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 June 30, 1997 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.
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(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-1680384
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(State Or Other Jurisdiction (IRS Employer Identification No.)
Of Incorporation)
700 Midland Square Building, 331 Second Avenue So., Minneapolis, MN 55401
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(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.
3,327,633 shares of Common Stock as of July 14, 1997
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INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 ............................... 2
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1997 and 1996.................. 4
Consolidated Statements of Stockholders' Equity ........................ 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 ........................... 6
Notes to Consolidated Financial Statements ............................. 7
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
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
ASSETS 1997 1996
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<S> <C> <C>
Current Assets
Cash and cash equivalents $529,373 $955,600
Accounts receivable:
Trade 465,926 713,965
Unbilled services 232,492 505,419
Related party 60,000 174,066
Less, allowance for doubtful accounts (120,000) (120,000)
---------------------------
Net accounts receivable 638,418 1,273,450
Other 65,138 39,044
---------------------------
Total current assets 1,232,929 2,268,094
---------------------------
Other Assets
Intangible assets, net of accumulated amortization of
$0 and $152,789, respectively -- 827,465
Capitalized development costs, net of accumulated amortization
of $0 and 5,916, respectively 199,418 101,061
Investment in and advances to American Research Corporation 152,988 41,764
---------------------------
352,406 970,290
---------------------------
Furniture and equipment, at cost 364,042 367,381
Less, accumulated depreciation 199,249 129,886
---------------------------
164,793 237,495
---------------------------
$1,750,128 $3,475,879
===========================
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See Notes to Consolidated Financial Statements (unaudited)
2
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LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
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<S> <C> <C>
Current Liabilities
Accounts payable $ 70,620 $ 182,032
Non compete agreement -- 16,508
Client advances 70,757 35,957
Accrued expenses:
Compensation 98,379 108,438
Other 49,353 137,291
---------------------------
Total current liabilities 289,109 480,226
---------------------------
Non compete agreement -- 47,461
---------------------------
Common stock subject to repurchase obligation 105,000 105,000
---------------------------
Stockholders' Equity
Common stock, $0.01 par value; authorized
20,000,000 shares; issued 3,327,633; 30,000 subject
to repurchase obligation 32,976 32,976
Additional paid in capital 6,765,307 6,765,307
Accumulated deficit (3,476,014) (1,988,841)
Notes receivable from officers and directors (1,966,250) (1,966,250)
---------------------------
1,356,019 2,843,192
---------------------------
$ 1,750,128 $ 3,475,879
===========================
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
3
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<TABLE>
<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues $ 580,977 $ 488,255 $ 1,113,512 $ 930,037
Direct operating costs:
Compensation and benefits 248,398 201,464 493,794 373,298
Other 84,776 68,177 176,994 112,468
-------------------------------- -------------------------------
Total direct operating costs 333,174 269,641 670,788 485,766
-------------------------------- -------------------------------
Gross profit 247,803 218,614 442,724 444,271
-------------------------------- -------------------------------
Other operating costs:
Sales and marketing 247,712 192,554 451,912 395,745
General and administrative 242,552 263,652 477,423 513,715
-------------------------------- -------------------------------
Total other operating costs 490,264 456,206 929,335 909,460
-------------------------------- -------------------------------
Operating loss (242,461) (237,592) (486,611) (465,189)
Interest income, net 9,254 31,640 18,963 81,469
-------------------------------- -------------------------------
Loss from continuing operations (233,207) (205,952) (467,648) (383,720)
Discontinued operations:
Loss from operations of The Law Office, Inc. (195,060) (106,849) (407,517) (158,349)
Loss on the disposal of The Law Office, Inc.
including $73,800 provision for operating
losses during phase-out period (612,008) -- (612,008) --
-------------------------------- -------------------------------
Net loss $(1,040,275) $ (312,801) $(1,487,173) $ (542,069)
================================ ===============================
Earnings per share:
Loss from continuing operations $ (0.10) $ (0.09) $ (0.21) $ (0.18)
Loss from discontinued operations $ (0.36) $ (0.05) $ (0.45) $ (0.07)
-------------------------------- -------------------------------
Net loss $ (0.46) $ (0.14) $ (0.66) $ (0.25)
================================ ===============================
Weighted average common shares outstanding 2,257,633 2,200,079 2,257,633 2,168,134
================================ ===============================
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4
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<TABLE>
<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
------------------------ Paid-in Accumulated Notes
Shares Amount Capital Deficit Receivable Total
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<S> <C> <C> <C> <C> <C> <C>
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 subject to a
stock subscription agreement 1,040,000 10,400 1,955,850 -- (1,966,250) --
Net loss -- -- -- (1,656,553) -- (1,656,553)
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Balance, December 31, 1996 3,297,633 32,976 6,765,307 (1,988,841) (1,966,250) 2,843,192
Net loss -- -- -- (1,487,173) -- (1,487,173)
-----------------------------------------------------------------------------------
Balance, June 30, 1997 3,297,633 $ 32,976 $ 6,765,307 $(3,476,014) $(1,966,250) $ 1,356,019
===================================================================================
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
5
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<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
------------------------------------
1997 1996
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<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,487,173) $ (542,069)
Adjustments to reconcile net loss to cash used in operating activities:
Loss on disposal of The Law Office, Inc. 612,008 --
Amortization of intangible assets and capitalized development costs 128,219 29,472
Depreciation 52,258 32,980
Equity in losses of unconsolidated investments -- 64,476
Provision for uncollectible accounts receivable 4,600 2,048
Loss on disposal of furniture and equipment 1,517 --
Changes in assets and liabilities:
Trade accounts receivable and unbilled services, net of write-offs 516,366 (208,306)
Related party accounts and other current assets (23,797) (2,029)
Accounts payable (111,413) (12,446)
Client advances 34,801 (3,675)
Accrued expenses (34,135) 25,850
------------------------------------
Net cash used in operating activities (306,749) (613,699)
------------------------------------
Cash Flows From Investing Activities
Cash paid for the acquisition of The Law Office, Inc. -- (50,750)
Purchases of furniture and equipment, net of dispositions (1,030) (74,550)
Advances to unconsolidated subsidiaries -- (386,618)
Capitalized development costs (110,193) 24,638
------------------------------------
Net cash used in investing activities (111,223) (487,280)
------------------------------------
Cash Flows From Financing Activities
Cash payments on non compete agreements (8,255) --
------------------------------------
Net cash used in financing activities (8,255) --
------------------------------------
Decrease in cash and cash equivalents (426,227) (1,100,979)
Cash and cash equivalents
Beginning 955,600 3,510,752
------------------------------------
Ending $ 529,373 $ 2,409,773
====================================
</TABLE>
6
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LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(unaudited)
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 a full fiscal year. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto, for the year ended December 31, 1996.
Principles Of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, The Law Office, Inc.
(TLO) and its eighty-five percent owned subsidiary, The CyberLaw Office, Inc.
(CLO). All significant inter company accounts and transactions have been
eliminated.
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 outstanding during the respective
periods.
Income Taxes: The income tax benefit computed at the statutory rate for the six
month period ended June 30, 1997 is approximately $507,000 which is offset by a
valuation allowance of the same amount. Deferred taxes are provided on a
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the amounts of assets and liabilities
recorded for income tax and financial reporting purposes. Deferred tax assets
are reduced by a valuation allowance when management determines that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Major Customers: One customer accounted for 11.3% of the Company's total
revenues in the quarter ended June 30, 1997. For the six month period ended June
30, 1997, one customer accounted for 16.4% of the Company's total revenues.
Two customers accounted for 25.8% and 15.2% of the Company's total revenues in
the quarter ended June 30, 1996. These same two customers accounted for 30.4%
and 12.8% respectively, of the Company's total revenues for the six month period
ended June 30, 1996.
American Research Corporation: In September 1995, the Company purchased less
than 5% of the common stock of American Research Corporation (ARC) for $100,000.
The Company uses the cost method of accounting for this investment. In September
1995, the Company advanced ARC $50,000, evidenced by an unsecured 9.75% note.
The note plus interest was repaid in October 1996.
ARC has developed a product and service that supports professional service
providers. ARC has reported losses in operations since inception in 1992 and has
been actively seeking financing to support its operation. The Company provides
research services to ARC for which it charges ARC an arm's-length negotiated
market rate. Total revenues from ARC were approximately $0 and $119,300 through
June 30, 1997 and 1996, respectively.
7
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At December 31, 1996 the Company had receivables and notes from ARC of
approximately $174,000. ARC made payments to the Company under the terms of its
original agreement, for services rendered through July 1996. In late 1996, the
Company restructured its arrangement with ARC to allow ARC more time to complete
its refinancing.
In June 1997, ARC closed on its refinancing which resulted in the repurchase of
its shares and a restructuring of the amounts due the Company. Amounts due the
Company under its services contract through September 1996 ($174,000 plus
accrued interest) were converted into a promissory note (Note) with quarterly
payments of $15,000 beginning September 15, 1997 and a final balloon payment due
June 15, 1999. The Note bears interest at a rate of 10% per annum. The Company
retains copyright on all work product as collateral on this Note. ARC made its
first installment payment of $15,000 under the Note in June 1997. ARC also
agreed to repurchase its shares held by the Company for $100,100 in exchange for
a unsecured promissory note (Unsecured Note). The Unsecured Note is repayable in
quarterly installments of $25,025 beginning June 30, 1999 and bears interest at
a rate of 10% per annum.
Given ARC's uncertain financial condition, the Company has reserved
approximately $80,000 of the Note and Unsecured Note as potentially
uncollectible.
The Law Office, Inc.: In May 1995, the Company acquired 25% of the stock of TLO.
In May 1996, the Company acquired all of the remaining outstanding shares of TLO
for $97,961 in cash including acquisition costs, issuance of 121,800 shares of
the Company and options to buy 54,500 shares of the Company at $3.50 per share.
The acquisition of TLO was accounted for as a purchase and the purchase price
was allocated to the assets acquired and liabilities assumed based on fair
values. The excess of the purchase price above the fair value of the assets had
been assigned to intangible assets which were being amortized over periods
ranging from 18 to 60 months. Intangible assets consisted primarily of an
Independent Content Provider Agreement (ICP) with Microsoft Online Services
Partnership (MOSP), non compete agreements with former shareholders of TLO and
goodwill.
TLO operates as a content provider and forum manager under an ICP agreement with
MOSP on The Microsoft Network (MSN) and directly on the Internet. The agreement
with MOSP expires in December 1997. Revenues were expected from leasing of space
to attorneys (Regional Attorney Network) and related vendors on TLO's web-site
and from the sale of services and advertising. Substantially all of TLO's
current revenue is generated by its Regional Attorney Network. To maintain and
grow the Regional Attorney Network requires significant expenditures on
advertising and marketing.
Monthly TLO revenues have not been sufficient to cover cash operating expenses
and development costs. In June 1997, TLO was informed by MOSP that the ICP
agreement will not be renewed for a second term. MSN has decided not to continue
with the ICP concept and is not renewing ICP contracts. Approximately 2% of
TLO's current web-site traffic is generated through its affiliation with MSN.
The Company has been seeking additional investors to fund operating and
continuing development costs of TLO. However, there can be no assurance that
financing of TLO can be obtained on terms acceptable to the Company or at all.
Due to continuing substantial negative cash flow, the non-renewal of the ICP
agreement and the uncertainty of obtaining adequate funds to finance TLO
operations and development, the Company has decided to suspend the funding of
TLO in the third quarter of 1997 and has instructed TLO management to pursue the
sale of TLO and CLO to recover its investment and advances. The expected manner
of sale of TLO would be either a purchase of a controlling interest by a
non-affiliated third party, a sale of major assets such as its operating
platform or a management led buyout by the end of 1997. There can be no
assurance that TLO and CLO's assets or business can be sold on terms acceptable
to the Company or at all.
8
<PAGE>
Due to the suspension of funding, uncertainty regarding financing and the plan
to sell all or part of TLO it is not likely that the Company will fully recover
its investment and advances. Therefore, the Company has recorded a $612,008
expected loss on the ultimate disposal of TLO as of June 30, 1997. The loss on
disposition consists primarily of a non-cash charge for intangible assets
$518,200, a non-cash valuation charge for computer equipment and related
equipment of approximately $20,000 and a provision for cash operating expenses
during the phase-out period of approximately $73,800.
Results from operations of TLO through June 30, 1997 and for the comparable
periods in 1996, are now reported as discontinued operations. TLO reported a net
loss of $195,060 for the quarter ended June 30, 1997 on revenues of $14,500. For
the comparable period in 1996, TLO reported a net loss of $106,849 on $0
revenues. For the six month period ended June 30, 1997, TLO reported a loss of
$407,517 on revenues of $32,719. For the six month period ended June 30, 1996,
TLO reported a loss of $158,349 on $0 revenues.
The CyberLaw Office, Inc.: CLO was incorporated in Minnesota in October 1995,
and is a majority owned subsidiary of the Company. CLO was originally created by
the Company to expand its on-line activities similar to TLO 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. In
August 1996, the Company consolidated management of all Internet related
activities under the Chief Executive Officer of CLO. As discussed above, the
Company has decided to sell its interest in TLO and CLO to recover its advances.
CLO has insignificant assets and reported no results from operations in the
three and six months ended June 30, 1997 and 1996, respectively. Therefore the
disposal of CLO is not expected to have a material impact on the Company's
financial results.
Common Stock Subject To Repurchase Obligation: 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 could require the Company to repurchase
10,000 shares at $3.50 a share upon written notice to the Company, on or before
December 31, 1997. In October 1996, the shareholder exercised this option. In
addition, the shareholder can require the Company to repurchase a portion or all
of the remaining shares at $3.50 a share if TLO obtains debt or equity financing
in excess of $500,000. These 30,000 shares are not considered outstanding shares
for the purposes of determining weighted average shares outstanding and net loss
per share.
Notes Receivable From Officers And Directors: 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 $1.89 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.
9
<PAGE>
Shares of common stock issued to officers or directors in exchange for notes
receivable structured as described above, are not deemed to be outstanding under
generally accepted accounting principles. However, such shares are treated as
stock options (and therefore, as common stock equivalents) for purposes of
calculating weighted average shares outstanding and net loss per share.
Earnings Per Share: The FASB has issued Statement No. 128, Earnings per Share,
which supersedes APB Opinion No. 15. Statement No. 128 requires the presentation
of earnings per share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic earnings per-share amounts. All other entities are
required to present basic and diluted per-share amounts. Diluted per-share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. All entities required to present
per-share amounts must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is not permitted.
The Company has not completed its analysis of Statement No. 128 however, it does
not expect that the impact of this new accounting pronouncement when implemented
by the Company, will have a material impact on earnings per share.
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 this Report and the Company's annual report for 1996 on Form
10-KSB.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers that statements
contained herein, other than historical data, may be forward-looking and subject
to risk 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. The following important factors could cause
the Company's actual results to differ materially from those projected in
forward-looking statements made by or on behalf of, the Company:
o Failure of the Company or its partners to successfully expand its
market share and sell products and services.
o Company's inability to produce and deliver its products and services
at margins sufficient to cover operating costs.
o Effectiveness of cost cutting measures implemented by the Company to
improve gross margins and moderate the growth in sales, marketing and
general and administrative expenses.
o Risks related to the discontinuation of operations of TLO and CLO and
the disposition of their assets and business.
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 developed and implemented programs designed to
attract customers to enter into long term relationships to provide greater
consistency in quarterly revenues.
The Company continues to develop its Corporate Alternative Dispute Resolution
Enterprises, (CADRE) program. An alternative dispute resolution (ADR) system is
a means to reduce the amount of courtroom litigation and includes private
arbitration and mediation. The Company intends to develop CADRE initially as a
several day corporate training course in the concepts and skills necessary to
implement and utilize an ADR system on a corporate-wide basis. The Company has
substantially completed the curriculum and market development and expects that
the product will be launched in the third quarter of 1997.
RESULTS OF OPERATIONS
Revenues: Revenues increased by $92,722 or 19.0%, to $580,977 for the three
month period ended June 30, 1997 over the same period of 1996. For the six month
period, revenues increased $183,475 or 19.7%. The increase in revenues is
primarily attributable to an increase in traditional research and writing,
on-site library services and document retrieval projects that the Company has
been able to secure through sales and marketing activities, offset by a decline
in multi-jurisdictional survey (MJS) and contract attorney revenues.
Second quarter and year-to-date 1997 MJS revenues declined from the comparable
periods in 1996 primarily due to the completion of a major non-recurring project
in the fourth quarter of 1996. Contract attorney revenues declined due to
completion of a major engagement in October 1996. The Company began to
de-emphasize this service in late 1996, electing to re-deploy research attorneys
to other products and services.
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
11
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production and support personnel. Other direct operating costs include outside
research fees and services, royalty fees for association referrals, computer
database charges, project data conversion fees and document retrieval expenses.
Total direct operating costs increased $63,533, or 23.6%, for the three months
ended June 30, 1997 from the same period in 1996. For the six month period,
direct operating costs increased $185,022 or 38.1%.
The increase in direct operating costs is primarily due to higher personnel
costs, computer database charges, document retrieval fees and project data
conversion fees. Personnel costs were higher due to wage and benefit increases
for existing staff, the hiring of additional staff attorneys for research and
writing to handle anticipated increases in volume which did not materialize and
an increase in non-billable time on fixed price contracts. Computer database
charges were higher due to increased usage of database services to complete
research projects as an offset to additional research attorney time. Project
data conversion fees increased as more customers require that work product be
delivered in an electronic format to facilitate subsequent sale or use.
Direct operating costs, expressed as a percentage of revenues, increased from
55.2% to 57.3% for the three months ended June 30, 1997 from the same period in
1996. For the six month period, direct operating costs as a percentage of
revenues increased from 52.2% to 60.2%. The increases are due to various factors
explained above. Compared to the first quarter of 1997, direct operating costs,
expressed as a percentage of revenues, decreased from 63.4% to 57.3% primarily
as the result of cost containment and process improvement measures implemented
in early 1997. The Company expects to decrease direct operating costs as a
percentage of revenues during the remainder of 1997 by improving the efficiency
of its research and production process and reducing or eliminating costs.
Gross Profit: Gross profit for the three month ended June 30, 1997 increased by
$29,189 or 13.4%, to $247,803 over gross profit of $218,614 for the comparable
1996 period. As a percentage of revenue, gross profit declined from 44.8% to
42.7% for the three months ended June 30, 1997 from the same period in 1996,
primarily as a result of the increase in direct operating costs discussed above.
For the six months ended June 30, 1997, gross profit declined by $1,547 or 0.3%
to $442,724 from the comparable 1996 period. As a percentage of revenue, gross
profit decreased from 47.8% to 39.8% for the six months ending June 30, 1997
from the same period in 1996, primarily as a result of direct costs increasing
at a faster rate than increases in revenue as discussed above.
Other Operating Costs: Other operating costs include compensation of officers,
sales and corporate staff, advertising and direct marketing expenditures and
general corporate overhead, including depreciation. Other operating costs
increased by $34,058, or 7.5%, for the three months ended June 30, 1997 over the
same period in 1996. Of these other operating costs, sales and marketing
expenses increased by $55,158, or 28.6%, but were offset by a decline of
$21,100, or 8.0%, in general and administrative expenses. For the six months
ended June 30, 1997, other operating costs increased $19,875 or 2.2%. Of these
other operating costs, sales and marketing expenses increased by $56,167 or
14.2%, but were offset by a decline of $36,292 or 7.1% in general and
administrative expenses.
The increase in sales and marketing costs for the three and six months ending
June 30, 1997 over the same period in 1996 was primarily due to increased
staffing and incentive pay under a new plan instituted in 1997 to generate
additional revenues and increased marketing and advertising expenditures to
support revenue production.
General and administrative expenditures decreased for the three and six months
ending June 30, 1997 over the same periods in 1996 primarily due to the
suspension of hiring in late 1996 and cost containment and reduction initiatives
implemented in the first quarter of 1997.
12
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Other Income and Expense: Interest income decreased $22,386 for the three months
ended June 30, 1997 and $62,506 for the six months ended June 30, 1997 from the
comparable periods in 1996. The decrease was a result of less cash invested in
interest bearing accounts.
Discontinued Operations: From January 1, 1996 through the date of acquisition on
May 13, 1996, the Company recorded 25% of TLO's losses under the equity method
of accounting. Subsequent to the acquisition, TLO's results of operations have
been fully consolidated into the Company's financial statements. As discussed
above, the Company has determined to suspend the funding of TLO in the third
quarter of 1997. The Company has entered into discussions to dispose of the some
or all of the stock or assets of TLO and anticipates that such actions will be
complete on or before the end of 1997. Results of operations and loss on the
expected disposal of TLO has been reported a part of discontinued operations for
the three and six months ending June 30, 1997 and 1996, respectively. The
Company has also determined to suspend the operations of CLO in the third
quarter of 1997 and to dispose of its business. However, this is not expected to
have a material impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to use the proceeds from its initial public offering in
August 1995 to fund year-to-date 1997 operating costs of the core business, to
fund the development of CADRE, and to provide working capital to CLO and TLO. In
addition, the Company continues to look for other marketing and development
opportunities and alliances to increase revenues and cash flow. At June 30, 1997
the Company had cash and cash equivalents of $529,373 and working capital of
$943,820.
Cash used in operating activities was $306,749 in the first six months of 1997.
This use of cash is primarily the result of a $1,487,173 net loss less the
anticipated loss on disposal of TLO, depreciation and amortization and other
non-cash charges of $798,602, a $111,413 decrease in accounts payable, offset by
a $516,366 decrease in accounts receivable and unbilled services. The decrease
in accounts receivable and unbilled services from December 31, 1996 is primarily
attributable to one large, multi-jurisdictional project under which the billing
cycle occurred over a 6 month time frame. The Company collected over $450,000 on
this large project in April 1997. Although the Company has taken steps to reduce
or defer cash outlays from operations, the Company expects cash flow from
operations to be negative for the next three months.
Investing activity for the first six months of 1997 was $111,223 principally as
a result of investments in CADRE. The Company expects the level of cash used in
investing activities to decrease over the next quarter as CADRE development
efforts near completion and the product begins to generate cash flow. The
Company is attempting to finance the remaining development and launch costs of
CADRE with an outside source in the third quarter of 1997 to reduce the impact
on the Company cash resources. There is no assurance that such funding will be
obtained on terms acceptable to the Company or at all.
Cash used in financing activities consisted of $8,255 of payments made to former
shareholders in connection with the acquisition of TLO. These cash payments have
ceased in July 1997 with the termination from employment of one of the former
shareholders of TLO.
Cash used in operating activities was $613,699 in the first six months of 1996.
The usage was primarily due to a net loss of $542,069 less non cash charges of
$128,976 offset by an increase in accounts receivable and unbilled services of
$208,306 and a net increase in accounts payable, client advances and accrued
expenses of $9,729. Cash used in investing activities was $487,280, primarily
due to advances to and the purchase of TLO and purchases of furniture and
equipment. There were no cash flows associated with financing activities during
the first six months of 1996.
13
<PAGE>
Management believes that during 1996, it completed the development and
implementation of the necessary infrastructure to support larger revenues in the
Company's core legal research and writing business. However, as revenues have
not grown at the pace forecast by the Company, the Company has instituted
specific cost control measures including hiring and wage freezes, salary
reductions, certain reductions in its workforce and the elimination of funding
for TLO's operations, all to reduce expenditures in all areas of the Company's
operation. In July 1997 and in exchange for certain salary reductions, eight
employees of the Company were granted an aggregate of 165,027 options to
purchase common stock of the Company, exercisable at $1.125 per share, the
market price on the date of grant. The Company expects that by the end of 1997,
expenditures in the core research business will be funded almost exclusively by
funds generated from operations. The Company believes that the cash requirements
of CADRE and other marketing and development activities in the core business
will decline in the third quarter of 1997. The Company intends to fund such
CADRE development activities and if possible, raise additional funding in 1997,
although there is no assurance that such financing will be available on terms
acceptable to the Company or at all.
During the balance of 1997, the Company expects to expend out of operating cash
approximately $73,800 in connection with the discontinuation of TLO and CLO's
operations and in the disposition of their businesses and assets. Management
does not currently anticipate recouping the Company's investment in TLO and CLO
upon such disposition.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
i. News release dated August 14, 1997 regarding the financial
results for the three and six months ending June 30, 1997 and
1996.
(b) Reports on Form 8-K
i. none
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: August 14, 1997 By: /s/ Frank G. Hallowell
-----------------------
Frank G. Hallowell
Vice President and Chief Financial Officer
14
<PAGE>
EXHIBIT
News release dated August 14, 1997 regarding financial results
for the three and six months ended June 30, 1997 and 1996
<PAGE>
August 14, 1997
Legal Research Center, Inc. Contacts: Christopher Ljungkull, CEO
700 Midland Square Building Frank Hallowell, CFO
331 Second Avenue South Legal Research Center, Inc.
Minneapolis, MN 55401 612/332-4950, 800/776-9377
e-mail: [email protected]
LEGAL RESEARCH CENTER ANNOUNCES
DISCONTINUATION OF TLO/CLO AND
REPORTS SECOND QUARTER RESULTS
Minneapolis, MN - Legal Research Center, Inc. (NASDAQ:LRCI) today announced
the restructuring and discontinuation of funding for The Law Office, Inc. (TLO)
and CyberLaw Office, Inc. (CLO). The company determined that continued funding
of these development stage enterprises was inconsistent with current financial
goals and objectives. The company also reported second quarter results.
The Company reported revenues of $580,977 for its second quarter ended June
30, 1997, an increase of 19 percent over $488,255 in 1996. The company posted a
loss from continuing operations of $233,207 or 10 cents a share, compared to a
loss from continuing operations of $205,952 or 9 cents a share, over the same
period in 1996. For the six months ended June 30, 1997, Legal Research Center
reported revenues of $1,113,512 versus $930,037 last year, an increase of 20
percent . The company posted a loss from continuing operations for the first
half of 1997 of $467,648 or 21 cents a share compared to $383,720 or 18 cents a
share in 1996.
As a result of a decision to restructure and eliminate funding of The Law
Office, Inc. (TLO), the company posted a non-cash charge of $538,200,
representing the write-down of intangible and other assets to net realizable
value and a charge of $73,800 for operating expenses during the anticipated
phase-out period. Operating losses of TLO for the quarter ended June 30, 1997
were $195,060 or 9 cents a share, compared to a loss of $106,849 or 5 cents a
share over the same period in 1996. For the six months ended June 30, 1997, TLO
operating losses were $407,517 or 18 cents a share, compared to a loss of
$158,349 or 7 cents a share for the period last year.
Taking into account the discontinuation of TLO's operations and the
non-cash charge of $538,200, the company reported a net loss for the second
quarter ended June 30, 1997 of $1,040,275 or 46 cents a share as compared to a
net loss of $312,801 or 14 cents per share in the same period of 1996. For the
six months ended June 30, 1997, the company reported a net loss of $1,487,173 or
66 cents per share as compared to a net loss of $542,069 or 25 cents a share in
the same period of 1996.
Christopher Ljungkull, chief executive officer of Legal Research Center,
commented:
"In early June, The Board of Directors of the Company asked management to
expand our existing plan to bring about immediate and predictable profitability.
This plan took effect July 1 and is based on significant reductions in expenses,
improvement of gross margins, continued revenue growth, and restructuring of The
Law Office.
We expect revenue in the second half of this year to exceed the first half.
More importantly, we are concentrating our efforts on reaching our stated goal
of profitability.
In the first quarter of 1997, we implemented hiring and wage freezes, and a
variety of other controls on administrative expenses. Starting July 1, we
imposed 10 - 30% reductions in management salaries and replaced that cash
compensation with stock options under our 1997 Stock Option Plan. We also
reduced staff through
<PAGE>
attrition and termination, resulting in a total reduction in salaries and
benefits of approximately 20% per month. Gross margins in our core business have
already improved over fourth quarter 1996 and first quarter 1997. We expect
continued improvement in gross margins during the second half of the year.
As a result of these efforts, the company's use of cash in the first half
of this year declined more than 61% from the same period in 1996. We expect the
use of cash to continue to decline as we strive to achieve profitability and
positive cash flow.
We believe that TLO and CLO, when viewed as one asset, is a valuable
platform on the Internet. In light of our limited resources, we have decided to
restructure and cease funding of TLO in the third quarter of 1997, preserve the
assets for sale while continuing to seek outside investment, and take a
provision for our remaining investment.
We expect CADRE to begin generating revenue in September and to be
substantially self-funding for the remainder of 1997. CADRE was the catalyst for
LRC to raise funds initially and is suggesting, even prior to the actual launch
of the program, that it can be a significant channel for marketing LRC's core
research business to corporate legal departments.
Legal Research Center, headquartered in Minneapolis, offers cost-effective
legal research and writing services to attorneys in corporate and private
practice throughout the world. Additionally, the company is developing a
proprietary alternative dispute resolution training program for corporate and
legal use under the trade name CADRE.
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 10-KSB, 10-QSB and other SEC filings.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
LEGAL RESEARCH CENTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 580,977 $ 488,255 $ 1,113,512 $ 930,037
Loss from continuing operations $ (233,207) $ (205,952) $ (467,648) $ (383,720)
Loss from discontinued operations $ (807,068) $ (106,849) $(1,019,525) $ (158,349)
Net loss $(1,040,275) $ (312,801) $(1,487,173) $ (542,069)
Net loss per share from continuing operations $ (0.10) $ (0.09) $ (0.21) $ (0.18)
Net loss per share from discontinuede operations $ (0.36) $ (0.05) $ (0.45) $ (0.07)
------------ ------------ ----------- ------------
Net loss per share $ (0.46) $ (0.14) $ (0.66) $ (0.25)
Weighted average common shares outstanding 2,257,633 2,200,079 2,257,633 2,168,134
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
------------ ------------
Current assets $ 1,232,929 $ 2,268,094
Furniture and equipment, net 164,793 237,495
Other assets 352,406 970,290
------------ ------------
Total assets $ 1,750,128 $ 3,475,879
============ ============
Current liabilities $ 289,109 $ 480,226
Long-term and other liabilities 105,000 152,461
Stockholders' equity 1,356,019 2,843,192
------------ ------------
Total liabilities and stockholders' equity $ 1,750,128 $ 3,475,879
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
QUARTER ENDED AND SIX MONTHS ENDED JUNE 30, 1997 FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 529,373
<SECURITIES> 0
<RECEIVABLES> 758,418
<ALLOWANCES> 120,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,232,929
<PP&E> 364,042
<DEPRECIATION> 199,249
<TOTAL-ASSETS> 1,750,128
<CURRENT-LIABILITIES> 289,109
<BONDS> 0
0
0
<COMMON> 32,976
<OTHER-SE> 1,323,043
<TOTAL-LIABILITY-AND-EQUITY> 1,750,128
<SALES> 0
<TOTAL-REVENUES> 1,113,521
<CGS> 0
<TOTAL-COSTS> 670,788
<OTHER-EXPENSES> 905,283
<LOSS-PROVISION> 4,600
<INTEREST-EXPENSE> 489
<INCOME-PRETAX> (467,648)
<INCOME-TAX> 0
<INCOME-CONTINUING> (467,648)
<DISCONTINUED> (1,019,525)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,487,173)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
