds
legally available for the payment of dividends. The holders of common stock are
entitled to share ratably in our net assets upon liquidation after we pay or
provide for all liabilities and for any preferential liquidation rights of any
preferred stock then outstanding. The common stockholders have no preemptive
rights to purchase shares of our stock. Shares of common stock are not subject
to any redemption provisions and are not convertible into any of our other
securities. All outstanding shares of common stock are, and the shares of
common stock we sell in this offering will be, fully paid and nonassessable
when we receive payment for the shares.
Preferred Stock
As of September 29, 1999, there were 3,866,330 shares of preferred stock
outstanding designated as follows:
. 931,044 shares were designated as Series A convertible preferred stock;
. 439,589 shares were designated as Series B redeemable preferred stock;
and
. 2,495,697 shares were designated as Series C convertible preferred
stock.
A total of 6,133,670 shares of preferred stock are authorized but have not
been designated.
Our Board of Directors has the authority, without further action by our
stockholders, to issue shares of undesignated preferred stock from time to time
in one or more series and to fix the related number of shares and the
designations, voting powers, preferences, optional and other special rights,
and restrictions or qualifications of that preferred stock. The rights,
preferences, privileges and restrictions or qualifications of different series
of preferred stock may differ with respect to dividend rates, amounts payable
on liquidation, voting rights, conversion rights, redemption provisions,
sinking fund provisions and other matters. The issuance of preferred stock
could:
. decrease the amount of earnings and assets available for distribution to
holders of common stock;
. adversely affect the rights and powers, including voting rights, of
holders of common stock; and
. have the effect of delaying, deferring or preventing a change in
control.
We have no present plans to issue any shares of undesignated preferred
stock. We intend to redeem the outstanding shares of Series B redeemable
preferred stock upon the completion of this offering, and upon redemption, the
Series B redeemable preferred stock will cease to be outstanding and will
assume the status of authorized but unissued shares of preferred stock without
designation.
57
<PAGE>
Delaware Law and Charter and Bylaw Provisions, Anti-Takeover Effects
Upon completion of this offering, Loislaw.com will be subject to the
provisions of Section 203 of the General Corporation Law of Delaware. Section
203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is generally a person who, together
with affiliates and associates, owns, or within the prior three years did own,
15% or more of the corporation's outstanding voting stock.
Our certificate of incorporation and bylaws provide that directors may be
removed only for cause by the affirmative vote of the holders of a majority of
the combined voting power of the then-outstanding shares of capital stock of
Loislaw.com entitled to vote. In addition, under the certificate of
incorporation, any vacancy on the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the Board, may be filled
only by vote of a majority of the directors then in office. The likely effect
of the limitations on the removal of directors and filling of vacancies is an
increase in the time required for the stockholders to change the composition
of the Board of Directors.
Our bylaws provide that the stockholders of Loislaw.com may submit
proposals for action to be taken at an annual meeting or special meeting of
stockholders only if Loislaw.com is given proper advance notice of the
proposed action. The by-laws further provide that special meetings of
stockholders may be called only by the Board of Directors, the chairman of the
Board of Directors, the president of Loislaw.com or the holders of a majority
of the outstanding shares of capital stock entitled to vote. The foregoing
provisions could have the effect of delaying until the next stockholders'
meeting stockholder actions that are favored by the holders of a majority of
the outstanding voting securities of Loislaw.com.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws,
unless a corporation's certificate of incorporation or bylaws, as the case may
be, requires a greater percentage. The majority stockholder vote would be in
addition to any separate class vote that might be required by the terms of any
series of preferred stock that might be outstanding at the time any amendments
are submitted to stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Reliance Trust
Company of Atlanta, Georgia.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that these large sales
could occur. These factors could also make it more difficult to raise funds
through future offerings of common stock.
After this offering, 20,939,524 shares of common stock will be outstanding,
21,536,524 shares if the underwriters exercise their over-allotment option in
full and 22,155,182 shares if, in addition, common stock is issued upon the
exercise of outstanding options and warrants. For more information about our
outstanding common stock, see "Capitalization" on page 20. Of these shares, the
3,980,000 shares, 4,577,000 shares if the underwriters exercise their over-
allotment option in full, sold in this offering will be freely tradeable
without restriction under the Securities Act except for any shares purchased by
"affiliates" of Loislaw.com, as defined in Rule 144 under the Securities Act.
The remaining 16,959,524 shares (17,578,182 shares if common stock is issued
upon the exercise of outstanding options and warrants) are "restricted
securities" within the meaning of Rule 144 under the Securities Act. The
restricted securities generally may not be sold unless they are registered
under the Securities Act or are sold under an exemption from registration, such
as the exemption provided by Rule 144.
We, our officers, directors, stockholders, including the selling
stockholder, and option holders have entered into lock-up agreements under
which we and they have agreed not to offer or sell any shares of common stock
for a period of 180 days after the date of this prospectus without the prior
written consent of Prudential Securities, on behalf of the underwriters.
Prudential Securities may, at any time and without notice, waive any of the
terms of these lock-up agreements specified in the underwriting agreement.
Following the lock-up period, these shares will not be eligible for sale in the
public market without registration under the Securities Act unless the sales
meet the conditions and restrictions of Rule 144 as described below.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for a period of at least one year (including the holding period of
any prior owner other than an affiliate of Loislaw.com) is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of the following:
. 1% of the then-outstanding shares of common stock; and
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the stockholder
files notice of the sale with the SEC.
Sales under Rule 144 are also subject to provisions relating to notice,
manner of sale and the availability of current public information about
Loislaw.com. In addition, a person (or persons whose shares are aggregated) who
has not been an affiliate of Loislaw.com at any time during the 90 days
immediately preceding a sale, and who has beneficially owned the shares for at
least two years (including the holding period of any prior owner other than an
affiliate of Loislaw.com), would be entitled to sell the shares under Rule
144(k) without regard to the volume limitation and other conditions described
above. The foregoing summary of Rule 144 is not intended to be a complete
description.
Rule 701 provides that shares of common stock acquired upon the exercise of
currently outstanding options (or under other rights granted under our employee
stock option plan) may be resold by persons, other than affiliates, beginning
90 days after the effective date of the registration statement of which this
prospectus is a part, subject only to the manner of sale provisions of Rule
144, and by affiliates under Rule 144, without compliance with its one-year
minimum holding period requirement, subject to some limitations. As of the date
of this prospectus, the Board of Directors has authorized up to 1,500,000
shares of common stock for issuance under our employee stock option plan, up to
320,000 shares of common stock for issuance under our nonemployee directors
stock option plan, subject to stockholder approval of that plan, and up to
300,000 shares of common stock for issuance under our employee stock purchase
plan. As of the date of this prospectus,
59
<PAGE>
333,842 shares of common stock were issuable under outstanding vested options
under our employee stock option plan, 535,780 shares of common stock were
issuable pursuant to outstanding options that are not yet exercisable, and
630,378 shares of common stock were available for future grants under our
employee stock option plan. In addition, as of the date of this prospectus,
120,000 shares of common stock were issuable pursuant to outstanding options
under our nonemployee directors stock option plan, none of which were
exercisable, and 200,000 shares of common stock were available for future
grants, subject to stockholder approval of that plan.
We intend to file one or more registration statements on Form S-8 under the
Securities Act within 90 days after the date of this prospectus to register all
shares of common stock that are issuable under our stock option plans and our
employee stock purchase plan. The registration statements are expected to
become effective upon filing. Shares covered by the registration statements on
Form S-8 will be eligible for sale in the public markets, subject to the lock-
up period, and for our affiliates, subject to some conditions and restrictions
(other than the holding period) of Rule 144.
After this offering, a majority of the holders of the 1,862,088 shares of
common stock that will have been issued upon conversion of the Series A
convertible preferred stock and the holders of at least 30% of the 4,991,394
shares of common stock that will have been issued upon conversion of the Series
C convertible preferred stock may request that we register all or any portion
of their registrable securities. Registrable securities include the following:
. 1,862,088 shares of common stock issuable upon conversion of the Series A
convertible preferred stock;
. 4,991,394 shares of common stock issuable upon conversion of the Series C
convertible preferred stock;
. 257,514 shares of common stock issuable to Mark Beyland upon the exercise
of vested options;
. 1,056,616 shares of common stock issued to Capital Resource Lenders III,
L.P. after it exercised warrants on May 19, 1999; and
. a total of 32,160 shares of common stock issuable upon the exercise of
warrants assigned to CRP Investment Partners III, L.L.C. and Rowland
Moriarty by Capital Resource Lenders III, L.P. on January 1, 1998.
All holders of common stock issuable upon conversion of the Series A
convertible preferred stock and the Series C convertible preferred stock have
the right to request any number of registrations on Form S-3 by us.
Additionally, the holders of approximately 10,144,181 shares of common stock
are entitled to notice if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights and are, subject to
limitations, entitled to include shares of common stock in the registration.
All current stockholders of Loislaw.com are parties to an Amended and
Restated Stockholders' Agreement dated May 25, 1999. This agreement imposes
transfer restrictions on their shares of capital stock of Loislaw.com in the
event that they attempt to sell their stock in a control block sale or a
private sale to a designated competitor. For more information about the Amended
and Restated Stockholders' Agreement, see "Management--Compensation Committee
Interlocks and Insider Participation" on pages 48-49.
60
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with Prudential Securities
Incorporated, U.S. Bancorp Piper Jaffray Inc., Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, and PrudentialSecurities.com, a
division of Prudential Securities Incorporated, acting as underwriters. We, and
the selling stockholder, are obligated to sell, and the underwriters are
obligated to purchase, all of the shares offered on the cover page of this
prospectus, if any are purchased. Subject to conditions of the underwriting
agreement, each underwriter has severally agreed to purchase the shares
indicated opposite its name:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Prudential Securities Incorporated..................................... 1,492,000
U.S. Bancorp Piper Jaffray Inc. ....................................... 1,313,400
Dain Rauscher Wessels.................................................. 1,074,600
PrudentialSecurities.com............................................... 100,000
---------
Total................................................................ 3,980,000
=========
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus, an over-allotment option to purchase up
to 597,000 additional shares from us. If any additional shares are purchased,
the underwriters will severally purchase the shares in the same proportion as
per the table above.
The underwriters have advised us that the shares will be offered to the
public at the offering price indicated on the cover page of this prospectus.
The underwriters may allow to selected dealers a concession not in excess of
$0.56 per share and these dealers may reallow a concession not in excess of
$0.10 per share to other dealers. After the shares are released for sale to the
public, the underwriters may change the offering price and the concessions. The
underwriters have informed us that they do not intend to sell shares to any
investor who has granted them discretionary authority.
We, and the selling stockholder, have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares:
<TABLE>
<CAPTION>
Total Fees
-------------------------------------------
Fee Without Exercise of Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us......... $0.98 $3,822,000 $4,407,060
Fees paid by the selling
stockholder............ $0.98 $78,400 $78,400
</TABLE>
In addition, we estimate that we will spend approximately $850,000 in
expenses for this offering, including those of the selling stockholder. We and
the selling stockholder have agreed to indemnify the underwriters against
liabilities, including liabilities under the Securities Act, or contribute to
payments that the underwriters may be required to make in respect of these
liabilities.
We, our officers and directors, and all stockholders, including the selling
stockholder and option holders, of Loislaw.com have entered into lock-up
agreements under which we and they have agreed not to offer or sell any shares
of common stock or securities convertible into or exchangeable or exercisable
for shares of common stock for a period of 180 days from the date of this
prospectus without the prior written consent of Prudential Securities, on
behalf of the underwriters. Prudential Securities may, at any time and without
notice, waive the terms of these lock-up agreements.
61
<PAGE>
Prior to this offering, there has been no public market for the common stock
of Loislaw.com. The public offering price, negotiated among us, the selling
stockholder and the underwriters, is based upon various factors such as
Loislaw.com's financial and operating history and condition, our prospects, the
prospects for the industry we are in and prevailing market conditions.
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
. Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities may elect to reduce this short
position by exercising some or all of the over-allotment option.
. Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
. Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
These activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
. the Public Offers of Securities Regulations 1995,
. the Financial Services Act of 1986, and
. the Financial Services Act 1986, (Investment Advertisements) (Exemptions)
Order 1996 (as amended).
We have asked the underwriters to reserve 195,000 shares for our active
customers and 195,000 shares for our officers, directors, employees and other
business affiliates or related third parties for sale at the same offering
price. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase the reserved
shares.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM, a full service brokerage firm program, may view offering terms and a
prospectus online and place orders through their financial advisors.
Upon the closing of this offering, we will pay Dublind Investments LLC, an
affiliate of Dublind Partners, Inc. and Dublind Securities, Inc., a fee of
$250,000 in exchange for financial advisory services relating to this offering.
LEGAL MATTERS
The validity of the shares of common stock to be issued in this offering
will be passed upon for Loislaw.com by Thompson & Knight L.L.P., Dallas, Texas.
Various legal matters in connection with the offering will be passed upon for
the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Loislaw.com as of December 31, 1997 and 1998 and
for each of the years in the three-year period ended December 31, 1998 have
been included in this prospectus and in the registration statement in reliance
upon the report, which appears elsewhere in this prospectus, of KPMG LLP,
independent certified public accountants, and upon their authority as experts
in accounting and auditing.
62
<PAGE>
AVAILABLE INFORMATION
Loislaw.com has filed with the SEC a registration statement on Form S-1
(including all amendments and exhibits thereto) under the Securities Act with
respect to the common stock in this offering. As permitted by the rules and
regulations of the SEC, this prospectus omits some of the information contained
in the registration statement. For further information with respect to
Loislaw.com and the common stock offered in this offering, you should refer to
the registration statement and its exhibits and schedules. You may obtain
copies of all or any portion of the registration statement at prescribed rates
from the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, at its regional
offices located at Seven World Trade Center, New York, New York 10007 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
or by calling the Commission at 1-800-SEC-0330. In addition, the Commission
maintains a web site that contains reports, proxy statements and information
statements and other information regarding registrants (including Loislaw.com)
that file electronically with the Commission, which can be accessed at
http://www.sec.gov.
We intend to furnish to our stockholders annual reports containing financial
statements audited by an independent public accounting firm and to make
available to our stockholders quarterly reports for each of the quarters of
each fiscal year containing unaudited financial statements.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets at December 31, 1997 and 1998 and June 30, 1999
(unaudited)............................................................. F-3
Statements of Operations for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 (unaudited) and 1999
(unaudited)............................................................. F-4
Statements of Redeemable Equity Securities and Stockholders' Equity
(Deficit) for the years ended December 31, 1996, 1997 and 1998 and the
six months ended June 30, 1999 (unaudited).............................. F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 (unaudited) and 1999
(unaudited)............................................................. F-7
Notes to Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Loislaw.com, Inc.:
We have audited the accompanying balance sheets of Loislaw.com, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
redeemable equity securities and stockholders' equity (deficit) and cash flows
for each of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 financial statements referred to above present fairly,
in all material respects, the financial position of Loislaw.com, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998,
in conformity with generally accepted accounting principles.
Little Rock, Arkansas
May 29, 1999, except as
to note 7(c) which is
as of July 22, 1999
KPMG LLP
F-2
<PAGE>
LOISLAW.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, 1999
------------------------ June 30, Pro forma
1997 1998 1999 (note 7)
----------- ----------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 3,233,172 $ 99,042 $ 3,274,946 $ 3,274,946
Accounts receivable, net
of allowance for
doubtful accounts of
$375,000 and $124,974 at
December 31, 1997 and
1998, respectively, and
$144,241 at June 30,
1999 (note 5)........... 896,001 1,540,052 1,889,283 1,889,283
Prepaid commissions...... 114,936 311,394 748,193 748,193
Prepaid software
license................. -- 96,958 271,125 271,125
Other current assets..... 19,654 138,811 631,302 631,302
----------- ----------- ----------- -----------
Total current assets..... 4,263,763 2,186,257 6,814,849 6,814,849
Databases, net (notes 3
and 5)................... 6,460,547 10,766,967 15,672,406 15,672,406
Property and equipment,
net (notes 4 and 5)...... 501,218 1,446,459 2,931,468 2,931,468
Deferred loan costs, net
of accumulated
amortization of $48,076
and $728,201 at
December 31, 1997 and
1998, respectively, and
$1,124,482 at June 30,
1999..................... 4,528,723 3,992,278 4,017,634 4,017,634
Other assets.............. 544,081 820,721 652,779 652,779
----------- ----------- ----------- -----------
Total assets............. $16,298,332 $19,212,682 $30,089,136 $30,089,136
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current installments of
long-term debt (note
5)...................... $ 26,443 $ 954,893 $14,557,184 $14,557,184
Accounts payable......... 1,906,319 2,559,631 3,676,373 3,676,373
Deferred revenues........ 2,540,459 2,961,067 3,566,185 3,566,185
Accrued expenses......... 304,708 461,549 557,861 557,861
----------- ----------- ----------- -----------
Total current
liabilities............. 4,777,929 6,937,140 22,357,603 22,357,603
Deferred revenues......... 981,722 967,046 440,037 440,037
Long-term debt, excluding
current installments
(note 5)................. 4,080,941 11,317,631 28,614 28,614
Other noncurrent
liabilities.............. -- 170,373 245,938 245,938
----------- ----------- ----------- -----------
Total liabilities........ 9,840,592 19,392,190 23,072,192 23,072,192
----------- ----------- ----------- -----------
Redeemable equity
securities (notes 5 and
7):
Series A convertible
preferred, 931,044
shares.................. 2,492,100 2,605,840 2,772,452 --
Series B redeemable
preferred, redemption
value of $4,395,890 plus
accrued dividends,
439,589 shares.......... 4,430,358 4,770,380 4,940,157 4,940,157
Series C convertible
preferred, 2,495,697
shares.................. -- -- 13,875,977 --
Common stock, 730,692
shares at December 31,
1998 and 2,113,232
shares at June 30,
1999.................... -- 1,189,158 3,673,877 --
Common stock warrants.... 4,293,821 3,154,975 61,602 --
----------- ----------- ----------- -----------
Total redeemable equity
securities.............. 11,216,279 11,720,353 25,324,065 4,940,157
----------- ----------- ----------- -----------
Stockholders' equity
(deficit) (notes 5 and
7):
Common stock, $.001 par
value. 50,000,000 shares
authorized; shares
issued--7,180,000 at
December 31, 1997, and
1998, 8,082,810 at
June 30, 1999 and
17,049,524 on a pro
forma basis at June 30,
1999.................... 7,180 7,180 8,083 17,049
Additional paid-in
capital................. 415,352 -- 1,168,777 21,543,719
Accumulated deficit...... (5,181,071) (11,890,941) (19,467,881) (19,467,881)
Treasury stock, at cost,
10,000 shares at
December 31, 1998 and
June 30, 1999........... -- (16,100) (16,100) (16,100)
----------- ----------- ----------- -----------
Total stockholders'
equity (deficit)........ (4,758,539) (11,899,861) (18,307,121) 2,076,787
Commitments and
contingencies (notes 5, 7
and 8)...................
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit)............... $16,298,332 $19,212,682 $30,089,136 $30,089,136
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
LOISLAW.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Web-based products.... $ 28,333 $ 208,357 $ 842,112 $ 272,054 $ 1,171,184
CD-ROM products....... 1,854,605 3,157,056 3,182,067 1,515,506 1,621,188
Other................. -- -- 1,000,000 353,090 --
----------- ----------- ----------- ----------- -----------
Total revenues...... 1,882,938 3,365,413 5,024,179 2,140,650 2,792,372
----------- ----------- ----------- ----------- -----------
Operating expenses:
Database costs........ 1,459,845 1,563,152 2,623,717 1,015,866 2,704,417
Costs of other
revenues............. -- -- 393,357 147,248 --
Selling and
marketing............ 2,152,638 2,363,028 4,606,638 1,902,504 4,320,448
General and
administrative....... 1,524,997 1,535,179 1,977,424 1,023,306 1,708,179
Product development... 101,057 86,465 540,866 368,228 333,075
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 5,238,537 5,547,824 10,142,002 4,457,152 9,066,119
----------- ----------- ----------- ----------- -----------
Loss from
operations......... (3,355,599) (2,182,411) (5,117,823) (2,316,502) (6,273,747)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest expense,
net.................. (250,964) (454,667) (1,548,931) (643,290) (1,308,678)
Other, net............ 2,644 (6,353) 41,953 1,002 5,485
----------- ----------- ----------- ----------- -----------
(248,320) (461,020) (1,506,978) (642,288) (1,303,193)
----------- ----------- ----------- ----------- -----------
Loss before income
taxes.............. (3,603,919) (2,643,431) (6,624,801) (2,958,790) (7,576,940)
Income tax benefit...... (52,184) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss............ (3,551,735) (2,643,431) (6,624,801) (2,958,790) (7,576,940)
Accrued preferred stock
dividends and accretion
on redeemable preferred
stock and common stock
warrants............... -- (34,468) (500,421) (210,643) (462,079)
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common stock........... $(3,551,735) $(2,677,899) $(7,125,222) $(3,169,433) $(8,039,019)
=========== =========== =========== =========== ===========
Net loss per share --
basic and diluted...... $ (0.50) $ (0.37) $ (0.99) $ (0.44) $ (0.95)
=========== =========== =========== =========== ===========
Weighted average common
shares outstanding --
basic and diluted...... 7,057,206 7,162,740 7,222,344 7,180,000 8,424,298
=========== =========== =========== =========== ===========
Unaudited pro forma
information:
Net loss per share --
basic and diluted.... $ (0.77) $ (0.72)
=========== ===========
Weighted average
common shares
outstanding -- basic
and diluted.......... 9,084,432 10,702,336
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
LOISLAW.COM, INC.
STATEMENTS OF REDEEMABLE EQUITY SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(Notes 5 and 7)
<TABLE>
<CAPTION>
Redeemable Equity Securities
-------------------------------------------------------------------
Series A Series B Series C Common
convertible redeemable convertible Common stock
preferred preferred preferred stock warrants Total
----------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1995............ $ -- $ -- $-- $ -- $ -- $ --
Issuance of
120,000 shares
of common stock
for cash........ -- -- -- -- -- --
Net loss........ -- -- -- -- -- --
---------- ---------- ---- --------- ---------- ----------
Balances at
December 31,
1996............ -- -- -- -- -- --
Issuance of
60,000 shares of
common stock for
cash............ -- -- -- -- -- --
Issuance of
931,044 shares
of Series A
convertible
preferred stock
for cash, net of
issuance costs
of $507,900..... 2,492,100 -- -- -- -- 2,492,100
Conversion of
notes payable
into 439,589
shares of Series
B redeemable
preferred
stock........... -- 4,395,890 -- -- -- 4,395,890
Issuance of
warrants to
purchase
2,675,278 shares
of redeemable
common stock.... -- -- -- -- 4,293,821 4,293,821
Accrued
dividends on
Series B
redeemable
preferred
stock........... -- 34,468 -- -- -- 34,468
Net loss........ -- -- -- -- -- --
---------- ---------- ---- --------- ---------- ----------
Balances at
December 31,
1997............ 2,492,100 4,430,358 -- -- 4,293,821 11,216,279
Accrued
dividends on
Series B
redeemable
preferred
stock........... -- 340,022 -- -- 340,022
Accretion on
redeemable
equity
securities...... 113,740 -- -- -- 46,659 160,399
Exercise of
warrants for
730,692 shares
of redeemable
common stock.... -- -- -- 1,189,158 (1,185,505) 3,653
Purchase of
treasury stock,
10,000 shares... -- -- -- -- -- --
Net loss........ -- -- -- -- -- --
---------- ---------- ---- --------- ---------- ----------
Balances at
December 31,
1998............ 2,605,840 4,770,380 -- 1,189,158 3,154,975 11,720,353
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------------------------------
Retained
Additional earnings/
Common paid-in (accumulated Treasury
stock capital deficit) stock Total
------ ---------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31,
1995............ $7,000 $ -- $ 1,014,095 $ -- $ 1,021,095
Issuance of
120,000 shares
of common stock
for cash........ 120 299,880 -- -- 300,000
Net loss........ -- -- (3,551,735) -- (3,551,735)
------ ---------- ------------- --------- ------------
Balances at
December 31,
1996............ 7,120 299,880 (2,537,640) -- (2,230,640)
Issuance of
60,000 shares of
common stock for
cash............ 60 149,940 -- -- 150,000
Issuance of
931,044 shares
of Series A
convertible
preferred stock
for cash, net of
issuance costs
of $507,900..... -- -- -- -- --
Conversion of
notes payable
into 439,589
shares of Series
B redeemable
preferred
stock........... -- -- -- -- --
Issuance of
warrants to
purchase
2,675,278 shares
of redeemable
common stock.... -- -- -- -- --
Accrued
dividends on
Series B
redeemable
preferred
stock........... -- (34,468) -- -- (34,468)
Net loss........ -- -- (2,643,431) -- (2,643,431)
------ ---------- ------------- --------- ------------
Balances at
December 31,
1997............ 7,180 415,352 (5,181,071) -- (4,758,539)
Accrued
dividends on
Series B
redeemable
preferred
stock........... -- (340,022) -- -- (340,022)
Accretion on
redeemable
equity
securities...... -- (75,330) (85,069) -- (160,399)
Exercise of
warrants for
730,692 shares
of redeemable
common stock.... -- -- -- -- --
Purchase of
treasury stock,
10,000 shares... -- -- -- (16,100) (16,100)
Net loss........ -- -- (6,624,801) -- (6,624,801)
------ ---------- ------------- --------- ------------
Balances at
December 31,
1998............ 7,180 -- (11,890,941) (16,100) (11,899,861)
</TABLE>
(Continued)
F-5
<PAGE>
LOISLAW.COM, INC.
STATEMENTS OF REDEEMABLE EQUITY SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(Notes 5 and 7)--(Continued)
<TABLE>
<CAPTION>
Redeemable Equity Securities
----------------------------------------------------------------------
Series A Series B Series C Common
convertible redeemable convertible Common stock
preferred preferred preferred stock warrants Total
----------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of
warrants to
purchase 204,182
shares of
redeemable
common stock
(unaudited)..... $ -- $ -- $ -- $ -- $ 408,364 $ 408,364
Accrued
dividends on
Series B
redeemable
preferred stock
(unaudited)..... -- 169,777 -- -- -- 169,777
Accretion on
redeemable
equity
securities
(unaudited)..... 166,612 -- -- 80,472 125,690 372,774
Exercise of
warrants for
2,113,232 shares
of redeemable
common stock
(unaudited)..... -- -- -- 3,637,993 (3,627,427) 10,566
Issuance of
2,495,697 shares
of Series C
convertible
preferred stock
for cash, net of
issuance costs
of $624,023
(unaudited)..... -- -- 13,875,977 -- -- 13,875,977
Issuance of
172,118 shares
of common stock
for cash, net of
issuance costs
of $21,517
(unaudited)..... -- -- -- -- -- --
Cancellation of
redemption
feature on
730,692 shares
of redeemable
common stock
(unaudited)..... -- -- -- (1,233,746) -- (1,233,746)
Net loss
(unaudited)..... -- -- -- -- -- --
---------- ---------- ----------- ---------- ---------- -----------
Balances at June
30, 1999
(unaudited)..... $2,772,452 $4,940,157 $13,875,977 $3,673,877 $ 61,602 $25,324,065
========== ========== =========== ========== ========== ===========
<CAPTION>
Stockholders' Equity (Deficit)
--------------------------------------------------------
Retained
Additional earnings/
Common paid-in (accumulated Treasury
stock capital (deficit) stock Total
------ ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of
warrants to
purchase 204,182
shares of
redeemable
common stock
(unaudited)..... $ -- $ -- $ -- $ -- $ --
Accrued
dividends on
Series B
redeemable
preferred stock
(unaudited)..... -- (169,777) -- -- (169,777)
Accretion on
redeemable
equity
securities
(unaudited)..... -- (372,774) -- -- (372,774)
Exercise of
warrants for
2,113,232 shares
of redeemable
common stock
(unaudited)..... -- -- -- -- --
Issuance of
2,495,697 shares
of Series C
convertible
preferred stock
for cash, net of
issuance costs
of $624,023
(unaudited)..... -- -- -- -- --
Issuance of
172,118 shares
of common stock
for cash, net of
issuance costs
of $21,517
(unaudited)..... 172 478,313 -- -- 478,485
Cancellation of
redemption
feature on
730,692 shares
of redeemable
common stock
(unaudited)..... 731 1,233,015 -- -- 1,233,746
Net loss
(unaudited)..... -- -- (7,576,940) -- (7,576,940)
------ ----------- ------------- --------- -------------
Balances at June
30, 1999
(unaudited)..... $8,083 $1,168,777 $(19,467,881) $(16,100) $(18,307,121)
====== =========== ============= ========= =============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
LOISLAW.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(3,551,735) $(2,643,431) $(6,624,801) $(2,958,790) $(7,576,940)
Adjustments to
reconcile net loss to
net cash provided
(used) by operating
activities:
Depreciation and
amortization......... 638,210 645,416 1,361,238 642,836 1,411,375
Deferred tax benefit.. (52,184) -- -- -- --
Loss on disposal of
property and
equipment............ -- -- 3,979 -- --
Change in operating
assets and
liabilities:
Accounts receivable.. (154,920) (1,025,210) (758,773) (368,645) 40,852
Prepaid expenses and
other current
assets.............. 174,168 (132,655) (412,573) (295,774) (1,103,457)
Accounts payable..... 1,371,768 (175,172) 823,685 261,211 1,192,307
Accrued expenses..... 326,070 (132,129) 156,841 (200,669) 96,312
Deferred revenue..... 1,597,149 1,768,429 405,932 332,176 78,109
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by operating
activities......... 348,526 (1,694,752) (5,044,472) (2,587,655) (5,861,442)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Database costs........ (2,741,984) (1,972,244) (4,769,562) (1,793,658) (5,737,218)
Purchase of property
and equipment........ (218,045) (92,528) (1,224,665) (870,359) (1,668,324)
Decrease (increase) in
other assets......... 8,892 (8,827) (161,918) (138,788) (222,141)
----------- ----------- ----------- ----------- -----------
Net cash used by
investing
activities......... (2,951,137) (2,073,599) (6,156,145) (2,802,805) (7,627,683)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Repayment of capital
lease obligation..... -- (25,183) (15,385) (9,967) (5,910)
Deferred loan costs
(note 5)............. -- (553,614) (143,681) -- (13,273)
Proceeds from sale of
Series A convertible
preferred stock, net
of $237,263 costs of
issuance (note 5).... -- 2,762,737 -- -- --
Proceeds from sale of
Series C convertible
preferred stock, net
of issuance costs of
$624,023 (note 5).... -- -- -- -- 8,893,850
Proceeds from notes
payable.............. 253,705 6,117,446 8,661,077 3,423,077 9,362,500
Repayment of notes
payable.............. (573,905) (2,240,855) (423,077) (423,077) (2,050,623)
Proceeds from related
party borrowing (note
7)................... 2,406,944 688,946 -- -- --
Proceeds from exercise
of warrants (note
5)................... -- -- 3,653 -- --
Proceeds from sale of
common stock......... 300,000 150,000 -- -- 478,485
Repurchase of treasury
stock................ -- -- (16,100) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 2,386,744 6,899,477 8,066,487 2,990,033 16,665,029
----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... (215,867) 3,131,126 (3,134,130) (2,400,427) 3,175,904
Cash and cash
equivalents at
beginning of year..... 317,913 102,046 3,233,172 3,233,172 99,042
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
year.................. $ 102,046 $ 3,233,172 $ 99,042 $ 832,745 $ 3,274,946
=========== =========== =========== =========== ===========
Supplemental cash flow
information:
Cash paid for
interest............. $ 104,217 $ 581,154 $ 683,761 $ 226,342 $ 1,176,070
Cash received from
income tax refunds... 134,007 -- -- -- --
Non cash investing and
financing
transactions:
Acquisition of
equipment through
capital lease........ 132,567 -- -- -- --
Accrued Series B
redeemable preferred
stock dividends...... -- 34,468 340,022 170,011 169,777
Satisfaction of
capital lease
obligation through
return of equipment.. -- -- 57,475 -- --
Conversion of related
party borrowing to
Series B redeemable
preferred stock (note
7)................... -- 4,395,890 -- -- --
Issuance of warrants
(note 5)............. -- 4,293,821 -- -- 408,364
Accretion on
redeemable equity
securities........... -- -- 160,399 40,632 372,774
Cancellation of
redemption feature on
redeemable common
stock (note 5)....... -- -- -- -- 1,233,746
Conversion of
subordinated notes
payable into 857,509
shares of Series C
convertible preferred
stock (note 5)....... -- -- -- -- 4,982,127
Exercise of warrants
for satisfaction of
subordinated notes
payable (note 5)..... -- -- -- -- 10,566
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
(1) Operations
Loislaw.com, Inc. (the "Company") provides legal and related information to
lawyers and law firms over the Internet and on CD-ROM.
(2) Significant Accounting Policies
(a) Management Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the 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 to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
(c) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. Concentrations
of credit risk related to subscription receivables are limited as the Company
sells its products direct to numerous users in the states for which the Company
offers legal information. The amount of loss should customers fail to pay the
receivables is limited to the notional amount of such receivables. At December
31, 1998, the Company's management does not believe any significant
concentration of credit risk exists.
(d) Product Development, Software and Database Costs
Product development expense consists primarily of employee salaries and
benefits, facilities cost allocations and expenses related to the development
of core software supporting the Company's products. Statement of Financial
Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. Based upon the Company's product development
process, technological feasibility is established upon completion of a working
model. Costs incurred by the Company between completion of the working model
and the point at which the product is ready for general release have been
insignificant. As a result, the Company has expensed software development
costs.
Prepaid software licenses are amortized on a straight line basis over the
remaining economic life of the license, or the amortization that would be
recorded by using the ratio of gross revenues derived from the use of the
license to total current and anticipated future gross revenues from the use of
the license. The noncurrent portion of prepaid software licenses is included in
other assets and amounted to approximately $170,000 at December 31, 1998, and
approximately $438,000 at June 30, 1999.
Database costs represent amounts incurred for data acquisition and
conversion costs, editing, coding, and quality control of legal information and
include salaries and benefits and overhead allocations. Costs to develop court
ruling databases, other than overhead allocations, are capitalized and
amortized to production costs once the product is released, on a straight-line
basis over the expected lives of the databases, which is estimated at twenty
years. Costs to develop statutes and regulations databases are also capitalized
and amortized to production costs once the product is released, on a straight-
line basis over the expected lives of the databases, which are estimated at two
years. Costs to maintain and enhance databases are expensed as incurred.
F-8
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
Amortization expense related to capitalized databases totaled approximately
$500,000, $440,000 and $460,000 in 1996, 1997 and 1998, respectively. The
Company currently contracts with three companies to perform a significant
amount of the initial data conversion for its databases.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated
useful lives of 7 years for office furniture and equipment and 5 years for data
processing equipment. Leasehold improvements are amortized over the lesser of
the lease term or 15 years.
(f) Revenue Recognition
Subscription revenue from web-based and CD-ROM products is recognized
ratably over the subscription period (1 to 5 years). Substantially all
subscriptions sold are billed annually, quarterly or monthly. Unearned portions
of subscription revenue are deferred. The noncurrent portions of amounts to be
received under long-term subscription agreements amounted to approximately
$489,000, $603,000 and $213,000, respectively, at December 31, 1997 and 1998
and June 30, 1999 and are included in other assets in the accompanying balance
sheets. Other revenue in 1998 results from producing databases for a third
party and is recognized under the percentage of completion method as production
costs are incurred. Web-based and CD-ROM subscriptions are both sold for the
same legal databases. Accordingly, there are no separate production costs for
web-based and CD-ROM sales. Costs of revenue related to the customized database
was approximately $147,000 for the first six months of 1998 and approximately
$393,000 for the entire year.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles, including database
costs, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
The Company believes that no significant impairment of its long-lived assets
and intangibles, including database costs, has occurred.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(i) Stock Option Plan
The Company has adopted the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation and, as permitted under SFAS No. 123,
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for compensation costs for its stock option plans. Accordingly,
F-9
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
compensation expense is recognized on the date of grant only if the current
market price of the underlying common stock at date of grant exceeds the
exercise price.
(j) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs amounted to
approximately $28,000, $17,000 and $300,000 for the years ended December 31,
1996, 1997 and 1998, respectively, and are included in selling and marketing
expenses in the accompanying statements of operations.
(k) Financial Instruments
The fair value of the company's accounts receivable and accounts payable
approximate their carrying values due to the relatively short maturities of
these instruments. The fair value of the Company's revolving credit borrowings
and notes payable approximate their carrying value since the interest rate on
these obligations fluctuates with the prime rate. The fair value of the
subordinated notes can not be determined without incurring excessive costs due
to the related party nature of such instruments.
(l) Loss Per Share
Loss per share has been computed by dividing the net loss attributable to
common stock by the weighted average shares of common stock outstanding during
each period as shown below:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss................ $3,551,735 $2,643,431 $6,624,801 $2,958,790 $7,576,940
Accrued dividends on
preferred stock........ -- 34,468 340,022 170,011 169,777
Accretion on redeemable
common stock warrants.. -- -- 46,659 -- 125,690
Accretion on redeemable
preferred stock........ -- -- 113,740 40,632 166,612
---------- ---------- ---------- ---------- ----------
Net loss applicable to
common stockholders.... $3,551,735 $2,677,899 $7,125,222 $3,169,433 $8,039,019
========== ========== ========== ========== ==========
Weighted average common
shares outstanding..... 7,057,206 7,162,740 7,222,344 7,180,000 8,424,298
========== ========== ========== ========== ==========
Loss per share.......... $ (0.50) $ (0.37) $ (0.99) $ (0.44) $ (0.95)
========== ========== ========== ========== ==========
</TABLE>
Potentially dilutive securities were excluded from the above calculations
because they were antidilutive in accordance with Statement of Financial
Accounting Standards No. 128. The number of shares under common stock options
and warrants which were excluded were 210,000, 2,743,278, and 2,086,254,
respectively, for the years ended December 31, 1996, 1997 and 1998 and
2,816,946 and 618,658, respectively, for the six months ended June 30, 1998 and
1999.
Unaudited pro forma loss per share and weighted average shares outstanding
reflect the conversion of 931,044 shares of Series A convertible preferred
stock and 2,495,697 shares of Series C convertible preferred stock into
6,853,482 shares of common stock and the elimination of the redemption feature
on outstanding warrants for 35,536 shares of common stock as if the conversion
and the elimination of the redemption feature
F-10
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
had taken place at the beginning of the respective periods. Pro forma loss per
share has been computed by dividing the pro forma net loss attributable to
common stock by the pro forma weighted average shares of common stock
outstanding during the period as shown below:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, 1998 June 30, 1999
----------------- -------------
<S> <C> <C>
Net loss................................ $ 6,624,801 $ 7,576,940
Accrued dividends on preferred stock.... 340,022 169,777
----------- -----------
Pro forma net loss attributable to
common stockholders.................... $ 6,964,823 $ 7,746,717
=========== ===========
Weighted average common shares
outstanding............................ 7,222,344 8,424,298
Conversion of Series A and Series C
convertible preferred stock into common
stock.................................. 1,862,088 2,278,038
----------- -----------
Pro forma weighted average common shares
outstanding............................ 9,084,432 10,702,336
=========== ===========
Pro forma loss per share................ $ (0.77) $ (0.72)
=========== ===========
</TABLE>
(m) Unaudited Interim Financial Information
The interim financial statements as of June 30, 1999 and for the six months
ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the financial
statement have been included in such unaudited financial statements. The
results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire year.
(3) Database Costs
Database costs consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Court ruling databases................... $6,696,994 $ 9,303,468 $14,509,095
Statutes and regulations databases....... 939,048 3,102,136 3,633,727
---------- ----------- -----------
7,636,042 12,405,604 18,142,822
Less accumulated amortization............ 1,175,495 1,638,637 2,470,416
---------- ----------- -----------
$6,460,547 $10,766,967 $15,672,406
========== =========== ===========
</TABLE>
(4) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Office furniture and equipment............ $ 241,952 $ 246,172 $ 686,927
Data processing equipment................. 906,243 1,916,936 3,107,174
Leasehold improvements.................... 18,073 149,611 186,942
---------- ---------- ----------
1,166,268 2,312,719 3,981,043
Less accumulated depreciation and
amortization............................. 665,050 866,260 1,049,575
---------- ---------- ----------
$ 501,218 $1,446,459 $2,931,468
========== ========== ==========
</TABLE>
F-11
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
(5) Debt
Debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
12.5% Senior Subordinated Notes......... $4,000,000 $ 8,000,000 $ 9,989,434
Notes payable........................... -- 2,907,000 4,567,750
8.25% revolving line of credit, due June
2000................................... -- 1,331,000 --
Capital lease obligation................ 107,384 34,524 28,614
---------- ----------- -----------
Total debt............................ 4,107,384 12,272,524 14,585,798
Less current installments............... 26,443 954,893 14,557,184
---------- ----------- -----------
$4,080,941 $11,317,631 $ 28,614
========== =========== ===========
</TABLE>
Interest expense on related party borrowings was $204,344 in 1996 and
$271,823 in 1997 (none in 1998).
On November 24, 1997, the Company entered into an agreement ("CRL
Agreement") with Capital Resource Lenders III, L.P. ("CRL") under which CRL
agreed to purchase from the Company up to $10,000,000 of 12.5% Senior
Subordinated Notes ("Notes") and a Warrant ("Warrant") and $3,000,000 of
Series A convertible preferred stock ("Series A Preferred"). See note 7. At
closing, CRL purchased $4,000,000 of the Notes and all of the Series A
Preferred (931,044 shares). In accordance with the CRL Agreement, CRL
purchased an additional $4,000,000 of the Notes during 1998 and purchased the
remaining $2,000,000 of the Notes during January and February 1999. Interest
on the Notes is payable quarterly beginning December 31, 1997 and principal is
due November 30, 2003.
The Warrant entitles CRL to purchase 1,944,586 shares of common stock of
the Company at $.005 per share at any time prior to September 30, 2004. The
value assigned to the Warrant was $3,121,060 which has been reflected as
deferred loan costs. Such deferred loan costs are being amortized over the
term of the notes using the interest method. On January 1, 1998 CRL assigned
32,160 of its warrants and a proportionate share of its other obligations and
rights under the CRL Agreement to CRP Investment Partners III, L.P. ("CRP")
and Rowland Moriarty ("Moriarty").
The Company paid $650,000 in cash and issued a warrant to purchase 730,692
shares of the Company's common stock at $.005 per share, at any time prior to
September 30, 2004, to a third party for its assistance in obtaining the CRL
Agreement. The value assigned to the warrant was $1,172,761, which has been
allocated to deferred loan costs and cost of issuance of the Series A
Preferred in the amounts of $902,124 and $270,637, respectively. Deferred loan
costs are being amortized into expense over the life of the Notes using the
interest method. During 1998, this warrant was exercised with the net proceeds
reflected as an increase in redeemable common stock in the accompanying
financial statements.
The proceeds from the CRL Agreement were used to repay indebtedness of
$2,240,855, to pay the $650,000 private placement fee referred to above and
other closing costs of $141,418 (of which amount $237,263 has been charged to
cost of issuance of the Series A Preferred) and to provide working capital for
the Company.
F-12
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
In connection with the CRL Agreement, a shareholders' agreement was entered
into whereby the preferred shareholders and warrant holders were given put
options which entitle such holders to sell their preferred stock, warrants or
any common shares obtained upon exercise of warrants or conversion of preferred
shares to the Company between September 30, 2003 and September 30, 2005.
Accordingly, all such preferred shares, warrants and common shares obtained
upon exercise of warrants have been classified as redeemable equity securities
in the accompanying balance sheets. The puts entitle such holders to have their
underlying shares redeemed at the fair market value of the common stock as of
the redemption date. The difference between the carrying value of such shares
and the estimated fair market value of common stock is being accreted through a
charge to retained earnings and, with respect to the preferred shares and
warrants, is presented as an increase in loss attributable to common
shareholders.
In 1998, the Company entered into a credit agreement with Fleet National
Bank ("Fleet") whereby Fleet agreed to advance up to a maximum of $12,000,000
to the Company. Borrowings under this agreement are evidenced by four separate
notes, including a working capital revolving line of credit ("Revolving
Credit"), two converting equipment lines of credit ("Equipment LOC"), and a
converting SBLC line of credit ("SBLC LOC").
In accordance with the terms and conditions of the Revolving Credit note,
the Company may borrow up to the lesser of $2,500,000 or the borrowing base of
eligible receivables as defined by the Fleet agreement ($1,336,240 at December
31, 1998). Advances under the Revolving Credit note at December 31, 1998 amount
to $1,331,000, bear interest, payable monthly, at Fleet's prime rate plus 1/2%
(8.25% at December 31, 1998), and are due June 1, 2000. In addition, the
Company is required to pay a quarterly commitment fee of $6,250.
Under one Equipment LOC note, the Company may borrow up to $1,000,000 for
the purchase of qualified equipment, as defined by the Fleet agreement.
Advances under this Equipment LOC note amounted to $407,000 at December 31,
1998 and $994,000 at June 30, 1999. Advances under this Equipment LOC converted
to Term Note A at June 30, 1999, and are repayable in thirty-six equal monthly
installments, plus interest, beginning July 1999. Under the other Equipment LOC
note, the Company may borrow up to $1,500,000 for the purchase of qualified
equipment. Advances under this note, which amounted to $292,500 at June 30,
1999 (none at December 31, 1998), shall automatically convert at June 1, 2000
to Term Note B and shall be repaid by the Company in thirty-six equal monthly
installments, plus interest, beginning July 2000. Borrowings under the
Equipment LOC and term notes bear interest, payable monthly, at Fleet's prime
rate plus 1 1/2% (9.25% at December 31, 1998).
Pursuant to the provisions of the SBLC LOC note, the Company may borrow up
to $4,000,000 from Fleet through June 30, 1999, to finance development of its
law library databases. Additionally, the Company may request and Fleet shall
arrange to issue standby letters of credit, provided, however, that aggregate
advances and outstanding letters of credit under the SBLC LOC note shall not
exceed $7,000,000. Aggregate advances under the SBLC LOC note (excluding the
letters of credit) amounted to $2,500,000 at December 31, 1998 and $3,281,250
at June 30, 1999. Such advances bear interest, payable monthly, at Fleet's
prime rate plus 1 1/2% (9.25% at December 31, 1998). Borrowings under the SBLC
LOC note are due in thirty-two monthly installments of $109,375, plus interest,
beginning May 1999. At December 31, 1998, letters of credit amounting to
approximately $2,100,000 are outstanding under the SBLC LOC note securing the
Company's performance under its data compilation contract with a foreign
supplier.
Obligations under the CRL Agreement are subordinate to the Fleet borrowings.
In addition, CRL, CRP and Moriarty have guaranteed 45% of any borrowings
outstanding under the SBLC LOC. In exchange for this guaranty, the Company
issued warrants in February 1999 to the guarantors. The warrants entitle the
holders to purchase 204,182 shares of common stock of the Company and have the
same terms as the original warrants issued in November 1997 and, accordingly,
have been classified as redeemable equity securities in the
F-13
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
accompanying balance sheets. The value assigned to the warrants ($408,364) has
been recorded as deferred loan costs and is being amortized into expense over
the remaining term of the related Fleet debt. On May 19, 1999 CRL exercised all
of the warrants it held (2,113,232 shares) in exchange for satisfaction of
$10,566 of subordinated notes payable. After exercise of these warrants, all
remaining warrants (35,536 shares) are held by CRP and Moriarty.
The per share fair value of common stock warrants issued during 1997 and
1999 was $1.60 and $2.00, respectively, on the date of issuance and was
determined using the Black Scholes option pricing model with the following
assumptions: no expected dividend yield; risk-free interest rate of 4.5% in
1997 and 1999; and an expected life of 7.0 years and 5.5 years, respectively,
in 1997 and 1999.
Prior to and in anticipation of the financing transaction discussed in the
following paragraph, CRL advanced to the Company $5,000,000 in exchange for
12.5% Senior Subordinated Convertible Promissory Notes. These notes are
subordinated to the Fleet borrowings and were issued as follows: March 10,
1999, $2,000,000; April 13, 1999, $2,000,000; and May 7, 1999, $1,000,000.
On May 25, 1999, the Company entered into an agreement ("Series C
Agreement") with Sandler Capital Partners IV, L.P. and Sandler Capital Partners
IV, FTE, L.P. (collectively, "Sandler"), CRL, Dublind Partners, Inc.
("Dublind"), Mark Beyland ("Beyland"), the president of the Company, and Exeter
Capital Partners IV, L.P. ("Exeter") whereby the Company issued 172,118 shares
of common stock to Dublind for $500,002 in cash and 2,495,697 shares of Series
C convertible preferred stock ("Series C Preferred") to Sandler, CRL, Beyland
and Exeter for $14,500,000, of which 857,509 shares were issued in exchange for
the $4,982,127 of senior subordinated convertible notes plus accrued interest
thereon held by CRL, and the remaining shares were issued to Sandler (1,118,760
shares), Beyland (129,088 shares) and Exeter (390,340 shares) for cash. In
connection with the agreement, the Company paid Dublind an advisory fee of
$475,000 and paid other costs in connection with the financing amounting to
$170,626. These costs of issuance have been allocated between common stock and
the Series C Preferred in the amounts of $21,517 and $624,023, respectively.
The net proceeds from the Series C Agreement are being used for database
development costs and other general corporate purposes.
In connection with the Series C Agreement, a new shareholders' agreement was
entered into whereby all remaining warrants and the shares obtained by CRL upon
exercise of warrants would have the same redemption feature as the Series A and
Series C shares, which entitles these shareholders to have the underlying
shares redeemed at the fair value of the common stock at the redemption date.
The common shares issued to Dublind and the 730,692 shares previously obtained
from exercising warrants in 1998 are no longer subject to such redemption
agreements. Accordingly, such shares have been reclassified into common stock
and additional paid-in capital as of May 25, 1999.
The CRL Agreement and the Fleet agreement contain certain covenants
requiring the Company to maintain certain financial ratios including minimum
profitability, minimum tangible capital base, as defined, debt service
coverage, and liquidity. At December 31, 1998, the Company was not in
compliance with certain of these covenants. On May 25, 1999, CRL and Fleet
waived compliance with these covenants. However, at June 30, 1999, the Company
was not in compliance with one of the financial ratio covenants of the Fleet
agreement. The Company has obtained a waiver of the noncompliance until March
31, 2000. Based upon current operations, however, the Company again expects to
be in violation of this same covenant at March 31, 2000, the next measurement
date for the covenant. Should the Company be in violation of its Fleet
covenants, CRL could also accelerate the due date on its subordinated notes. On
June 18, 1999, the Company filed a registration statement with the Securities
and Exchange Commission to sell shares of common stock in an initial public
offering. If the public offering is completed prior to March 31, 2000, the
Company's management expects to be in compliance with this covenant as well as
all other covenants. If the Company is unable to
F-14
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
complete its public offering, and should Fleet require repayment of the
borrowings prior to their scheduled maturity, the Company will be required to
obtain alternate sources of financing to repay such obligations. Since Fleet
has waived violations through December 31, 1999, the Company has classified its
debt according to its scheduled maturities at December 31, 1998. Since there
can be no assurance that the Company will be able to successfully complete its
public offering or obtain alternate sources of financing, the Company has
classified all of the Fleet and CRL debt as current at June 30, 1999.
The aggregate maturities of long-term debt for the five years ending
December 31, 2003 are as follows: 1999, $954,893; 2000, $2,792,227; 2001,
$457,571; 2002, $67,833; and 2003, $8,000,000.
(6) Income Taxes
There was no income tax benefit for the years ended December 31, 1997 or
1998. The actual income tax benefit differs from the expected tax benefit
(computed by applying the U.S. Federal corporate tax rate of 34% to loss before
income taxes) as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Computed expected tax benefit......... $(1,225,332) $ (898,767) $(2,252,432)
Increase (reduction) in income taxes
resulting from:
State income taxes, net of Federal
income tax benefit and change in
valuation allowance applicable to
state taxes of $233,685 in 1996;
$170,553 in 1997; and $427,386 in
1998............................... (154,232) (112,565) (282,074)
Change in valuation allowance due to
operating losses not utilized...... 1,324,400 1,004,687 2,517,630
Other, net.......................... 2,980 6,645 16,876
----------- ---------- -----------
$ (52,184) $ -- $ --
=========== ========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are presented below.
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 3,029,026 $7,109,861
Accrued revenues and expenses reported on cash
basis for tax purposes......................... 1,800,632 1,898,815
Valuation allowance............................. (2,329,087) (4,846,717)
----------- ----------
Total deferred tax assets..................... 2,500,571 4,161,959
----------- ----------
Deferred tax liabilities:
Capitalized database production costs expensed
as incurred for tax purposes................... (2,473,743) (4,122,671)
Other, net...................................... (26,828) (39,288)
----------- ----------
Total deferred tax liabilities................ (2,500,571) (4,161,959)
----------- ----------
Net deferred tax liability.................... $ -- $ --
=========== ==========
</TABLE>
F-15
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
The valuation allowance at January 1, 1997 was $1,324,400. 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 will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the levels of historical
taxable losses and uncertainty regarding the generation of taxable income in
future years, management has established a valuation allowance equal to net
deferred tax assets at December 31, 1997 and 1998. At December 31, 1998, the
Company has Federal net operating loss carryforwards of approximately
$17,300,000 which begin to expire in 2010 and state net operating loss
carryforwards of approximately $19,000,000 which begin to expire in 2000.
(7) Stockholders' Equity
(a) Capital Stock
The Company has authorized 60,000,000 shares of stock consisting of
50,000,000 shares of $.001 par value common stock and 10,000,000 shares of
$.001 par value preferred stock.
The Board of Directors of the Company may designate the relative rights and
preferences of the preferred stock when and if issued. Such rights and
preferences could include liquidation preferences, redemption rights, voting
rights and dividends, and the shares could be issued in multiple series with
different rights and preferences. During 1997, the Board of Directors
designated and issued 931,044 shares of Series A Preferred and during May 1999
designated and issued 2,495,697 shares of Series C Preferred. Simultaneous with
the closing of the CRL Agreement discussed in note 5, the Company designated
and issued 439,589 shares of Series B Preferred to a related party in exchange
for the note payable to the related party. The Series B Preferred pays annual
dividends at the rate of $.7735 per share which accrue from day to day
beginning on November 24, 1997. On December 31, 2005 the Company shall redeem
all outstanding shares of the Series B Preferred Stock for $10 per share plus
unpaid dividends. As of June 30, 1999, there are 6,133,670 shares of
undesignated and unissued preferred stock.
The Series A Preferred shares, which have an initial liquidation value of
$3,000,000, and the Series C Preferred shares, which have an initial
liquidation value of $15,000,002, are convertible, at the option of the holder,
into two shares of common stock for each preferred share and are entitled to
receive non-cumulative dividends ratably and on a parity with such dividends as
may be paid on the common stock as if such Series A Preferred and Series C
Preferred shares had been converted into common stock. The Series A Preferred
and Series C Preferred are redeemable at the option of the holder, beginning
May 25, 2004, and will automatically convert to common stock upon an initial
public offering of the Company's common stock.
The unaudited pro forma balance sheet at June 30, 1999 is based upon the
historical unaudited balance sheet and gives effect to the conversion of the
Series A Preferred and Series C Preferred shares into shares of common stock
and the elimination of the redemption features on 2,113,232 shares of common
stock and outstanding warrants for the purchase of 35,536 shares of common
stock as if the conversion and the elimination of the redemption feature had
occurred on June 30, 1999.
As discussed in note 5, all of the common and preferred shareholders as well
as all of the warrant and common stock option holders have entered into a
shareholders' agreement which provides for the naming of directors by certain
shareholder groups and restricts the sale of stock by parties to the agreement.
F-16
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
(b) Stock Option Plan
In June, 1996 the Board of Directors and shareholders adopted the 1996 Stock
Option Plan ("Plan") which provides for the granting of options to purchase up
to 1,000,000 shares of the Company's common stock. Incentive stock options may
be granted to employees of the Company at an exercise price per share of not
less than the fair value per common share at the date of the grant.
Nonqualified stock options may be granted to employees, officers or directors
of, or consultants or advisers to, the Company at an exercise price per share
as determined by the Board of Directors. The options expire on dates as
determined by the Board of Directors, not to exceed 10 years from the date of
grant. Twenty-five percent of these options vest twelve months after the grant
date, and the remaining shares vest ratably over the thirty-six months
thereafter. At December 31, 1998, the weighted-average remaining contractual
life of outstanding options was 3.53 years.
The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 was $0.42, $0.55 and $0.18, respectively, on the date of
grant using the Black Scholes option pricing model with the following weighted-
average assumptions: no expected dividend yield; risk-free interest rate of
4.5% in 1996, 1997 and 1998; and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's pro forma net loss would not have been significantly different than
the loss reported in the statement of operations for 1997 or 1998.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number Weighted- Number
of Average of Shares
Shares Exercise Price Exercisable
-------- -------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995............ -- -- --
Granted............................... 210,000 $2.50
--------
Balance at December 31, 1996............ 210,000 2.50 --
Granted............................... 12,000 2.50
Forfeited............................. (154,000) 2.50
--------
Balance at December 31, 1997............ 68,000 2.50 14,000
Granted............................... 73,668 2.50
--------
Balance at December 31, 1998............ 141,668 2.50 33,750
========
</TABLE>
Under the terms of an employment agreement dated April 22, 1999 with
Beyland, the Company is required to grant options equal to 2.5% of its fully
diluted equity after giving effect to the financing transaction completed on
May 25, 1999 (see note 5) and accordingly granted an option to Beyland on May
25, 1999 for 441,454 shares at an option price of $2.91 per share. The options
vest 50% at the date of grant and the remaining options vest in twenty-four
equal monthly amounts.
(c) Subsequent Event
The Company was originally incorporated in 1987 in Arkansas as Law Office
Information Systems, Inc. On June 18, 1999 the Company was reincorporated in
Delaware as Loislaw.com, Inc.
F-17
<PAGE>
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and with respect to the
six months ended June 30, 1998 and 1999 is unaudited)
On July 22, 1999, the Board of Directors declared a two-for-one stock split,
effected in the form of a stock dividend. All share and per share data in the
financial statements have been restated to give effect to the stock split.
(8) Commitments and Contingencies
(a) Leases
The Company leases parking and office space under an operating lease with a
related party that expires in December, 2003. The lease is renewable for two
additional successive periods of five years each. Rent expense was
approximately $50,000 in both 1996 and 1997 and approximately $66,000 in 1998.
Effective May 5, 1999 the lease was amended to provide for annual rentals of
approximately $170,000 as a result of the expansion of space under lease.
(b) Retirement Plan
Effective January 1, 1999, the Company adopted a 401(k) plan which covers
substantially all employees. Under the terms of the Plan, employees may
contribute up to 15% of their annual compensation, subject to Internal Revenue
Service limitations. The Company, at its discretion, may make matching
contributions of employee deferrals.
(c) Other
The Company is involved in certain claims and pending litigation arising
from the normal conduct of business. Based on the present knowledge of the
facts and, in certain cases, opinions of outside counsel, management believes
the resolution of these claims and pending litigation will not have a material
adverse effect on the financial position, results of operations or liquidity of
the Company.
F-18
<PAGE>
- -------------------------------------------------------------------------------
Until October 24, 1999, all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
[Loislaw.com Logo]
Loislaw.com
Prudential Securities
U.S. Bancorp Piper Jaffray
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
PrudentialSecurities.com
- -------------------------------------------------------------------------------
Description of Inside Front Cover Graphic:
The inside front cover graphic depicts a computer showing the loislaw.com home
page, with the Lady Lois logo on, and projected outward from, the screen. The
background is composed of bookshelves containing law books. The heading across
the top of the page is in large text and reads "EVOLUTION OF LEGAL
INFORMATION".
Description of Fold-Out Graphics:
The fold-out graphics consist of two pages. On these two pages, there are six
pictures (two rows of three) of six different computer screens depicting
various aspects of the Loislaw.com product. The background of the two pages is
a blue sky with clouds. The heading across the top of the two pages is
underlined large text that reads "LOISLAW.COM. . . LEGAL INFORMATION FOR THE
INTERNET AGE". The following five phrases are centered along the top of the
fold-out pages and appear directly below the heading: . Comprehensive federal
and state legal information and news; . Databases updated with the latest
legal information; . Database quality standards that we have tested to 99.995%
accuracy; . Access available at an annual fixed price; and . Utilizes standard
browser-based Internet technology.
Starting from the far left side of the top row, the first computer screen
depicts a personal home page for a Loislaw.com customer. The heading that
appears above this picture is composed of yellow text against a red background
and reads "Personalized Access." The standard text that is located directly
below the screen reads, "Custom start page to simplify your access, retrieve
saved searches, locate previous steps, link you to LOIS LawWatch, track
research time and get around-the-clock customer service."
The computer screen located in the center of the top row depicts case
summaries you can view after completing a search. The heading that appears
above this picture is composed of yellow text against a red background and
reads "Electronic Annotation". The standard text that is located directly
below the screen reads, "View summaries of documents provided by a search that
gives you the ability to determine the relevance of the search results prior
to reviewing the full text."
The computer screen located at the far right side of the top row depicts some
of the various sources that are available to you when conducting a search. The
heading that appears above this picture is composed of yellow text against a
red background and reads "Search Many Legal Sources." The standard text that
is directly below the screen reads, "Simultaneously search multiple legal
databases using sophisticated search technology that supports both traditional
and plain-language searches."
The computer screen located in the far left side of the bottom row depicts the
LOIS LawWatch feature. The heading that appears above this picture is composed
of yellow text against a red background and reads "LOIS LawWatch". The
standard text that is directly below the screen reads, "LOIS LawWatch searches
all databases and news feeds selected by you around-the-clock and
automatically delivers results via e-mail or to your personalized home page."
The computer screen located in the center of the bottom row depicts the
partial display of two documents. The heading that appears above this picture
is composed of yellow text against a red background and reads "View Multiple
Documents". The standard text that is directly below the screen reads, "Pop-up
abilities, which permit simultaneous review of original and hyperlinked
documents."
The computer screen located on the far right side of the bottom row lists
various news sources that you can search. The heading that appears above this
picture is composed of yellow text against a red background and reads
"Customized News Feeds." The standard text that is directly below the screen
reads, "Provides news feed of over 100,000 news articles per month from more
than 400 domestic and international sources of legal, business, financial,
health, technology and political news."
Description of Inside Back Cover:
The inside back cover graphic depicts the sources of our databases as well as
our production process. The heading across the top of the page is underlined
large text that reads "OUR LEGAL DATABASE PRODUCTION PROCESS". The pictures
located directly below the heading represent seven information sources from
which we obtain the data for our databases and are identified by the following
seven headings: Regulatory Agencies, Bar Associations, Secretaries of State,
State Courts, Legislatures, Supreme Courts and Attorneys General. Under these
pictures, there is an additional graphic that contains five horizontal rows of
boxes with arrows pointing downward from each box (other than the box on the
bottom row) to a box below it. The top row contains three boxes which contain
text: "Receive Electronic Data from Third Party Converters", "Receive
Electronic Data from Data Providers" and "Receive Print from Data Providers &
Convert to Electronic Format". There is an arrow pointing downward from each
box on this row to a single box on the second row which contains text:
"Editing". There is an arrow pointing downward from this box to the single box
in the third row, which contains text: "Coding". There is an arrow pointing
downward from this box to the single box in the fourth row, which contains
text: "Quality Assurance". There is an arrow pointing downward from this box
to the single box in the fifth row, which contains text: "1,300 databases with
over 5.5 million documents". There is an arrow pointing downward from this box
to a computer depicting the Loislaw.com home page.
