SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________.
Commission file number 0-26548
Legal Research Center, Inc.
(Name of Small Business Issuer in Its Charter)
Minnesota 41-1680384
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
700 Midland Square Building, 331 Second Ave. So., Minneapolis, MN 55401
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: 612/332-4950
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the issuer filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
-- --
[Cover page 1 of 2 pages]
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
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State issuer's revenues for its most recent fiscal year. $2,760,038
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)
$2,854,813 as of March 7, 1997
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
3,297,633 shares of Common Stock as of March 7, 1997
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security-holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to
security-holders for fiscal year ended December 31, 1996).
Definitive Proxy Statement of Legal Research Center, Inc., relating to the
Annual Meeting of Shareholders to be held in June 1997 (the "1997 Proxy
Statement") (incorporated by reference into Part III of this Form 10-KSB).
[Cover page 2 of 2 pages]
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PART I
Item 1. DESCRIPTION OF BUSINESS
General
Legal Research Center, Inc. (the "Company" or "LRC") became a
publicly-owned company in August 1995. The Company provides outsourced legal and
factual research, writing and support services to U.S. and Canadian attorneys in
corporate and private practice. LRC utilizes a carefully selected group of
attorneys to provide value-added services to its customers by (i) conducting
computerized and manual legal and factual information research and analysis and
(ii) preparing written memoranda, formal court-ready legal briefs and surveys of
the law. As an adjunct to its core services, the Company also provides contract
attorneys to law firms and corporate law departments on a temporary or permanent
basis, library management services and non-legal research services to the
general public.
Industry Overview
U.S. Industrial Outlook 1994 estimated that over $97 billion was spent in
1994 in the U.S. on legal services and that such expenditures have increased
significantly over the past ten years. In advising clients on the routine legal
and practical aspects of their business transactions and dealings, and in
advocating positions in court on behalf of clients, attorneys in corporate and
private practice rely on an analysis of applicable laws, rules, regulations and
court decisions. As federal, state and local governmental authorities
increasingly add to the myriad of laws and as the number of court decisions
proliferate, the accurate and timely analysis of the controlling law places
growing burdens on practicing private and corporate attorneys. Even with the
introduction of computerized legal databases such as West Publishing Company's
WESTLAW system and Mead Data Central, Inc.'s LEXIS/NEXIS system, a significant
portion of the average attorney's billable time is dedicated to legal research.
In a large private law firm, an associate attorney, who typically is less
experienced than the attorney having the primary business contact with the
firm's client, is usually assigned the task of conducting all necessary legal
and factual research and of writing an internal memorandum to the senior
attorney related to the client's project or lawsuit. The memorandum, which
usually describes the controlling laws and court decisions relevant to the
issues presented, may be shared with the client in connection with strategic
decision making on a business issue or in the ongoing litigation. If the project
involves litigation, the associate attorney may also be assigned the
responsibility to prepare a legal brief for presentation to the court. A legal
brief advocates a client's legal, factual and business reasons for prevailing
over the opposing party on the issues presented to the court for adjudication.
Research and writing services, such as LRC, prepare legal memoranda and briefs
for review and use by attorneys in law firms as an alternative to internal
preparation by law firm associates.
Corporations with in-house legal counsel usually rely on their staff to
advise management on core business and legal issues. However, in-house counsel
continue to rely on private law firm support for expertise in areas outside of
the counsel's knowledge and for the conduct of litigation. As corporations seek
to improve operating efficiencies and reduce costs in all areas of their
businesses, their in-house legal counsel also seek to reduce overall outside
legal expenses. Increasingly, corporate clients have begun to treat legal
services as a commodity and have been carefully reviewing the legal fees charged
by private law firms for analytical research and writing, especially since much
of this work is performed out of the client's view and therefore cannot easily
be assessed as to its actual added value. These trends also have led
corporations to outsource their legal and factual research and writing
activities to professional research and writing companies such as LRC.
Management believes that there will be
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continued growth in the outsourcing of legal and factual research and writing
activities by corporations and that such corporations will increasingly use, or
require their outside counsel to use, companies such as LRC for such purposes.
Individual attorney practitioners and small law firms often do not have the
professional support for the conduct of legal and factual research or for
writing projects. In order to accomplish necessary legal research and writing,
yet at the same time focus their efforts on direct client contact, solo
practitioners and small law firms increasingly are outsourcing their legal and
factual research and writing activities to professional companies such as LRC.
Business Overview and Initiatives
LRC's core activities consist of providing legal and factual information
research and writing services to its customers. The Company may receive
assignments from corporate in-house counsel or law firms requesting the analysis
of a single legal or factual issue or of complex, interrelated issues. Upon
receipt of an assignment, the Company assigns the project directly to one of the
Company's research attorneys who contacts the customer to obtain any additional
information necessary to understand the scope of the project and the customer's
needs. The researcher accesses available legal and other computer databases,
such as WESTLAW, LEXIS/NEXIS and DIALOG, to locate controlling laws, rules and
regulations and court decisions relevant to the customer's research request and
conducts research manually, in order to obtain the information necessary to
complete the customer's project.
In most cases, the Company provides its customers with a finished written
work product often in the form of (i) a memorandum describing the facts of the
customer's project and setting forth the legal and factual analysis of the
issues presented, (ii) a court-ready legal brief which advocates the legal,
factual and business reasons why the customer should prevail over the opposing
party in the matter before the court for adjudication or (iii) a survey of the
applicable laws, rules and regulations in various jurisdictions on the topics
selected by the customer. In order to ensure the quality of the Company's work
product, the Company's managing research attorneys conduct a substantive and an
editorial review of legal memoranda, briefs and multi-jurisdictional surveys,
and all documents are edited and checked for proper citations.
LRC regularly seeks to create new products and value-added services for its
clients. Towards this end, the Company developed a product called
Multi-Jurisdictional Surveys. The Company prepares written reports of the laws
in various states on selected topics for corporate customers. For example, in
1996, the Company completed a large, 52 jurisdiction survey of law for the
banking and financial services industries. An attractive feature of this form of
product is that, once prepared, it can be resold to other customers who can use
this information. The Company also adds value to the product by converting all
or portions of the document into electronic form which is easier to review and
cross reference. The Company attempts to re-market these surveys to other
corporate customers and shares proceeds from remarketing with the originating
customer, thereby enabling them to recoup a substantial portion of the original
cost of the survey.
The Company believes that as on-line communication of information on
established networks like The Microsoft Network (MSN) and on the Internet become
more standardized and widely utilized, corporate counsel and attorneys will
gravitate towards using this medium to purchase and sell their products and
services. The Company's strategy is to play an active role in this emerging
market.
In May 1996 the Company completed the purchase of The Law Office, Inc.
(TLO). TLO is a development stage entity which will provide content by the way
of web-sites on MSN and the Internet.
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TLO operates as a MSN content provider under a non-exclusive contract with
Microsoft Online Services Partnership. The contract expires in December 1997 and
the Company expects to be able to renew this contract for additional annual
terms after the initial expiration date. Revenues will be derived from the
leasing of space on TLO's web-site and from the sale of services and
advertising. As of December 31, 1996, TLO had generated $24,300 in revenues.
1996 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 and has advanced $974,000 as working capital. TLO has a
negative book value and requires substantial additional investment to achieve
its economic potential.
In October 1995, the Company created The CyberLaw Office, Inc. (CLO) an
eighty five percent owned subsidiary, to expand its on-line activities into the
international market place. The remaining fifteen percent is owned by Arun K.
Dube, its Chairman of the Board of Directors and Chief Executive Officer of CLO.
In August 1996, the Company consolidated management of all Internet related
activities including TLO. CLO plans to seek additional investment from potential
outside investors in the future. The Company intends to consolidate ownership of
TLO under CLO after additional financing is obtained.
CLO 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. Through a comprehensive and
aggressive sales, promotional, advertising and networking effort that leverages
on the marketing success of Windows 95 and Office 97, CLO and TLO expect to
attract entrepreneurial national and regional practice attorneys and vendors to
offer their services and products through CLO's and TLO' s web-site.
In 1996, the Company continued the development of 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. CADRE's mission is to provide
corporations with the highest quality state of the art alternative dispute
resolution training and consulting services, enabling corporate managers and
legal counsel to develop, implement and institutionalize policies for reducing
the risk and spiraling costs of litigation. Management believes that the trend
to save legal costs which have led to outsourcing of analytical research and
writing activities by corporations will also lead in-house corporate counsel
increasingly to seek ADR as a more cost-effective and efficient alternative to
litigation in resolving corporate legal disputes. The potential market for the
services of CADRE includes any industry presently committed to reducing its
conflict costs. Industries experiencing the most claims and highest conflict
costs clearly will be most interested in CADRE's services. 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 second
quarter of 1997.
The Company believes that the continued development of new products and
investment in new market niches will be justified by the returns generated from
these investments. In addition, the Company believes that initiatives such as
CLO, TLO and CADRE will create greater exposure and awareness of the Company's
core research and writing services and will create additional impetus for growth
in the traditional markets served by the Company.
As an adjunct to its other services, the Company provides full or part-time
contract attorneys and librarians for temporary or permanent assignments to law
firms and corporate law departments. In many cases, a customer indicates to the
Company its interest in engaging the specific contract attorney who had
previously been assigned to a project for such customer. While revenues from
such services are not
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significant, the Company believes that offering such value-added placement
services enhances the Company's visibility and long-term relationships with its
customers. The Company also provides document retrieval services for attorneys
and the general public.
Sales and Marketing
LRC's marketing strategy centers around providing customized, value-added
solutions in response to each customer's analytical research and writing needs.
Because of the Company's historical limited marketing budget, the Company had
relied primarily on its customers' own initiatives to provide repeat business to
LRC. Since its initial public offering, the Company has been targeting
opportunities to capture an increasing share of its customers' analytical
research and writing activities by increasing its contacts with its existing
customers through direct mail, telemarketing and direct account services. In
1996, the Company added one sales representative to increase its direct sales
effort with respect to research and writing projects.
The Company also seeks strategic marketing relationships with major law
associations and other providers of legal services. LRC believes these
relationships enhance the Company's visibility to practitioners and reputation
for quality and enable its marketing partners to offer their members a
value-added service. In 1989, the Association of Trail Lawyers of America (ATLA)
selected LRC as the exclusive designated outsourced provider of research and
writing services to its 60,000 members. Since 1990, LRC has also served the
members of the American Corporate Counsel Association (ACCA), the largest
organization serving the nation's corporate counsel. In 1996, the Company was
invited to become a member of ACCA's Chairman Circle Gold, an honor provided
only one other legal vendor working with ACCA. Also in 1996, the National
Association of Criminal Defense Lawyers selected the Company as the exclusive
outsourced provider of legal research and writing for their 9,000 members. The
Company paid approximately $20,000 in royalties for research and writing
referrals in 1996.
In 1994, the Company entered into an agreement with West Publishing Company
pursuant to which West, the leading legal publisher in the U.S. and operator of
the WESTLAW computer legal database, exclusively refers to the Company for a fee
all requests for analytical legal and factual research and writing. The term of
the West Agreement is through June 1997, and the agreement automatically renews
for successive one year periods unless earlier terminated by either of the
parties on 90 days written notice. In 1996, West was acquired by The Thompson
Corporation. The Company does not expect its relationship with West to
materially change as a result of this acquisition.
The Company believes that the ownership and development of CLO and TLO will
result in significant cost sharing and market development opportunities. The
Company will have a presence on MSN through TLO and will be able to sell its
multi-jurisdictional surveys products to a wider market, both in the legal and
the non-legal market.
Customer Relationships
The Company generally operates under project-by-project contractual
agreements. The pricing component of a contract generally includes a fixed price
or an hourly rate for analytical research and writing services and separate
charges for computer database and other ancillary charges. The Company generally
charges higher hourly rates for quick turn-around service and offers discounted
rates to certain customers willing to commit to a specified usage of the
Company's services. The Company often prices multi-jurisdictional surveys of the
law on a flat fee basis.
In 1996, pursuant to a three year alliance, the Company completed a large
multi-jurisdictional survey for a customer which accounted for 52% of the
Company's revenues. This survey represented a
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non-recurring multi-jurisdictional project in 1996. The Company will continue to
receive revenue under its agreement with this customer to update the survey over
the next two years. Revenue under this agreement will not be at the same level
in future years.
Executive Officers of the Company
The following sets forth biographical information for Christopher R.
Ljungkull, James R. Seidl and Frank G. Hallowell, the executive officers of the
Company. Biographical information for directors of the Company can be found in
the Company's 1997 Proxy Statement, incorporated herein by reference.
Christopher R. Ljungkull has been Chief Executive Officer of the Company
since rejoining it on a full time basis in 1994. From 1987 to 1994, Mr.
Ljungkull served in various capacities with West Publishing Corporation, most
recently as an editor. Mr. Ljungkull is an attorney and co-founder of the
Company and has been a director since its inception.
James R. Seidl has been the President of the Company since 1988 and served
as its Chief Executive Officer prior to Mr. Ljungkull's return in 1994. Mr.
Seidl is an attorney and co-founder of the Company and has been a director of
the Company since its inception.
Frank G. Hallowell joined the Company as Vice President and Chief Financial
Officer in July 1996. From 1994 to 1996, Mr. Hallowell was with BellSouth
Corporation as Regional Director of Finance for Cellular One in Madison, WI.
From 1990 to 1994, Mr. Hallowell was a Project Manager of Mergers and
Acquisitions, at BellSouth's Altanta, Georgia headquarters. Mr. Hallowell is a
certified public accountant.
Personnel
As of March 7, 1997, the Company had 45 employees of which 10 are
part-time, and a pool of 43 contract attorneys. Most of the Company's contract
attorneys work part-time. Six full-time employees were in sales and marketing,
thirteen were in research related activities of which two are part-time,
fourteen in support services of which eight are part-time, and twelve in finance
and administration. No Company employees are currently represented by labor
unions and the Company is not a party to any collective bargaining agreement.
The Company has never been subject to any form of work stoppage or strike and
has not experienced any labor difficulties. The current full-time staffing level
is considered to be adequate with modest staff increases anticipated in the
sales and customer services area. The Company expects that it will continue to
need more contract attorneys as its business grows and expects that it will be
able to secure such attorneys as needed.
Competition
The business of providing legal research services is highly competitive and
extremely fragmented. The Company competes in the corporate market with in-house
counsel and outside law firms and individual legal practitioners, who are also
customers of the Company. For its major corporate clients, the Company competes
with larger law firms which have the financial ability to negotiate flexible fee
arrangements for their major clients. The Company also competes with other
companies, such as the National Legal Research Group and Legal Research Network,
which also provide legal research services on an outsourced basis.
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Government Regulation
The Company engages attorneys as employees or independent contractors to
provide analytical research and writing services for the Company and its
customers. The practice of law is regulated by each state. The Company believes
that it is not engaged in the practice of law because it provides customized
research and writing services for other lawyers to use in connection with
representation of their clients. In addition, the Standing Committee on Ethics
and Professional Responsibility of the American Bar Association has taken the
position that performing legal research does not constitute the practice of law.
Although the Company believes that it does not engage in the practice of law,
there can be no assurance that a state will not take the position that the
Company is improperly engaged in the practice of law or that all of the persons
providing legal research services must be licensed in the state where the
Company's customers are located.
Insurance
The Company carries property damage and workers' compensation insurance
coverage in amounts management considers sufficient to protect the Company.
Management does not believe that the Company is engaged in the practice of law
and accordingly does not maintain any professional malpractice insurance.
Item 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters and administrative offices are located
in Minneapolis, Minnesota in an office building and consists of approximately
6,057 square feet leased office space. The Company leases the facility from a
related party under an operating lease expiring January 2001, requiring annual
rent of approximately $73,000 and a portion of the increase in tax and operating
costs over their 1993 levels. The lease is on the same terms and conditions as
the lease between the related party and the related party's landlord. Because
most of the Company's research attorneys generally office in their homes or in
public library facilities, the Company believes that the leased premises are
suitable and adequate for its current operations and its foreseeable needs. In
the event that additional space is required, the Company has the right, prior to
October 1, 1998, to expand the leased premises to include any available space in
the office building. Prior to November 1, 1998, the landlord has the right,
subject to the Company's right of first refusal, to lease the space occupied by
the Company to a third party. The Company does not anticipate any difficulty in
obtaining additional premises if necessary.
Item 3. LEGAL PROCEEDINGS
The Company is not currently a party to any litigation which would likely
have a materially adverse effect on the Company's results of operations or
financial condition, if decided adversely to the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted during the fourth quarter of the Company's
1996 fiscal year to a vote of security holders, through the solicitation of
proxies or otherwise.
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Common Stock has been traded on the Nasdaq SmallCap Market
(Nasdaq) since August 3, 1995. As of March 7, 1997, there were approximately 56
recordholders of its Common Stock. The Company estimates that there are
approximately 1,200 beneficial holders of its Common Stock.
The following table sets forth the quarterly high and low bid prices for
the periods indicated, as reported by Nasdaq. The prices listed are inter-dealer
quotations without retail mark-up, mark-down or commission and may not reflect
actual transactions. The Company has not independently verified the prices
listed.
Period Low Bid High Bid
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08/03/95 - 09/30/95 $3-1/4 $4-1/4
10/01/95 - 12/31/95 $2-1/2 $3-3/4
01/01/96 - 03/31/96 $2-1/4 $4-4/8
04/01/96 - 06/30/96 $1-7/8 $3-3/8
07/01/96 - 09/30/96 $1-3/4 $2-7/8
10/01/96 - 12/31/96 $1-1/4 $2-7/8
Current (03/07/97) $1-5/8 $1-23/32
Under Nasdaq rules, the Company's Common Stock may be deleted from the
Nasdaq system if, among other matters, the Company's total assets fall below
$2,000,000, stockholders equity falls below $1,000,000, or the bid price of the
Common Stock falls below $1.00.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
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 foot notes which
appear elsewhere in this Report.
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
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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 Risks related to obtaining permanent financing for CLO and TLO.
o Effectiveness of cost cutting measures implemented in 1996 by the
Company to moderate the growth in sales and marketing and general and
administrative expenses.
The Company's revenues have historically been derived from conducting
analytical research and writing a non-recurring basis for its customers.
Historically, the Company has experienced a seasonal fluctuation in revenues
with the first quarter being the slowest quarter of the year and the last
quarter being the strongest. During 1996, the Company implemented programs to
attract customers to enter into long term relationships to provide greater
consistency in quarterly revenues.
As discussed in greater detail in Note 2 of the Consolidated Financial
Statements, the Company issued shares in its initial public offering (IPO) in
August and received $4,462,880 in net proceeds from this offering. The Company
used a portion of the proceeds to hire additional sales, research, management
and support personnel to substantially increase its sales and marketing
activities and to support a larger operation. In addition to increased spending
in the sales and marketing area, the Company advanced CLO and TLO working
capital. The Company intends to secure separate, permanent financing for CLO and
TLO.
The Company increased its operating costs beginning in the third quarter of
1995 and continuing through 1996, as it positioned itself for growth. In
addition, during 1996 the Company completed the largest multi-jurisdictional
survey project in its history. The production effort to complete this survey
required an additional investment in infrastructure and operating expense from
what was originally contemplated, which reduced gross margins in the fourth
quarter of 1996. Management believes that these expenditures will position the
Company to realize and support the expected long term growth of revenues and
business operations.
Results of Operations
Year ended December 31, 1996 compared to the year ended December 31, 1995
Revenues increased by $1,355,649, or 97%, to $2,760,038, for 1996 over 1995
revenues of $1,404,389. The increase in revenues in 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 survey projects quarterly or annually.
The Company also attempts to re-market surveys to other customers with similar
needs or issues. The Company expects to continue its sales and marketing efforts
to seek and expand upon similar projects in the future.
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
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services, royalty fees for association referrals, computer database charges and
document retrieval expenses.
Total direct operating costs increased $975,070, or 132%, to $1,715,257
over 1995 direct operating costs of $740,187. The increase in direct operating
costs are primarily due to higher personnel costs, hiring of independent
attorneys and fees paid to outside firms to complete large multi-jurisdictional
research projects. The percentage increase in these costs was higher than the
increase in revenues for 1996, due to additional research and production
expenses to complete and deliver a large, fixed price multi-jurisdictional
survey by December 31, 1996. The production effort required additional
expenditures for personnel and independent contractors from what was originally
contemplated. The Company expects to recover these additional costs in 1997 and
beyond with new surveys already in production and on order, as well as
subsequent re-sales of the original survey.
Gross profit increased $380,579, or 57%, to $1,044,781 over 1995 gross
profit of $664,202. As a percentage of revenue, gross profit declined to 38% in
1996 compared to 47% in 1995. The decline is principally due to the increase in
direct operating costs to complete large multi-jurisdictional surveys as
discussed above. The Company expects gross profit in the core research business
to return to higher levels in 1997.
Other operating costs include compensation of officers, sales and other
corporate staff, advertising and direct marketing expenditures, development
costs of TLO and general corporate overhead, including depreciation and
amortization. These costs increased $1,613,465, or 148%, to $2,705,009 over 1995
costs of $1,091,544. The increase in these costs by category was $585,082, or
144%, for sales and marketing; $482,292, or 70%, in general and administrative;
and $546,091 in development costs of TLO. The increase in sales and marketing
costs was due to higher compensation and benefit costs, the hiring of
additional sales and support staff and increased marketing and advertising
expenditures. General and administrative expenditures increased due to higher
compensation and benefit costs, the hiring of additional finance and support
personnel and increases in operating expenses (rent, utilities, supplies) for a
larger organization.
The Company recognized $546,091 of expenses associated with the development
of TLO from May through December 1996. Development costs were incurred to hire a
sales and support staff and begin marketing its services. From January 1, 1996
through the date of acquisition May 13, 1996, the Company recorded 25% of TLO's
losses, or $64,476 under the equity method of accounting. TLO commenced
operations in May 1995 and reported year-to-date losses of $197,622 through
December 31, 1995, of which $29,500 had been recorded by the Company under the
equity method of accounting.
Interest income increased $42,222, or 50%, to $127,018 in 1996 over
interest income of $84,796 in 1995. The increase in interest income was due to a
full years earnings on invested cash proceeds received in the public offering
that was completed in August of 1995. Interest expense decreased $20,075 to $632
due to the retirement of substantially all interest bearing obligations after
the IPO in 1995.
The Company recorded a charge of $122,711 as its share of losses in
unconsolidated investments in TLO and American Research Corporation (ARC). For
further discussion on ARC see Note 3 to Consolidated Financial Statements. In
1995, the Company recorded $29,500 as its share of losses in unconsolidated
investments.
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New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which establishes new standards for stock-based employee
compensation plans. The statement establishes a fair-value-based method of
accounting for stock-based compensation plans and encourages, but does not
require, entities to adopt that method in place of APB Opinion No. 25,
Accounting for Stock Issued to Employees. Entities that elect to continue under
Opinion No. 25 must disclose pro forma net income and earnings per share for all
years presented as if Statement No. 123 had been adopted.
In 1996, the Company adopted the statement but did not adopt the fair-value
based method. Required pro forma disclosures are included in Note 6 to the
Consolidated Financial Statements.
Liquidity and Capital Resources
The Company continued to use the proceeds from its IPO to fund 1996
operating costs, to position itself for future growth in 1997, 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. At December 31, 1996, the Company had cash and cash
equivalents of $955,600 and working capital of $1,787,868.
Net cash used in operating activities increased from $432,444 in 1995 to
$1,925,548 in 1996. The Company had a net loss of $1,656,553 in 1996 compared to
a net loss of $392,753 in 1995 for the reasons discussed above. Non cash charges
increased $342,211 in 1996 over 1995 primarily due to increased amortization and
depreciation on long-term assets, increased provision for doubtful accounts and
a full year's loss from operations from investments accounted for under the
equity method. The use of cash stemming from the changes in other current assets
and liabilities in 1996, net of the effects of the purchase of TLO, was
$710,712. This use of cash is primarily due to an increase in accounts
receivable, unbilled services, related party accounts and other current assets
of $802,203 offset by a net increase in accounts payable and accrued expenses of
$91,491. The increase in accounts receivable, unbilled services and related
party advances is due to higher volume of larger projects that take longer to
complete and under contract terms, are billed as phases of the project are
completed.
Net cash used in investing activities increased by $68,521 in 1996 over
1995. The increase was due to interest and advances to TLO prior to acquisition
in May 1996, cash paid to acquire TLO, investments in the CADRE and TLO web site
development. The Company expects that investment in CADRE will continue during
the first half of 1997.
Cash used in financing activities was $48,928 in 1996 compared to
$4,445,103 of net cash provided in 1995. The use of cash in 1996 was due to
payments made to former shareholders in connection with the acquisition of TLO.
The cash provided in 1995 was primarily the result of the Company's IPO. In
1995, the Company used some of the IPO proceeds to pay down outstanding debt,
including bank debt and other borrowings. The Company's financing activities are
described in greater detail in Note 2 of the Consolidated Financial Statements.
Management believes that during 1996, it has completed the development and
implementation of the necessary infrastructure to support larger revenues in the
core business in 1997 and beyond. In addition, the Company has instituted
specific cost control measures such as hiring and wage freezes, to reduce
expenditures in all areas of its operation. 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 CLO, TLO, CADRE and other
-10-
<PAGE>
marketing and development activities will be significant in the first half of
1997. Initially, the Company intends to fund such investments and 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. If the Company does not raise such funds, cash advances to
CLO and TLO will be reduced or eliminated in order to conserve cash.
The Company does not anticipate the payment of cash dividends on its Common
Stock in the foreseeable future. It is anticipated that profits, if any,
received from operations will be devoted to the Company's future operations. Any
decision to pay dividends will depend upon the Company's profitability at the
time, cash availability and other factors.
Item 7. FINANCIAL STATEMENTS
The information required by this item is incorporated herein by reference
to pages F-1 through F-18, which follow this page.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-11-
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-2
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F18
- --------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Legal Research Center, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Legal Research
Center, Inc. and subsidiaries, as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Legal Research
Center, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
February 14, 1997
F-2
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 955,600 $ 3,510,752
Accounts receivable:
Trade 713,965 246,945
Unbilled services 505,419 205,582
Related party 174,066 136,223
Less, allowance for doubtful accounts (120,000) (41,341)
--------------------------
Net accounts receivable 1,273,450 547,409
Other 39,044 5,000
--------------------------
Total current assets 2,268,094 4,063,161
--------------------------
Other Assets
Intangible assets, net of accumulated amortization of
$152,789 827,465 --
Investment in and note receivable from The Law Office, Inc. -- 193,539
Capitalized development costs, net of accumulated
amortization of $5,916 in 1996 101,061 14,000
Investment in American Research Corporation 41,764 100,000
--------------------------
970,290 307,539
--------------------------
Furniture and equipment, at cost 367,381 197,018
Less, accumulated depreciation 129,886 44,598
--------------------------
237,495 152,420
--------------------------
$ 3,475,879 $ 4,523,120
==========================
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 182,032 $ 172,393
Non compete agreement 16,508 --
Client advances 35,957 39,969
Accrued expenses:
Compensation 108,438 59,544
Other 137,291 10,510
--------------------------
Total current liabilities 480,226 282,416
--------------------------
Non compete agreement 47,461 --
--------------------------
Common stock subject to repurchase obligation 105,000 --
--------------------------
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 (1,988,841) (332,288)
Notes receivable from officers and directors (1,966,250) --
--------------------------
2,843,192 4,240,704
--------------------------
$ 3,475,879 $ 4,523,120
==========================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
1996 1995
- --------------------------------------------------------------------------------
Revenues $ 2,760,038 $ 1,404,389
Direct operating costs:
Compensation and benefits 1,340,666 561,152
Other 374,591 179,035
--------------------------
Total direct operating costs 1,715,257 740,187
--------------------------
Gross profit 1,044,781 664,202
--------------------------
Other operating costs:
Sales and marketing 990,726 405,644
General and administrative 1,168,192 685,900
Developmental costs of The Law Office, Inc. 546,091 --
--------------------------
Total other operating costs 2,705,009 1,091,544
--------------------------
Operating loss (1,660,228) (427,342)
Interest income 127,018 84,796
Interest expense (632) (20,707)
Losses related to unconsolidated investments (122,711) (29,500)
--------------------------
Net loss $(1,656,553) $ (392,753)
==========================
Net loss per share $ (0.75) $ (0.33)
==========================
Weighted average common shares outstanding 2,213,040 1,191,189
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
Common Stock Additional
------------------------ Paid-in Accumulated Notes
Shares Amount Capital Deficit Receivable Total
-----------------------------------------------------------------------------------
<S> <C> <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 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)
-----------------------------------------------------------------------------------
Balance, December 31, 1996 3,297,633 $ 32,976 $ 6,765,307 $(1,988,841) $(1,966,250) $ 2,843,192
===================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,656,553) $ (392,753)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 81,642 28,467
Amortization of intangible assets and capitalized development costs 158,705 --
Provision for uncollectible accounts receivable 78,659 41,539
Equity in losses of unconsolidated investments 122,711 29,500
Changes in assets and liabilities, net of effects of the
purchase of The Law Office, Inc. in 1996:
Trade accounts receivable and unbilled services (682,450) (272,624)
Related party accounts and other current assets (119,753) (1,816)
Accounts payable (48,020) 103,539
Client advances (16,512) 29,419
Accrued expenses 156,023 2,285
--------------------------
Net cash used in operating activities (1,925,548) (432,444)
--------------------------
Cash Flows From Investing Activities
Purchases of furniture and equipment (123,285) (139,124)
Advances to The Law Office, Inc. through date of acquisition (266,453) --
Cash paid for The Law Office, Inc. including acquisition costs (97,961) (29,500)
Capitalized development costs (92,977) (14,000)
Purchase of American Research Corporation common stock -- (100,000)
Disbursements on related-party notes receivable -- (229,532)
--------------------------
Net cash used in investing activities (580,676) (512,156)
--------------------------
Cash Flows From Financing Activities
Cash payments on redemption of common stock (35,000) --
Cash payments on non compete agreements (13,928) --
Proceeds on notes payable -- 500,000
Principal payments on long-term debt and notes payable -- (564,023)
Distributions to stockholders -- (36,000)
Net proceeds from sale of stock -- 4,554,126
--------------------------
Net cash (used in) provided by financing activities (48,928) 4,454,103
--------------------------
(Decrease) increase in cash and cash equivalents (2,555,152) 3,509,503
Cash and cash equivalents
Beginning 3,510,752 1,249
--------------------------
Ending $ 955,600 $ 3,510,752
==========================
</TABLE>
See Notes to Consolidated Financial Statements
(Continued)
F-7
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 632 $ 20,707
==========================
Supplemental Schedule of Non-cash Investing and Financing
Activities
Notes received for issuance of common stock $ 1,966,250 $ --
Conversion of note payable into common stock
subject to repurchase obligation 140,000 --
Conversion of note payable to common stock -- 154,000
Deferred stock offering costs -- 20,246
Acquisition of The Law Office, Inc.
Tangible assets acquired $ 79,997 $ --
Intangible assets acquired 980,254 --
Liabilities assumed (625,352) --
Stock options issued (15,441) --
Non compete agreement (77,897) --
Common stock issued (243,600) --
--------------------------
Cash purchase price, including acquisition costs $ 97,961 $ --
==========================
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business and credit risk: Legal Research Center, Inc. provides legal
and factual research and writing services to U.S. and Canadian attorneys in
corporate and private practice. The Company grants credit to its customers on
terms it establishes for each customer. Through its eighty-five percent owned
subsidiary The CyberLaw Office, Inc. (CLO) and its wholly-owned subsidiary The
Law Office, Inc. (TLO), the Company intends 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.
Use of estimates in the preparation of financial statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Revenue recognition: Revenue is recognized as the services are performed.
Unbilled services relate to unbilled revenue recognized for services performed
which include projects which are not fully complete.
Cash and cash equivalents: The Company considers all investments with an
original maturity of three months or less to be cash equivalents.
Cash and cash equivalents includes approximately $946,600 in 1996 and $3,544,000
in 1995, which were invested in money market accounts. These investments are
carried at cost which is equal to fair value.
Depreciation: Depreciation is computed using the straight-line method over three
to seven years.
Capitalized development costs: The Company capitalizes certain product costs
incurred for the development of its Corporate Alternative Dispute Resolution
Enterprises (CADRE) program and through part of 1996, the development costs of
the web-site for TLO. Capitalized costs include direct labor and fees and
expenses of contractors who are or have assisted in the development of the
product or service. Once the product or service has been launched, such costs
are no longer capitalized and are expensed as incurred. Capitalized development
costs for products now in service are amortized on a straight-line basis over a
two year period.
Intangible and long-lived assets: In accordance with Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
to Be Disposed of, the Company reviews its long-lived assets and goodwill
related to those assets periodically to determine potential impairment by
comparing the carrying value of the long-lived assets with the estimated future
net undiscounted cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future
cash net cash flows be less than the carrying value, the Company would recognize
an impairment loss at that date. An impairment loss would be measured by
comparing the amount by which the carrying value exceeds the fair value
(estimated discounted future cash flows) of the long-lived assets and goodwill.
While management has determined that no impairment currently
F-9
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
exists, a future impairment may develop if the Company is unable to meet its
plans and objectives related to the development of CLO and TLO.
Fair value of financial instruments: The following methods and assumptions were
used to estimate the fair value of each class of financial instruments.
Cash and cash equivalents: The carrying value approximates fair value.
Notes receivable and advances: The carrying value approximates fair value due to
the associated interest rate approximating the current rate available on similar
notes.
Investment in American Research Corporation (ARC): The fair value of this
investment, based upon subsequent sales of stock by ARC, results of operations
and estimated cash flow, is estimated to be its recorded value.
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.
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.
Newly adopted accounting standard: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, which established new standards for
stock-based employee compensation plans. The statement established a
fair-value-based method of accounting for stock-based compensation plans and
encourages, but does not require, entities to adopt that method in place of APB
Opinion No. 25, Accounting for Stock Issued to Employees. Entities that elect to
continue under Opinion No. 25 must disclose pro forma net income and earnings
per share for all years presented as if Statement No. 123 had been adopted. In
1996, the Company adopted the statement but did not adopt the fair value based
method in measuring expense. Required pro forma disclosures are detailed in Note
6.
Advertising and promotion: All costs associated with advertising and promoting
products are expensed in the year incurred. Advertising and promotion expense
was approximately $449,000 and $214,000 in 1996 and 1995, respectively.
Note 2. Common Stock
Public offering and recapitalization: On August 8, 1995, the Company sold
1,350,000 shares of its common stock at a price of $3.50 per share in an initial
public offering (IPO). Under terms of the IPO, the underwriter exercised an over
allotment option to purchase an additional 202,500 shares of common stock at a
price of $3.50 per share, which was exercised by the underwriter on September
13, 1995. The underwriter was also granted warrants to purchase an additional
135,000 shares at a price of $4.20 per share. The Company received net proceeds
of an aggregate of $4,462,880 from the sale of the shares of common stock in the
IPO.
F-10
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Financing and issuance of stock: In May and June 1995, the Company issued
$500,000 of 10 percent promissory notes (including $150,000 purchased by related
parties) and warrants to purchase 100,000 shares of the common stock at $2.625
per share. In June 1995, $154,000 of the promissory notes were converted into
57,037 shares of common stock at $2.70 per share. The remaining notes were
repaid in August 1995. The warrants expire in June 1999.
In June 1995, the Company issued to two officers and stockholders in the
aggregate 26,296 shares of common stock at a price of $2.625 per share and
warrants to purchase 14,200 shares for $2.70 per share which expire in June
1999.
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. In October 1996, 10,000 of such shares
were repurchased by the Company from the shareholder at $3.50 a share. 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 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.
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.
Common stock issued to officers or directors (Officer Shares) 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 treated as stock options and therefore common stock equivalents for purposes
of calculating weighted common average shares outstanding and earnings per
share.
Note 3. Investments and Notes Receivable
Acquisition of The Law Office, Inc.: In May 1995 the Company acquired 25% of the
stock of The Law Office, Inc. (TLO). The investment in TLO was accounted for
under the equity method of accounting through May 1996.
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 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 consisted of actual and
contingent liabilities. During the third and
F-11
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
fourth quarters 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:
Purchase Price:
Stock issued and cash paid $ 341,561
Stock options issued 15,441
Liabilities assumed 703,249
----------
$1,060,251
==========
Allocated to:
Tangible assets $ 79,997
Intangible assets:
Microsoft contract 70,800
Non compete agreement 96,468
Goodwill 812,986
----------
$1,060,251
==========
The excess of the purchase price net of liabilities assumed over the fair value
of the tangible asset acquired has been assigned to intangible assets which are
being amortized using the straight-line method over the following periods:
Microsoft contract 18 months
Non compete agreement 54 months
Goodwill 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 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. CLO has insignificant assets and
reported no results from operations in 1996 or 1995. 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 when additional financing is complete. TLO has a negative book value
and requires substantial additional investment to achieve its potential. CLO
plans to seek additional investment from outside investors in 1997.
American Research Corporation: In September 1995, the Company purchased less
than 5 percent of the common stock of ARC for $100,000. ARC has developed a
product and service that supports professional service providers. ARC has
reported losses in operations since inception in 1992. 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 $202,000 and $84,000 in
1996 and 1995, respectively.
F-12
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company uses the cost method of accounting for this investment. In September
1995, the Company advanced ARC $50,000, evidenced by a unsecured 9.75% note. The
note plus interest was repaid in October 1996.
At December 31, 1996 and 1995, the Company had receivables from ARC of
approximately $174,000 and $136,000, respectively. 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. ARC is currently seeking
investors to raise funds to meet its operating cash requirements. The Company,
based on information currently available through discussions with ARC
management, has concluded that the amounts due from ARC should be collectible.
Given the uncertainties associated with ARC attempts to raise additional
financing and the possibility that ARC may be unable to raise the necessary
funds to meet its obligations, the Company has reserved approximately $80,000 of
the December 31, 1996 receivable as potentially uncollectible. In addition, the
Company wrote down its stock investment in ARC from $100,000 to approximately
$42,000 at December 31, 1996, an estimate of its market value.
Note 4. 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.
Year ending December 31,
--------------------------
1996 1995
--------------------------
Pro forma revenues $ 2,760,038 $1,404,389
Pro forma loss $(1,840,710) $ (721,762)
Pro forma net loss per share $ (0.82) $ (.057)
Pro forma weighted average common shares outstanding 2,257,633 1,268,607
Note 5. Income Taxes and S Corporation Distributions
Prior to the completion of the IPO on August 8, 1995, the Company was taxed as a
S Corporation whereby the profits and losses of the Company were reported in the
individual income tax returns of the stockholders. Periodic distributions were
made to the Company's stockholders for the estimated income tax liability on
reported earnings.
Upon the completion of the IPO, the Company became a C Corporation, and is
required to pay income taxes on its subsequent earnings. Accordingly, the
accumulated deficit was reclassified to additional paid-in capital as a
constructive dividend to the S Corporation stockholders followed by a
contribution by such stockholders to the capital of the Company.
F-13
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss or tax
credit 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.
Deferred taxes consisted of the following at December 31,
1996 1995
---------------------
Deferred tax assets:
Trade receivables $ 42,000 14,000
Investments 36,000 10,000
Accrued expenses 16,000 --
Net operating loss carry forward 645,000 112,000
----------------------
739,000 136,000
Deferred tax liability:
Furniture and equipment (4,000) (8,000)
----------------------
Net deferred tax assets 735,000 128,000
Valuation allowance (735,000) (128,000)
----------------------
$ -- $ --
======================
The Company has not recorded an income tax benefit in 1996 or 1995 due to a
valuation allowance which was recorded to account for the uncertainty associated
with the realization of such loss carryforwards in future years.
At December 31, 1996, the Company had a net operating loss carryforwards
totaling $1,843,000, of which $650,000 and $1,193,000 will expire in 2010 and
2011, respectively. $350,000 of the net operating carryforwards are subject to
certain annual limitations.
Note 6. Stock Option Plans
At December 31, 1996 the Company had two stock-based compensation plans, which
are described below. The Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for its fixed options plans. In addition,
no compensation cost has been charged against income for its performance based
stock option grants in 1996. Had compensation cost for the Company's two
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
F-14
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1996 1995
-----------------------------
Net loss As reported $ (1,656,533) $ (392,753)
Pro forma $ (3,336,450) $ (422,744)
Loss per share As reported $ (0.75) $ (0.33)
Pro forma $ (1.51) $ (0.35)
The pro forma effects of applying Statement No. 123 are not indicative of future
amounts since, among other reasons, the pro forma requirements of the Statement
have been applied only to options granted after December 31, 1994.
Fixed Stock Option Plans
In May 1995, the Company adopted the Legal Research Center, Inc. 1995 Stock
Option Plan (Option Plan) and reserved 200,000 shares of common stock for
issuance under the plan. The Board of Directors has approved an amendment to the
Option Plan to increase the number of reserved shares to 700,000. Options may
not be granted at an exercise price less than the fair market value of the
common stock of the Company on the date of grant. The options granted may
qualify as incentive stock options, vest annually, and are exercisable over
periods ranging from three to ten years.
In April 1995, the Company adopted the Legal Research Center, Inc. Existing
Officers' Stock Option Plan. Pursuant to the officers' plan, the Company
reserved and granted options to two officers to each purchase 180,000 shares of
common stock. These incentive stock options are exercisable at fair value on the
date of grant, vest in three equal installments commencing one year from the
date of grant and expire five years from the date of grant.
Non-employee directors are compensated with annual stock option grants (Director
Options) of 5,000 shares, exercisable at fair market value on the date of grant
and expiring ten years after issuance.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: no dividend yield
during the expected life of outstanding options; expected volatility of 93 and
41 percent; risk free interest rates of 6 percent; and expected lives of 5.7 and
2.6 years.
A summary of the status of the Company's fixed stock options under these plans,
including the stock issued to officers and directors which are treated as stock
options (see Note 2), as of December 1996 and 1995 and changes during the years
ending on those dates is presented below:
F-15
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- ----------------------------------
Weighted-average Weighted-average
Shares Exercise Price Shares Exercise Price
-------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 394,200 $ 2.96 -- $ --
Granted 1,138,104 2.96 -- --
Exercised -- -- 394,200 2.96
Forfeited (1,500) 2.25 -- --
------------ ----------
Outstanding at end of year 1,530,804 2.96 394,200 2.96
============ ==========
Weighted-average fair value of
options granted during the year $ 1.37 $ 1.18
============ ==========
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ---------------------------------
Number Weighted -Average Number
Range of Outstanding at Remaining Weighted-average Exercisable Weighted-average
Exercise Prices 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- -------------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$1.88 - 2.70 57,200 2.47 $ 2.53 57,200 $ 2.53
$1.69 - 2.97 413,604 3.26 2.84 173,604 2.66
$1.89 1,040,000 6.68 3.02 1,040,000 3.02
$3.50 10,000 8.59 3.50 10,000 3.50
$3.38 10,000 9.47 3.38 10,000 3.38
----------- ---------
$1.69 - $3.50 1,530,804 5.63 2.96 1,290,804 2.96
=========== =========
</TABLE>
Performance-based Stock Option Plans
In June 1996, under the terms of the Option Plan, the Company adopted a program
to award stock option grants to executive officers whose vesting is contingent
upon the Company attaining two consecutive profitable quarters. The exercise
price of each option is equal to the market price of the Company's stock on the
date of grant and expire in periods ranging from three to five years from the
date of grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: no dividend yield during the expected life
of outstanding options; expected volatility of 93%; risk free interest rate of 6
percent; and expected lives of 2.0 years.
A summary of the status of the Company's performance-based option plans as of
December 1996 and changes during the year is presented below:
F-16
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1996
--------------------------------------
Weighted-average
Shares Exercise Price
--------------------------------------
Outstanding at beginning of year -- $ --
Granted 385,000 2.03
Exercised -- --
Forfeited -- --
--------
Outstanding at end of year 385,000 2.03
========
Weighted-average fair value of
options granted during the year $ 1.05
========
The following table summarizes information about performance-based stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- --------------------------------------
Number Weighted -Average Number
Range of Outstanding at Remaining Weighted-average Exercisable Weighted-average
Exercise Prices 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- -------------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$2.88 15,000 2.49 $2.88 -- $ --
$2.00 370,000 4.37 2.00 -- --
------------ -------------
385,000 4.29 2.03 -- --
============ =============
</TABLE>
Note 7. Agreements
The Company has agreements with certain associations which require the Company
to pay royalties for projects resulting from direct referrals. In addition,
royalties are also required when the project was not referred yet the customer
served is a member of the association. Royalty rates and terms of the agreements
vary depending upon the agreement and apply to a significant portion of the
Company's revenues. Royalty expense for 1996 and 1995 was approximately $20,000
and $47,000, respectively.
Note 8. Related-Party Transactions
Lease: The Company leases an office facility from a related party under an
operating lease requiring monthly rent of approximately $6,000 through January
2001. The lease is at the same terms and conditions as the lease between the
related party and the related party's landlord. Rent expense, including
operating expenses, was approximately $66,700 and $40,300 for 1996 and 1995,
respectively.
Officer employment agreements: The Company entered into three-year employment
agreements with two officers of the Company commencing July 1, 1995. The
agreements, as amended, require annual base salaries of $96,000 for each
officer, plus goal-oriented incentives starting in 1996, which may be adjusted
by the Board of Directors. Incentive compensation expense under officer
employment agreements was approximately $68,200 in 1996.
Capitalized development costs: The Company entered into an agreement with one of
its directors for the development of CADRE, an alternative dispute resolution
program which the Company intends to market as a corporate training course. The
agreement requires payments of $2,800 per month through
F-17
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
July 1997 and automatically renews for one year periods unless terminated by
either party. The Company has capitalized these development costs.
Note 9. Major Customer
One customer accounted for 52% of the Company's revenues in 1996 and had amounts
owing to the Company for services of approximately $770,000 at December 31,
1996. No customer accounted for more than 10 percent of total revenues in
recorded in 1995.
F-18
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information contained under the captions "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
1997 Proxy Statement is incorporated herein by reference.
Information concerning executive officers of the Company can be found under
the caption "Executive Officers of the Company" in Item I hereof.
Item 10. EXECUTIVE COMPENSATION
The information contained under the captions "Executive Compensation" and
"Election of Directors--Board of Directors and Committees--Remuneration of
Directors" in the 1997 Proxy Statement is incorporated herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Principal Shareholders" in the
1997 Proxy Statement is incorporated herein by reference.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and
Transactions" in the 1997 Proxy Statement is incorporated herein by reference.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of the report:
1. Financial Statements. Audited financial statements as of December 31, 1996
and 1995 and for the years then ended are filed as part of this Form 10-KSB. See
Index to Financial Statements on Page F-1.
2. Exhibits. The following exhibits are being filed as part of this Form 10-KSB:
Exhibit No. Title Method of Filing
- ----------- ----- ----------------
3.1 Restated Articles of Incorporation 1
3.2 Restated Bylaws 1
4 Form of Common Stock Certificate 1
10.1 1995 Stock Option Plan 1
-12-
<PAGE>
10.2 Existing Officer's Stock Option Plan 1
10.3 Employment Agreement dated July 1, 1995
between the Company and Christopher R. Ljungkull 1
10.4 Employment Agreement dated July 1, 1995 between
the Company and James R. Seidl 1
10.10 Agreement dated May 17, 1995 between the
Company and the other shareholders of The Law Office, Inc. 1
10.11 First Amendment to Net Office Lease Agreement dated
June 1996 2
10.12 Letter Agreement dated September 6, 1995 between
LRC and James Seifert re: Consulting Services 2
10.13 Acquisition of Stock of The Law Office, Inc.
dated May 13, 1996 3
10.14 Employment Agreement dated July 25, 1996
between The CyberLaw Office, Inc.
and Arun K. Dube Filed herewith
10.15 Sale of Common Stock to Officers and Directors
on September 3, 1996 4
10.16 News release dated March 6, 1997 regarding
the financial results for the year
ended December 31, 1996 Filed herewith
11 Subsidiaries of Legal Research Center, Inc. Filed herewith
1. Incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form SB-2, which was declared effective August 3,
1995, pursuant to Rule 12b-32.
2. Incorporated by reference to the same numbered Exhibit to the Company's
Form 10-KSB, dated March 29, 1996.
3. Incorporated by reference to Exhibits 2.1 and 2.2 to the Company's Form 8-K
dated May 13, 1996.
4. Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 to the Company's
Form 8-K dated September 5, 1996.
(b) Reports on Form 8-K.
None
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LEGAL RESEARCH CENTER, INC.
By:/s/ Frank G. Hallowell
--------------------------
Frank G. Hallowell, VP &
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name and Title Signature Date
Arun K. Dube
Chairman of the Board /s/ Arun K. Dube March 26, 1997
-------------------
Christopher R. Ljungkull
Chief Executive Officer
(Principal Executive /s/ C.R. Ljungkull March 26, 1997
Officer) and Director -------------------
James R. Seidl
President and Director /s/ James R. Seidl March 26, 1997
-------------------
James J. Seifert
Director /s/James J. Seifert March 26, 1997
-------------------
-14-
<PAGE>
As filed with the Securities and Exchange Commission
on March 26, 1997
SECURITIES AND EXCHANGE COMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10 KSB
ANNUAL REPORT
For the fiscal year ended December 31, 1996
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
LEGAL RESEARCH CENTER, INC.
700 Midland Square Building
331 Second Avenue South
Minneapolis, MN 55401
<PAGE>
INDEX TO EXHIBITS
Exhibits
--------
10.14 Employment Agreement dated July 25, 1996 between The CyberLaw Office,
Inc. and Arun K. Dube
10.16 News release dated March 6, 1997 regarding the financial results for
the year ended December 31, 1996
11 Subsidiaries of Legal Research Center, Inc.
Exhibit 10.14
Employment Agreement dated July 25, 1996 between
The CyberLaw Office, Inc. and Arun K. Dube
<PAGE>
The CyberLaw Office, Inc.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGGREEMENT is entered into effective as of the 25th day of July,
1996, by and between The CyberLaw Office, Inc., a Minnesota corporation
("Employer") and Arun Dube ("Employee").
WHEREAS, Employer is in the business of providing an online legal forum for
consumers, corporations, law firms and individual lawyer practitioners;
WHEREAS, The parties desire to enter into this Agreement to provide for the
terms and conditions of Employee's employment as CEO and President of the
Employer;
WHEREAS, the parties acknowledge that the terms and provisions of this
Agreement, including the severance package and stock options contained herein,
provide separate and valuable consideration for the Non-Compete Covenant
contained herein.
NOW, THEREFORE, in consideration of the premises, it is agreed as follows:
1. Duties. Employee agrees to serve as an employee of Employer in the capacity
of President. Employee agrees to faithfully and diligently perform the acts
and duties of his office and devote his best efforts on a full-time basis.
Employee shall also perform such other duties as are consistent with his
position as are reasonably assigned to him by the BOD of the Employer.
Employer recognizes that Employee has existing business interests and they
are expected to continue.
2. Term. The term of Employee's employment under this Agreement will begin
immediately and will be for a fixed period of three (3) years. This
agreement shall expire on July 25, 1999.
3. Compensation and Related Matters. Employer shall pay Employee compensation
and benefits as follows:
Base Compensation. During the Employment Period, Employer shall pay to
Employee an annual base salary of $100,000. Employee's salary may be
further reviewed and adjusted periodically. Bonus. Beginning May 15, 1996,
Employee shall also be entitled to a bonus, payable quarterly, equal to 1%
of the increase in gross revenue, plus 4% of the increase in Profit Before
Taxes ("PBT"), in the prior quarter over the corresponding quarter in the
prior year. For example, the bonus in 2nd quarter 1997 will be equal to 1%
of the difference between 1st quarter 1997 gross revenue and 1st quarter
1996 gross revenue, plus 4% of the difference between 1st quarter 1997 PBT
and 1st quarter 1996 PBT. The 4th quarter bonus, if any, shall be equal to
the difference between (i) the applicable percentage increase in gross
revenue and net revenue for the year then ended over the prior year and
(ii) the sum of the three preceding quarterly bonuses paid to Employee in
the year then ended, it being understood that if such annual computation
discloses that the Company has overpaid Employee, Employee shall promptly
refund to the Company the overpaid amount. Notwithstanding anything stated
previously in this paragraph, the Board of Directors reserves the final
authority to decide the appropriateness of this bonus on a quarterly basis.
Signing Bonus. Employer shall pay to Employee a $10,000 bonus upon the
execution of this Agreement. This payment is waived by the employee.
Options. 50,000 LRC shares, granted and vesting immediately, market price
as of July 26, 1996. This option grant is hereby waived by the employee, in
that an already vested grant for 50,000 LRC shares at $2.00 was effective
to the employee as of May 15, 1996. Employee is additionally being granted
the immediate right to purchase 15% of the shares of employer, outstanding
after an anticipated future Initial Public Offering ("IPO") for a purchase
price of $120.00. The purchase price
-1-
<PAGE>
these shares at time of execution of this agreement. If the total shares
outstanding after the IPO of the employer, as detailed in Exhibit A,
attached herewith and hereby made a part of this agreement, differ from the
15% of the total per this agreement, the employer and the employee agree to
an adjustment of the number of shares to be sold under this agreement to
the employee. The adjustment shall be made by an appropriate stock split,
if necessary, or any other appropriate legal transaction so that the
employee owns 15% of the outstanding shares after the IPO.
Expenses. During the Employment Period, Employee shall be entitled to
receive prompt reimbursement for all reasonable expenses incurred by
Employee in performing services hereunder; provided, however, that Employee
complies with Employer's policies and procedures established from time to
time to document such expense.
Vacation and Other Benefits. Employee shall be entitled to such paid
vacation and other benefits as shall be in effect from time to time for
senior executive officers of Legal Research Center.
4. Termination and Compensation Due on Termination. For the term of this
agreement, employee's employment hereunder may not be terminated without
cause, but may be terminated subject to the following provisions and
obligations:
(a) Death or Disability. Employee's employment hereunder shall terminate
upon his death, or in the event that Employee becomes disabled by
reason of a medical condition (physical or nonphysical) pursuant to
which he cannot timely perform the material duties of his position
with Employer (such determination to be made in the discretion of the
Board), and no further payment of salary, any benefits or other
payment in connection with Employee's employment shall be due from
Employer to Employee or Employee's estate under this Agreement
thereafter, except for salary and bonus accrued, and Options vested
through the date of death or disability.
(b) Cause. Employer may terminate Employee's employment hereunder the
"Cause," which shall mean (i) fraud, dishonesty, gross negligence, or
willful malfeasance by Employee in connection with the performance of
his duties hereunder, (ii) conviction of Employee of a felony, (iii)
insubordination or other substantial failure, refusal or negligence by
Employee in fulfilling his duties and obligations hereunder, which
breach or failure Employee fails to remedy within ten (10) days after
written demand from the Board, or (iv) violation of the terms and
conditions of this Agreement, including without limitation, the
Non-Compete Covenant provided in Section 7 hereof. In the event that
Employee's employment is terminated hereunder for Cause, Employer
shall have no further obligations to Employee in connection with
Employee's employment except for salary and bonus accrued, and Options
vested through the date of termination.
(c) Voluntary Termination. Upon any voluntary termination of employment by
Employee, Employer shall have no further obligations to Employee
except for salary and bonus accrued, and Options vested through the
date of termination, and any other obligations provided by law.
5. Nondisclosure of Confidential Information. Employee agrees that he will not
use or disclose, or permit others to use or disclose (other than other
employees or representatives of Employer), any trade secrets, confidential
information, data or records relating to the business, techniques,
operations and conditions (financial or otherwise) of Employer which is not
generally known or available through other lawful sources.
6. Property Rights. Subject to the last sentence in this Paragraph, Employer
shall acquire exclusive right, title, and interest to all inventions,
discoveries, improvements, designs, ideas, know-how, technology and the
like developed, conceived, or invented by Employee, in whole or in part,
whether
-2-
<PAGE>
written or in some other form and whether or not patentable or eligible for
protection under any copyright law. Without limiting the generality of the
foregoing, Employee hereby assigns to Employer (i) all rights to any
inventions, or to improvements, and all rights to apply for United States
and/or foreign letters of patent granted upon such inventions; and (ii) any
copyrights Employee may have in materials created by Employee or otherwise
generated during the period in which Employee is performing services for
Employer, and Employer shall have the sole right to apply for and obtain
copyright protection for any materials for which such protection can be
obtained and to obtain such copyright renewals. Despite any of the
foregoing, nothing in this Paragraph 6 shall apply to an invention for
which no equipment, supplies, facility or trade secret information of
Employer is used and which is developed entirely on Employee's own time,
and (i) does not relate (a) directly to a business of Employer or (b) to
Employer's actual or demonstrably anticipated research or development, or
(ii) which does not result from any work performed by Employee for
Employer.
7. Non-Compete Covenant. During the Employment Period and for a period of 18
months after the termination of employment for any reason Employee shall
not (i) directly or indirectly, whether as a principal, owner, agent,
employee or in any other capacity whatsoever, engage in the business of an
online legal forum, (ii) solicit for employment or employ any employee or
independent contractor of Employer, or (iii) contact any present or
contemplated customers of Employer regarding the business of Employer.
8. Remedies for Breach. Employee acknowledges that he has carefully read and
considered all of the terms and conditions of this Agreement. Employee
further acknowledges that money damages would not be a measurable or
adequate remedy for Employee's breach of any of the covenants contained in
this Agreement, and, accordingly, in addition to and without limiting any
other remedy available to Employer in the event of such a breach, Employee
agrees to submit to the equitable jurisdiction of any court of competent
personal and subject matter jurisdiction in connection with any action to
enjoin the Employee form violating any such covenants. In the event that
Employee is found to have breached any of the terms from violating any such
covenants. In the event that Employee is found to have breached any of the
terms and conditions of this Agreement, Employee hereby agrees to pay all
costs and expenses incurred by Employer in enforcing the provisions of this
Agreement, Employee hereby agrees to pay all costs and expenses incurred by
Employer in enforcing the provisions of this Agreement found to have been
breached by Employee, including Employer's attorney's fees.
9. Benefit of Agreement. This Agreement shall inure to the benefit of and be
enforceable by Employer, it's successors, assigns and affiliates.
10. Waiver. The failure of Employer to insist on the strict performance of the
any provision of this Agreement or to exercise any right, power or remedy
upon a breach by Employee shall not constitute a waiver of that or any
other provision of this Agreement. A waiver on any one occasion shall not
be deemed to be a waiver for subsequent occasions.
11. Survival and severability. The terms and conditions of this Agreement shall
survive the termination of Employee's employment with Employer to the full
extent necessary for their enforcement and for the protection of Employer,
it's successors, assigns and affiliates. If for any reason any portion of
any provision of this Agreement is declared invalid, void or unenforceable
by a court of competent jurisdiction, the validity and binding effect of
any remaining provisions of this Agreement shall remain in full force and
effect to the fullest extent possible as if this Agreement had been
executed with the invalid, void or unenforceable portion or provision
eliminated. In the event that any provision of this Agreement relating to
time periods and /or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time periods or areas such
court deems reasonable and enforceable, said time periods and/or areas of
restriction shall be deemed to become
-3-
<PAGE>
and thereafter be the maximum time periods and/or areas which such court
deems reasonable and enforceable.
12. Governing Law. This Agreement shall be governed by the laws of the State of
Minnesota.
IN WITNESS WHEREOF, the undersigned have hereunto affixed their signatures.
The CyberLaw Office, Inc.
By:/s/ C.R. Lungkull
----------------------
Its:Chief Executive Officer
/s/Arun K. Dube
- -------------------------
Arun K Dube
-4-
Exhibit 10.16
News release dated March 6, 1997 regarding the financial results
for the year end December 31, 1996
<PAGE>
FOR IMMEDIATE RELEASE
March 6, 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
Joseph Jennings
The Sage Group
612/321-9897
LEGAL RESEARCH CENTER REPORTS
RECORD REVENUE IN FOURTH QUARTER AND YEAR
Minneapolis, MN - Legal Research Center, Inc. (NASDAQ:LRCI) today announced
record revenues of $2,760,038 for its fiscal year ended December 31, 1996, an
increase of 97 percent over $1,404,389 in 1995. In fiscal 1996, the company
posted a net loss of $1,656,553, or 75 cents a share, compared to a net loss of
$392,753, or 33 cents a share, over the same period in 1995. On a pro forma
basis, the portion of net loss attributable to the company's on-going
development of The CyberLaw Office, Inc. and The Law Office, Inc. (collectively
referred to as "CLO") amounted to $775,995, or 35 cents per share, versus
$197,662 or 16 cents a share in fiscal 1995.
In the fourth quarter ended December 31, 1996, Legal Research Center posted
record revenues of $877,965 up $445,571 or 103 percent from revenues of $432,394
in the fourth quarter of last year. The company reported a net loss for the
quarter of $780,143, or 35 cents per share, versus a net loss of $204,242, or 10
cents a share, in the fourth quarter of 1995. On a pro forma basis, the portion
of the net loss attributable to the company's investment in CLO amounted to
$228,404, or 10 cents per share, in the fourth quarter of 1996, versus $119,384
or 5 cents a share, in the fourth quarter of 1995.
The weighted average number of common and common equivalent shares used in
determining per share information increased from 1,191,189 at the end of 1995,
to 2,213,040 as a result of Legal Research Center's initial public offering in
August of 1995 and additional share issuances in the second quarter of 1996 in
connection with the acquisition of The Law Office, Inc.
During the fourth quarter of 1996, Legal Research Center completed the
largest multi-jurisdictional survey project in its history. The production
effort required an additional investment in infrastructure from what was
originally contemplated, which reduced gross margins in the fourth quarter to 38
percent from a historical rate of approximately 50 percent. The company expects
to recover this investment in 1997 and beyond with new surveys already in
production and on order, as well as subsequent re-sales of the original survey.
CLO continued to expand during the fourth quarter with the successful
launch of its Regional Attorney Network. Initial revenues were generated in
1996, which was ahead of plan. CLO now operates on the new Microsoft Network as
The MSN Law Forum and directly on the Internet as The Law Office.
-1-
<PAGE>
Christopher Ljungkull, chief executive officer of Legal Research Center,
commented: "We expect our carefully orchestrated investment in infrastructure in
1996 will accrue great benefit for the company and its shareholders in 1997 and
beyond. Our production capacity has been significantly expanded and planned
additions to overhead in our core research business have been completed. We
expect gross margins in the core business to return toward historical levels in
1997 and will continue efforts to reduce expenses, particularly in the area of
selling, general and administrative overhead.
"We are pleased with CLO's fourth quarter performance," Ljungkull
continued, "CLO generated initial revenue and at the same time controlled
expenses."
Jim Seidl, president of Legal Research Center, added: "We expect continued
revenue growth in 1997 as lawyers experience the multiple benefits of
outsourcing their legal research and library functions to the company. Law firms
are now asking us to manage their libraries and provide research training to
their staff. Corporations are asking us to build work product databases and
produce electronic multi-jurisdictional surveys. The movement away from
litigation sets the stage for CADRE, and the Internet phenomenon sets the stage
for CLO. No legal research company in the world is better positioned than Legal
Research Center to take advantage of these remarkable market opportunities."
Legal Research Center, headquartered 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 CyberLaw
Office and The Law Office, which operates a web site on The Microsoft Network
and the Internet. Additionally, the company is developing a proprietary
alternative dispute resolution training program for corporate and legal use
under the trade name CADRE (Center for Alternative Dispute Resolution
Enterprise).
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)
-2-
<PAGE>
<TABLE>
<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Year
Ended December 31, Ended December 31,
------------------------------- ------------------------------
1996 1995 1996 1995
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Revenues $ 877,965 $ 432,394 $ 2,760,038 $ 1,404,389
Development costs of The Law Office, Inc. $ (190,249) $ -- $ (546,091) $ --
Operating loss $ (738,724) $ (256,690) $(1,660,228) $ (427,342)
Net loss $ (780,143) $ (204,242) $(1,656,553) $ (392,753)
Net loss per share $ (0.35) $ (0.10) $ (0.75) $ (0.33)
Weighted average common and common
equivalent shares outstanding 2,257,633 2,135,833 2,213,040 1,191,189
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
---------- ----------
Current assets $2,268,094 $4,063,161
Furniture and equipment, net 237,495 152,420
Other assets 970,290 307,539
---------- ----------
Total assets $3,475,879 $4,523,120
========== ==========
Current liabilities $ 480,226 $ 282,416
Long-term and other liabilities 152,461 --
Stockholders' equity 2,843,192 4,240,704
---------- ----------
Total liabilities and shareholders' equity $3,475,879 $4,523,120
========== ==========
-3-
Exhibit 11
Subsidiaries of Legal Research Center, Inc.
<PAGE>
Subsidiaries of Legal Research Center, Inc.
Name Jurisdiction of Incorporation
---- -----------------------------
The CyberLaw Office, Inc. Minnesota
The Law Office, Inc. Washington
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YEAR ENDED
DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 955,600
<SECURITIES> 0
<RECEIVABLES> 1,393,450
<ALLOWANCES> 120,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,268,094
<PP&E> 367,381
<DEPRECIATION> 129,886
<TOTAL-ASSETS> 3,475,879
<CURRENT-LIABILITIES> 480,226
<BONDS> 0
0
0
<COMMON> 32,976
<OTHER-SE> 2,810,216
<TOTAL-LIABILITY-AND-EQUITY> 3,475,879
<SALES> 0
<TOTAL-REVENUES> 2,760,038
<CGS> 0
<TOTAL-COSTS> 1,715,257
<OTHER-EXPENSES> 2,705,009
<LOSS-PROVISION> 78,659
<INTEREST-EXPENSE> 632
<INCOME-PRETAX> (1,656,533)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,656,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,656,533)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
