SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________________
Commission file number 0-26548
Legal Research Center, Inc.
(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-1680384
(State Or Other Jurisdiction (IRS Employer Identification No.)
Of Incorporation)
700 Midland Square Building, 331 Second Avenue So., Minneapolis, MN 55401
(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 612/332-4950
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
3,327,633 shares of Common Stock as of November 7, 1997
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 ........................2
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996...........4
Consolidated Statements of Stockholders' Equity .....................5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 ....................6
Notes to Consolidated Financial Statements ..........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..................................15
<PAGE>
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
ASSETS 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 373,496 $ 955,600
Accounts receivable:
Trade 485,132 713,965
Unbilled services 62,531 505,419
Related party 60,000 174,066
Less, allowance for doubtful accounts (119,000) (120,000)
--------------------------
Net accounts receivable 488,663 1,273,450
Other 36,354 39,044
--------------------------
Total current assets 898,513 2,268,094
--------------------------
Other Assets
Intangible assets, net of accumulated amortization of
$152,789 -- 827,465
Capitalized development costs, net of accumulated amortization
of $0 and $5,916, respectively 284,590 101,061
Investment in and advances to American Research Corporation 127,124 41,764
--------------------------
411,714 970,290
--------------------------
Furniture and equipment, at cost 364,043 367,381
Less, accumulated depreciation 225,280 129,886
--------------------------
138,763 237,495
--------------------------
$ 1,448,990 $ 3,475,879
==========================
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
2
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 77,211 $ 182,032
Non compete agreement -- 16,508
Client advances 83,330 35,957
Accrued expenses:
Compensation 104,113 108,438
Other 57,324 137,291
--------------------------
Total current liabilities 321,978 480,226
--------------------------
Non compete agreement -- 47,461
--------------------------
Common stock subject to repurchase obligation 105,000 105,000
--------------------------
Stockholders' Equity
Common stock, $0.01 par value; authorized 20,000,000 shares
issued 3,327,633; 30,000 subject repurchase obligation 32,976 32,976
Additional paid in capital 6,765,307 6,765,307
Accumulated deficit (3,810,021) (1,988,841)
Notes receivable from officers and directors (1,966,250) (1,966,250)
--------------------------
1,022,012 2,843,192
--------------------------
$ 1,448,990 $ 3,475,879
==========================
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
3
<PAGE>
<TABLE>
<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues $ 355,133 $ 942,837 $ 1,468,645 $ 1,872,874
Direct operating costs:
Compensation and benefits 157,249 360,621 651,043 733,918
Other 55,529 161,248 232,523 273,717
------------------------------- -------------------------------
Total direct operating costs 212,778 521,869 883,566 1,007,635
------------------------------- -------------------------------
Gross profit 142,355 420,968 585,079 865,239
------------------------------- -------------------------------
Other operating costs:
Sales and marketing 165,824 223,587 617,736 619,332
General and administrative 211,569 297,346 688,992 811,061
------------------------------- -------------------------------
Total other operating costs 377,393 520,933 1,306,728 1,430,393
------------------------------- -------------------------------
Operating loss (235,038) (99,965) (721,649) (565,154)
Interest income, net 6,031 28,376 24,994 109,666
------------------------------- -------------------------------
Loss from continuing operations (229,007) (71,589) (696,655) (455,488)
Discontinued operations:
Loss from operations of The Law Office, Inc. -- (262,752) (407,517) (420,922)
Loss on the disposal of The Law Office, Inc.
including $73,800 provision for operating
losses during phase-out period (105,000) -- (717,008) --
------------------------------- -------------------------------
Net loss $ (334,007) $ (334,341) $(1,821,180) $ (876,410)
=============================== ===============================
Earnings per share:
Loss from continuing operations $ (0.10) $ (0.03) $ (0.31) $ (0.21)
Loss from discontinued operations $ (0.05) $ (0.12) $ (0.50) $ (0.19)
------------------------------- -------------------------------
Net loss $ (0.15) $ (0.15) $ (0.81) $ (0.40)
=============================== ===============================
Weighted average common shares outstanding 2,257,633 2,266,763 2,257,633 2,201,132
=============================== ===============================
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
4
<PAGE>
<TABLE>
<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
----------------------- Paid-in Accumulated Notes
Shares Amount Capital Deficit Receivable Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,135,833 $ 21,358 $ 4,551,634 $ (332,288) $ -- $ 4,240,704
Issuance of stock to purchase
The Law Office, Inc. 121,800 1,218 242,382 -- -- 243,600
Issuance of stock options to
purchase The Law Office, Inc. -- -- 15,441 -- -- 15,441
Issuance of shares subject to a
stock subscription agreement 1,040,000 10,400 1,955,850 -- (1,966,250) --
Net loss -- -- -- (1,656,553) -- (1,656,553)
---------------------------------------------------------------------------------
Balance, December 31, 1996 3,297,633 32,976 6,765,307 (1,988,841) (1,966,250) 2,843,192
Net loss -- -- -- (1,821,180) -- (1,821,180)
---------------------------------------------------------------------------------
Balance, September 30, 1997 3,297,633 $ 32,976 $ 6,765,307 $(3,810,021) $(1,966,250) $ 1,022,012
=================================================================================
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
5
<PAGE>
<TABLE>
<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
--------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,821,180) $ (876,410)
Adjustments to reconcile net loss to cash used in operating activities:
Loss on disposal of The Law Office, Inc. 717,008 --
Amortization of intangible assets and capitalized development costs 128,219 91,057
Depreciation 73,201 56,280
Equity in losses of unconsolidated investments -- 64,476
Provision for uncollectible accounts receivable 4,645 10,673
Loss on disposal of furniture and equipment 1,517 --
Changes in assets and liabilities:
Trade accounts receivable and unbilled services, net of write-offs 666,076 (768,715)
Related party accounts and other current assets 30,851 11,908
Accounts payable (104,821) (14,945)
Client advances 47,373 3,050
Accrued expenses (120,343) 135,061
--------------------------
Net cash used in operating activities (377,454) (1,287,565)
--------------------------
Cash Flows From Investing Activities
Cash paid for the acquisition of The Law Office, Inc. -- (50,750)
Purchases of furniture and equipment, net of dispositions (1,030) (94,022)
Advances to unconsolidated subsidiaries -- (267,932)
Capitalized development costs (195,365) (83,039)
--------------------------
Net cash used in investing activities (196,395) (495,743)
--------------------------
Cash Flows From Financing Activities
Cash payments on non compete agreements (8,255) (9,801)
--------------------------
Net cash used in financing activities (8,255) (9,801)
--------------------------
Decrease in cash and cash equivalents (582,104) (1,793,109)
Cash and cash equivalents
Beginning 955,600 3,510,752
--------------------------
Ending $ 373,496 $ 1,717,643
==========================
</TABLE>
See Notes to Consolidated Financial Statements (unaudited)
6
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
Basis Of Presentation: The interim financial statements are unaudited, but in
the opinion of management reflect all adjustments necessary for a fair
presentation of results of such periods. All such adjustments are of a normal
recurring nature. The results of operations for any interim period are not
necessarily indicative of results for a full fiscal year. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto, for the year ended December 31, 1996.
Principles Of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, The Law Office, Inc.
(TLO) and its eighty-five percent owned subsidiary, The CyberLaw Office, Inc.
(CLO). All significant inter company accounts and transactions have been
eliminated.
Use Of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Net Loss Per Common Share: Net loss per common share is computed on the basis of
the weighted average number of common shares outstanding during the respective
periods.
Income Taxes: The income tax benefit computed at the statutory rate for the nine
month period ended September 30, 1997 is approximately $621,000 which is offset
by a valuation allowance of the same amount. Deferred taxes are provided on a
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the amounts of assets and liabilities
recorded for income tax and financial reporting purposes. Deferred tax assets
are reduced by a valuation allowance when management determines that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Major Customers: One customer accounted for 14.1% of the Company's total
revenues in the quarter ended September 30, 1997. For the nine month period
ended September 30, 1997, this same customer accounted for 16.2% of the
Company's total revenues.
One customer accounted for 66.6% of the Company's total revenues for the quarter
ended September 30, 1996. For the nine month period ended September 30, 1996,
this same customer accounted for 42.9% of the Company's total revenues.
American Research Corporation: In September 1995, the Company purchased less
than 5% of the common stock of American Research Corporation (ARC) for $100,000.
The Company used the cost method of accounting for this investment through June
1997 at which time the shares were repurchased by ARC in exchange for an
unsecured note receivable (see discussion below). In September 1995, the Company
advanced ARC $50,000, evidenced by an unsecured 9.75% note. The note plus
interest was repaid in October 1996.
ARC has developed a product and service that supports professional service
providers. ARC has reported losses in operations since inception in 1992 and has
been actively seeking financing to support its operation. The Company provides
research services to ARC for which it charges ARC an arm's-length negotiated
market rate. Year-to-date revenues from ARC were approximately $0 and $184,200
through September 30, 1997 and 1996, respectively.
7
<PAGE>
At December 31, 1996 the Company had receivables and notes from ARC of
approximately $174,000. ARC made payments to the Company under the terms of its
original agreement, for services rendered through July 1996. In late 1996, the
Company restructured its arrangement with ARC to allow ARC more time to complete
its refinancing.
In June 1997, ARC closed on its refinancing which resulted in the repurchase of
its shares and a restructuring of the amounts due the Company. Amounts due the
Company under its services contract through September 1996 ($174,000 plus
accrued interest) were converted into a promissory note (Note) with quarterly
payments of $15,000 beginning September 15, 1997 and a final balloon payment due
June 15, 1999. The Note bears interest at a rate of 10% per annum. The Company
retains copyright on all work product as collateral on this Note. ARC made three
installment payments totaling $45,000 under the Note through September 30, 1997.
ARC also agreed to repurchase its shares held by the Company for $100,100 in
exchange for a unsecured promissory note (Unsecured Note). The Unsecured Note is
repayable in quarterly installments of $25,025 beginning June 30, 1999 and bears
interest at a rate of 10% per annum.
Given ARC's uncertain financial condition, the Company has reserved
approximately $80,000 of the Note and Unsecured Note as potentially
uncollectible.
The Law Office, Inc.: In May 1995, the Company acquired 25% of the stock of TLO.
In May 1996, the Company acquired all of the remaining outstanding shares of TLO
for $97,961 in cash including acquisition costs, issuance of 121,800 shares of
the Company and options to buy 54,500 shares of the Company at $3.50 per share.
The acquisition of TLO was accounted for as a purchase and the purchase price
was allocated to the assets acquired and liabilities assumed based on fair
values. The excess of the purchase price above the fair value of the assets had
been assigned to intangible assets which were being amortized over periods
ranging from 18 to 60 months. Intangible assets consisted primarily of an
Independent Content Provider Agreement (ICP) with Microsoft Online Services
Partnership (MOSP), non compete agreements with former shareholders of TLO and
goodwill.
TLO operates as a content provider and forum manager under an ICP agreement with
MOSP on The Microsoft Network (MSN) and directly on the Internet. The agreement
with MOSP expires in December 1997. Revenues were expected from leasing of space
to attorneys (Regional Attorney Network) and related vendors on TLO's web-site
and from the sale of services and advertising. Substantially all of TLO's
current revenue is generated by its Regional Attorney Network. To maintain and
grow the Regional Attorney Network requires significant expenditures on
advertising and marketing.
Monthly TLO revenues have not been sufficient to cover cash operating expenses
and development costs. In June 1997, TLO was informed by MOSP that the ICP
agreement will not be renewed for a second term. MSN has decided not to continue
with the ICP concept and is not renewing ICP contracts. Approximately 2% of
TLO's current web-site traffic is generated through its affiliation with MSN.
The Company has been seeking additional investors to fund operating and
continuing development costs of TLO. Due to continuing substantial negative cash
flow, the non-renewal of the ICP agreement and the uncertainty of obtaining
adequate funds to finance TLO operations and development, the Company has
decided to suspend the funding of TLO in the third quarter of 1997 and has
instructed TLO management to pursue the sale of TLO and CLO to attempt to
recover its investment and advances. The expected manner of sale of TLO would be
either a purchase of a controlling interest by a non-affiliated third party, a
sale of major assets such as its operating platform or a management led buyout
by the end of 1997. There can be no assurance that TLO and CLO's assets or
business can be sold on terms acceptable to the Company or at all.
Due to the suspension of funding, uncertainty regarding financing and the plan
to sell all or part of TLO it is not likely that the Company will fully recover
its investment and advances. Therefore, the Company had recorded a
8
<PAGE>
$612,008 expected loss on the ultimate disposal of TLO as of June 30, 1997. The
expected loss was subject to valuation of certain notes and stock repurchase
obligations to the former shareholders of TLO. The Company subsequently
determined that there was no remaining value to the asset associated with the
stock repurchase obligations and recorded a non-cash charge of $105,000 in the
third quarter of 1997. See also discussion below on Common Stock Subject to
Repurchase Obligation. The year-to-date loss on disposition consists of a
non-cash charge for intangible assets and stock repurchase obligations totaling
$623,200, a non-cash valuation charge for computer equipment and related
equipment of approximately $20,000 and a provision for cash operating expenses
during the phase-out period of approximately $73,800.
Results from operations of TLO through September 30, 1997 and for the comparable
periods in 1996, are now reported as discontinued operations. TLO operating
results after June 30, 1997 no longer affect the Company's consolidated results
due to the provision booked in June 1997. TLO incurred a net loss of $61,743 on
revenues of $10,818 for the quarter ended September 30, 1997. For the comparable
period in 1996, TLO reported a net loss of $262,752 on revenues of $9,200. For
the nine month period ended September 30, 1997, TLO reported a loss of $407,517
on revenues of $43,537. For the nine month period ended September 30, 1996, TLO
reported a loss of $516,935 on revenues of $9,200, of which the Company recorded
$420,922 representing its proportionate share interest in TLO.
The CyberLaw Office, Inc.: CLO was incorporated in Minnesota in October 1995,
and is a majority owned subsidiary of the Company. CLO was originally created by
the Company to expand its on-line activities similar to TLO into the
international market place. In July 1996, the Company sold a 15% interest to a
director of the Company as an inducement to become the new Chief Executive
Officer of CLO, as part of the employment agreement, for a nominal sum. In
August 1996, the Company consolidated management of all Internet related
activities under the Chief Executive Officer of CLO. As discussed above, the
Company has decided to sell its interest in TLO and CLO to recover its advances.
CLO has insignificant assets and reported nominal results from operations in the
three and nine months ended September 30, 1997 and 1996, respectively. Therefore
the disposal of CLO is not expected to have a material impact on the Company's
financial results.
Common Stock Subject To Repurchase Obligation: In September 1996, the Company
issued 40,000 shares of common stock on behalf of TLO to settle a $140,000 note
payable. The note was issued to a former shareholder of TLO as a prerequisite to
the acquisition of TLO by the Company. Under the terms of the agreement by which
the shares were issued, the shareholder could require the Company to repurchase
10,000 shares at $3.50 a share upon written notice to the Company, on or before
December 31, 1997. In October 1996, the shareholder exercised this option. In
addition, the shareholder can require the Company to repurchase a portion or all
of the remaining shares at $3.50 a share if TLO obtains debt or equity financing
in excess of $500,000. These 30,000 shares are not considered outstanding shares
for the purposes of determining weighted average shares outstanding and net loss
per share. When TLO is ultimately sold or liquidated, the repurchase obligation
will be recorded as additional capital of the Company.
Notes Receivable From Officers And Directors: On September 3, 1996, the Company
sold an aggregate of 1,040,000 shares of its common stock to three of its
officers and/or directors, at the closing price for the Company's common stock
on September 4, 1996, or $1.89 per share. The purchases were made through seven
year non-recourse notes, with the shares pledged as collateral. The notes bear a
fixed interest rate of 8.5% and cannot be prepaid anytime before September 2,
2003. The shares are restricted and cannot be sold or otherwise transferred
without repaying the notes. It is Company policy not to record interest income
on the notes until cash is received on September 2, 2003.
9
<PAGE>
Shares of common stock issued to officers or directors in exchange for notes
receivable structured as described above are not deemed to be outstanding under
generally accepted accounting principles. However, such shares are treated as
stock options (and therefore, as common stock equivalents) for purposes of
calculating weighted average shares outstanding and net loss per share.
Earnings Per Share: The FASB has issued Statement No. 128, Earnings per Share,
which supersedes APB Opinion No. 15. Statement No. 128 requires the presentation
of earnings per share by all entities that have common stock or potential common
stock, such as options, warrants and convertible securities, outstanding that
trade in a public market. Those entities that have only common stock outstanding
are required to present basic and diluted per-share amounts. All other entities
are required to present basic earnings per-share amounts. Diluted per-share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. All entities required to present
per-share amounts must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is not permitted.
The Company has not completed its analysis of Statement No. 128 however, it does
not expect that the impact of this new accounting pronouncement when implemented
by the Company, will have a material impact on reported earnings per share.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the financial statements and footnotes which appear
elsewhere in this Report and the Company's annual report for 1996 on Form
10-KSB.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers that statements
contained herein, other than historical data, may be forward-looking and subject
to risk and uncertainties including, but not limited to the continuation of
revenues through the Company's strategic alliances and the successful
development of other new business. The following important factors could cause
the Company's actual results to differ materially from those projected in
forward-looking statements made by or on behalf of, the Company:
o Failure of the Company or its partners to successfully expand its
market share and sell products and services.
o Company's inability to produce and deliver its products and services
including the planned roll out of CADRE, at margins sufficient to
cover operating costs.
o Effectiveness of cost cutting measures implemented by the Company to
improve gross margins and moderate the growth in sales, marketing and
general and administrative expenses.
o Risks related to the discontinuation of operations of TLO and CLO and
the disposition of their assets and business.
In addition, as a result of the delisting of the Company's common stock from the
Nasdaq SmallCap Market, described below, investors may suffer a loss of
liquidity in the shares and the Company may have difficulty raising funds in the
capital markets. Although the Company anticipates that its common stock will
trade on the Nasdaq "bulletin board" or in the local over-the-counter market,
there can be no assurance that such a market will develop or be maintained.
The Company's revenues have historically been derived from conducting analytical
research and writing on a non-recurring basis for its customers. Historically,
the Company has experienced a seasonal fluctuation in revenues with second and
third quarters being the slowest quarters of the year and the last quarter being
the strongest. The Company has developed and implemented programs designed to
attract customers to enter into long term relationships to provide greater
consistency in quarterly revenues.
The Company continues to develop its Corporate Alternative Dispute Resolution
Enterprises, (CADRE) program. An alternative dispute resolution (ADR) system is
a means to reduce the amount of courtroom litigation and includes private
arbitration and mediation. The Company intends to develop CADRE initially as a
several day corporate training course in the concepts and skills necessary to
implement and utilize an ADR system on a corporate-wide basis. The Company
started generating revenue from CADRE needs assessment and related consulting
services in September 1997. The Company will begin soliciting customers for the
first course of the training program during the fourth quarter of 1997.
RESULTS OF OPERATIONS
Revenues: Revenues decreased by $587,704 or 62.3%, to $355,133 for the three
month period ended September 30, 1997 over the same period of 1996. For the nine
month period, revenues decreased $404,229 or 21.6%. The decrease in revenues is
primarily attributable to a decrease in multi-jurisdictional survey (MJS) and
contract attorney revenues offset by an increase in traditional research and
writing and on-site library services revenues.
11
<PAGE>
Third quarter and year-to-date 1997 MJS revenues declined approximately 89.0%
and 71.0% from three and nine months ended September 30, 1996 primarily due to
the completion of two major non-recurring projects in the fourth quarter of
1996. These projects began producing revenue in the second quarter of 1996,
accelerating in the third quarter and were completed and shipped by the end of
1996. Contract attorney revenues declined due to completion of a major
engagement in October 1996. The Company began to de-emphasize this service in
late 1996, electing to re-deploy research attorneys to other products and
services. The increase in traditional research and writing and on-site library
services revenues was due to increased marketing and sales activity that began
in early 1997.
Direct Operating Costs: Direct operating costs for compensation and other
benefits include hourly contract fees for independent research attorneys and
hourly compensation of staff research attorneys, document production and support
personnel. Other direct operating costs include outside research fees and
services, royalty fees for association referrals, computer database charges,
project data conversion fees and document retrieval expenses.
Total direct operating costs decreased $309,091 or 59.2%, for the three months
ended September 30, 1997 from the same period in 1996. For the nine month
period, direct operating costs decreased $124,069 or 12.3%.
The decrease in direct operating costs for the three months ended September 30,
1997 from the same period in 1996 is primarily due to lower personnel costs.
Personnel costs were lower due to the completion of two major non-recurring MJS
projects during the fourth quarter of 1996.
The decrease in direct operating costs for the nine month period over the same
period in 1996 was due to lower personnel costs offset by an increase in
computer database charges. Personnel costs were lower due to the completion of
the two major non-recurring MJS projects referenced above. Computer database
charges were higher due to increased usage of database services to complete
research projects as an offset to additional research attorney time during 1997.
Direct operating costs, expressed as a percentage of revenues, increased from
55.4% to 59.9% for the three months ended September 30, 1997 from the same
period in 1996. For the nine month period, direct operating costs as a
percentage of revenues increased from 53.8% to 60.2%. The increase in direct
operating costs as a percentage of revenues is due to a decline in revenues that
was not proportionate with the decline in direct operating costs. Direct
operating costs did not decline proportionately with revenue due to increases in
compensation and benefits expenses paid to research and production staff and
because revenue levels were not high enough to cover certain fixed costs, e.g.,
non-billable administrative research hours and production staff hours. The
Company expects to decrease direct operating costs as a percentage of revenues
during the remainder of 1997 by improving the efficiency of its research and
production process, fixing personnel costs as a percentage of revenue billed to
customers through a new incentive plan and reducing or eliminating costs.
Gross Profit: Gross profit for the three month ended September 30, 1997
decreased by $278,613 or 66.2%, to $142,355 compared to gross profit of $420,968
for the comparable 1996 period. As a percentage of revenue, gross profit
declined from 44.6% to 40.1% for the three months ended September 30, 1997 from
the same period in 1996, primarily as a result of the decrease in revenues and
an increase in direct operating costs discussed above.
For the nine months ended September 30, 1997, gross profit declined by $280,160
or 32.4% to $585,079 from the comparable 1996 period. As a percentage of
revenue, gross profit decreased from 46.2% to 39.8% for the nine months ending
September 30, 1997 from the same period in 1996, primarily as a result of the
decrease in revenues and an increase in direct operating costs discussed above.
Other Operating Costs: Other operating costs include compensation of officers,
sales and corporate staff, advertising and direct marketing expenditures and
general corporate overhead, including depreciation. Other operating costs
decreased by $143,540, or 27.6%, for the three months ended September 30, 1997
over the same
12
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period in 1996. Of these other operating costs, sales and marketing expenses
decreased by $57,763, or 25.8%, and general and administrative expenses
decreased $85,777 or 28.8%. For the nine months ended September 30, 1997, other
operating costs decreased $123,665 or 8.6%. Of these other operating costs,
sales and marketing expenses decreased by $1,596 or 0.3%, and general and
administrative expenses decreased $122,069 or 15.1%.
The decrease in sales and marketing costs for the three and nine months ending
September 30, 1997 over the same period in 1996 was primarily due to turnover in
sales positions, reductions in management compensation, lower marketing and
advertising expenditures and elimination of outside consulting expenditures
offset by increased staffing expenses during the first part of 1997 and higher
incentive pay under a new plan instituted in 1997 to generate additional
revenues.
General and administrative expenditures decreased for the three and nine months
ending September 30, 1997 over the same periods in 1996 primarily due to the
suspension of hiring in late 1996, reductions in staff, reductions in management
compensation and cost containment and reduction initiatives implemented in the
first quarter of 1997.
Interest: Net interest income decreased $22,345 for the three months ended
September 30, 1997 and $84,672 for the nine months ended September 30, 1997 from
the comparable periods in 1996. The decrease was a result of less cash invested
in interest bearing accounts. Interest expense for the same periods was nominal.
Discontinued Operations: From January 1, 1996 through the date of acquisition on
May 13, 1996, the Company recorded 25% of TLO's losses under the equity method
of accounting. Subsequent to the acquisition, TLO's results of operations have
been fully consolidated into the Company's financial statements. As discussed
above, the Company has determined to suspend the funding of TLO in the third
quarter of 1997. Results of operations and loss on the expected disposal of TLO
has been reported a part of discontinued operations for the three and nine
months ending September 30, 1997 and 1996, respectively. The Company has also
determined to suspend the operations of CLO in the third quarter of 1997 and to
dispose of its business. However, this is not expected to have a material impact
on the Company.
Delisting from Nasdaq SmallCap Market: As a result of the Company's recording of
a $643,200 expected loss on the disposal of TLO, the Company's total assets as
of September 30, 1997 ($1,449,990) fell below the minimum total asset
requirement for continued listing on the Nasdaq SmallCap Market of $2,000,000
(which requirement, effective August 1997, was modified to $2,000,000 in net
tangible assets for continued listing). Accordingly, the Company's common stock
was delisted from the Nasdaq SmallCap Market as of the close of business on
October 29, 1997. Although the Company anticipates that it's common stock will
trade on the Nasdaq "bulletin board" or in the local over-the-counter market,
there can be no assurance that such a market will develop or be maintained. In
addition, once a company has been delisted from the Nasdaq SmallCap Market, the
requirements for requalificaton for listing are substantially higher than those
for continued listing. The Company does not anticipate that its common stock
will requalify for trading in the Nasdaq SmallCap Market in the foreseeable
future.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to use the proceeds from its initial public offering in
August 1995 to fund year-to-date 1997 operating costs of the core business, to
fund the development of CADRE, and to provide working capital to CLO and TLO. In
addition, the Company continues to look for other marketing and development
opportunities and alliances to increase revenues and cash flow. At September 30,
1997 the Company had cash and cash equivalents of $373,496 and working capital
of $576,535.
Cash used in operating activities was $377,454 in the first nine months of 1997.
This use of cash is primarily the result of a $1,821,180 net loss less the
anticipated loss on disposal of TLO, depreciation and amortization and
13
<PAGE>
other non-cash charges of $924,590, a $225,164 decrease in accounts payable and
accrued expenses, offset by a $666,076 decrease in accounts receivable and
unbilled services and a $47,373 increase in client advances. The decrease in
accounts receivable and unbilled services from December 31, 1996 is primarily
attributable to one large, multi-jurisdictional project under which the billing
cycle occurred over a 6 month time frame. The Company collected over $450,000 on
this large project in April 1997. Although the Company has taken steps to reduce
or defer cash outlays from operations, the Company expects cash flow from
operations to be negative for the next three months.
Investing activity for the first nine months of 1997 was $196,395 principally as
a result of investments in CADRE. The Company expects the level of cash used in
investing activities to decrease over the next quarter as CADRE development
efforts near completion and the product begins to generate cash flow. The
Company is attempting to finance the remaining development and launch costs of
CADRE with an outside source in the fourth quarter of 1997 to reduce the impact
on the Company cash resources. There is no assurance that such funding will be
obtained on terms acceptable to the Company or at all.
Cash used in financing activities for the first nine months of 1997 consisted of
$8,255 of payments made to former shareholders in connection with the
acquisition of TLO. These cash payments have ceased in July 1997 with the
termination from employment of all former shareholders of TLO.
Cash used in operating activities was $1,287,565 in the first nine months of
1996. The usage was primarily due to a net loss of 876,410 less non cash charges
of $222,486 offset by an increase in accounts receivable and unbilled services
of $768,715 and a net increase in accrued expenses of $135,061. Cash used in
investing activities was $495,743, primarily due to advances to and the purchase
of TLO and purchases of furniture and equipment.
Cash used in financing activities during the first nine months of 1996 consisted
of $9,801 of payments made to former shareholders in connection with the
acquisition of TLO. These cash payments have ceased in July 1997 with the
termination from employment of all former shareholders of TLO.
Management believes that during 1996, it completed the development and
implementation of the necessary infrastructure to support larger revenues in the
Company's core legal research and writing business. However, as revenues have
not grown at the pace forecast by the Company, the Company has instituted
specific cost control measures including hiring and wage freezes, salary
reductions, new incentive compensation plans, certain reductions in its
workforce and the elimination of funding for TLO's operations, all to reduce
expenditures in all areas of the Company's operation. In July 1997 and in
exchange for certain salary reductions, eight employees of the Company were
granted an aggregate of 165,027 options to purchase common stock of the Company,
exercisable at $1.125 per share, the market price on the date of grant. The
Company expects that by the end of 1997, expenditures in the core research
business will be funded almost exclusively by funds generated from operations.
The Company believes that the cash requirements of CADRE and other marketing and
development activities in the core business will decline in the fourth quarter
of 1997. The Company intends to fund such CADRE development activities and if
possible, raise additional funding in 1997, although there is no assurance that
such financing will be available on terms acceptable to the Company or at all.
During the balance of 1997, the Company expects to expend out of operating cash
approximately $13,000 in connection with the discontinuation of TLO and CLO's
operations and in the disposition of their businesses and assets. Management
does not currently anticipate recouping the Company's investment in TLO and CLO
upon such disposition.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
i. News release dated November 7, 1997 regarding the financial
results for the three and nine months ending September 30, 1997
and 1996.
(b) Reports on Form 8-K
i. none
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LEGAL RESEARCH CENTER, INC.
Dated: November 7, 1997 By: /s/ Frank G. Hallowell
-----------------------
Frank G. Hallowell
Vice President and Chief Financial
Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTER
ENDED AND NINE MONTHS ENDED SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 373,496
<SECURITIES> 0
<RECEIVABLES> 607,663
<ALLOWANCES> 119,000
<INVENTORY> 0
<CURRENT-ASSETS> 898,513
<PP&E> 364,042
<DEPRECIATION> 225,280
<TOTAL-ASSETS> 1,448,990
<CURRENT-LIABILITIES> 321,978
<BONDS> 0
0
0
<COMMON> 32,976
<OTHER-SE> 989,036
<TOTAL-LIABILITY-AND-EQUITY> 1,448,990
<SALES> 0
<TOTAL-REVENUES> 1,468,645
<CGS> 0
<TOTAL-COSTS> 883,566
<OTHER-EXPENSES> 1,276,485
<LOSS-PROVISION> 4,645
<INTEREST-EXPENSE> 604
<INCOME-PRETAX> (696,655)
<INCOME-TAX> 0
<INCOME-CONTINUING> (696,655)
<DISCONTINUED> (1,124,525)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,821,180)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
EXHIBIT
News release dated November 7, 1997 regarding financial results
for the three and nine months ended September 30, 1997 and 1996
<PAGE>
November 7, 1997
Legal Research Center, Inc. Contacts: Christopher Ljungkull, CEO
700 Midland Square Building Frank Hallowell, CFO
331 Second Avenue South 612 / 332-4950
Minneapolis, MN 55401
LEGAL RESEARCH CENTER REPORTS
-----------------------------
THIRD QUARTER RESULTS
---------------------
Minneapolis, MN - Legal Research Center, Inc. (OTC:LRCI) today announced
revenues of $355,133 for its third quarter ended September 30, 1997, a decrease
of 62 percent over $942,837 in 1996. The company posted a loss from continuing
operations of $229,007 or 10 cents a share, compared to a loss from continuing
operations of $71,589 or 3 cents a share, over the same period in 1996.
For the nine months ended September 30, 1997, Legal Research Center
reported revenues of $1,468,645 versus $1,872,874 last year, a decrease of 22
percent. The company posted a loss from continuing operations for the nine
months ended September 30, 1997 of $696,655 or 31 cents a share compared to a
loss of $455,488 or 21 cents a share, over the same period in 1996.
As a result of a decision to restructure and eliminate funding of The Law
Office, Inc. (TLO) in the third quarter of 1997, the company posted a non-cash
charge of $643,200, representing the write-down of intangible and other assets
to net realizable value and a charge of $73,800 for operating expenses during
the anticipated phase-out period. The company recognized a $105,000 non-cash
charge in the third quarter of 1997 due to the write-down of intangible assets
stemming from certain stock repurchase obligations that arose in connection with
the purchase of TLO. Operating losses for TLO for the quarter ended September
30, 1997 were nil, compared to a loss of $262,752 or 12 cents a share over the
same period in 1996. For the nine months ended September 30, 1997, TLO operating
losses were $407,517 or 18 cents a share, compared to a loss of $420,922 or 19
cents a share for the same period last year.
Taking into account the discontinuation of TLO's operations and a non-cash
charge of $105,000, the company reported a net loss for the third quarter ended
September 30, 1997 of $334,007 or 15 cents a share as compared to a net loss of
$334,341 or 15 cents a share in the same period of 1996. For the nine months
ended September 30, 1997, the company reported a net loss of $1,821,180 or 81
cents a share as compared to a net loss of $876,410 or 40 cents a share in the
same period of 1996.
Christopher Ljungkull, chief executive officer of Legal Research Center,
commented:
"As stated in our second quarter announcement, The Board of Directors of
the Company asked management to expand our existing plan to bring about
immediate and predictable profitability. This plan took effect July 1 and is
based on continued revenue growth, significant reductions in expenses,
improvement of gross margins, and restructuring of TLO. We remain committed to
this plan.
"Our core revenues (services such as research memos and briefs) have
increased approximately $50,000 or 22% over the third quarter 1996. Year to
date, core revenues have increased $667,000 or 55%. We expect revenues in the
fourth quarter to be less than the same period in 1996, but to be greater than
the third quarter of 1997. More importantly, we are concentrating all our
efforts on reaching profitability and positive cash flow on a monthly basis."
"Third quarter revenues declined from the same period in 1996, primarily
due to the completion of two major non-recurring multi-jurisdictional projects
in the fourth quarter of 1996." Ljungkull continued, "These
<PAGE>
projects began in the second quarter of 1996, accelerated during the third
quarter and were completed and shipped by the end of 1996. While there continues
to be demand for such work in the market place, the Company is focused on
acquiring projects with more predictable and manageable margins."
"While we do not report monthly financial results, it's worth noting that
by September of this year our efforts reduced the monthly loss before
adjustments taken to dispose of TLO, to approximately $70,000 compared to an
average of approximately $125,000 per month for the year."
"In the first quarter of 1997, we implemented hiring and wage freezes,
re-negotiated major service agreements and instituted a variety of other
controls on administrative expenses. In the third quarter, we imposed 10 - 30%
reductions in management salaries and replaced that cash compensation with stock
options under our 1997 Stock Option Plan. We also reduced staff through
attrition and termination, resulting in a total reduction in salaries and
benefits of approximately 20% per month. In the fourth quarter the company will
implement a new compensation structure aimed at fixing direct research costs to
billable revenue. We believe this will improve gross margins.
"As a result of these efforts, the company's use of cash in the first nine
months of this year declined more than 32% from the same period in 1996. We
expect use of cash to continue to decline as we work toward profitability and
positive cash flow."
"CADRE generated consulting revenues for the first time in September as the
company rolled out its initial product offering" Ljungkull said. "CADRE is
currently providing alternate dispute resolution (ADR) consulting to customers
and will be soliciting customers for the first seminar offering, "Resolving to
Profit" in November. We expect CADRE to generate revenue from both ADR
consulting services and a group of seminar offerings, as well as add-on research
services for corporate counsel."
Legal Research Center, with its headquarters in Minneapolis, offers
cost-effective legal research and writing services to attorneys in corporate and
private practice throughout the world. Additionally, the company is developing a
proprietary alternative dispute resolution training program for corporate and
legal use under the trade name CADRE.
Statements contained here, other than historical data, may be forward-looking
and subject to risks and uncertainties including, but not limited to the
continuation of revenues through the company's strategic alliances and the
successful development of other new business, as well as those set forth in the
company's 10-KSB, 10-QSB and other SEC filings.
<PAGE>
<TABLE>
<CAPTION>
LEGAL RESEARCH CENTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 355,133 $ 942,837 $ 1,468,645 $ 1,872,874
Loss from continuing operations $ (229,007) $ (71,589) $ (696,655) $ (455,488)
Loss from discontinued operations $ (105,000) $ (262,752) $(1,124,525) $ (420,922)
----------- ----------- ----------- -----------
Net loss $ (334,007) $ (334,341) $(1,821,180) $ (876,410)
Earnings per share:
Loss from continuing operations $ (0.10) $ (0.03) $ (0.31) $ (0.21)
Loss from discontinued operations $ (0.05) $ (0.12) $ (0.50) $ (0.19)
----------- ----------- ----------- -----------
Net loss $ (0.15) $ (0.15) $ (0.81) $ (0.40)
Weighted average common shares outstanding 2,257,633 2,266,763 2,257,633 2,201,132
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- ------------
Current assets $ 898,513 $2,268,094
Furniture and equipment, net 138,763 237,495
Other assets 411,714 970,290
---------- ----------
Total assets $1,448,990 $3,475,879
========== ==========
Current liabilities $ 321,978 $ 480,226
Long-term and other liabilities 105,000 152,461
Stockholders' equity 1,022,012 2,843,192
---------- ----------
Total liabilities and stockholders' equity $1,448,990 $3,475,879
========== ==========
