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, 1998 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]
<PAGE>
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 ___.
State issuer's revenues for its most recent fiscal year. $2,403,079
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.)
$1,066,003 as of March 15, 1999
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.
3,334,133 shares of Common Stock as of March 15, 1999
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 1998 (the "1998 Proxy
Statement") (incorporated by reference into Part III of this Form 10-KSB).
[Cover page 2 of 2 pages]
<PAGE>
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, and non-legal research services to the general public.
Business Highlights
The Company focused its resources and efforts entirely on its core business
starting in the second half of 1997 and continuing into early 1998. This
strategy resulted in significant cost savings and increased revenues in 1998.
Revenues increased to $2,403,079 compared to 1997 revenues of $1,779,033.
Revenues from attorneys working for Risk Enterprise Management (REM) - which
manages the claims of insurance companies such as Home Insurance - which were
expected to reach only $250,000 in 1998, were $375,000 in 1998. Revenues from
major corporate customers such as REM accounted for approximately 60% of total
revenues in 1998.
Gross profit increased from 40 cents for every $1 of revenue in 1997 to 52
cents for every $1 of revenue in 1998. The Company also cut overhead by $472,592
or 28%. Overhead decreased as a percentage of revenue from 94% in 1997 to 50% in
1998. These factors, combined with the growth in revenues, have had a positive
impact on the Company's use of cash. In 1997 it used $790,000 of its cash, in
1998 the Company added $270,000 to cash.
Industry Overview
It is estimated that over $100 billion is spent in the U.S. on legal
services each year 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.
-3-
<PAGE>
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 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 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. 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 -
disk, CD-ROM or Website - which is easier to review and cross reference.
In 1998, the Company completed 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
-4-
<PAGE>
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
industries committed to reducing their conflict costs and industries which are
experiencing high conflict costs. The Company believes that 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. The Company is currently seeking to market CADRE
through insurers to their customers with large product liability exposure.
As an adjunct to 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 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 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.
The Company maintains 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. LRC has been the exclusive designated outsourced provider
of research and writing services to the 60,000 members of the Association of
Trail Lawyers of America since 1989. 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 1998, the Company entered into an
exclusive 4-year contract with ACCA.
In 1994, the Company entered into an agreement with West Publishing Company
- - now West Group - 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 all requests for analytical legal and factual research and writing.
The original term of the West Agreement expired in June 1998; the agreement was
renewed and currently expires in June 1999.
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 contract, the Company completed a large
multi-jurisdictional survey for a customer, Bankers Systems, Inc., which
accounted for approximately 8% and 14% of the Company's revenues in 1998 and
1997, respectively. The agreement between the Company and BSI will renew
automatically in June of 1999.
-5-
<PAGE>
The Company has a relationship with Risk Enterprise Management (REM) under
which the Company provides research services directly for the attorneys and law
firms serving REM. Revenues from major corporate customers such as REM, BSI and
WestGroup accounted for approximately 60% of total revenues in 1998.
Executive Officers of the Company
The following sets forth biographical information for Christopher R.
Ljungkull and James R. Seidl, the executive officers of the Company.
Biographical information for directors of the Company can be found in the
Company's 1998 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.
Personnel
As of March 12, 1999, the Company had 17 employees, including 5 full-time
research attorneys, and a pool of 25 contract attorneys. This represents a
reduction in staff of approximately 66% since approximately July of 1997,
attributable to lower revenue levels as well as efficiencies in production of
research and overhead expenses. Most of the Company's contract attorneys work
part-time. 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. 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, both of which
may have significantly greater resources than the Company and therefore may also
have the ability to compete more effectively.
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.
-6-
<PAGE>
Insurance
The Company carries property damage, workers' compensation, and Directors
and Officers liability 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 $61,000 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
excessive for its current operations and its foreseeable needs, and is seeking
to reduce the amount of space leased at it's current location.
Item 3. LEGAL PROCEEDINGS
Except as described below, 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.
In June of 1998 the Company was sued by Lawfinders Associates, Inc. (LFA),
a Dallas competitor, based on LFA's allegation that the Company usurped
proprietary information learned in the context of preliminary business
combination discussions, which did not materialize. The lawsuit was based on the
Company's plan to offer customers for appellate briefs a 100% guarantee based on
result. This plan was halted when LFA obtained a temporary restraining order in
Texas state court temporarily ending LRC's program. LFA seeks unspecified
damages and seeks to enjoin LRC from offering a results-based guarantee. On
November 4, 1998, a federal court in Dallas, Texas granted LRC's request to
dissolve the state court order and rejected LFA's claims that it had exclusive
rights to guaranteed brief writing services. The Company expects to continue to
prevail in the proceedings and expects all its costs related to the litigation
to be covered by its insurer.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the Company's 1998
fiscal year to a vote of security holders, through the solicitation of proxies
or otherwise.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Common Stock was traded on the Nasdaq SmallCap Market
(Nasdaq) from August 3, 1995 to October 30, 1997, when it was delisted from
Nasdaq as a result of not meeting Nasdaq's continued listing criteria. It now
trades on the Over-the-Counter Bulletin Board. As of March
-7-
<PAGE>
15, 1999, 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, through December 31, 1998, 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
------ ------- --------
01/01/97 - 03/31/97 $1 $1-7/8
04/01/97 - 06/30/97 $5/8 $1-1/2
07/01/97 - 09/30/97 $5/8 $1
10/01/97 - 12/31/97 $1/8 $1/2
01/01/9 - 03/31/98 $3/16 $1/2
04/01/98 - 06/30/98 $7/32 $7/16
07/01/98 - 09/30/98 $7/32 $25/64
10/01/98 - 12/31/98 $3/16 $25/64
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 footnotes 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 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. 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 Company's dependence on a major customer or customers.
o Failure of the Company or its partners successfully to 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 Company's inability to continue operating due to insufficient cash or
capital.
-8-
<PAGE>
The Company's revenues have historically been derived from conducting
analytical research and writing on a non-recurring basis for its customers. In
1998, 10 customers accounted for approximately 60% of the Company's revenues.
The loss of one or more of these customers without the Company generating
replacement business would have a material adverse impact on its financial
condition. Historically, the Company has experienced a seasonal fluctuation in
revenues with the second and third quarters being the slowest quarters of the
year and the last quarter being the strongest.
The Company has expended an aggregate of $3,721,557 due to losses in 1996
and 1997. Steps taken in 1997 and 1998, including the discontinuation of The Law
Office and the write-down thereof, enabled it to achieve profitability by the
third Quarter of 1998.
Results of Operations
Year ended December 31, 1998 compared to the year ended December 31, 1997
Revenues: Revenues increased by $624,046 or 35%, to $2,403,079 for 1998
compared to 1997 revenues of $1,779,033. The increase in revenues is primarily
attributable to increased sales to corporate customers.
Direct Operating Costs: Direct operating costs for compensation and other
benefits include hourly contract fees for independent research attorneys and
hourly compensation of staff research attorneys, document production and support
personnel. Other direct operating costs include outside research fees and
services, royalty fees for association referrals, computer database charges and
document retrieval expenses. Total direct operating costs increased $75,155, or
7%, to $1,144,488, compared to 1997 direct operating costs of $1,069,333. This
increase is directly related to the increase in revenue in 1998.
Gross Profit: Gross profit increased $548,891, or 77%, to $1,258,591
compared to 1997 gross profit of $709,700. As a percentage of revenue, gross
profit increased to 52% in 1998 compared to 40% in 1997. The increase was
principally due to increased efficiency in the production of research and
writing.
Other Operating Costs: Other operating costs include compensation of
officers, sales and other corporate staff, advertising and direct marketing
expenditures and general corporate overhead, including depreciation and
amortization. These costs decreased $472,592, or 28%, to $1,205,585 over 1997
costs of $1,678,177. Other operating costs decreased as a percentage of revenues
from 94% in 1997 to 50% in 1998. The decrease in these costs by category was
$281,166, or 36%, for sales and marketing; $191,426, or 21%, in general and
administrative. The decrease in sales and marketing costs was due to the
reduction of the sales and support staff and decreased marketing and advertising
expenditures. General and administrative expenditures decreased due to the
reduction of the support and management staff, decreases in management
compensation and decreases in operating expenses (travel, accounting and legal
support and supplies).
Depreciation and Amortization: The Company had depreciation and
amortization of $155,081 in 1998 compared to $193,736 in 1997.
Earnings Before Interest, Taxes, Depreciation and Amortization: Earnings
before interest, taxes, depreciation and amortization were $223,203, or $.10 per
share for 1998, compared to a loss of $1,871,268 or $.82 in 1997.
Net Income (Loss): The Company earned $55,240 or $.02 per share (basic and
diluted) for the year ended December 31, 1998, compared to a loss from
continuing operations of $940,479 or $.41 per share for the comparable period in
1997. The 106% change in the income/loss per share was the result of a 35%
increase in revenue offset by a 7% increase in direct operating costs, further
offset by a 28% decrease in other operating costs through the continued
downsizing of the Company's infrastructure.
-9-
<PAGE>
Year 2000
The Company's information systems and accounting employees have examined
all its internal systems, including hardware and software, and believes that
year 2000 issues will not materially affect its business, results of operations
or financial condition. The Company relies primarily on current versions of
WordPerfect and Word which it believes are not subject to year 2000 issues. The
Company's accounting and record-keeping systems - relying primarily on Microsoft
ACCESS, Windows NT and Peachtree, it believes, are year 2000 compliant and, in
any event, are not 2-digit date dependent. Additionally, its accounting and
record keeping systems can be replicated easily and manually. Primary research
sources relied upon are WESTLAW and LEXIS, which the Company believes are year
2000 compliant but which are, nevertheless, significantly redundant to each
other and to easily-accessible print sources.
Liquidity and Capital Resources
At December 31, 1998, the Company had cash and cash equivalents of $436,110
and working capital of $812,006. At the same time in 1997, the Company had cash
and cash equivalents of $165,924 and working capital of $391,990.
In 1997, the Company instituted specific cost control measures such as
hiring and wage freezes and reductions, to reduce expenditures in all areas of
its operation. The Company expected that by the end of 1997, expenditures would
be funded almost exclusively by funds generated from operations. The Company
reached that goal during the first half of 1998, and raised additional working
capital in the form of convertible debt. The debt consists of two notes payable
incurred in 1998 totaling $200,000 with interest payments at an annual rate of
10%, and is convertible at $1 per share.
Net cash provided by operating activities was $28,081 in 1998 compared to
$600,745 net cash used in operating activities in 1997. The Company had net
income of $55,240 compared to a net loss of $2,065,004 in 1997 for the reasons
discussed above.
Investment activities provided $42,105 in 1998 through cash received on a
note receivable plus proceeds from the sale of equipment. Financing activities
provided $200,000 from notes payable discussed above.
The Company does not anticipate the payment of cash dividends on its Common
Stock in the foreseeable future. It is anticipated that profits 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.
Business Outlook
The Company expects to continue to benefit from it's restructuring, which
began in July 1, 1997, with the discontinuation of operations of The Law Office
(TLO) on June 30, 1997. Until that time, the Company was burdened with 1)
continued expenses for the funding of TLO, with inadequate revenue from TLO, 2)
low gross margins in the core research business and 3) increased overhead from
an infrastructure developed to support revenues of $3 - 5 million.
Starting July 1, 1997, the Company sought to improve gross margins by
restructuring research procedures and compensation, raising and restructuring
pricing, and utilizing the technology developed with its new infrastructure to
reduce its production department. The Company reduced overhead by reducing
management compensation by 10% - 30%, restructuring sales compensation, reducing
non-research staff by attrition and layoffs by two-thirds, and reducing or
eliminating all other fixed expenses. The Company hopes to maintain annual gross
margins of 50% or better and hopes overhead will continue to be static or grow
at a rate significantly lower than revenue.
-10-
<PAGE>
The Company continues to focus its marketing/sales efforts on direct
marketing of its traditionally-strong products and services. The Company
believes the market for the outsourced legal research and writing services it
provides to be growing and that it can continue to increase revenues for the
foreseeable future.
Item 7. FINANCIAL STATEMENTS
The information required by this item is incorporated herein by reference
to pages F-1 through F-13, which follow this page.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Effective as of December 17, 1997, the Company's principal accounting firm,
McGladrey & Pullen, LLP resigned. McGladrey & Pullen's reports on the financial
statements of the Company for 1996 and 1995 did not contain an adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. There have been no disagreements between
the Company (including the audit committee of the Board of Directors) and
McGladrey & Pullen on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. Effective as of
February 13, 1998, the Company hired Lurie Besikof, Lapidus & Co., LLP, which
firm audited the Company's 1997 and 1998 financial statements.
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-1
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-13
- --------------------------------------------------------------------------------
-11-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Legal Research Center, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of LEGAL RESEARCH
CENTER, INC. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 that 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 LEGAL RESEARCH
CENTER, INC. as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
February 18, 1999
F1
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 436,110 $ 165,924
Accounts receivable 457,723 277,144
Notes receivable 30,909 60,000
Other 33,121 43,399
----------- -----------
TOTAL CURRENT ASSETS 957,863 546,467
----------- -----------
FURNITURE AND EQUIPMENT 342,067 362,247
Less accumulated depreciation 298,340 245,632
----------- -----------
43,727 116,615
----------- -----------
OTHER ASSETS
Notes receivable, net of current amount 50,050 60,959
Intangible assets 232,645 313,624
----------- -----------
282,695 374,583
----------- -----------
$ 1,284,285 $ 1,037,665
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 44,235 $ 57,411
Accrued expenses:
Compensation 80,990 48,899
Other 3,155 21,394
Client advances 17,477 26,773
----------- -----------
TOTAL CURRENT LIABILITIES 145,857 154,477
----------- -----------
NOTES PAYABLE 200,000 --
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value (authorized - 20,000,000 shares;
issued - 3,327,633) 33,276 33,276
Additional paid-in capital 6,870,007 6,870,007
Accumulated deficit (3,998,605) (4,053,845)
Notes receivable from officers and directors (1,966,250) (1,966,250)
----------- -----------
938,428 883,188
----------- -----------
$ 1,284,285 $ 1,037,665
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F2
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
1998 1997
----------- -----------
REVENUES $ 2,403,079 $ 1,779,033
----------- -----------
DIRECT OPERATING COSTS
Compensation and benefits 817,111 767,712
Other 327,377 301,621
----------- -----------
1,144,488 1,069,333
----------- -----------
GROSS PROFIT 1,258,591 709,700
----------- -----------
OTHER OPERATING COSTS
Sales and marketing 493,324 774,490
General and administrative 712,261 903,687
----------- -----------
1,205,585 1,678,177
----------- -----------
INCOME (LOSS) FROM OPERATIONS 53,006 (968,477)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 15,116 27,998
Interest expense (12,882) --
----------- -----------
2,234 27,998
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 55,240 (940,479)
----------- -----------
DISCONTINUED OPERATIONS (Note 2)
Loss from operations -- (407,517)
Loss on the disposal of subsidiaries -- (717,008)
----------- -----------
-- (1,124,525)
----------- -----------
NET INCOME (LOSS) $ 55,240 ($2,065,004)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
Continuing operations - basic and diluted $ 0.02 ($ 0.41)
Discontinued operations - basic and diluted -- (0.50)
----------- -----------
$ 0.02 ($ 0.91)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 2,287,633 2,272,633
Diluted 2,292,568 2,272,633
See notes to consolidated financial statements.
F3
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Accumulated Notes
Shares Amount Capital Deficit Receivable Total
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 3,297,633 $ 32,976 $ 6,765,307 ($1,988,841) ($1,966,250) $ 2,843,192
Expiration of repurchase option
on common stock 30,000 300 104,700 -- -- 105,000
Net loss -- -- -- (2,065,004) -- (2,065,004)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 3,327,633 33,276 6,870,007 (4,053,845) (1,966,250) 883,188
Net income -- -- -- 55,240 -- 55,240
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 3,327,633 $ 33,276 $ 6,870,007 ($3,998,605) ($1,966,250) $ 938,428
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F4
<PAGE>
LEGAL RESEARCH CENTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 55,240 ($2,065,004)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Loss on disposal of subsidiaries -- 717,008
Depreciation 71,777 83,279
Amortization of intangible assets and capitalized
development costs 83,304 110,457
Gain on sale of furniture and equipment (3,319) --
Accounts receivable (180,579) 646,374
Other current assets 10,278 169,711
Accounts payable (13,176) (124,621)
Accrued expenses 13,852 (128,765)
Client advances (9,296) (9,184)
----------- -----------
Net cash provided (used) by operating activities 28,081 (600,745)
----------- -----------
INVESTING ACTIVITIES
Cash received on notes receivable 40,000 50,000
Capitalized development costs (2,325) (224,398)
Proceeds from sale of property and equipment 4,430 --
Purchases of furniture and equipment -- (6,278)
----------- -----------
Net cash provided (used) by investing activities 42,105 (180,676)
----------- -----------
FINANCING ACTIVITIES
Proceeds from notes payable 200,000 --
Payments on noncompete agreements -- (8,255)
----------- -----------
Net cash provided (used) by financing activities 200,000 (8,255)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 270,186 (789,676)
CASH AND CASH EQUIVALENTS
Beginning of year 165,924 955,600
----------- -----------
End of year $ 436,110 $ 165,924
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 12,882 $ --
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Conversion of accounts receivable from American Research
Corporation to a note receivable, net of allowance of $8,414 and
reclassification of allowance for doubtful accounts of $46,721 -- 129,145
Sale of investment in American Research Corporation
for a note receivable, net of allowance of $58,336 -- 41,764
</TABLE>
See notes to consolidated financial statements.
F5
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business and Summary of Significant Accounting Policies-
The Business
Legal Research Center, Inc. (the Company) provides outsourced legal and
factual research, and writing and support services to U.S. and Canadian
attorneys in corporate and private practice. The Company grants credit to
customers on terms established for each customer. Additionally, the Company
developed the Corporate Alternative Dispute Resolution Enterprises (CADRE)
program, a training course focusing on the concepts and skills necessary to
implement and utilize an alternative dispute resolution system on a
corporate wide basis.
During 1997, the Company discontinued the operations of the subsidiaries
The Law Office, Inc. (TLO) and The CyberLaw Office, Inc. (CLO), which were
acquired during 1996 and 1995 (Note 2).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its TLO and CLO subsidiaries presented on a discontinued basis. All
significant intercompany accounts and transactions are eliminated.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect certain reported amounts and disclosures in the
financial statements and accompanying notes. Actual results could differ
from these estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments consisting of cash and cash
equivalents, receivables, accounts payable, and notes payable approximate
their fair values.
Revenue Recognition
Revenue is recognized as the services are performed. Unbilled services
relate to revenue recognized for services performed, but not billed.
Cash and Cash Equivalents
All investments purchased with a maturity of three months or less are
considered to be cash equivalents. Cash and cash equivalents include money
market accounts of approximately $430,700 and $152,300 at December 31, 1998
and 1997, respectively. These investments are not insured by the Federal
Deposit Insurance Corporation.
(continued)
F6
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business and Summary of Significant Accounting Policies-
(continued)
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed
using the straight-line method over three to five years.
Intangible Assets
The Company capitalized certain product costs incurred for the development
of the Corporate Alternative Dispute Resolution Enterprises (CADRE)
training program. Capitalized costs include direct labor, fees, and
expenses of contractors who assisted in the development of the product. The
Company completed the development of CADRE during the first quarter of 1998
and began amortizing the capitalized costs over three years on the
straight-line method. Accumulated amortization was $83,304 and $-0- at
December 31, 1998 and 1997, respectively.
Advertising and Promotions
Costs associated with advertising and promoting products are expensed in
the year incurred. Advertising and promotion expenses were approximately
$203,800 and $281,000 in 1998 and 1997, respectively.
Net Income (Loss) Per Common Share
Basic net income (loss) per share is computed based on the weighted average
number of common shares outstanding. Diluted net income (loss) per share is
computed based on the weighted average number of common shares outstanding
plus stock options and the shares subject to subscription if the inclusion
of such items is dilutive.
Accounting for Stock-Based Compensation
The Company accounts for employee stock options under the method prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and provides the pro forma disclosures required by Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation.
F7
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Discontinued Operations of The Law Office, Inc. and The CyberLaw Office,
Inc. -
During 1996 and 1995, the Company acquired The Law Office, Inc. (TLO) and
The CyberLaw Office, Inc. (CLO) to develop on-line legal services. TLO and
CLO revenues were not sufficient to cover cash operating expenses and
development costs, and in 1997, the Company was informed that a significant
agreement with Microsoft Online Services Partnership would not be renewed.
The Company suspended the funding of TLO and CLO as a result of the above
and the uncertainty of obtaining adequate funds to finance the TLO and CLO
operations and development. The Company recorded a $717,008 loss on the
disposal of TLO and CLO in 1997. The loss on disposition consists of a
noncash charge for intangible assets totaling $623,200, a noncash valuation
charge for computer and related equipment of approximately $20,000, and a
provision for operating expenses during the phase-out period of
approximately $73,800.
3. Accounts Receivable -
Accounts receivable consist of the following:
1998 1997
-------- --------
Trade $458,430 $415,083
Unbilled services 56,493 15,261
-------- --------
514,923 430,344
Less allowance for doubtful accounts 57,200 153,200
-------- --------
$457,723 $277,144
======== ========
4. Notes Receivable -
Notes receivable, including past due interest, consist of the following:
Annual
Interest 1998 1997
-------- -------- --------
Unsecured promissory note, monthly payments
of $5,000 and a final balloon payment due
July 1999 (restructuring note) 10% $ 94,280 $134,280
Unsecured promissory note, due in quarterly
installments of $25,025 beginning July 1999
(repurchase note) 10% 100,100 100,100
Interest receivable - past due 37,612 14,380
-------- --------
231,992 248,760
Less allowance for doubtful accounts 151,033 127,801
-------- --------
80,959 120,959
Less current amount 30,909 60,000
-------- --------
$ 50,050 $ 60,959
======== ========
(continued)
F8
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Receivable - (continued)
The notes are due from American Research Corporation (ARC), an entity in
which the Company held a 5% investment from September 1995 to June 1997.
The restructuring note arose from the conversion of amounts owed the
Company totaling $184,280, including accrued interest. The repurchase note
was received in conjunction with ARC reacquiring all of its shares owned by
the Company for $100,100. Due to ARC's uncertain financial condition, the
Company reserved a portion of the notes and accrued interest as potentially
uncollectible.
5. Notes Payable -
The two notes require quarterly interest payments at an annual rate of 10%.
The notes may be converted into common stock at the option of the holder at
$1 per share any time prior to maturity in 2000.
6. Common Stock -
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 could have required the Company to repurchase
a portion or all of the remaining shares at $3.50 a share if TLO obtained
debt or equity financing in excess of $500,000. However, due to the
discontinued status of TLO and the shareholder's disposal of these shares,
the repurchase option was treated as expired in 1997.
Notes Receivable From Officers and Directors
In September 1996, the Company sold an aggregate of 1,040,000 shares of
common stock to three officers and/or directors at the closing price for
the Company's common stock on September 4, 1996, or $1.89 a share. The
purchases were made through nonrecourse notes with the shares pledged as
collateral. The notes bear interest at 8.5% and cannot be prepaid anytime
before September 2003, except in connection with a merger, acquisition, or
sale of substantially all of the Company's assets. The shares are
restricted and cannot be sold or otherwise transferred without repaying the
notes. The Company's policy is to not record interest income on the notes
until the cash is received in September 2003.
Common stock issued to officers and directors (Officer Shares) in exchange
for notes receivable 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 potentially dilutive for
purposes of calculating weighted average common shares outstanding and
earnings per share.
F9
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes -
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- -----------------------------------------
Total Federal State Total Federal State
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for doubt-
ful accounts $ 81,000 $ 70,000 $ 11,000 $ 109,000 $ 94,000 $ 15,000
Intangible, other
assets and accrued
expenses $ 71,000 $ 61,000 $ 10,000 $ 78,000 $ 67,000 $ 11,000
Furniture and
equipment $ 14,000 $ 12,000 $ 2,000 -- --
Net operating loss
carryforward $ 1,219,000 $ 1,036,000 $ 183,000 $ 1,215,000 $ 1,033,000 $ 182,000
----------- ----------- ----------- ----------- ----------- -----------
$ 1,385,000 $ 1,179,000 $ 206,000 $ 1,402,000 $ 1,194,000 $ 208,000
Valuation allowance ($1,385,000) ($1,179,000) ($ 206,000) ($1,397,000) ($1,190,000) ($ 207,000)
Deferred tax liability-
furniture and
equipment -- -- -- ($ 5,000) ($ 4,000) ($ 1,000)
=========== =========== =========== =========== =========== ===========
$ -- $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== =========== ===========
</TABLE>
The Company recorded a valuation allowance due to the uncertainty
associated with the realization of the net deferred tax assets. The change
in the valuation allowance was a decrease of $12,000 and an increase of
$662,000 in 1998 and 1997, respectively.
At December 31, 1998, the Company has a federal net operating loss
carryforward totaling $3,049,000 (state - $1,870,000) expiring $9,000,
$1,196,000, $1,194,000, and $650,000 in 2018, 2012, 2011, and 2010,
respectively. The net operating loss carryforward includes $350,000 subject
to certain annual limitations.
8. Stock Option Plans -
The Company reserved 700,000 shares of common stock for issuance under the
1995 fixed stock option plan. 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.
The Company also has the Legal Research Center, Inc. Existing Officer's
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.
(continued)
F10
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Option Plans - (continued)
The Company also has a 1997 fixed stock option plan and reserved 700,000
shares of common stock for issuance under that plan. Options may not be
granted at an exercise price less than the fair market value of the common
stock on the date of grant. The options may qualify as incentive stock
options, vest annually, and are exercisable over periods ranging from three
to ten years.
Nonemployee 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 expire 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 1998 and 1997, respectively; no dividend
yield during the expected life of outstanding options; expected volatility
of 167% and 178%; risk free interest rates of 5.5% and 6.5%, and expected
lives of 2.5 and 3.8 years.
A summary of the status of the fixed stock options under these plans,
including the stock issued to officers and directors which are treated as
stock options, is as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
--------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 1,653,404 $2.81 1,530,804 $2.96
Granted 193,200 .25 126,600 1.15
Forfeited (53,133) 1.74 (4,000) 2.23
--------- ---------
Outstanding at
end of year 1,793,471 $2.60 1,653,404 $2.81
========= =========
Weighted-average fair
value of options granted
during the year $ .21 $1.04
===== =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1998:
Options Outstanding
---------------------------------
Weighted- Weighted-
Range of Average Average
Exercise Remaining Exercise
Prices Options Contractual Life Price
------------- ------- ---------------- ---------
$.13 - $.25 154,400 3.6 $ .24
$.29 - $.75 19,700 2.5 .33
$1.13 - $1.88 95,871 3.9 1.15
$2.00 - $2.63 79,300 1.9 2.11
$2.70 - $2.97 374,200 1.2 2.96
$3.02 - $3.50 1,070,000 4.7 3.02
----------
$.13 - $3.50 1,793,471 3.7 2.60
==========
(continued)
F11
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Option Plans - (continued)
All of the above options are exercisable.
In June 1996, under the terms of the Option Plan, the Company adopted a
program to award stock options to executive officers whose vesting was
contingent upon the Company attaining two consecutive profitable quarters.
The exercise price of each option was equal to the market price of the
Company's stock on the date of grant and expired in periods ranging from
three to five years from the date of grant. In 1996, options totaling
$385,000 were issued with a weighted-average exercise price of $2.03. In
1997, these options were cancelled.
The Company applies APB Opinion 25 and related interpretations in
accounting for stock option plans. Accordingly, no compensation cost was
recognized for the fixed options plans or performance-based stock option
plans in 1998 or 1997. Had compensation cost for the 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 SFAS No.
123, the pro forma net income (loss) and net income (loss) per share would
be as follows:
1998 1997
------------- -------------
Net income (loss):
As reported $ 55,240 ($ 2,065,004)
Pro forma (69,421) (2,356,452)
Net income (loss) per share:
As reported - basic and diluted $ 0.02 ($ 0.91)
Pro forma - basic and diluted (0.03) (1.04)
The pro forma effects of applying SFAS No. 123 are not indicative of future
amounts since, among other reasons, the pro forma requirements of the
Statement were applied only to options granted after December 31, 1994.
9. Royalty Agreements -
The Company has agreements with certain associations which require payment
of royalties for projects. Royalty rates and terms vary depending upon the
agreement. Royalty expense for 1998 and 1997 was approximately $9,500 and
$19,000, respectively.
F12
<PAGE>
LEGAL RESEARCH CENTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Major Customers -
The Company had the following transactions with significant customers:
Percent Accounts Receivable
of Revenues at December 31,
------------- -------------------
Company 1998 1997 1998 1997
------- ------ ------ ----------- ---------
A 30% -- $ 60,500 $ --
B 16% -- 115,500 --
C -- 14% -- 47,000
11. Related Party Transactions -
Lease
The Company utilizes an office facility leased by a related party under an
operating lease requiring monthly rent of approximately $6,300 through
January 2001. The Company complies with 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 $61,300 and
$64,700 for 1998 and 1997, respectively.
Officer Employment Agreements
The Company has employment agreements with two officers through July 1,
1999. The agreements, as amended, require annual base salaries of $96,000
for each officer, plus goal-oriented incentives, which may be adjusted by
the Board of Directors. There was no incentive compensation expense under
the officer employment agreements in 1998 or 1997.
F13
<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
1998 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 1 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 1998 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
1998 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 1998 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, 1998
and 1997 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:
<TABLE>
<CAPTION>
Exhibit No. Title Method of Filing
----------- ----- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation 1
3.2 Restated Bylaws 1
4 Form of Common Stock Certificate 1
</TABLE>
-12-
<PAGE>
<TABLE>
<S> <C> <C>
10.1 1995 Stock Option Plan 1
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
10.5 1997 Stock Option Plan 5
10.11 First Amendment to Net Office Lease Agreement dated June 1996
2
10.14 Employment Agreement dated July 25, 1996 between The
CyberLaw Office, Inc. and Arun K. Dube 5
10.15 Sale of Common Stock to Officers and Directors on September
3, 1996 4
11 Subsidiaries of Legal Research Center, Inc. 5
27 1998 Fiscal Year End Financial Data Schedule Filed Herewith
99.1 News Release regarding the agreement with Risk Enterprise 6
Management
99.2 News Release regarding the agreement with WIRE 6
</TABLE>
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.
5. Incorporated by reference to Exhibits 10.14 and 11 to the Company's Form
10-KSB (as amended) dated March 27, 1997.
6. Incorporated by reference to Exhibits 10.17 and 10.18 to the Company's Form
10-KSB (as amended) dated March 27, 1998.
(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/ Christopher R. Ljungkull
-----------------------------
Christopher R. Ljungkull, CEO
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 , 1999
------------------
Christopher R. Ljungkull
Chief Executive Officer
(Principal Executive Officer) and
Director /s/ C.R. Ljungkull March 26, 1999
------------------
James R. Seidl
President and Director /s/ James R. Seidl March 26, 1999
------------------
Bruce J. Aho /s/ Bruce J. Aho March 26, 1999
------------------
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YEAR
ENDED DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 436,110
<SECURITIES> 0
<RECEIVABLES> 521,753
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 957,863
<PP&E> 342,067
<DEPRECIATION> 298,340
<TOTAL-ASSETS> 1,284,285
<CURRENT-LIABILITIES> 145,857
<BONDS> 0
0
0
<COMMON> 33,276
<OTHER-SE> 1,105,152
<TOTAL-LIABILITY-AND-EQUITY> 1,284,285
<SALES> 0
<TOTAL-REVENUES> 2,403,079
<CGS> 0
<TOTAL-COSTS> 1,144,488
<OTHER-EXPENSES> 1,205,585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,882
<INCOME-PRETAX> 55,240
<INCOME-TAX> 0
<INCOME-CONTINUING> 55,240
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,240
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
