<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------
Commission File Number 1-07149
INTERNET LAW LIBRARY, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 82-0277987
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4301 WINDFERN ROAD, SUITE 200, HOUSTON, TEXAS 77041
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (281) 600-6000
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 / /
The number of shares of the registrant's common stock outstanding as of
November 9, 2000, was 33,366,555.
<PAGE>
INTERNET LAW LIBRARY, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 16
Item 2. Changes in Securities and Use of Proceeds.................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................. 18
SIGNATURES............................................................................. 22
</TABLE>
2
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INTERNET LAW LIBRARY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including $5,749 and $20,235
respectively, distributable to the stockholders of Planet
Resources, Inc. $ 141,798 $ 78,544
Short-term investments 155,000 450,000
Accounts receivable, net of allowance for doubtful accounts of
$0 and $5,534, respectively 105,207 86,015
Due from affiliated company -- 55,423
Other current assets 202,324 13,284
------------ ------------
Total current assets 604,329 683,266
------------ ------------
Database content and software costs, net 7,376,901 2,956,861
Furniture and equipment, net 422,393 104,066
Acquired intangible assets, net 10,374,017 2,176,458
------------ ------------
Total assets $ 18,777,640 $ 5,920,651
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 33,668 $ --
Notes payable and advance from chairman 1,825,050 --
Accounts payable 273,296 156,472
Accrued liabilities 282,445 72,414
Deferred revenue 51,462 82,400
Assets distributable to stockholders 15,749 30,235
------------ ------------
Total current liabilities 2,481,670 341,521
------------ ------------
Commitments and contingencies
Redeemable common stock 125,000 125,000
------------ ------------
Stockholders' equity:
Series A Convertible Preferred stock, par value $.001
50,000,000 shares authorized; 260 shares
issued and outstanding at September 30, 2000 3,376,250 --
Common stock, par value $.001, 100,000,000 shares authorized;
30,956,955 and 24,920,991 shares issued, respectively; and
30,946,217 and 24,910,253 shares outstanding, respectively 30,957 24,921
Warrants 1,608,100 --
Additional paid-in capital 19,292,332 7,974,994
Deferred compensation (27,169) (364,600)
Accumulated deficit (8,066,316) (2,138,001)
Treasury stock, at cost, 10,738 shares (43,184) (43,184)
------------ ------------
Total stockholders' equity 16,170,970 5,454,130
------------ ------------
Total liabilities and stockholders' equity $ 18,777,640 $ 5,920,651
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
INTERNET LAW LIBRARY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE $ 724,232 $ 144,671 $ 264,652 $ 91,151
OPERATING EXPENSES:
Selling and marketing 1,118,973 423,244 597,223 178,469
General and administrative 3,097,186 566,816 760,367 354,925
Production and computer service 365,054 69,538 133,689 4,465
Amortization and depreciation 1,104,957 223,514 493,608 80,731
------------- ------------- ------------ -----------
Total operating expenses 5,686,170 1,283,112 1,984,887 618,590
OPERATING LOSS (4,961,938) (1,138,441) (1,720,235) (527,439)
INTEREST INCOME (EXPENSE), net (60,127) (5,812) (21,876) (4,600)
------------- ------------- ------------ -----------
NET LOSS $ (5,022,065) $ (1,144,253) $(1,742,111) $ (532,039)
DEEMED PREFERRED STOCK DIVIDENDS (906,250) - (80,916) -
------------- ------------- ------------ -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (5,928,315) $ (1,144,253) $(1,823,027) $ (532,039)
============= ============= ============ ===========
NET LOSS PER COMMON SHARE, basic and diluted $ (0.21) $ (0.05) $ (0.06) $ (0.03)
============= ============= ============ ===========
SHARES USED IN COMPUTING NET LOSS PER COMMON
SHARE, basic and diluted 28,300,535 21,963,331 28,541,099 19,709,976
============= ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
INTERNET LAW LIBRARY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,022,065) $ (1,144,253)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services 939,376 52,300
Note payable assumed for services 33,668 --
Amortization and depreciation 1,104,957 223,514
Changes in:
Accounts receivable 14,851 (18,639)
Due from affiliated company 55,423 --
Other current assets (179,390) --
Accounts payable 19,599 1,417,128
Accrued liabilities 97,952 14,095
Deferred revenue (30,938) --
------------- -------------
Net cash provided by (used in) operating activities (2,966,567) 544,145
------------- -------------
CASH FLOWS FROM INVESTMENT ACTIVITES:
Purchase of short-term investments (1,850,000) --
Sale of short-term investments 2,145,000 --
Additions to database and development costs (1,345,137) (1,843,659)
Additions to furniture and equipment (170,042) (42,012)
Cash acquired in acquisitions -- 90,275
------------- -------------
Net cash used in investment activities (1,220,179) (1,795,396)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of debentures -- 200,000
Proceeds from notes payable 1,400,000 180,000
Issuance of common stock -- 1,945,015
Issuance of preferred stock 2,870,000 --
Payments on note acquired in acquisition (20,000) --
------------- -------------
Net cash provided by financing activities 4,250,000 2,325,015
------------- -------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 63,254 1,073,764
CASH AND CASH EQUIVALENTS, beginning
of period 78,544 --
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 141,798 $ 1,073,764
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 4,387 $ --
Non cash investing and financing transactions:
Fair value of common stock issued for acquisitions $ 11,900,000 $ 2,300,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
INTERNET LAW LIBRARY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS:
Internet Law Library, Inc., a Delaware corporation, operates Internet sites
that provide subscription access to databases used for tracking pending
legislation and for performing legal research through its wholly owned
subsidiaries National Law Library, Inc., GoverNet Affairs, Inc. and Brief
Reporter LLC. These databases consist of pending legislation, statutory law,
rules and case law at the federal and state levels. Legal briefs from certain
important cases before federal and state courts are also available, as are
articles and litigation forms. This material can be useful to legislators,
corporate regulatory personnel, lobbyists, individual lawyers, judges, law
firms, corporate legal departments, government agencies, and businesses and
individuals involved in legislative efforts, litigation, and corporate legal
planning. Interfacing with these databases are software retrieval engines that
are owned by or licensed to Internet Law's operating subsidiaries. Customers
using these Internet sites pay subscription fees to the operating subsidiaries
under monthly, quarterly or annual subscription agreements. Another wholly
owned subsidiary, ITIS, Inc. furnishes hardware, software, content conversion
technology, and management support and expertise to Internet Law's other
subsidiaries. Two other subsidiaries were acquired in October 2000: Compass
Data Systems, Inc. and Venco Compliance, Inc. (see Note 9, Subsequent Events).
On May 11, 2000, Internet Law executed an intermediate financing agreement (see
Note 8) for the sale of $3 million of convertible preferred stock.
Additionally, with respect to notes payable (see Note 5) extended to Internet
Law from its chief executive officer after December 31, 1999, the chief
executive officer has provided a written commitment to Internet Law to provide
forbearance and extend the due date on such notes, if to demand payment would
impair Internet Law's ability to meet its other existing liabilities and
commitments. This commitment is effective for notes between Internet Law and
the chief executive officer with maturity dates through March 2001.
As shown in the accompanying consolidated financial statements, Internet Law
has incurred significant losses from operations, maintains a working capital
deficit and has used significant cash in operations. Accordingly, Internet Law
will require additional financing to fund its operations and execute its
business plan. The inability to obtain additional financing will substantially
impact Internet Law's ability to continue as a going concern. To provide
interim financing to fund its operations until the $25 million equity line (see
Note 8) is completed or an alternative source of long-term financing becomes
available, management plans to utilize additional loans from Mr. Carr and other
directors and investors. While Internet expects to obtain financing by November
2000, they have been informed by Arthur Andersen LLP, that if the conditions
described above related to the need for additional financing continue to exist
at the time of their audit of the financial statements for the year ended
December 31, 2000, their report on those statements will include an explanatory
fourth paragraph expressing uncertainty regarding Internet Law's ability to
continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION - In January 2000, Internet Law's Board of Directors
approved a resolution changing the fiscal year end from June 30 to December 31.
Accordingly, the balance sheet as of December 31, 1999, has been presented with
the balance sheet as of September 30, 2000.
6
<PAGE>
The accompanying unaudited interim consolidated financial statements of
Internet Law have been prepared in accordance with generally accepted
accounting principles and the rules of the SEC and should be read in
conjunction with the audited consolidated financial statements and notes
thereto contained in Internet Law's latest Annual Report filed with the SEC on
Form 10-K, as amended. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of financial position and the results of operations for the interim periods
presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. Notes to the consolidated financial statements, which would
substantially duplicate the disclosure contained in the audited consolidated
financial statements for the most recent fiscal year, as reported in Internet
Law's 1999 Form 10-K, have been omitted.
The nine and three month periods ended 2000 have been compared to prior periods
which include November 30, 1998 (inception), through December 31, 1998.
Activity for the period from inception through December 31, 1998, is
insignificant.
NET LOSS PER SHARE - Basic net loss per share has been computed by dividing net
loss by the weighted-average number of shares outstanding. Shares of Internet
Law outstanding at the time of the reverse acquisition in 1999 have been
treated as outstanding during the entire period, after adjustment for a 1 for 2
reverse stock split immediately preceding the reverse acquisition. Shares of
Internet Law outstanding before the reverse acquisition have been included in
the weighted-average shares outstanding since November 30, 1998, its date of
inception. All options outstanding at September 30, 1999, and 2000 have been
excluded because they are anti-dilutive. Accordingly, basic and diluted net
loss per share is the same for all periods presented.
NOTE 3 - TRANSACTIONS WITH AFFILIATED COMPANY:
The content and software development assets of National Law were conveyed to it
by Hunter M. A. Carr, an individual who is now the Chairman of the Board, Chief
Executive Officer, President and the largest stockholder of Internet Law (the
"CEO"). Until January 2000, the CEO was also the controlling stockholder of
ITIS, a Texas corporation formed in 1994 for the purpose of document management
services and software development. As required by generally accepted accounting
principles, Internet Law has recorded the purchases of database content from
ITIS until January 2000 at ITIS' cost basis in the database content, based upon
the common control between Internet Law and ITIS. However, upon the divestiture
of the CEO's controlling interest in ITIS in January 2000, and through the date
of acquisition of ITIS (see Note 4) Internet Law recorded purchases of database
content from ITIS in accordance with the contractual rate between ITIS and
Internet Law. The effective rate recorded by Internet Law during its period
under common control with ITIS is substantially less than the contractual rate.
During the six months ended June 30, 2000, Internet Law purchased $4,101,925 of
case law content from ITIS, including $469,347 purchased at ITIS' estimated
cost and $3,632,578 purchased at the contractual rate of $0.65 per 1,000
characters of data. For the three months ended September 30, 2000, case law
content produced by ITIS has been recorded at ITIS' estimated cost of $161,712.
NOTE 4 - ACQUISITION OF AFFILIATED COMPANY:
Effective April 30, 2000, Internet Law executed a Stock Exchange Agreement,
pursuant to which Internet Law exchanged 5,044,903 shares of its common stock,
which have been initially valued at approximately $11,900,000, for all the of
the outstanding common stock of ITIS, pending an independent appraisal
currently in process.
7
<PAGE>
Since National Law's inception on November 30, 1998, ITIS has served as its
primary vendor of new case law content while also providing to National Law
various executive, sales, production, software, hardware, and administrative
services. During the period from National Law's inception to December 31, 1999,
the CEO was the sole stockholder of ITIS. During the three months ended March
31, 2000, the CEO sold or otherwise conveyed most of his stock in ITIS to
various individuals and entities, some of whom are either directors or officers
of Internet Law or are entities controlled by directors of Internet Law. Of the
5,044,903 shares issued to ITIS' stockholders, 1,721,003 shares were issued to
five directors of Internet Law or their beneficiaries and 328,300 shares were
issued to four officers of Internet Law.
The acquisition was accounted for under the purchase method of accounting and
resulted in a purchase price of approximately $8,942,000 in excess of the value
of tangible net assets acquired. The excess purchase price has been
preliminarily allocated to identifiable intangible assets such as content,
trademarks, developed technology and experienced workforce. The intangibles are
being amortized over their estimated useful lives. An independent appraisal is
currently in process to determine the final purchase price and allocation of
the excess purchase price.
The results of operations of ITIS have been included in Internet Law's
financial statements since the acquisition date of April 30, 2000. The
following unaudited pro forma financial information assumes the acquisition had
occurred at inception, and is preliminary, pending the final results of the
previously discussed appraisal:
<TABLE>
<CAPTION>
Nine months Nine months
Ended Ended
September 30, 1999 September 30, 2000
------------------ ------------------
<S> <C> <C>
Revenues $ 370,246 $ 769,202
Net loss $(1,767,277) $(5,342,299)
Loss per share $ (0.07) $ (0.17)
</TABLE>
NOTE 5 - NOTES PAYABLE AND ADVANCE FROM CHAIRMAN:
During the period from January 1 to June 30, 2000, Internet Law borrowed a
total of $1,400,000 from the CEO to fund working capital requirements. These
borrowings are evidenced by unsecured promissory notes, each bearing an annual
interest rate of 11.75% and payable in full with accrued interest after six
months. With respect to these notes payable, the CEO has provided a written
commitment to Internet Law to provide forbearance and extend the due date on
such notes, if to demand payment would impair Internet Law's ability to meet
its other existing liabilities and commitments. This commitment is effective
for notes between Internet Law and the CEO with maturity dates through March
2001. At September 30, 2000 no principal or interest payments had been made to
Mr. Carr in regard to these notes.
In connection with the acquisition of ITIS, Internet Law assumed liabilities to
the Chairman in the amount of $425,050. The liabilities are
non-interest-bearing and payable on demand.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
LEASE FOR OFFICE SPACE
Effective in July 2000, Internet Law is committed to making monthly payments of
at least $12,400 under a lease agreement for office space that expires in June
2004. If Internet Law is not successful in
8
<PAGE>
maintaining existing sub-leasing arrangements with a third party tenant, this
monthly obligation may increase to approximately $18,600. In addition, GoverNet
Affairs and Brief Reporter lease office space pursuant to lease agreements
requiring monthly payments of approximately $3,300 and $2,600 through December
2001 and August 2001 respectively.
NOTE 7 - STOCKHOLDERS' EQUITY
COMMON STOCK
In December 1999, Internet Law approved a bonus to various employees and two
board members for services rendered in 1999. The bonus consisted of 33,042
aggregate shares of common stock, which were issued in January 2000. The
aggregate value of the award, totaling $105,404, was recorded to compensation
expense and additional paid-in capital at December 31, 1999. However, when the
common shares were issued in January 2000, the par value was recorded and the
related additional paid-in capital was reduced accordingly.
In March 2000, Internet Law issued a total of 125,000 shares of common stock
valued at $551,172, to its outside directors. The award was recorded as
compensation expense in March 2000.
In May 2000, Internet Law entered into an agreement with a vendor pursuant to
which Internet Law agreed to issue an aggregate of 39,825 shares of common
stock as consideration for services over the vendor's service period. Upon
completion of the service agreement in September 2000, total expense of $34,907
was recorded for the aggregate fair value of the 39,825 shares issued.
From July through September 2000, holders of 40 shares of Series A convertible
preferred stock converted the preferred shares to 443,194 shares of common
stock. Subsequent to September 30, 2000, an additional 61.5 shares have been
converted to 918,379 shares of common stock. At November 14, 2000, 198.5 shares
of Series A convertible preferred stock remain outstanding.
In July 2000, Internet Law issued a total of 50,000 shares of common stock
valued at $53,075, to new outside directors. The award was recorded as
compensation expense in July 2000.
In August 2000, Internet Law entered into an agreement with a vendor pursuant
to which Internet Law issued an aggregate of 300,000 shares of common stock
(valued at approximately $231,000 at September 30, 2000) as consideration for
services over the vendor's service period. The aggregate fair value of the
shares will be measured upon the date the services are completed and
estimated at interim periods until that time. The estimated fair value is
being recognized as expense over the interim service period through September
30, 2000.
STOCK OPTIONS
In February 2000, Internet Law increased the number of shares available for
grant under the 1999 Stock Option Plan to 3,000,000 shares of common stock.
In May 2000, Internet Law entered into a consulting agreement pursuant to which
an option was issued for common shares of Internet Law. The option has an
exercise price of $4.63 per share, vests on October 31, 2000, and is
exercisable through October 2003. The shares under option are calculated as the
number of shares aggregating $35,000 in value on the exercise date. The
aggregate fair value of the option will be measured upon the date the services
are completed and is being estimated at each reporting date until that time.
The estimated fair value is being recognized as expense over the service period
through September 2000.
9
<PAGE>
During the six months ended June 2000, Internet Law granted stock options to
employees for the purchase of an aggregate of 105,000 shares of common stock,
which are classified as variable awards. Pursuant to APB Opinion No.25, the
initial compensation expense related to these options was calculated based on
the difference between the market price of the underlying common stock on the
grant date and the exercise price of the option. The charge is recognized
ratably over the expected service period related to the variable award.
Additionally, a periodic adjustment to deferred compensation and related
compensation expense is computed at the end of each reporting period based on
the difference between the then current market price and the exercise price less
previously recognized compensation expense.
NOTE 8 -INTERMEDIATE FINANCING AGREEMENT:
On May 11, 2000, Internet Law entered into an intermediate financing agreement
with a private capital fund, and privately placed 300 shares of 5% Series A
Convertible Preferred Stock for $3 million. This preferred stock is convertible
into shares of Internet Law's common stock based on a price equal to the lesser
of (i) $3.2375 or (ii) 80% of the average of the three lowest closing bid prices
during a 20-day trading period prior to the date of conversion. Internet Law is
entitled to redeem the convertible preferred stock at a cash price equal to 120%
of the issue price, provided there is an effective registration statement for
the underlying shares of common stock. As part of this financing agreement,
Internet Law issued a five-year warrant to the investor for the purchase of
500,000 shares of its common stock at an exercise price of $3.56 per share. The
estimated fair value of this warrant totaled $1,114,500 and has been recorded in
stockholders' equity. Additionally, as part of this financing agreement and in
consideration for negotiating a $25 million equity line, Internet Law issued a
five-year warrant to a third party for the purchase of 200,000 common shares at
an exercise price of $3.3994 per share. The estimated fair value of this warrant
totaled $493,600 and has been recorded in stockholders' equity. A commission of
$100,000 and legal fees of $30,000 related to acquiring this financing
arrangement were recorded in stockholders' equity.
In connection with the issuance of the preferred stock, the Company incurred
a deemed dividend. Such dividends are calculated as the discount from fair
market value as of the date the preferred stock was sold to the investors.
This aggregate discount amount of $906,250 for the Series A Preferred Stock
has been treated as dividends to the holders of the Series A Preferred Stock
and was recorded during the period from issuance through the earliest
available date of conversion, July 5, 2000.
On July 5, 2000, the SEC declared effective the registration statement filed by
Internet Law, which registered an amount of shares of its common stock
sufficient to satisfy any conversion, warrant exercise, and dividend
requirements under the terms of this financing agreement. On October 25, 2000,
Internet Law filed a Post Effective Amendment to update the prospectus contained
in the registration statement, which was declared effective by the SEC on
November 9, 2000.
NOTE 9 - SUBSEQUENT EVENTS
ACQUISITION OF COMPASS DATA SYSTEMS, INC.
Internet Law signed a Stock Purchase Agreement, effective October 1, 2000, for
the purchase of a controlling interest of Compass Data Systems, Inc., a private
Nevada corporation. Under the terms of the Stock Purchase Agreement, Internet
Law is obligated to issue an aggregate 1,676,105 unregistered shares of its
common stock, valued at approximately $2.3 million, for approximately 63% of the
total outstanding shares of the common stock of Compass Data Systems.
Compass Data Systems provides electronic information publishing services in a
completely searchable infobase to a wide variety of industries and
organizations. Using Internet and CD technology, clients can search through
endless piles of paper on computer files in seconds. These infobases are quickly
accessed through a hard drive, CD-ROM or over the Internet.
ACQUISITION OF VENCO COMPLIANCE, INC.
10
<PAGE>
On September 28, 2000, the Board of Directors of Internet Law approved the
purchase of all of the stock of Venco Compliance, Inc., a private Texas
corporation. Internet Law issued an aggregate of 100,000 unregistered shares of
its common stock at closing on October 1, 2000, valued then at $90,600. Internet
Law has entered into a consulting agreement with a former owner of Venco for
$72,000 per year for one year, with a renewal right for a one-year term on each
anniversary of the agreement. Internet Law may issue 50,000 additional
unregistered shares to the former shareholders of Venco Compliance in the future
for consulting services. In addition, the former owner is eligible to receive a
cash bonus based on Venco Compliance's revenues.
Venco Compliance is in the business of selling compliance and safety training
and information such as OSHA regulations to businesses such as dry cleaners and
others that deal with hazardous chemicals, biomaterials and other regulated
substances.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of Internet Law Library, Inc. ("Internet Law"), which are
included elsewhere in this Form 10-Q. Included in this discussion are certain
forward-looking statements regarding Internet Law's expectations for its
business and its capital resources. These expectations are subject to various
uncertainties and risks that may cause actual results to differ significantly
from these forward-looking statements.
Internet Law, through its wholly owned subsidiaries, National Law Library, Inc.,
GoverNet Affairs, Inc. and Brief Reporter LLC, operates Internet sites that
provide subscription access to databases used for tracking pending legislation
and for performing legal research. These databases consist of pending
legislation, statutory law, rules and case law at the federal and state levels.
Legal briefs from certain important cases before federal and state courts are
also available, as are articles and litigation forms. This material can be
useful to legislators, corporate regulatory personnel, lobbyists, individual
lawyers, judges, law firms, corporate legal departments, government agencies,
and businesses and individuals involved in legislative efforts, litigation, and
corporate legal planning. Interfacing with these databases are search engines
owned by or licensed to Internet Law's operating subsidiaries. Customers using
these Internet sites pay subscription fees to National Law, GoverNet Affairs,
and Brief Reporter under monthly, quarterly or annual subscription agreements.
On April 30, 2000, the Internet Law acquired all of the outstanding stock of
ITIS, a company once wholly owned by Hunter M.A. Carr, Internet Law's Chairman
of the Board, President, Chief Executive Officer and largest stockholder.
According to the terms of the Stock Exchange Agreement, Internet Law exchanged
5,044,903 unregistered shares of the their common stock for all of the
outstanding common stock of ITIS. While serving as one of Internet Law's primary
vendors of case law content, ITIS also furnishes hardware, software, content
conversion technology and management support and expertise to the other
affiliates of Internet Law. Internet Law expects to use ITIS' expertise in the
future to provide similar products in other industries.
The following is management's discussion and analysis of certain significant
factors that have affected Internet Law's financial condition and results of
operations during the three and nine months ended September 30, 2000, and 1999.
RESULTS OF OPERATIONS
REVENUES. Revenue increased by $579,561 to $724,232 during the nine months ended
September 30, 2000, from $144,671 recorded for the nine months ended September
30, 1999. Revenues also increased by $173,501 for the quarter ended September
30, 2000, to $264,652, as compared to revenues of $91,151 for the quarter ended
September 30, 1999. The increases are due to a greater number of subscribers in
National Law's databases, 2,258 at September 30, 2000, compared to 1,388 at
September 30, 1999. A substantial portion of the new subscriptions are due to
the addition of more single-state subscription packages available with statutes
and extended case law, as opposed to the bundled multi-state service, where
subscribers gain access to the databases of several states and federal courts
for one rate. National Law's expanded content databases by state have enabled
these sales of state-by-state packages. Average monthly subscription rates
increased to $48.40 at September 30, 2000 from $46.19 at September 30, 1999. As
a result of the acquisitions of GoverNet Affairs and Brief Reporter during the
last calendar quarter of 1999, consolidated revenues for the nine months ended
September 30, 2000, and the three months ended September 30, 2000, increased by
$129,777 and $110,996, respectively.
12
<PAGE>
SALES AND MARKETING EXPENSE. Sales and marketing expense increased by $695,729
to $1,118,973 during the nine months ended September 30, 2000, from $423,244
during the corresponding period ended September 30, 1999. Sales and marketing
expense also increased by $418,754 during the quarter ended September 30, 2000,
to $597,223 from $178,469 for the quarter ended September 30, 1999. During 1999,
National Law was planning and developing a sales and marketing program, which it
began to implement in April 1999 with contract telemarketing personnel. During
2000, the National Law has continued to expand its telemarketing force and has
also engaged a field sales force. Additional sales and marketing expense has
been incurred in placing banner ads on Internet sites, increased print
advertising in legal publications, and participation in major legal industry
meetings and conferences.
GENERAL AND ADMINISTRATIVE EXPENSE. During the nine months ended September 30,
2000, general and administrative expense totaled $3,097,186, resulting in an
increase of $2,530,370 over the $566,816 recorded during the nine months ended
September 30, 1999. For the quarter ended September 30, 2000, general and
administrative expenses increased by $405,442 from $354,925 for the quarter
ended September 30, 1999, to $760,367 for the quarter ended September 30, 2000.
In connection with internal expansion and acquisitions, payroll and related
costs at the administrative and management level have increased. Included in
general and administrative expense is $763,886 of non-cash expense related to
stock and option awards for the nine months ended September 30, 2000, and
$147,070 for the three months ended September 30, 2000. As a result of Internet
Law's acquisitions of GoverNet Affairs, Brief Reporter and ITIS, general and
administrative expenses increased by $470,000 for the nine months ended
September 30, 2000, and by $158,000 for the three months ended September 30,
2000, as compared to the corresponding periods in 1999.
PRODUCTION AND COMPUTER SERVICE EXPENSE. Production and computer service expense
of $365,054 for the nine months ended September 30, 2000, and $133,689 for the
three months ended September 30, 2000, reflects increases of $295,516 and
$129,224 over the respective periods ended September 30, 1999. Ongoing updates
of legislative tracking information by Internet Law's subsidiary, GoverNet
Affairs, account for approximately $200,000 in production and computer service
expense for the nine months ended September 30, 2000, and $120,000 for the three
months ended September 30, 2000. Other expenses relate primarily to Internet
service provider co-location costs, contract programming expense and ongoing
maintenance of computer equipment and software for all subsidiaries.
AMORTIZATION AND DEPRECIATION EXPENSE. During the nine months ended September
30, 2000, amortization and depreciation expense amounted to $1,104,957, compared
to $223,514 for the nine months ended September 30, 1999. For the three months
ended September 30, 2000, amortization and depreciation expense amounted to
$493,608, compared to $80,731 for the three months ended September 30, 1999. The
resulting increases of $881,443 and $412,877 are primarily attributable to
amortization relating to estimated intangible assets acquired by Internet Law in
the acquisitions of GoverNet Affairs, Brief Reporter and ITIS, while the balance
of the increases relate to depreciation of fixed-asset acquisitions occurring
during the respective periods.
INTEREST EXPENSE. Interest expense of $95,628 incurred for the nine months ended
September 30, 2000, includes accrued interest payable to Mr. Carr in the amount
of $86,016, of which $41,334 was accrued during the three months ended September
30, 2000. Internet Law calculates the interest based on the terms of ten
unsecured promissory notes payable in the total amount of $1,400,000 extended to
Mr. Carr.
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LIQUIDITY AND CAPITAL RESOURCES
Internet Law's ability to execute its business strategy depends to a significant
degree on its ability to attract additional capital. Internet Law's principal
demands for liquidity are cash for operations and funds for investment in new
database content.
For the nine months ended September 30, 2000, Internet Law's cash and cash
equivalents increased by $63,254 from the December 31,1999 balance of $78,544 to
$141,798 at September 30, 2000. Cash used in operating and investing activities
was $2,966,567 and $1,220,179, respectively. These uses were funded by advances
from a related party and issuances of convertible preferred stock. Mr. Carr,
Internet Law's Chairman, President and Chief Executive Officer, made advances to
Internet Law amounting to $1,400,000 during the six months ended June 30, 2000.
These advances are represented by notes payable extended by Internet Law to Mr.
Carr, and Mr. Carr has provided a written commitment to Internet Law to provide
forbearance and extend the due date on such notes, if to demand payment would
impair Internet Law's ability to meet its other existing liabilities and
commitments. This commitment is effective for notes between Internet Law and Mr.
Carr with maturity dates through March 2001. At September 30, 2000, no principal
or interest payments had been made to Mr. Carr in regard to these notes.
On May 11, 2000, Internet Law entered into an intermediate financing agreement
with a private capital fund, and privately placed 300 shares of 5% Series A
Convertible Preferred Stock for $3 million. This preferred stock is convertible
into shares of Internet Law's common stock based on a price equal to the lesser
of (i) $3.2375 or (ii) 80% of the average of the three lowest closing bid prices
during a 20-day trading period prior to the date of conversion. Internet Law is
entitled to redeem the convertible preferred stock at a cash price equal to 120%
of the issue price, provided there is an effective registration statement for
the underlying shares of common stock. On July 5, 2000, the SEC declared
effective the registration statement filed by Internet Law, which registered an
amount of shares of its common stock sufficient to satisfy any conversion,
warrant exercise, and dividend requirements under the terms of this financing
agreement. As part of this financing agreement, Internet Law has agreed to issue
a five-year warrant to the investor for the purchase of 500,000 shares of its
common stock at an exercise price of $3.56 per share. The estimated fair value
of this warrant totaled $1,114,500 and has been recorded in stockholders'
equity. The convertible preferred stock purchased by the investor is also
subject to mandatory redemption by Internet Law upon the occurrence of a change
in control or certain other events. Additionally, Internet Law agreed to issue a
five-year warrant to a third party for the purchase of 200,000 common shares at
an exercise price of $3.3994 per share. The estimated fair value of this warrant
totaled $493,600 and has been recorded in stockholders' equity. A commission of
$100,000 and legal fees of $30,000 related to acquiring this financing
arrangement were recorded in stockholders' equity.
In October 2000 Internet Law executed two demand notes totaling $450,000 in
favor of two members of the Board of Directors. The notes bear interest at the
rate of prime plus two percent per year and are payable on demand after one year
through five years from October 20,2000. At the option of the holder, the notes
may be repaid in common stock of Internet Law at a discounted price based on the
lowest price at which Internet Law has sold its common stock during the one-year
period preceding the exercise of this option.
In addition to negotiating and attempting to close an equity line for $25
million with a private funding source, Internet Law is actively pursuing other
financing alternatives. It is anticipated that the additional funds will be used
for operations, production of new database content, and increased marketing of
our products. Capital expenditures for the balance of 2000 are expected to be
insignificant.
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Internet Law is actively pursuing acquisition of information companies that will
assist and complement its goal of providing superior access to and use of all
types of information resources for increasing business, services and knowledge.
By expanding our information resource capabilities beyond the legal industry and
through the use of our powerful search engines, we intend to become one of the
world's most favored information sources for data retrieval of all types. We
anticipate that major content additions, including the addition of statutes and
case law for all states and large portions of federal law, will have been
completed by December 31, 2000, at a significant cost savings due to the
acquisition of ITIS. While the concentration of our content building activities
in the near term are in increased content additions related to the legal
industry, future plans include expanding our information resource capabilities
into other areas.
The Board of Directors has approved a name change to "Information
Technology/Information Services, Inc." to more fully describe the products of
Internet Law. The shareholders will be asked to approve the name change at
Internet Law's annual meeting on March 5, 2001.
Our future success is dependent upon securing additional financing to fund
operations and execute our business plan. The inability to obtain additional
financing will substantially impact our ability to continue as a going concern.
To provide interim financing until the $25 million equity line is completed or
an alternative source of long-term financing becomes available, we plan to
utilize additional loans from Mr. Carr and other directors and investors. We
continue to actively pursue other financing alternatives. While we expect to
obtain financing by November 2000, we have been informed by Arthur Andersen LLP,
our independent public accountants, that if the conditions described in Note 1
to the consolidated financial statements related to the need for additional
financing continue to exist at the time of their audit of the financial
statements for the year ended December 31, 2000, their report on those
statements will include an explanatory fourth paragraph expressing uncertainty
regarding our ability to continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During the nine months ended September 30, 2000, Internet Law's short-term
investments consisted of corporate debt securities supported by letters of
credit which are classified as "securities available for sale" and are reported
at their fair value with accrued interest expense and income recorded when such
securities are purchased and sold, respectively. As of September 30, 2000,
Internet Law held $155,000 in such investments.
Internet Law is exposed to interest rate risk, as additional financing may be
needed due to the operating losses and capital expenditures associated with
establishing and expanding its business. The interest rate that Internet Law
will be able to obtain on debt financing will depend on market conditions at the
time such financing is arranged.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 9, 1999, Loislaw.com, Inc. filed a lawsuit in the District Court of
Harris County, Texas, 11th Judicial District (Case No. 1999-45563), against
Internet Law, National Law and ITIS. Loislaw.com, one of our competitors,
alleged that ITIS breached an agreement between Loislaw.com and ITIS by
allegedly providing certain materials to National Law for use on National Law's
web site, which allegations have been denied by us and our subsidiaries. The
suit seeks, among other things, to enjoin National Law from using such Texas
materials, actual damages equal to the value of its market position prior to
defendants' alleged tortuous interference with the contract, and actual damages
for alleged lost profits.
On October 3, 2000, the District Court granted a partial summary judgment
against ITIS. The partial summary judgment was with respect to the disputed
retainage under the contract being litigated, in an amount of $82,098.
Loislaw.com's claim for attorney's fees was denied. The partial summary judgment
is not final and Internet Law intends to make a timely appeal. At this juncture,
written discovery has been completed, and depositions are continuing. The case
is now set for trial in December 2000. Our management and counsel consider the
suit to be without merit, with the exception of partial summary judgment granted
against ITIS, and we intend to continue to vigorously defend the case.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2000, Internet Law issued and sold
unregistered shares of its common stock to the persons described below:
1. In July 2000, we issued 9,000 shares of our common stock to Value Plus
Marketing Inc. as a fee for services valued at $7,889.
2. .
3. In July 2000, we awarded and issued 25,000 shares of our common stock to W.
Allyn Hoaglund for his service as an outside director on Internet Law's
Board.
4. In July 2000, we awarded and issued 25,000 shares of our common stock to
Donald W. Sapaugh for his service as an outside director on Internet Law's
Board.
5. In August 2000, we issued 300,000 shares of our common stock to Sunstate
Futures, Inc., as a fee for services valued at $231,081.
6. In September 2000, we issued 9,000 shares of our common stock to Value Plus
Marketing Inc. as a fee for services valued at $7,888.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Reorganization dated March 25, 1999,
between Planet Resources, National Law and the stockholders of
National (incorporated by reference to Exhibit A to Company's
Form 8-K filed on April 2, 1999).
2.2 First Amendment to Agreement and Plan of Reorganization dated as
of March 30, 1999, between Planet Resources, National Law and
the stockholders of National Law (incorporated by reference to
Exhibit 2.2 to Company's Form 10-K filed on October 13, 1999).
2.3 Agreement and Plan of Distribution dated as of March 25, 1999,
between Planet Resources, New Planet Resources, Inc. and National
Law (incorporated by reference to Annex B to Company's
Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934 filed on April 19, 1999).
2.4 Contract for Sale of Stock, dated November 8, 1999, by and
between John R. Marsh, Ronald W. Hogan, and Charles E. Bowen,
Jr., as Sellers, and Internet Law, as Buyer (incorporated by
reference to Exhibit 2.1 to Internet Law's Form 8-K filed on
November 30, 1999).
2.5 Option Agreement to Purchase Stock, dated November 8, 1999, by
and between Internet Law, as Seller, and Ronald W. Hogan, as
Optionee (incorporated by reference to Exhibit 2.2 to Internet
Law's Form 8-K filed on November 30, 1999).
2.6 Option Agreement to Purchase Stock, dated November 8,1999, by
and between Internet Law, as Seller, and Charles E. Bowen, Jr.,
as Optionee (incorporated by reference to Exhibit 2.3 to Internet
Law's Form 8-K filed on November 30, 1999).
2.7 Option Agreement to Purchase Stock, dated November 8, 1999, by
and between Internet Law, as Seller, and John R. Marsh, as
Optionee (incorporated by reference to Exhibit 2.4 to Internet
Law's Form 8-K filed on November 30, 1999).
2.8 Contract for Sale of Stock, dated December 8, 1999, by and
between David P. Harriman, Andrew Wyszkowski, Eugene Meyung,
Suzanne Meyung, and Christina Brown, as Sellers, and Internet
Law, as Buyer (incorporated by reference to Exhibit 2.7 to
Internet Law's Form 8-K filed December 23, 1999).
2.9 Stock Exchange Agreement by and among Internet Law and the
Shareholders of ITIS relating to the acquisition of all of the
outstanding stock of ITIS dated April 30, 2000 (incorporated by
reference to Exhibit 2.9 to Internet Law's Form 10-K/A filed on
May 19, 2000).
2.10 Stock Purchase Agreement by and between Internet Law and
Jeremiah Kane, dated July 27, 2000, as amended by that amendment
dated effective October 1, 2000 (Incorporated by reference to
Exhibit 2.10 to the Registrant's Form 8-K filed with the SEC on
October 16, 2000).
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.11 Stock Purchase Agreement by and between Internet Law and John
McHugh, dated July 27, 2000, as amended by that amendment
dated effective October 1, 2000 (Incorporated by reference to
Exhibit 2.11 to the Registrant's Form 8-K filed with the SEC
on October 16, 2000).
2.12 Stock Purchase Agreement by and between Internet Law and Jack
Ben Ezra, dated July 27, 2000, as amended by that amendment
dated effective October 1, 2000 (Incorporated by reference to
Exhibit 2.12 to the Registrant's Form 8-K filed with the SEC
on October 16, 2000).
2.13 Stock Exchange Agreement by and among Internet Law and all of
the shareholders of Venco Compliance, Inc., a Texas corporation,
dated effective October 1, 2000 (Incorporated by reference to
Exhibit 2.13 to the Registrant's Form 8-K filed with the SEC on
October 16, 2000).
3.1 Amended and Restated Certificate of Incorporation of Internet
Law (incorporated by reference to the Annex A of Internet
Law's Definitive Proxy Statement on Schedule 14A filed on
January 31, 2000).
3.2 Bylaws of Internet Law, as amended (incorporated by reference
to Exhibit 3.2 to Company's Form 10-K filed on October 13, 1999).
3.3 Certificate of Designation for Internet Law's 5% Series A
Convertible Preferred Stock (incorporated by reference to
Exhibit 3.3 to Form 10-K/A filed on May 19, 2000).
10.1 Option Agreement between Internet Law and Hunter M. A. Carr
(incorporated by reference to Exhibit B to Schedule 13D filed
on October 12, 1999, by Hunter M. A. Carr).
10.2 Option Agreement between Internet Law and Jack I. Tompkins
(incorporated by reference to Exhibit B to Schedule 13D filed
on October 12, 1999, by Jack I. Tompkins).
10.3 Consulting Agreement between National Law and Castle Development,
Ltd. (incorporated by reference to Exhibit 4(A) to Company's
Registration Statement on Form S-8 filed on April 2, 1999).
10.4 Continuing Service Agreement between National Law and ITIS,
effective December 1, 1998 (incorporated by reference to
Exhibit 10.4 to Internet Law's Form 10-K filed on October 13,
1999).
10.5 Management and Financial Services Agreement between National Law
and ITIS, effective March 1, 1999 incorporated by reference to
Exhibit 10.5 to Internet Law's Form 10-K filed on October 13,
1999).
10.6 Software Development and Consulting Agreement between National
Law and ITIS dated March 24, 1999 (incorporated by reference to
Exhibit 10.6 to Internet Law's
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
Form 10-K filed on October 13, 1999).
10.7 Option Agreement to Purchase Stock, effective March 30, 1999,
by and between Internet Law and Jonathan Gilchrist (incorporated
by reference to Exhibit 10.7 to Internet Law's Form 10-K filed
on October 13, 1999).
10.8 Planet Resources 1999 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Company's Form 10-K/A filed on
October 28, 1999).
10.9 Planet Resources Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.2 to Company's Form 10-K/A filed on
October 28, 1999).
10.10 New Planet Resources, Inc. Stock Incentive Plan (incorporated by
reference to Exhibit 10.3 to Company's Form 10-K/A filed on
October 28, 1999).
10.11 Planet Resources 1999 Director Option Plan (incorporated by
reference to Exhibit 10.4 to Company's Form 10-K/A filed on
October 28, 1999).
10.12 Consulting and Option Agreement by and between ITIS, Frank Fisher
and Steve Tebo, dated January 22, 2000, as amended (incorporated
by reference to Exhibit 10.12 to Internet Law's Form 10-K/A
filed on May 19, 2000).
10.13 Convertible Preferred Stock Purchase Agreement by and among
Internet Law and Cootes Drive LLC, dated May 11, 2000
(incorporated by reference to Exhibit 10.13 to Internet Law's
Form 10-K/A filed on May 19, 2000).
10.14 Warrant to purchase 500,000 shares of Internet Law's common
stock issued to Cootes Drive LLC, dated May 11, 2000
(incorporated by reference to Exhibit 10.14 to Internet Law's
Form 10-K/A filed on May 19, 2000).
10.15 Registration Rights Agreement by and among the Company and
Coots Drive LLC, dated May 11, 2000 (incorporated by reference
to Exhibit 10.15 to the Company's Form 10-K/A filed on May 19,
2000).
10.16 Warrant to purchase 200,000 shares of the Company's common stock
issued to Aspen Capital Partners, Inc., dated May 19, 2000
(incorporated by reference to Exhibit 10.16 to the Company's
Form 10-K/A filed on May 19, 2000).
10.17 Consulting Agreement by and between Venco Compliance, Inc. and
Kathryn Tull d/b/a First Choice Consulting, dated October 1,
2000 (incorporated by reference to Exhibit 10.17 to the
Registrant's Form 8-K filed with the SEC on October 16, 2000).
16.1 Letter, dated April 5, 2000, from Harper & Pearson Company to
the Securities and Exchange Commission (incorporated by reference
to Exhibit 16.1 to the Company's Form 8-K/A filed on April 5,
2000).
27.1* Financial Data Schedule for the nine months ended September 30,
2000.
*Filed herewith.
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(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter for
which this report is filed:
(1) Form 8-K filed on May 15, 2000, reporting under Item 2 the
acquisition of all of the outstanding stock of ITIS, Inc.
(2) Form 8-KA filed on July 14, 2000, reporting the unaudited
financial statements for Internet Law's acquisition of ITIS,
Inc. reported on Form 8-K filed on May 15, 2000.
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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.
INTERNET LAW LIBRARY, INC.
November 14, 2000 /s/ Hunter M.A. Carr
--------------------------------------
Hunter M.A. Carr
President and Chief Executive Officer
November 14, 2000 /s/ Joanna Hoover
--------------------------------------
Joanna Hoover
Principal Accounting Officer
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