As filed with the Securities and Exchange Commission on June 18, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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LOISLAW.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7374 71-0655999
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
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105 North 28th Street
Van Buren, Arkansas 72956
(501) 471-5581
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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KYLE D. PARKER
Chairman of the Board and Chief Executive Officer
Loislaw.com, Inc.
105 North 28th Street
Van Buren, Arkansas 72956
(501) 471-5581
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Kenn W. Webb, Esq. Lawrence S. Wittenberg, Esq.
Thompson & Knight, P.C. Testa, Hurwitz & Thibeault, LLP
1700 Pacific Avenue, Suite 3300 125 High Street
Dallas, Texas 75201 Boston, Massachusetts 02110
(214) 969-1700 (617) 248-7000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an Offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same Offering. [_]
If this Form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Aggregate
Title of Each Class of Offering Amount of
Securities to be Registered Price(2) Registration Fee
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Common Stock ($0.001 par value)............... $75,000,000 $20,850
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(1) Includes shares that the Underwriters have the option to purchase to cover
any over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. +
+Loislaw.com may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+of an offer to buy these securities in any state where the offer or sale is +
+not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION-- , 1999
PROSPECTUS
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Shares
[LOGO] Loislaw.com, Inc.
Common Stock
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Loislaw.com, Inc. is offering shares of its common stock and a selling
stockholder is offering shares of common stock in an initial public
offering. Prior to this offering, there has been no public market for
Loislaw.com's common stock.
Loislaw.com provides comprehensive, affordable and easy-to-use legal and
related information over the Internet and on CD-ROM.
It is anticipated that the public offering price will be between $ and $
per share. The shares of Loislaw.com will be quoted in the Nasdaq National
Market under the symbol "LOIS."
Per Share Total
Public offering price...................................... $ $
Underwriting discounts and commissions..................... $ $
Proceeds, before expenses, to Loislaw.com.................. $ $
Proceeds to selling stockholder............................ $ $
See "Risk Factors" on pages 6 to 13 for factors that you should consider before
investing in the shares of Loislaw.com.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
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The underwriters may, under certain circumstances, purchase up to
additional shares from Loislaw.com at the public offering price, less
underwriting discounts and commissions. Delivery and payment for the shares
will be on , 1999.
Prudential Securities
U.S. Bancorp Piper Jaffray
Dain Rauscher Wessels
a division of Dain
Rauscher Incorporated
, 1999
TABLE OF CONTENTS
Page
----
Prospectus Summary................... 1
Risk Factors......................... 6
Forward-Looking Statements........... 14
Use of Proceeds...................... 15
Dividend Policy...................... 15
Capitalization....................... 16
Dilution............................. 17
Selected Financial Data.............. 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Page
----
Business............................ 29
Management.......................... 40
Certain Transactions................ 46
Principal and Selling Stockholders.. 48
Description of Capital Stock........ 50
Shares Eligible for Future Sale..... 52
Underwriting........................ 54
Legal Matters....................... 55
Experts............................. 55
Available Information............... 56
Index to Financial Statements....... F-1
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The terms "Loislaw.com", "we", "our" and "us" refer to Loislaw.com, Inc.
unless the context suggests otherwise. The term "you" refers to a prospective
investor.
We have obtained federal trademark registrations for LOIS PROFESSIONAL
LIBRARY(R), N-line(R), PITA(R) and THE TECHNOLOGY COMPANY WITH A LAW
DEGREE(R), and have pending trademark applications for LOIS SM and the LOIS
logo SM. We have also obtained copyright registrations for the following
proprietary software programs: PITA(R), CaseBase: The Arkansas Reports, and
Law Office Information Systems: Master Menu Systems. Other trademarks and
trade names in this prospectus are the property of other owners.
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You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you
with different information. We are not making an offer of these securities in
any jurisdiction where the offer or sale is not permitted. You should not
assume that the information contained in this prospectus is accurate as of any
date other than the date on the front cover of this prospectus.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
investors should consider before investing in our common stock. You should read
the entire prospectus carefully.
Loislaw.com
Our Business
Loislaw.com provides comprehensive, affordable and easy-to-use legal and
related information to lawyers and law firms over the Internet and on CD Rom.
We offer more than 950 databases that we estimate to contain over 50 million
pages of federal and state law, continuing legal education materials and other
legal information. We believe this is the largest collection of legal databases
in hypertext mark-up language, or HTML, the standard format language used on
the Internet. We offer powerful and intuitive search tools designed to make our
information easily accessible and valuable to our users. Through LOIS LawWatch,
we provide personalized, intelligent search agents that automatically and
continuously search our web site and notify our users when new documents match
their search criteria. Our news feeds provide up to 150,000 news articles a
month from more than 400 domestic and international sources. Our legal
information is available through our web site at loislaw.com or through our CD-
ROM products at a low annual subscription price.
We have historically targeted our marketing efforts to law firms with fewer
than 20 lawyers. Small law firms typically require legal information for the
states in which they practice, while large law firms typically require
information for all 50 states. Currently, we provide statutes, regulations and
rules of court for all state and federal jurisdictions. We also provide
comprehensive court decisions for the U.S. Supreme Court and all federal
circuit courts of appeal. In addition, with the completion of databases for 11
new states in the last six months, we currently provide comprehensive legal
information for 31 of the 50 states. The lawyers in these states represent over
80% of the total number of active practicing lawyers in the U.S. We intend to
complete our state law databases for all 50 states by December 31, 1999. Upon
completion of these databases, we plan to aggressively market to additional
small law firms, large law firms and legal departments of corporations.
Since we launched our web site in 1996, our web-based products have
represented an increasing percentage of our sales. We expect this trend to
continue as we sell more web-based products to existing customers and gain new
customers, and as our existing CD-ROM customers migrate to our web-based
products. During the month of March 1999, we exceeded 1.4 million searches on
our web site compared to 146,000 during March 1998. At March 31, 1999, we had a
total of 7,251 customers of which 2,393 purchased our web-based products and
4,858 purchased our CD-ROM products. The percentage of customers that renewed
their subscriptions to our products was 89.3% in 1998. We generated revenues of
$5.0 million in 1998 and $1.3 million in the first quarter of 1999, and
incurred a net loss of $8.6 million in 1998 and $2.7 million in the first
quarter of 1999. Through March 31, 1999, our accumulated deficit totaled $17.5
million.
Our Market
The market for web-based and other on-line legal, tax and public record
information is large and growing. According to an industry source, the market
for web-based and other on-line legal, tax and public record information was
$1.7 billion in 1998 and is projected to grow to $2.7 billion in 2002,
representing a compound annual growth rate of 12.3%.
We believe that the following are the key drivers of growth in the market
for web-based and other on-line legal information:
.An increase in the number of lawyers;
.An increase in litigation; and
.The growth of the Internet.
1
Our Strategy
Our objective is to become the leading Internet destination for lawyers, law
students, business people and consumers who need legal and related information.
We developed our core products to serve the research needs of lawyers. As we
expand our product offerings, we plan to address additional needs of lawyers
and offer legal information designed to meet the needs of consumers. To achieve
our business objectives, we plan to do the following:
. Continue to market aggressively to small law firms to expand our small
law firm customer base;
. Complete our state law databases for all 50 states by December 31, 1999,
at which time we intend to aggressively market our products to large law
firms and legal departments of corporations;
. Continue to build the depth and breadth of our databases through internal
development and by licensing and acquiring information from third
parties;
. Continue to promote brand awareness through expansion of our direct sales
force, reliable product offerings, excellent customer service and
effective marketing and promotion;
. Continue to forge alliances with state and national bar associations,
continuing legal education associations and court systems; and
. Develop a new web site linked to our loislaw.com web site that will offer
legal and related information to consumers.
Loislaw.com was incorporated in Arkansas as Law Office Information Systems,
Inc. on October 13, 1987 and reincorporated in the State of Delaware on June
18, 1999. Our principal executive offices are located at 105 North 28th Street,
Van Buren, Arkansas 72956 and our telephone number is (501) 471-5581. Our web
site address is www.loislaw.com. The information contained on our web site is
not a part of this prospectus.
2
The Offering
Shares offered by Loislaw.com................ shares
Shares offered by the selling stockholder.... shares
Total shares outstanding after this
offering.................................... shares
Use of proceeds by Loislaw.com............... For debt reduction, redemption of
preferred stock, continued development
of legal databases, expansion of
marketing and sales activities,
potential acquisitions and other general
corporate purposes.
Proposed Nasdaq National Market symbol....... LOIS
The common stock to be outstanding after the offering is based on the shares
outstanding as of March 31, 1999 and does not include the following:
. 500,000 shares of common stock reserved for issuance under our employee
stock option plan, of which options to purchase 291,561 shares are
currently outstanding;
. 320,000 shares of common stock that we intend to reserve for issuance
under a stock option plan for nonemployee directors, including shares
that will be covered by options we intend to grant with exercise prices
equal to the initial public offering price;
. shares that we intend to reserve for issuance under an employee
stock purchase plan; and
. 17,768 shares reserved for issuance under outstanding warrants.
Unless otherwise indicated, all information contained in this prospectus
reflects:
. a -for-one stock split to be effected before the completion of this
offering;
. the conversion of Series A convertible preferred stock and Series C
convertible preferred stock into common stock, which will occur
immediately upon the completion of this offering; and
. does not include shares subject to the underwriters' over-allotment
option.
Risk Factors
You should consider the risk factors before investing in Loislaw.com's
common stock, and the impact of various events that could adversely affect our
business.
3
Summary Financial Data
The summary financial data set forth below should be read in conjunction
with Loislaw.com's financial statements and notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this prospectus.
Years Ended December Three Months
31, Ended March 31,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
Statement of Operations Data: (in thousands, except per share data)
Web-based product revenue....... $ 28 $ 208 $ 842 $ 115 $ 499
CD-ROM product revenue.......... 1,855 3,157 3,182 737 837
Other........................... -- -- 1,000 117 --
------- ------- ------- ------- -------
Total revenues................... 1,883 3,365 5,024 969 1,336
------- ------- ------- ------- -------
Costs and expenses............... 5,125 5,574 12,111 2,555 3,484
------- ------- ------- ------- -------
Loss from operations............. (3,242) (2,209) (7,087) (1,586) (2,148)
Other income (expenses).......... (249) (461) (1,507) (278) (592)
------- ------- ------- ------- -------
Net loss......................... (3,491) (2,670) (8,594) (1,864) (2,740)
Accrued preferred stock dividends
and accretion on redeemable
preferred stock and common stock
warrants........................ -- (34) (500) (105) (206)
------- ------- ------- ------- -------
Net loss applicable to common
stock........................... $(3,491) $(2,704) $(9,094) $(1,969) $(2,946)
======= ======= ======= ======= =======
Net loss per share--basic and
diluted......................... $ (0.99) $ (0.76) $ (2.52) $ (0.55) $ (0.75)
======= ======= ======= ======= =======
Weighted average common stock
outstanding--basic and diluted.. 3,529 3,581 3,611 3,590 3,950
======= ======= ======= ======= =======
Three Months
Years Ended Ended
December 31, March 31,
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1997 1998 1998 1999
------ ------ ------ ------
(in thousands)
Other Data (unaudited):
Web-based new sales(1)................. $ 485 $1,985 $ 181 $ 608
CD-ROM new sales(1).................... 2,370 2,081 462 256
------ ------ ------ ------
Total new sales(1).................... $2,855 $4,066 $ 643 $ 864
====== ====== ====== ======
- --------
(1) New sales represent the total contract value of all new product sales to
existing and new customers, excluding renewals of existing subscriptions of
web-based or CD-ROM products.
The Pro Forma column included in the Balance Sheet Data adjusts the numbers
in the Actual column to give effect to:
. the exercise on May 19, 1999 of warrants for 1,056,616 shares of common
stock at $.01 per share;
. the issuance on May 25, 1999 of 2,495,697 shares of Series C convertible
preferred stock and 86,059 shares of common stock, in each case at $5.81
per share, a portion of which was paid for by conversion of the 12.5%
Senior Subordinated Convertible Notes, and the use of the proceeds to
pay accrued interest related to the convertible notes and $555,000 of
costs of issuance; and
. the elimination of the redemption features on 365,346 shares of common
stock.
4
The Pro Forma as Adjusted column included in the Balance Sheet Data set
forth below adjusts the numbers in the Actual column to give effect to the
proforma adjustments described in the preceding paragraph and:
. the sale of shares of common stock at an assumed public offering
price of $ per share by us in this offering;
. the conversion of 931,044 shares of Series A convertible preferred stock
and 2,495,697 shares of Series C convertible preferred stock into
3,426,741 shares of common stock immediately upon completion of this
offering;
. the elimination of the redemption feature of outstanding warrants for
17,768 shares of common stock; and
. our application of $4,855,385 to redeem 439,589 shares of Series B
redeemable preferred stock and accrued dividends on this stock and $
to repay outstanding debt with a portion of the net proceeds of this
offering.
. the loss or extinguishment of debt attributable to the write-off of
deferred loan costs in the amount of $ as a result of repaying the
related debt.
As of March 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma as Adjusted
Balance Sheet Data (unaudited): -------- --------- -----------
(in thousands)
Cash and cash equivalents..................... $ 20 $12,454 $
Working capital (deficit)..................... (6,341) 6,114
Total assets.................................. 22,016 34,451
Total debt (including capital lease
obligations)................................. 17,589 15,589
Deferred revenues............................. 3,802 3,802
Redeemable equity securities.................. 12,353 25,119
Total stockholders' deficit................... (17,065) (15,375)
5
RISK FACTORS
You should consider carefully the following risk factors in addition to the
other information set forth in this prospectus before purchasing shares of
common stock of Loislaw.com. Each of these risk factors could adversely affect
our business, operating results and financial condition as well as adversely
affect the value of an investment in our common stock.
Risks Particular to Loislaw.com
We have operated at a loss in recent periods and may not become profitable
in the future.
We had net operating losses of $3.5 million in 1996, $2.7 million in 1997,
$8.6 million in 1998 and $2.7 million in the three months ended March 31,
1999. These losses have resulted principally from expenses related to data
conversion and the marketing costs incurred with the introduction of our new
products in the various state markets. We expect operating losses and negative
cash flows to continue for the foreseeable future as we continue to incur
significant operating expenses and make capital investments in our business.
We may never generate sufficient revenues to achieve profitability. Even if we
do become profitable, we may not be able to sustain or increase profitability
on a quarterly or annual basis. At March 31, 1999, we had an accumulated
deficit of $17.5 million.
The competition in our industry is intense, our principal competitors have
significantly greater resources than we do and this competition may
adversely affect our financial results.
The market for electronic legal information is currently dominated by
LEXIS/NEXIS, which is owned by Reed-Elsevier, and West Group, a division of
The Thomson Corporation. These competitors are both large, well-established
companies. They offer databases that are similar to or in some cases larger
than the databases that we offer. Our competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical and marketing resources than Loislaw.com. This
may enable them to undertake more extensive marketing campaigns, to respond
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can. LEXIS/NEXIS and West Publishing Company
have significant penetration in the large law firm market, a market in which
we intend to compete.
In addition, we compete with companies that offer fee-based access to
selected legal databases over the Internet. These companies may be more
successful than we may be in capturing market share.
Our results of operations are subject to significant quarterly fluctuations
and may not be a good indicator of future results, which could result in
lower prices for our common stock.
Our quarterly operating results have been affected by the spending patterns
of small law firms, which constitute our primary customers. In the future, our
quarterly results may also be affected by other factors that are beyond our
control, including:
.introduction of new products or pricing programs by our competitors;
.difficulties in managing growth;
.technical difficulties or system downtime affecting our web-based
products;
.other business interruptions;
.increases in selling and marketing expenses, as well as other operating
expenses;
.Year 2000 problems with our technology or the technology of third parties
with which we do business;
6
.the amount and timing of costs associated with the development and
introduction of new database products;
. economic conditions specific to the Internet or to the legal profession,
as well as general economic conditions; and
.costs and risks associated with potential acquisitions.
In addition, a substantial portion of our expenses, including most product
development and selling and marketing expenses, must be incurred in advance of
revenue generation. If our projected revenue does not meet our expectations,
then our operating profit (loss) may fall short of our expectations. Further,
we may change our pricing strategy for our products due to the rapidly evolving
market for electronic legal information, and this may affect our quarterly
results.
Any one or more of these factors could affect our business, financial
condition and results of operations, and this makes the prediction of results
of operations on a quarterly basis unreliable. As a result, we believe that
period-to-period comparisons of our historical results of operations are not
necessarily meaningful and that you should not rely on them as an indication of
future performance. Also, due to these and other factors, it is possible that
our quarterly results of operations may be below the expectations of public
market analysts and investors. This could adversely affect the price of our
common stock.
We could be subject to legal liability relating to the information on our
web site.
Although we perform extensive quality control tests on information we
include in our databases, we cannot achieve 100% accuracy. We may be subject to
claims based on negligence or other theories relating to the information we
distribute. These types of claims could be time-consuming and expensive to
defend and could result in the diversion of our management's time and
attention. We maintain business liability insurance and provide no express or
implied warranties to our customers, but our insurance and our contracts with
customers may not fully protect us against these types of claims.
Rapid growth could strain our operational and financial resources.
Since we began delivering our legal information databases over the Internet
in July 1996, we have experienced rapid growth in our operations. This growth
has placed a strain on our operational and financial resources. Any increase in
the volume of users of our computer system could strain the capacity of our
software or hardware, which could lead to slower response times or system
failures. Any future growth may require us, among other things, to:
. expand and upgrade our hardware and software systems;
. expand and improve our operational and financial procedures, systems and
controls;
. improve our financial and management information systems;
. expand, train and manage a larger workforce; and
. improve the coordination among our technical, sales and marketing,
financial, accounting and management personnel.
We cannot assure you that our personnel, systems and controls will be
adequate to support future growth, if any. Our inability to manage growth
effectively or to maintain the quality of our products and services could
materially and adversely affect our business, results of operations and
financial condition.
If we do not increase awareness of our brand name, our ability to reach new
customers will be limited.
Our future success will depend, in part, on our ability to increase
awareness of our brand name and our loislaw.com web site by potential
customers. In order to do so, we must succeed in our marketing efforts, provide
high-quality products and services and increase traffic to our web site. We
intend to increase our marketing budget substantially as part of our brand-
building efforts. If our marketing efforts are unsuccessful or if we cannot
increase our brand awareness, our business, financial condition and results of
operations will be materially and adversely affected.
7
Our inability to penetrate the large law firm, corporate legal department
and consumer markets could adversely affect our business.
Substantially all of our revenues to date have been generated by sales of
our products to law firms having 20 or fewer lawyers. Our business plan calls
for increased sales to large law firms and legal departments of corporations
and the development of a consumer-oriented web site. The large law firm market
for electronic legal information is dominated, and is likely to be dominated
for the near future, by West Group and LEXIS-NEXIS, our two principal
competitors. Moreover, we have little experience designing products and serving
the needs of large law firms, legal departments of corporations or consumers.
In addition, if we do not complete our comprehensive state law databases for
all 50 states by December 31, 1999, it could have a material adverse effect on
our ability to penetrate the large law firm, and corporate legal department
markets. Our inability to market our products to large law firms, legal
departments of corporations or consumers successfully would prevent us from
carrying out our business plan.
The loss of our relationships with courts and legislatures could adversely
affect our business by increasing the time and expense required to convert
legal data.
Loislaw.com maintains databases consisting of court decisions, statutes,
regulations, administrative decisions and other legal information that has been
provided to us by various courts and legislatures. We have formal agreements
with some but not all of these data providers. Our ability to maintain our
relationships with courts and legislatures and to build new relationships with
additional data providers is critical to the success of our business. If we
were not able to obtain data directly from courts and legislatures, we would
have to obtain it in printed format, which would significantly increase the
time and expense required to convert the information into the format we use for
our products. We obtain data from most courts and legislatures free of charge
or at nominal costs. If any of them began to charge us significant fees for
providing court decisions, statutes and other data, our costs of data
acquisition could increase significantly. The loss of any relationships with
data providers, or any significant increase in data acquisition costs, could
materially and adversely affect our business, operating results or financial
condition.
System failures could interrupt delivery of our web site service and
adversely affect our business.
The continued and uninterrupted performance of our computer system is
critical to our success. Any system failure that causes interruptions in our
ability to deliver our products to our customers, including failures that
affect our ability to collect information from our data providers, could reduce
customer satisfaction and, if sustained or repeated, would reduce the
attractiveness of our services. We also face the risk of a security breach of
our computer system which could disrupt the distribution of our legal
information. The number of visits to our web site has been increasing, and we
have had to purchase additional computer equipment to handle the increased
traffic. Further increases in traffic on our web site could strain our systems
and increase the likelihood of system failures. Any of these problems could
materially and adversely affect our business, results of operations and
financial condition.
Our operations are dependent on our ability to protect our computer system
against damage from computer viruses, fire, power loss, telecommunications
failures, vandalism and other malicious acts, and similar unexpected adverse
events. In addition, a failure of our telecommunication providers to provide
the data communications capacity in the time frame required by us for any
reason could cause interruptions in the delivery of our products. Substantially
all of our computer and communications hardware is located at a single facility
in Van Buren, Arkansas, and the loss of this hardware or the data it contains
would cause us not to be able to operate our business for a substantial period
of time. Unanticipated problems could interrupt or delay access to our web-
based products. Although we carry general liability insurance, our insurance
may not cover any claims by dissatisfied subscribers or may not be adequate to
indemnify us for any liability we may incur if we are sued. Any system failure,
security breach or other damage that interrupts or delays our operations could
materially and adversely affect our business, results of operations and
financial condition.
8
Our reliance on third parties for critical products and services creates
risks of business interruption.
We rely on third parties to convert some of our printed materials into
electronic format, which we then edit and code into our legal databases. Our
ability to expand our product offering depends upon the simultaneous expansion
of our legal databases. Any interruption or termination of our arrangements
with third-party data converters could result in increased costs to us or a
slow-down in our expansion and product introduction plans while we locate
alternative sources for the data conversion or increase our own conversion
capabilities. Our three primary third-party data converters are located in
foreign countries. There are numerous risks related to our business with
foreign companies, including the adoption of laws and changes in political and
economic conditions that could restrict or eliminate our ability to do business
in certain jurisdictions.
We depend heavily on our management team, which has little experience
working together or in managing a public company.
Our success depends, to a significant extent, upon the efforts and abilities
of Kyle D. Parker, our Chairman of the Board and Chief Executive Officer, Mark
O. Beyland, our President and Chief Financial Officer, and other members of
senior management. Loss of their services could materially and adversely affect
our business, results of operations and financial condition. In addition, the
rapid growth of our operations has strained our managerial resources. Until
recently, Mr. Parker also performed the duties of president and chief financial
officer. We hired Mr. Beyland in May 1999 to serve as our President and Chief
Financial Officer. The short period of time that our senior officers have
worked together, or their inability to work successfully together, may
adversely affect our ability to manage growth. Moreover, none of our officers
has ever been a senior executive of a public company. Our management team may
not be able to manage future growth, if any, or the demands of successfully
operating a public company.
There is intense competition for qualified personnel necessary to the
success of our business.
Our future success also depends upon our ability to attract and retain
qualified computer programmers and other technical personnel and sales and
marketing personnel. We do not have employment agreements with any of our
employees, other than senior management. Competition for talented personnel,
particularly technical personnel, is intense. This competition could increase
the costs of hiring and retaining personnel. We may not be able to attract,
retain and adequately motivate our personnel or to integrate new personnel into
our operations successfully. Our failure to do so could adversely affect our
business.
If our software becomes defective, it could be costly for us to correct.
Complex software such as the software we develop for our products may
contain errors or defects, especially when first implemented, that may be
costly to correct. Defects or errors also could result in downtime and our
business could suffer significantly from potential adverse customer reaction,
negative publicity and harm to our reputation.
We may not be able to protect our proprietary technology and we may
infringe the proprietary rights of others.
Our services are highly dependent upon proprietary technology. We rely on
contracts, copyright, trademark and trade secrecy laws and confidentiality
agreements to protect our proprietary rights in our technology. We have also
obtained several trademark registrations for our various product names. These
measures may not be adequate to protect our proprietary technology. Our
competitors or potential competitors may independently develop technologies
that are substantially equivalent or superior to our technology. We have
developed many of our software programs in-house. These programs interact with
and perform numerous functions similar to software available from third
parties. Therefore, although we do not believe we infringe any proprietary
rights, we could be subject to claims that our technology infringes the
proprietary rights of third parties. These claims, even if without merit, could
subject us to costly litigation and could divert the time and attention of our
technical and management teams.
9
Potential problems related to the Year 2000 may decrease use of Internet
services, cause harm to our reputation and adversely affect our business.
Our business could be adversely affected if the systems on which we depend
to conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties and computers, software,
telephone systems and other equipment used internally. If any of our
significant hardware or software systems are not Year 2000 compliant, our web
site could be unavailable and we would not be able to deliver products to our
users over the Internet. Many third parties with which our computer systems
interact have not responded to our inquiries about their Year 2000 compliance.
Any failure by us to address our Year 2000 compliance issues successfully, or
of our suppliers and other third parties with which we conduct business to
address their Year 2000 issues successfully, could materially and adversely
affect our business, operating results and financial position.
We may be unable to make attractive acquisitions or integrate acquired
companies, and our inability to do so may disrupt our business.
Our business strategy calls for acquisitions of businesses or technologies
that complement our current business. We cannot assure you that we will be able
to identify attractive acquisition opportunities. Even if we do identify
attractive candidates, we cannot assure you that we will be able to complete
the acquisition of them or do so on commercially acceptable terms. If we
acquire another business, we could have difficulty integrating its operations,
systems, management and other personnel and technology with our own. These
difficulties could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results of
operations. Even if these difficulties could be overcome, we cannot assure you
that the anticipated benefits of any acquisition would be realized. In
addition, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could be dilutive to our
existing stockholders.
Risks Related to Our Industry
Our market is new and rapidly evolving and we may not be able to accurately
predict and respond to market developments.
The market for web-based distribution of electronic legal information has
only recently begun to develop and it is rapidly evolving. This makes it
difficult to predict demand and market acceptance for our products as well as
an appropriate pricing strategy for our products. We cannot guarantee that the
market for our products will grow, that our products will become widely
accepted or that our pricing strategy will be successful. If the market for our
products does not develop as quickly as we expect, if our products are not
accepted by customers or if our pricing strategy is not successful our future
financial results will be adversely affected.
Availability of free information from Internet portal companies may lessen
the demand for our products.
We compete with Internet portal companies that offer free access to
government sponsored sites that provide some of the same information that we
provide. These companies often expect to achieve high
10
enough usage to allow them to achieve profitability by selling advertising on
their sites. Substantial amounts of free legal information is also available
over the Internet and from other sources, such as courts and other government
agencies. This free information may lessen the demand for our products.
If we do not respond to rapid technological change and evolving industry
standards, we will be at a competitive disadvantage.
The market for web-based products and services is characterized by rapid
technological developments, evolving industry standards and customer demands
and frequent new product and service introductions and enhancements. As a
result, our success depends upon our ability to improve the performance,
content and reliability of our products in response to both evolving demands of
the legal community and competitive product offerings. We cannot assure you
that we will be able to do so successfully or that any enhancements or new
products that we introduce will gain acceptance in the marketplace.
A downturn in the legal industry could adversely affect our business.
Our business depends on the continued demand for legal information in
electronic format. Therefore, any downturn in business for the legal profession
could materially and adversely affect our business, results of operations and
financial condition.
Our success is tied to the adequacy of the Internet infrastructure and the
continued growth and commercial viability of the Internet.
Loislaw.com's success depends in large part on the maintenance of the
Internet infrastructure as a reliable network backbone that provides adequate
speed, data capacity and security. Our success also depends on the timely
development of products, such as high-speed modems, that enable reliable
Internet access and services. The Internet may continue to experience
significant growth in the number of users, frequency of use and amount of data
transmitted. The Internet infrastructure may not be able to support the demands
placed on it and the performance or reliability of the Internet may be
adversely affected by this continued growth. In addition, the Internet could
lose its commercial viability if the number of people who use the Internet does
not continue to grow. A number of factors, including unreliable service or
concerns about security, could impede this growth. The infrastructure or
complementary products and services necessary to maintain the Internet as a
viable commercial medium may not be developed, and the Internet may not
continue to be a viable commercial medium for Loislaw.com.
Changes in government regulations could adversely affect our business by
increasing costs.
Currently there are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may
be adopted that address issues such as pricing and the characteristics of
products and services. In addition, several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet and on-
line service providers in a manner similar to long distance telephone carriers
and to impose access fees on them. This could increase the cost of transmitting
data over the Internet. Finally, state tax laws and regulations relating to the
provision of products and services over the Internet are still developing. A
few states have tried to impose taxes on products and services provided over
the Internet. If additional states try to do so, the cost of our products may
increase and we may not be able to increase the price that we charge for our
products to cover these costs. Most states impose sales taxes on sales of
information delivered in CD-ROM format. Any new laws or regulations or new
interpretations of existing laws and regulations relating to the Internet, or
any increases in taxes imposed on CD-ROM sales, could adversely affect our
business.
11
Risks Related to This Offering
You will suffer immediate and substantial dilution of your investment in
Loislaw.com.
You will experience an immediate and substantial dilution of $ per share
in the net tangible book value per share of common stock from the initial
public offering price. Assuming an initial public offering price of $ per
share of common stock, our net tangible book value as of June , 1999, after
giving effect to this offering, is $ per share. See "Dilution" for more
detailed information about the dilution that you will incur.
Existing stockholders will continue to control Loislaw.com.
Following this offering, Kyle D. Parker, Mark O. Beyland, Capital Resource
Lenders III, L.P., CRP Investment Partners III, LLC, Sandler Capital Partners
IV, L.P., Sandler Capital Partners IV, FTE, L.P., Exeter Capital Partners IV,
L.P., Rowland Moriarty and Dublind Partners Inc. will beneficially own % of
our outstanding common stock ( % if the underwriters' over-allotment option is
exercised in full). If these persons acted together, they would have sufficient
voting power to control the outcome of corporate actions submitted to the
stockholders for approval and to control the management and affairs of the
company. In addition, our existing stockholders have agreed that for so long as
each of (a) Capital Resource Lenders III, L.P. and (b) Sandler Capital Partners
IV, L.P. and Sandler Capital Partners IV, FTE, L.P. own at least 10% of the
common stock of Loislaw.com, they will vote their shares of common stock in
favor of the election to our Board of Directors of one representative
designated by Capital Resource Lenders III, L.P. and one representative
designated by the Sandler parties pursuant to an Amended and Restated
Stockholders' Agreement dated May 25, 1999.
There has been no prior public market for our stock and our stock price may
be extremely volatile.
Prior to this offering, there has not been a public market for our common
stock. We intend to include the common stock for quotation in the Nasdaq
National Market. We do not know the extent to which investor interest in
Loislaw.com will lead to the development of a trading market for the common
stock or how the common stock will trade in the future. The public offering
price will be determined by negotiations among us, the selling stockholder and
the representatives of the underwriters. You may not be able to resell your
shares at or above the initial public offering price.
The price at which our common stock will trade depends upon a number of
factors, including our historical and anticipated operating results and general
market and economic conditions, some of which are beyond our ability to
control. Factors such as fluctuations in our financial and operating results
and developments affecting us and the markets or industry in which we compete
could also cause the market price of our common stock to fluctuate
substantially. In addition, the stock market, and the technology sector of the
stock market, have from time to time experienced extreme price and volume
fluctuations. These market fluctuations may adversely affect the market price
of our common stock.
The large number of shares of our stock eligible for future sale, and
registration rights we have granted to third parties, may cause the price
of our common stock to drop.
After this offering, we will have outstanding shares of common stock
( shares if the underwriters' over-allotment option is exercised in full).
This includes the shares we are selling in this offering ( shares if the
underwriters' over-allotment option is exercised in full), which may be resold
in the public market immediately without restrictions under the Securities Act,
except for any shares purchased by "affiliates" of Loislaw.com (as defined in
Rule 144 under the Securities Act). All of our officers, directors and current
stockholders, including the selling stockholder, option holders and warrant
holders, who collectively own the remaining 8,829,091 shares of our common
stock, have entered into lock-up agreements pursuant to which they have agreed
not to offer or sell any shares of common stock for a period of 180 days after
the date
12
of this prospectus without the prior written consent of Prudential Securities,
on behalf of the underwriters. Prudential Securities may, at any time and
without notice, waive the terms of these lock-up agreements specified in the
underwriting agreement. Upon expiration of the lock-up period, these 8,829,091
shares may be sold in the future subject to compliance with the volume
limitations and other restrictions of Rule 144. See "Underwriting."
We have granted to certain stockholders the right to require us to file with
the Securities and Exchange Commission a registration statement covering the
resale of their 3,444,509 shares of common stock. These stockholders purchased
preferred stock from Loislaw.com that will be converted into common stock
immediately upon completion of this offering. In addition, if we register
common stock for sale in the future, these stockholders and several other
stockholders who purchased common stock from us, or who have warrants to
purchase common stock, have the right to include their shares of common stock
in the registration. See "Description of Capital Stock."
The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that they could occur.
These factors could also make it more difficult to raise funds through future
offerings of common stock.
You should not expect to receive dividends from us.
We do not expect to declare or pay any cash dividends in the near future. In
addition, our agreement with Fleet National Bank, N.A., with whom we have lines
of credit, prohibits us from paying dividends.
Our management has broad discretion over the use of the net proceeds from
this offering and may allocate these net proceeds in ways in which you do
not agree.
A significant portion of the anticipated net proceeds to Loislaw.com from
this offering have not been designated for specific uses. Accordingly,
management will have broad discretion with respect to the use of these funds.
Our charter and the Delaware General Corporation Law may inhibit a
takeover.
Certain provisions of our certificate of incorporation and bylaws may make
it more difficult for a third party to acquire Loislaw.com, or may discourage
acquisition bids for Loislaw.com and could limit the price that certain
investors might be willing to pay in the future for shares of our common stock.
For example, we have a classified board and after the completion of this
offering and the conversion of the Series A convertible preferred stock and the
Series C convertible preferred stock into common stock, and after the
redemption of the Series B redeemable preferred stock, the Board of Directors
of Loislaw.com will have the authority to issue up to 10,000,000 additional
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions of those shares without any further vote or action by the
stockholders.
13
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions including, among other things:
. General economic and business conditions, both nationally and in our
markets;
. Assumed growth in usage of the Internet;
. Assumed growth in the number of lawyers;
. Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
. The impact of year 2000 problems;
. Anticipated trends in our business;
. Existing and future regulations affecting our business;
. Our acquisition opportunities; and
. Other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect" and similar
expressions, as they relate to Loislaw.com, our business or our management, are
intended to identify forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-
looking statements.
14
USE OF PROCEEDS
The net proceeds to Loislaw.com from the sale of common stock by us in this
offering, assuming a public offering price of $ per share, are estimated to
be $ ($ if the underwriters exercise their over-allotment option in
full), after deducting underwriting discounts and commissions and estimated
offering expenses of $ . We intend to use these net proceeds for the
following purposes:
. We intend to use approximately $10.2 million of the net proceeds to us to
repay principal and interest on three senior subordinated notes issued by
us to Capital Resource Lenders III, L.P., CRP Investment Partners III,
L.P. and Rowland Moriarty. These notes bear interest at a rate of 12.5%
per year and are due November 30, 2003, unless accelerated upon the
occurrence of any one of several events;
. We will use approximately $5.0 million of the net proceeds to us to
redeem the 439,589 shares of Series B redeemable preferred stock plus
accrued dividends held by Melissa Parker. For more information, see
"Certain Transactions";
. We intend to use a significant amount of the net proceeds to us to
continue to develop our legal databases;
. We will repay $1.2 million outstanding under our secured converting
equipment line of credit and $3.1 million under our two secured lines of
credit for database development with Fleet National Bank, N.A. Amounts
outstanding under these lines of credit bear interest at a rate of prime
plus 1.5%;
. We will pay $250,000 to Dublind Partners, Inc. for financial advisory
services; and
. We intend to use a significant portion of the net proceeds to us to
expand our marketing and sales activities.
We have broad discretion regarding the use of some of the proceeds to us
from this offering. We intend to use the remaining net proceeds for general
corporate purposes, including working capital. We may also use a portion of the
net proceeds to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies.
Pending these uses, we may invest the net proceeds temporarily in short-
term, investment grade, interest-bearing securities or guaranteed obligations
of the U.S. government. We will not receive any proceeds from the sale of
common stock by the selling stockholder.
DIVIDEND POLICY
We have not declared or paid and do not anticipate declaring or paying any
dividends on our common stock in the near future. Any future payment of
dividends will be at the discretion of our Board of Directors and will depend
on then existing conditions, including our financial condition, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors as our Board of Directors deems relevant. Moreover, we have
an existing line of credit with Fleet National Bank, N.A., that prohibits us
from declaring any dividend on any class of our stock, including the common
stock.
15
CAPITALIZATION
The following table displays our Actual, Pro Forma and Pro Forma as Adjusted
capitalization as of March 31, 1999. Capitalization consists of long-term debt,
including the current portion, redeemable equity securities and stockholders'
equity (deficit). Our Pro Forma capitalization reflects (a) the issuance on May
25, 1999 of 2,495,697 shares of Series C convertible preferred stock and 86,059
shares of common stock, in each case at $5.81 per share, a portion of which was
paid for by conversion of the 12.5% Senior Subordinated Convertible Notes, and
the use of the proceeds to pay accrued interest related to the convertible
notes and $555,000 of costs of issuance; (b) the elimination of the redemption
features on 365,346 shares of common stock and (c) the exercise on May 19, 1999
of warrants for 1,056,616 shares of common stock at $.01 per share. Our Pro
Forma As Adjusted capitalization reflects the pro forma adjustments described
in the previous sentence and: (a) the conversion of 931,044 shares of Series A
convertible preferred stock and 2,495,697 shares of Series C convertible
preferred stock into 3,426,741 shares of common stock immediately upon
completion of this offering; (b) the sale of shares of common stock at an
assumed public offering price of $ per share by us in this offering; (c) the
elimination of the redemption feature of warrants for 17,768 shares of common
stock; (d) our application of $4,855,385 to redeem 439,589 shares of Series B
redeemable preferred stock and accrued dividends on this stock and $ to
repay outstanding debt with a portion of the net proceeds of this offering; and
the loss or extinguishment of debt attributable to the write-off of deferred
loan costs in the amount of $ as a result of repaying the related debt.
March 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------- --------- -----------
(in thousands)
Long-term debt, including current portion:
12.5% Senior Subordinated Notes.............. $ 10,000 $ 10,000 $
12.5% Senior Subordinated Convertible Note... 2,000 --
Notes payable due in monthly installments.... 4,222 4,222
Revolving line of credit..................... 1,336 1,336
Capital lease obligation..................... 32 32
-------- -------- ---
Total long-term debt....................... 17,590 15,590
-------- -------- ---
Redeemable equity securities:
Series A preferred........................... 2,674 2,674
Series B preferred, including accrued
dividends................................... 4,855 4,855
Series C preferred........................... -- 13,964
Common stock................................. 1,208 3,566
Common stock warrants........................ 3,616 60
-------- -------- ---
12,353 25,119
-------- -------- ---
Stockholders' equity (deficit)(1):
Common stock, $.001 par value; 10,000,000
shares authorized; 3,955,346 shares issued
and 5,098,021 and shares issued pro
forma and pro forma as adjusted,
respectively................................ 4 5
Additional paid-in capital................... 1,638 5,685
Accumulated deficit.......................... (17,483) (17,483)
Redeemable common stock...................... (1,208) (3,566)
Treasury stock at cost, 5,000 common shares.. (16) (16)
-------- -------- ---
Total stockholders' equity (deficit)....... (17,065) (15,375)
-------- -------- ---
Total capitalization....................... $ 12,878 $ 25,334 $
======== ======== ===
- --------
(1) Excludes 500,000 shares of common stock reserved for issuance under our
incentive stock option plan, of which options to purchase 291,561 shares
are currently outstanding, 320,000 shares of common stock that we intend to
reserve for issuance under a stock option plan for nonemployee directors,
and shares of common stock that we intend to reserve for issuance under
an employee stock purchase plan. Also excludes 17,768 shares reserved for
issuance pursuant to outstanding warrants.
16
DILUTION
Purchasers of the common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the common stock
from the initial public offering price. Net tangible book value per share
represents the amount of the total tangible assets less total liabilities of
Loislaw.com, divided by the number of shares of common stock outstanding. At
June , 1999, Loislaw.com had a net tangible book value of $ million or $
per share of common stock. After giving effect to the sale of shares of
common stock offered by Loislaw.com at an assumed initial public offering price
of $ per share and after the deduction of underwriting discounts and
commissions and estimated offering expenses payable by us, the pro forma net
tangible book value of Loislaw.com at June , 1999 would have been $ million
or $ per share. This represents an immediate increase in net tangible book
value of $ per share to existing stockholders and an immediate and
substantial dilution of $ per share to new investors purchasing common stock
in this offering. The following table illustrates this per share dilution:
Assumed initial public offering price............................. $
Net tangible book value as of June , 1999...................... $
Increase attributable to new investors.......................... $
Pro forma net tangible book value after this offering.............
----
Dilution in pro forma net tangible book value to new investors.... $
====
The following table summarizes, on the pro forma basis set forth above as of
June , 1999, the differences between existing stockholders and new investors
in this offering with respect to the number of shares of common stock purchased
from us, the total consideration paid and the average consideration paid per
share (before the deduction of underwriting discounts and commissions and
offering expenses payable by us):
Shares Purchased Total Consideration Average
------------------- ---------------------- Price
Number Percent Amount Percent Per Share
-------- -------- ---------- ---------- ---------
Existing stockholders... % $ % $
New investors........... % %
-------- -------- ---------- --------- ----
Total................. 100% $ 100% $
======== ======== ========== ========= ====
The foregoing tables assume no exercise of the options or warrants
outstanding to purchase an additional shares of common stock at a weighted
average exercise price of $ per share. To the extent that these options or
warrants are exercised, there will be further dilution to new stockholders in
the net tangible book value of their shares. For more information, see
"Management--Equity Plans." In addition, the second table does not reflect the
sale of shares by the selling stockholder in this offering. These sales
will reduce the shares held by existing stockholders to of the total shares
of common stock to be outstanding after this offering, and will increase the
number of shares to be purchased by the new stockholders to of the total
shares of common stock to be outstanding after this offering. Finally, the
number of shares disclosed for existing stockholders includes 3,426,741 shares
of common stock expected to be issued immediately upon the completion of this
offering upon conversion of the outstanding Series A convertible preferred
stock and Series C convertible preferred stock. For more information, see
"Principal and Selling Stockholders."
17
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our financial statements and notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing elsewhere
in this prospectus. The Statement of Operations data for the years ended
December 31, 1996, 1997 and 1998, and the Balance Sheet Data as of December 31,
1997 and 1998, have been derived from our audited financial statements and
notes appearing elsewhere in this prospectus. The balance sheet data as of
December 31, 1996 has been derived from our audited balance sheet that does not
appear in this prospectus. The statements of operations data and balance sheet
data as of and for the two years ended December 31, 1994 and 1995 have been
derived from our unaudited financial statements that do not appear in this
prospectus. The statement of operations data and balance sheet data as of and
for the three-month periods ended March 31, 1998 and 1999 are derived from
unaudited financial statements appearing elsewhere in this prospectus. In the
opinion of management, all unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our financial position and results of operations for the
periods presented. The historical results are not necessarily indicative of the
operating results to be expected in the future.
Three Months
Years Ended December 31, Ended March 31,
------------------------------------------ ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------- ------- ------- ------- -------
(unaudited) (unaudited)
(in thousands, except per share data)
Statement of Operations
Data:
Revenues:
Web-based products.... $ -- $ -- $ 28 $ 208 $ 842 $ 115 $ 499
CD-ROM products....... 93 1,742 1,855 3,157 3,182 737 837
Other................. 1,381 -- -- -- 1,000 117 --
------ ------- ------- ------- ------- ------- -------
Total revenues...... 1,474 1,742 1,883 3,365 5,024 969 1,336
------ ------- ------- ------- ------- ------- -------
Costs and expenses:
Database cost......... 738 1,442 1,850 2,013 5,527 1,165 1,066
Costs of other
revenues............. 600 -- -- -- 393 46 --
Selling and
marketing............ 208 935 2,153 2,363 4,414 750 1,706
General and
administrative....... 301 289 1,071 1,150 1,331 451 525
Product development... 27 108 51 48 446 143 187
------ ------- ------- ------- ------- ------- -------
Total costs and
expenses........... 1,874 2,774 5,125 5,574 12,111 2,555 3,484
------ ------- ------- ------- ------- ------- -------
Loss from operations.... (400) (1,032) (3,242) (2,209) (7,087) (1,586) (2,148)
------ ------- ------- ------- ------- ------- -------
Other income (expenses):
Interest, net......... 13 (69) (251) (455) (1,549) (278) (593)
Other, net............ (74) 5 2 (6) 42 -- 1
------ ------- ------- ------- ------- ------- -------
(61) (64) (249) (461) (1,507) (278) (592)
------ ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (461) (1,096) (3,491) (2,670) (8,594) (1,864) (2,740)
Income tax benefit...... (99) (259) -- -- -- -- --
------ ------- ------- ------- ------- ------- -------
Net loss................ (362) (837) (3,491) (2,670) (8,594) (1,864) (2,740)
Accrued preferred stock
dividends and accretion
on redeemable preferred
stock and common stock
warrants .............. -- -- -- (34) (500) (105) (206)
------ ------- ------- ------- ------- ------- -------
Net loss applicable to
common stock........... $ (362) $ (837) $(3,491) $(2,704) $(9,094) $(1,969) $(2,946)
====== ======= ======= ======= ======= ======= =======
Net loss per share--
basic and diluted...... $(0.10) $ (0.24) $ (0.99) $ (0.76) $ (2.52) $ (0.55) $ (0.75)
====== ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding--
basic and diluted...... 3,500 3,500 3,529 3,581 3,611 3,590 3,950
====== ======= ======= ======= ======= ======= =======
18
Three Months
Years Ended Ended
December 31, March 31,
------------- -------------
1997 1998 1998 1999
------ ------ ------ ------
(in thousands)
Other Data (unaudited):
Web-based new sales(1).............................. $ 485 $1,985 $ 181 $ 608
CD-ROM new sales(1)................................. 2,370 2,081 462 256
------ ------ ------ ------
Total new sales(1)................................ $2,855 $4,066 $ 643 $ 864
====== ====== ====== ======
As of
As of December 31, March 31,
-------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
------ ----- ------ ------ ------- ------ -------
(unaudited) (unaudited)
(in thousands)
Balance Sheet Data:
Cash and cash
equivalents............ $ 40 318 102 3,233 99 3,621 20
Working capital
(deficit).............. (37) (629) (3,397) (514) (4,751) (177) (6,341)
Total assets............ 2,011 3,476 5,799 16,067 17,012 17,443 22,016
Total debt (including
capital lease
obligations)........... 116 1,744 3,963 4,107 12,272 7,099 17,589
Deferred revenues....... -- 157 1,754 3,522 3,928 3,616 3,802
Redeemable equity
securities............. -- -- -- 11,216 11,720 11,322 12,353
Total stockholders'
equity (deficit)....... 1,592 755 (2,436) (4,990) (14,100) (6,960) (17,065)
- --------
(1) New sales represent the total contract value of all new product sales to
existing and new customers, excluding renewals of existing subscriptions of
web-based or CD-ROM products.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Financial Data" and the accompanying financial statements and
related notes included elsewhere in this prospectus. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
but not limited to those set forth under "Risk Factors" and included elsewhere
in this prospectus.
Overview
Loislaw.com provides comprehensive, affordable and easy-to-use legal and
related information over the Internet. We offer more than 950 databases that we
estimate to contain over 50 million pages of federal and state law, continuing
legal education materials and other legal information.
Since our inception in 1987, and our release of the first known
comprehensive legal research CD-ROM in 1989, we have concentrated on producing
high quality, comprehensive coverage of state and federal legal information.
Our first CD-ROM product contained legal information for Arkansas, and we have
added legal databases each year since then. From August 1991 to July 1994,
Thomson Legal Publishing Company marketed our products pursuant to an exclusive
marketing agreement. Substantially all of our other revenues of $1.4 million in
1994 represent payments made to us by Thomson in connection with this
agreement. This agreement was terminated by mutual consent in 1994. In August
1994, we began marketing our own CD-ROM products. At that time, we had 42
databases containing legal information for five states.
We generate revenues from the sale of web-based products and CD-ROM
products. Sales of web-based products and CD-ROM products consist primarily of
fixed annual subscription fees. The list price for unlimited Internet access to
substantially all federal and state law databases is $1,176 per seat per year.
The list price for unlimited Internet access to substantially all state law for
one state is $720 per seat per year. Continuing legal education and bar
materials are available for purchase at an additional charge. The list prices
for annual subscriptions for our CD-ROM products range from $300 to $700 per
state or federal jurisdiction. Pricing discounts on CD-ROM products are offered
mainly to customers who also purchase our web-based products. Our pricing
strategy may change as a result of our evolving market.
Upon the sale of a new subscription, the total amount of the subscription
fee is accounted for as deferred revenue. Revenues from subscription sales are
then recognized and charged against deferred revenue on a monthly basis over
the subscription period, which is typically one year. Subscription fees are
paid up front in cash or on a monthly basis by electronic funds transfer.
Revenues from CD-ROM products also include a small amount of revenue from one-
time sales of certain bar association publications.
Database costs consist primarily of database production costs that support
both our web-based products and our CD-ROM products. Since January 1, 1996, we
have spent more than $20 million on our database development. Database
development costs represent amounts incurred for data acquisition and
conversion, editing, coding and quality control of legal information, related
salaries and benefits, facilities cost allocation and related expenses
associated with computers for data processing. We capitalize costs related to
the production of databases containing court decisions. Court decisions
establish legal precedent that is valid until the decision is reversed by the
court or overruled by a higher court. Many court decisions are never reversed
or overruled. Therefore, court decisions, particularly those of the U.S. and
state supreme courts, have significant value for long periods of time or
indefinitely. We amortize our court decision databases over 20 years. We
expense as incurred costs related to the production of databases containing
statutes and regulations, the value of which declines rapidly if they are not
continually updated. We also expense as incurred database maintenance and
updating costs.
20
During 1995, 1996 and 1997, substantially all of our new sales were sales of
CD-ROM products. We launched our web site, loislaw.com, in July 1996 and began
selling subscriptions to our web-based products in October 1996. Since then, we
have experienced a significant shift in the mix of new sales. New sales
represent the total contract value of all new product sales to existing and new
customers, excluding renewals of existing subscriptions of web-based or CD-ROM
products. In 1997, web-based products produced 17.0% of new sales and CD-ROM
products produced 83.0% of new sales. In 1998, web-based products produced
48.8% of new sales and CD-ROM products produced 51.2% of new sales. In the
first quarter of 1999, web-based products generated 70.4% of new sales, while
CD-ROM products fell to 29.6% of new sales. We expect that this trend will
continue and that sales of subscriptions to our web-based products will
represent an increasing percentage of new sales in future periods. This trend
in new sales, together with the continuing migration of existing CD-ROM
customers to our web-based products, will ultimately result in a larger portion
of total revenues being attributable to subscriptions to our web-based products
than to subscriptions to our CD-ROM products. Internet searches have also
increased rapidly. During the month of March 1999, we exceeded 1.4 million
searches on our web site compared to 146,000 during March 1998.
As of March 31, 1999, we had deferred loan costs of $3.8 million. These
deferred loan costs relate to debt that we plan to pay off with the net
proceeds from this offering. In the period that the debt is paid off, the
related deferred loan costs will be expensed and accounted for as an
extraordinary item.
Results of Operations
Comparison of Results for the Quarters Ended March 31, 1999 and 1998
Revenues. Total revenues increased 37.8% to $1.3 million for the quarter
ended March 31, 1999 from $969,000 for the quarter ended March 31, 1998.
Revenues from web-based products increased 332.8% to $499,000 for the quarter
ended March 31, 1999 from $115,000 for the quarter ended March 31, 1998. We
believe the increase in revenues from web-based products was due primarily to
the addition of new state-law databases, the increase in marketing efforts and
the expansion of our sales staff. We expect that this trend will continue and
that web-based product revenues will represent an increasing percentage of
total revenues in future periods. Revenues from CD-ROM products increased 11.3%
to $837,000 for the quarter ended March 31, 1999 from $737,000 for the quarter
ended March 31, 1998. This increase was less than the increase in web-based
product revenues due to the migration of some CD-ROM customers to our web-based
products and to the high percentage of new sales generated by web-based
products. Other revenues of $117,000 and costs of other revenues of $46,000 in
the first quarter of 1998 related to a customized database project that did not
recur in the first quarter of 1999.
Database costs. Total database costs decreased 8.6% to $1.1 million for the
quarter ended March 31, 1999 from $1.2 million for the quarter ended March 31,
1998. The decline in the costs in the first quarter of 1999 compared to the
first quarter of 1998 is attributable to our production of more court decision
databases, which we capitalized, in 1999, compared to our production of more
statute and regulation databases, which we expensed, in 1998.
Selling and Marketing Expense. Selling and marketing expense increased
127.5% to $1.7 million for the quarter ended March 31, 1999 from $750,000 for
the quarter ended March 31, 1998. This was principally due to a 93% increase in
compensation expense associated with an increase in the number of sales and
marketing personnel to 128 at March 31, 1999 from 60 at March 31, 1998. Selling
and marketing expense consists primarily of:
. employee salaries and benefits for marketing and customer support
personnel;
. sales commissions paid to our sales force;
. advertising expenses;
. the cost of direct marketing promotional materials; and
. facilities cost allocation and related expenses.
21
We pay sales commissions when subscription agreements are signed. We record
commissions as prepaid commissions and amortize them ratably over the term of
the contract, typically one year, as we recognize the associated revenues. We
do not pay commissions on renewals of subscriptions. We expense all other
selling and marketing costs as incurred.
General and Administrative Expense. General and administrative expense
increased 16.4% to $525,000 for the quarter ended March 31, 1999 from $451,000
for the quarter ended March 31, 1998. This increase resulted primarily from an
increase in our number of employees and executive recruiting costs in the first
quarter of 1999. General and administrative expense consists primarily of
employee salaries and benefits, facilities cost allocation and related expenses
associated with our management, finance, human resources, management
information systems and administrative groups.
Product Development Expense. Product development expense increased 30.7% to
$187,000 for the quarter ended March 31, 1999 from $143,000 for the quarter
ended March 31, 1998. This increase was due to an increase in personnel
performing product development functions. Product development expense consists
primarily of employee salaries and benefits, facilities cost allocation and
expenses related to the development and enhancement of core software supporting
our products. Product development expense does not include the cost of
acquiring or converting the data that we include in our databases.
Interest Expense, Net. Interest expense, net of interest income, increased
113.1% to $593,000 for the quarter ended March 31, 1999 from $278,000 for the
quarter ended March 31, 1998. This increase was due primarily to an increase in
borrowings to support the rapid expansion of database production and the
related increase in selling and marketing efforts.
Comparison of Results for the Years Ended December 31, 1998 and December 31,
1997
Revenues. Total revenues increased 49.3% to $5.0 million in 1998 from $3.4
million in 1997. Revenues from web-based products increased 304.2% to $842,000
in 1998 from $208,000 in 1997. The increase in web-based revenues was due in
part to an increase in the number of legal databases we offered to 517 at
December 31, 1998 from 323 at December 31, 1997, expanded sales and marketing
efforts and the migration of some CD-ROM customers to our web-based products.
In addition, in October 1998 we changed our pricing strategy by eliminating the
requirement that customers purchase at least three "seats," or concurrent user
licenses. This change made our products more affordable to small law firms and
sole practitioners, and we believe it positively impacted sales of web-based
products in late 1998. By eliminating the package pricing associated with the
mandatory three-seat license, we also increased the average price of a single
seat. Revenues from CD-ROM products remained relatively flat at $3.2 million in
1998 and in 1997. Other revenues of $1.0 million and costs of other revenue of
$393,000 in 1998 resulted from a customized database development project for a
publishing company that was started and completed in 1998. We earned no revenue
from customized database development projects in 1997.
Database Costs. Total database costs increased 174.5% to $5.5 million in
1998 from $2.0 million in 1997. The increase in costs for 1998 compared to 1997
is attributable to our production of more databases containing statutes and
regulations, the costs of which we expensed as incurred, in 1998, compared to
our production of more databases containing court decisions, the costs of which
we capitalized, in 1997.
Selling and Marketing Expense. Selling and marketing expense increased 86.8%
to $4.4 million in 1998 from $2.4 million in 1997. This increase was
principally due to a 21.9% increase in sales commissions due to increased
product sales and a 124.0% increase in compensation expense associated with an
increase in the number of sales and marketing personnel to 87 at December 31,
1998 from 44 at December 31, 1997.
General and Administrative Expense. General and administrative expense
increased 15.7% to $1.3 million in 1998 from $1.2 million in 1997. This
increase primarily resulted from an increase in the number of employees
performing general and administrative functions.
22
Product Development Expense. Product development expense increased 840.2% to
$446,000 in 1998 from $47,000 in 1997. The increase was due to an increase in
personnel performing development functions.
Interest Expense, Net. Interest expense, net of interest income, increased
240.7% to $1.5 million in 1998 from $455,000 in 1997. The increase was due
primarily to an increase in borrowings to support the rapid expansion of
database production and the related increase in selling and marketing efforts.
Comparison of Results for the Years Ended December 31, 1997 and December 31,
1996
Revenues. Total revenues increased 78.7% to $3.4 million in 1997 from $1.9
million in 1996. Revenues from web-based products increased to $208,000 in 1997
from $28,000 in 1996. We launched our loislaw.com web site in July 1996 and
began selling subscriptions to our web-based products in October 1996. Revenues
from CD-ROM products increased 67.7% to $3.2 million in 1997 from $1.9 million
in 1996. The increase in total revenues was due in part to a significant
increase in the number of legal databases we offered. At December 31, 1997, we
had 323 databases, compared to 223 at December 31, 1996.
Database costs. Total database costs increased 8.9% to $2.0 million in 1997
from $1.8 million in 1996. The increase in cost of revenues is attributable to
our production of more databases.
Selling and Marketing Expense. Selling and marketing expense increased 9.8%
to $2.4 million in 1997 from $2.2 million in 1996. This increase was
principally due to an increase in sales commissions due to increased product
sales and an increase in compensation expense associated with an increase in
the number of sales and marketing personnel. Prior to June 1996, we outsourced
selling and marketing to a third party.
General and Administrative Expense. Although general and administrative
expense remained relatively unchanged at $1.1 million in 1997 and in 1996, bad
debt expense declined from $525,000 in 1996 to $94,000 in 1997. This is
attributable primarily to the transfer of our sales, billing and collection
functions from third parties to in-house personnel in June 1996. This was
offset by the settlement of a lawsuit with a third party to which we outsourced
administrative tasks, consulting fees paid for the development of our
enterprise systems and an increase in the number of employees performing
general and administrative functions.
Product Development Expense. Product development expense remained relatively
unchanged at $47,000 in 1997 and $52,000 in 1996 as production personnel
efforts were focused primarily on development of databases in both 1996 and
1997.
Interest Expense, Net. Interest expense, net of interest income, increased
81.2% to $455,000 in 1997 from $251,000 in 1996. The increase was due primarily
to an increase in borrowings to support the rapid expansion of database
production and the related increase in selling and marketing efforts.
23
Quarterly Results of Operations and Other Data
The following Statement of Operations Data table sets forth a summary of our
unaudited quarterly operating results for each of the five quarters in the 15-
month period ended March 31, 1999. This information has been derived from
unaudited interim financial statements that, in the opinion of management, have
been prepared on a basis consistent with the financial statements appearing
elsewhere in this prospectus and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of this
information when read in conjunction with our financial statements and notes.
Our operating results and other data for any quarter do not necessarily
indicate what the results for any future period may be.
1998 1999
------------------------------------------- --------
March 31 June 30 September 30 December 31 March 31
-------- ------- ------------ ----------- --------
(Unaudited, in thousands)
Statement of Operations
Data:
Revenues:
Web-based products..... $ 115 $ 157 $ 257 $ 313 $ 499
CD-ROM products........ 737 778 801 866 837
Other.................. 117 236 255 392 --
------- ------- ------- ------- -------
Total revenues....... 969 1,171 1,313 1,571 1,336
------- ------- ------- ------- -------
Costs and expenses:
Database costs......... 1,165 700 1,362 2,300 1,066
Costs of other
revenues.............. 46 101 102 144 --
Selling and marketing.. 750 1,035 1,228 1,402 1,706
General and
administrative........ 451 350 243 287 525
Product development.... 143 192 77 34 187
------- ------- ------- ------- -------
Total costs and
expenses............ 2,555 2,378 3,012 4,167 3,484
------- ------- ------- ------- -------
Loss from operations..... (1,549) (1,207) (1,699) (2,596) (2,148)
------- ------- ------- ------- -------
Costs and other income
(expense)............... (278) (364) (410) (455) (593)
------- ------- ------- ------- -------
Net loss................. $(1,864) $(1,571) $(2,109) $(3,051) $(2,740)
======= ======= ======= ======= =======
Other Data:
Web-based new sales(1)... $ 181 $ 552 $ 444 $ 807 $ 608
CD-ROM new sales(1)...... 462 626 593 401 256
------- ------- ------- ------- -------
Total new sales(1)... $ 643 $ 1,178 $ 1,037 $ 1,208 $ 864
======= ======= ======= ======= =======
- --------
(1) New sales represent the total contract value of all new product sales to
existing and new customers, excluding renewals of existing subscriptions of
web-based or CD-ROM products.
Our quarterly revenues and results of operations have fluctuated
significantly in the past, and we expect them to continue to fluctuate
significantly in the future. Other revenues in all four quarters of 1998
resulted from a customized database development project for a publishing
company that was started and completed in 1998. Database costs have fluctuated
because during certain quarters we have had more costs related to statutes and
regulations that we expensed and in other quarters we have had more costs
related to court decisions that we capitalized. Other causes of quarterly
fluctuations have included and may include, among other factors:
.introduction of new products or pricing programs by our competitors;
24
. difficulties in managing growth;
. technical difficulties or system downtime affecting our web-based
products;
. other business interruptions;
. changes in pricing strategy;
. increases in selling and marketing expenses, as well as other operating
expenses;
. Year 2000 problems with our technology or the technology of third parties
with which we do business;
. amount and timing of the costs associated with the development and
introduction of new database products;
. economic conditions specific to the Internet or to the legal profession,
as well as general economic conditions; and
. costs and risks associated with potential acquisitions.
Our quarterly operating results have also been subject to seasonal
fluctuations. Our results are affected by the spending patterns of small law
firms, which constitute our primary customers. These timing variations can
cause our revenues to fall short of our expectations and have an adverse effect
on our operating results.
In addition, we must incur a substantial portion of our expenses, including
certain product development and selling and marketing expenses in advance of
revenue generation. If our projected revenue does not meet our expectations,
then our operating profit (loss) is likely to fall even shorter of our
expectations.
Liquidity and Capital Resources
We have used substantial amounts of cash in the growth of our company.
Operating activities provided $199,000 in cash during 1996. Operating
activities used cash of $1.9 million in 1997 and $7.2 million in 1998,
primarily resulting from our net losses, reduced by depreciation and
amortization during those years. Although our net loss was $2.7 million in the
three months ended March 31, 1999, we used only $905,000 of cash in operations
due to longer payment terms with our third-party data converters. We expect to
continue to incur significant database production costs for the foreseeable
future. The continued development of new databases is expected to generate
losses for 1999 through the end of 2000.
Investing activities used cash of $2.8 million in 1996, $1.9 million in
1997, $4.0 million in 1998 and $4.5 million during the three months ended March
31, 1999. In 1996 and 1997, the primary use of cash was the payment of our
database development costs, which are capitalized. In 1998, $2.6 million of
these expenditures was for the payment of our database development costs, which
we capitalized, and $1.2 million was for property and equipment purchased to
support the growth of our business. In the first quarter of 1999, $3.5 million
of these expenditures was for the payment of our database development costs,
which we capitalized, and $860,000 of these expenditures was for property and
equipment purchased to support the growth of our business.
To finance our operations and continued expansion we have obtained
additional capital through a private placement of debt and equity and from
related party and bank financing. Total financing, net of repayments, was
approximately $2.4 million in 1996, $6.9 million in 1997 and $8.1 million in
1998 and $5.3 million during the three months ended March 31, 1999. Subsequent
to March 31, 1999, we have obtained additional financing from a private
placement of common stock and convertible preferred stock in the amount of
$15.0 million.
During the final nine months of 1999, we are obligated to pay $1.2 million
to a third party for data conversion services. During the final nine months of
1999, we anticipate spending significant amounts for data conversion costs in
connection with updating existing and acquiring new databases, for the purchase
of property and equipment and in connection with the development of a shadow
site fully equivalent to our current web site. We believe the recent private
placement of equity, available borrowings under our bank credit facility, cash
generated by operations and the proceeds of this offering will be adequate to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next 12 months.
25
As part of our growth strategy, we may consider acquiring companies or
businesses, and any acquisition could significantly increase our cash
requirements. We are not currently involved in any negotiations relating to any
acquisition. An acquisition, or any other increase in our anticipated cash
requirements, could require us to obtain additional financing. We cannot assure
you that additional financing would be available to us or, if available, that
we would be able to obtain it on terms we considered satisfactory. If we raise
capital through the issuance of additional equity securities, you may suffer
additional dilution in the value of the common stock you purchase in this
offering.
Our credit agreement with Fleet National Bank dated August 20, 1998, as
amended, establishes the following:
. a working capital revolving line of credit in the maximum principal
amount of $2.5 million;
. an equipment line of credit in the maximum principal amount of $1.0
million;
. a second equipment line of credit in the maximum principal amount of
$1.5 million; and
. a line of credit to finance the development of our databases in the
maximum principal amount of $7.0 million.
Each of these lines bears interest at a floating rate equal to a specified
percentage above the bank's prime rate. We must pay a commitment fee with
respect to the revolving line of credit in the amount of $6,250 per fiscal
quarter. In addition, the Fleet credit facility contains certain restrictive
covenants that obligate us to meet certain requirements and that, without the
prior written consent of the bank, prohibit us from incurring indebtedness
(other than certain permitted indebtedness) or declaring or paying dividends or
other distributions. As of March 31, 1999, we were in technical default under
the credit facility for failing to meet specified financial ratios. The bank
waived these covenants for the 12 months ended March 31, 1999 and, as of the
date of this prospectus, we are in compliance with the financial covenants
under the credit facility as amended on May 25, 1999. As of March 31, 1999, we
had outstanding borrowings under the credit facility as follows:
. $1.3 million under the revolving line of credit,
. $722,000 under the first equipment line,
. $0 under the second equipment line, and
. $3.5 million under the line of credit for database development costs.
All borrowings under the credit facility are secured by a pledge of most of
our assets.
Net Operating Loss
Since 1994, we have incurred significant net losses. Through March 31, 1999,
our accumulated deficit totaled $17.5 million. At December 31, 1998, we had net
operating loss carry-forwards of approximately $17.3 million for federal income
tax purposes that begin to expire in 2010 and state net operating loss carry-
forwards of approximately $19.0 million that begin to expire in 2000. We cannot
assure you that we will have income, if any, that is sufficient to allow us to
use these loss carry-forwards.
Year 2000 Disclosure
The Year 2000 issue is the result of computer programs being written using
two rather than four digits to define the applicable year. The arrival of the
year 2000 poses a unique worldwide challenge to the ability of systems to
recognize the date change from December 31, 1999 to January 1, 2000. The Year
2000 issue could result in system failures or miscalculations causing
disruptions of operations. Among other things, our customers may temporarily be
unable to access our databases or we may be unable to engage in other normal
business activities. For purposes of this discussion, the terms "computer
equipment" and "software" include systems that are commonly thought of as IT
systems, including accounting, data processing, data conversion
26
and telephone/PBX systems, as well as systems that are not commonly thought of
as IT systems, such as heating and air conditioning systems, fax machines, or
other miscellaneous systems. Both IT and non-IT systems may contain embedded
technology, which complicates our identification, assessment, remediation and
testing efforts.
We have taken various steps intended to ensure that our computer equipment
and software will function properly on January 1, 2000 and thereafter. We have
completed assessments of our IT systems and our non-IT systems, which consist
primarily of minor office equipment. Based upon our identification and
assessment of our IT systems, we have replaced or modified certain computer
equipment and software including our telephone/PBX system. Based upon our
identification and assessment of our non-IT systems, we have not identified any
equipment or software requiring replacement or modification. In addition, in
the ordinary course of replacing computer equipment and software, we only
purchase replacement parts that manufacturers represent are Year 2000
compliant. Using both internal and external resources to identify and assess
needed Year 2000 remediation, we currently anticipate that our Year 2000
identification, assessment, remediation and testing efforts, which began in
August 1997, will be completed by November 1999, and that these efforts will be
completed prior to any currently anticipated impact on our computer equipment
and software. At June 15, 1999, we had completed approximately 85 percent of
our Year 2000 initiatives and the remaining ones are in process and we expect
them to be completed on or about November 1, 1999. Our remediation of central
system issues is 85% complete and we expect it to be completed by July 1, 1999.
Our remediation of desktop and individual systems is 85% complete and we expect
it to completed by November 1, 1999.
We have mailed letters to our overseas data convertors to determine the
extent to which their IT and Non-IT systems are vulnerable to Year 2000 issues.
Based on their responses, we believe that these data converters are year 2000
compliant. We do not believe that there are any Year 2000 issues with respect
to the electronic data we receive from our third party data providers. We
typically receive the data in both electronic and printed form and believe that
if a Year 2000 issue should arise with respect to the electronic data, we could
convert the same data from printed form with minimal delay.
In addition, we are in the process of mailing letters to significant vendors
and service providers to determine the extent to which our interfaces with them
are vulnerable to Year 2000 issues and whether the products obtained from and
services provided by them are Year 2000 compliant. A follow-up telephone survey
to significant vendors and service providers that do not initially respond, or
whose responses we deem unsatisfactory, will be completed by July 30, 1999,
with responses due by August 16, 1999.
We believe the total cost of our Year 2000 identification, assessment,
remediation and testing efforts, as well as costs we expect to incur with
respect to Year 2000 issues of our third party IT vendors, will not exceed
$200,000, which will be funded from operating cash flows. As of May 27, 1999,
we had incurred costs of approximately $35,000 related to our Year 2000
program. All of this amount relates to analysis, repair or replacement of
existing software, upgrades of existing software, or evaluation of information
received from significant vendors, service providers or customers. This amount
represents approximately 6.0% of our total actual and anticipated IT
expenditures for fiscal 1999. Other non-Year 2000 IT efforts have not been
materially delayed or impacted by Year 2000 projects. We believe that the Year
2000 issue will not pose significant operational problems for us. However, if
we do not properly identify all Year 2000 issues, do not successfully complete
remediation and testing with respect to problems that we identify, or do not do
so in a timely manner, we cannot assure you that the Year 2000 issue will not
materially adversely affect our relationships with customers, vendors or
others. Additionally, we cannot assure you that the Year 2000 issues of other
entities will not have a material adverse impact on our systems or business.
We have begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from our and certain third parties' failure to
achieve Year 2000 compliance on a timely basis. We have not yet developed a
contingency plan for dealing with the most reasonably likely worst case
scenario, and we have not yet clearly identified the worst case scenario. We
plan to complete the worst case scenario analysis and contingency planning by
November 1, 1999.
27
We do not plan to engage an independent expert to evaluate our Year 2000
identification, assessment, remediation and testing efforts. However, we have
engaged a third party to perform an overall review and assessment of our web
site architecture, and that review will include Year 2000 compliance of the
systems included in the review. We expect this review to be completed by August
1999. In addition, the firm that provided installation, training and certain
other services in connection with our new accounting and sales force management
software is reviewing Year 2000 issues related to that software. Certain
problems have been identified and are being corrected. We expect this review
and related remediation to be completed by July 1999.
The costs of our Year 2000 identification, assessment, remediation and
testing efforts and the dates on which we believe we will complete those
efforts are based upon our management's best estimates, which were made using
numerous assumptions regarding future events, including the continued
availability of certain resources, third-party remediation plans and other
factors. We cannot assure you that these estimates will prove to be accurate
and actual results could differ materially from those we currently anticipate.
Specific factors that could cause such material differences include, but are
not limited to, the availability and cost of personnel trained in Year 2000
issues, the ability to locate and correct all relevant computer codes, and the
ability to identify, assess, remediate and test all embedded technology and
similar uncertainties.
Recently Issued Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. We do not expect SOP 98-
1, which is effective for Loislaw.com beginning January 1, 1999, to have a
material effect on our financial condition or results of operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." Start-up activities are defined broadly as those one-time
activities relating to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SOP 98-5, the cost of start-up activities should be expensed as incurred.
SOP 98-5 is effective for Loislaw.com's 1999 financial statements and we do not
expect its adoption to have a material effect on our financial condition or
results of operations.
Quantitative and Qualitative Disclosures About Market Risk
We do not engage in commodity futures trading or hedging activities and do
not enter into derivative financial instrument transactions for trading or
other speculative purposes. We also do not engage in transactions in foreign
currencies or in interest rate swap transactions that could expose us to market
risk.
We are subject to some interest rate risk in connection with our bank credit
facility. This facility permits us to borrow up to $12.0 million, consisting of
up to $2.5 million under a secured working capital revolving line of credit, up
to $2.5 million under two secured equipment lines of credit and up to $7.0
million under a secured line of credit to develop our databases. All amounts
that we borrow under the credit facility bear interest at floating rates. At
March 31, 1999, the outstanding principal balance under the credit facility was
$5.6 million, and during 1998 the average outstanding principal balance was
$2.9 million.
28
BUSINESS
Overview
Loislaw.com provides comprehensive, affordable and easy-to-use legal and
related information to lawyers and law firms over the Internet and on CD-Rom.
We offer more than 950 databases that we estimate to contain over 50 million
pages of federal and state law, continuing legal education materials and other
legal information. We believe this is the largest collection of legal databases
in hypertext mark-up language, or HTML, the standard format language used on
the Internet. We offer powerful and intuitive search tools designed to make our
information easily accessible and valuable to our users. Through LOIS LawWatch,
we provide personalized, intelligent search agents that automatically and
continuously search our web site and notify our users when new documents match
their search criteria. Our news feeds provide up to 150,000 news articles a
month from more than 400 domestic and international sources. Our legal
information is available through our web site at loislaw.com or through our CD-
ROM products at a low annual subscription price.
At March 31, 1999, we had a total of 7,251 customers of which 2,393
purchased our web-based products and 4,858 purchased our CD-ROM products. The
percentage of customers that renewed their subscriptions to our products was
89.3% in 1998. We have historically targeted our sales to small law firms with
fewer than 20 lawyers. Currently, we provide statutes, regulations and rules of
court for all state and federal jurisdictions. We also provide comprehensive
court decisions for the U.S. Supreme Court and all federal circuit courts of
appeal. In addition, with the completion of databases for 11 new states in the
last six months, we currently provide comprehensive legal information for 31 of
the 50 states, representing over 80% of the total number of active practicing
lawyers in the U.S. Small firms typically require legal information for the
states in which they practice, while large firms typically require legal
information for all 50 states. We intend to complete our state law databases
for all 50 states by December 31, 1999. Upon completion of these databases, we
plan to aggressively market to additional small law firms, large law firms and
legal departments of corporations.
Our objective is to become the leading Internet destination for lawyers, law
students, business people and consumers who need legal and related information.
We developed our core products to serve the research needs of lawyers. As we
expand our product offerings, we plan to address additional needs of lawyers
and offer legal information in a format designed to meet the needs of
consumers.
Industry Overview
The market for web-based and other on-line legal, tax and public record
information is large and growing. According to an industry source, the market
for web-based and other on-line legal, tax and public record information was
$1.7 billion in 1998 and is projected to grow to $2.7 billion in 2002,
representing a compound annual growth rate of 12.3%.
We believe that the following are the key drivers of growth in the market
for web-based and other on-line legal information:
. An increase in the number of lawyers;
.An increase in litigation; and
.The growth of the Internet.
Users of legal information include lawyers, law students, business people
and consumers. Lawyers are the largest users of legal information. According to
an industry analyst, there were approximately 980,000 lawyers in the United
States as of December 31, 1998 and this number is projected to grow to
1,065,000 in 2002.
29
In recent years the number of lawsuits has increased. According to a report
by the National Center for State Courts, from 1984 to 1997 the number of civil
lawsuits grew by 28% and criminal caseloads increased by 55% in the state court
systems.
The explosive growth of the Internet is rapidly transforming the market for
legal information. The Internet is an increasingly significant medium for
distributing, collecting and manipulating information. This growth is being
driven by, among other things, the increased use of personal computers and
modems, lower cost access to the Internet, increased awareness of the Internet
and more compelling interactive content available on the Internet. These
factors are also fueling the growth of Internet use in law firms. According to
a February 1998 survey by the American Bar Association, nearly 99% of large law
firms surveyed had Internet access.
Increasingly, Internet use has penetrated small law firms with fewer than 20
lawyers, which we believe represent approximately 55% of all lawyers in the
U.S. According to the February 1998 American Bar Association survey, nearly 80%
of small law firms surveyed had Internet access and 37% of small firms without
Internet access planned to obtain it in 1998. Although Internet access at small
law firms has increased, many lawyers at small law firms continue to rely on
books and reference guides for their legal research needs. Books and reference
guides are inefficient, cumbersome and sometimes not updated in a timely manner
to reflect changes in the law. Moreover, the capital investment required to
acquire a printed law library is substantial, and prohibitive for many small
law firms. As a result, lawyers in small law firms often must travel to local
law libraries to conduct legal research. Electronic legal information has
emerged as an alternative to printed legal information because it can be more
rapidly updated, more easily stored and more quickly searched than printed
legal information.
The dominant providers of electronic legal information have been LEXIS-NEXIS
and West Group. Until recently, they have provided their information through
closed networks accessed through a dial-up modem. These traditional electronic
legal information providers built their network infrastructures based upon
mainframe computer systems. Recently, these traditional providers have offered
an Internet gateway to their closed systems. However, the source information in
their legal databases is generally not organized in HTML, the standard format
language used on the Internet. Databases that are not organized in HTML or
another Internet-based language are not designed to provide full functionality
and ease of use over the Internet. In addition, we believe these traditional
electronic legal information providers' infrastructures, computer systems,
business models and distribution methods have resulted in pricing that has
traditionally made their products too expensive for many small firms.
Currently, there are other providers of legal information on the Internet.
However, we believe that most of them do not provide comprehensive and current
legal information required by lawyers and business professionals. Most legal
Internet sites act as portals to free legal information that is on government-
sponsored sites. These legal sites are simply aggregators of information, which
often is not edited or reviewed to ensure the integrity of the information.
Furthermore, the information may not be in a format that allows researchers to
complete tasks in a timely manner. While some of this information may be an
improvement over law books, it generally does not match the functionality of
traditional electronic legal databases.
Traditional electronic legal information providers, book publishers and
Internet portal companies do not adequately meet the information needs of many
legal professionals in today's highly litigious and competitive legal
environment. We believe there is a significant opportunity to provide
comprehensive, easy-to-use, web-based legal information to meet the needs of
law firms, corporations and other consumers of legal information.
The Loislaw.com Solution
Through our web site, loislaw.com, we provide comprehensive, affordable and
easy-to-use legal information on the Internet. We believe that we were the
first company to provide this comprehensive
30
information on the Internet and that we have the largest collection of
databases of federal and state law in HTML. We offer an attractive alternative
to law firms, legal departments of corporations, government bodies and law
schools that previously could only choose between law books and expensive
electronic legal information.
Internet delivery model
Our Internet delivery model allows us to provide easily accessible legal
information in a user-friendly format. To access our legal information, a
subscriber needs only an Internet connection. Our databases are based on
standard Internet technology and our customers need no additional installation
or systems support and have full access to the databases at all times and from
anywhere via the Internet.
Price leadership
Access to our loislaw.com web site is available at a fixed annual
subscription price that is significantly less than the fees charged by
traditional electronic legal information providers for full access to their
networks. Our fixed price model encourages lawyers to use our web site as
needed without concern for additional charges.
Advanced Functionality
Our loislaw.com web site provides advanced functionality. For example, we
provide:
. simultaneous searching of multiple databases and fields using
sophisticated search technology that employs both traditional and plain
language searches;
. the ability to save multiple searches for an indefinite period of time;
. summaries of documents produced by a search that gives a user the ability
to determine the relevance of the search results prior to reviewing the
full text;
. automatic notification by email of new information matching the user's
specified search criteria;
. HTML formatting, which permits hyperlinking, cutting-and-pasting and
printing;
. pop-up abilities, which permit simultaneous review of original and
hyperlinked documents; and
. complete multi-media tutorials.
Breadth of Information
We have more than 950 databases that we estimate to contain over 50 million
pages of federal and state law, continuing legal education materials and other
legal information. We provide statutes, regulations and rules of court for all
state and federal jurisdictions. We currently provide comprehensive court
decisions for the U.S. Supreme Court, all federal circuit courts of appeal and
31 states as well as a limited number of court decisions for the remaining 19
states. Over 80% of lawyers in the U.S. practice in states in which we have
comprehensive legal databases. We expect to provide comprehensive court
decisions for all 50 states by December 31, 1999 and for bankruptcy courts, tax
courts and selected federal district courts by the second quarter of 2000.
Through Loislaw.com news feeds, we also provide access to up to 150,000 news
articles per month extracted from more than 400 domestic and international
sources of legal, business, financial, health, technology and political news.
Timeliness
Our infrastructure and relationships with data providers enable us to meet
or exceed the industry standards in timeliness. We have relationships with over
500 governmental entities and independent publishers from
31
whom we receive court decisions, statutes, regulations and administrative
decisions. We have over 200 employees in our production department who process
this legal information and make it available on our web site. We are usually
able to make newly-released legal information available on our web site within
24 hours after we receive it in electronic format and within 72 hours after we
receive it in print.
Accuracy
We maintain databases consisting of court decisions, statutes, regulations
and administrative decisions that we have tested to a 99.995% rate of accuracy.
We believe this rate is comparable to the accuracy rates of our principal
competitors and is substantially better than the typical accuracy rates of many
legal web sites accessed through Internet portal companies. To achieve our
accuracy standards, we follow a strict quality control process involving 56
testing procedures.
Strategy
Our goal is to gain a significant share of the market for web-based and
other on-line legal information and to become the leading Internet destination
for legal and related information. The key elements of our strategy include:
. Expand Current Loislaw.com Customer Base. We believe that substantially
all of our existing customer base is small law firms. We believe this
segment of the market is underserved by traditional electronic legal
information providers and, as a result, we intend to continue to market
aggressively to small law firms to expand our small firm customer base.
We believe there are substantial opportunities to expand our presence in
this underserved segment through completion of databases in new states,
increased sales to our current customer base, aggressive marketing to
potential new customers and continued conversion of our CD-ROM customers
to web-based customers.
. Aggressively Market Products to Large Law Firms and Legal Departments of
Corporations. After we complete our state law databases for all 50
states, we intend to aggressively market our products to large law firms
and legal departments in corporations. We have not focused our marketing
efforts on these potential customers to date because they generally
require access to comprehensive court decisions from all 50 states. We
expect to complete databases of comprehensive court decisions for all 50
states by December 31, 1999. We believe our ability to provide low-cost,
comprehensive and easy-to-use legal information will present an
attractive alternative or complement to information currently purchased
from traditional providers of legal information.
. Expand Content and Features. We intend to continue to build the depth
and breadth of our databases through internal development and by
licensing and acquiring information from third parties. For example, in
addition to completing the state law databases for the remaining 19
states by December 31, 1999, we intend to add tax court and bankruptcy
court and selected federal district court decisions by the second
quarter of 2000. In addition to expanding content, we intend to expand
features available through our web site and are currently developing
personalized database management capabilities and tools for personalized
customer homepages.
. Build Brand Awareness. We believe it is critical to continue to build
brand awareness in order to market our products to large law firms and
legal departments of corporations as well as to our existing small law
firm customer base. We intend to continue to promote brand awareness
through expansion of our direct sales force, reliable product offerings,
excellent customer service and effective marketing and promotion.
Further, in an effort to increase law student awareness of Loislaw.com,
we instituted a program of introducing our products to law librarians at
law schools across the U.S. Currently, we provide law librarians at law
schools free training as well as access to our Internet product for a
nominal charge. We have entered into similar relationships with many
state bar associations and continuing legal education associations
offering lawyers who are members of these
32
associations the opportunity to learn about and try our products at
reduced rates. We intend to pursue relationships with additional state
bar associations and continuing legal education organizations.
. Form Strategic Alliances and Make Acquisitions. We intend to continue to
forge alliances with state and national bar associations, continuing
legal education associations and court systems. Moreover, we may seek
additional information sources, distribution channels or technology
through selective acquisitions or strategic alliances.
. Enter the Consumer Market. We are currently developing a new web site
linked to Loislaw.com that will offer legal information and related
services to nonlawyers. We intend to leverage the content on our current
web site, together with our experience in the legal market, to enter
this new market. We expect that this new web site will include news
feeds, selected legal information from our current web site and legal
forms. In addition, the web site may include attorney referrals, an ask-
an-attorney service and other services.
Products
Loislaw.com Web Site
Our web site offers Internet access to federal and state law, continuing
legal education materials, current news feeds and other legal information. We
have more than 950 databases that we estimate to contain over 50 million pages
of information.
. Federal Law. The following table sets forth the content of our federal
law databases. In addition, by the second quarter of 2000 we intend to
offer bankruptcy court, tax court and selected federal district court
decisions.
Description of Federal Law Databases
--------------------------------------------------------
U.S. Reports (official court decisions of the U.S.
Supreme Court) 1899-present
U.S. Constitution
U.S. Code (federal statutory law)
U.S. Code of Federal Regulations and Federal Register
U.S. Federal Reports (official court decisions of all
13 U.S. Circuit Courts of Appeal) 1971-present
Rules of the U.S. Supreme Court
33
. State Law. We currently offer 31 comprehensive state law databases and
intend to complete the databases for the remaining 19 states by December
31, 1999. Over 80% of the lawyers in the U.S. practice in states in
which we have comprehensive legal databases. A comprehensive state
database provides all statutes, regulations, acts and court rules as
well as at least 45 years of court decisions. The map and table below
depict the states for which we provide comprehensive databases and the
years in which they were completed.
[U.S. MAP APPEARS HERE]
Comprehensive State Legal Information Coverage
- --------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999 (1)
-------------- --------- -------------- ------------- -------- ------------
Colorado Missouri South Carolina Kansas Indiana Maryland
Arkansas Wisconsin Massachusetts Rhode Island Florida Illinois
North Carolina Georgia Oklahoma New Hampshire Arizona Michigan
Louisiana New York Washington
Connecticut Texas California
Nebraska Pennsylvania
New Jersey
Alabama
Virginia
Tennessee
Ohio
(1) Represents coverage through June 15, 1999.
. Continuing Legal Education. Under cooperative marketing alliances with
state bar associations and continuing legal education associations, we
provide continuing legal education and bar materials to lawyers in over
10 states. We provide more than 280 databases related to the continuing
legal education programs administered by these groups.
34
. Loislaw.com News Feeds. Our web site provides news feeds of up to
150,000 news articles per month from more than 400 domestic and
international sources of legal, business, financial, health, technology
and political news. The news feeds can be filtered to reflect the user's
personal search criteria or interests. Ninety days of news is stored in
our servers and can be searched by the user.
A subscription to the products we offer on our web site includes the
following features and benefits:
. LOIS LawWatch. Our web site provides personalized, intelligent search
agents that automatically and continuously search our federal and state
law databases and news feeds. LOIS LawWatch delivers results of these
searches to users by email or by saving search results on users'
personalized homepages on our web site. LOIS LawWatch is in an easy-to-
use format with on-screen tutorials to guide users in establishing
ongoing, personalized search instructions.
. Advanced Functionality. We offer intuitive search tools designed to make
our information easily accessible and valuable to our users. Users may
search for information in any combination of multiple jurisdictions
simultaneously and may do so simply by entering a string of words.
Moreover, all of our data is hyperlinked to enable the user to retrieve
a second document and view it simultaneously with the initial document.
Loislaw.com also offers a time clock to assist lawyers in timekeeping as
well as a citation checking service that allows a user, among other
things, to confirm that a court decision has not been overruled.
. Exceptional Service. Our web site is user friendly, offering tips and
navigational instructions on each page. In addition, we provide our
subscribers with 24-hour customer telephone and email support and
provide company field sales representatives who will assist with
training.
We sell our web-based products through annual subscriptions. Unlimited
Internet access to substantially all federal and state law databases lists for
$1,176 per seat per year. Unlimited Internet access to substantially all state
law for one state lists for $720 per seat per year. Continuing legal education
and bar materials are available for purchase at an additional charge.
CD-ROM Products
Prior to our introduction of the loislaw.com web site in 1996, we
distributed federal and state law databases exclusively on CD-ROM. We expect to
continue to produce and sell CD-ROMs as long as customer demand exists. In
addition, we will continue to provide our CD-ROM customers with an updating
service called N-Line that allows users to receive weekly electronic updates
via modem. N-Line integrates these updates with existing information to permit
users to use a single search to find old and new law. We expect our CD-ROM
customers to continue to transition to our web-based products. The list prices
for annual subscriptions for our CD-ROM products range from $300 to $700 per
state or federal jurisdiction.
Production of Databases
Our customers require access to highly accurate, searchable and up-to-date
legal databases. Accordingly, the process of producing our databases is
critical to our success.
We generally receive all statutes, court decisions, regulations and rules
directly from official sources within each jurisdiction. We convert this
information into standard mark-up language, or SGML, and hypertext mark-up
language, or HTML, to make it easy for users to search the databases. By using
HTML and SGML programming languages we require fewer lines of code than
mainframe computer language and thereby reduce our costs.
When we initially establish a database of legal information, we typically
must convert large amounts of historical information from printed text to
electronic form. Currently, we have agreements with three foreign companies to
convert this data. We pay these companies based on the number of characters
converted, the accuracy of the converted data and the timeliness of the
conversion. After the information is converted to electronic format, it is
forwarded to us for further processing.
35
We continually update our databases by adding new court decisions,
statutes, regulations and other legal information. We receive this new
information in both electronic and printed format. For information delivered
to us in printed format, we scan the printed text on imaging equipment,
convert it to an electronic format and run macros to correct errors.
With respect to both electronic data converted overseas and electronic data
received or converted by us, we perform extensive quality control and editing
functions including:
. spell checks;
. translation of information into SGML and HTML;
. input of page numbers, carriage returns and line feeds, reference lines
and other information; and
. assembly of the information into logical blocks.
After the editing process, our paralegals code the information using up to 30
different codes, such as parties' names, dates and judges' names, to provide
fields for accurately searching the information in each database.
To complete this process, we perform both automated and manual quality
control tests to assure that we have completed the imaging/scanning, editing
and coding processes successfully. We compile and index the information and
then submit it to a final, more stringent, quality control test. If the
information does not satisfy our accuracy standards, we send the information
back to editing or coding to restart the entire process. If the information
passes the second quality control test, we place it on our Internet server.
This quality control process includes 56 testing procedures and results in
data that we have tested to an accuracy rate of 99.995%.
The following graphic depicts these database production processes:
[Graph containing six horizontal rows of boxes with arrows pointing downward
from each box (other than the box on the bottom row) to a box or boxes below
it. The top row contains one box with text: "Receive Print from Data
Providers." The arrow from this box points downward to a box in the second row
(which is the third box from the left, of three total), which contains text:
"Convert Print to Electronic Data." The other two boxes on the second row
(from left to right) contain text: "Receive Electronic Data From Third Party
Converters" and "Receive Electronic Data From Data Providers." There is an
arrow pointing downward from each box on this row to the single box on the
third row, which contains text: "Editing." There is an arrow pointing downward
from this box to the single box in the fourth row, which contains text:
"Coding." There is an arrow pointing downward from this box to the single box
in the fifth row, which contains text: "Quality Assurance." There are two
arrows pointing downward from this box to the two boxes in the sixth row,
which contain text (from left to right): "CD-ROM Products" and "Web-based
Products."]
36
We have committed significant resources to establish our production
capabilities and processes. At March 31, 1999, our production staff included
128 converters and editors, 37 coders and 39 quality control specialists. As a
result, we usually are able to make updated legal information available to our
Internet users within 24 hours of receipt in electronic format and within 72
hours of receipt in paper format.
We have been producing data since 1989. From January 1, 1996 through March
31, 1999, we spent over $20 million on database production, including costs of
converting, editing, coding and quality control.
Product Development
In addition to enhancing content, we conduct product development efforts
focused on continuously improving the search capabilities, tools and
applications available at our loislaw.com web site. At March 31, 1999, we had
five employees devoted to this aspect of product development. We will continue
to add new features to our products, such as searchable tables of contents and
personal email, that will make our sites easier and more enjoyable to use.
We intend to offer subscribers to our loislaw.com web site the ability to
convert word processing, billing and other electronic files into personal
databases stored at our web site. These databases may include all types of
documents, such as briefs, motions, interrogatories, memoranda, contracts,
correspondence and other forms, and will be searchable in the same manner as
the law databases. Access to the databases will be password-protected and can
be shared among, for example, a law firm and specific clients or co-counsel.
We are currently developing a consumer web site. This web site will be free
of charge and will offer, among other products, limited access to some of our
existing databases.
Sales and Marketing
We sell our products through a sales force that as of March 31, 1999
included 79 company field sales representatives based in 25 states and 42
inside sales representatives. Our sales force is compensated with a base salary
plus a commission. In addition, we have a marketing department that at March
31, 1999 consisted of seven people responsible for direct mail, advertising and
cooperative marketing programs.
We also market our products by seeking endorsements from organizations that
are likely to influence lawyers' purchasing decisions. We offer our products
for a nominal per-student charge to law schools and to state bar associations
and courts. Eleven state bar associations have agreed to promote our products.
We provide free CD-ROM products to the supreme courts of 12 states. We also
develop relationships with individual leaders of the legal community in cities
throughout the country, as we believe recommendations of respected peers and
mentors significantly influence many lawyers' purchasing decisions.
After we complete our state law databases for all 50 states we intend to
hire additional sales professionals and to aggressively market our products to
large law firms and legal departments of corporations.
Customers
At March 31, 1999, we had a total of 7,251 customers of which 2,393
purchased our web-based products and 4,858 purchased our CD-ROM products. At
December 31, 1998, we had a total of 6,976 customers of which 1,841 purchased
our web-based product and 5,135 purchased our CD-ROM products. A customer
represents a single account, which in many cases includes subscriptions for
multiple seats or concurrent users. Substantially all of our customers are law
firms having fewer than 20 lawyers.
Customer Support
We provide telephone and email support for our clients 24 hours a day, 365
days a year. Our customer service employees assist customers with preparing
searches and our technical support employees assist
37
customers with technical issues. At March 31, 1999, we had eight customer
service employees and 13 technical support employees. In addition, our field
sales representatives provide on-site support.
Web Site Architecture and Operations
We currently host our loislaw.com web site at our office in Van Buren,
Arkansas. We have designed our web site architecture to be flexible, scalable
and reliable. Our web site operates using Verity searching software, Microsoft
NT Operating System software and Novell Networking software that runs on
Hewlett-Packard servers. Our databases and searching software are platform
independent and could be moved to another operating system, if necessary.
Our web site architecture is designed to be able to expand easily by adding
additional servers. We currently have two information servers that we use to
maintain identical versions of our legal information. Each information server
is connected to three search servers that use the Verity database searching
software to process search queries. Our server system is redundant and employs
load balancing router technology ahead of the servers to enhance the
distribution of incoming user requests. We believe our servers have sufficient
capacity to support our planned growth over the next 12 months; nevertheless,
we have ordered two additional information servers to create additional system
capacity.
We currently have backup systems in place to protect our data and we intend
to create additional backup systems. Our legal databases are backed up on
temporary tapes each night and backed up on permanent tapes once a week. The
weekly backup tapes are kept in a safety deposit box at a local commercial
bank. We currently have enough battery power to operate our web site for one
hour if there is a power outage at our facility. In addition, we are in the
process of installing a power generator that should be operational in the next
several months. We are also currently analyzing alternatives for a shadow site
fully equivalent or live web site. This shadow web site would be fully
operational and could completely replace the operations of our existing web
site, if necessary.
We selected industry-standard hardware and software components to provide
the maximum amount of flexibility going forward. Internet connectivity is
provided by AT&T and is currently scheduled to increase from one to four T1
connections within the next few months. AT&T monitors our service and provides
a watchdog function to lock out unauthorized access 24 hours a day, 365 days a
year.
Monitoring of the web site is a continuous process. Monitoring software
watches for key service problems of the various servers and reports to our
Information Systems staff by email and pager if any of the servers stop
responding. Additional software is in place to analyze server activity to
profile the performance and usage of the web site.
Trademarks and Copyrights
We have obtained federal trademark registrations for LOIS PROFESSIONAL
LIBRARY(R), N-line(R), PITA(R) and THE TECHNOLOGY COMPANY WITH A LAW DEGREE(R),
and have pending trademark applications for LOIS SM and the LOIS logo SM. We
use the service mark LOIS LAWWATCH SM and claim common law service mark rights
in this mark. We have also obtained copyright registrations for the following
proprietary software programs: PITA(R), CaseBase: The Arkansas Reports, and Law
Office Information Systems: Master Menu Systems. Other trademarks and trade
names in this prospectus are the property of other owners.
Competition
The market for electronic legal information is intensely competitive.
Historically, this market has been dominated by West Publishing Company, which
is owned by Thomson Corporation, and LEXIS-NEXIS, which is owned by Reed-
Elsevier. Our competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. See "Risk
38
Factors--The competition in our industry is intense, our principal competitors
have significantly greater resources than we do and this competition may
adversely affect our financial results."
The principal competitive factors in our industry are:
. price;
. quality and accuracy of data;
. comprehensiveness of data;
. ease of use;
. support and training required; and
. performance characteristics of the database.
As a new entrant in a market dominated by these major corporations, we are
in the position of having to ease customer concerns over accuracy and
reliability. Furthermore, our products are not as comprehensive as those of
LEXIS-NEXIS or the West Group because we do not provide as many forms of legal
commentary and analysis and other specialized legal information as they provide
and we do not yet provide comprehensive court decisions for all 50 states or
federal district court decisions.
We also compete with a few smaller Internet portal companies that offer free
access to government sponsored sites that provide some of the same information
that we provide. A few offer fee-based access to selected legal databases. We
do not believe that any of these companies are comparable to Loislaw.com with
respect to breadth and depth of coverage, reliability and quality of data or
sophistication of functionality.
Employees
We had 399 full-time employees at March 31, 1999, including five in product
development, 79 in field sales, 42 in inside sales, seven in marketing, 165 in
converting and production, 39 in quality assurance, 25 in technical support and
MIS, eight in customer service, 15 in finance and 15 in administration. Our
employees are not represented by any collective bargaining organization. We
have never experienced a work stoppage and we believe that our relationships
with our employees are good.
Facilities
Our corporate headquarters are located in a 36,200 square foot leased
facility in Van Buren, Arkansas, under a lease expiring in May 2004, with an
option to renew for two, five-year periods. The lessor of our headquarters is
The Parker Law Firm, an entity owned by Kyle D. Parker and Douglas W. Parker,
Sr. We believe that these facilities and additional or alternative space
available to us will be adequate to meet our needs for the foreseeable future.
Litigation
Loislaw.com is not a party to any material litigation.
39
MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to the executive
officers and directors of Loislaw.com as of June , 1999.
Name Age Position
- ---- --- --------
Kyle D. Parker(1)....... 42 Chief Executive Officer and Chairman of the Board
Mark O. Beyland(2)...... 49 President, Chief Financial Officer and Director
W. Clark Wigley......... 46 Vice President of Business Development
Reves W. Dillon, Jr. ... 45 Vice President of Operations
Jay Scott Thompson...... 41 Chief Technology Officer
Pamela G. Rogers........ 39 Controller
Douglas W. Parker,
Sr. ................... 74 Secretary
Robert C. Ammerman(1)... 45 Director
D. Randy Laney(2)....... 45 Director
Hannah C. Stone(1)(2)... 34 Director
- --------
(1) Member of compensation committee.
(2) Member of audit committee.
Kyle D. Parker founded Loislaw.com in 1987 and has served as Chief Executive
Officer and Chairman of the Board since that time. Mr. Parker served as
President of Loislaw.com from 1987 to May 1999. Since 1985 Mr. Parker has been
a partner at the Parker Law Firm in Fort Smith, Arkansas. Mr. Parker served on
the Legal Automation Committee of the Arkansas Bar Association and the American
Association of Law Librarian's Task Force on Citation Formats. Mr. Parker holds
a J.D., with highest honors, from Franklin Pierce Law Center and a B.A., cum
laude, from Arkansas Tech University. Mr. Parker is the son of Douglas W.
Parker, Sr.
Mark O. Beyland joined Loislaw.com as President, Chief Financial Officer and
a Director in May 1999. Prior to joining Loislaw.com, Mr. Beyland served as
President and Chief Executive Officer of Reed Technology and Information
Services, Inc. a subsidiary of Reed-Elsevier from September 1993 to March 1998.
Mr. Beyland holds a B.S. in Business and Science from Ohio State University and
an M.B.A. from the University of Dayton.
W. Clark Wigley joined Loislaw.com as Chief Operating Officer in February
1995 and became Vice President of Business Development in April 1998. Prior to
joining Loislaw.com, Mr. Wigley served as Vice President at Barclays Law
Publishers in California from 1993 to February 1995, a legal publishing
company. From 1990 to 1993, Mr. Wigley was a Vice President and a general
manager at Thomson Electronic Publishing, a division of Thomson Legal
Publishing, a legal publishing company. Mr. Wigley holds a B.S. and an M.S. in
Engineering from Lehigh University and an M.B.A. from U.C.L.A.
Reves W. Dillon, Jr. joined Loislaw.com in September 1989 as a scanning and
editing operator. Mr. Dillon served as Director of Production from May 1994 to
November 1997 and served as Chief Operations Officer from November 1997 to May
1999. Mr. Dillon became Vice President of Operations in May, 1999. Mr. Dillon
has over 25 years of experience serving in production management capacities in
various industries.
Jay Scott Thompson joined Loislaw.com in April 1992 as assistant MIS
Director. Mr. Thompson served as Director of Information Systems from February
1995 to November 1997. Mr. Thompson became Chief Technology Officer in December
1998. Mr. Thompson has over 15 years of experience in the electronics industry.
Pamela G. Rogers joined Loislaw.com as Controller in October 1997. Prior to
joining Loislaw.com, Ms. Rogers served as Controller for Stapleton Corporation,
a manufacturing company, from March 1997 to October
40
1997. Ms. Rogers also served as Controller for Exsorbet Administration, Inc.,
an environmental remediation company, from January 1996 to February 1997 and
Controller for Consolidated Environmental Services, Inc., an environmental
consulting company from January 1995 to January 1996. Ms. Rogers holds a B.A.
in Accounting from the University of Central Arkansas and is a certified public
accountant.
Douglas W. Parker, Sr. has served as Secretary of Loislaw.com since October
1987. Prior to June 1999, he served as Director and Treasurer of Loislaw.com
from October 1987 to June 1999. Mr. Parker practiced law at the Parker Law Firm
for over 36 years. Mr. Parker is the father of Kyle D. Parker. Mr. Parker holds
a B.S. from the University of Arkansas and an L.L.B. from LaSalle University.
Robert C. Ammerman has served as a Director of Loislaw.com since November
1997. Since 1987 Mr. Ammerman has served as Treasurer of Capital Resource
Management, Inc., a private capital investment firm, and as general partner of
several private capital funds affiliated with Capital Resource Management. Mr.
Ammerman holds a B.A. and an M.S. from Carnegie Mellon University.
D. Randy Laney has served as a Director of Loislaw.com since June 1999.
Since October 1998 Mr. Laney has served as Chief Executive Officer, President
and Chairman of BAV Software, Inc., a web-enabling supply chain software
development company. From August 1995 to October 1998, Mr. Laney served as a
partner of Bentonville Associates Ventures, LLC, a financial and business
consulting company. In addition, Mr. Laney was employed by Wal-Mart from 1980
to 1993 and served as Vice President of Finance and Treasurer for a portion of
that time. He holds a B.S. and a J.D. from the University of Arkansas.
Hannah C. Stone has served as a Director of Loislaw.com since June 1999. In
1993 Ms. Stone joined Sandler Capital Management, a private capital investment
firm, and she is a general partner of various partnerships associated with
Sandler Capital Management. She holds a B.A. from Stanford University and an
M.B.A. from Harvard Business School. She is also a director of Millbrook Press.
Election of Officers and Directors
The executive officers of Loislaw.com are elected by the Board of Directors
on an annual basis and serve until their successors are duly elected and
qualified. Under an Amended and Restated Stockholders' Agreement dated as of
May 25, 1999, as long as each of (a) Capital Resource Lenders III, L.P. and (b)
Sandler Capital Partners IV, L.P. and Sandler Capital Partners IV, FTE, L.P.
collectively hold at least 10% of the outstanding shares of common stock of
Loislaw.com, the existing stockholders of Loislaw.com have agreed to vote their
shares to elect one representative of Capital Resource Lenders III, L.P. and
one representative of the Sandler parties to the Board of Directors of
Loislaw.com. Mr. Ammerman will continue as a director and Ms. Stone was
selected as a director of Loislaw.com pursuant to this agreement. For more
information, see "Certain Transactions."
Board Composition
The Board of Directors of Loislaw.com is divided into three classes. The
Board currently consists of one Class I Director (Ms. Stone), two Class II
Directors (Mr. Laney and Mr. Ammerman) and two Class III Directors (Messrs.
Parker and Beyland). At each annual meeting of stockholders, a class of
directors will be elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the Class I Director,
Class II Directors and Class III Directors will expire upon the election and
qualification of successor directors at the annual meeting of stockholders to
be held during calendar years 2000, 2001 and 2002, respectively.
41
Committees of the Board of Directors
The Board of Directors has appointed a compensation committee consisting of
Messrs. Ammerman and Parker and Ms. Stone. The compensation committee reviews
and evaluates the compensation and benefits of all officers of Loislaw.com,
reviews general policy matters relating to compensation and benefits of
Loislaw.com employees and makes recommendation concerning these matters to the
Board of Directors. The compensation committee also administers Loislaw.com's
1996 Stock Option Plan and its Employee Stock Purchase Plan. For more
information, see "--Equity Plans."
The Board of Directors has also appointed an audit committee consisting of
Messrs. Laney and Beyland and Ms. Stone. The audit committee reviews, with
Loislaw.com's independent auditors, the scope and timing of the auditors'
services, the auditors' report on Loislaw.com's financial statements following
completion of their audit, and Loislaw.com's policies and procedures with
respect to internal accounting and financial controls. In addition, the audit
committee will make annual recommendations to the Board of Directors for the
appointment of independent auditors for the ensuing year.
Compensation of Directors
Loislaw.com pays each non-employee director an annual fee of $10,000 and
reimburses each director for reasonable expenses incurred in attending board
meetings. In addition, directors who are not officers or employees of
Loislaw.com are eligible to receive options under our stock option plan for
nonemployee directors.
Nonemployee Directors Stock Option Plan. We intend to adopt a nonqualified
stock option plan for nonemployee directors before the completion of this
offering. The nonemployee directors plan will provide for the issuance of a
maximum of 320,000 shares of common stock. See "Equity Plans."
Compensation Committee Interlocks and Insider Participation
The compensation committee is comprised of Messrs. Ammerman and Parker and
Ms. Stone. Mr. Parker is an executive officer of Loislaw.com. No member of the
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of Loislaw.com's Board of Directors or compensation
committee.
Executive Compensation
Summary Compensation
The following table sets forth the compensation paid by Loislaw.com for the
fiscal year ended December 31, 1998 to our Chief Executive Officer and the one
other executive officer of Loislaw.com whose compensation exceeded the
threshold for inclusion in the table:
Summary Compensation Table for Last Fiscal Year
Annual Compensation
----------------------
Name and Principal Position Salary Bonus Other
- --------------------------- ------------ ---------------
Kyle D. Parker, Chief Executive Officer........ $ 150,000 $ 0 $ 0
W. Clark Wigley, Vice President of Business
Development................................... $ 144,000 $ 0 $6,000(1)
- --------
(1) Consists of a monthly car allowance of $500.
42
Employment Agreements
We have entered or will enter into the following employment agreements with
our Named Executive Officers:
Officer Term Base Salary Position
------- --------------------- ----------- --------------------------------------
Kyle D. Parker.......... June 1999-June 2002 $225,000 Chairman and Chief Executive Officer
Mark O. Beyland......... June 1999-June 2002 $175,000 President and Chief Financial Officer
W. Clark Wigley......... July 1996-August 1999 $144,000 Vice President of Business Development
The respective agreements of Messrs. Parker and Beyland entitle each of them
to participate in any bonus or employee benefit plans or arrangements from time
to time in effect. If we terminate the employment of Mr. Parker or Mr. Beyland
without "cause," as defined in the respective agreements, Mr. Parker or Mr.
Beyland, as the case may be, will be entitled to receive payments equal to one
year's annual salary. If such termination of employment is in connection with a
change of control (as defined in the agreement) of Loislaw.com, Mr. Parker and
Mr. Beyland each will be entitled to receive a lump-sum payment equal to two
times his annual salary plus bonuses and continuing coverage under our medical
plan for one year. Under the respective agreements, Messrs. Parker and Beyland
each agree not to engage, directly or indirectly, in certain activities in
competition with Loislaw.com either as an employee, employer, consultant,
agent, principal, partner, stockholder, corporate officer, director, or in any
other individual or representative capacity.
Mr. Wigley's agreement terminates on the earlier of August 1, 1999 or two
years after our initial public offering and it provides for an annual base
salary of $144,000. If we terminate the employment of Mr. Wigley without cause,
Mr. Wigley will be entitled to receive a lump-sum payment of one-half of his
annual salary plus health benefits for six months.
Equity Plans
1996 Stock Option Plan. The Board of Directors and our stockholders adopted
the Loislaw.com 1996 Stock Option Plan on June 17, 1996. We have reserved
500,000 shares of common stock for issuance under the 1996 Plan to employees
and consultants. The 1996 Plan provides for the grant of options that are
intended to qualify as incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, and options not intended
to qualify as incentive stock options. Incentive stock options may be granted
only to employees of Loislaw.com. The maximum number of shares with respect to
which awards may be granted to any employee under the 1996 Plan may not exceed
100,000 shares of common stock during any calendar year.
The Board of Directors, or a committee to which the Board has delegated
authority, administers the 1996 Plan. Options granted under the 1996 Plan are
not transferrable or assignable other than by will or the laws of descent and
distribution and may be exercised during the grantee's lifetime only by the
grantee. Subject to the provisions of the 1996 Plan, the Board of Directors or
the committee appointed by the Board, as the case may be, has the authority to
select the individuals to whom options may be granted and determine the terms
of each award, including the number of shares of common stock subject to any
option, the exercise date and the vesting requirements. Payment of the exercise
price may be made in cash or by shares of common stock valued at the fair
market value on the date of exercise or by a combination of such methods of
payment.
If we merge with or into another corporation or sell all or substantially
all our assets, each outstanding option under the 1996 Plan will automatically
vest and become fully exercisable if the successor corporation does not assume
or provide for the substitution of each outstanding option.
To date, we have granted stock options to purchase an aggregate of 291,561
shares of common stock pursuant to the 1996 Plan. We have not granted any
options under the 1996 Plan to either of the officers named in the Summary
Compensation Table.
43
On May 25, 1999, in connection with our hiring of Mark O. Beyland to serve
as our President and Chief Financial Officer, we granted him incentive stock
options pursuant to the 1996 Plan covering a total of 220,727 shares of our
common stock at an exercise price of $5.81. One-half of these options vested on
the date of grant and the remaining options vest at the rate of 1/48th per
month until fully vested. In addition we intend to grant to of our employees
pursuant to the 1996 plan incentive stock options to purchase a total of
shares at an exercise price equal to the initial public offering price. Twenty-
five percent of each of these options will vest one year from the date of the
grant and the balance of the options will vest at a rate of 1/48th per month
beginning after that first year.
Employee Stock Purchase Plan. We intend to adopt an employee stock purchase
plan before the completion of this offering . The stock purchase plan will
provide for the purchase by employees of a maximum of 300,000 shares of common
stock after the completion of this offering. Shares purchased under the plan
may be newly issued shares of common stock or treasury shares, including shares
purchased by us on the open market for sale under the plan.
A committee of three or more employees appointed by the Board of Directors
will administer the stock purchase plan. All full-time employees of Loislaw.com
who have been employed by us for more than six months on or before the first
day of any payment period and whose customary employment is more than 20 hours
per week will be eligible to participate in the stock purchase plan. Employees
who would own 5% or more of the total combined voting power or value of
Loislaw.com's stock immediately after the grant will not be eligible to
participate in the stock purchase plan. To participate in the stock purchase
plan, an employee must authorize Loislaw.com to deduct an amount (not less than
one percent nor more than ten percent of an employee's total cash compensation)
from his or her pay during six-month payment periods. The first payment period
will commence on the first day of the month following the registration of
Loislaw.com's common stock under the Exchange Act and will end on December 31,
1999. Thereafter, the payment periods will commence on each January 1 and July
1 and end on the following June 30 and December 31, respectively, of each year,
but in no case will an employee be entitled to purchase in any one payment
period a number of shares that has a fair market value (determined at the
beginning of the period) of more than $12,500. The purchase price for the stock
that employees are entitled to purchase in any payment period is equal to the
lesser of 85% of the fair market value of the common stock and the beginning of
the payment period and 85% of the fair market value of the common stock at the
end of the payment period. If an employee is not a participant on the last day
of the payment period, the employee will not be entitled to purchase any shares
for that period, and the amount of his or her accumulated payroll deductions
will be refunded. An employee's rights under the stock purchase plan will
terminate upon his or her voluntary withdrawal from the plan at any time or
upon termination of his or her employment..
1999 Nonqualified Stock Option Plan for Nonemployee Directors. We intend to
adopt a nonqualified stock option plan for nonemployee directors before the
completion of this offering. The nonemployee directors plan will provide for
the issuance of a maximum of 320,000 shares of common stock.
Each nonemployee director will be granted an option to purchase 40,000
shares of common stock at an exercise price that will be equal to the initial
public offering price of the common stock in this offering. Subject to the
director's continued membership on the Board, each option will vest in annual
increments of 25% beginning one year from the date of grant. Directors,
including new members to the Board of Directors after the completion of this
offering, may be granted options at the discretion of the committee of the
Board administering the plan. All options granted to nonemployee directors will
be nonstatutory options with an exercise price equal to 100% of the fair market
value of common stock on the date of grant. The nonemployee directors plan will
be administered by a committee of disinterested directors.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan.
Employees must complete 12 months of service at Loislaw.com before they are
eligible to participate. Employees may contribute a
44
percentage of their pre-tax compensation and Loislaw.com may, in its discretion
from year-to-year, make matching and profit sharing contributions to the
employees. Amounts contributed by Loislaw.com vest over six years.
Limitation of Liability and Indemnification of Officers and Directors
Our certificate of incorporation and by-laws provide that the directors and
officers of Loislaw.com shall be indemnified by Loislaw.com to the fullest
extent authorized by Delaware law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with their service for or on behalf of Loislaw.com. In addition, the restated
certificate of incorporation provides that the directors of Loislaw.com will
not be personally liable for monetary damages to Loislaw.com for breaches of
their fiduciary duty as directors, unless they violated their duty of loyalty
to Loislaw.com or its stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors. Further,
we have entered into indemnification agreements with each of our officers and
directors in which we have agreed to indemnify them in addition to the
indemnification provided for in our certificate of incorporation and by-laws.
These agreements indemnify our directors and officers for certain expenses
(including attorneys' fees and associated legal expenses), judgments, fines and
amounts paid in settlement, actually and reasonably incurred by any such person
in connection with services as a director or officer of Loislaw.com. In order
to receive the indemnification, the director or officer must have acted in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of Loislaw.com or, with respect to any criminal
proceeding, must have had reasonable cause to believe that his or her conduct
was lawful. We intend to obtain insurance that insures the directors and
officers of Loislaw.com against specified losses and that insures Loislaw.com
against specific obligations to indemnify its directors and officers. We
believe these provisions and agreements are necessary to attract and retain
qualified directors and officers.
45
CERTAIN TRANSACTIONS
Sale of Series C Preferred Stock. Pursuant to a stock purchase agreement, on
May 25, 1999, we sold an aggregate of $14.5 million of Series C Preferred Stock
to Capital Resource Lenders III, L.P., Mark O. Beyland, Sandler Capital
Partners IV, L.P., Sandler Capital Partners IV, FTE, L.P., and Exeter Capital
Partners IV, L.P. and approximately $500,000 of common stock to Dublind
Partners, Inc. In connection with such sale, we entered into an Amended and
Registration Rights Agreement and an Amended and Restated Stockholders
Agreement, both of which are described below. Capital Resource Lenders III,
L.P. is one of our Series A Convertible Preferred stockholders. Mark O. Beyland
is our President and Chief Financial Officer. We paid $475,000 to Dublind
Investments LLC on May 25, 1999 pursuant to the terms of a financial advisory
services contract with Dublind Partners, Inc. and Dublind Securities, Inc.,
affiliates of Dublind Investments LLC . In addition, Capital Resource Lenders
III, L.P. purchased its portion of the Series C Preferred Stock by converting
notes issued to it by us with an aggregate outstanding principal balance of $5
million.
Registration Rights. Pursuant to an Amended and Restated Registration Rights
Agreement dated as of May 25, 1999 among Loislaw.com and certain stockholders
of Loislaw.com, Capital Resource Lenders III, L.P., CRP Investment Partners
III, LLC, Rowland T. Moriarty, Mark O. Beyland, Sandler Capital Partners IV,
L.P., Sandler Capital Partners IV, FTE, L.P., Exeter Capital Partners IV, L.P.
and certain transferees of Dublind Partners, Inc. have the right to require us
to register under the Securities Act all or any part of the shares of
Loislaw.com that they own, and we are required to use our best efforts to cause
such registration to occur, subject to certain limitations and conditions,
including that we shall not be required to effect such a registration (i) more
than one time for the former holders of the Series A Convertible Preferred
Stock, (ii) more than one time for the former holders of Series C Convertible
Preferred Stock and (iii) if the reasonably anticipated aggregate price to the
public will not exceed $5 million. Additionally, if we propose to register
common stock under the Securities Act, the above stockholders as well as
Charles J. Lindsay, George P. Lindsay, Charles M. Dubroff, Nester J. Olivier
and Dublind Partners, Inc., have the right to request the inclusion of their
shares of common stock in the registration, subject to certain limitations and
conditions, among them the right of the underwriters of such registered
offering to exclude or limit the number of their shares included in such
offering. Finally, all former holders of Series A Convertible Preferred Stock
and Series C Convertible Preferred Stock have the right to request any number
of registrations on Form S-3, subject to certain limitations and conditions,
including that the reasonably anticipated aggregate price to the public must
exceed $500,000.
We have agreed to pay the expenses of the registrations described above.
These costs include filing fees, printing expenses, fees of legal counsel
(including up to $10,000 for one counsel for all the selling stockholders) and
other related costs. The selling stockholders will pay any underwriting
discounts and commissions associated with the sale of their securities.
We have agreed that in the event of any registration of securities pursuant
to the Amended and Restated Registration Rights Agreement, we will indemnify
the selling stockholders against certain liabilities incurred in connection
with such registration, including liabilities under the Securities Act. The
selling stockholders will provide a similar indemnity for liabilities incurred
as a result of information furnished in writing to us by any selling
stockholder for inclusion in the registration statement.
Subject to certain limitations and conditions, the registration rights held
by these selling stockholders may be transferred with their securities.
Amended and Restated Stockholders Agreement. On May 25, 1999, we and our
existing stockholders entered into an Amended and Restated Stockholders'
Agreement. After the completion of this offering, this agreement will continue
to provide that the stockholders will vote their shares to elect to the Board
of Directors of Loislaw.com one person designated by each of (a) Capital
Resource Lenders III, L.P. and (b) Sandler Capital Partners IV, L.P. and
Sandler Capital Partners IV, FTE, L.P., so long as they each hold at least 10%
of the outstanding shares of common stock of Loislaw.com. Also, each of Capital
Resource Lenders III, L.P. and the Sandler entities retain observer rights to
attend meetings of our Board of Directors as long as, among other
46
things, they continue to hold at least 25% of their Series A Preferred Stock
and Series C Preferred Stock, respectively. In addition, these stockholders as
well as the Parker Family Trust, will have co-sale rights entitling them to
include shares of their stock in any sale of a control block of securities of
Loislaw.com or the sale of shares of Loislaw.com by any party to the
stockholders' agreement to a designated competitor of Loislaw.com. Finally, all
stockholders that are parties to this agreement have transfer restrictions on
their shares of capital stock of Loislaw.com in the event that they attempt to
sell their stock in a control block sale or a private sale to a designated
competitor.
Series B Preferred Stock. On November 1, 1995, we entered into a promissory
note and loan agreement with Melissa A. Parker, sister-in-law of Kyle D. Parker
and daughter-in-law of Douglas W. Parker, Sr., pursuant to which Loislaw.com
borrowed $2.0 million. We borrowed additional funds from Mrs. Parker such that
as of June 30, 1996 the outstanding principal balance borrowed was $4.0
million. In November 1997, the original $4.0 million loan plus accrued interest
in the amount of $395,891.01 was converted into 439,589 shares of Series B
Redeemable Preferred Stock. These shares earn dividends at a rate of 7.735% per
year and such dividends are paid as and when declared by the Board. We intend
to redeem these shares of Series B Preferred Stock upon the completion of this
offering.
Advisory Fees. On February 5, 1999, Loislaw.com renewed a letter agreement
with Dublind Partners, Inc. and Dublind Services, Inc. originally dated July 8,
1997 pursuant to which the Dublind entities provided financial advisory
services to Loislaw.com relating to private financings and an initial public
offering. We paid Dublind Investments LLC, an affiliate of Dublind Partners,
Inc. and Dublind Securities, Inc., $475,000 on May 25, 1999 in connection with
this letter agreement. Upon the closing of this offering, we will also pay to
Dublind a fee of $250,000 in exchange for financial advisory services provided
to us.
Stockholder Loans. We have borrowed money from Capital Resource Lenders III,
L.P., CRP Investment Partners III, LLC and Rowland T. Moriarty and have
executed three senior subordinated notes, which as of March 31, 1999 had a
combined outstanding principal balance of $10,000,000.00. These notes accrue
interest at a rate of 12.5% per annum and are due on November 30, 2003.
Interest on these notes is payable quarterly in arrears on the last business
day of March, June, September and December of each year. For 1997 and 1998, we
paid interest in the total amounts of $53,000 and $820,000 on these notes.
These notes are subject to the terms and conditions of a Senior Subordinated
Note and Securities Agreement, dated as of November 24, 1997, as subsequently
amended. We intend to repay these notes upon completion of this offering.
Board Members. Robert C. Ammerman, a member of the Board of Directors, is a
managing member of Capital Resource Partners III, L.L.C., the general partner
of Capital Resource Lenders III, L.P., and a managing member of CRP Investment
Partners III, LLC. Hannah C. Stone, a member of the Board of Directors, is a
managing director of Sandler Capital Management, an affiliate of Sandler
Capital Partners IV, L.P. and Sandler Capital Partners IV, FTE, L.P. Kyle D.
Parker, Chairman of the Board, Chief Executive Officer and a member of the
Board of Directors, is trustee of the Parker Family Trust. The beneficiaries of
this trust include Kyle D. Parker, Douglas W. Parker, Sr. and Melissa Parker.
Also, W. Clark Wigley has been granted options by this trust covering 140,000
shares of common stock.
Lease. Loislaw.com leases its principal executive office and operations
facility in Van Buren, Arkansas from the Parker Law Firm, of which Douglas W.
Parker, Sr. and Kyle D. Parker are partners. The lease provides for a five-year
term expiring in May 2004 with two five-year renewals. Monthly payments under
the lease were increased to $14,200 during May 1999 as a result of expansion of
space under lease. During 1996, 1997 and 1998, we paid $49,834, $49,834 and
$65,984, respectively, under this lease.
Future Transactions. All future transactions, including loans between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested directors of the Board of Directors, and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Loislaw.com's common stock as of June 18, 1999 and as adjusted to
reflect the completion of this offering by:
. each of our directors,
. each named executive officer listed in the Summary Compensation Table,
. all directors and executive officers of Loislaw.com as a group, and
. each person who is known by us to own beneficially more than five percent
of the outstanding shares of the common stock (including the selling
stockholder).
Unless otherwise indicated, (1) each person or entity named in the table has
sole voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as beneficially
owned by such person or entity and (2) the address of each beneficial owner is
c/o Loislaw.com, Inc., 105 North 28th Street, Van Buren, Arkansas 72956. The
number of shares of common stock outstanding used in calculating the percentage
for each person listed includes the shares of common stock underlying options
held by such person that are exercisable within 60 days of June 18, 1999, but
excludes shares of common stock underlying options held by any other person.
Percentage of beneficial ownership is based on 8,519,762 shares of common stock
outstanding as of June 18, 1999, after giving effect to the conversion of the
convertible preferred stock, and shares of common stock outstanding after
completion of this offering.
Shares Beneficially Shares Beneficially
Owned Owned
Prior to the Offering After the Offering
---------------------------- Shares -----------------------
Name of Beneficial Owner Number Percent Offered Number Percent
- ------------------------ ------------- ----------- ------- ------------ ----------
Kyle D. Parker,
Trustee(1)............. 3,395,000 39.8% 3,395,000
W. Clark Wigley(1)...... 140,000(2) 1.6 0 140,000 *
Mark O. Beyland(3)...... 253,247 2.9 0 253,247
Robert C. Ammerman(4)... 2,832,085 33.2 0 2,832,085
Hannah C. Stone(5)...... 1,118,760 13.1 0 1,118,760
D. Randy Laney.......... 0 * 0 0 *
Capital Resource Lenders
III, L.P.(4)........... 2,832,085 33.2 0 2,832,085
Sandler Capital Partners
IV, L.P.(5)............ 1,118,760 13.1 0 1,118,760
Sandler Capital Partners
IV, FTE, L.P.(5)....... 1,118,760 13.1 0 1,118,760
Douglas W. Parker,
Sr.(1)................. 779,800 9.2
All directors and
executive officers as a
group
(10 persons)........... 7,619,882 87.9 0
- --------
* Less than 1%
(1) Kyle D. Parker is the trustee of the Parker Family Trust. Under the terms
of the Trust, Mr. Parker has sole voting power of all of the shares held of
record by the trust and he is the beneficiary of 1,559,600 shares. Douglas
W. Parker, Sr. is the beneficiary of 779,800 shares and Melissa Parker is
the beneficiary of 779,800 shares. Further, W. Clark Wigley has been
granted an option by the trust to purchase 140,000 shares, and another
employee of Loislaw.com beneficially owns 135,800 shares held of record by
the trust. Kyle D. Parker holds a right of first refusal to purchase the
135,800 shares held by the employee upon the employee's resignation,
termination, incapacity or death. Kyle D. Parker disclaims beneficial
ownership of such shares, except to the extent of his pecuniary interest
therein.
(2) Consists of (i) an option to purchase 35,000 shares of common stock from
the Parker Trust that vests on the date that we file this registration
statement and (ii) an option to purchase 105,000 shares of common stock
from the Parker Trust that vests on August 1, 1999.
(3) Includes 124,159 shares subject to options held by Mr. Beyland that are
presently exercisable or will be exercisable within 60 days.
48
(4) Consists of (i) an aggregate of 2,829,771 shares held of record by Capital
Resource Lenders III, L.P. of which 1,056,616 shares are common stock,
915,646 shares are Series A Convertible Preferred Stock and 857,509 shares
are Series C Convertible Preferred Stock; and (ii) an aggregate of 2,314
shares held of record by CRP Investment Partners III, LLC, of which 1,074
shares are Series A Convertible Preferred Stock and 1,240 shares are
covered by a warrant to purchase our common stock. Mr. Ammerman is a
managing member of Capital Resource Partners III, LLC, the general partner
of Capital Resource Lenders III, L.P. Capital Resource Partners III, LLC
has sole voting and investment power with respect to the shares held of
record by Capital Resource Lenders III, L.P. Mr. Ammerman is also a
managing member of CRP Investment Partners III, LLC. Mr. Ammerman shares
with three other managing members the voting and investment power with
respect to the shares held of record by CRP Investment Partners III, LLC.
Mr. Ammerman disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest therein. The address for Mr. Ammerman,
Capital Resource Lenders III, L.P. and CRP Investment Partners III, LLC is
85 Merrimac Street, Suite 200, Boston, Massachusetts 02114.
(5) Consists of 793,680 shares held of record by Sandler Capital Partners IV,
L.P. and 325,080 shares held of record by Sandler Capital Partners IV, FTE,
L.P. Ms. Stone is a Managing Director of Sandler Capital Management, a
general partnership, the general partner of Sandler Capital Partners IV,
L.P and Sandler Capital Partners IV, FTE, L.P. Ms. Stone shares voting and
investment power with respect to the shares held of record by Sandler
Capital Partners IV, L.P. and Sandler Capital Partners IV, FTE, L.P. with
several other managing directors. Ms. Stone disclaims beneficial ownership
of such shares, except to the extent of her pecuniary interest therein. The
address for Ms. Stone, Sandler Capital Partners IV, L.P. and Sandler
Capital Partners IV, FTE, L.P. is 767 Fifth Avenue, 45th Floor, New York,
New York 10153.
49
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.001 par value, and 10,000,000 shares of preferred stock, $.001 par value.
The following summary of the terms and provisions of our capital stock
does not purport to be complete, and we refer you to the certificate of
incorporation and bylaws, which we filed as exhibits to the registration
statement of which this prospectus is a part, and applicable law.
Common Stock
As of June 18, 1999, there were 5,093,021 shares of common stock
outstanding. Based upon the number of shares outstanding as of that date and
giving effect to the issuance of 3,426,741 shares of common stock upon the
conversion of the Series A Convertible Preferred Stock and the Series C
Convertible Preferred Stock upon the completion of this offering, after this
offering, there will be shares of common stock outstanding. Upon
completion, the shares of Series A and Series C convertible preferred stock
will cease to be outstanding and will assume the status of authorized but
unissued shares of preferred stock without designation.
The holders of common stock are entitled to one vote for each share of
common stock held on all matters voted upon by stockholders, including the
election of directors. Subject to the rights of any then outstanding shares of
preferred stock, the holders of the common stock are entitled to such dividends
as may be declared in the discretion of the Board of Directors out of funds
legally available for the payment of dividends. The holders of common stock are
entitled to share ratably in our net assets upon liquidation after we pay or
provide for all liabilities and for any preferential liquidation rights of any
preferred stock then outstanding. The common stockholders have no preemptive
rights to purchase shares of our stock. Shares of common stock are not subject
to any redemption provisions and are not convertible into any of our other
securities. All outstanding shares of common stock are, and the shares of
common stock we sell in this offering will be, fully paid and nonassessable
when we receive payment for such shares.
Preferred Stock
As of June 18, 1999, there were 3,866,330 shares of preferred stock
designated as follows: (i) 931,044 shares were designated as Series A
Convertible Preferred Stock, (ii) 439,589 shares were designated as Series B
Redeemable Preferred Stock, and (iii) 2,495,697 shares were designated as
Series C Convertible Preferred Stock. A total of 1,133,670 shares of preferred
stock are authorized but have not been designated.
Our Board of Directors has the authority, without further action by our
stockholders, to issue shares of undesignated preferred stock from time to time
in one or more series and to fix the related number of shares and the
designations, voting powers, preferences, optional and other special rights,
and restrictions or qualifications of such Preferred Stock. The rights,
preferences, privileges and restrictions or qualifications of different series
of preferred stock may differ with respect to dividend rates, amounts payable
on liquidation, voting rights, conversion rights, redemption provisions,
sinking fund provisions and other matters. The issuance of such preferred stock
could: (i) decrease the amount of earnings and assets available for
distribution to holders of common stock; (ii) adversely affect the rights and
powers, including voting rights, of holders of common stock; and (iii) have the
effect of delaying, deferring or preventing a change in control. We have no
present plans to issue any shares of undesignated preferred stock. We intend to
redeem the outstanding shares of Series B Redeemable Preferred Stock upon the
completion of this offering, and upon such redemption, the Series B Redeemable
Preferred Stock will cease to be outstanding and will assume the status of
authorized but unissued shares of preferred stock without designation.
Delaware Law and Certain Charter and By-Law Provisions, Anti-Takeover Effects
Upon completion of this offering, Loislaw.com will be subject to the
provisions of Section 203 of the General Corporation Law of Delaware. Section
203 prohibits a publicly-held Delaware corporation from
50
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within the prior
three years did own, 15% or more of the corporation's outstanding voting stock.
Our certificate of incorporation and by-laws provide that directors may be
removed only for cause by the affirmative vote of the holders of a majority of
the combined voting power of the then outstanding shares of capital stock of
Loislaw.com entitled to vote. In addition, under the certificate of
incorporation, any vacancy on the board of directors, however occurring,
including a vacancy resulting from an enlargement of the board, may be filled
only by vote of a majority of the directors then in office. The likely effect
of the limitations on the removal of directors and filling of vacancies is an
increase in the time required for the stockholders to change the composition of
the board of directors.
Our by-laws provide that any action required or permitted to be taken by the
stockholders of Loislaw.com at an annual meeting or special meeting of
stockholders may be taken only if Loislaw.com is given proper advance notice of
the action. The by-laws further provide that special meetings of stockholders
may be called only by the board of directors, the chairman of the board of
directors, the president of Loislaw.com. or the holders of a majority of the
outstanding shares of capital stock entitled to vote. The foregoing provisions
could have the effect of delaying until the next stockholders' meeting
stockholder actions that are favored by the holders of a majority of the
outstanding voting securities of Loislaw.com.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The majority stockholder vote would be in
addition to any separate class vote that might be required pursuant to the
terms of any series of preferred stock that might be outstanding at the time
any amendments are submitted to stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock will be .
51
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, shares of common stock will be outstanding (
shares if the underwriters exercise their over-allotment option in full and
shares if, in addition, common stock is issued upon the exercise of
outstanding options and warrants). See "Capitalization". Of these shares, the
shares ( shares if the underwriters exercise their over-allotment
option in full) sold in this offering will be freely tradeable without
restriction under the Securities Act except for any shares purchased by
"affiliates" of Loislaw.com, as defined in Rule 144 under the Securities Act.
The remaining 8,519,762 shares (8,829,091 shares if common stock is issued upon
the exercise of outstanding options and warrants) are "restricted securities"
within the meaning of Rule 144 under the Securities Act. The restricted
securities generally may not be sold unless they are registered under the
Securities Act or are sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144.
All of our officers, directors, stockholders, including the selling
stockholder, and option holders have entered into lock-up agreements pursuant
to which they have agreed not to offer or sell any shares of common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of Prudential Securities, on behalf of the underwriters. See
"Underwriting". Prudential Securities may, at any time and without notice,
waive any of the terms of these lock-up agreements specified in the
underwriting agreement. Following the lock-up period, these shares will not be
eligible for sale in the public market without registration under the
Securities Act unless such sales meet the conditions and restrictions of Rule
144 as described below.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for a period of at least one year (including the holding period of
any prior owner other than an affiliate of Loislaw.com) is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then-outstanding shares of common stock and (ii) the
average weekly trading volume in the common stock during the four calendar
weeks immediately preceding the date on which the stockholder files notice of
such sale with the SEC. Sales under Rule 144 are also subject to certain
provisions relating to notice, manner of sale and the availability of current
public information about Loislaw.com. In addition, a person (or persons whose
shares are aggregated) who has not been an affiliate of Loislaw.com at any time
during the 90 days immediately preceding a sale, and who has beneficially owned
the shares for at least two years (including the holding period of any prior
owner other than an affiliate of Loislaw.com), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitation and other
conditions described above. The foregoing summary of Rule 144 is not intended
to be a complete description.
Rule 701 provides that shares of common stock acquired upon the exercise of
currently outstanding options (or pursuant to other rights granted under our
stock plan) may be resold by persons, other than affiliates, beginning 90 days
after the effective date of the registration statement of which this prospectus
is a part, subject only to the manner of sale provisions of Rule 144, and by
affiliates under Rule 144, without compliance with its one-year minimum holding
period requirement, subject to certain limitations. As of the date of this
prospectus, the board of directors has authorized up to 500,000 shares of
common stock for issuance pursuant to our employee stock option plan, up to
320,000 shares of common stock for issuance pursuant to our nonemployee
directors stock option plan and up to shares of common stock for issuance
pursuant to our employee stock purchase plan. At June 30, 1999, 145,015 shares
of common stock were issuable pursuant to outstanding vested options under our
stock option plans, 146,546 shares of common stock are issuable pursuant to
outstanding options that are not yet exercisable, and 208,439 shares of common
stock are available for future grants under our stock option plans.
52
We intend to file one or more registration statements on Form S-8 under the
Securities Act within 90 days after the date of this prospectus to register all
shares of common stock that are issuable pursuant to our stock option plans and
our employee stock purchase plan. The registration statements are expected to
become effective upon filing. Shares covered by the registration statements on
Form S-8 will be eligible for sale in the public markets, subject to the lock-
up period, and for our affiliates, subject to certain conditions and
restrictions (other than the holding period) of Rule 144.
After this offering, a majority of the holders of the 931,044 shares of
common stock that were issued upon conversion of the Series A Convertible
Preferred Stock and the holders of at least 30% of the 2,495,697 shares of
common stock that were issued upon conversion of the Series C Convertible
Preferred Stock may request that we register all or any portion of their
registrable securities. Registrable securities include the 931,044 shares of
common stock issuable upon conversion of the Series A Convertible Preferred
Stock, 2,495,697 shares of common stock issuable upon conversion of the Series
C Preferred Stock and 17,768 shares of common stock issued or issuable upon
exercise of warrants. All holders of common stock that was issued upon
conversion of the Series A Convertible Preferred Stock and the Series C
Convertible Preferred Stock have the right to request any number of
registrations on Form S-3 by us. Additionally, the holders of approximately
451,405 shares of common stock are entitled to notice if we propose to register
any of our securities under the Securities Act, either for our own account or
for the account of other security holders exercising registration rights and
are, subject to certain limitations, entitled to include shares of common stock
in such registration.
All current stockholders of Loislaw.com are parties to an Amended and
Restated Stockholders' Agreement dated May 25, 1999. This agreement imposes
transfer restrictions on their shares of capital stock of Loislaw.com in the
event that they attempt to sell their stock in a control block sale or a
private sale to a designated competitor. See "Certain Transactions."
53
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated, U.S. Bancorp Piper Jaffray
Inc. and Dain Rauscher Wessels are acting as representatives. We, and the
selling stockholder, are obligated to sell, and the underwriters are obligated
to purchase, all of the shares offered on the cover page of this prospectus, if
any are purchased. Subject to conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the shares indicated opposite its
name:
Number
Underwriters of Shares
------------ ---------
Prudential Securities Incorporated...................................
U.S. Bancorp Piper Jaffray Inc. .....................................
Dain Rauscher Wessels................................................
----
Total..............................................................
====
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus, an over-allotment option to purchase up
to additional shares from us. If any additional shares are purchased, the
underwriters will severally purchase the shares in the same proportion as per
the table above.
The representatives of the underwriters have advised us that the shares will
be offered to the public at the offering price indicated on the cover page of
this prospectus. The underwriters may allow to selected dealers a concession
not in excess of $ per share and such dealers may reallow a concession not in
excess of $ per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and the concessions. The representatives have informed us that the
underwriters do not intend to sell shares to any investor who has granted them
discretionary authority.
We, and the selling stockholder, have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares:
Total Fees
-------------------------------------------
Fee Without Exercise of Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
--------- --------------------- ---------------------
Fees paid by us......... $ $ $
Fees paid by the selling
stockholder............ $ $ $
In addition, we estimate that we will spend approximately $ in expenses
for this offering, including those of the selling stockholder. We and the
selling stockholder have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments that the underwriters may be required to make in respect of these
liabilities.
We, our officers and directors, and all stockholders, including the selling
stockholder and option holders, of Loislaw.com have entered into lock-up
agreements pursuant to which we and they have agreed not to offer or sell any
shares of common stock or securities convertible into or exchangeable or
exercisable for shares of common stock for a period of 180 days from the date
of this prospectus without the prior written consent of Prudential Securities,
on behalf of the underwriters. Prudential Securities may, at any time and
without notice, waive the terms of these lock-up agreements specified in the
underwriting agreement.
54
Prior to this offering, there has been no public market for the common stock
of Loislaw.com. The public offering price, negotiated among us, the selling
stockholder and the representatives, is based upon various factors such as the
Loislaw.com's financial and operating history and condition, its prospects, the
prospects for the industry we are in and prevailing market conditions.
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
. Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities may elect to reduce this short
position by exercising some or all of the over-allotment option.
. Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
. Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
Such activities, which may be commenced and discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
. the Public Offers of Securities Regulations 1995,
. the Financial Services Act of 1986, and
. the Financial Services Act 1986, (Investment Advertisements) (Exemptions)
Order 1996 (as amended).
We have asked the underwriters to reserve shares for sale at the same
offering price directly to our officers, directors, employees and other
business affiliates or related third parties. The number of shares available
for sale to the general public in the offering will be reduced to the extent
such persons purchase the reserved shares.
LEGAL MATTERS
The validity of the shares of common stock to be issued in this offering
will be passed upon for Loislaw.com by Thompson & Knight, P.C., Dallas, Texas.
Various legal matters in connection with the offering will be passed upon for
the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Loislaw.com as of December 31, 1997 and 1998 and
for each of the years in the three-year period ended December 31, 1998 have
been included in this prospectus and in the registration statement in reliance
upon the report, which appears elsewhere in this prospectus, of KPMG LLP,
independent certified public accountants, and upon their authority as experts
in accounting and auditing.
55
AVAILABLE INFORMATION
Loislaw.com has filed with the SEC a registration statement on Form S-1
(including all amendments and exhibits thereto) under the Securities Act with
respect to the common stock in this offering. As permitted by the rules and
regulations of the SEC, this prospectus omits certain information contained in
the registration statement. For further information with respect to Loislaw.com
and the common stock offered in this offering, you should refer to the
registration statement and its exhibits and schedules. Statements contained in
this prospectus regarding the contents of any agreement or other document filed
as an exhibit to the registration statement are not necessarily complete, and
in each instance reference is made to the copy of that agreement or document
filed as an exhibit to the registration statement, and each such statement is
qualified in all respects by such reference. You may obtain copies of all or
any portion of the registration statement at prescribed rates from the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549, at its regional offices
located at Seven World Trade Center, New York, New York 10007 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, or by
calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains
a web site that contains reports, proxy statements and information statements
and other information regarding registrants (including Loislaw.com) that file
electronically with the Commission, which can be accessed at
http://www.sec.gov.
We intend to furnish to our stockholders annual reports containing financial
statements audited by an independent public accounting firm and with quarterly
reports for each of the quarters of each fiscal year containing unaudited
financial statements.
56
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Balance Sheets at December 31, 1997 and 1998 and March 31, 1999
(unaudited) and March 31, 1999 (pro forma).............................. F-3
Statements of Operations for the years ended December 31, 1996, 1997 and
1998 and the three months ended March 31, 1998 (unaudited) and 1999
(unaudited)............................................................. F-4
Statements of Redeemable Equity Securities and Stockholders' Equity
(Deficit) for the years ended December 31, 1996, 1997 and 1998 and the
three months ended March 31, 1999 (unaudited)........................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and the three months ended March 31, 1998 (unaudited) and 1999
(unaudited)............................................................. F-7
Notes to Financial Statements............................................ F-8
F-1
When the transactions referred to in Note 7(c) of the Notes to Financial
Statements have been consummated, we will then be in a position to render the
following report.
KPMG LLP
Little Rock, Arkansas
June 18, 1999
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Loislaw.com, Inc.:
We have audited the accompanying balance sheets of Loislaw.com, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
redeemable equity securities and stockholders' equity (deficit) and cash flows
for each of the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Loislaw.com, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998,
in conformity with generally accepted accounting principles.
Little Rock, Arkansas
May 29, 1999, except as to
note 7(c) which is as
of June , 1999
F-2
LOISLAW.COM, INC.
BALANCE SHEETS
March 31,
December 31, 1999
------------------------- March 31, Pro Forma
1997 1998 1999 (note 5)
----------- ------------ ------------ ------------
(unaudited) (unaudited)
Assets
Current assets:
Cash and cash
equivalents........... $ 3,233,172 $ 99,042 $ 20,031 $ 12,454,467
Accounts receivable,
net of allowance for
doubtful accounts of
$375,000 and $124,974
at December 31, 1997
and 1998,
respectively, and
$115,440 at March 31,
1999 (note 5)......... 896,001 1,540,052 1,671,558 1,671,558
Prepaid commissions.... 114,936 311,394 587,383 587,383
Prepaid software
licenses.............. -- 96,958 196,958 196,958
Other current assets... 19,654 138,811 374,925 374,925
----------- ------------ ------------ ------------
Total current assets... 4,263,763 2,186,257 2,850,855 15,285,291
Databases, net (notes 3
and 5)................. 6,228,884 8,566,529 11,980,513 11,980,513
Property and equipment,
net (notes 4 and 5).... 501,218 1,446,459 2,233,172 2,233,172
Deferred loan costs, net
of accumulated
amortization of $48,076
and $728,201 at
December 31, 1997 and
1998, respectively, and
$905,248 at March 31,
1999................... 4,528,723 3,992,278 4,223,595 4,223,595
Other assets............ 544,081 820,721 728,517 728,517
----------- ------------ ------------ ------------
Total assets........... $16,066,669 $ 17,012,244 $ 22,016,652 $ 34,451,088
=========== ============ ============ ============
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities:
Current installments of
long-term debt (note
5).................... 26,443 954,893 1,395,927 1,395,927
Accounts payable....... 1,906,319 2,559,631 4,063,819 4,063,819
Deferred revenue....... 2,540,459 2,961,067 3,146,616 3,146,616
Accrued expenses....... 304,708 461,549 585,931 564,799
----------- ------------ ------------ ------------
Total current
liabilities........... 4,777,929 6,937,140 9,192,293 9,171,161
Deferred revenue........ 981,722 967,046 655,198 655,198
Long-term debt,
excluding current
installments (note 5).. 4,080,941 11,317,631 16,193,671 14,193,671
Other noncurrent
liabilities............ -- 170,373 686,986 686,986
----------- ------------ ------------ ------------
Total liabilities...... 9,840,592 19,392,190 26,728,148 24,707,016
----------- ------------ ------------ ------------
Redeemable equity
securities (notes 5 and
7):
Series A convertible
preferred, 931,044
shares................ 2,492,100 2,605,840 2,674,454 2,674,454
Series B 7.735%
preferred, redemption
value of $4,395,890
plus accrued
dividends, 439,589
shares................ 4,430,358 4,770,380 4,855,385 4,855,385
Series C convertible
preferred, 2,495,697
shares................ -- -- -- 13,963,500
Common stock........... -- 1,189,158 1,208,110 3,566,000
Common stock warrants.. 4,293,821 3,154,975 3,615,451 60,017
----------- ------------ ------------ ------------
Total redeemable equity
securities............ 11,216,279 11,720,353 12,353,400 25,119,356
----------- ------------ ------------ ------------
Stockholders' equity
(deficit) (notes 5 and
7):
Common stock, $.001 par
value. 10,000,000
shares authorized;
shares issued--
3,590,000 at December
31, 1997, 3,955,346 at
December 31, 1998 and
March 31, 1999 and
5,098,021 on a pro
forma basis at March
31, 1999.............. 3,590 3,955 3,955 5,098
Additional paid-in
capital............... 449,910 1,638,703 1,638,703 5,685,062
Accumulated deficit.... (5,443,702) (14,537,699) (17,483,344) (17,483,344)
Redeemable common
stock, 365,346 shares
at December 31, 1998
and March 31, 1999 and
1,056,616 on a pro
forma basis at March
31, 1999.............. -- (1,189,158) (1,208,110) (3,566,000)
Treasury stock, at
cost, 5,000 shares in
1998 and 1999......... -- (16,100) (16,100) (16,100)
----------- ------------ ------------ ------------
Total stockholders'
equity (deficit)...... (4,990,202) (14,100,299) (17,064,896) (15,375,284)
----------- ------------ ------------ ------------
Commitments and
contingencies (notes 5,
7 and 8)
Total liabilities and
stockholders' equity
(deficit)............. $16,066,669 $ 17,012,244 $ 22,016,652 $ 34,451,088
=========== ============ ============ ============
See accompanying notes to financial statements.
F-3
LOISLAW.COM, INC.
STATEMENTS OF OPERATIONS
Three Months Ended
Years Ended December 31, March 31,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
Revenues:
Web-based products.... $ 28,333 208,357 842,112 115,342 499,247
CD-ROM products....... 1,854,605 3,157,056 3,182,067 737,160 836,634
Other................. -- -- 1,000,000 116,913 --
----------- ----------- ----------- ----------- -----------
Total revenues...... 1,882,938 3,365,413 5,024,179 969,415 1,335,881
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Database cost......... 1,849,893 2,013,716 5,526,731 1,165,684 1,065,503
Selling and
marketing............ 2,152,638 2,363,028 4,413,645 749,956 1,706,399
General and
administrative....... 1,071,094 1,150,304 1,331,429 450,645 524,767
Product development... 51,642 47,396 445,615 143,015 186,925
Cost of other
revenues............. -- -- 393,357 46,185 --
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 5,125,267 5,574,444 12,110,777 2,555,485 3,483,594
----------- ----------- ----------- ----------- -----------
Loss from
operations......... (3,242,329) (2,209,031) (7,086,598) (1,186,070) (2,147,713)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest expense,
net.................. (250,964) (454,667) (1,548,931) (278,624) (593,704)
Other, net............ 2,644 (6,353) 41,953 250 1,503
----------- ----------- ----------- ----------- -----------
(248,320) (461,020) (1,506,978) (278,374) (592,201)
----------- ----------- ----------- ----------- -----------
Net loss............ (3,490,649) (2,670,051) (8,593,576) (1,864,444) (2,739,914)
Accrued preferred stock
dividends and accretion
on redeemable preferred
stock and common stock
warrants............... -- (34,468) (500,421) (105,321) (205,731)
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common stock........... $(3,490,649) $(2,704,519) $(9,093,917) $(1,969,765) $(2,945,645)
=========== =========== =========== =========== ===========
Net loss per share--
basic and diluted...... $ (0.99) (0.76) (2.52) (0.55) (0.75)
=========== =========== =========== =========== ===========
Weighted average common
stock outstanding--
basic and diluted...... 3,528,603 3,581,370 3,611,172 3,590,000 3,950,346
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
F-4
LOISLAW.COM, INC.
STATEMENTS OF REDEEMABLE EQUITY SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(Notes 5 and 7)
Redeemable Equity Securities
------------------------------------------------------------------
Series A Series C Common
convertible Series B convertible Common stock
preferred preferred preferred stock warrants Total
----------- --------- ----------- --------- ---------- ----------
Balances at
December 31,
1995............ $ -- -- -- -- -- --
Issuance of
60,000 shares of
common stock for
cash............ -- -- -- -- -- --
Net loss........ -- -- -- -- -- --
--------- --------- --------- --------- ---------- ----------
Balances at
December 31,
1996............ -- -- -- -- -- --
Issuance of
30,000 shares of
common stock for
cash............ -- -- -- -- -- --
Issuance of
931,044 shares
of Series A
preferred stock
for cash, net of
issuance costs
of $507,900..... 2,492,100 -- -- -- -- 2,492,100
Conversion of
notes payable
into 439,589
shares of Series
B preferred
stock........... -- 4,395,890 -- -- -- 4,395,890
Issuance of
warrants to
purchase
1,337,639 shares
of redeemable
common stock.... -- -- -- -- 4,293,821 4,293,821
Accrued
dividends on
Series B
preferred stock.. -- 34,468 -- -- -- 34,468
Net loss........ -- -- -- -- -- --
--------- --------- --------- --------- ---------- ----------
Balances at
December 31,
1997............ 2,492,100 4,430,358 -- -- 4,293,821 11,216,279
Accrued
dividends on
Series B
preferred stock.. -- 340,022 -- -- 340,022
Accretion on
redeemable
equity
securities...... 113,740 -- -- -- 46,659 160,399
Exercise of
warrants for
365,346 shares
of redeemable
common stock.... -- -- -- 1,189,158 (1,185,505) 3,653
Purchase of
treasury stock,
5,000 shares.... -- -- -- -- -- --
Net loss........ -- -- -- -- -- --
--------- --------- --------- --------- ---------- ----------
Balances at
December 31,
1998............ 2,605,840 4,770,380 -- 1,189,158 3,154,975 11,720,353
Issuance of
warrants to
purchase 102,091
shares of
redeemable
common stock
(unaudited)..... -- -- -- -- 408,364 408,364
Accrued
dividends on
Series B
preferred stock
(unaudited)..... -- 85,005 -- -- -- 85,005
Accretion on
redeemable
equity
securities
(unaudited)..... 68,614 -- -- 18,952 52,112 139,678
Net loss
(unaudited)..... -- -- -- -- -- --
--------- --------- --------- --------- ---------- ----------
Balances at
March 31, 1999
(unaudited)..... 2,674,454 4,855,385 -- 1,208,110 3,615,451 12,353,400
--------- --------- --------- --------- ---------- ----------
Stockholders' Equity (Deficit)
------------------------------------------------------------------
Retained
Additional earnings/ Redeemable
Common paid-in (accumulated Treasury common
stock capital (deficit) stock stock Total
------ ---------- ------------- --------- ----------- ------------
Balances at
December 31,
1995............ 3,500 -- 751,466 -- -- 754,966
Issuance of
60,000 shares of
common stock for
cash............ 60 299,940 -- -- -- 300,000
Net loss........ -- -- (3,490,649) -- -- (3,490,649)
------ ---------- ------------- --------- ----------- ------------
Balances at
December 31,
1996............ 3,560 299,940 (2,739,183) -- -- (2,435,683)
Issuance of
30,000 shares of
common stock for
cash............ 30 149,970 -- -- -- 150,000
Issuance of
931,044 shares
of Series A
preferred stock
for cash, net of
issuance costs
of $507,900..... -- -- -- -- -- --
Conversion of
notes payable
into 439,589
shares of Series
B preferred
stock........... -- -- -- -- -- --
Issuance of
warrants to
purchase
1,337,639 shares
of redeemable
common stock.... -- -- -- -- -- --
Accrued
dividends on
Series B
preferred stock.. -- -- (34,468) -- -- (34,468)
Net loss........ -- -- (2,670,051) -- -- (2,670,051)
------ ---------- ------------- --------- ----------- ------------
Balances at
December 31,
1997............ 3,590 449,910 (5,443,702) -- -- (4,990,202)
Accrued
dividends on
Series B
preferred stock.. -- -- (340,022) -- -- (340,022)
Accretion on
redeemable
equity
securities...... -- -- (160,399) -- -- (160,399)
Exercise of
warrants for
365,346 shares
of redeemable
common stock.... 365 1,188,793 -- -- (1,189,158) --
Purchase of
treasury stock,
5,000 shares.... -- -- -- (16,100) -- (16,100)
Net loss........ -- -- (8,593,576) -- -- (8,593,576)
------ ---------- ------------- --------- ----------- ------------
Balances at
December 31,
1998............ 3,955 1,638,703 (14,537,699) (16,100) (1,189,158) (14,100,299)
Issuance of
warrants to
purchase 102,091
shares of
redeemable
common stock
(unaudited)..... -- -- -- -- -- --
Accrued
dividends on
Series B
preferred stock
(unaudited)..... -- -- (85,005) -- -- (85,005)
Accretion on
redeemable
equity
securities
(unaudited)..... -- -- (120,726) -- (18,952) (139,678)
Net loss
(unaudited)..... -- -- (2,739,914) -- -- (2,739,914)
------ ---------- ------------- --------- ----------- ------------
Balances at
March 31, 1999
(unaudited)..... 3,955 1,638,703 (17,483,344) (16,100) (1,208,110) (17,064,896)
------ ---------- ------------- --------- ----------- ------------
(Continued)
F-5
LOISLAW.COM, INC.
STATEMENTS OF REDEEMABLE EQUITY SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(Notes 5 and 7)--(Continued)
Redeemable Equity Securities
--------------------------------------------------------------------
Series A Series C Common
convertible Series B convertible Common stock
preferred preferred preferred stock warrants Total
----------- --------- ----------- ---------- ---------- ----------
Pro forma
adjustments
(unaudited):
Exercise of
warrants for
1,056,616 shares
of redeemable
common stock.... $ -- -- -- 3,566,000 (3,555,434) 10,566
Issuance of
2,495,697 shares
of Series C
preferred stock
for cash, net of
issuance costs
of $536,000..... -- -- 13,963,500 -- -- 13,963,500
Issuance of
86,059 shares of
common stock for
cash, net of
issuance costs
of $18,500...... -- -- -- -- -- --
Cancellation of
redemption
feature on
365,346 shares
of redeemable
common stock.... -- -- -- (1,208,110) -- (1,208,110)
---------- --------- ---------- ---------- ---------- ----------
Pro forma at
March 31, 1999
(unaudited)...... $2,674,454 4,855,385 13,963,500 3,566,000 60,017 25,119,356
========== ========= ========== ========== ========== ==========
Stockholders' Equity (Deficit)
------------------------------------------------------------------
Retained
Additional earnings/ Redeemable
Common paid-in (accumulated Treasury common
stock capital (deficit) stock stock Total
------ ---------- ------------- --------- ----------- ------------
Pro forma
adjustments
(unaudited):
Exercise of
warrants for
1,056,616 shares
of redeemable
common stock.... 1,057 3,564,943 -- -- (3,566,000) --
Issuance of
2,495,697 shares
of Series C
preferred stock
for cash, net of
issuance costs
of $536,000..... -- -- -- -- -- --
Issuance of
86,059 shares of
common stock for
cash, net of
issuance costs
of $18,500...... 86 481,416 -- -- -- 481,502
Cancellation of
redemption
feature on
365,346 shares
of redeemable
common stock.... -- -- -- -- 1,208,110 1,208,110
------ ---------- ------------- --------- ----------- ------------
Pro forma at
March 31, 1999
(unaudited)...... 5,098 5,685,062 (17,483,344) (16,100) (3,566,000) (15,375,284)
====== ========== ============= ========= =========== ============
See accompanying notes to financial statements.
F-6
LOISLAW.COM, INC.
STATEMENTS OF CASH FLOWS
Three months ended
Years ended December 31, March 31,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
----------- ---------- ---------- ---------- ----------
(unaudited)
Cash flows from
operating activities:
Net loss............... $(3,490,649) (2,670,051) (8,593,576) (1,864,444) (2,739,914)
Adjustments to
reconcile net loss to
net cash provided
(used) by operating
activities:
Depreciation and
amortization......... 375,207 462,245 1,166,925 267,428 338,943
Loss on disposal of
property and
equipment............ -- -- 3,979 -- --
Change in operating
assets and
liabilities:
Accounts receivable.. (154,920) (1,025,210) (758,773) 70,123 89,498
Prepaid commissions
and other current
assets.............. 174,168 (132,655) (412,573) (308,036) (612,103)
Accounts payable..... 1,371,768 (175,172) 823,685 352,552 2,020,801
Accrued expenses..... 326,070 (132,129) 156,841 (197,438) 124,382
Deferred revenue..... 1,597,149 1,768,429 405,932 93,754 (126,299)
----------- ---------- ---------- ---------- ----------
Net cash provided
(used) by operating
activities.......... 198,793 (1,904,543) (7,207,560) (1,586,061) (904,692)
----------- ---------- ---------- ---------- ----------
Cash flows from
investing activities:
Legal database costs... (2,592,251) (1,762,453) (2,606,474) (349,547) (3,502,161)
Purchase of property
and equipment......... (218,045) (92,528) (1,224,665) (533,601) (860,432)
Decrease (increase) in
other assets.......... 8,892 (8,827) (161,918) 138,788 (128,800)
----------- ---------- ---------- ---------- ----------
Net cash used by
investing
activities.......... (2,801,404) (1,863,808) (3,993,057) (1,021,936) (4,491,393)
----------- ---------- ---------- ---------- ----------
Cash flows from
financing activities:
Repayment of capital
lease obligation...... -- (25,183) (15,385) (3,947) (2,926)
Deferred loan costs
(note 5).............. -- (553,614) (143,681) -- --
Proceeds from sale of
Class A preferred
stock, net of $237,263
costs of issuance
(note 5).............. -- 2,762,737 -- -- --
Proceeds from notes
payable............... 253,705 4,300,000 8,661,077 3,423,077 5,320,000
Repayment of notes
payable............... (573,905) (423,409) (423,077) (423,077) --
Proceeds from related
party borrowing (note
7).................... 2,406,944 688,946 -- -- --
Proceeds from exercise
of warrants (note 5).. -- -- 3,653 -- --
Proceeds from sale of
common stock.......... 300,000 150,000 -- -- --
Repurchase of treasury
stock................. -- -- (16,100) -- --
----------- ---------- ---------- ---------- ----------
Net cash provided by
financing
activities.......... 2,386,744 6,899,477 8,066,487 2,996,053 5,317,074
----------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents............ (215,867) 3,131,126 (3,134,130) 388,056 (79,011)
Cash and cash
equivalents at
beginning of year...... 317,913 102,046 3,233,172 3,233,172 99,042
----------- ---------- ---------- ---------- ----------
Cash and cash
equivalents at end of
year................... $ 102,046 3,233,172 99,042 3,621,228 20,031
=========== ========== ========== ========== ==========
Supplemental cash flow
information:
Cash paid for
interest.............. $ 104,217 581,154 683,761 5,612 344,107
Cash received from
income tax refunds 134,007 -- -- -- --
Non cash investing and
financing
transactions:
Acquisition of
equipment through
capital lease......... 132,567 -- -- -- --
Accrued Series B
preferred stock
dividends............. -- 34,468 340,022 85,005 85,005
Satisfaction of
capital lease
obligation through
return of equipment... -- -- 57,475 -- --
Conversion of related
party borrowing to
Series B preferred
stock (note 7)........ -- 4,395,890 -- -- --
Issuance of warrant
(note 5).............. -- 1,172,761 -- -- 408,364
Accretion on
redeemable equity
securities............ -- -- 160,399 20,316 139,678
=========== ========== ========== ========== ==========
See accompanying notes to financial statements.
F-7
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
(1) Operations
Loislaw.com, Inc. ("the Company") designs, develops and markets state and
Federal legal research libraries in CD-ROM and Internet formats.
(2) Significant Accounting Policies
(a) Management Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
(c) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. Concentrations
of credit risk related to subscription receivables are limited as the Company
sells its products direct to numerous users in the states for which the Company
offers law libraries. The amount of loss should customers fail to pay the
receivables is limited to the notional amount of such receivables. At December
31, 1998, the Company's management does not believe any significant
concentration of credit risk exists.
(d) Product Development, Software and Database Costs
Product development expense consists primarily of employee salaries and
benefits, facilities cost allocations and expenses related to the development
of core software supporting the Company's products. Statement of Financial
Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. Based upon Loislaw.com's product development
process, technological feasibility is established upon completion of a working
model. Costs incurred by Loislaw.com between completion of the working model
and the point at which the product is ready for general release have been
insignificant. As a result, Loislaw.com has expensed software development
costs.
Prepaid software licenses are amortized straight line over the remaining
economic life of the license, or the amortization that would be recorded by
using the ratio of gross revenues derived from the use of the license to total
current and anticipated future gross revenues from the use of the license. The
noncurrent portion of prepaid software licenses is included in other assets and
amount to $169,677 at December 31, 1998.
F-8
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
Database costs represent amounts incurred for data acquisition and
conversion costs, editing, coding, and quality control of legal information and
include salaries and benefits and overhead allocations. Costs to develop court
ruling databases are capitalized and amortized to production costs once the
product is released, on a straight-line basis over the expected lives of the
databases, which is estimated at twenty years. Costs to develop statutes and
regulations databases and costs to maintain and enhance databases are expensed
as incurred. Amortization expense related to capitalized legal databases
totaled approximately $240,000, $260,000 and $270,000 in 1996, 1997 and 1998,
respectively. The Company currently contracts with three companies to perform a
significant amount of the initial data conversion for its databases.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated on the straight-line method over the estimated useful
lives of 7 years for office furniture and equipment and 5 years for data
processing equipment. Leasehold improvements are amortized over the lesser of
the lease term or 15 years.
(f) Revenue Recognition
Subscription revenue from web-based and CD-ROM products is recognized as
revenue ratably over the subscription period (1 to 5 years). Substantially all
subscriptions sold are billed annually, quarterly or monthly. Unearned portions
of subscription revenue are deferred. The noncurrent portion of amounts to be
received under long-term subscription agreements amounted to approximately
$489,000 and $603,000, respectively, at December 31, 1997 and 1998 and is
included in other assets in the accompanying balance sheets. Other revenue in
1998 results from producing databases for a third party and is recognized under
the percentage of completion method as production costs are incurred. Web-based
and CD-ROM subscriptions are both sold from the same databases. Accordingly,
there are no separate production costs for web-based and CD-ROM products. Cost
of revenue related to the customized database was approximately $46,000 for the
first quarter of 1998 and $393,000 for the entire year.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles, including database
costs, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. The Company believes that no significant impairment of its long-
lived assets and intangibles, including database costs, has occurred.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-9
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
(i) Stock Option Plan
The Company has adopted the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation and, as permitted under SFAS No. 123,
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for compensation costs for its stock option plans. Accordingly,
compensation expense is recognized on the date of grant only if the current
market price of the underlying common stock at date of grant exceeds the
exercise price.
(j) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs amounted to
approximately $28,000, $17,000 and $300,000 for the years ended December 31,
1996, 1997 and 1998, respectively, and are included in selling and marketing
expenses in the accompanying statements of operations.
(k) Financial Instruments
The fair value of the company's accounts receivable and accounts payable
approximate their carrying values due to the relatively short maturities of
these instruments. The fair value of the Company's revolving credit borrowings
and notes payable approximate their carrying value since the interest rate on
these obligations fluctuates with prime rate. The fair value of the
subordinated notes can not be determined without incurring excessive costs due
to the related party nature of such instruments.
(l) Loss Per Share
Loss per share has been computed by dividing the net loss attributable to
common stock by the weighted average shares of common stock outstanding during
the period as shown below:
Three months ended
Year ended December 31, March 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
---------- --------- --------- --------- ---------
Net loss................ $3,490,649 2,670,051 8,593,576 1,864,444 2,739,914
Accrued dividends on
preferred stock........ -- 34,468 340,022 85,005 85,005
Accretion on redeemable
common stock warrants.. -- -- 46,659 -- 52,112
Accretion on redeemable
preferred stock........ -- -- 113,740 20,316 68,614
---------- --------- --------- --------- ---------
Net loss attributable to
common shareholders.... $3,490,649 2,704,519 9,093,997 1,969,765 2,945,645
========== ========= ========= ========= =========
Weighted average common
shares outstanding..... 3,528,603 3,581,370 3,611,172 3,590,000 3,950,346
========== ========= ========= ========= =========
Loss per share.......... $ (0.99) (0.76) (2.52) (0.55) (0.75)
========== ========= ========= ========= =========
Potentially dilutive securities were excluded from the above calculations
because they were antidilutive in accordance with Statement of Financial
Accounting Standards No. 128. The number of shares under common stock options
and warrants which were excluded were 105,000, 1,371,639, and 1,043,127,
respectively, for the years ended December 31, 1996, 1997 and 1998 and
1,408,473 and 1,145,218, respectively, for the three months ended March 31,
1998 and 1999.
F-10
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
(3) Database Costs
Database costs consist of the following:
December 31,
-------------------- March 31,
1997 1998 1999
---------- --------- ----------
Database costs............................... $6,696,994 9,303,468 12,805,629
Less accumulated amortization.............. 468,110 736,939 825,116
---------- --------- ----------
$6,228,884 8,566,529 11,980,513
========== ========= ==========
(4) Property and Equipment
Property and equipment consist of the following:
December 31,
-------------------- March 31,
1997 1998 1999
---------- --------- ---------
Office furniture and equipment.............. $ 241,952 246,172 358,183
Data processing equipment................... 906,243 1,916,936 2,600,855
Leasehold improvements...................... 18,073 149,611 214,113
---------- --------- ---------
1,166,268 2,312,719 3,173,151
Less accumulated depreciation and
amortization............................... 665,050 866,260 939,979
---------- --------- ---------
$ 501,218 1,446,459 2,233,172
========== ========= =========
(5) Long-Term Debt
Long-term debt consists of the following:
December 31,
---------------------- March 31,
1997 1998 1999
---------- ---------- ----------
12.5% Senior Subordinated Notes........ $4,000,000 8,000,000 10,000,000
12.5% Senior Subordinated Convertible
Promissory Notes...................... -- -- 2,000,000
Notes payable.......................... -- 2,907,000 4,222,000
8.25% revolving line of credit, due
June 2000............................. -- 1,331,000 1,336,000
Capital lease obligation............... 107,384 34,524 31,598
---------- ---------- ----------
Total long-term debt............... 4,107,384 12,272,524 17,589,598
Less:
Current installments................. (26,443) (954,893) (1,395,927)
---------- ---------- ----------
$4,080,941 11,317,631 16,193,671
========== ========== ==========
Interest expense on related party borrowings was $204,344 in 1996 and
$271,823 in 1997 (none in 1998).
F-11
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
On November 24, 1997, the Company entered into an agreement ("CRL
Agreement") with Capital Resource Lenders III, L.P. ("CRL") under which CRL
agreed to purchase from the Company up to $10,000,000 of 12.5% Senior
Subordinated Notes and a Warrant ("Notes") and $3,000,000 of Series A Preferred
Stock ("Series A Preferred"). See note 7. At closing, CRL purchased $4,000,000
of the Notes and all of the Series A Preferred (931,044 shares). In accordance
with the CRL Agreement, CRL purchased an additional $4,000,000 of the Notes
during 1998 and purchased the remaining $2,000,000 of the Notes during January
and February 1999. Interest on the Notes is payable quarterly beginning
December 31, 1997 and principal is due in sixteen equal quarterly installments
beginning December 31, 2000 with the final installment due September 30, 2004.
The Warrant entitles CRL to purchase 972,293 shares of common stock of the
Company at $.01 per share at any time prior to September 30, 2004. The value
assigned to the warrant was $3,121,060 which has been reflected as deferred
loan costs. Such deferred loan costs and discount are being amortized over the
term of the notes using the interest method. On January 1, 1998 CRL assigned
16,080 of its warrants and a proportionate share of its other obligations and
rights under the CRL Agreement to CRP Investment Partners III, L.P. ("CRP") and
Rowland Moriarty ("Moriarty").
The Company paid $650,000 in cash and issued a warrant to purchase 365,346
shares of the Company's common stock at $.01 per share, at any time prior to
September 30, 2004, to a third party for its assistance in obtaining the CRL
Agreement. The value assigned to the warrant was $1,172,761 which has been
allocated to deferred loan costs and cost of issuance of the Series A Preferred
in the amounts of $902,124 and $270,637, respectively. Deferred loan costs are
being amortized into expense over the life of the Notes using the interest
method. During 1998, this warrant was exercised with the net proceeds reflected
as an increase in redeemable common stock in the accompanying financial
statements.
The proceeds from the CRL Agreement were used to repay indebtedness of
$2,240,855, to pay the $650,000 private placement fee referred to above and
other closing costs of $141,418 (of which amount $237,263 has been charged to
cost of issuance of the Series A Preferred) and to provide working capital for
the Company.
In connection with the CRL Agreement, a shareholders' agreement was entered
into whereby the preferred shareholders and warrant holders were given put
options which entitle such holders to put their preferred stock, warrants or
any common shares obtained upon exercise of warrants or conversion of preferred
shares to the Company between September 30, 2003 and September 30, 2005.
Accordingly, all such preferred shares warrants and common shares obtained upon
exercise of warrants have been classified as redeemable equity securities in
the accompanying balance sheets. The puts entitle such holders to have their
underlying shares redeemed at the fair market value of the common stock as of
the redemption date. The difference between the carrying value of such shares
and the estimated fair market value of common stock is being accreted through a
charge to retained earnings and, with respect to the preferred shares and
warrants, is presented as an increase in loss attributable to common
shareholders.
In 1998, the Company entered into a credit agreement with Fleet National
Bank ("Fleet") whereby Fleet agreed to advance up to a maximum of $12,000,000
to the Company. Borrowings under this agreement are evidenced by three separate
notes including a working capital revolving line of credit ("Revolving
Credit"), a converting equipment line of credit ("Equipment LOC"), and a
converting SBLC line of credit ("SBLC LOC").
F-12
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
In accordance with the terms and conditions of the Revolving Credit note,
the Company may borrow up to the lesser of $2,500,000 or the borrowing base of
eligible receivables as defined by the Fleet agreement ($1,336,240 at December
31, 1998). Advances under the Revolving Credit note at December 31, 1998 amount
to $1,331,000, bear interest, payable monthly, at Fleet's prime rate plus 1/2%
(8.25% at December 31, 1998), and are due June 30, 2000. In addition, the
Company is required to pay a quarterly commitment fee of $6,250.
Under the Equipment LOC note, the Company may borrow up to $2,500,000 for
the purchase of qualified equipment, as defined by the Fleet agreement.
Advances under the Equipment LOC note amounted to $407,000 at December 31, 1998
and bear interest, payable monthly, at Fleet's prime rate plus 1 1/2% (9.25% at
December 31, 1998). Aggregate advances under the Equipment LOC note at June 30,
1999 and June 30, 2000 shall automatically convert to term note A and term note
B, respectively. Advances under term note A and term note B shall be repaid by
the Company in thirty-six equal monthly installments, plus interest, beginning
July 1999 and July 2000, respectively.
Pursuant to the provisions of the SBLC LOC note, the Company may borrow up
to $4,000,000 from Fleet through June 30, 2000 to finance development of its
law library databases. Additionally, the Company may request and Fleet shall
arrange to issue standby letters of credit, provided, however, that aggregate
advances and outstanding letters of credit under the SBLC LOC note shall not
exceed $7,000,000. Aggregate advances under the SBLC LOC note (excluding the
letters of credit) amounted to $2,500,000 at December 31, 1998 ($3,500,000 at
March 31, 1999). Such advances bear interest, payable monthly, at Fleet's prime
rate plus 1 1/2% (9.25% at December 31, 1998). Borrowings under the SBLC LOC
note are due in thirty-two monthly installments of $109,375, plus interest,
commencing May 1999. At December 31, 1998, letters of credit amounting to
approximately $2,100,000 are outstanding under the SBLC LOC note securing the
Company's performance under its data compilation contract with its foreign
supplier.
Obligations under the CRL Agreement are subordinate to the Fleet borrowings.
In addition, CRL, CRP and Moriarty have guaranteed 45% of any borrowings
outstanding under the SBLC LOC. In exchange for this guaranty, the Company
issued 102,091 additional warrants in February 1999 to the guarantors. The
warrants have the same terms as the original warrants issued in November 1997
and, accordingly, have been classified as redeemable equity securities in the
accompanying balance sheets. The value assigned to the warrants ($408,364) has
been recorded as deferred loan costs and is being amortized into expense over
the remaining term of the related Fleet debt. On May 19, 1999 CRL exercised all
of the warrants it held (1,056,616 shares). After exercise of these warrants,
all remaining warrants (17,768 shares) are held by CRP and Moriarty.
Prior to and in anticipation of the financing transaction discussed in the
following paragraph, CRL advanced to the Company $5,000,000 in exchange for
12.5% Senior Subordinated Convertible Promissory Notes. These notes are
subordinated to the Fleet borrowings and were issued as follows: March 10,
1999, $2,000,000; April 13, 1999, $2,000,000; and May 7, 1999, $1,000,000.
On May 25, 1999, the Company entered into an agreement ("Dublind Agreement")
with CRL, Dublind Partners, Inc. ("Dublind") Mark Beyland ("Beyland"), the
president of the Company, and other purchasers whereby the Company issued
86,059 shares of common stock to Dublind for $500,002 in cash and 2,495,697
shares of Series C Convertible Preferred Stock ("Series C Preferred") to CRL,
Beyland and the other purchasers for $14,500,000 of which 857,509 shares were
issued in exchange for the $5,000,000 of senior subordinated convertible notes
plus accrued interest thereon held by CRL and the remaining shares were issued
to Beyland (129,088 shares) and the other purchasers (1,509,100 shares) for
cash. In connection with the agreement, the Company paid Dublind a brokers' fee
of $475,000 and paid other costs in connection with the
F-13
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
financing amounting to approximately $80,000. These costs of issuance will be
allocated between common stock and the Series C Preferred in the amounts of
$18,500 and $536,500, respectively. The net proceeds from the Dublind Agreement
are to be used for database development costs and other general corporate
purposes.
In connection with the Dublind Agreement, a new shareholders' agreement was
entered into whereby all remaining warrants and the shares obtained by CRL upon
exercise of warrants would have the same redemption feature as the Series A and
Series C shares, which entitles these shareholders to have the underlying
shares redeemed at the fair value of the common stock at the redemption date.
The common shares issued to Dublind and the 365,346 shares previously obtained
from exercising warrants in 1998 are no longer subject to such redemption
agreements. Accordingly, such shares will be reclassified into common stock and
additional paid-in capital as of May 25, 1999.
The unaudited pro forma balance sheet at March 31, 1999 is based upon the
historical unaudited balance sheet and gives effect to the exercise of the
warrants by CRL, the additional issuances of the convertible notes to CRL and
the Dublind Agreement as if all of these transactions had occurred on March 31,
1999.
The CRL Agreement and the Fleet agreement contain certain covenants
requiring the Company to maintain certain financial ratios including minimum
profitability, minimum tangible capital base, as defined, debt service
coverage, and liquidity. At December 31, 1998, the Company was not in
compliance with certain of these covenants. On May 25, 1999, CRL and Fleet
waived compliance with these covenants. Additionally, CRL, Fleet and the
Company amended their agreements to revise certain of the covenants such that
the Company's management expects to be in compliance with the covenants, as
amended, during future periods. Should the Company fail to meet the revised
covenants, CRL and Fleet could accelerate the due dates of amounts due them by
the Company.
The aggregate maturities of long-term debt for the five years ending
December 31, 2003 are as follows: 1999, $954,893; 2000, $3,292,227; 2001,
$2,457,571; 2002, $2,067,833; 2003, $2,000,000; and thereafter, $1,500,000.
(6) Income Taxes
There was no income tax expense for the years ended December 31, 1996, 1997
or 1998. The actual income tax benefit differs from the expected tax benefit
(computed by applying the U.S. Federal corporate tax rate of 34% to loss before
income taxes) as follows:
1996 1997 1998
----------- --------- ----------
Computed expected tax benefit........... $(1,186,821) (907,817) (2,926,816)
Increase (reduction) in income taxes
resulting from:
State income taxes, net of Federal
income tax benefit and change in
valuation allowance applicable to
state taxes of $226,322 in 1996;
$172,283 in 1997; and $555,356 in
1998................................. (149,373) (113,707) (366,535)
Change in valuation allowance due to
operating losses not utilized........ 1,333,213 1,014,879 3,271,474
Other, net............................ 2,981 6,645 16,877
----------- --------- ----------
$ -- -- --
=========== ========= ==========
F-14
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are presented below.
1997 1998
----------- ----------
Deferred tax assets:
Net operating loss carryforwards................ $ 3,029,026 7,109,861
Accrued revenues and expenses reported on cash
basis for tax purposes......................... 1,800,632 1,898,815
Valuation allowance............................. (2,417,790) (5,689,264)
----------- ----------
Total deferred tax assets..................... 2,411,868 3,319,412
----------- ----------
Deferred tax liabilities:
Capitalized database production costs expensed
as incurred for tax purposes................... (2,385,040) (3,280,124)
Other, net...................................... (26,828) (39,288)
----------- ----------
Total deferred tax liabilities................ (2,411,868) (3,319,412)
----------- ----------
Net deferred tax liability.................... $ -- --
=========== ==========
The valuation allowance at January 1, 1997 was $1,402,911. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the levels of historical
taxable losses and uncertainty regarding the generation of taxable income in
future years, management has established a valuation allowance equal to net
deferred tax assets at December 31, 1997 and 1998. At December 31, 1998, the
Company has Federal net operating loss carryforwards of approximately
$17,300,000 which begin to expire in 2010 and state net operating loss
carryforwards of approximately $19,000,000 which begin to expire in 2000.
(7) Stockholders' Equity
(a) Capital Stock
The Company has authorized 15,000,000 shares of stock consisting of
10,000,000 shares of $.001 par value common stock and 5,000,000 shares of $.001
par value preferred stock.
The Board of Directors of the Company may designate the relative rights and
preferences of the preferred stock when and if issued. Such rights and
preferences could include liquidation preferences, redemption rights, voting
rights and dividends and the shares could be issued in multiple series with
different rights and preferences. During 1997, the Board of Directors
designated and issued 931,044 shares of Series A Preferred and during May 1999
designated and issued 2,495,697 shares of Series C Preferred. Simultaneous with
the closing of the CRL Agreement discussed in note 5, the Company designated
and issued 439,589 shares of Series B Preferred to a related party in exchange
for the note payable to the related party. The Series B Preferred pays annual
dividends at the rate of $.7735 per share which accrue from day to day
beginning on November 24, 1997. On December 31, 2005 the Company shall redeem
all outstanding shares of the Series B Preferred Stock for $10 per share plus
unpaid dividends. As of May 25, 1999, there are 1,133,670 shares of
undesignated and unissued preferred stock.
F-15
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
The Series A Preferred, which has an initial liquidation value of
$3,000,000, and the Series C Preferred, which has an initial liquidation value
of $15,000,002, are convertible, at the option of the holder, into common stock
on a share for share basis and are entitled to receive non-cumulative dividends
ratably and on a parity with such dividends as may be paid on the common stock
as if such Series A Preferred and Series C Preferred shares had been converted
into common stock. The Series A Preferred and Series C Preferred are redeemable
at the option of the holder, beginning May 25, 2004, and will automatically
convert to common stock upon an initial public offering of the Company's common
stock.
As discussed in note 5, all of the common and preferred shareholders as well
as all of the warrant and common stock option holders have entered into a
shareholders' agreement which provides for the naming of directors by certain
shareholder groups and restricts the sale of stock by parties to the agreement.
(b) Stock Option Plan
In June, 1996 the Board of Directors and shareholders adopted the 1996 Stock
Option Plan ("Plan") which provides for the granting of options to purchase up
to 500,000 shares of the Company's common stock. Incentive stock options may be
granted to employees of the Company at an exercise price per share of not less
than the fair value per common share at the date of the grant. Nonqualified
stock options may be granted to employees, officers or directors of, or
consultants or advisers to, the Company at an exercise price per share as
determined by the Board of Directors. The options expire on dates as determined
by the Board of Directors, not to exceed 10 years from the date of grant.
Twenty-five percent of these options vest twelve months after the grant date,
and the remaining shares vest ratability over the forty-eight months
thereafter. At December 31, 1998, the weighted-average remaining contractual
life of outstanding options was 3.53 years.
The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 was 0.84, $1.09 and $0.36, respectively, on the date of
grant using the Black Scholes option pricing model with the following weighted-
average assumptions: no expected dividend yield; risk-free interest rate of
4.5% in 1996, 1997 and 1998; and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's pro forma net loss would not have been significantly different than
the loss reported in the statement of operations for 1997 or 1998.
Stock option activity during the periods indicated is as follows:
Number Weighted- Number
of average of shares
shares exercise price exercisable
------- -------------- -----------
Balance at December 31, 1995............. -- -- --
Granted................................ 105,000 $5.00
-------
Balance at December 31, 1996............. 105,000 5.00 --
Granted................................ 6,000 5.00
Forfeited.............................. (77,000) (5.00)
-------
Balance at December 31, 1997............. 34,000 5.00 7,000
Granted................................ 36,834 5.00
-------
Balance at December 31, 1998............. 70,834 5.00 14,781
======= ===== ======
F-16
LOISLAW.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and with respect to the
three months ended March 31, 1998 and 1999 is unaudited)
Under the terms of an employment agreement dated April 22, 1999 with
Beyland, the Company is required to grant options equal to 2.5% of its fully
diluted equity after giving effect to the financing transaction completed on
May 25, 1999 (see note 5) and accordingly granted an option to Beyland on May
25, 1999 for 220,727 shares at an option price of $5.81 per share. The option
will vest over a five year period with 50% vesting at the date of grant and the
remaining options vesting in equal monthly amounts over the remaining four
years. The option price will be determined by the Board of Directors at the
time such options are granted.
(c) Subsequent Event
The Company was originally incorporated in 1987 in Arkansas as Law Office
Information Systems, Inc. On June , 1999 the Company was reincorporated in
Delaware as Loislaw.com, Inc.
On June , 1999, the Board of Directors declared a -for-one stock split,
effected in the form of a stock dividend, which was distributed on , 1999.
All share and per share data in the financial statements have been restated to
give effect to the stock split. (Alternatively, if holding company or Delaware
company is to be formed, this transaction will need to be disclosed).
(8) Commitments and Contingencies
(a) Leases
The Company leases parking and office space under an operating lease with a
related party that expires in December, 2004. The lease is renewable for two
additional successive periods of five years each. Rent expense was
approximately $46,000, $50,000 and $66,000 for 1996, 1997 and 1998,
respectively. Effective May 5, 1999 the lease was amended to provide for annual
rentals of approximately $170,000 as a result of the expansion of space under
lease.
(b) Retirement Plan
Effective January 1, 1999, the Company adopted a 401(k) plan which covers
substantially all employees. Under the terms of the Plan, employees may
contribute up to 15% of their annual compensation, subject to Internal Revenue
Service limitations. The Company, at its discretion, may make matching
contributions of employee deferrals.
(c) Other
The Company is involved in certain claims and pending litigation arising
from the normal conduct of business. Based on the present knowledge of the
facts and, in certain cases, opinions of outside counsel, management believes
the resolution of these claims and pending litigation will not have a material
adverse effect on the financial position, results of operations or liquidity of
the Company.
F-17
- --------------------------------------------------------------------------------
Until , all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
[Loislaw.com Logo]
Prudential Securities
U.S. Bancorp Piper Jaffray
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
- --------------------------------------------------------------------------------
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all
expenses payable by Loislaw.com in connection with the registration of the
common stock offered hereby, other than underwriting discounts and commissions:
SEC Registration Fee................................................ $20,850
NASD Filing Fee..................................................... $ 8,000
Nasdaq National Market application and listing fees................. $ *
Accountants' fees and expenses...................................... $ *
Legal fees and expenses............................................. $ *
Printing and engraving expenses..................................... $ *
Transfer agent's and registrar's fees............................... $ *
Blue sky fees and expenses.......................................... $ *
Miscellaneous....................................................... $ *
-------
Total............................................................. $
=======
- --------
* To come
ITEM 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Article VI of our Certificate of Incorporation (Exhibit 3.1 hereto) and Article
VI of our Bylaws (Exhibit 3.2 hereto) provide for the indemnification of its
directors, officers and other authorized representatives to the maximum extent
permitted by the Delaware General Corporation Law. Section 145 empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director, officer or agent of the corporation
or another enterprise if serving at the request of the corporation. Depending
on the character of the proceeding, a corporation may indemnify against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such action,
suit or proceeding if the person indemnified acted in good faith and in a
manner he reasonably believed to be in or not opposed to, the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In the case of an action
by or in the right of the corporation, no indemnification may be made with
respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
court of chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Section 145 further provides that to the extent a director or officer
of a corporation has been successful in the defense of any action, suit or
proceeding referred to above or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Our Bylaws permit us to purchase insurance on behalf of any such person
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not we would have
the power to indemnify him against such liability under the applicable
provisions of our Bylaws. We currently carry directors and officers liability
insurance with policy limits of $ .
Prior to consummation of this offering, we will enter into indemnification
agreements with each of our directors and executive officers that provide for
indemnification and expense advances in addition to those provided for in our
certificate of incorporation and bylaws.
II-1
Reference is made to Section 8 of the underwriting agreement filed as
Exhibit 1.1 hereto, indemnifying the officers and directors of Loislaw.com
against certain liabilities.
ITEM 15. Recent Sales of Unregistered Securities
Issuance of Capital Stock.
In the three years preceding the filing of this registration statement, we
have issued and sold the following securities that were not registered under
the Securities Act:
Title and Amount of Name or Class of
Date of Sale Securities Sold Purchaser of Securities Consideration
------------ ------------------------ ------------------------ ---------------------
July 11, 1996........... 60,000 shares of common Johnnie L. Hernreich and $300,000
stock Larry Murray
April 23, 1997.......... 30,000 shares of common Johnnie L. Hernreich and $150,000
stock Larry Murray
November 20, 1997....... 439,589 shares of Series Melissa Parker Conversion of
B Redeemable Preferred $4,395,890 in
outstanding debt
November 24, 1997....... Warrant for the right to Dublind Investments, LLC Financial investment
purchase 365,346 shares services
of common stock
November 24, 1997....... 931,044 shares of Series Capital Resource $2,998,934.12
A Convertible Preferred Lenders III, L.P.
November 24, 1997....... Warrant for the right to Capital Resource (1)
purchase of 972,293 Lenders III, L.P.
shares of common stock
December 9, 1998........ 365,346 shares of common Dublind Investments, LLC $3,653.46
stock upon exercise of
warrant
February 9, 1999........ Warrant for the right to Capital Resource (2)
purchase of 100,403 Lenders III, L.P.
shares of common stock
February 9, 1999........ Warrant for the right to CRP Investment (2)
purchase of 118 shares Partners, LLC
of common stock
February 9, 1999........ Warrant for the right to Rowland T. Moriarity (2)
purchase of 1,570 shares
of common stock
March 10, 1999.......... Convertible Note Capital Resource $2,000,000 principal
Lenders III, L.P. amount of note
April 13, 1999.......... Convertible Note Capital Resource $2,000,000 principal
Lenders III, L.P. amount of note
May 7, 1999............. Convertible Note Capital Resource $1,000,000 principal
Lenders III, L.P. amount of note
May 19, 1999............ 1,056,616 shares of Capital Resource $10,566.16
common stock upon Lenders III, L.P.
exercise of warrant
May 25, 1999............ 857,509 shares of Series Capital Resource Conversion of notes
C Convertible Preferred Lenders III, L.P. totaling $5,000,000
in principal amount
II-2
Title and Amount of Name or Class of
Date of Sale Securities Sold Purchaser of Securities Consideration
------------ ------------------------ ----------------------- ---------------------
May 25, 1999............ 86,059 shares of common Dublind Partners, Inc. $500,002.79
stock
May 25, 1999............ 390,340 shares of Series Exeter Capital $2,267,875.40
C Convertible Preferred Partners IV, L.P.
May 25, 1999............ 793,680 shares of Series Sandler Capital $4,982,127.29
C Convertible Preferred Partners IV, L.P.
May 25, 1999............ 325,080 shares of Series Sandler Capital $1,888,714.80
C Convertible Preferred Partners IV, FTE, L.P.
May 25, 1999............ 129,088 shares of Series Mark O. Beyland $750,001.28
C Convertible Preferred
- --------
(1) Loislaw.com issued a warrant to purchase 972,293 shares of its common stock
to Capital Resource Lenders III at a purchase price of $.01 per share in
connection with Capital Resource Lenders III, L.P.'s purchase of certain
12.5% Senior Subordinated Notes due 2003 under a Senior Subordinated Note
and Securities Purchase Agreement dated November 24, 1997 between
Loislaw.com and Capital Resource Lenders III, L.P., as amended.
(2) Loislaw.com issued warrants to purchase 100,403, 118 and 1,570 shares of
common stock to Capital Resource Lenders III, L.P., CRP Investment Partners
LLC and Rowland T. Moriarity, respectively, at a purchase price of $.01 per
share in connection with the execution of Amendment No. 4 to the Senior
Subordinated Note and Securities Purchase Agreement dated as of November
24, 1997 between Loislaw.com and Capital Resource Lenders III, L.P., as
amended.
No underwriters were involved in the foregoing sales of securities. Except
for the sales made on May 19 and May 25, 1999, such sales were made in reliance
upon an exemption from the registration provisions of the Securities Act set
forth in Section 4(2) thereof relative to sales by an issuer not involving any
public offering or the rules and regulations thereunder. The sales made on May
19 and May 25, 1999 were made in reliance upon the exemption from the
registration process provided by Rule 506 of the Securities Act. All of the
foregoing securities are deemed restricted securities for purposes of the
Securities Act.
Grants of Stock Options and Warrants.
From November 24, 1996 to June 18, 1999, we granted incentive stock options
to purchase an aggregate of 291,561 shares of common stock to employees and
officers of Loislaw.com under the 1996 Stock Option Plan at exercise prices
ranging from $5.00 to $5.81. These options vest over a period of time following
their respective dates of grant. These issuances were exempt from registration
under Section 4(2) of, and Rule 701 promulgated under, the Securities Act of
1933, as amended.
In addition, on January 1, 1998 and on February 1, 1999, Loislaw.com granted
warrants to three investors to purchase an aggregate of 1,074,384 shares of
common stock of Loislaw.com at an exercise price of $.01 per share. These
issuances were exempt from registration under Section 4(2) of, and Rule 506
promulgated under, the Securities Act of 1933, as amended. On May 19, 1999, one
investor exercised its warrants and purchased a total of 1,056,616 shares of
common stock of Loislaw.com.
II-3
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement
*2.1 Agreement and Plan of Merger, dated as of June 16, 1999
*2.2 Certificate and Articles of Merger of Law Office Information Systems,
Inc. (an Arkansas Corporation) with and into Loislaw.com, Inc. (a
Delaware Corporation).
*3.1 Certificate of Incorporation of Loislaw.com, as filed with the
Secretary of State of Delaware on June 16, 1999.
*3.2 Bylaws of Loislaw.com
4.1 Specimen Certificate for shares of common stock
*4.2 Amended and Restated Stockholders' Agreement, dated as of May 25, 1999
by and among Loislaw.com and certain stockholders
*4.3 Amended and Restated Registration Rights Agreement, dated as of May
25, 1999 by and among Loislaw.com and certain stockholders
5.1 Opinion of Thompson & Knight, P.C.
*10.1 1996 Stock Option Plan
*10.2 Form of Employment Agreement by and between Loislaw.com and Kyle D.
Parker
*10.3 Form of Employment Agreement by and between Loislaw.com and Mark O.
Beyland
*10.4 Reimbursement Agreement by and among Kyle D. Parker, as Trustee for
The Parker Trust, Melissa Ann Parker and Capital Resource Lenders III,
L.P. dated as of November 24, 1997, as amended on June 17, 1999.
*10.5 Employment Agreement, effective as of July 2, 1996, by and between
Loislaw.com and W. Clark Wigley
*10.6 Corporate License and Services Agreement, effective as of February 18,
1998, by and between Loislaw.com and Verity, Inc., as amended
*10.7 Credit Agreement between Loislaw.com and Fleet National Bank, N.A.,
dated August 20, 1998
*10.8 First Amendment to Credit Agreement, by and between Loislaw.com and
Fleet National Bank, N.A., dated December 31, 1998
*10.9 Second Amendment and Waiver to Credit Agreement, by and between
Loislaw.com and Fleet National Bank, N.A., dated April 30, 1999
*10.10 Third Amendment to Credit Agreement, by and between Loislaw.com and
Fleet National Bank, N.A., dated May 25, 1999
*10.11 Form of Indemnity Agreement with a schedule of pending director and
officer signatories.
*10.12 Lease Agreement by and between Loislaw.com and the Parker Law Office
dated May 5, 1999.
10.13 Agreement by and between Loislaw.com and Pacific Data Conversion
Corporation, dated December 29, 1998.
10.14 Agreement by and between Loislaw.com and Infocon, dated July 1, 1998
10.15 Master Services Agreement by and among Loislaw.com, Digital Publishing
International Ltd. and Innodata Corporation, dated June 10, 1998
10.16 Employee Stock Purchase Plan.
10.17 1999 Nonqualified Directors Stock Option Plan for Non-Employee
Directors
*10.18 Senior Subordinated Note and Securities Purchase Agreement, dated as
of November 24, 1997, by and between Loislaw.com and Capital Resource
Lenders III, L.P., as amended.
II-4
Exhibit
Number Description
------- -----------
*10.19 Internet Services General Agreements by and between Loislaw.com and
AT&T, dated as of December 21, 1998.
*10.20 AT&T Contract Tariff Order Form by and between AT&T Corp. and
Loislaw.com, dated as of April 6, 1999.
*10.21 Agreement by and between AT&T Corp. and Loislaw.com for AT&T
WorldNetSM Services, dated as of September 25, 1995.
*10.22 Form of Customer Subscription Agreement.
*21.0 Subsidiaries of Loislaw.com
23.1 Consent of Thompson & Knight, P.C. (included in its opinion filed as
Exhibit 5 hereto)
*23.2 Consent of KPMG LLP
*24.1 Power of Attorney (included on signature page of the Registration
Statement as initially filed)
*27.1 Financial Data Schedule
- --------
* Filed herewith
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not required,
are not applicable, or the information is included in the Financial Statements
or Notes thereto.
ITEM 17. Undertakings
Loislaw.com hereby undertakes to provide to the underwriters, at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Loislaw.com pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer or controlling person of Loislaw.com in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Loislaw.com hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Loislaw.com pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Loislaw.com has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Van Buren,
State of Arkansas, on June 18, 1999.
Law Office Information Systems, Inc.
/s/ Kyle D. Parker
By: _________________________________
Kyle D. Parker
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose names
appear below hereby appoint and constitute Kyle D. Parker and Mark O. Beyland,
and each of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute any and all amendments to the
within Registration Statement, and to sign any and all registration statements
relating to the same offering of securities as this Registration Statement that
are filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended,
and to file the same, together with all exhibits thereto, with the Securities
and Exchange Commission, the National Association of Securities Dealers, Inc.,
and such other agencies, offices and persons as may be required by applicable
law, granting unto each said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each said attorney-in-fact and agent may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons on June 18,
1999 in the capacities indicated:
Signature Title Date
--------- ----- ----
/s/ Kyle D. Parker Chairman of the Board and June 18, 1999
______________________________________ Chief Executive Officer
Kyle D. Parker (principal executive
officer)
/s/ Mark O. Beyland President, Chief Financial June 18, 1999
______________________________________ Officer and Director
Mark O. Beyland
/s/ Pamela G. Rogers Controller and chief June 18, 1999
______________________________________ accounting officer
Pamela G. Rogers
/s/ Robert C. Ammerman Director June 18, 1999
______________________________________
Robert C. Ammerman
/s/ Randy Laney Director June 18, 1999
______________________________________
D. Randy Laney
/s/ Hannah C. Stone Director June 18, 1999
______________________________________
Hannah C. Stone
II-6
SCHEDULE II
LOISLAW.COM, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1996, 1997 and 1998
Additions
Balance at charged to Bad debts Bad Balance
beginning costs and written debts at end
of year expenses off recovered of year
---------- ---------- --------- --------- -------
1996:
Allowance for doubtful
accounts................... $ -- 525,000 -- -- 525,000
======== ======= ======== ====== =======
1997:
Allowance for doubtful
accounts................... $525,000 94,381 (244,381) -- 375,000
======== ======= ======== ====== =======
1998:
Allowance for doubtful
accounts................... $375,000 -- (279,244) 29,218 124,974
======== ======= ======== ====== =======
S-1