<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
exchange act of 1934
For the transition period from to .
------------- -------------
Commission file number 0-27463
Loislaw.com, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 71-0655999
------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
105 North 28th Street
Van Buren, Arkansas 72956
--------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
(501) 471-5581
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Not applicable
- --------------------------------------------------------------------------------
Former name, address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X *
----- -----
* The registrant became subject to such filing requirements on September 29,
1999.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
20,942,003 shares of common stock, $.001 par value, were outstanding on
November 8, 1999.
<PAGE>
INDEX
LOISLAW.COM, INC.
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (unaudited) Page
- ------- ----
Condensed Balance Sheets -- September 30, 1999 and December 31, 1998 3
Condensed Statements of Operations - Three months and nine months
ended September 30, 1999 and 1998 4
Condensed Statements of Cash Flows -- Nine months ended September 30,
1999 and 1998 5
Notes to Condensed Financial Statements -- September 30, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------
of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
- -------
PART II. OTHER INFORMATION
- --------------------------
Item 2. Changes in Securities and Use of Proceeds 17
- -------
Item 4. Submission of Matters to a Vote of Security Holders 18
- -------
Item 5. Other Information 18
- -------
Item 6. Exhibits and Reports on Form 8-K. 18
- -------
</TABLE>
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -------
LOISLAW.COM, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1999
December 31, September 30, Pro forma
1998 1999 (see note C)
------------ ------------ ------------
ASSETS (see note) (unaudited) (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 99,042 $ 299,531 $ 299,531
Accounts receivable, net 1,540,052 2,843,029 2,843,029
Prepaid commissions 311,394 1,074,895 1,074,895
Prepaid software license 96,958 271,125 271,125
Other current assets 138,811 743,788 743,788
------------ ------------ ------------
Total current assets 2,186,257 5,232,368 5,232,368
Databases, net 10,766,967 16,402,698 16,402,698
Property and equipment, net 1,446,459 3,260,201 3,260,201
Deferred loan costs, net of accumulated amortization 3,992,278 3,796,736 3,796,736
Other assets 820,721 1,785,620 1,785,620
------------ ------------ ------------
Total assets $ 19,212,682 $ 30,477,623 $ 30,477,623
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ 954,893 $ 3,847,100 $ 3,847,100
Accounts payable 2,559,631 5,471,910 5,471,910
Deferred revenues 2,961,067 4,640,633 4,640,633
Accrued expenses 461,549 2,395,787 2,395,787
------------ ------------ ------------
Total current liabilities 6,937,140 16,355,430 16,355,430
Deferred revenues 967,046 296,673 296,673
Long-term debt, excluding current installments 11,317,631 12,802,896 12,802,896
Other noncurrent liabilities 170,373 - -
------------ ------------ ------------
Total liabilities 19,392,190 29,454,999 29,454,999
------------ ------------ ------------
Redeemable equity securities:
Series A convertible preferred, 931,044 shares 2,605,840 3,621,091 -
Series B redeemable preferred, redemption value of
$4,395,890 plus accrued dividends, 439,589 shares 4,770,380 5,025,862 5,025,862
Series C convertible preferred, 2,495,697 shares - 15,797,959 -
Common stock, 730,692 shares at December 31, 1998
and 2,113,232 shares at September 30, 1999 1,189,158 4,942,617 -
Common stock warrants 3,154,975 82,937 -
------------ ------------ ------------
Total redeemable equity securities 11,720,353 29,470,466 5,025,862
------------ ------------ ------------
Stockholders' equity (deficit):
Common stock, $.001 par value. 50,000,000 shares authorized;
7,180,000 shares issued at December 31, 1999 and 8,082,810
shares issued at September 30, 1998 and 20,949,524 shares
issued on a pro forma basis at September 30, 1999 7,180 8,083 17,050
Additional paid-in capital - - 24,435,637
Accumulated deficit (11,890,941) (28,439,825) (28,439,825)
Treasury stock, at cost, 10,000 shares (16,100) (16,100) (16,100)
------------ ------------ ------------
Total stockholders' equity (deficit) (11,899,861) (28,447,842) (4,003,238)
------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 19,212,682 $ 30,477,623 $ 30,477,623
============ ============ ============
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and disclosures required by generally accepted accounting principles for
complete financial statements.
See notes to condensed financial statements.
Page 3
<PAGE>
LOISLAW.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Subscriptions $ 1,826,387 $ 1,058,050 $ 4,618,759 $ 2,845,610
Other - 255,016 - 608,106
----------- ----------- ------------ -----------
Total revenues 1,826,387 1,313,066 4,618,759 3,453,716
Operating expenses:
Database cost 2,555,874 711,000 5,260,291 1,726,866
Cost of other revenues - 102,000 - 249,248
Selling and Marketing 3,288,591 1,270,222 7,609,040 3,172,726
General and administrative 1,301,716 522,405 3,337,485 1,912,937
----------- ----------- ------------ -----------
Total operating expenses 7,146,181 2,605,627 16,206,816 7,061,777
----------- ----------- ------------ -----------
Loss from operations (5,319,794) (1,292,561) (11,588,057) (3,608,061)
Interest income (expense):
Interest income 10,869 - 40,681 -
Interest expense (685,394) (410,363) (2,023,883) (1,053,653)
----------- ----------- ------------ -----------
Total interest income (expense) (674,525) (410,363) (1,983,202) (1,053,653)
----------- ----------- ------------ -----------
Net loss (5,994,319) (1,702,924) (13,571,259) (4,661,714)
Accrued preferred stock dividends and
accretion on redeemable preferred
stock and common warrants 2,877,661 130,967 3,339,740 341,610
----------- ----------- ------------ -----------
Net loss applicable to common stock $(8,871,980) $(1,833,891) $(16,910,999) $(5,003,324)
----------- ----------- ------------ -----------
Net loss per share - basic and diluted $ (0.87) $ (0.26) $ (1.87) $ (0.70)
=========== =========== ============ ===========
Weighted average common shares
outstanding - basic and diluted 10,186,042 7,175,326 9,027,027 7,178,425
=========== =========== ============ ===========
Pro forma information: (see Note B)
Net loss per share - basic and diluted $ (0.36) $ (0.20) $ (1.04) $ (0.54)
=========== =========== ============ ===========
Weighted average common shares
outstanding - basic and diluted 17,039,524 9,037,414 13,247,686 9,040,513
=========== =========== ============ ===========
</TABLE>
See notes to condensed financial statements.
Page 4
<PAGE>
LOISLAW.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Operating activities:
Net loss $(13,571,259) $ (4,661,711)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 2,264,243 1,527,248
Provision for doubtful accounts 115,000 20,000
Changes in operating assets and liabilities:
Receivables (876,290) (207,541)
Prepaid expenses and other current assets (1,542,645) (314,628)
Accounts payable 2,741,906 958,626
Accrued expenses 1,934,237 (177,927)
Deferred revenue 1,009,193 536,613
------------ ------------
Net cash used by operating activities (7,925,615) (2,319,320)
Investing activities:
Database production expenditures (6,967,664 (3,964,218)
Purchase of property and equipment (2,128,874) (1,071,171)
Increase in other assets (222,141) (653,916)
------------ ------------
Net cash used by investing activities (9,318,679) (5,689,305)
Financing activities:
Proceeds from notes payable 11,840,700 4,816,000
Proceeds from sale of common stock 478,485 -
Proceeds from sale of Series C convertible preferred
stock, net of issuance costs of $624,023 8,893,850 -
Repayment of notes payable (2,461,581) -
Repayment of capital lease obligations (8,954) (11,739)
Deferred loan costs (13,273) -
Deferred offering costs (1,284,444) -
Purchase of treasury stock - (16,100)
------------ ------------
Net cash provided by financing activities 17,444,783 4,788,161
Increase (Decrease) in cash and cash equivalents 200,489 (3,220,464)
Cash and cash equivalents at beginning of period 99,042 3,233,172)
------------ ------------
Cash and cash equivalents at end of period $ 299,531 $ 12,708
============ ============
Supplemental cash flow information:
Cash paid for interest $ 1,309,997 $ 454,984
Noncash investing and financing transactions:
Accrued Series B redeemable preferred stock dividends $ 255,482 $ 255,016
Accretion on redeemable equity securities $ 3,264,693 $ 86,594
Issuance of warrants $ 408,364 -
Cancellation of redemption feature on redeemable
common stock $ 1,233,746 -
Conversion of subordinated notes payable into 857,509
shares of Series C convertible preferred stock $ 4,982,127 -
Exercise of warrants for satisfaction of subordinated
notes payable $ 10,566 -
Trade-in on copier capital lease - $ 57,475
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE>
LOISLAW.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the financial
statements and notes thereto included in the prospectus dated September 29, 1999
of LOISLAW.COM, INC. (the "Company") (File No. 333-81107) filed with Securities
and Exchange Commission pursuant to Rule 424(b) under the Securities Act of
1933.
NOTE B--PRO FORMA LOSS PER SHARE
Pro forma loss per share and pro forma weighted average shares outstanding
reflect (1) the conversion of 931,044 shares of Series A convertible preferred
stock into 1,862,088 shares of common stock as if the conversion had taken place
at the beginning of the respective periods and (2) the conversion of 2,495,697
shares of Series C convertible preferred stock into 4,991,394 shares of common
stock as if the conversion had taken place on May 25, 1999, the date of original
issuance of the Series C convertible preferred stock. These conversions
actually occurred on October 5, 1999. 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>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (5,994,319) $(1,702,924) $(13,571,259) $(4,661,714)
Accrued dividends on preferred
stock 85,704 85,005 255,482 255,016
------------ ------------ ------------ ------------
Pro forma net loss attributable
to common stockholders $ (6,080,023) $(1,787,929) $(13,826,741) $(4,916,730)
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 10,186,042 7,175,326 9,027,027 7,178,425
Conversion of Series A and
Series C convertible preferred
stock into common stock 6,853,482 1,862,088 4,220,659 1,862,088
------------ ------------ ------------ ------------
Pro forma weighted average
common shares outstanding 17,039,524 9,037,414 13,247,686 9,040,513
------------ ------------ ------------ ------------
Pro forma loss per share $ (0.36) $ (0.20) $ (1.04) $ (0.54)
------------ ------------ ------------ ------------
</TABLE>
Page 6
<PAGE>
NOTE C--SUBSEQUENT EVENTS
On September 30, 1999, the Company sold 3,900,000 shares of its common stock in
an initial public offering at $14.00 per share. Proceeds to the Company, net of
underwriting discounts and commissions, were $50.8 million, and were received
on October 5, 1999.
Simultaneously with the closing of the initial public offering, all outstanding
shares of Series A and Series C convertible preferred stock were automatically
converted into an aggregate of 6,853,482 shares of common stock.
On October 5, 1999, the Company paid $5.0 million to redeem 439,589 shares of
Series B redeemable preferred stock and accrued dividends on that stock, paid
$16.6 million to repay outstanding debt, and paid $250,000 for financial
services. Such amounts were paid with a portion of the net proceeds of the
offering.
The pro forma balance sheet at September 30, 1999 is based upon the historical
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 September 30, 1999.
Page 7
<PAGE>
FORM 10-Q
LOISLAW.COM, INC.
Item 2. Management's Discussion and Analysis of Financial
- -------
Condition and Results of Operations
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 1,500 databases that we estimate to contain over 8.0 million
documents. These databases consist of federal and state law, continuing legal
education materials and other legal information. As of September 30, 1999, our
databases included federal statutes and regulations, state statutes and
regulations of all 50 states, court decisions for the U.S. Supreme Court and all
13 federal circuit courts of appeal and court decisions for 34 states. We
expect to offer court decisions databases for all 50 states by the end of 1999.
During 2000, we will continue to expand our product offerings and will add a
number of specialty databases, including U.S. Tax Courts, IRS Cumulative
Bulletins, and SEC Decisions and Reports.
We generate revenues primarily from the sale of web-based products and CD-ROM
products for fixed annual subscription fees. The list price for unlimited
Internet access to substantially all federal and state law databases that we
offer is currently $1,176 per seat per year. 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 fees for multiple users of a seat.
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.
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.
Page 8
<PAGE>
Database costs consist primarily of database production costs that support
both our web-based products and our CD-ROM products. 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. Because court decisions have significant value
for long periods of time or indefinitely, we amortize our court decision
databases over 20 years. We amortize databases containing statutes and
regulations, which have a much more limited useful life, over two years. We
expense as incurred database maintenance and updating costs.
As of September 30, 1999, we had unamortized deferred loan costs of $3.8
million. These deferred loan costs relate to debt that was retired on October 5,
1999, with a portion of the net proceeds received from our initial public
offering ("IPO"). As a result of the early repayment of the debt, the deferred
loan costs will be expensed as an extraordinary item in the fourth quarter of
1999.
Results of Operations
Comparison of Results for the Three Months Ended September 30, 1999 and 1998
Revenues. Total revenues increased 39.1% to $1.8 million for the three
months ended September 30, 1999 from $1.3 million for the three months ended
September 30, 1998. Revenues from subscriptions increased 72.6% to $1.8 million
for the three months ended September 30, 1999 from $1.1 million for the three
months ended September 30, 1998. We believe the increase in revenues from
subscriptions was due primarily to the increase in the number of legal databases
we offered to 1,501 at September 30, 1999 from 366 at September 30, 1998, the
increase in our marketing efforts and the expansion of our sales staff. We
expect that this trend will continue and that subscription revenues will
represent substantially all of our total revenues in future periods. Total
database seats increased 69.3% to 12,061 at September 30, 1999 from 7,125 at
September 30, 1998. Other revenues of $255,000 and costs of other revenues of
$102,000 in the three months ended September 30, 1998 related to a customized
database project that was started and completed in 1998.
Database Costs. Total database costs increased 259.5% to $2.6 million for
the three months ended September 30, 1999 from $711,000 for the three months
ended September 30, 1998. The increase is primarily attributable to increased
amortization and updating costs as a result of having more databases.
Selling and Marketing Expense. Selling and marketing expense increased
158.9% to $3.3 million for the three months ended September 30, 1999 from $1.3
million for the three months ended September 30, 1998. This was principally due
to an increase of 166.1% in our compensation and commission expenses associated
with an increase in the number of sales and marketing personnel to 225 at
September 30, 1999 from 66 at September 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.
Page 9
<PAGE>
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 149.2% to $1.3 million for the three months ended September 30, 1999
from $522,000 for the three months ended September 30, 1998. This increase
resulted primarily from an increase of 105.2% in compensation expenses
associated with an increase in the number of administrative employees, including
technical support employees who support our web site, to 61 at September 30,
1999 from 28 at September 30, 1998. 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.
Interest Expense, Net. Interest expense, net of interest income, increased
64.4% to $675,000 for the three months ended September 30, 1999 from $410,000
for the three months ended September 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 $221,000 for the three
months ended September 30, 1999 and $169,000 for the three months ended
September 30, 1998.
Comparison of Results for the Nine Months Ended September 30, 1999 and 1998
Revenues. Total revenues increased 33.7% to $4.6 million for the nine months
ended September 30, 1999 from $3.5 million for the nine months ended September
30, 1998. Revenues from subscriptions increased 62.3% to $4.6 million for the
nine months ended September 30, 1999 from $2.8 million for the nine months ended
September 30, 1998. We believe the increase in revenues from subscriptions was
for the same reasons discussed above in the comparison of the quarter ended
September 30, 1999 to the quarter ended September 30, 1998. Other revenues of
$608,000 and costs of other revenues of $249,000 in the nine months ended
September 30, 1998 related to a customized database project that was started and
completed in 1998.
Database Costs. Total database costs increased 204.6% to $5.3 million for
the nine months ended September 30, 1999 from $1.7 million for the nine months
ended September 30, 1998. This increase is attributable to the same reasons
discussed above in the comparison of the quarter ended September 30, 1999 to the
quarter ended September 30, 1998.
Selling and Marketing Expense. Selling and marketing expense increased
139.8% to $7.6 million for the nine months ended September 30, 1999 from $3.2
million for the nine months ended September 30, 1998. This was principally due
to the same reasons discussed above in the comparison of the quarter ended
September 30, 1999 to the quarter ended September 30, 1998.
General and Administrative Expense. General and administrative expense
increased 74.5% to $3.3 million for the nine months ended September 30, 1999
from $1.9 million for the nine months ended September 30, 1998. This increase
resulted primarily from the same reasons discussed above in the comparison of
the quarter ended September 30, 1999 to the quarter ended September 30, 1998.
Page 10
<PAGE>
Interest Expense, Net. Interest expense, net of interest income, increased
88.2% to $2.0 million for the nine months ended September 30, 1999 from $1.1
million for the nine months ended September 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 $617,000 for
the nine months ended September 30, 1999 and $505,000 for the nine months
ended September 30, 1998.
Liquidity and Capital Resources
We have used substantial amounts of cash in the growth of our company. Net
cash used in operating activities was $2.3 million and $7.9 million for the nine
months ended September 30, 1998 and 1999, respectively. The primary use of cash
was the payment of operating expenses. We expect to continue to incur
significant database production costs for the foreseeable future. The continued
amortization of production costs of new databases, together with increased
selling and marketing expenditures, is expected to generate losses for 1999 and
at least through the end of 2000.
Net cash used in investing activities was $5.7 million and $9.3 million for
the nine months ended September 30, 1998 and 1999, respectively. The primary
use of cash was the payment of our database production costs, which were
capitalized. For the nine months ended September 30, 1998, $4.0 million of
these expenditures was for the payment of our database production costs, which
we capitalized, and $1.7 million was for property and equipment, and other
assets purchased to support the growth of our business. For the nine months
ended September 30, 1999, $7.0 million of these expenditures was for the payment
of our database production costs, which we capitalized, and $2.3 million was for
property and equipment, and other assets purchased to support the growth of our
business.
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 $4.8 and
$17.4 million for the nine months ended September 30, 1998 and 1999,
respectively. The $17.4 million in 1999 included financing from a private
placement of common stock and convertible preferred stock in the amount of $15.0
million.
During the final three months of 1999, we are obligated to pay $600,000 to a
third party for data conversion services. During the final three months of
1999, we also 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 our IPO 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
Page 11
<PAGE>
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.
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 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. As of September 30, 1999, we had
outstanding borrowings under the credit facility as follows:
. $911,167 under the term note for equipment costs;
. $645,700 under the second equipment line;
. $3.0 million under the term note for database production costs; and
. $2.1 million under the Revolving Line of Credit.
All borrowings under the credit facility are secured by a pledge of most of
our assets. All of these borrowings were repaid in October, 1999.
Net Operating Loss Carryforwards
Since 1994, we have incurred significant net losses. Through September 30,
1999, our accumulated deficit totaled $28.4 million. At December 31, 1998, we
had net operating loss carryforwards of approximately $17.3 million for federal
income tax purposes that begin to expire in 2010 and state net operating loss
carryforwards of approximately $19.0 million that begin to expire in 2000. We
cannot assure you that we will have income, that is sufficient to allow us to
use these loss carryforwards.
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
Page 12
<PAGE>
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 the end of November 1999, and that these
efforts will be completed prior to any currently anticipated impact on our
computer equipment and software. At November 5, 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 30, 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 workstations 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 30, 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.
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
Page 13
<PAGE>
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 November
5, 1999, we had incurred costs of approximately $55,000 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 30, 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 were 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, 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
Page 14
<PAGE>
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 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.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because
Loislaw.com does not use derivatives, Statement No. 133 will have no significant
effect on earnings or the financial position of Loislaw.com.
Forward-Looking Statements
- --------------------------
Except for the historical information contained herein, the matters discussed
in this report on Form 10-Q are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that are dependent on certain risks
and uncertainties. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends affecting Loislaw.com and the financial condition of our business.
Actual results may differ materially from those anticipated or implied in the
forward-looking statements due to a variety of factors. These factors include,
among other things, our ability to predict and respond to rapid technological
changes; the presence of competitors in the web-based legal information market
with larger databases and greater financial resources; the availability of free
legal information from Internet portal companies; the acceptance of our products
by the market; our potential loss of relationships with legal information
providers; difficulties managing growth; difficulties caused by the Year 2000
problem; risks due to our reliance on foreign data converters; legal liability
caused by legal information provided in our databases; and the other risks
detailed from time to time in the reports we file with the Securities and
Exchange Commission, including the factors discussed under the heading "Risk
Factors" in the company's prospectus dated September 29, 1999 (Registration No.
333-81107) filed with the Commission pursuant to Rule 424(b) under the
Securities Act of 1933.
In addition, in this report, the words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect," and similar expressions 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.
Page 15
<PAGE>
FORM 10-Q
LOISLAW.COM, INC.
Item 3. 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
September 30, 1999, the outstanding principal balance under the credit facility
was $6.6 million, and during 1998, the average outstanding principal balance was
$2.9 million. All borrowings under this credit facility were repaid in October,
1999.
Page 16
<PAGE>
FORM 10-Q
LOISLAW.COM, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
- -------
On October 5, 1999, Loislaw.com completed an initial public offering in which
it sold 3,900,000 shares of its common stock and a selling stockholder sold
80,000 shares of common stock. The managing underwriters in the offering were
Prudential Securities Incorporated, U.S. Bancorp Piper Jaffray Inc., Dain
Rauscher Wessels, and PrudentialSecurities.com. The shares of common stock sold
in the offering were registered under the Securities Act of 1933, as amended, on
a Registration Statement on Form S-1 (the "Registration Statement") (Reg. No.
333-81107) that was declared effective by the Securities and Exchange Commission
on September 29, 1999. All 3,980,000 shares of common stock registered under
the Registration Statement were sold at a price of $14.00 per share for gross
proceeds to Loislaw.com of $54.6 million and gross proceeds to the selling
stockholder of $1,120,000. Offering proceeds to Loislaw.com, net of underwriter
discounts and commissions, were approximately $50.8 million. As of October 5,
1999, we had accrued offering expenses of approximately $1.3 million that will
be paid by year-end 1999.
The net proceeds from the initial public offering have been or will be used
for debt reduction, redemption of preferred stock, the payment of a financial
advisory fee, development of a consumer web site and continued development of
legal databases and for general corporate purposes, including working capital to
fund anticipated operating losses, expenses associated with our advertising
campaigns, brand-name promotions and other sales and marketing efforts and
capital expenditures. Loislaw.com also may use a portion of the net proceeds to
acquire or invest in businesses, technologies, products or services, although no
specific acquisitions are planned and no portion of the net proceeds has been
allocated for any acquisition. None of the net offering proceeds of Loislaw.com
have been or will be paid directly or indirectly to any director, officer,
persons owning 10% or more of any class of Loislaw.com's equity securities, or
an affiliate of Loislaw.com, other than debt repayments to Capital Resource
Lenders III, L.P. and CRP Investment Partners III, L.P. as described in the
following paragraph.
On October 5, 1999, the closing date of the offering, we used an aggregate of
$22.1 million of the net proceeds as follows:
. to repay approximately $10.3 million of principal and interest on three
subordinated notes previously issued by us to Capital Resource Lenders III,
L.P., CRP Investment Partners III, L.P. and Rowland T. Moriarty;
. to pay approximately $5.0 million to redeem the 439,589 shares of Series B
redeemable preferred stock plus accrued dividends that were held by Melissa
Parker;
. to repay a aggregate of $6.5 million outstanding and accumulated interest
under notes and lines of credit with Fleet National Bank, N.A.; and
. to pay $250,000 to Dublind Partners, Inc. for financial advisory services.
Of the remaining $28.7 million of net offering proceeds, $27.6 million has
been placed in temporary investments, including a NAIC-Approved Class I interest
bearing short-term fund and the balance was used for general corporate purposes.
Page 17
<PAGE>
Simultaneous with the closing of the sale of common stock in the initial
public offering, each outstanding share of Loislaw.com's Series A and Series C
convertible preferred stock was automatically converted into two shares of
Loislaw.com's common stock without payment of additional consideration. The
common stock issued upon conversion of the preferred stock was exempt from
registration under Section 3(a)(9) of the Act, as securities exchanged by an
issuer with existing security holders.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------
During the quarter ended September 30, 1999, the stockholders of Loislaw.com
acted one time by written consent, on September 24, 1999. Pursuant to that
consent, the stockholders unanimously (1) approved the company's Employee Stock
Purchase Plan, and (2) approved an amendment to the company's 1996 Stock Option
Plan to, among other things, increase the number of shares issuable under that
plan.
Item 5. Other Information.
- -------
Loislaw.com has elected to comply with the requirement to make quarterly
financial information available to its stockholders by making its quarterly
reports on Form 10-Q available through its web site. To view or print this
information, please visit our web site at www.loislaw.com and select "Investor
---------------
Relations -- SEC Filings." You may also request that a copy of our most recent
report on Form 10-Q be mailed to you by submitting a request through our web
site by selecting "Investor Relations -- Info Request" or by calling
Loislaw.com's Investor Resources Information Line toll free at (877) 447-5647.
Item 6. Exhibits and Reports on Form 8-K.
- -------
(A) Exhibits
--------
27.1 Financial Data Schedule
(B) Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1999.
Page 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOISLAW.COM, INC.
-------------------------------------
(Registrant)
Date: 11/09/1999 /s/ MARK O. BEYLAND
----------------- -------------------------------------
Mark O. Beyland
President and Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
Page 19
<PAGE>
FORM 10-Q
INDEX TO EXHIBITS
LOISLAW.COM, INC.
Sequentially
Exhibit Numbered
Number Exhibit Page
------------- ------------------------------- ----------------
27.1 Financial Data Schedule 21
Page 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S REPORT ON FORM 10-Q FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 299,531
<SECURITIES> 0
<RECEIVABLES> 3,019,685
<ALLOWANCES> 176,656
<INVENTORY> 0
<CURRENT-ASSETS> 5,232,368
<PP&E> 24,084,058
<DEPRECIATION> 4,421,159
<TOTAL-ASSETS> 30,477,623
<CURRENT-LIABILITIES> 16,355,430
<BONDS> 0
19,419,050
5,025,862
<COMMON> 8,083
<OTHER-SE> (28,455,925)
<TOTAL-LIABILITY-AND-EQUITY> 30,477,623
<SALES> 4,618,759
<TOTAL-REVENUES> 4,618,759
<CGS> 0
<TOTAL-COSTS> (11,588,057)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,983,202)
<INCOME-PRETAX> (13,571,259)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,571,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,339,740)
<NET-INCOME> (16,910,999)
<EPS-BASIC> (1.87)
<EPS-DILUTED> (1.87)
</TABLE>
