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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
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(Exact name of Registrant as specified in its charter)
Delaware 71-0655999
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
105 North 28th Street
Van Buren, Arkansas 72956
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(Address of principal (Zip Code)
executive offices)
(501) 471-5581
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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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 X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 27, 2000, the aggregate market value of voting stock held by
non-affiliates of the Registrant, based upon the closing sales price for the
Registrant's Common Stock, as reported in the Nasdaq National Market System, was
$144,892,123. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for any other
purpose.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
20,970,586 shares of common stock, $.001 par value, were outstanding on
March 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K:
Portions of the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated into Items 10, 11, 12, and 13.
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INDEX
LOISLAW.COM, INC.
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Item Page
PART I.
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Forward Looking Statements or Information.............................................................. 4
Item 1. Business..................................................................................... 4
Overview............................................................................. 4
Loislaw.com Web Site................................................................. 6
Database Content..................................................................... 6
Products............................................................................. 7
Web Product Features................................................................. 8
Production of Databases.............................................................. 9
Product Development.................................................................. 10
Strategic Alliances.................................................................. 10
Sales and Marketing.................................................................. 11
Customers............................................................................ 11
Customer Support..................................................................... 11
Web Site Hardware and Software Design................................................ 12
Trademarks and Copyrights............................................................ 12
Competition.......................................................................... 12
Employees............................................................................ 13
Risk Factors......................................................................... 13
Item 2. Properties................................................................................... 20
Item 3. Legal Proceedings............................................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 21
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 21
Item 6. Selected Financial Data...................................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation......... 24
Overview............................................................................. 24
Initial Public Offering.............................................................. 25
Results of Operations................................................................ 26
Liquidity and Capital Resources...................................................... 27
Net Operating Loss Carryforwards..................................................... 29
Year 2000 Issues..................................................................... 29
Recently Issued Accounting Pronouncements............................................ 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 29
Item 8. Financial Statements and Supplementary Data.................................................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 30
PART III
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Item 10. Directors and Executive Officers of the Registrant........................................... 30
Item 11. Executive Compensation....................................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 30
Item 13. Certain Relationships and Related Transactions............................................... 30
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 30
Signatures............................................................................................. 31
Exhibits............................................................................................... 32
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PART I
Forward-Looking Statements or Information
This Form 10-K includes certain statements that are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Statements included or incorporated by reference in this Form 10-K
which address activities, events or developments that Loislaw.com, Inc. ("the
Company") expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
expansion and other development trends of industry segments in which the Company
is active, business strategy, marketing techniques, expansion and growth of the
Company's business and operations and other such matters are forward-looking
statements. Although the Company believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions within the bounds
of its knowledge of its business, a number of factors could cause actual results
to differ materially from those expressed in or contemplated by any forward-
looking statements, whether oral or written, made by or on behalf of the
Company. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company.
All phases of the Company's operations are subject to influences outside
its control. Any one, or a combination, of these factors could materially
affect the results of the Company's operations. These factors include, without
limitation: the Company's 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 and government agencies; the
acceptance of the Company's products by its market; the Company's loss of
relationships with legal information providers; difficulties managing growth;
difficulties caused by the Year 2000 problem; difficulties caused by internet
accessibility and increased usage; risks due to the Company's reliance on
foreign data converters; and legal liability caused by legal information
provided in the Company's databases. Forward-looking statements made by or on
behalf of the Company are based on a knowledge of its business and the
environment in which it operates, but because of the factors listed above and
other factors, including those discussed under the heading "Risk Factors" below,
actual results may differ materially from those contemplated by the forward-
looking statements. Consequently, all of the forward-looking statements made
are qualified by these and other cautionary statements and there can be no
assurance that the results or developments anticipated by the Company will be
realized or, even if substantially realized, that they will have the expected
consequences to or effects on the Company or its business or operations.
Item 1. Business.
Overview
Loislaw.com, Inc. provides comprehensive, affordable and easy-to-use legal
and related information to attorneys, law firms, law school faculty and
students, and others over the Internet. We also have some subscribers who have
purchased our products on compact disc.
Law Office Information Systems, Inc., an Arkansas corporation, was formed
in 1987. On June 18, 1999, Law Office Information Systems, Inc. merged with and
into Loislaw.com, Inc., a Delaware corporation. As used throughout this Annual
Report on Form 10-K, the terms "the Company," "we," "us," or similar terms refer
to Loislaw.com, Inc. and its predecessor, Law Office Information Systems, Inc.
On July 22, 1999, we declared a two-for-one stock split, effected in the
form of a stock dividend. All information in this Annual Report gives effect to
this stock split. On September 30, 1999, we offered and sold 3,900,000 shares
of our common stock at a price of $14.00 per share in our initial public
offering.
The Company was founded by Kyle D. Parker, an attorney, and initially
provided primary state law for the State of Arkansas on compact disc. At
December 31, 1998, we offered comprehensive primary law databases for 20 states.
At December 31, 1999, we offered comprehensive primary law databases for all 50
states and the District of Columbia. These databases are available to our
subscribers on our Internet web site, http://www.loislaw.com.
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Our primary law databases consist of statutes, case law, regulations, and
certain court rules for all 50 states and the District of Columbia. Regulations
for the states of Delaware, Hawaii, Maine, Mississippi, New Hampshire, Rhode
Island, Vermont and Washington are available only for payment of an additional
annual fee because of the terms of the agreement with our source for these
regulations. Our state law databases also include certain attorney general
opinions, jury instructions, and manuals, all of which vary from state to state.
Our databases also include case law from every U.S. Circuit Court of
Appeals from 1971 (except for the Eleventh Circuit, which begins with its first
published opinion in 1981), the United States Supreme Court from 1899, the
United States Code, and Code of Federal Regulations. We also offer news feeds
that are capable of providing more than 100,000 news articles per month from
more than 45 domestic and international sources.
We offer more than 1,800 databases that we estimate to contain over 8
million documents. We believe that our databases are 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 LawWatchTM, 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.
Access to our 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. As of January 24, 2000,
subscribers pay a fixed monthly installment fee of $139 per seat for our
National CollectionSM product, which includes all of our primary law databases.
Part of our philosophy is that our customers should pay for content, not time.
Therefore, there are no additional fees for spending extended time periods
researching the law on our site. We also do not charge for printing or
downloading cases.
We also offer access to certain premium databases for an additional fee.
These databases include Bar Association materials, Continuing Legal Education
materials, and legal form files.
Total database seats at December 31, 1999 were 14,925, compared to 7,498
seats at December 31, 1998. At December 31, 1999, we had a total of 11,947
customers. The percentage of customers that renewed their subscriptions to our
products was approximately 90% in 1999. We have historically had a customer
renewal rate of approximately 90% and have targeted our sales to small law firms
with fewer than 20 lawyers, which we believe represent approximately 55% of all
practicing lawyers in the U.S. Our completion in December 1999 of comprehensive
primary law databases for all 50 states will enhance our ability to compete for
new customers among large law firms and corporations. We believe the quality
and functionality of our database products, Internet accessibility and lower,
fixed-rate pricing will cause many potential customers in these market segments
to view our products as an attractive alternative or supplement to the products
offered by our primary competitors.
In January 2000, we launched our newest web site, www.loislawschool.com.
On this site, we provide free access to most of our databases to faculty and
students of accredited law schools that agree to offer the site to their
students and faculty. While the format of this site is different from our
primary site, we believe that the site offers law school students the ability to
become acquainted with our products and databases, encouraging purchase of our
products and services upon graduation. We intend to offer advertising on our
www.loislawschool.com site but do not believe that there will be any significant
revenue generated from the site through at least the end of 2000.
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, we intend to offer a tax product consisting of the
Internal Revenue Service Cumulative Bulletin from 1932 to the present and U.S.
Tax Court Decisions from 1942 to the present. We also intend to add a
Bankruptcy Opinions product consisting of selected opinions from 1979 to the
present and another product consisting of Securities and Exchange Commission
Decisions and Reports. The Tax, Bankruptcy, and SEC products will be premium
products for which an additional fee will be charged. We also intend to offer a
database consisting of selected U.S. District Court Opinions as part of our
National Collection and Federal Series products. We intend to offer these
products and databases by the end of 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.
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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 and related information in a format designed to
meet the needs of consumers.
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 and related
information. We have approximately 1,800 databases that we estimate to contain
over 8 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 in an interface. A
search engine searches a designated database or databases and presents search
results in a summary form. If a customer decides to see the full document, he
or she simply selects the highlighted document link on the screen.
We believe that our web-based legal information is easy to access and our
search engines are user friendly. We provide web-based multi-media tutorials,
which, we believe, are capable of teaching almost anyone with a basic
familiarity with computer use how to use our products in a matter of
approximately 20 minutes or less. We also offer technical support through a
toll-free telephone number, available 24 hours per day, seven days per week.
Our www.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;
. automatic notification by e-mail of new information matching the
user's specified search criteria;
. HTML formatting, which permits hyperlinking, cutting-and-pasting and
printing; and
. pop-up abilities, which permit simultaneous review of original and
hyperlinked documents.
Database Content
Federal Law. The following list sets forth the content of our federal law
databases. In addition, by the end of the second quarter of 2000 we intend to
offer a Bankruptcy Opinions product, a Tax product, a U.S. District Court
product, and an SEC product.
U.S. Supreme Court 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
Federal Register
U.S. Federal Reports for all 13 U.S. Circuit Courts of Appeal 1971-present
(except in 11th Circuit, which begins with its first published opinion in
1981-present)
Rules of the U.S. Supreme Court
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Federal Rules of Appellate Procedure
Federal Rules of Criminal Procedure
Federal Rules of Civil Procedure
Federal Rules of Evidence
Federal Rules of Procedure of the Judicial Panel
U.S. Sentencing Commission Guidelines
State Law. At December 31, 1999, we offered comprehensive state law
databases for all 50 states and the District of Columbia. A comprehensive state
law database provides statutes, acts, regulations, court rules, and appellate
court decisions for at least 45 years. Regulations for the States of Delaware,
Hawaii, Maine, Mississippi, New Hampshire, Rhode Island, Vermont and Wyoming are
not included in our basic multi-state subscription product. Because of
licensing arrangements, these databases are available only at an additional cost
of $3,600 per year, which includes all of the eight listed states. We are
attempting to renegotiate the licensing arrangement for these eight states to
provide more attractive pricing for these regulations.
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.
Products
We sell our web-based products through annual subscriptions. Customers may
pay the cost of annual subscriptions in one payment at the inception of the
subscription or in monthly installments paid through bank draft or credit card
debit. All of our products, except Stevenson's Legal Forms and Practice Guide
for TexasSM, provide for a 30-day money back guarantee. We also offer a one-
time ten-day free trial for our National Collection Product.
The following paragraphs describe the content and pricing for our principal
products. However, the content and pricing for any of our products are subject
to change at any time. Additionally, certain groups, companies, and others have
negotiated special contract pricing with us. The following products are now
available or were available during 1999 as indicated:
Internet All. During the year ended December 31, 1999, we offered our
Internet All product. This product provided Internet access to all of our state
and federal law databases (except for our premium databases and administrative
regulations for the states of Delaware, Hawaii, Maine, Mississippi, New
Hampshire, Rhode Island, Vermont and Wyoming). Our Internet All product was
priced at $98 per month. On January 24, 2000, we discontinued offering Internet
All with the introduction of our National Collection product. This product was
not available on compact disc.
National Collection. Our National Collection product currently includes
comprehensive state law for all 50 states and the District of Columbia (except
for our premium databases and administrative regulations for Delaware, Hawaii,
Maine, Mississippi, New Hampshire, Rhode Island, Vermont and Wyoming),
comprehensive federal law for the U.S. Supreme Court and all 13 U.S. Circuit
Courts of Appeal, GlobalCite, LOIS Law Watch and LOIS News Feeds. National
Collection also provides access to other primary state law, which varies from
state to state, such as Attorney General Opinions, jury instructions, and
administrative agency decisions. We estimate that our databases included in the
National Collection product consist of over 8 million documents. National
Collection is available by accessing our Internet web site. We believe that the
National Collection is competitively priced at $139 per month. This product is
available only on the Internet and not on compact disc.
LOIS Professional Library/State Series. Our LOIS Professional
Library/State Series is our offering of primary state law for a single state
available on our Internet web site. It consists of appellate court decisions,
state
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statutes, legislative acts, administrative regulations (except for the states of
Delaware, Hawaii, Maine, Mississippi, New Hampshire, Rhode Island, Vermont and
Wyoming), and certain court rules, all for a single state. The depth of coverage
varies from state to state, but generally consists of at least 45 years of court
decisions. Our State Series product is priced at $39 to $49 per seat per month,
dependent upon the state. Throughout 1999, these same products were sold at
prices varying from $39 to $57.50 per seat per month. This product is available
on the Internet. The product is also available on compact disc for renewal
subscriptions.
LOIS Professional Library/State and Federal Series. We offer primary case
law coverage for one state and case law from the U.S. Court of Appeals for the
circuit in which the state is located, as well as U.S. Supreme Court Reports,
U.S. Code, and Rules of the U.S. Supreme Court, for $79 per seat per month. We
also offer primary case law coverage for one state and case law from all Federal
Circuits, as well as U.S. Supreme Court Reports, U.S. Code, and Rules of the
U.S. Supreme Court, for $99 per seat per month. The State and Federal Series
products are available on our Internet web site. This product is available on
the Internet. The product is also available on compact disc for renewal
subscriptions.
Stevenson's Legal Forms and Practice Guide for Texas(SM). On March 13,
2000, we began to offer Stevenson's Legal Forms and Practice Guide for Texas.
This product is an on-line collection of legal forms, tips, and practice guides,
intended for use primarily by Texas attorneys. This product is offered at $29
per month to customers who subscribe to National Collection or LOIS Professional
Library products and $39 per month to those who do not subscribe to those
products. The forms cover 27 areas, which are arranged in the following
sections:
Business and Contracts Law Forms
Family Law Forms
Law Office Management Forms
Civil and Criminal Trial Practice/Bankruptcy Forms
Probate/Wills/Real Estate Forms.
Compact Disc Products. Prior to our introduction of the www.loislaw.com
web site in 1996, we distributed our products exclusively on compact disc. We
sold new subscriptions to our compact disc products until July 1999. While we
no longer sell new compact disc subscriptions, we expect to continue to produce
compact discs 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 compact disc.
Web Product Features
A subscription to the products we offer on our Internet web site includes
the following features and benefits:
Loislaw.com News Feeds. Our web site provides news feeds of more than
100,000 news articles per month from more than 45 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.
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 e-mail 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. Five LOIS LawWatch search agents are provided with each web-based
product subscription.
Advanced Functionality. We offer intuitive search tools designed to make
our information easily accessible and valuable to our users. Subscribers to any
multi-jurisdiction product, such as National Collection, may
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search for information in any combination of the subscribed 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.
GlobalCite. On January 24, 2000, we offered our customers GlobalCite at
no extra charge. GlobalCite enables an Internet user to search all of our
databases to find all documents (case opinions, statutes, regulations and other
databases) in our databases that have cited the document that the customer is
viewing. A summary list of results is displayed. Users can highlight any link
on the list to display the entire case, statute or other document. With
GlobalCite, customers can verify that a published case has not been overruled by
a later published decision.
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 e-mail support and provide company field
sales representatives who assist customers with training.
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.
The charges made to us to obtain legal information vary from agreement to
agreement. For example, a number of our sources charge us a nominal fee for
delivery of the legal information. Other sources charge us annual amounts or a
percentage of sales. In addition, other sources charge us a ''per e-mail'' 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 per user.
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. All data that must be converted is converted internally at our
offices or through an agreement with a third party. If the information is
converted to electronic format by a third party, it is forwarded to us for
further processing. The majority of information which we must convert from
print to electronic form is converted by a third party.
We have tested our databases 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 rigorous quality control process.
We continually update our databases by adding new court decisions,
statutes, regulations, and other legal information. We receive some information
in both electronic and printed format and other information in printed form
only. For information delivered to us in printed format, we have the printed
text scanned on imaging equipment, convert it to an electronic format, and run
software programs to identify and correct errors.
We have committed significant resources to establish our production
capabilities and processes. At December 31, 1999, our production staff included
120 converters and editors, 38 coders, and 37 quality assurance specialists.
These resources, together with our relationships with approximately 800
governmental entities, independent publishers, and others from whom we receive
our data, usually enable us 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 our databases since 1989. From January 1, 1996
through December 31, 1999, we spent over $27 million on database production,
including costs of converting, editing, coding, and quality control. We
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anticipate that we will spend approximately $4.3 million for production of new
databases during the first six months of 2000.
Product Development
In addition to enhancing content, we conduct product development efforts
focused on continuously improving the search capabilities, tools, features and
applications available at our www.loislaw.com web site.
We intend to continue to build the depth and breadth of our databases
through internal development and by acquiring and/or licensing information from
third parties. We intend to offer a Tax product consisting of the Internal
Revenue Service Cumulative Bulletin from 1932 to the present and U.S. Tax Court
Decisions from 1942 to the present. We also intend to add a Bankruptcy product
consisting of selected bankruptcy opinions from 1979 to the present and another
product consisting of Securities and Exchange Commission Decisions and Reports.
We also intend to offer a product consisting of selected U.S. District Court
Opinions. We intend to offer these products by the end of the second quarter of
2000. The U.S. District Court Opinions product will be included in our National
Collection product at no additional charge. We may provide U.S. District Court
Opinions as part of our other product offerings or may make it available with
other products as a premium product. The other products will be premium
products, which will be offered at an additional price. The pricing for these
premium products has not yet been determined.
We are also currently developing a consumer web site. Access to this web
site will be free of charge and will offer, among other products, limited access
to some of our existing 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. We do not presently know when this site will be completed and do not
expect this site to generate any material revenue, if it produces any revenue
whatsoever, during the year 2000.
Strategic Alliances
On November 17, 1999, we entered into a cooperative marketing arrangement
with CDB Infotek, a subsidiary of ChoicePoint Services Inc. ("ChoicePoint"), a
leading provider of public records information. The arrangement will 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 the
ChoicePoint subsidiary. Similarly, it will enable ChoicePoint's customers to
access our legal information. It will 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. The
hyperlinks and other features of this arrangement have not yet been implemented.
We believe that the arrangement will be implemented by the third quarter of
2000, but we are not anticipating receiving revenues from the arrangement until
the fourth quarter of 2000.
We do not have any experience in implementing cooperative marketing
arrangements with entities other than state bar association and similar
entities. While we believe that this arrangement with CDB Infotek should
improve our ability to obtain customers in the government, corporate and large
law firm markets, there is no assurance that the arrangement will be successful
or produce any revenues.
We 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, we believe that our relationship with ChoicePoint
should improve our brand awareness in targeted markets and among other visitors
to ChoicePoint's web site.
Applicable statutes restrict access to some of the information available on
the ChoicePoint site, such as credit reporting information. ChoicePoint will
determine whether any attempted access of such restricted files is in compliance
with applicable law. While we believe that adequate safeguards designed to
ensure statutory and regulatory compliance have been developed, a failure of
compliance could result in the imposition of penalties or damages against us and
otherwise affect our arrangement with ChoicePoint.
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In January 2000, we formed an alliance with PowerBrief, Inc., which
provides multi-media connections between attorneys and courts to assist in the
presentation of legal briefs and evidence. The arrangement calls for us to
provide primary law on a per-use basis. We do not anticipate that we will
receive any substantial revenues from this alliance until the fourth quarter of
2000 or the first half of 2001. There is no assurance that we will ever receive
any significant revenue from this arrangement.
We also formed a strategic alliance with Enlighten Technologies in January
2000. Enlighten Technologies provides a government-certified Secure Private
Network to law firms, court systems, government entities and corporations.
Enlighten Technologies will offer our National Collection product as an option
to its customers. While we believe that both the PowerBrief, Inc. and Enlighten
Technologies alliances provide opportunities for us, additional efforts on our
part will be required for either of these alliances to be a significant source
of revenue.
We have entered into 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, continuing legal education organizations and court systems.
Moreover, we may seek additional information sources, distribution channels or
technology through selective acquisitions or strategic alliances.
Sales and Marketing
We sell our products through a sales force that as of December 31, 1999
included 99 company field sales representatives and 64 inside sales
representatives. Our sales force is compensated with a base salary plus a
commission. On occasion, we also provide incentives to our sales force by
providing options to acquire our stock in accordance with the terms of our 1996
Stock Option Plan.
In addition, we have a marketing department that at December 31, 1999
consisted of 29 people responsible for direct mail, advertising, and cooperative
marketing programs. The number of calls per month from and into our sales
department was approximately 96,000 in December 1999.
We market our products through direct mail and telephone solicitation,
through advertising, and through other means such as seeking endorsements from
organizations that are likely to influence lawyers' purchasing decisions.
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 in certain instances to lower state courts, and
to the Supreme Court of the United States. Through www.loislawschool.com, we
offer free access to our products to students, faculty, and librarians at
accredited law schools and paralegal schools. 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.
We have increased our marketing efforts since we completed our state law
databases for all 50 states in December 1999. We intend to aggressively market
our products to large law firms and legal departments of corporations.
Customers
At December 31, 1999, we had a total of 11,947 customers occupying 14,925
database seats. At December 31, 1998, we had a total of 6,976 customers
occupying 7,498 database seats. 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.
Customer Support
We provide telephone and e-mail 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 December 31, 1999, we had 10 customer service employees and 30
technical support employees. In addition, our field sales representatives
provide on-site support.
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Web Site Hardware and Software Design
We currently host our www.loislaw.com and www.loislawschool.com web sites
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(R) searching software, Microsoft NT(R) Operating System software
and Novell(R) Networking software that runs on Hewlett-Packard(R) servers. Our
databases and searching software are designed to run on more than one operating
system.
Limitations imposed by the Internet have sometimes made access to our web
site difficult at certain times from certain locations and have resulted in
temporary interruptions of our service. We are currently in the process of
launching a co-hosted site in Austin, Texas. This site will be fully equivalent
to our live web site. This second web site will be fully operational and will
work in conjunction with our primary site. It will provide load balancing of
customer search requests during periods of peak use and a fully redundant back-
up site if the operation of our primary web site is interrupted. The two sites
will be synchronized in real-time via high-speed direct private connections. We
anticipate that this site will be working no later than the end of the second
quarter of 2000. We believe that this site will substantially reduce Internet-
related connection problems to our site.
Our web site hardware and software is designed to be able to expand easily
by adding additional servers. We currently have four information servers that
we use to maintain identical versions of our legal information. Each
information server is connected to eight search servers that use the Verity(R)
database searching software to process search queries. Upon initial conversion
of a legal database, the Verity(R) software catalogues the information contained
in the database. When a user searches for information on our web site, the
Verity(R) 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
continuously, and 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 have a natural gas-powered back-up
generator, as well as enough battery power to operate our web site for
approximately 45 minutes if there is a power outage at our facility.
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 e-mail 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), THE TECHNOLOGY COMPANY WITH A LAW DEGREE(R),
LOIS(R) and the LOIS logo(R). We claim protection for LOIS LAWWATCH(SM) and LOIS
NEWSFEEDS(SM), among other marks, under common law trademark rights. We have
pending applications for the service marks NATIONAL COLLECTIONSM and
GLOBALCITESM, and claim common law service mark rights in these marks. We have
also obtained federal copyright registrations for the following proprietary
software programs: PITA(R), CaseBase: The Arkansas Reports, and Law Office
Information Systems: Master Menu Systems.
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. 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-
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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.
While we have been in the legal information business for more than ten
years, West Group has been in the 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.
The principal competitive factors in our industry are:
. price;
. quality and accuracy of data;
. comprehensiveness of data;
. ease of use;
. features of the software;
. support and training required; and
. performance characteristics of the database.
As a relatively 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 our depth of coverage may not be as
deep and 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.
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 490 full-time employees at December 31, 1999, including 99 in field
sales, 64 in inside sales, 29 in marketing, 120 converters and editors, 38
coders, 37 in quality assurance, 30 in technical support, 16 in management
information systems, 10 in customer service, and 47 in administration (including
accounting and finance). 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.
Risk Factors
You should consider carefully the following risk factors in addition to the
other information set forth in this Annual Report on Form 10-K before investing
in any securities of Loislaw.com. Each of these risk factors could adversely
affect our business, operating results, and financial condition, as well as
adversely affecting the value of an investment in our securities.
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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 $23.0 million in 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
throughout the year 2000 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.
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 for
over ten years, 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;
. other business interruptions;
. changes in pricing strategy;
. variations in spending patterns by lawyers;
. 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;
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. 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 results of
operations.
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 and annual 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 and annual 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 and update 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.
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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 www.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 or
profitability.
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.
Our inability to market our products to large law firms, legal departments of
corporations or consumers successfully could impede our growth or profitability.
The loss of our relationships with courts, legislatures, and others 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 that contain court decisions, statutes, regulations,
acts, administrative decisions, and other legal information that has been
provided to us by various courts, legislatures, and other sources. We have
formal agreements with many courts and legislatures. Our ability to maintain
our relationships with courts and legislatures and to build new relationships
with additional data providers is critical to the success of our business.
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When we are not able to obtain data directly from courts and legislatures, we
must obtain it in printed or electronic format from alternate sources. Obtaining
data in printed format significantly increases the expense required to convert
the information into the format we use for our products. If the materials are
printed, conversion may take a significant amount of time. We obtain significant
amounts of our data from courts and legislatures free of charge or at nominal
costs. However, some states and other entities attempt to charge significant
amounts for providing court decisions, statutes, and other data. These costs,
and any additional costs that may be imposed in the future, 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 increased significantly in
1999, 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. While we are in the
process of developing a second location for simultaneous operation of fully
redundant computer hardware, substantially all of our computer and
communications hardware is presently 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, China, and the Republic
of the Philippines 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.
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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 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.
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.
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 by-laws 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.
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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.
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.
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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.
Item 2. Properties.
Our corporate headquarters are located in a 37,400 square foot leased
facility located at 105 North 28th Street, Van Buren, Arkansas. We lease the
facilities under a lease agreement 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, a partnership consisting of Kyle D. Parker, our Chief Executive
Officer and Chairman, and Douglas W. Parker, Sr., our Secretary. We believe
that our facilities and additional or alternative space available to us will be
adequate to meet our needs for the foreseeable future.
Monthly payments under the lease were increased to $14,144 in May 1999 as a
result of expansion of space under the lease. During 1999, we paid $144,629 as
rental payments under the lease.
We do not own or have leasehold rights in any real property other than the
real estate where our corporate headquarters are located.
Item 3. Legal Proceedings.
On December 17, 1999, Anderson Publishing Company filed a lawsuit against
us, styled Anderson Publishing Company v. Loislaw.com, Inc., in the United
States District Court for the Southern District of Ohio, Western Division
(Cincinnati). The plaintiff alleges that certain data included in the web-based
and compact disc versions of our Ohio statutory database infringes copyrights
that the plaintiff claims to have in "statute headings, chapter and subchapter
headings, histories and editorial emendations" in the Page's Revised Ohio Code
Annotated. The plaintiff alleges at least 74 counts of infringement. In its
complaint, the plaintiff indicates that it intends to seek statutory damages
under the Copyright Act, which provides for statutory damages of not less than
$500 and not more than $20,000 for each infringement, or not more than $100,000
for each willful infringement, in the discretion of the court. The plaintiff
also makes a claim for attorneys' fees and court costs. In addition to its
copyright claim, the plaintiff seeks to recover under the Lanham Act, which
relates to trademarks, and under state or common law deceptive trade practices
and unfair competition theories. The plaintiff does not specify the amount of
damages it is seeking under these theories. On February 15, 2000, we filed an
answer to the plaintiff's complaint and denied any liability in connection with
the plaintiff's claims. Discovery has begun, but no trial date has been set.
We believe that the plaintiff's allegations are without merit and intend to
defend ourselves vigorously by all available means. We do not believe we have
infringed any valid copyrights or trademarks held by the plaintiff. Further, we
believe that the items in which the plaintiff claims to hold copyrights are not
protectable under copyright laws. Further, we do not believe that the plaintiff
is entitled to the relief it seeks under the Lanham Act and state-law theories.
Although we cannot assure you that we will prevail in this litigation, based on
our present knowledge of the facts, we believe that resolution of this claim
will not have a material adverse effect on our financial position, results of
operations, or liquidity.
The Company is a party to a proceeding brought on or about December 27,
1999, in the Sebastian County,
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Arkansas Circuit Court by a former officer of the Company, styled D. L. Johnson
& Co. and Donald L. Johnson v. Loislaw.com. The former officer seeks to recover
damages for the alleged breach of an employment agreement and a separate
consulting agreement, a declaration that the employment agreement is still in
effect, damages for breach of contract and implied contractual covenants alleged
to exist, and damages for actual and constructive misrepresentation. The
complaint does not specify the amount of damages being sought by the plaintiff
but the plaintiff has indicated that he seeks approximately $600,000 in
connection with his allegations of contract breach. We have filed a motion to
dismiss the case and commence preliminary discovery. No trial date has been set.
We believe that the plaintiff's allegations are without merit and intend to
defend ourselves vigorously by all available means. Although we cannot assure
you that we will prevail in this litigation, based on our present knowledge of
the facts, we believe that resolution of this claim will not have a material
adverse effect on our financial position, results of operations, or liquidity.
We are party to routine litigation in the ordinary course of our business
from time to time, but except as set forth above, we are not currently party to
any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is traded on the Nasdaq Stock Market National Market. The
stock trades under the symbol "LOIS." The high and low sale prices for our
common stock for each identified period were as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
<S> <C> <C>
September 30, 1999 18 1/2 13 3/4
December 31, 1999 47 1/2 13 1/8
</TABLE>
In connection with our initial public offering, the common stock began
trading on September 30, 1999. Thus, the prices indicated in the table for the
quarter ended September 30, 1999 are the high and low sale prices for a single
day. Prior to September 30, 1999, our common stock had not been registered and
there was not an established trading market for the common stock.
The closing sale price of the common stock on March 27, 2000 was $23.75.
As of that date, there were approximately 57 holders of record of our common
stock and 20,970,586 shares outstanding. However, because many of the
outstanding shares of common stock are held by brokers or others, as nominees,
we believe the number of beneficial owners of our common stock is significantly
greater than the number of record holders.
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.
Recent Unregistered Sales of Securities. On October 12, 1999, we issued
2,479 shares of common stock to Capital Resource Partners, III L.P., or one of
its affiliates, upon the exercise of warrants. The warrants allowed the
warrantholder to receive 2,480 shares at an exercise price of $.005 per share.
The warrants allowed the warrantholder to exercise a cashless transaction by
giving notice of a net issue election and surrendering of the warrants. Upon
surrender of the warrants, the warrantholder received 2,479 shares, without the
payment of additional consideration, by surrendering the Warrants to the Company
with a net issue election notice. The
21
<PAGE>
issuance of the shares upon exercise was made in reliance upon an exemption from
registration under the Securities Act of 1933 provided by Section 4(2) of that
Act for sales by an issuer not involving a public offering. The shares of common
stock are deemed to be restricted securities for purposes of that Act.
Use of Proceeds of Initial Public Offering. On October 5, 1999, we
completed an initial public offering in which we sold 3,900,000 shares of our
common stock and a selling stockholder sold 80,000 shares of common stock. 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 (Registration
No. 333-81107) that was declared effective by the Securities and Exchange
Commission on September 29, 1999. Net proceeds of the offering to Loislaw.com,
net of underwriter discounts and commissions, were approximately $49.4 million.
Of these proceeds, $22.1 million of the net proceeds were used for the following
purpose on October 5, 1999:
. 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.
We have also used the following estimated amounts through March 27, 2000
for the purposes indicated:
. to pay $2.7 million in costs related to database acquisition and
production;
. to pay $750,000 for the purchase of computer equipment that we use in
our business;
. approximately $11.1 million was used for working capital; and
. approximately $13.0 million remains in short term investments
(NAIC-Approved Class I interest bearing short term fund).
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<PAGE>
Item 6. Selected Financial Data.
The selected financial data set forth below should be read in conjunction
with our audited financial statements and notes included in "Item 8 - Financial
Statements and Supplementary Data" and ''Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations,'' appearing elsewhere
in this Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Web-based products................................... $ -- $ 28 $ 208 $ 842 $ 3,929
CD-ROM products...................................... 1,742 1,855 3,157 3,182 3,007
Other (1)............................................ -- -- 1,000 --
------ ------- ------- ------- --------
Total revenues...................................... 1,742 1,883 3,365 5,024 6,936
------ ------- ------- ------- --------
Operating expenses:
Database costs....................................... 1,152 1,459 1,563 2,624 7,454
Costs of other revenues.............................. -- -- -- 393 --
Selling and marketing................................ 935 2,153 2,363 4,607 11,706
General and administrative........................... 569 1,525 1,535 1,977 4,570
Product development.................................. 133 101 86 541 675
------ ------- ------- ------- --------
Total operating expenses............................ 2,789 5,238 5,547 10,142 24,405
------ ------- ------- ------- --------
Loss from operations.................................. (1,047) (3,355) (2,182) (5,118) (17,469)
------ ------- ------- ------- --------
Other income (expense):
Interest expense, net................................ (69) (251) (455) (1,549) (1,691)
Other, net........................................... 5 2 (6) 42 5
------ ------- ------- ------- --------
(64) (249) (461) (1,507) (1,686)
------ ------- ------- ------- --------
Loss before extraordinary item...................... (1,111) (3,604) (2,643) (6,625) (19,155)
Extraordinary item - loss on extinguishment of debt... -- -- -- -- 3,797
------ ------- ------- ------- --------
Loss before income taxes.............................. (1,111) (3,604) (2,643) (6,625) (22,952)
Income tax benefit.................................... (339) (52) -- -- --
------ ------- ------- ------- --------
Net loss............................................ (772) (3,552) (2,643) (6,625) (22,952)
Accrued preferred stock dividends and accretion on
redeemable preferred stock and common stock warrants. -- -- (34) (500) (3,344)
------ ------- ------- ------- --------
Net loss applicable to common stock................... $ (772) $(3,552) $(2,677) $(7,125) $(26,296)
====== ======= ======= ======= ========
Net loss per share--basic and diluted................. $ (.11) $(.50) $ (.37) $(.99) $(2.21)
====== ======= ======= ======= ========
Weighted average common shares outstanding - basic
and diluted.......................................... 7,000 7,057 7,163 7,222 11,912
====== ======= ======= ======= ========
</TABLE>
(1) Other revenues in 1998 were from producing customized databases for a third
party.
23
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 318 $ 102 $ 3,233 $ 99 $19,286
Working capital (deficit)....................... (629) (3,397) (514) (4,751) 15,427
Total assets.................................... 3,794 6,004 16,298 19,213 46,573
Total debt (including capital lease obligations) 1,744 3,963 4,107 12,373 13
Deferred revenues............................... 157 1,754 3,522 3,928 6,226
Redeemable equity securities.................... -- -- 11,216 11,720 --
Total stockholders' equity (deficit)............ 1,021 (2,231) (4,758) (11,900) 36,028
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The following analysis and discussion highlights the significant factors
affecting our financial condition and results of operations. For a more
complete understanding of the following discussion, reference should be made to
the Company's Financial Statements and the related notes presented elsewhere in
this report.
Overview
Loislaw.com provides comprehensive, affordable and easy-to-use legal and
related information to lawyers and law firms over the Internet and on compact
disc. We offer more than 1,800 databases that we estimate to contain over 8
million documents. These databases consist of federal and state law, continuing
legal education materials and other legal information. As of December 31, 1999,
our databases included state court decisions, statutes, acts, and regulations of
all 50 states and the District of Columbia, federal statutes, the Code of
Federal Regulations, and court decisions for the U.S. Supreme Court and all 13
federal circuit courts of appeal. During 2000, we will continue to expand our
product offerings and expect to add a number of databases, including selected
U.S. District Court Reports, Bankruptcy Opinions, a Tax product consisting of
opinions of the United States Tax Court and IRS Cumulative Bulletins, and a
product consisting of SEC Decisions and Reports.
We generate revenues primarily from the sale of Internet web-based products
and compact disc 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 $139 per seat per month. During 1999, we
offered another multi-jurisdiction product offering fewer databases for $98 per
month. The list price for unlimited Internet access to substantially all state
law for a single state currently varies from state to state from $39 to $49 per
seat per month ($39 to $69 during 1999). We do not charge any additional fees
for multiple permitted users of a seat but only one simultaneous access per seat
is allowed. Our pricing strategy with respect to our web-based products may
change as a result of our evolving market. Continuing legal education, bar
materials, and some specialty databases are available for an additional charge.
Historically we offered compact disc products at annual subscription prices
ranging from $300 to $690 per state or federal jurisdiction. In recent periods,
we have de-emphasized our compact disc 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. Some revenue from
compact disc sales will continue as we fulfill obligations to our current
compact disc customers. Revenues from compact disc products also include a
small amount of revenue from one-time sales of bar association publications. We
will continue to make these one-time compact disc sales.
The migration of our customers to our web-based products will increase our
average revenue per customer if most customers purchase our unlimited Internet
access package, National Collection(SM), featuring substantially all
24
<PAGE>
of our primary state and federal law. It will also decrease our average cost per
customer if fewer customers use our compact disc products. This is because we
currently provide our compact disc customers with updated discs every 90 days
and because compact disc products typically require significantly more customer
and technical support due to the reinstallation of updated compact disc 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
recognized 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 or credit card debits.
Database costs consist primarily of database production costs that support
both our web-based products and our compact disc 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 more limited useful life, over two years. We expense
as incurred database maintenance and updating costs.
Initial Public Offering
On October 5, 1999, we completed an initial public offering of 3,900,000
shares of common stock at an initial offering price of $14 per share. An
additional 80,000 shares were sold in the offering by an existing shareholder.
Prior to the initial public offering, there was no public market for our common
stock. We did not receive any of the proceeds from the sale of the shares held
by the existing shareholder. The net proceeds to the Company from this initial
public offering, after deducting underwriting discounts and offering expenses,
amounted to $49,416,121.
The net proceeds to the Company 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. In particular, the net proceeds were used to repay debt
and related accrued interest of $16,831,390, to redeem the Series B redeemable
preferred stock and pay accrued dividends for $5,030,519, and to pay a financial
advisory fee of $250,000. We also estimate that we have used the following
amount through March 27, 2000: $2.7 million in costs related to database
acquisition and production, $750,000 for purchase of computer equipment, and
$11.1 million for working capital. Approximately $13.0 million of the net
proceeds in short term investments (NAIC-Approved Class I interest bearing short
term fund). In connection with the repayment of debt, the Company recorded an
extraordinary loss of $3,796,736 ($0.32 per share), which represents the write-
off of deferred loan costs.
Upon the closing of the initial public offering, 931,044 shares of Series A
convertible preferred stock and 2,495,697 shares of the Series C convertible
preferred stock were converted on a two-for-one basis into 6,853,482 shares of
our common stock. Additionally, the redemption feature on 2,113,232 shares of
common stock and outstanding warrants for the purchase of 35,536 shares of
common stock was eliminated. Accordingly, the Company reclassified the values
assigned to the redeemable Series A and Series C convertible preferred stock,
the common stock and warrants for the purchase of common stock and the related
accretion of these redeemable equity securities to par value of common stock and
additional paid-in capital in the December 31, 1999 balance sheet.
25
<PAGE>
Results of Operations
Comparison of Results for the Years Ended December 31, 1999 and 1998
Revenues. Total revenues increased 38% to $6.9 million for the year ended
December 31, 1999 from $5.0 million for the year ended December 31, 1998.
Revenues from subscriptions for our web-based products increased 366% to $3.9
million for the year ended December 31, 1999, compared to $842,000 for the year
ended December 31, 1998. We believe the increase in revenues from web-based
subscriptions was due to increased marketing efforts, expansion of sales staff,
and the inclusion of comprehensive primary law databases for all 50 states by
December 31, 1999. We expect that this trend will continue and that web-based
subscription revenues will represent substantially all of our total revenues in
future periods. Revenues from subscriptions to compact disc products decreased
6% to $3.0 million for the year ended December 31, 1999 compared to $3.2 million
for the year ended December 31, 1998. We believe the decrease in revenues for
compact disc products is directly related to our marketing of web-based
products, as well as our decision to cease offering compact disc products to new
subscribers in July 1999. We also believe that compact disc product revenue
will continue to decline as we continue to focus our marketing efforts on web-
based products. Total revenues for the year ended December 31, 1998 included
other revenue of $1.0 million and costs of other revenues of $393,000 in 1998
related to a non-recurring customized database project that was started and
completed in 1998. Total database seats increased 99% to 14,925 at December 31,
1999 from 7,498 at December 31, 1998.
Database Costs. Total database costs increased 184% to $7.5 million for
the year ended December 31, 1999 from $2.6 million for the year ended December
31, 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
154% to $11.7 million for the year ended December 31, 1999 from $4.6 million for
the year ended December 31, 1998. This was principally due to an increase in
our compensation and commission expenses associated with an increase in the
number of sales and marketing personnel. Selling and marketing expense consists
primarily of:
. employee salaries and benefits for marketing and customer support
personnel;
. salaries and sales commissions paid to our sales force and sales
department management;
. advertising expenses;
. trade show 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 presently pay
commissions on renewals of subscriptions but it may be necessary to do so in the
future to ensure that our field sales representatives address the needs of our
customers. We expense all other selling and marketing costs as incurred.
General and Administrative Expense. General and administrative expense
increased 131% to $4.6 million for the year ended December 31, 1999 from $2.0
million for the year ended December 31, 1998. This increase resulted primarily
from an increase in compensation expenses associated with an increase in the
number of administrative employees, including technical support employees who
support our web site. 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.
26
<PAGE>
Product Development Expense. Product development expense increased 25% to
$675,000 for the year ended December 31, 1999 from $541,000 for the year ended
December 31, 1998. This increase was due to an increase in personnel and
payments to third party consultants for product enhancements. Product
development expense consists primarily of employee salaries and benefits related
to the development of core software supporting our products.
Interest Expense, Net. Interest expense, net of interest income,
increased 13% to $1.7 million for the year ended December 31, 1999 from $1.5
million for the year ended December 31, 1998. This increase, all of which
occurred prior to completion of our initial public offering, 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. For the
year ended December 31, 1999, there was also an extraordinary item of $3.8
million due to a loss on extinguishment of debt.
Comparison of Results for the Years Ended December 31, 1998 and December 31,
1997
Revenues. Total revenues increased 49% to $5.0 million in 1998 from $3.4
million in 1997. Revenues from web-based products increased 304% to $842,000 in
1998 from $208,000 in 1997. The increase in web-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 compact disc 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 compact disc 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 68% 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 95%
to $4.6 million in 1998 from $2.4 million in 1997. This increase was
principally due to a 22% increase in sales commissions due to increased product
sales and a 124% 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 29% 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%
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 241% 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.
Liquidity and Capital Resources
We have used substantial amounts of cash in the growth of our company. Net
cash used in operating activities was $16.7 million, $5.0 million, and $1.7
million for the years ended December 31, 1999, 1998, and 1997, respectively.
The primary use of cash was the payment of operating expenses of our business.
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 at least through the end of 2000.
27
<PAGE>
Net cash used in investing activities was $10.6 million, $6.1 million, and
$2.1 million for the years ended December 31, 1999, 1998, and 1997,
respectively. The primary use of cash was the payment of our database
production costs, which were capitalized. In 1998 and 1998, these investing
activities also included purchase of equipment in the amounts of $2.8 million
and $7.2 million, respectively, to support the growth of our business.
To finance our operations and continued expansion we have obtained
additional capital through our initial public offering of 3.9 million shares of
common stock in September, 1999, as well as private placements of debt and
equity and from related party and bank financing. Total financing, net of
repayments, was approximately $46.5 million, $8.1 million, and $6.9 million for
the years ended December 31, 1999, 1998, and 1997, respectively.
During 1999, we had a net loss of approximately $22,950,000 and had
negative cash flows from operations of approximately $16,700,000. Even though
we have a history of losses and negative cash flow, we have been able to secure
capital from private placements with venture capitalists and from financial
institution lenders, and from a public offering of our common stock. Management
believes that these sources of capital will continue to be available, if needed,
for at least the remainder of the current year, given the market capitalization
of our outstanding shares of common stock. Should we be unable to obtain the
necessary capital to finance our operations, we may have to significantly reduce
our sales and marketing activities and/or the production and/or maintenance of
our databases.
During the first half of 2000, we anticipate that we will complete
production of four new specialty databases. These databases are the U.S.
District Court Opinions, Tax Database, Bankruptcy Database, and SEC Decisions
and Reports. We believe we will be required to expend approximately $4.3 million
for acquisition and conversion of these databases. We also anticipate that,
during the same time, our selling and marketing expenses will increase due to
more aggressive marketing. We believe available cash on hand generated from
operations and our initial public offering will be adequate to meet our
anticipated cash needs for working capital and capital expenditures throughout
the year 2000. However, we may choose to seek additional financing to accelerate
our growth by, for example, adding new specialty databases at a faster pace, to
expand our marketing activities or for other purposes.
As part of our growth strategy, we may consider acquiring companies or
businesses, and any acquisition could significantly increase our cash
requirements. An acquisition, or any other increase in our anticipated cash
requirements, could require us to obtain additional financing. While we believe
that we would be able 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.
Our credit agreement with Fleet National Bank dated August 20, 1998, as
amended, established 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 December 31, 1999, we had no
outstanding borrowings under the credit facility. All borrowings under the
credit facility are secured by a pledge of most of our assets.
28
<PAGE>
Net Operating Loss Carryforwards
Since 1994, we have incurred significant net losses. Through December 31,
1999, we had a net operating loss carryforward of approximately $49 million that
will begin to expire in 2010 for federal income tax purposes and in 2000 for
state tax purposes. Through December 31, 1999, our accumulated deficit totaled
$38 million. We cannot assure you that we will have income that is sufficient
to allow us to use these loss carryforwards.
Year 2000 Issues
The Year 2000 issue is the result of computer programs being written using
two rather than four digits to define the applicable year. We are continuing to
monitor our systems to identify any Year 2000 issues that we may not have
identified previously or any Year 2000 problems that have not yet become
evident. As of the date of this Annual Report, we are not aware that any of our
systems have experienced any disruptions as a result of the arrival of the new
year. We also are not aware that any of our customers, data providers, data
converters or other parties with which we do business have experienced any
significant disruptions as a result of the arrival of the year 2000, although we
have not contacted all those parties since year end regarding this issue. It is
possible that some Year 2000 problems may not be immediately evident, and we or
the third parties with which we do business may discover Year 2000 problems in
the future. We cannot assure you that any such problems, or claims arising out
of those problems, will not have a material adverse impact on our business or
financial condition.
We believe that the measures we have taken to identify, assess, and
remediate Year 2000 issues, and related testing, are reasonable based on our
operations and circumstances. The total cost of such measures was $161,000,
which was funded by operating cash flows. This amount represented approximately
5.0% of our total actual information technology expenditures for fiscal 1999.
Non-Year 2000 information technology projects were not materially impacted or
delayed by our Year 2000 projects.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which will
be effective for the Company beginning January 1, 2000. Because Loislaw.com
does not use derivatives, Statement No. 133 will have no significant effect on
our financial condition or results of operations.
Item 7A. 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 rates swap transactions that could expose us to market
risk.
We are subject to some interest rate risk in connection with our bank
credit facility with Fleet National Bank. All amounts that we borrow under the
credit facility bear interest at floating rates. At December 31, 1999, we had no
outstanding borrowings under the credit facility.
Item 8. Financial Statements and Supplementary Data.
See the Index to Financial Statements on page F-1 of this Annual Report.
The Financial Statements and Notes listed therein and included elsewhere in this
report are incorporated into this Item 8 by reference.
29
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information required by this item will be set forth under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive Proxy Statement (the "Proxy Statement") in
connection with the 2000 Annual Meeting of Shareholders to be filed not later
than 120 days after the end of the fiscal year covered by this Annual Report.
Such information is incorporated herein by reference.
Item 11. Executive Compensation.
Information relating to executive compensation will be set forth under the
caption "Executive Compensation" in the Proxy Statement. Such information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information relating to security ownership of certain beneficial owners and
management will be set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement. Such information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information relating to certain relationships and related transactions will
be set forth under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement. Such information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as part of this Annual Report on Form 10-K
(1) Financial Statements (See the Index to Financial Statements on
page F-1 of this Annual Report, which is incorporated into this
Item 14 by reference.)
(2) Financial Statement Schedules--None.
(3) Exhibits.
The exhibits filed as part of this Annual Report on Form 10-K are listed on the
Index to Exhibits immediately preceding the exhibits. The Index to Exhibits is
incorporated herein by reference.
(b) Reports on Form 8-K
None
30
<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: March 30, 2000 By: /s/ Mark O. Beyland
-------------- ---------------------------------
Mark O. Beyland
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kyle D. Parker Chairman of the Board and March 30, 2000
- -----------------------------------
Kyle D. Parker Chief Executive Officer
(Principal Executive Officer)
/s/ Mark O. Beyland President, Chief Financial March 30, 2000
- ----------------------------------- Officer and Director
Mark O. Beyland
/s/ Randell L. Sisemore Vice-President of Finance March 30, 2000
- ----------------------------------- (Principal Accounting Officer)
Randell L. Sisemore
/s/ Robert C. Ammerman Director March 30, 2000
- -----------------------------------
Robert C. Ammerman
/s/ Randy Laney Director March 30, 2000
- -----------------------------
Randy Laney
/s/ Hannah C. Stone Director March 30, 2000
- -----------------------------------
Hannah C. Stone
</TABLE>
31
<PAGE>
FORM 10-K
INDEX TO EXHIBITS
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of June 16, 1999 (incorporated
herein by reference to Exhibit 2.1 to the Company's Registration
Statement on Form S-1, Registration No. 333-81107).
2.2 Certificate and Articles of Merger of Law Office Information Systems,
Inc. (an Arkansas Corporation) with and into Loislaw.com, Inc. (a
Delaware Corporation) (incorporated herein by reference to Exhibit 2.2
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
3.1 Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1, Registration No. 333-81107).
3.2 Bylaws of the Company (incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
3.3 Certificate of Designations as filed with the State of Delaware
(incorporated herein by reference to Exhibit 3.3 to Amendment No. 1 to
the Company's Registration Statement on Form S-1, Registration No.
333-81107).
4.1 Form of Common Stock Certificate of the Company (incorporated herein
by reference to Exhibit 4.1 to Amendment No. 2 to the Company's
Registration Statement on Form S-1, Registration No. 333-81107).
4.2 Amended and Restated Stockholders' Agreement, dated as of May 25,
1999, by and among the Company and certain stockholders (incorporated
herein by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1, Registration No. 333-81107).
4.3 Amended and Restated Registration Rights Agreement dated as of May 25,
1999 by and among the Company and certain stockholders (incorporated
herein by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1, Registration No. 333-81107).
10.1* 1996 Stock Option Plan, as amended (incorporated herein by reference
to Exhibit 10.1 to the Company's Registration Statement on Form S-1,
Registration No. 333-81107).
10.2* Employment Agreement by and between the Company and Kyle D. Parker
(incorporated herein by reference to Exhibit 10.2 to Amendment No. 2
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
10.3* Employment Agreement by and between the Company and Mark O. Beyland
(incorporated herein by reference to Exhibit 10.3 to Amendment No. 2
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
10.4 Reimbursement Agreement by and among Kyle D. Parker, as Trustee for
the Parker Trust, Melissa Ann Parker and Capital Resource Lenders III,
L.P. dated as of November 24, 1997, as amended on June 17, 1999
(incorporated herein by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1, Registration No. 333-81107).
10.5** Cooperative Marketing Agreement dated as of November 17, 1999 by and
between the Company and CDB Infotek.
32
<PAGE>
10.6 Corporate License and Services Agreement, effective as of February 18,
1998, by and between the Company and Verity, Inc., as amended
(incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1, Registration No. 333-81107).
10.7 Credit Agreement between the Company and Fleet National Bank, N.A.,
dated August 20, 1998 (incorporated herein by reference to Exhibit
10.7 to the Company's Registration Statement on Form S-1, Registration
No. 333-81107).
10.8 First Amendment to Credit Agreement, by and between the Company and
Fleet National Bank, N.A., dated December 31, 1998 (incorporated
herein by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1, Registration No. 333-81107).
10.9 Second Amendment and Waiver to Credit Agreement, by and between the
Company and Fleet National Bank, N.A., dated April 30, 1999
(incorporated herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Registration No. 333-81107).
10.10 Third Amendment to Credit Agreement, by and between the Company and
Fleet National Bank, N.A., dated May 25, 1999 (incorporated herein by
reference to Exhibit 10.10 to the Company's Registration Statement on
Form S-1, Registration No. 333-81107).
10.11 Form of Indemnity Agreement with a schedule of director and officer
signatories (incorporated herein by reference to Exhibit 10.11 to
Amendment No. 2 to the Company's Registration Statement on Form S-1,
Registration No. 333-81107).
10.12 Lease Agreement by and between the Company and the Parker Law Office
dated May 5, 1999 (incorporated herein by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
10.13*** Agreement by and between the Company and Pacific Data Conversion
Corporation, dated December 29, 1998 (incorporated herein by reference
to Exhibit 10.13 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, Registration No. 333-81107).
10.14*** Agreement by and between the Company and Infocon, dated July 1, 1998
(incorporated herein by reference to Exhibit 10.14 to Amendment No. 1
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
10.15*** Master Services Agreement by and among the Company, Digital Publishing
International Ltd. and Innodata Corporation, dated June 10, 1998
(incorporated herein by reference to Exhibit 10.15 to Amendment No. 1
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
10.16* Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 10.16 to Amendment No. 4 to the Company's Registration
Statement on Form S-1, Registration No. 333-81107).
10.17* 1999 Nonqualified Stock Option Plan for Nonemployee Directors
(incorporated herein by reference to Exhibit 10.17 to Amendment No. 2
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
10.18 Senior Subordinated Note and Securities Purchase Agreement, dated as
of November 24, 1997, by and between the Company and Capital Resource
Lenders III, L.P., as amended (incorporated herein by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-1,
Registration No. 333-81107).
10.19 Amendment No. 4 to Subordinated Note and Securities Purchase Agreement
and Amendment Agreement by and among the Company, Capital Resource
Lenders III, L.P., CRP Investment Partners III, L.L.C., Rowland
Moriarty and certain stockholders, dated as of January 29, 1999
33
<PAGE>
(incorporated herein by reference to Exhibit 10.19 to Amendment No. 2
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
10.20* Form of Loislaw.com, Inc. 1996 Stock Option Plan Option Agreement by
and between the Company and Michael E. Romanies (incorporated herein
by reference to Exhibit 10.20 to Amendment No. 2 to the Company's
Registration Statement on Form S-1, Registration No. 333-81107).
10.21* Form of Law Office Information Systems, Inc. 1996 Stock Option Plan
Option Agreement by and between the Company and Mark O. Beyland
(incorporated herein by reference to Exhibit 10.21 to Amendment No. 2
to the Company's Registration Statement on Form S-1, Registration No.
333-81107).
10.22 Form of Customer Subscription Agreement (incorporated herein by
reference to Exhibit 10.22 to the Company's Registration Statement on
Form S-1, Registration No. 333-81107).
21.0 Subsidiaries of Loislaw.com (incorporated herein by reference to
Exhibit 21.0 to the Company's Registration Statement on Form S-1,
Registration No. 333-81107).
23.1** Consent of KPMG LLP.
27.1** Financial Data Schedule.
______________
* The following exhibits constitute management contracts or compensatory
plans or arrangements: Exhibits 10.1, 10.2, 10.3, 10.16, 10.17, 10.20, and
10.21.
** Filed herewith.
*** Confidential treatment has been obtained with respect to certain portions
of these agreements.
34
<PAGE>
LOISLAW.COM, INC.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Balance Sheets at December 31, 1998 and 1999 F-3
Statements of Operations for the years ended December 31, 1997,
1998 and 1999 F-4
Statements of Redeemable Equity Securities and Stockholders' Equity (Deficit)
for the years ended December 31, 1997, 1998 and 1999 F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 F-7
Notes to Financial Statements F-9
</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, 1998 and 1999, 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, 1999. 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, 1998 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
Little Rock, Arkansas
January 21, 2000
F-2
<PAGE>
LOISLAW.COM, INC.
Balance Sheets
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Assets 1998 1999
------------------ ---------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 99,042 19,286,007
Accounts receivable, net of allowance for doubtful
accounts of $124,974 and $235,183 at
December 31, 1998 and 1999, respectively
(notes 5 and 6) 1,540,052 4,052,088
Prepaid commissions 311,394 1,454,797
Prepaid software license 96,958 296,125
Other current assets 138,811 650,843
-------------- --------------
Total current assets 2,186,257 25,739,860
Databases, net (notes 3, 6 and 8) 10,766,967 16,585,088
Property and equipment, net (notes 4 and 6) 1,446,459 3,803,122
Deferred loan costs, net of accumulated amortization of
$728,201 at December 31, 1998 (notes 6 and 8) 3,992,278 --
Other assets 820,721 444,985
-------------- --------------
Total assets $ 19,212,682 46,573,055
============== ==============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current installments of long-term debt (notes 6 and 8) 954,893 13,060
Accounts payable 2,559,631 2,580,284
Deferred revenue 2,961,067 6,003,521
Accrued expenses 461,549 1,716,435
-------------- --------------
Total current liabilities 6,937,140 10,313,300
Deferred revenue 967,046 222,504
Long-term debt, excluding current installments (notes 6 and 8) 11,317,631 9,405
Other noncurrent liabilities 170,373 --
-------------- --------------
Total liabilities 19,392,190 10,545,209
-------------- --------------
Redeemable equity securities (notes 6 and 8):
Series A convertible preferred, 931,044 shares 2,605,840 --
Series B redeemable preferred, redemption value of
$4,395,890 plus accrued dividends, 439,589 shares 4,770,380 --
Common stock, 730,692 shares 1,189,158 --
Common stock warrants 3,154,975 --
-------------- --------------
Total redeemable equity securities 11,720,353 --
-------------- --------------
Stockholders' equity (deficit) (notes 6, 8 and 10):
Common stock, $.001 par value. 50,000,000 shares
authorized; shares issued -7,180,000 at December 31,
1998 and 20,952,003 at December 31, 1999 7,180 20,952
Additional paid-in capital -- 73,847,856
Accumulated deficit (11,890,941) (37,824,862)
Treasury stock, at cost, 10,000 shares (16,100) (16,100)
-------------- --------------
Total stockholders' equity (deficit) (11,899,861) 36,027,846
Commitments and contingencies (notes 6, 8, 9 and 10)
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 19,212,682 46,573,055
============== ==============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
LOISLAW.COM, INC.
Statements of Operations
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
Web-based products $ 208,357 842,112 3,929,153
CD-ROM products 3,157,056 3,182,067 3,006,893
Other -- 1,000,000 --
-------------- -------------- ---------------
Total revenues 3,365,413 5,024,179 6,936,046
-------------- -------------- ---------------
Operating expenses:
Database costs 1,563,152 2,623,717 7,453,903
Costs of other revenues -- 393,357 --
Selling and marketing 2,363,028 4,606,638 11,705,924
General and administrative 1,535,174 1,977,424 4,570,252
Product development 86,465 540,866 675,039
-------------- -------------- ---------------
Total operating expenses 5,547,819 10,142,002 24,405,118
-------------- -------------- ---------------
Loss from operations (2,182,406) (5,117,823) (17,469,072)
-------------- -------------- ---------------
Other income (expense):
Interest expense, net (454,667) (1,548,931) (1,690,993)
Other, net (6,353) 41,953 5,161
-------------- -------------- ---------------
(461,020) (1,506,978) (1,685,832)
-------------- -------------- ---------------
Loss before extraordinary item (2,643,431) (6,624,801) (19,154,904)
Extraordinary item - loss on extinguishment
of debt (note 8) -- -- 3,796,736
-------------- -------------- ---------------
Net loss (2,643,431) (6,624,801) (22,951,640)
Accrued preferred stock dividends and accretion
on redeemable preferred stock and common stock
warrants (notes 6 and 8) (34,468) (500,421) (3,344,397)
-------------- -------------- ---------------
Net loss applicable to common shares $ (2,677,899) (7,125,222) (26,296,037)
============== ============== ===============
Net loss per share - basic and diluted:
Net loss applicable to common shares before
extraordinary item (0.37) (0.99) (1.89)
Extraordinary item (note 8) -- -- (0.32)
-------------- -------------- ---------------
Net loss $ (0.37) (0.99) (2.21)
============== ============== ===============
Weighted average common shares outstanding -
basic and diluted 7,162,740 7,222,344 11,912,334
============== ============== ===============
See accompanying notes to financial statements.
</TABLE>
F-4
4
<PAGE>
<TABLE>
<CAPTION>
LOISLAW.COM, INC.
Statements of Redeemable Equity Securities and Stockholders' Equity (Deficit) (Notes 6 and 8)
December 31, 1997, 1998 and 1999
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, 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
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit) Additional
-------------------------------------------------------------------
Additional
Common paid-in Accumulated Treasury
stock capital deficit stock Total
------------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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)
Continued
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
LOISLAW.COM, INC.
Statements of Redeemable Equity Securities and Stockholders' Equity (Deficit) (Notes 6 and 8)
December 31, 1997, 1998 and 1999
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 $ -- -- -- -- 408,364 408,364
Accrued dividends on Series B
redeemable preferred stock -- 260,139 -- -- -- 260,139
Accretion on redeemable equity
securities 1,015,251 -- 1,921,982 1,349,212 147,025 4,433,470
Exercise of warrants for 2,113,232
shares of redeemable common
stock -- -- -- 3,637,993 (3,627,427) 10,566
Issuance of 2,495,697 shares of
Series C convertible preferred
stock for cash and conversion of
notes payable, net of issuance
costs of $624,023 -- -- 13,875,977 -- -- 13,875,977
Issuance of 172,118 shares of
common stock for cash, net
of issuance costs of $21,517 -- -- -- -- -- --
Cancellation of redemption
feature on 730,692 shares
of redeemable common stock -- -- -- (1,233,746) -- (1,233,746)
Issuance of 3,900,000 shares of
common stock for cash, net
of issuance costs of $1,361,879 -- -- -- -- -- --
Conversion of Series A and Series C
convertible preferred stock into
6,853,482 shares of common stock (3,621,091) -- (15,797,959) -- -- (19,419,050)
Cancellation of redemption feature
on 2,113,232 shares of redeemable
common stock and warrants to
purchase 35,536 share of
redeemable common stock -- -- -- (4,942,617) (82,937) (5,025,554)
Redemption of 439,589 shares of
Series B redeemable preferred
stock -- (5,030,519) -- -- -- (5,030,519)
Exercise of warrants for 2,479
shares of common stock -- -- -- -- -- 2
Net loss -- -- -- -- -- --
------------- ------------- ------------- ------------ ------------- ------------
Balances at December 31, 1999 $ -- -- -- -- -- --
============= ============= ============= ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
---------------------------------------------------------------------------------------
Additional
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 -- -- -- -- --
Accrued dividends on Series B
redeemable preferred stock -- (169,777) (90,362) -- (260,139)
Accretion on redeemable equity
securities -- (1,541,551) (2,891,919) -- (4,433,470)
Exercise of warrants for 2,113,232
shares of redeemable common
stock -- -- -- -- --
Issuance of 2,495,697 shares of
Series C convertible preferred
stock for cash and conversion of
notes payable, net of issuance
costs of $624,023 -- -- -- -- --
Issuance of 172,118 shares of
common stock for cash, net
of issuance costs of $21,517 172 478,313 -- -- 478,485
Cancellation of redemption
feature on 730,692 shares
of redeemable common stock 731 1,233,015 -- -- 1,233,746
Issuance of 3,900,000 shares of
common stock for cash, net
of issuance costs of $1,361,879 3,900 49,412,221 -- -- 49,416,121
Conversion of Series A and Series C
convertible preferred stock into
6,853,482 shares of common stock 6,854 19,412,196 -- -- 19,419,050
Cancellation of redemption feature
on 2,113,232 shares of redeemable
common stock and warrants to
purchase 35,536 share of
redeemable common stock 2,113 5,023,441 -- -- 5,025,554
Redemption of 439,589 shares of
Series B redeemable preferred
stock -- -- -- -- --
Exercise of warrants for 2,479
shares of common stock 2 (2) -- -- --
Net loss -- -- (22,951,640) -- (22,951,640)
------------- ------------- ------------- ------------ -------------
Balances at December 31, 1999 $ 20,952 73,847,856 (37,824,862) (16,100) 36,027,846
============= ============= ============= ============ =============
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
LOISLAW
Statements of Cash Flows
December 31, 1997, 1998 and 1999
1997 1998 1999
-------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,643,431) (6,624,801) (22,951,640)
-------------- ------------- --------------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 645,416 1,361,238 3,148,476
Extraordinary item - loss on extinguishment
of debt (note 8) -- -- 3,796,736
Provision for doubtful accounts 94,381 -- 187,000
Loss on disposal of property and equipment -- 3,979 --
Change in operating assets and liabilities:
Accounts receivable (1,119,591) (758,773) (2,186,482)
Prepaid expenses and other
current assets (132,655) (412,573) (2,069,825)
Accounts payable (175,172) 823,685 (149,720)
Accrued expenses (132,129) 156,841 1,254,886
Deferred revenue 1,768,429 405,932 2,297,912
-------------- ------------- --------------
Net cash used by operating activities (1,694,752) (5,044,472) (16,672,657)
-------------- ------------- --------------
Cash flows from investing activities:
Database costs (1,972,244) (4,769,562) (7,678,111)
Purchase of property and equipment (92,528) (1,224,665) (2,812,744)
Increase in other assets (8,827) (161,918) (136,818)
-------------- ------------- --------------
Net cash used by investing activites (2,073,599) (6,156,145) (10,627,673)
-------------- ------------- --------------
Cash flows from financing activities:
Repayment of capital lease obligation (25,183) (15,385) (12,059)
Deferred loan costs (note 6) (553,614) (143,681) (13,276)
Proceeds from sale of Class A preferred stock,
net of $237,263 cost of issuance (note 6) 2,762,737 -- --
Redemption of Class B preferred stock, plus
accrued dividends (note 8) -- -- (5,030,519)
Proceeds from sale of Class C preferred stock,
net of issuance costs of $624,023 (note 6) -- -- 8,893,850
Proceeds from notes payable 6,117,446 8,661,077 10,403,700
Repayment of notes payable (note 8) (2,240,855) (423,077) (17,649,007)
Proceeds from related party borrowing (note 8) 688,946 -- --
Proceeds from exercise of warrants (note 6) -- 3,653 --
Proceeds from sale of common stock (note 8) 150,000 -- 49,894,606
Repurchase of treasury stock -- (16,100) --
-------------- ------------- --------------
Net cash provided by financing activities 6,899,477 8,066,487 46,487,295
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents 3,131,126 (3,134,130) 19,186,965
Cash and cash equivalents at beginning of year 102,046 3,233,172 99,042
-------------- ------------- --------------
Cash and cash equivalents at end of year $ 3,233,172 99,042 19,286,007
============== ============= ==============
</TABLE>
(Continued)
F-7
<PAGE>
<TABLE>
<CAPTION>
LOISLAW.COM, INC.
Statements of Cash Flows
December 31, 1997, 1998 and 1999
1997 1998 1999
---------------- --------------- --------------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid for interest $ 581,154 683,761 1,703,061
Non cash investing and financing transactions:
Accrued Series B redeemable preferred stock
dividends 34,468 340,022 260,139
Satisfaction of capital lease obligation through
return of equipment -- 57,475 --
Conversion of related party borrowing to
Series B redeemable preferred stock (note 8) 4,395,890 -- --
Issuance of warrants (note 6) 4,293,821 -- 408,364
Accretion on redeemable equity securities -- 160,399 4,433,470
Cancellation of redemption feature on
redeemable common stock and warrants
to purchase shares of redeemable common
stock (note 6) -- -- 6,259,300
Conversion of subordinated notes payable
into 857,509 shares of Series C convertible
preferred stock (note 6) -- -- 4,982,127
Exercise of warrants in satisfaction of
subordinated notes payable (note 6) -- -- 10,566
Conversion of Series A and Series C
convertible preferred stock to shares of
common stock (note 8) -- -- 19,419,050
Exercise of warrants for common stock (note 6) -- -- 2
================ ============== ==============
See accompanying notes to financial statements.
</TABLE>
F-8
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(1) Operations
Loislaw.com, Inc. ("the Company") provides legal and related information
to lawyers and law firms over the Internet and on CD-ROM. 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. 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.
(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, 1999, 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.
F-9
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
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 and
$353,000 at December 31, 1998 and 1999, respectively.
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 two years. Costs to
maintain and enhance databases are expensed as incurred. Amortization
expense related to capitalized databases totaled approximately $440,000,
$460,000 and $1,860,000 in 1997, 1998 and 1999, 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 $603,000 and $91,000, respectively, at December
31, 1998 and 1999 and are included in other assets in the accompanying
balance sheets. Other revenue, which is recognized under the percentage
of completion method as production costs are incurred, and costs of other
revenue in 1998 result from producing databases for a third party. 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.
F-10
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(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, 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 $17,000, $300,000 and $1,313,000 for the years ended
December 31, 1997, 1998 and 1999, respectively, and are included in
selling and marketing expenses in the accompanying statements of
operations.
F-11
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(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.
(l) Loss Per Share
Loss per share has been computed by dividing the net loss applicable to
common stock by the weighted average shares of common stock outstanding
during each period as shown below:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 1998 1999
------------- -------------- ---------------
<S> <C> <C> <C>
Net loss $ 2,643,431 $ 6,624,801 $ 22,951,640
Accrued dividends on preferred stock 34,468 340,022 260,139
Accretion on redeemable common
stock warrants -- 46,659 147,025
Accretion on redeemable preferred
Stock -- 113,740 2,937,233
Net loss applicable to common stock $ 2,677,899 $ 7,125,222 $ 26,296,037
Weighted average common shares
Outstanding 7,162,740 7,222,344 11,912,334
Loss per share - basic and diluted $ (0.37) $ (0.99) $ (2.21)
</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 2,743,278, 2,086,254 and
900,927, respectively, for the years ended December 31, 1997, 1998 and
1999.
(m) Prior Year Reclassifications
Certain 1998 amounts have been reclassified to conform with 1999
presentation. These prior year reclassifications had no impact on 1998
net loss as previously reported.
F-12
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(3) Database Costs
Database costs consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
--------------- --------------
<S> <C> <C>
Court ruling databases $ 9,303,468 $ 16,449,988
Statutes and regulations databases 3,102,136 3,633,727
12,405,604 20,083,715
Less accumulated amortization 1,638,637 3,498,627
-------------- --------------
$ 10,766,967 $ 16,585,088
============== ==============
</TABLE>
(4) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
--------------- --------------
<S> <C> <C> <C> <C>
Office furniture and equipment $ 246,172 $ 756,439
Data processing equipment 1,916,936 3,970,211
Leasehold improvements 149,611 398,813
--------------- --------------
2,312,719 5,125,463
Less accumulated depreciation and amortization 866,260 1,322,341
--------------- --------------
$ 1,446,459 $ 3,803,122
</TABLE>
(5) Allowance for Doubtful Accounts
A summary of activity in the allowance for doubtful accounts receivable is
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 525,000 $ 375,000 $ 124,974
Additions charged to costs and expenses 94,381 -- 187,000
Amounts written off, net of recoveries (244,381) (250,026) (76,791)
------------- ------------- ------------
Balance at end of year $ 375,000 $ 124,974 $ 235,183
============= ============= ============
</TABLE>
F-13
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(6) Debt
Debt consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
--------------- --------------
<S> <C> <C>
12.5% Senior Subordinated Notes $ 8,000,000 $ --
Notes payable 2,907,000 --
8.25% revolving line of credit, due June 2000 1,331,000 --
Capital lease obligation 34,524 22,465
--------------- ---------------
Total long-term debt 12,272,524 22,465
Less current installments 954,893 13,060
--------------- ---------------
$ 11,317,631 $ 9,405
=============== ===============
</TABLE>
Interest expense on related party borrowings was approximately $324,000 in
1997, $833,000 in 1998, and $940,000 in 1999.
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 8. 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 was payable quarterly beginning December 31, 1997 and principal was due
in sixteen equal quarterly installments beginning December 31, 2000 with the
final installment due November 30, 2003. All borrowings under the CRL
Agreement were repaid with proceeds from the Company's initial public
offering (see note 8).
The Warrant entitled 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 and was reflected as deferred
loan costs. Such deferred loan costs were 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").
F-14
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
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 were 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 amounts $237,263 has been charged
to cost of issuance of the Series A Preferred) and to provide working capital
for the Company.
In connection with the CRL Agreement, a shareholders' agreement was entered
into whereby the preferred shareholders and warrant holders were given put
options which entitled 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 were originally classified as redeemable
equity securities in the Company's balance sheets. The puts entitled 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 was being accreted through a charge to retained earnings and, with
respect to the preferred shares and warrants, has been 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 were 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"). All outstanding borrowings
under the Fleet agreement were repaid on October 5, 1999 with proceeds from
the Company's initial public offering (see note 8).
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 (approximately
$3,260,000 at December 31, 1999). Advances under the Revolving Credit note
at December 31, 1998 amounted to $1,331,000, bore interest, payable monthly,
at Fleet's prime rate plus 1/2% (8.25% at December 31, 1998), and were due
June 1, 2000. In addition, the Company is required to pay a quarterly
commitment fee of $6,250.
F-15
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
Under one Equipment LOC note, the Company could 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. Advances under this Equipment LOC converted to Term Note A at June 30,
1999, and were repayable in thirty-six equal monthly installments, plus
interest, beginning July 1999. Under the other Equipment LOC note, the
Company could borrow up to $1,500,000 for the purchase of qualified
equipment. Advances under this note would have automatically converted at
June 1, 2000 to Term Note B and were to be repaid by the Company in thirty-
six equal monthly installments, plus interest, beginning July 2000.
Borrowings under the Equipment LOC and term notes bore 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 could 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. Such
advances bore interest, payable monthly, at Fleet's prime rate plus 1-1/2%
(9.25% at December 31, 1998). Borrowings under the SBLC LOC note were due in
thirty-two monthly installments of $109,375, plus interest, beginning May
1999. At December 31, 1999, letters of credit amounting to approximately
$2,167,000 are outstanding under the SBLC LOC note securing the Company's
performance under its data compilation contract with one of its foreign
suppliers.
Obligations under the CRL Agreement were subordinate to the Fleet borrowings.
In addition, CRL, CRP and Moriarty 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 entitled
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, were originally classified as redeemable equity securities in
the Company's balance sheets. The value assigned to the warrants ($408,364)
was recorded as deferred loan costs and was 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. On October 12, 1999, CRP exercised
all of the warrants it held (2,480 shares) by tendering a warrant for one
share in exchange for the Company's issuance of 2,479 shares of its common
stock. After exercise of these warrants, all remaining warrants (33,056
shares) are held by Moriarty.
The per share fair value of common stock warrants issued during 1997 and 1999
was $1.60 and $2.00, respectively, on the dates 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 were
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.
F-16
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
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
(1,178,760 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 were no longer subject
to such redemption agreements and, accordingly, such shares have been
reclassified into common stock and additional paid-in capital as of May 25,
1999.
(7) Income Taxes
There was no income tax benefit for the years ended December 31, 1997, 1998
or 1999. 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>
1997 1998 1999
--------------- -------------- --------------
<S> <C> <C> <C>
Computed expected tax benefit $ (898,767) $ (2,252,432) $ (7,803,557)
Increase (reduction) in income taxes
resulting from:
State income taxes - change in
valuation allowance applicable to
state taxes of $170,553 in 1997;
$427,386 in 1998; and $1,488,357
in 1999, net of Federal income
tax benefit (112,565) (282,074) (982,315)
Increase in valuation allowance due
to operating losses not utilized 1,004,687 2,517,630 8,767,567
Other, net 6,645 16,876 18,305
--------------- -------------- --------------
$ -- $ -- $ --
=============== ============== ==============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets
F-17
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
and liabilities at December 31, 1998 and 1999 are presented below.
<TABLE>
<CAPTION>
1998 1999
------------------ ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 7,109,861 $ 18,791,918
Accrued revenues and expenses reported
on cash basis for tax purposes 1,898,815 1,391,567
Other, net -- 4,192
Valuation allowance (4,846,717) (13,614,284)
------------------ ----------------
Total deferred tax assets 4,161,959 6,573,393
------------------ ----------------
Deferred tax liabilities:
Capitalized database production costs
expensed as incurred for tax purposes (4,122,671) (6,350,429)
Property and equipment depreciated on
an accelerated basis for tax (37,642) (222,964)
Other, net (1,646) --
------------------ ----------------
Total deferred tax liabilities (4,161,959) (31,010,443)
------------------ ----------------
Net deferred tax asset $ -- $ --
================== ================
</TABLE>
The valuation allowance at January 1, 1997 was $2,329,087. 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, 1998 and
1999. At December 31, 1999, the Company has net operating loss carryforwards
of approximately $49,000,000 which begin to expire in 2010 for Federal income
tax purposes and in 2000 for state tax purposes.
F-18
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(8) Stockholders' Equity
(a) Capital Stock
The Company has authorized 60,000,000 shares of capital 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 6, the Company designated and
issued 439,589 shares of Series B preferred stock ("Series B
Preferred") to a related party in exchange for the note payable to the
related party. The Series B Preferred accrued annual dividends at the
rate of $.7735 per share beginning on November 24, 1997 and all
outstanding shares of the Series B Preferred were required to be
redeemed for $10 per share plus unpaid dividends no later than
December 31, 2005.
The Series A Preferred shares, which had an initial liquidation value
of $3,000,000, and the Series C Preferred shares, which had an initial
liquidation value of $15,000,002, were convertible, at the option of
the holder, into two shares of common stock for each preferred share
and were 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 were redeemable at the option of the holder, beginning May
25, 2004, and would automatically convert to common stock upon an
initial public offering of the Company's common stock.
On October 5, 1999, the Company completed an initial public offering
of 3,980,000 shares of its common stock at an initial offering price
of $14 per share. Of the 3,980,000 common shares offered, 3,900,000
shares were issued and sold by the Company and 80,000 shares were sold
by an existing shareholder. Prior to the initial public offering,
there was no public market for the Company's common stock. The Company
did not receive any of the proceeds from the sales of the shares held
by the existing shareholder. The net proceeds to the Company from this
initial public offering, after deducting applicable underwriting
discounts and offering expenses, amounted to $49,416,121. The net
proceeds to the Company were used to repay debt and related accrued
interest of $16,831,390, to redeem the Series B Preferred and accrued
dividends for $5,030,519 and to pay an advisory fee of $250,000 to a
third party. The remaining proceeds are to be used for database
development costs and other general corporate purposes. In connection
with the repayment of debt, the Company recorded an extraordinary loss
of $3,796,736 ($0.32 per share) which represents the write-off of
deferred loan costs.
F-19
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
Upon the closing of the Company's initial public offering, 931,044 shares
of the Series A Preferred and 2,495,697 shares of the Series C Preferred
were converted on a two-for-one basis to 6,853,482 shares of the
Company's common stock. Additionally, the redemption feature on
2,113,232 shares of common stock and outstanding warrants for the
purchase of 35,536 shares of common stock was eliminated. Accordingly,
the Company reclassified the values assigned to the redeemable Series A
and Series C Preferred, the common stock and warrants for the purchase of
common stock and the related accretion of these redeemable equity
securities to par value of common stock and additional paid-in capital in
the accompanying December 31, 1999 balance sheet.
As discussed in note 6, all of the common and preferred shareholders as
well as all of the warrant and common stock option holders who held such
securities of the Company prior to the Company's initial public offering
have entered into a shareholders' agreement which provides for the naming
of nominees for election as directors by certain shareholder groups and
restricts the sale of stock by parties to the agreement.
(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 1,500,000 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 and vest as determined by the
Board of Directors, generally with 25% vesting 12 months after the grant
date and the remaining shares vesting ratably over the 36 months
thereafter, and with expiration not to exceed 10 years from the date of
grant.
Under the terms of an employment agreement dated April 22, 1999 with
Beyland, the Company was 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 6) 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 with the remaining
options vesting in twenty-four equal monthly amounts.
The per share weighted-average fair value of stock options granted during
1997, 1998 and 1999 was $0.55, $0.18 and $4.24, respectively, on the
dates 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 1997, 1998 and 1999; volatility of 10% in
1997 and 1998 and 116% in 1999; and an expected life of 5 to 10 years.
F-20
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
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 applicable
to common shares and net loss per share would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
Net loss applicable to common shares:
As reported $ 2,677,899 $ 7,125,222 $ 26,296,037
Pro forma 2,680,912 7,131,594 26,693,299
Loss per share - basic and diluted:
As reported (0.37) (0.99) (2.21)
Pro forma (0.37) (0.99) (2.24)
=============== =============== ==============
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted-
Number average Number
of exercise of shares
shares price exercisable
-------------- -------------- --------------
<S> <C> <C> <C>
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
Granted 758,454 8.12
Forfeited (32,251) (6.78)
--------------
Balance at December 31, 1999 867,871 7.25 395,005
============== ============ ============
</TABLE>
F-21
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
Summary information about the Company's stock options outstanding at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------------- ----------------------------
Weighted
average Weighted Weighted
Number remaining Average Number average
Range of of contractual Exercise of exercise
exercise prices options life - in Price options price
years
- ------------------------------ ------------- ---------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 1 - 10 562,871 7.9 $ 2.82 368,755 $ 2.82
10 - 20 274,000 9.7 14.01 26,250 14.00
20 - 30 31,000 9.9 27.94 -- --
------------- -----------
867,871 8.6 7.25 395,005 3.56
============= ============= ============= =========== ==========
</TABLE>
(c) Stock Purchase Plan
On September 24, 1999, the Company's board of directors adopted an
employee stock purchase plan ("ESPP") that provides for the purchase
by employees of a maximum of 300,000 shares of common stock. The ESPP
was amended on October 14, 1999. Under the terms of the ESPP, as
amended, all full-time employees, as defined by the ESPP, are entitled
to invest between one and ten percent of his/her compensation for the
purchase of shares of the Company's common stock beginning September
29, 1999 and each May 1 and November 1 from and after May 1, 2000, not
to exceed $12,500 in value (determined as of the beginning of the
period) in any one purchase period. Each purchase period is six months
long, except that the first purchase period commenced on September 29,
1999, and a special purchase period commenced on October 14, 1999, and
in each case ends on April 30, 2000. The purchase price of the stock,
as specified by the ESPP, is equal to 90% of the fair value of the
common stock. There were no shares purchased under the ESPP during
1999.
(9) 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.
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. Rent expense under this lease was approximately
$50,000, $66,000 and $147,000 in 1997, 1998 and 1999, respectively.
F-22
<PAGE>
LOISLAW.COM, INC.
Notes to Financial Statements
December 31, 1997, 1998 and 1999
(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.
During 1999, no matching contributions were made by the Company.
(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, management believes these claims and pending
litigation will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
(10) Liquidity
During 1999, the Company had a net loss of approximately $22,950,000 and
had negative cash flows from operations of approximately $16,700,000. Even
though the Company has a history of losses and negative cash flow, the
Company has been able to secure capital from private placements with
venture capitalists and financial institution lenders and from a public
offering of its common stock. Management believes that these sources of
capital will continue to be available to the Company, if needed, for at
least the remainder of the current year, given the market capitalization
of its outstanding shares of common stock. Should the Company be unable to
obtain the necessary capital to finance its operations, management may
have to significantly reduce its sales and marketing activities and/or the
production and/or maintenance of its databases.
F-23
<PAGE>
EXHIBIT 10.5
Cooperative Marketing Agreement dated as of November 17, 1999
by and between the Company and CDB Infotek
Edgarized on or about January 3, 2000 as an exhibit to Form S-1 Draft
R.R. Donnelley Job #31589FS1
<PAGE>
COOPERATIVE MARKETING AGREEMENT
This COOPERATIVE MARKETING AGREEMENT (the "Agreement") is entered into as
of the 17th day of November, 1999 by and between Loislaw.com, Inc.,
("LOISLAW.COM"), and CDB Infotek, a subsidiary of ChoicePoint Services Inc.
("CDB") with reference to the following facts.
WHEREAS, CDB is the owner and operator of a proprietary electronic public
record information reference and retrieval system maintained on the World Wide
Web portion of the Internet ("CDB Site") containing certain data set forth on
Exhibit "A" ("CDB Data"), which it provides to its legal market subscribers
("CDB Subscribers"); and
WHEREAS, LOISLAW.COM is a legal publisher operating a proprietary
electronic law library maintained on the World Wide Web portion of the Internet
("LOISLAW.COM Site") containing certain data set forth on Exhibit "B"
("LOISLAW.COM Data"), which it provides to its subscribers ("LOISLAW.COM
Subscribers"); and
WHEREAS, CDB and LOISLAW.COM do not currently compete with each other, and
CDB and LOISLAW.COM desire to enter into a mutually beneficial arrangement so
they can better compete in their respective markets by offering enhanced
products and services; and
WHEREAS, CDB desires to make certain CDB Data available to LOISLAW.COM
Subscribers who are eligible to become CDB Subscribers ("Referred Subscribers")
through the normal course of business and via a hotlinked URL connection to a
co-branded CDB maintained site on the World Wide Web portion of the Internet
("Co-Branded Site"), and LOISLAW.COM
<PAGE>
desires to provide access to the CDB Data to the Referred Subscribers, on the
terms and subject to the conditions set forth herein; and
WHEREAS, LOISLAW.COM desires to make the LOISLAW.COM Data available to CDB
Subscribers through the normal course of business and via a hotlinked URL
connection to the LOISLAW.COM Site, and CDB desires to provide access to the
LOISLAW.COM Data to CDB Subscribers, on the terms and subject to the conditions
set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, and intending to be legally bound hereby, the
parties agree as follows:
1. Icon(s). Each party shall provide the other with an icon(s) that
represents the other party's web site. Each Party will incorporate the
other party's icon(s) into its web site and will make such icon(s)
visible to all customers accessing such web site. In order to
facilitate such access, each party will supply the NIC registered
address(es) of those server(s) that will be accessed when any users
double-clicks the other party's icon(s).
2. Proprietary Interest. Each party acknowledges that the other party's
intellectual property, including without limitation, trademarks, logos
or icons are proprietary to each party and are protected by applicable
laws relating to copyright, trademark, patent and trade secrets. Each
party agrees that no proprietary rights pass to the other party by
virtue of this Agreement except for the right to incorporate each
party's icon(s) on the other party's web site.
3. Grant to LOISLAW.COM.
(a) CDB hereby grants to LOISLAW.COM the right to offer to the
LOISLAW.COM Subscribers the opportunity to become Referred
<PAGE>
Subscribers, as determined by CDB, and to access the CDB Data on
the Co-Branded Site.
(b) LOISLAW.COM agrees that it will not offer data, which is the same
or similar to the CDB Data, from other public records providers
(except for data which may be offered by a subsidiary, parent, or
affiliate of LOISLAW.COM) on the LOISLAW.COM Site, any other
LOISLAW.COM site or any third party web site. Other public record
providers include without limitation, LEXIS-NEXIS, West Group,
Merlin, Dun & Bradstreet, DBT, Information America, U.S.
Search.com, Inc. and any parent, subsidiary, or affiliate of
each.
(c) LOISLAW.COM agrees to cooperate with CDB throughout the term
hereof and to dedicate such resources as shall be necessary and
reasonable to assist CDB in the automation, tracking, fulfillment
and customer delivery of the CDB Data, without recourse to CDB
for any costs or expenses incurred by LOISLAW.COM. CDB shall be
responsible for all costs associated with the development and
maintenance of the CDB Site, the Co-Branded Site and the link
between the Co-Branded Site and the LOISLAW.COM Site, without
recourse to LOISLAW.COM for any costs or expenses incurred by CDB
in the development and maintenance of said sites.
(d) CDB shall have the exclusive right to determine whether
LOISLAW.COM Subscribers qualify to become Referred Subscribers in
order to access
<PAGE>
CDB Data. CDB may in its sole discretion terminate any Referred
Subscriber's access immediately for any reason.
(e) CDB shall perform for the Referred Subscribers all functions that
it performs for its customers generally including customer
service and training for qualified Referred Subscribers, and CDB
shall act as the point of contact and communication with Referred
Subscribers for CDB Data and services.
4. Use Limitations of the CDB Data.
(a) Both parties acknowledge that CDB, LOISLAW.COM and Referred
Subscribers will be required to agree that CDB Data cannot be
used for any consumer credit purposes, consumer insurance
underwriting, employment purposes, tenant screening purposes, or
for any other purpose(s) specified by the federal Fair Credit
Reporting Act (15 U.S.C. Sec. 1681 et seq., as amended) or
similar state or federal statute.
(b) LOISLAW.COM understands and acknowledges that CDB complies with
the IRSG Principles and that compliance to IRSG Principles
extends to the Referred Subscribers. LOISLAW.COM also understands
and acknowledges that CDB has identified industry specific
appropriate uses for which the CDB Data is to be used, and
LOISLAW.COM understands and acknowledges that the IRSG Principles
may be amended at any time and/or that other industry principles
or CDB policies and procedures may be amended at any time, which
may have the effect of either limiting or
<PAGE>
expanding the ability of LOISLAW.COM or Referred Subscribers to
use the CDB Data.
(c) LOISLAW.COM understands and acknowledges that the Referred
Subscribers must agree to state their appropriate use for any CDB
Data, prior to accessing it, must limit their use to those stated
purposes, and must take appropriate measures so as to protect
against the misuse of CDB's Data. Provided however, that
LOISLAW.COM shall not be responsible, and shall have no
liability, with respect to any misuse of CDB Data by a Referred
Subscriber. LOISLAW.COM understands and agrees that in order to
ensure compliance with IRSG Principles and other use limitations,
CDB will conduct periodic audits and reviews of the Referred
Subscriber activity and will, on a random basis, contact the
Referred Subscribers to provide documentation of executed
searches.
(d) LOISLAW.COM acknowledges that CDB and/or third parties retain all
right, title and interest under applicable contractual, copyright
and related laws in the CDB Data, and LOISLAW.COM and Referred
Subscribers shall be required to use such CDB Data consistent
with such right, title and interest of CDB.
(e) LOISLAW.COM further acknowledges that Referred Subscribers must
agree not to reproduce, retransmit, republish or otherwise
transfer for commercial purpose any CDB Data, except to employees
whose duties reasonably relate to the legitimate business
purposes for which the
<PAGE>
information is requested. LOISLAW.COM acknowledges that Referred
Subscribers shall warrant that they are the end users of the
information.
5. Grant to CDB.
(a) LOISLAW.COM hereby grants to CDB the right to offer CDB
Subscribers access to the LOISLAW.COM Data by way of the Co-
Branded Site and/or the CDB Site.
(b) CDB agrees that it will not offer data, which is the same or
similar to the LOISLAW.COM Data, from comprehensive electronic
case law providers (except for data which may be offered by a
subsidiary, parent or affiliate of CDB) on the Co-Branded Site,
the CDB Site, or on another CDB or third party web site. Other
comprehensive electronic case law providers include without
limitation, LEXIS-NEXIS, West Group and any parent, subsidiary,
or affiliate of each.
(c) CDB agrees to cooperate with LOISLAW.COM throughout the term
hereof and to dedicate such resources as shall be necessary and
reasonable to assist LOISLAW.COM in the automation, tracking,
fulfillment and customer delivery of LOISLAW.COM Data, without
recourse to LOISLAW.COM for any costs or expenses incurred by
CDB. LOISLAW.COM shall be responsible for all costs associated
with the development and maintenance of the LOISLAW.COM site and
the link between the LOISLAW.COM Site and the CDB Site, without
recourse to CDB for any costs or expenses incurred by LOISLAW.COM
in the development and maintenance of said site.
<PAGE>
(d) LOISLAW.COM shall perform for CDB Subscribers all functions that
it performs for its customers generally, including without
limitation, customer service and related functions, including
training for all qualified CDB Subscribers, and LOISLAW.COM shall
act as the point of contact and communication with CDB
Subscribers for LOISLAW.COM Data and services.
(e) LOISLAW.COM grants to CDB the right to use LOISLAW.COM's merchant
identification number for the orders placed by Referred
Subscribers under this Agreement.
6. Pricing.
(a) Each party shall have the right at all times to determine the
product it will offer, the prices to be charged by it for each
product and the methods of sale and distribution of its products,
it being the intention of the parties hereto to preserve in full
CDB's unencumbered ownership of the CDB Data and the rights and
benefits thereof and LOISLAW.COM's unencumbered ownership of the
LOISLAW.COM data and the rights and benefits thereof.
(i) For each search purchased by a Referred Subscriber and
charged to LOISLAW.COM's merchant identification number, CDB
will receive $22.50 for each Comprehensive Business Search
and $11.70 for each Comprehensive Individual Search from
LOISLAW.COM. LOISLAW.COM is free to determine the prices to
be charged for each product as stated above. If a Referred
<PAGE>
Subscriber stops accessing the Co-Branded Site and starts
accessing CDB Date directly from the CDB Site and is not
already a CDB Subscriber, then CDB agrees to pay LOISLAW.COM
10% of the payment made by Referred Subscriber to CDB for
each search of the CDB Data conducted by the Referred
Subscriber for a period of one (1) year after the initial
search.
(ii) LOISLAW.COM agrees to pay to CDB a 30% commission for a
period of one (1) year from the initial (not renewal)
commencement date of any subscription (based on the price of
all the LOISLAW.COM products or services) sold by CDB and
licensed by LOISLAW.COM. The appropriate split on commission
for joint sales efforts will be determined on a case-by-case
basis.
(b) All fees for the previous month's activity are due within thirty
(30) days after the end of that month.
7. Marketing and Sales Efforts.
(a) The parties hereby undertake to use their reasonable efforts
during the Initial Term and any Renewal Term(s) to promote the
availability of the other party's data, to undertake marketing
and promotional activities both jointly and separately related
thereto, and to make regular efforts to increase the number of
Subscribers with access to each other's Sites. Without limiting
the foregoing, each party shall advise its Subscribers on or
about the Effective Date, either through notice, publication in
its
<PAGE>
newsletter or the circulation of announcements of the
availability of the CDB Data and the LOISLAW.COM Data.
(b) All marketing materials describing this agreement or relationship
between the parties must be approved prior to production and
distribution by both parties.
(c) Both parties agree to make joint sales calls to the largest 250
law firms in the United States.
8. CDB Database Enhancement. LOISLAW.COM agrees on a quarterly basis to
update the CDB lawyer database with the lawyer address and law firm
affiliation information that LOISLAW.COM has in its possession.
9. Representations and Warranties.
(a) CDB hereby represents and warrants to LOISLAW.COM that (i) it is
a corporation duly organized and validly existing under the laws
of the State of California, (ii) it has the right, authority, and
ability to conduct its business as it is currently being
conducted, (iii) to its knowledge, its license and distribution
of the CDB Data to Referred Subscribers shall be in accordance
with all applicable laws, regulations and ordinances, and (iv) to
its knowledge, such license and distribution of the CDB Data to
Referred Subscribers shall not infringe on the rights of any
other person or entity.
(b) LOISLAW.COM hereby represents and warrants to CDB that (i) it is
a corporation duly organized and validly existing under the laws
of the State of Delaware, (ii) it has the right, authority, and
ability to conduct its
<PAGE>
business as it is currently being conducted, (iii) to its
knowledge, its licensing and distribution of the LOISLAW.COM Data
to CDB Subscribers shall be in accordance with all applicable
laws, regulations and ordinances, and (iv) to its knowledge, such
licensing and distribution of the LOISLAW.COM Data by CDB shall
not infringe on the rights of any other person or entity.
(c) Neither party shall be liable to the other party or any third
party in contract, tort, or otherwise for any indirect,
incidental, or consequential loss or damage.
(d) EACH PARTY COVENANTS AND PROMISES THAT IT WILL NOT SUE THE OTHER
PARTY FOR OR SEEK PUNITIVE DAMAGES IN ANY SUIT. EACH PARTY DOES
NOT MAKE AND HEREBY DISCLAIMS ANY WARRANTY EXPRESS OR IMPLIED.
NEITHER PARTY GUARANTEES OR WARRANTS THE CORRECTNESS,
COMPLETENESS, CURRENTNESS, MERCHANT ABILITY, OR FITNESS FOR A
PARTICULAR PURPOSE OF THE DATA. NEITHER PARTY SHALL BE LIABLE TO
THE OTHER PARTY OR TO ANY PERSON CLAIMING THROUGH IT FOR ANY LOSS
OR INJURY ARISING OUT OF OR CAUSED IN WHOLE OR IN PART, BY SUCH
OTHER PARTY'S NEGLIGENT ACTS OR OMISSIONS IN PROCURING,
COMPILING, COLLECTING, INTERPRETING, REPORTING, COMMUNICATING, OR
DELIVERING THE DATA.
<PAGE>
10. Breach of Representations and Warranties. Notwithstanding section
9(c), in the event that either party breaches any of the
representations and warranties made to the other party herein, or
fails to perform any of its obligations contained in this Agreement,
and if such breach or failure is not cured within 10 business days of
written notice thereof (or if a cure is not commenced if such breach
or failure is not readily curable within such period) and damages
result therefrom, the non-breaching party shall be entitled to receive
from a court of competent jurisdiction the entire amount of costs,
claims, demands, damages, losses or liabilities incurred or suffered
by such non-breaching party resulting from such breach or failure by
the other party, including, without limitation, reasonable attorneys'
fees and costs of suit incurred in defending any action brought by any
person or entity as a result of such breach of failure, as such fees
and costs are incurred.
11. Term and Termination.
(a) The term of this Agreement ("Term") shall be for an initial
period of two (2) years (the "Initial Term"), unless earlier
terminated pursuant hereto, commencing on the date first set
forth above ("Effective Date"). This Agreement shall
automatically be renewed for additional one year periods (each a
"Renewal Term") unless either party, within the 60 day period
prior to the end of the Initial Term or of any Renewal Term,
informs the other party of its intention not to renew this
Agreement.
(b) Either party may terminate this Agreement and the rights granted
hereunder at any time without any liability or obligation
whatsoever: (i)
<PAGE>
upon One Hundred and Twenty (120) days prior written notice to
the other party, or (ii) upon fifteen (15) business days prior
written notice of a material breach of the other party, if such
breach is not cured within such fifteen (15) business day period.
(c) If at any time during the Initial Term or any Renewal Term,
applicable law or regulation, including the Individual Reference
Services Group ("IRSG") Principles dated December 15, 1997 set
forth at Exhibit "C", restricts or forbids CDB's resale of the
CDB Data or LOIS LAW. COM Data such that the benefit to CDB from
this Agreement is materially reduced or eliminated, CDB shall
have the right, in its discretion, to terminate this Agreement
upon ten (10) days prior written notice to LOISLAW.COM.
(d) If LOISLAW.COM terminates this Agreement pursuant to paragraph
(b) of this section, LOISLAW.COM agrees that it will not enter
into the same or similar business arrangement offering data,
which is the same or similar to the CDB Data, from any other
public records provider for a period of one (1) year after the
termination of this Agreement. If CDB terminates this Agreement
pursuant to paragraph (b) of this Section, CDB agrees that it
will not enter into the same or similar business arrangement
offering data, which is the same or similar to the LOISLAW.COM
Data, from any other comprehensive electronic case law provider
for a period of one (1) year after the termination of this
Agreement.
12. Miscellaneous.
<PAGE>
(a) Notwithstanding any of the provisions of this Agreement, the
relationship between the parties shall be that of independent
contractors. No provision hereof shall be construed to imply the
formation of a joint venture, partnership, agency relationship or
any other joint relationship, and neither party shall have the
right, power or authority to create any obligation, express or
implied, on behalf of the other without its express prior written
permission.
(b) This Agreement may be executed in one of more counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same document. This Agreement is
entered into and shall be interpreted in accordance with the laws
of the State of Georgia, without giving effect to the principles
of conflicts of law thereof.
(c) All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been given
or made when delivered personally or three business days after
having been sent by registered or certified mail (postage
prepaid, return receipt requested) or one business day after
having been sent by Federal Express or other comparable
nationally recognized overnight courier service (receipt
requested), as follows:
Kyle D. Parker
Loislaw.com, Inc.
105 North 28th Street
Van Buren, AR 72956
Phone: 501-471-5581
Fax: (501) 471-7145
<PAGE>
If to CDB, to:
CDB Infotek
Six Hutton Centre, Suite 650
Santa Ana, CA 92707
Attn: Legal Department
Telephone: (714) 708-2000
Facsimile: (714) 708-1021
With a copy to:
ChoicePoint Services Inc.
1000 Alderman Drive, MD71A
Alpharetta, GA 30005
Attn: J. Michael de Janes, Esq.
Telephone: (770) 752-5745
Facsimile: (770) 752-5939
or such other persons or at such other addresses as either party shall have
designated by like notice in writing to the other party.
(d) If any provision of this Agreement shall be declared by any court
of competent jurisdiction to be illegal, void or unenforceable,
all other provisions of this Agreement shall not be affected and
shall remain in full force and effect. The headings contained in
this Agreement are inserted for convenience only and do not
constitute a part of this Agreement. This Agreement (including
Exhibits) constitutes the entire agreement among the parties
hereto and supersedes all prior and contemporaneous agreements
and understandings, both written and oral, between the parties
hereto, with respect to the subject matter hereof.
(e) This Agreement shall inure to the benefit of and be binding upon
the parties and their respective successors and assigns. Neither
this Agreement nor any of the parties' rights, interests or
obligations hereunder
<PAGE>
shall be assignable by either party without the prior written
consent of the other party, provided that no transfer of the
capital stock or sale of all or substantially all of the assets
of a party shall be considered an assignment hereunder. Any
attempted assignment of this Agreement in breach of this
provision shall be void and of no effect.
(f) In the event any dispute between the parties relating to
enforcement or interpretation of this Agreement cannot be
resolved, the parties hereby agree to have such dispute settled
by arbitration conducted by a single arbitrator acceptable to
both parties pursuant to the then current rules of the American
Arbitration Association. Unless the arbitrator shall rule
otherwise, each party shall pay its own expenses related to such
arbitration and one-half of the costs of conducting the
arbitration procedure.
IN WITNESS WHEREOF, the parties hereto, by their duly authorized
officers, have executed this Agreement as of the day and year first above
written.
Loislaw.com, Inc. CDB Infotek
By: /s/ Kyle Parker By: /s/ J. Michael de Janes
----------------------------- -----------------------------
Name: Kyle Parker Name: J. Michael de Janes
------------------------- -------------------------
Title: C.E.O Title: General Counsel
------------------------- -------------------------
<PAGE>
List of Exhibits
Exhibit A: Description of CDB Data Used by the Legal Market Segment
Exhibit B: Description of Loislaw.com Data
Exhibit C: Individual References Services Group Principles
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 333-88075) pertaining to the Registrant's 1996 Stock Option
Plan, Employee Stock Purchase Plan and 1999 Nonqualified Stock Option Plan for
Nonemployee Directors of our report dated January 21, 2000 with respect to the
financial statements of Loislaw.com, Inc. included in this Annual Report on Form
10-K for the year ended December 31, 1999.
KPMG LLP
Little Rock, Arkansas
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,286,007
<SECURITIES> 0
<RECEIVABLES> 4,287,271
<ALLOWANCES> 235,183
<INVENTORY> 0
<CURRENT-ASSETS> 25,739,860
<PP&E> 5,125,463
<DEPRECIATION> 1,322,341
<TOTAL-ASSETS> 46,573,055
<CURRENT-LIABILITIES> 10,313,300
<BONDS> 0
0
0
<COMMON> 20,952
<OTHER-SE> 36,006,894
<TOTAL-LIABILITY-AND-EQUITY> 46,573,055
<SALES> 6,936,046
<TOTAL-REVENUES> 6,936,046
<CGS> 0
<TOTAL-COSTS> 24,405,118
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,685,832)
<INCOME-PRETAX> (19,154,904)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (3,796,736)
<CHANGES> 0
<NET-INCOME> (22,951,640)
<EPS-BASIC> (2.21)
<EPS-DILUTED> (2.21)
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