<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): APRIL 30, 2000
INTERNET LAW LIBRARY, INC.
(Exact name of Company as specified in charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
1-07149 82-0277987
(Commission File Number) (IRS Employer Identification No.)
4301 WINDFERN ROAD, SUITE 200, HOUSTON, TEXAS 77041
(Address of principal executive offices including Zip Code
(281) 600-6000
(Registrant's telephone number)
================================================================================
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
Inapplicable
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 23, 2000, the Board of Directors of Internet Law Library,
Inc. approved the purchase of ITIS, Inc., a company once wholly owned by
Hunter M.A. Carr, Chairman of the Board, Chief Executive Officer, and
President of Internet Law Library, Inc. The Board's approval was subject to
certain final reviews and negotiations that were concluded on April 30, 2000.
According to the terms of the Stock Exchange Agreement dated April 30, 2000,
Internet Law Library, Inc. exchanged 5,044,903 restricted shares of its
common stock, valued at $17,976,250, for all the of the outstanding common
stock of ITIS, Inc.
Since November 30, 1998, the start-up date for National Law Library,
Inc., which is Internet Law Library, Inc.'s largest operating subsidiary,
ITIS has served as one of its primary vendors of case law content while also
providing to National Law Library various executive, sales, production, and
administrative services including programming, hardware and software support,
and product development. During the period from National Law Library, Inc.'s
inception to December 31, 1999, Mr. Carr was the sole stockholder of ITIS,
Inc. Then, during the three months ended March 31, 2000, Mr. Carr sold most
of his stock in ITIS to various individuals and entities, some of whom are
either directors or officers of ITIS, Internet Law Library or are entities
controlled by directors of Internet Law Library. Of the 5,044,903 shares of
Internet Law Library's common stock issued to ITIS' stockholders, 310,000
shares were issued to employees of ITIS, excluding Mr. Kirker, 1,721,003
shares were issued to five directors of Internet Law Library or their
beneficiaries and 328,300 shares were issued to four officers of Internet Law
Library as shown below:
<TABLE>
<CAPTION>
Name of Director/Officer Position Number of Shares
------------------------ -------- ----------------
<S> <C> <C>
Hunter M. A. Carr Director and officer 196,003
W. Paul Thayer (Thayer Investment Co.) Director 750,000
Kelley V. Kirker Director and officer 500,000
Eugene A. Cernan Director 25,000
George A. Roberts, Trustee Director 250,000
Edward P. Stevens Officer 150,000
Donald H. Kellam Officer 150,000
David P. Harriman Officer 25,000
Robert Sarlay Officer 3,300
---------
Total 2,049,303
=========
</TABLE>
2
<PAGE>
The acquisition of ITIS was accounted for under the purchase method
of accounting and is expected to result in the purchase price being allocated
to tangible assets, specific intangible assets such as trademarks, developed
technology, experienced workforce and goodwill. Pending the results of an
independent appraisal to allocate the purchase price, the ultimate value
assigned to the consideration given for ITIS and the value received has not
been determined. Considering the unregistered nature of the ILL shares
conveyed, the limited trading activity of Internet Law's common stock, the
closely held nature of ITIS, and the significant related party activity
between the entities and their shareholders, a significant discount from the
traded price of Internet Law at April 28, 2000 is likely. Internet Law has
preliminarily estimated this value at approximately $12.4 million, which
would result in the remaining purchase price being allocated to intangible
assets.
The value of the consideration for the acquisition was determined
from an independent appraisal by reference to the values of ITIS' data
contracts, developed technology, accounts receivable from NLL, sales to NLL,
and future earnings potential of ITIS.
It is expected that ITIS will continue to be a major vendor of
technological expertise, database content and additional services to National
Law Library. In addition, ITIS will attempt to leverage its experience with
legal data conversion by entering and competing in other content conversion
markets found over the Internet or through other media.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Inapplicable.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Inapplicable.
ITEM 5. OTHER EVENTS
Inapplicable.
ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTOR
Inapplicable.
3
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements of Business Acquired
The appropriate financial statements are filed herewith as
Annex A.
b. Pro Forma Financial Information
The appropriate pro forma financial information relating to
the acquisition is filed herewith as Annex A.
ITEM 8. CHANGE IN FISCAL YEAR
Inapplicable.
4
<PAGE>
SIGNATURE
Under the requirements of the Securities Exchange Act of 1934,
Internet Law Library, Inc. has caused this Report to be signed on its behalf
by the undersigned Officer so authorized.
INTERNET LAW LIBRARY, INC.
Date: July 14, 2000 By: /s/ Hunter M.A. Carr
--------------------------
Hunter M.A.Carr
President and
Chief Executive Officer
5
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
2.9 Stock Exchange Agreement by and between Internet Law Library,
Inc. and the Shareholders of ITIS, Inc. relating to the
acquisition of all of the outstanding stock of ITIS, Inc.,
dated April 30, 2000 (incorporated by reference to Exhibit 2.9
to the Transition Form 10-K filed on May 11, 2000 by Internet
Law Library, Inc.)
10.12 Consulting and Option Agreement by and between ITIS, Inc.,
Frank Fisher and Steve Tebo, dated January 22, 2000, as
amended (incorporated by reference to Exhibit 10.12 to the
Transition Form 10-KA filed on May 11, 2000 by Internet Law
Library, Inc.).
</TABLE>
6
<PAGE>
ANNEX A
INDEPENDENT AUDITOR'S REPORT
To the Stockholders of
ITIS, Inc.
We have audited the accompanying balance sheets of ITIS, Inc. as of December
31, 1999 and 1998 and the related statements of income and retained earnings
for the years ended December 31, 1999 and 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ITIS, Inc. as of December
31, 1999 and 1998, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
As more fully discussed in Note A, subsequent to December 31, 1999, all of
the outstanding stock of ITIS, Inc. was acquired by an entity related by
common ownership.
/s/ HARPER & PEARSON COMPANY
Houston, Texas
June 23, 2000
7
<PAGE>
ITIS, INC.
BALANCE SHEETS
MARCH 31, 2000 (UNAUDITED), DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS March 31, December 31, December 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 20,554 $ 2,742 $ 79
Accounts receivable, trade -- -- 54,060
Accounts receivable, affiliate 3,015,835 37,854 57,518
Deferred tax assets -- 106,245 88,391
Due from employees 12,423 100 1,174
----------- ----------- -----------
TOTAL CURRENT ASSETS 3,048,812 146,941 201,222
----------- ----------- -----------
FIXED ASSETS
Furniture and fixtures 30,121 29,688 4,328
Office equipment 45,730 45,730 13,993
Data processing equipment 276,481 198,035 156,618
Leasehold improvements 11,554 11,554 --
363,886 285,007 174,939
Less accumulated depreciation (147,116) (125,516) (76,977)
----------- ----------- -----------
216,770 159,491 97,962
----------- ----------- -----------
OTHER ASSETS
Deposits 9,650 9,650 7,548
Investment -- -- 1,000
9,650 9,650 8,548
----------- ----------- -----------
$ 3,275,232 $ 316,082 $ 307,732
=========== =========== ===========
</TABLE>
See accompanying notes.
8
<PAGE>
ITIS, INC.
BALANCE SHEETS
MARCH 31, 2000 (UNAUDITED), DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31, December 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
CURRENT LIABILITIES
Cash overdraft $ 400 $ 361 $ 8,811
Notes payable 20,000 40,000 170,750
Advances from shareholder 425,050 365,050 464,057
Accounts payable 109,410 160,029 249,427
Accounts payable, affiliate -- 55,423 54,084
Accounts payable, other 3,120 50,443 90,398
Deferred rent liability 93,888 73,483 --
Deferred income taxes 949,194 -- --
Income taxes payable 152,215 128,506 --
Accrued expenses 17,670 10,208 14,481
----------- ----------- -----------
TOTAL LIABILITIES 1,770,947 883,503 1,052,008
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
ommon stock, no par value, 10,000,000
shares authorized, 4,544,903, 4,000,000
and 4,000,000 shares issued and
outstanding at March 31, 2000 and
December 31, 1999 and 1998, respectively 1,000 1,000 1,000
Retained earnings (deficit) 1,503,285 (568,421) (745,276)
----------- ----------- -----------
1,504,285 (567,421) (744,276)
----------- ----------- -----------
$ 3,275,232 $ 316,082 $ 307,732
=========== =========== ===========
</TABLE>
See accompanying notes.
9
<PAGE>
ITIS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
SALES
Sales to nonaffiliates $ 429,123 $2,866,726
----------- -----------
Sales to affiliates 8,197,171 434,934
Revision of sale price to an affiliate (Note B) (6,324,742) --
----------- -----------
Revised sales to affiliates 1,872,429 434,934
----------- -----------
NET SALES 2,301,552 3,301,660
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,005,747 1,907,306
BAD DEBTS EXPENSE -- 1,530,083
----------- -----------
Operating Income (Loss) 295,805 (135,729)
INTEREST EXPENSE (8,298) (125,652)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 287,507 (261,381)
INCOME TAX EXPENSE (BENEFIT) 110,652 (88,391)
----------- -----------
NET INCOME (LOSS) 176,855 (172,990)
RETAINED (DEFICIT), Beginning (745,276) (572,286)
----------- -----------
RETAINED (DEFICIT), Ending $ (568,421) $ (745,276)
=========== ===========
BASIC NET INCOME (LOSS) PER SHARE $ .04 $ (.04)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,000,000 4,000,000
=========== ===========
</TABLE>
See accompanying notes.
10
<PAGE>
ITIS, INC.
UNAUDITED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
SALES
Sales to nonaffiliates $ 3,335 $ 6
----------- -----------
Sales to affiliates 5,085,405 611,192
Revision of sale price to an affiliate (Note B) (1,524,384) (513,180)
----------- -----------
Revised sales to affiliates 3,561,021 98,012
----------- -----------
NET SALES 3,564,356 98,018
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 412,145 314,127
BAD DEBTS EXPENSE -- --
Operating Income (Loss) 3,152,211 (216,109)
INTEREST EXPENSE (1,357) (3,274)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE 3,150,854 (219,383)
INCOME TAX EXPENSE (BENEFIT) 1,079,148 (74,590)
----------- -----------
NET INCOME (LOSS) 2,071,706 (144,793)
RETAINED (DEFICIT), Beginning (568,421) (745,277)
----------- -----------
RETAINED EARNINGS (DEFICIT), Ending $ 1,503,285 $ (890,070)
=========== ===========
BASIC NET INCOME (LOSS) PER SHARE $ .46 $ (.04)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,544,903 4,000,000
=========== ===========
</TABLE>
See accompanying notes.
11
<PAGE>
ITIS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 176,855 $ (172,990)
----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 48,539 33,942
Deferred income taxes (17,854) (88,391)
Bad debts expense -- 1,236,568
Change in operating assets and liabilities:
Accounts receivable, trade 54,060 (746,870)
Accounts receivable, affiliate 19,664 (57,518)
Due from employees 1,074 133
Deposits (2,102) --
Accounts payable (44,349) (72,533)
Accounts payable, affiliate 1,339 54,084
Accounts payable, other (39,955) (62,515)
Deferred rent liability 73,483 --
Income taxes payable 128,506 (4,212)
Accrued expenses (4,273) 14,481
----------- -----------
Total adjustments 218,132 307,169
----------- -----------
Net cash provided by operating activities 394,987 134,179
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (110,067) (78,319)
Change in investments 1,000 (1,000)
----------- -----------
Net cash used by investing activities (109,067) (79,319)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft (8,450) (47,723)
Advances from shareholder 80,083 31,000
Repayment of advances from shareholder (224,140) (12,500)
Proceeds from notes payable 90,613 95,197
Payments on notes payable (221,363) (121,344)
----------- -----------
Net cash used by financing activities (283,257) (55,370)
----------- -----------
NET INCREASE (DECREASE) IN CASH 2,663 (510)
CASH AT BEGINNING OF YEAR 79 589
----------- -----------
CASH AT END OF YEAR $ 2,742 $ 79
=========== ===========
</TABLE>
See accompanying notes.
12
<PAGE>
ITIS, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,071,706 $ (144,793)
----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 21,600 31,378
Deferred income taxes 1,055,439 (74,590)
Change in operating assets and liabilities:
Accounts receivable, trade -- 51,091
Accounts receivable, affiliate (2,977,981) --
Due from employees (12,323) (44,101)
Accounts payable (50,619) 37,151
Accounts payable, affiliate (55,423) 212,053
Accounts payable, other (47,323) (54,084)
Deferred rent liability 20,405 --
Income taxes payable 23,709 --
Accrued expenses 7,462 1,359
----------- -----------
Total adjustments (2,015,054) 160,257
----------- -----------
Net cash provided by operating activities 56,652 15,464
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (18,879) --
----------- -----------
Net cash used by investing activities (18,879) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 39 6,555
Payments on notes payable (20,000) (22,000)
----------- -----------
Net cash used by financing activities (19,961) (15,445)
----------- -----------
NET INCREASE IN CASH 17,812 19
CASH AT BEGINNING OF PERIOD 2,742 79
----------- -----------
CASH AT END OF PERIOD $ 20,554 $ 98
=========== ===========
</TABLE>
See accompanying notes.
13
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - ITIS, Inc. was incorporated in 1994 for the
purpose of providing document and data management products and
services.
ACQUISITION BY INTERNET LAW LIBRARY, INC. - On March 23, 2000, Internet
Law Library, Inc. (ILL) Board of Directors approved the purchase of
ITIS subject to certain final reviews and negotiations that were
concluded on April 30, 2000. According to the terms of a Stock Exchange
Agreement, effective April 30, 2000, the Companies exchanged 5,044,903
shares of common stock, of which all were unregistered shares.
ITIS has served as one of the primary vendors of case law content to
National Law Library, Inc. (NLL), a wholly owned subsidiary of ILL,
since the inception of NLL on November 30, 1998, while also providing
to NLL various executive, sales, production, and administrative
services including programming, hardware and software support, and
product development. During the period from NLL's inception to December
31, 1999, Mr. Hunter M.A. Carr was the sole stockholder of ITIS. Then,
during the three months ended March 31, 2000, Mr. Carr sold
approximately 92% of his stock in ITIS to various individuals and
entities, some of whom are either directors or officers of ITIS or ILL
or are entities controlled by directors of ILL. Of the 5,044,903 shares
issued to ITIS stockholders, 310,000 shares were issued to employees of
ITIS, 1,721,003 shares were issued to five directors of ILL or their
beneficiaries and 328,300 shares were issued to four officers of ILL.
The acquisition was accounted for under the purchase method of
accounting and is expected to result in the purchase price being
allocated to tangible assets, specific intangible assets such as
trademarks, developed technology, experienced workforce and goodwill.
Pending the results of an independent appraisal to allocate the
purchase price, the ultimate value assigned to the consideration given
for ITIS and the value received has not been determined. Considering
the unregistered nature of the ILL shares conveyed, the limited trading
activity of ILL's common stock, the closely held nature of ITIS, and
the significant related party activity between the entities and their
shareholders, a significant discount from the traded price of ILL at
April 28, 2000 is likely. ILL has preliminarily estimated this value at
approximately $12.4 million, which would result in the remainder being
allocated to intangible assets.
14
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS - The accompanying balance sheet
as of March 31, 2000 and the statements of operations and retained
earnings and cash flows for the three months ended March 31, 2000 and
1999 are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of results for the interim periods. Results for
the three months ended March 21, 2000 are not necessarily indicative of
the results that may be expected for the fiscal year ending December
31, 2000.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates and the results could have a material
impact on the operations of ITIS.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially
subject ITIS to concentrations of credit risk consist principally of
trade receivables and cash. ITIS places its cash with high quality
financial institutions. Generally, no collateral or other security is
required to support customer receivables. To reduce credit risk, a
customer's credit history is reviewed before extending credit. During
1998, ITIS wrote off $1,530,083 of uncollectible accounts receivables
due from unrelated entities. During 1999, the majority of revenues were
generated from NLL.
FIXED ASSETS - Fixed assets are stated at cost less accumulated
depreciation. Depreciation is computed using accelerated methods over
estimated useful lives of five to seven years.
When properties are retired or otherwise disposed of, the cost and the
applicable accumulated depreciation and amortization are removed from
the respective accounts and the resulting gain or loss is reflected in
earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS - At December 31, 1999 and 1998,
ITIS estimates that the fair values of financial instruments
approximate their recorded costs.
REVENUE RECOGNITION - ITIS recognizes revenues when products are
delivered or services are rendered.
15
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES - ITIS accounts for income taxes in accordance with the
liability method prescribed by SFAS No. 109, "Accounting for Income
Taxes." Under this method, deferred income taxes reflect the impact of
temporary differences between financial accounting and tax bases of
assets and liabilities. Deferred tax assets are evaluated for
realization based on a more-likely-than-not criteria in determining if
a valuation allowance should be provided.
BASIC NET INCOME (LOSS) PER SHARE - Basic net income (loss) per share
is computed by dividing net income (loss) by the weighted average
number of shares outstanding.
IMPAIRMENT - ITIS has adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS
No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the expected
future cash flows from the use of the asset and its eventual
disposition is less than the carrying amount of the asset, an
impairment loss is recognized based on the fair value of the asset.
NOTE B RELATED PARTY TRANSACTIONS
In December 1998, NLL and ITIS entered into a continuing service
agreement under which ITIS provides database content to NLL. Under the
terms of this agreement, ITIS provides NLL with data files including
case law and statutes as are in the public domain together with coding
and proprietary editing services covering these data files. Under the
agreement, NLL is obligated for a three year period to provide ITIS
with minimum orders for data files containing an aggregate of 750
million characters per month. However, pricing under this agreement is
to reflect market prices for comparable work, and NLL may select
another vendor should ITIS' prices not be competitive.
Because the sole shareholder of ITIS at December 31, 1999 and 1998 was
also a major shareholder and officer of ILL, transfers of assets
between entities under common control must be accounted for using the
direct cost of the transferor. Consequently, revaluation of sales to
NLL during 1999 resulted in a $6,324,742 reduction of recorded
revenues. At December 31, 1999, accounts payable to an affiliate
consists of $55,423 due to NLL resulting from this adjustment.
16
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B RELATED PARTY TRANSACTIONS (CONTINUED)
Upon the divestiture of the shareholder's controlling interest in ITIS
commencing in January 2000, and through the date of acquisition of ITIS
(see Note A), ITIS recorded sales of database content to NLL in
accordance with the contractual rate between ITIS and NLL. The
effective rate recorded by ITIS during its period under common control
with NLL is substantially less than the contractual rate. During the
three months ended March 31, 2000, ITIS sold $3,428,774 of case law
content, data files and services to NLL, including $260,930 sold at
ITIS' estimated cost and $3,167,844 sold at the contractual rate of
$0.65 per 1,000 characters of data. During 1999 and 1998, ITIS recorded
total revenues from NLL under these agreements amounting to $7,972,903
and $116,666, respectively.
NLL and ITIS operate under a management and financial services
agreement under which ITIS provides accounting, staffing, and
procurement services and office space to NLL. In addition, ITIS is
entitled to charge a $3,600 monthly management fee under the agreement.
Effective in December 1998, NLL entered into an agreement with ITIS to
receive software development and consulting services for its database
and retrieval software.
During 1999, ITIS leased office space to a company partially owned by
the sole shareholder of ITIS for $4,628 per month plus a share of
certain office expenses. In 1998, the two entities shared office space
and personnel. In 1999 and 1998, ITIS recorded sales to affiliates
amounting to $224,268 and $318,268, respectively. During 1999 and 1998,
ITIS incurred expenses for Internet services amounting to $5,023 and
$3,364 provided by this related company.
NOTE C ADVANCES FROM SHAREHOLDER
At December 31, 1999, advances from shareholder consist of funds
advanced by or were Company expenses paid by the shareholder. At
December 1998, advances from shareholder include $332,500 due to other
individuals, which have been assumed by the shareholder.
17
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D NOTES PAYABLE
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Note payable to a bank in monthly installments of $5,000 plus
interest at 10.5% through April 15, 2000. Renewed at maturity,
now due August 2000, payable in monthly installments
of $5,000 including interest at 11%. $ 40,000 $ -
Note payable to a bank with maximum
borrowings of $150,000; interest at 10.5%
payable monthly, principal due April 15, 1999. - 128,750
Revolving line of credit with maximum
borrowings of $25,000, interest at prime plus
6.75% due monthly. - 21,887
Revolving line of credit with maximum
borrowings of $25,000, interest at prime plus
6.75% due monthly. - 20,113
----------- --------
$ 40,000 $170,750
=========== ========
</TABLE>
NOTE E INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current $ 128,506 $ -
Deferred - current (17,854) (88,391)
----------- ----------
$ 110,652 $ (88,391)
=========== ==========
</TABLE>
18
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E INCOME TAXES (CONTINUED)
During 1999 and 1998, ITIS used tax basis net operating loss
carryforwards of approximately $180,000 and $479,000 to offset current
tax expense of approximately $61,000 and $156,000, respectively. The
difference between the effective rate of income tax expense and the
amount that would be determined by applying the U.S. statutory income
tax rates to income (loss) before income tax expense (benefit) is
explained below according to the tax implications of various items of
income or expense:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Provision for income tax expense (benefit) at
U.S. statutory rates $ 97,752 $ (88,870)
Change in tax expense resulting from:
Nondeductible entertainment and meal expense 6,514 13,496
Other 6,386 (13,017)
----------- ----------
$ 110,652 $ (88,391)
=========== ==========
</TABLE>
Deferred income taxes result from use of the cash method of
accounting for tax reporting, with certain revenues and
expenditures not being recognized until the cash is actually
collected or spent, and the accrual method for financial
statement purposes and for timing differences in the
calculation of depreciation expense. The gross amounts of
deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred Tax Assets (Liabilities)
Accounts payable and accrued expenses $ 100,015 $ 126,327
Depreciation 6,230 -
---------- -----------
Deferred tax assets 106,245 126,327
---------- -----------
Accounts receivable - (37,936)
---------- -----------
Deferred tax liabilities - (37,936)
---------- -----------
Net deferred income tax assets $ 106,245 $ 88,391
========== ===========
</TABLE>
19
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F COMMITMENTS
ITIS leases office space and equipment from unrelated third parties.
Rent expense for the years ended December 31, 1999 and 1998 amounted to
$122,338 and $146,250, respectively. Future minimum lease commitments
at December 31, 1999 amount to:
<TABLE>
<S> <C>
2000 $ 194,069
2001 247,198
2002 246,680
2003 246,680
2004 94,378
----------
$1,029,005
==========
</TABLE>
NOTE G CONTINGENCY
In September 1999, LOISLAW.com, Inc. filed a lawsuit in the District
Court of Harris County, Texas, 11th Judicial District (Case No.
1999-45563), against defendants ILL, NLL and ITIS. LOIS, a competitor
of NLL, alleged that ITIS breached an agreement between LOIS and ITIS
by allegedly providing certain materials to NLL for use on NLL's web
site. The suit seeks, to enjoin NLL from using such material, certain
unspecified actual damages for alleged loss of market value and alleged
loss of profits. In October 1999, defendants answered the lawsuit with
general and special denials of LOIS' claims. At the same time,
discovery procedures were commenced and LOIS and defendants filed
responses to one another's discovery requests. The trial judge has
assigned a trial date of October 23, 2000. Management of ITIS believes
the suit is not material, has no merit, and was filed solely to harm
defendants in their business. Defendants intend to continue vigorously
defending the case.
NOTE H SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid for interest $ 8,298 $125,652
========= ========
</TABLE>
NOTE I SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1999, the sole shareholder of ITIS personally assumed
certain trade accounts payable and ITIS reclassified $45,049
from accounts payable to advances from shareholder.
20
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE J SUBSEQUENT EVENTS
On January 2, 2000, ITIS authorized the issuance of an
additional 544,903 shares of common stock.
On January 22, 2000, ITIS entered into a consulting agreement with a
third party whereby ITIS granted options to acquire 500,000 shares of
ITIS common stock at an exercise price of $.12 per share in exchange
for consulting services. The estimated fair value of these options
using criteria promulgated by SFAS No. 123, "Accounting for Stock-Based
Compensation" was an immaterial amount at January 22, 2000.
As more fully described in Note A, all of the outstanding shares of
ITIS stock was acquired by Internet Law Library on April 30, 2000.
The unaudited pro forma balance sheet as of March 31, 2000 and the
income statements of Internet Law Library, Inc. and ITIS for the three
months ended March 31, 2000 and the twelve months ended December 31,
1999 are shown below. These pro forma statements reflect the financial
position and results of operations as if the entities had been
consolidated effective January 1, 1999.
BALANCE SHEET AT MARCH 31, 2000:
<TABLE>
<CAPTION>
Pro Forma
Internet Law Pro Forma Internet Law
Library, Inc. ITIS, Inc. Adjustments Library, Inc.
(Unaudited) (Unaudited) (Note A) (Unaudited)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets $ 281,897 $ 3,048,812 $ (3,015,835) $ 314,874
Fixed assets, net 6,490,784 216,770 (3,031,001) 3,676,553
Intangible assets, net 2,073,319 - 16,471,965 18,545,284
Other assets - 9,650 - 9,650
------------ ----------- ------------ -----------
TOTAL ASSETS $ 8,846,000 $ 3,275,232 $ 10,425,129 $22,546,361
============ =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities $ 4,419,389 $ 1,770,947 $ (4,094,983) $ 2,095,353
Redeemable common stock 125,000 - - 125,000
Shareholders' equity 4,301,611 1,504,285 14,520,112 20,326,008
------------ ----------- ------------ -----------
TOTAL LIABILITIES
& EQUITY $ 8,846,000 $ 3,275,232 $ 10,425,129 $22,546,361
============ =========== ============ ===========
</TABLE>
21
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE J SUBSEQUENT EVENTS (CONTINUED)
INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31,2000:
<TABLE>
<CAPTION>
Pro Forma
Internet Law Pro Forma Internet Law
Library, Inc. ITIS, Inc. Adjustments Library, Inc.
(Unaudited) (Unaudited) (Note A) (Unaudited)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 208,382 $ 3,564,356 $ (3,428,774) $ 343,964
SELLING, GENERAL &
ADMINISTRATIVE 1,991,147 413,502 (397,773) 2,006,876
INCOME TAX EXPENSE - 1,079,148 (1,079,148) -
----------- ----------- ------------ ------------
NET INCOME (LOSS) $(1,782,765) $ 2,071,706 $ (1,951,853) $ (1,662,912)
============ =========== ============ ============
LOSS PER SHARE $ .(07)
============
PRO FORMA WEIGHTED
AVERAGE SHARES
OUTSTANDING 25,048,852
============
</TABLE>
EXPLANATIONS FOR ADJUSTMENTS AT MARCH 31, 2000:
Note (A) To record goodwill from acquisition of ITIS, Inc. and
eliminate intercompany receivables, payables, sales, ITIS'
gross margin on data sales included in ILL's capitalized cost
of the data base, and income taxes.
INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1999:
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Internet Law
Internet Law Adjustments Library, Inc.
Library, Inc. ITIS, Inc. (Note A) (Unaudited)
------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 276,217 $ 2,301,552 $ (1,648,161) $ 929,608
SELLING, GENERAL &
ADMINISTRATIVE 2,387,565 2,014,045 (1,648,161) 2,753,449
INCOME TAX EXPENSE - 110,652 (110,652) -
------------ ------------ ------------ -------------
NET INCOME (LOSS) $ (2,111,348) $ 176,855 $ 110,652 $ (1,823,841)
============ ============ ============ ============
LOSS PER SHARE $ (.08)
============
PRO FORMA WEIGHTED
AVERAGE SHARES
OUTSTANDING 22,840,676
============
</TABLE>
22
<PAGE>
ITIS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE J SUBSEQUENT EVENTS (CONTINUED)
EXPLANATIONS FOR ADJUSTMENTS AT DECEMBER 31, 1999:
Note (A) To eliminate intercompany sales and income taxes.
In management's opinion, the unaudited pro forma combined results of
operations may not be indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of 1999
or of the future of operations of the combined companies.
23
