<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-QSB
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996 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 0-26548
Legal Research Center, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Minnesota 41-1680384
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION)
700 Midland Square Building, 331 Second Avenue So., Minneapolis, MN 55401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 612/332-4950
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
----- -----
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
3,297,633 shares of Common Stock as of November 8, 1996
<PAGE>
LEGAL RESEARCH CENTER, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
-----
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995 ....................... 2
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1996 and 1995 ........ 4
Consolidated Statements of Stockholders' Equity (Deficit) ........... 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 .................. 6
Notes to Consolidated Financial Statements .......................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................. 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
ASSETS (unaudited)
- -------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 1,717,643 $ 3,510,752
Accounts receivable:
Trade accounts, less allowance for
doubtful accounts of $52,014 and
$41,341, respectively 599,174 205,604
Unbilled services 654,461 289,989
Related-party accounts and notes receivable 52,444 56,816
Other 29,006 --
---------- -----------
Total current assets 3,052,728 4,063,161
---------- -----------
Other Assets
Intangible assets, net of accumulated
amortization of $89,577 843,467 --
Investment in and notes receivable from
The Law Office, Inc. -- 193,539
Investment in American Research Corp. 100,000 100,000
Capitalized development costs 97,039 14,000
---------- -----------
Total other assets 1,040,506 307,539
---------- -----------
Furniture and equipment, at cost 338,117 197,018
Less accumulated depreciation (104,526) (44,598)
---------- -----------
233,591 152,420
---------- -----------
$ 4,326,825 $ 4,523,120
---------- -----------
---------- -----------
See Notes to Consolidated Financial Statements (unaudited)
2
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
- -------------------------------------------------------------------------
Current Liabilities
Accounts payable $ 200,107 $ 172,393
Non compete agreement 16,500 --
Notes payable 15,000 --
Client advances 55,519 39,969
Accrued expenses
Compensation 148,804 59,544
Other 58,264 10,510
---------- -----------
Total current liabilities 494,194 282,416
---------- -----------
Long-Term Liabilities
Non compete agreement 51,596 --
Deferred income taxes 17,700 --
Redeemable common stock, authorized, issued
and outstanding 40,000 shares 140,000 --
Stockholders' Equity
Common stock, $0.01 par value; authorized
20,000,000 shares; issued 3,297,633 and
2,135,833 shares, respectively; 32,976 21,358
Additional paid-in capital 6,765,307 4,551,634
Accumulated deficit (1,208,698) (332,288)
Notes receivable from officers
and director (1,966,250) --
----------- -----------
3,623,335 4,240,704
---------- -----------
$ 4,326,825 $ 4,523,120
------------ -----------
------------ -----------
See Notes to Consolidated Financial Statements (unaudited)
3
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------------------------------------
1996 1995 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 952,037 $ 252,883 $ 1,882,074 $ 971,995
Direct Operating Costs
Compensation and benefits 368,173 113,959 741,470 353,458
Other 162,737 49,868 275,873 134,469
-------------------------------------------------------
Total direct operating costs 530,910 163,827 1,017,343 487,927
-------------------------------------------------------
Gross profit 421,127 89,056 864,731 484,068
Other Operating Costs
Sales and marketing 223,587 133,359 619,332 303,519
General and administrative 297,346 139,479 811,061 360,446
Development costs of The
Law Office, Inc. 263,032 -- 356,238 --
-------------------------------------------------------
Total other operating costs 783,965 272,838 1,786,631 663,965
-------------------------------------------------------
Operating loss (362,838) (183,782) (921,900) (179,897)
Interest income 28,497 31,280 109,966 33,397
Interest expense -- (13,550) -- (20,707)
Equity in pre-acquisition losses
of The Law Office, Inc. -- (19,500) (64,476) (19,500)
-------------------------------------------------------
Net loss $ (334,341) $ (185,552) $ (876,410) $ (186,707)
-------------------------------------------------------
-------------------------------------------------------
Net loss per share $ (.15) $ (.13) $ (.40) $ (.24)
-------------------------------------------------------
-------------------------------------------------------
Weighted Average Common
and Common Equivalent
Shares Outstanding 2,266,763 1,405,489 2,201,132 787,039
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
4
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common
---------------------- Additional
Paid-in Accumulated
Shares Amount Capital Deficit Total
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 500,000 $ 5,000 $ 104,417 $(127,840) $ (18,423)
Sale of common stock 26,296 263 70,737 -- 71,000
Conversion of note payable to
common stock 57,037 570 153,430 -- 154,000
Distribution to stockholders -- -- -- (36,000) (36,000)
Net loss through date of
S Corporation termination -- -- -- (60,465) (60,465)
Sale of common stock, net of
issuance costs of $970,870 1,552,500 15,525 4,447,355 -- 4,462,880
Constructive dividend to
S Corporation stockholders -- -- (224,305) 224,305
Net loss subsequent to
S Corporation termination -- -- -- (332,288) (332,288)
-------------------------------------------------------------
Balance, December 31, 1995 2,135,833 21,358 4,551,634 (332,288) 4,240,704
Issuance of stock to purchase
The Law Office, Inc. 121,800 1,218 242,382 -- 243,600
Issuance of stock options to
purchase The Law Office, Inc. -- -- 15,441 -- 15,441
Issuance of shares to officers
and director 1,040,000 10,400 1,955,850 -- 1,966,250
Notes received for issuance
of shares -- -- -- -- (1,966,250)
Net loss -- -- -- (876,410) (876,410)
-------------------------------------------------------------
Balance, September 30, 1996 3,297,633 $ 32,976 $6,765,307 $(1,208,698) $3,623,335
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
5
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
1996 1995
---------------------------
Cash Flows from Operating Activities
Net loss $ (876,410) $ (186,707)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
net of the effects of the purchase of
The Law Office, Inc.:
Depreciation and amortization 147,337 9,522
Provision for uncollectible accounts receivable 10,673 4,605
Equity in pre-acquisition losses of The Law
Office, Inc. 64,476 19,500
Changes in assets and liabilities:
Trade accounts receivable and unbilled
services (768,715) (40,358)
Other current assets (2,464) (1,816)
Related-party accounts and notes receivable 14,372 --
Accounts payable (14,945) 149,239
Client advances 3,050 16,936
Accrued expenses 135,061 10,226
---------------------------
Net cash used in operating activities (1,287,565) (18,853)
---------------------------
Cash Flows from Investing Activities
Cash paid for the purchase of The Law
Office, Inc. (50,750) (29,500)
Advances to The Law Office, Inc.
through the date of acquisition (267,932) (95,000)
Purchase of American Research Corp. common stock -- (100,000)
Disbursements on notes receivable -- (55,000)
Purchases of furniture and equipment (94,022) (108,151)
Capitalized development costs (83,039) --
---------------------------
Net cash used in investing activities (495,743) (387,651)
---------------------------
Cash Flows From Financing Activities
Cash payments on non compete agreements (9,801) --
Net proceeds on notes payable -- 77,000
Net proceeds on the sale of common stock -- 4,554,126
Principal payments on long-term debt -- (141,023)
S Corporation distribution to stockholders -- (36,000)
---------------------------
Net cash provided by financing
activities (9,801) 4,454,103
---------------------------
(Decrease) increase in cash and cash
equivalents (1,793,109) 4,047,599
---------------------------
Cash and cash equivalents
Beginning 3,510,752 1,249
---------------------------
Ending $ 1,717,643 $ 4,048,848
---------------------------
---------------------------
See Notes to Consolidated Financial Statements (unaudited)
6
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
1996 1995
---------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ -- $ 20,707
---------------------------
---------------------------
Supplemental Schedule of Non-cash Investing
and Financing Activities
Conversion of note payable to common stock $ -- $ 154,000
Deferred stock offering costs -- $ 20,246
---------------------------
---------------------------
Acquisition of The Law Office, Inc.
Cash purchase price $ 50,750 $ --
---------------------------
---------------------------
Tangible assets acquired $ 79,997 $ --
Intangible assets acquired 933,044 --
Liabilities assumed (625,353) --
Stock options issued (15,441) --
Non compete agreement (77,897) --
Stock issued (243,600) --
---------------------------
$ 50,750 $ --
---------------------------
---------------------------
See Notes to Consolidated Financial Statements (unaudited)
7
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED)
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its subsidiaries, The Law Office, Inc. and The
CyberLaw Office, Inc. All significant intercompany accounts and transactions
have been eliminated.
BASIS OF PRESENTATION: The interim financial statements are unaudited, but
in the opinion of management reflect all adjustments necessary for a fair
presentation of results of such periods. All such adjustments are of a
normal recurring nature.
The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should
be read in conjunction with the audited financial statements and notes
thereto, for the year ended December 31, 1995.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NET LOSS PER COMMON SHARE: Net loss per common share is computed on the
basis of the weighted average number of common shares, and when dilutive,
common equivalent shares outstanding during the respective periods.
INCOME TAXES AND S CORPORATION DISTRIBUTIONS: Prior to the completion of its
initial public offering (IPO) on August 8, 1995, the profits and losses of
the Company were reported in the individual income tax returns of the
stockholders under sub-chapter S of the Internal Revenue Code. Periodic
distributions were made to the Company's stockholders for the estimated
income tax liability on the S Corporation earnings. Upon the completion of
the IPO, the Company became a C Corporation, and was required to pay income
taxes on its subsequent earnings.
The income tax benefit computed at the statutory rate for the nine month
period ended September 30, 1996 is approximately $300,000, which is offset by
a valuation allowance of the same amount. Deferred tax assets consist
primarily of a net loss carry forward, intangible asset amortization,
allowance for doubtful trade accounts, and equity in the losses of The Law
Office, Inc., through the date of acquisition.
MAJOR CUSTOMER: One customer accounted for 66.6% of the Company's total
revenues for the quarter ended September 30, 1996. This same customer
accounted for 42.9% of the Company's total revenues for the nine month period
ended September 30, 1996. Two customers accounted for 12.2% and 15.8%,
respectively, of the Company's total revenues for the quarter ended September
30, 1995. No single customer accounted for more than 10% of the Company's
total revenues for the nine month period ended September 30, 1995.
ACQUISITION OF THE LAW OFFICE, INC.: In May 1995 the Company acquired 25% of
the stock of The Law Office, Inc. (TLO), a development stage company. The
investment in TLO was accounted for under the equity method of accounting.
In May 1996, the Company acquired all the outstanding shares of TLO for
$50,750 in cash, issuance of 121,800 shares of the Company and options to buy
53,000 shares of the Company at $3.50 per share. The purchase of TLO was
accounted for as a purchase and the purchase price has been allocated to the
assets acquired and liabilities assumed based on fair values. The original
purchase price allocation recognized in the second quarter of 1996 consisted
of actual and contingent liabilities. During the third quarter of 1996,
certain contingent liabilities were settled; accordingly, the purchase price
allocation has been adjusted to reflect the settlement. The revised purchase
price and allocation to assets acquired and liabilities assumed is as
follows:
8
<PAGE>
Purchase Price
Stock issued and cash paid $ 294,350
Stock options issued 15,441
Liabilities assumed 703,250
-----------
$ 1,013,041
-----------
-----------
Allocated to:
Tangible assets $ 79,997
Microsoft contract 70,800
Non compete agreement 77,897
Goodwill 784,347
-----------
$ 1,013,041
-----------
-----------
The excess of the purchase price above the fair value of the assets has been
assigned to intangible assets which are being amortized over periods ranging
from 18 to 60 months.
THE CYBERLAW OFFICE, INC.: The CyberLaw Office, Inc. (CLO), a Minnesota
corporation, was incorporated on October 16, 1995, and is a majority owned
subsidiary of the Company. CLO was originally created by the Company to
expand its on-line activities into the international market place. In July
1996, the Company sold a 15% interest to a director of the Company as an
inducement to become the new Chief Executive Officer of CLO, as part of the
employment agreement, for a nominal sum. CLO has insignificant assets and
reported no results from operations in the third quarter and nine months
ending September 30, 1996. In August 1996, the Company consolidated
management of all Internet related activities under the Chief Executive
Officer of CLO. The Company intends to consolidate ownership of TLO under CLO
in the near future. TLO has a negative book value and requires substantial
additional investment to achieve its potential. CLO plans to seek additional
investment from potential outside investors in the future.
REDEEMABLE COMMON STOCK: In September 1996, the Company issued 40,000 shares
of common stock on behalf of TLO to settle a $140,000 note payable. The note
was issued to a former shareholder of TLO as a prerequisite to the
acquisition of TLO by the Company. Under the terms of the agreement by which
the shares were issued, the shareholder can require the Company to redeem
10,000 shares at $3.50 a share upon written notice to the Company, on or
before December 31, 1997. In October 1996, 10,000 of the redeemable common
shares were repurchased by the Company from the shareholder at $3.50 a share.
In addition, the shareholder can require the Company to redeem a portion or
all of the remaining 30,000 shares at $3.50 a share if TLO obtains debt or
equity financing in excess of $500,000.
NOTES RECEIVABLE FROM OFFICERS AND DIRECTOR: On September 3, 1996 the
Company sold an aggregate of 1,040,000 shares of its common stock to three of
its officers and/or directors, at the closing price for the Company's common
stock on September 4, 1996, or $1.890625 per share. The purchases were made
through seven year non-recourse notes, with the shares pledged as collateral.
The notes bear a fixed interest rate of 8.5% and cannot be prepaid anytime
before September 2, 2003. The shares are restricted and cannot be sold or
otherwise transferred without repaying the notes. It is Company policy not
to record interest income on the notes until cash is received on September 2,
2003.
Common stock issued to officers or directors in exchange for notes receivable
structured as described above, are not deemed to be shares outstanding under
generally accepted accounting principles. Rather, such shares are
considered stock options and therefore common stock equivalents for purposes
of calculating weighted common average shares outstanding and earnings per
share.
PRO FORMA RESULTS OF OPERATIONS: The following pro forma information is
based on the historical financial statements of the Company and TLO. This
information gives effect to the acquisition of TLO by the Company as if it
occurred on May 3, 1995, the date operations commenced for TLO. The pro
forma financial information does not purport to represent what the Company's
results of operations would actually have been if the acquisition occurred on
the dates indicated or to project the Company's results at any future period
or date. The pro forma information is presented for comparative purposes
only.
9
<PAGE>
Three Months Ending September 30,
1996 1995
---------------------------------
Pro forma revenues $ 952,037 $ 252,883
---------------------------------
---------------------------------
Pro forma loss $ (334,341) $ (244,330)
---------------------------------
---------------------------------
Pro forma net loss per share $ (.15) $ (.16)
---------------------------------
---------------------------------
Weighted average common and common equivalent
shares outstanding 2,266,763 1,527,289
---------------------------------
---------------------------------
Nine Months Ending September 30,
1996 1995
---------------------------------
Pro forma revenues $ 1,882,074 $ 971,995
---------------------------------
---------------------------------
Pro forma loss $(1,036,720) $ (245,485)
---------------------------------
---------------------------------
Pro forma net loss per share $ (.47) $ (.29)
---------------------------------
---------------------------------
Weighted average common and common
equivalent shares outstanding 2,201,132 853,962
---------------------------------
---------------------------------
RECLASSIFICATIONS: Certain reclassifications have been made to the 1995
financial statements to conform to the classifications in the 1996 financial
statements. These reclassifications did not have any impact on the net loss
or net loss per share of the Company for 1995.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion
should be read in conjunction with the financial statements and footnotes
which appear elsewhere in the Report and the Company's annual report for 1995
on Form 10-KSB.
This report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements.
The Company's revenues have historically been derived from conducting
analytical research and writing on a non-recurring basis for its customers.
Historically, the Company has experienced a seasonal fluctuation in revenues
with second and third quarters being the slowest quarters of the year and the
last quarter being the strongest. The Company has recently developed
programs designed to attract customers to enter into long term relationships
to provide greater consistency in quarterly revenues.
In May 1995 the Company acquired 25% of the stock of The Law Office, Inc.
(TLO). The Company purchased all of the outstanding shares of TLO on May 13,
1996. TLO is a development stage entity which will provide content by the
way of web-sites on MSN and the Internet. TLO plans to be a full-service,
on-line commercial center offering a variety of goods and services to legal
professionals and a variety of legal related goods and services to the
general public. Revenues will be derived from the leasing of space on TLO's
web-site and from the sale of services and advertising. To date, TLO has
generated $9,200 in revenues. Third quarter and 1996 year-to-date
expenditures from the date of acquisition have been on activities necessary
to bring the web-site on-line, develop a sales and marketing program, solicit
content providers and hire staff. The Company has been funding development
of TLO since May 1995. The Company recognized $263,032 of expenses
associated with the development of TLO for the three months ended September
30, 1996. From January 1, 1996 through the date of acquisition on May 13,
1996, the Company recorded 25% of TLO's losses, or $64,476. For the nine
month period ending September 30, 1996, the Company recognized $356,238 in
development costs of TLO. TLO commenced operations in May 1995 and reported
year-to-date losses of $78,000 through September 30, 1995, of which $19,500
had been recorded by the Company under the equity method of accounting.
In October 1995, the Company created CLO to expand its on-line activities
into the international market place. In July 1996, the Company sold a 15%
interest to a director of the Company as an inducement to become the new
Chief Executive Officer of CLO. In August 1996, the Company consolidated
management of all Internet related activities under the Chief Executive
Officer of CLO. The Company intends to consolidate ownership of TLO under CLO
in the near future. TLO has a negative book value and requires substantial
additional investment to achieve its potential. CLO plans to seek additional
investment from potential outside investors in the future.
The Company issued shares in a public offering and received $4,462,880 in net
proceeds from this offering in August 1995. The Company used a portion of
the proceeds to hire additional sales, management and support personnel to
substantially increase its sales and marketing activities. The Company
believes that these activities will result in increased revenues in 1996 and
in future years. The Company also used a portion of the net proceeds to
purchase and fund the development of TLO. The Company expects to continue to
fund TLO operations and, if possible, raise additional funds from outside
sources. In addition to increased spending in the sales and marketing area
and the funding of TLO, the Company has made certain development
expenditures and other investments to position the Company for long term
growth in emerging areas in the research and alternative dispute resolution
niches of the legal services market.
RESULTS OF OPERATIONS
REVENUES: Revenues increased by $699,154 or 276.5%, to $952,037 for the
three month period ended September 30, 1996 over the same period of 1995.
For the nine month period, revenues increased $910,079 to $1,882,074 or
93.6%. The increase in revenues for the third quarter and the nine months
ended September 30, 1996 is primarily attributable to an increase in large
multi-jurisdictional research projects that the Company has been able to
secure through sales and marketing activities. Multi-jurisdictional surveys
are typically non-recurring projects. In some instances on-going revenue
will be derived from updating completed projects quarterly or annually. The
Company expects to continue its sales and marketing efforts to seek and
expand upon similar projects in the future.
11
<PAGE>
DIRECT OPERATING COSTS: Direct operating costs for compensation and other
benefits include hourly contract fees for independent research attorneys and
hourly compensation of staff research attorneys, document production and support
personnel. Other direct operating costs include outside research fees and
services, royalty fees for association referrals, computer database charges and
document retrieval expenses. The Company attempts to fix its direct operating
costs as a percentage of revenue associated with the preparation of research and
writing for its customers.
Total direct operating costs increased $367,083, or 224.1%, for the three
months ended September 30, 1996 from the same period in 1995. The increase
in direct operating costs is primarily due to higher personnel costs, hiring
of independent attorneys and fees paid to outside firms to complete large
multi-jurisdictional research projects. For the nine month period, direct
operating costs increased $529,416, or 108.5%, for the comparable period of
1995. The increase is principally attributable to the hiring of additional
personnel, hiring of independent attorneys and fees paid to outside firms to
support research operations during the first nine months of 1996.
Direct operating costs, expressed as a percentage of revenue, declined from
64.8% to 55.8% for the three months ended September 30, 1996 from the same
period in 1995. The decrease is primarily due to higher fixed expenses in
1995 in relation to billable revenue as discussed above. For the nine month
period, direct costs, expressed as a percentage of revenue, increased from
50.2% to 54.1%. The increase is attributable to higher direct costs in 1996
in relation to billable revenue as discussed in the preceding paragraph.
GROSS PROFIT: Gross profit increased by $332,071, or 372.9%, to $421,127 for
the three months ended September 30, 1996, primarily as a result of the
revenue increases. Due to the increase in direct operating costs in 1995
discussed above, gross profit as a percentage of revenues increased from 35%
to 44% during the third quarter of 1996. For the nine month period, gross
profit increased by $380,663, or 78.6%, from the comparable period in 1995.
As a percentage of revenue, gross profit declined from 49.8% to 45.9% for
the comparable nine month period of 1995. The decline is principally
attributable to the increase in direct operating costs in 1996, as discussed
above.
OTHER OPERATING COSTS: Other operating costs include compensation of
officers and corporate staff, advertising expenditures and general corporate
overhead, including depreciation and amortization. Other operating costs
increased by $511,127, or 187.3%, for the three months ended September 30,
1996 from the comparable period of 1995. The increase in other operating
costs by major category was $90,227, or 67.7%, in sales and marketing;
$157,868, or 113.2%, in general and administrative; and $263,032 in
development costs of TLO. The increase of sales and marketing costs was due
to increased staffing in the Company's sales group and increased marketing
and advertising expenditures. General and administrative expenditures
increased due to higher compensation and benefits costs, hiring of additional
support personnel, and increases in operating expenses (rent, utilities,
supplies) for a larger organization. TLO development costs increased due to
expenditures by TLO as it attempts to develop a sales staff and market its
services.
For the nine month period, other operating costs increased $1,122,666 or
169.1%. Of this increase, $315,813 was attributable to increased staffing in
the sales group and increases in marketing and advertising expenditures to
produce new research projects. General and administrative costs increased by
$450,615 from the comparable period in 1995 primarily attributable to
increased staffing and related expenditures associated with a growth strategy
in a publicly held company. TLO development costs increased by $356,238 due
to on-going development activities discussed above.
OTHER INCOME AND EXPENSES: Interest income decreased $2,783 for the three
months ended September 30, 1996 and increased $76,569 for the nine months
ended September 30, 1996 from the comparable period in 1995. The decrease in
the third quarter interest income was a result of less cash invested in
interest bearing accounts. The increase in interest income in the first nine
months of 1996 over 1995 is due to earnings on invested cash proceeds
received in the public offering that was completed in August of 1995.
12
<PAGE>
Interest expense decreased $13,550 for the three months ended September 30,
1996 and $20,707 for the nine months ended September 30, 1996 from the
comparable periods in 1995, due to the retirement of all interest bearing
obligations in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $1,287,565 in the first nine months of
1996. This use of cash is primarily the result of a $653,924 net loss before
depreciation and amortization and other non-cash charges offset by a $768,715
increase in accounts receivable and unbilled services. The increase in
accounts receivable and unbilled services is attributable to one large,
multi-jurisdictional project for which billing cycle spans over a 3 to 6
month time frame.
Investing activity for the first nine months of 1996 was $495,743 principally
as a result of advances to TLO through the date of acquisition and purchases
of furniture and equipment. Cash used in financing activities consisted of
$9,801 paid to amortize non compete obligations through September 30, 1996.
The non compete obligations arose in connection with the Company's purchase
of TLO in May 1996.
Cash used by operating activities was $18,853 in the first nine months of
1995. This was the result of $153,080 of net income before depreciation and
other non-cash charges and $134,227 of changes in assets and liabilities.
Cash used in investing activities for the first nine months of 1995 was
$387,651 representing advances to and investment in TLO, an investment in and
advances to American Research Corp. and purchases of furniture and equipment.
Cash provided by financing activities for the first nine months of 1995 was
$4,454,103 representing the proceeds from the Company's sale of common stock
during the period and proceeds on notes payable, offset by the repayment of
long-term debt and a stockholder distribution to pay for estimated taxes when
the Company's earnings were taxed as a sub-chapter S corporation.
The Company continues to use the proceeds from its initial public offering to
fund operating costs as it positions itself for future growth and to fund the
operations of TLO. In addition, the Company continues to look for other
marketing and development opportunities and alliances. The Company believes
that the cash requirements of TLO and other marketing and development
activities will be significant for the remainder of 1996 and into the first
half of 1997. The Company intends to initially fund such investments and
development activities and raise additional funding, if possible, in the
future.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
i. News release dated November 6, 1996 regarding the financial
results for the nine months ended September 30, 1996.
(b) Reports on Form 8-K
Form 8-K, dated September 5, 1996. Includes Item 5, Other Events,
Sale of Common Shares to officers and a director.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LEGAL RESEARCH CENTER, INC.
Dated: November 8, 1996 By: /s/ Frank G. Hallowell
--------------------------------
Frank G. Hallowell
Vice President and Chief
Financial Officer
<PAGE>
FOR IMMEDIATE RELEASE
November 6, 1996
Legal Research Center, Inc. Contacts: Christopher Ljungkull, CEO
700 Midland Square Building Legal Research Center, Inc.
331 Second Avenue South 612/332-4950, 800/776-9377
Minneapolis, MN 55401
Joseph Jennings
The Sage Group
612/321-9897
LEGAL RESEARCH CENTER ANNOUNCES
STRONG REVENUE GROWTH IN THIRD QUARTER
Minneapolis, MN - Legal Research Center, Inc. (NASDAQ:LRCI) today
announced financial results for its third quarter ended September 30, 1996,
with record revenues of $952,037, up $699,154 or 276 percent from revenues of
$252,883 in the third quarter of last year. The company reported a net loss
for the quarter of $334,341, or 15 cents per share, versus a net loss of
$185,552, or 13 cents a share, in the same period of 1995. That portion of
the net loss attributable to the company's on-going development of The Law
Office, Inc. (TLO) amounted to $263,032, or 12 cents per share.
For the nine months ended September 30, 1996, Legal Research Center had
revenues of $1,882,074 versus $971,995 last year, an increase of 94 percent.
The company posted a net loss for the first nine months in 1996 of $876,410,
or 40 cents a share, compared to a net loss of $186,707, or 24 cents a share,
over the same period in 1995. That portion of the net loss attributable to
the company's investment in TLO amounted to $356,238, or 16 cents per share,
for the nine months ended September 30, 1996.
The weighted average number of common and common equivalent shares used
in per-share reporting increased from 1,405,489 in the third quarter of 1995
to 2,266,763 in the second quarter of 1996 as a result of the company's
initial public offering in August of 1995 and additional share issuances in
the second quarter of 1996.
During the third quarter of 1996, Legal Research Center consolidated the
management of its Internet related activities including TLO within the
CyberLaw Office, Inc. (CLO), a subsidiary of the company. CLO completed
several alliances during the quarter including Inherent.com, a graphics and
web-site management provider; American Research Corp., a publishing and
marketing
<PAGE>
services provider to the legal industry; and Law Journal Extra, Inc., a
publisher and provider of services to the legal industry. TLO also
recognized initial revenues ahead of plan in this quarter.
Christopher Ljungkull, chief executive officer of Legal Research Center,
commented: "It is extremely gratifying to see improvement in the operating
performance of our core research business. Factoring out the operating
results of TLO, our development stage subsidiary, we had a 3-cent loss per
share, versus a 13-cent loss in the third quarter a year ago. This
demonstrates the company's ability to achieve fast growth and turn toward
profitability at the same time.
"The tremendous increase in revenue virtually ensures that we'll be
meeting revenue expectations for the year. Without projecting revenue or
earnings figures, we expect impressive growth going forward into 1997, with
profitability on a consolidated basis by mid year 1997, and increasing
throughout the remainder of next year."
Legal Research Center, headquarters in Minneapolis, offers cost-effective
legal research and writing services to attorneys in corporate and private
practice throughout the world. Legal Research Center also provides
law-related products and services to lawyers and the general public through
The Law Office, which operates a web site on The Microsoft Network and the
Internet. Additionally, the company is developing a proprietary ADR training
program for corporate and legal use under the trade name CADRE (Center for
Alternative Dispute Resolution Enterprise).
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995:
STATEMENTS CONTAINED HERE, OTHER THAN HISTORICAL DATA, MAY BE FORWARD-LOOKING
AND SUBJECT TO RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO THE
CONTINUATION OF REVENUES THROUGH THE COMPANY'S STRATEGIC ALLIANCES AND THE
SUCCESSFUL DEVELOPMENT OF OTHER NEW BUSINESS, AS WELL AS THOSE SET FORTH IN
THE COMPANY'S 10KSB, 10QSB AND OTHER SEC FILINGS.
(more - summary financials follow)
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------ -----------------------------
1996 1995 1996 1995
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Revenues $ 952,037 $ 252,883 $ 1,882,074 $ 971,995
Development costs of The Law Office, Inc. $ (263,032) $ -- $ (356,238) $ --
Operating loss $ (362,838) $ (183,782) $ (921,900) $ (179,897)
Net loss $ (334,341) $ (185,552) $ (876,410) $ (186,707)
Net loss per share $ (0.15) $ (0.13) $ (0.40) $ (0.24)
Weighted average common and common
equivalent shares outstanding 2,266,763 1,405,489 2,201,132 787,039
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
1996 1995
---------------- -----------
Current assets $ 3,052,728 $ 4,063,161
Furniture and equipment, net 233,591 152,420
Other assets 1,040,506 307,539
---------------- ------------
Total assets $ 4,326,825 $ 4,523,120
---------------- ------------
---------------- ------------
Current liabilities $ 494,194 $ 282,416
Long-term and other liabilities 209,296 --
Stockholders' equity 3,623,335 4,240,704
---------------- ------------
Total liabilities and shareholders'
equity $ 4,326,825 $ 4,523,120
---------------- ------------
---------------- ------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTER AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,717,643
<SECURITIES> 0
<RECEIVABLES> 651,188
<ALLOWANCES> 52,014
<INVENTORY> 0
<CURRENT-ASSETS> 3,052,278
<PP&E> 338,117
<DEPRECIATION> 104,526
<TOTAL-ASSETS> 4,326,825
<CURRENT-LIABILITIES> 494,194
<BONDS> 0
0
0
<COMMON> 32,976
<OTHER-SE> 3,590,359
<TOTAL-LIABILITY-AND-EQUITY> 4,326,825
<SALES> 0
<TOTAL-REVENUES> 1,882,074
<CGS> 0
<TOTAL-COSTS> 1,017,343
<OTHER-EXPENSES> 1,786,631
<LOSS-PROVISION> 10,673
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (876,410)
<INCOME-TAX> 0
<INCOME-CONTINUING> (876,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (876,410)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
