SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002 or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________
Commission file number 0-26548
Legal Research Center, Inc.
(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-1680384
(State Or Other Jurisdiction (IRS Employer
Of Incorporation) Identification No.)
310 Fourth Avenue South, Suite 1100, Minneapolis, MN 55415-1005
(Address Of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 612/332-4950
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
3,290,392 shares of Common Stock as of November 12, 2002
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Condensed Balance Sheets
September 30, 2002 and December 31, 2001........................ 2
Condensed Statements of Operations
Three Months and Nine Months Ended September 30, 2002 and 2001.. 3
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001................... 4
Notes to Condensed Financial Statements .......................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 5
Item 4 Controls and Procedures .......................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 8
Item 6. Exhibits and Reports on Form 8-K......................... 9
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
LEGAL RESEARCH CENTER, INC.
CONDENSED BALANCE SHEETS
(unaudited)
September 30 December 31,
ASSETS 2002 2001
- ------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 24,235 $ 750,550
Certificates of deposit 665,000 855,000
Accounts receivable 600,286 954,727
Deferred income taxes 73,600 284,700
Other 64,882 101,016
----------- -----------
TOTAL CURRENT ASSETS 1,428,003 2,945,993
----------- -----------
FURNITURE AND EQUIPMENT 149,766 140,745
Less accumulated depreciation 83,011 61,072
----------- -----------
66,755 79,673
----------- -----------
OTHER ASSETS
Development costs 541,182 177,715
Investment in Integrity Interactive Corporation 500,000 500,000
Deferred income taxes 493,100 12,800
----------- -----------
1,534,282 690,515
----------- -----------
$ 3,029,040 $ 3,716,181
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 64,110 $ 46,852
Accrued expenses 89,158 179,337
Deferred revenue 30,000 --
----------- -----------
TOTAL CURRENT LIABILITIES 183,268 226,189
----------- -----------
DEFERRED RENT EXPENSE 78,185 44,256
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; (authorized 20,000,000 shares;
issued - 3,290,392 and 3,501,558 shares, respectively) 32,904 35,016
Additional paid-in capital 6,585,521 6,882,731
Accumulated deficit (1,884,588) (1,505,761)
Notes receivable from officers and directors (1,966,250) (1,966,250)
-----------
2,767,587 3,445,736
----------- -----------
$ 3,029,040 $ 3,716,181
=========== ===========
See Notes to Condensed Financial Statements
LEGAL RESEARCH CENTER, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2002 2001 2002 2001
========================= =========================
REVENUE $ 566,646 $1,144,936 $ 1,599,814 $4,347,459
----------- ---------- ----------- ----------
DIRECT OPERATING COSTS
Compensation and benefits 218,439 502,804 568,801 2,056,386
Other 39,548 57,960 136,231 214,208
----------- ---------- ----------- ----------
257,987 560,764 705,032 2,270,594
----------- ---------- ----------- ----------
GROSS PROFIT 308,659 584,172 894,782 2,076,865
----------- ---------- ----------- ----------
OTHER OPERATING COSTS
Sales and marketing 317,281 287,619 883,504 959,790
General and administrative 219,651 205,084 634,136 603,961
----------- ---------- ----------- ----------
536,932 492,703 1,517,640 1,563,751
----------- ---------- ----------- ----------
INCOME (LOSS) FROM OPERATIONS (228,273) 91,469 (622,858) 513,114
INTEREST INCOME 4,309 19,155 19,969 59,379
----------- ---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (223,964) 110,624 (602,889) 572,493
INCOME TAX EXPENSE (BENEFIT) (95,300) 45,200 (256,500) 222,000
----------- ---------- ----------- ----------
NET INCOME (LOSS) $ (128,664) $ 65,424 $ (346,389) $ 350,493
=========== ========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (0.06) $ 0.03 $ (0.15) $ 0.14
=========== ========== =========== ==========
Diluted $ (0.06) $ 0.02 $ (0.15) $ 0.13
=========== ========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES OUSTANDING
Basic 2,250,392 2,536,287 2,336,612 2,549,178
=========== ========== =========== ==========
Diluted 2,250,392 2,712,041 2,336,612 2,741,645
=========== ========== =========== ==========
See Notes to Condensed Financial Statements
LEGAL RESEARCH CENTER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months
Ended September 30,
2002 2001
----------------------
OPERATING ACTIVITIES
Net income (loss) $(346,389) $ 350,493
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 21,939 14,782
Amortization of development costs -- 25,849
Deferred rent expense 33,929 22,128
Deferred income taxes (256,500) 222,000
Changes in operating assets and liabilities:
Accounts receivable 354,441 78,503
Other current assets 36,134 14,224
Accounts payable 17,258 (61,733)
Accrued expenses (90,179) (83,928)
Deferred revenue 30,000 --
--------- ---------
Net cash provided (used) by operating activities (199,367) 582,318
--------- ---------
INVESTING ACTIVITIES
Development costs (363,467) --
Redemption of certificates of deposit 190,000 --
Purchases of furniture and equipment (9,021) (73,932)
--------- ---------
Net cash used by investing activities (182,488) (73,932)
--------- ---------
FINANCING ACTIVITIES
Redemption of Legal Research Center stock (344,460) (90,008)
Proceeds from exercise of stock options -- 4,916
--------- ---------
Net cash used by financing activities (344,460) (85,092)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (726,315) 423,294
CASH AND CASH EQUIVALENTS
Beginning of period 750,550 575,817
--------- ---------
End of period $ 24,235 $ 999,111
========= =========
See Notes to Condensed Financial Statements
LEGAL RESEARCH CENTER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(unaudited)
Basis Of Presentation: The interim condensed financial statements are unaudited,
and in the opinion of management reflect all adjustments necessary for a fair
presentation of results of such periods. All such adjustments are of a normal
recurring nature. The results of operations for any interim period are not
necessarily indicative of results for a full fiscal year.
The condensed balance sheet as of December 31, 2001, is derived from the audited
financial statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America. The notes
accompanying the financial statements in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2001, include accounting policies and
additional information pertinent to an understanding of both the December 31,
2001, balance sheet and the interim condensed financial statements. The
information has not changed substantially except as a result of normal
transactions in the nine months ended September 30, 2002, and as discussed in
the following notes.
Deferred Revenue: Represents amounts received from customers for projects that
have not been completed and, accordingly, revenue has not been recognized for
financial statement purposes.
Major Customers: One customer accounted for 50% of the Company's revenue for the
quarter ended September 30, 2002. The same customer accounted for 68% of the
Company's revenue for the quarter ended September 30, 2001. For the nine months
ended September 30, 2002, one company accounted for 44% of the Company's
revenue, the same company accounted for 72% of the Company's revenue for the
comparable period in 2001. A single large multi-year project for that customer
concluded at the end of 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the financial statements and notes that appear
elsewhere in this Report and the Company's Annual Report for 2001 on Form
10-KSB.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers that statements
contained herein, other than historical data, may be forward-looking and subject
to risk and uncertainties including, but not limited to the continuation of
revenue through the Company's strategic alliances and the successful development
of other new business. The following important factors could cause the Company's
actual results to differ materially from those projected in forward-looking
statements made by, or on behalf of, the Company:
o Failure of the Company or its partners to successfully expand its
market share and sell products and services.
o Company's inability to produce and deliver its products and services
at margins sufficient to cover operating costs.
o Company's dependence on a major customer or customers.
Investors may suffer a loss of liquidity in the shares and the Company may have
difficulty raising funds in the capital markets. Although the Company
anticipates that its common stock will trade on the Nasdaq "bulletin board" or
in the local over-the-counter market, there can be no assurance that such a
market will develop or be maintained.
The Company's revenue has historically been derived from conducting analytical
research and writing on a non-recurring basis for its customers. Historically,
the Company has experienced a seasonal fluctuation in revenue with second and
third quarters being the slowest quarters of the year and the last quarter being
the strongest. The Company has developed and implemented programs designed to
attract customers to enter into long-term relationships to provide greater
consistency in quarterly revenue.
RESULTS OF OPERATIONS
Revenue: Revenue decreased by $578,290 or 50.5%, to $566,646 for the three month
period ended September 30, 2002, over the same period in 2001. For the
nine-month period, revenue decreased by $2,747,645 or 63%. The decrease is
primarily attributable to decreases in research and writing services for
corporate and private clients following the events of September 11, which
preceded a downturn in legal service spending.
Direct Operating Costs: Direct operating costs for compensation and benefits
include hourly contract fees for independent research attorneys as well as
salaries and hourly compensation of staff research attorneys, document
production and support personnel. Other direct operating costs include outside
research fees and services, royalty fees for association referrals, computer
database charges, project data conversion fees, photocopying, and document
retrieval expense.
Direct operating costs decreased 54% or $302,777 for the three months ended
September 30, 2002, from the same period in 2001. For the nine-month period,
direct operating costs decreased $1,565,562 or 69%. Compensation and benefits
decreased 72% and other operating expense decreased 36%. The decrease in
operating costs is due to the decrease in revenue.
Direct operating costs expressed as a percentage of revenue decreased 3.5% to
45.5% for the three months ended September 30, 2002, from the same period in
2001. For the nine-month period, direct operating costs as a percentage of
revenue decreased from 52% to 44%. The decrease was due to a decrease in
lower-margin higher-volume work from the Company's major customer as well as an
increase in higher-margin compliance training sales.
Gross Profit: Gross profit for the three months ended September 30, 2002,
decreased $275,513 or 47% to $308,659 from a gross profit of $584,172 for the
comparable period for 2001. As a percentage of revenue, gross profit increased
3.5% to 54.5% for the three months ended September 30, 2002, from the same
period in 2001.
For the nine months ended September 30, 2002, gross profit decreased $1,182,083
or 57% to $894,782 from a gross profit of $2,076,865 for the comparable period
for 2001. As a percentage of revenue, gross profit increased from 48% to 56% for
the nine months ended September 30, 2001. The increase in gross profit is
attributable to a decrease in labor costs and an increase in higher-margin
compliance training sales.
Other Operating Costs: Other operating costs include compensation of officers,
sales and corporate staff, advertising and direct marketing expenditures and
general corporate overhead, including depreciation. Other operating costs
increased by $44,229 or 9% for the three months ended September 30, 2002, from
the same period in 2001. For the nine-month period, other operating costs
decreased $46,111 or 3% from the comparable period in 2001. The decrease is due
to a decrease in direct mail and other marketing expenses offset by an increase
in administrative costs and professional fees.
Earnings (Losses) Before Interest, Taxes, Depreciation and Amortization: Loss
before interest, taxes, depreciation and amortization was ($220,830) or ($.10)
per share for the three months ended September 30, 2002, compared to earnings of
$98,512 or $.04 (basic) per share for the comparable period in 2001.
Interest Income: Interest income decreased $14,846 or 77.5% for the three months
ended September 30, 2002, from the comparable period in 2001. For the nine-month
period, interest income decreased $39,410 or 66% from the same period in 2001.
The decrease is a result of decreased funds in interest-bearing accounts and
declining interest rates in 2002.
Income Tax Expense (Benefit): Income tax benefit was ($95,300) for the three
months ended September 30, 2002, compared to income tax expense of $45,200 for
the three months ended September 30, 2001. The tax benefit is due to a
($223,964) loss before income taxes in third quarter 2002. For the nine-month
period ended September 30, 2002, income tax benefit was ($256,500) compared to
income tax expense of $222,000 for the comparable period in 2001.
Net Income (Loss): The Company lost ($128,664) or ($.06) basic and diluted per
share for the three months ended September 30, 2002, compared to income of
$65,424 or $.03 basic and $.02 diluted per share for the comparable period in
2001. For the nine-month period ended September 30, 2002, the Company lost
($346,389) or ($.15) basic and diluted per share compared to income of $350,493,
or $.14 basic and $.13 diluted in 2001. The decrease in net income for the nine
months ended September 30, 2002, is the result of a downturn in the economy and
decreased demand for legal research and writing.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2002, the Company had cash and cash equivalents and
certificates of deposit of $689,235 and working capital of $1,244,735.
Net cash provided (used) by operating activities was ($199,367) for the
nine months ended September 30, 2002 compared to $582,318 for the comparable
period in 2001.
Investing activities used $182,488 in the nine months ended September 30,
2002. The investment consisted primarily of development costs of $363,467 offset
by the redemption of certificates of deposit totaling $190,000.
Financing activities used $344,460 for the purchase of the Company's stock
during the nine months ended September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
a. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Management of the Company, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, have evaluated the Company's
disclosure controls and procedures pursuant to Rule 13a-14 promulgated by the
Securities and Exchange Commission within 90 days of the date of filing of this
Form 10-Q, and have determined that the disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in the Company's periodic filings with the
Securities and Exchange Commission.
b. CHANGES IN INTERNAL CONTROLS.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their evaluation. There were no significant deficiencies or material
weaknesses identified in the system of internal controls.
Part II - Other Information
Item 1. Legal Proceedings
LAWFINDERS LITIGATION
On June 29, 1998, the Company was sued in Dallas, Texas by Lawfinders, Inc.
("Lawfinders"), a competitor of the Company, which alleged that the Company had
misappropriated Lawfinders' proprietary information. Lawfinders sought injuctive
relief and unspecified damages.
Commencing in the summer of 1997 and ending in early 1998, the Company was
engaged in discussions with Lawfinders about a possible business combination.
Those discussions failed to produce an agreement between the parties.
Lawfinders commenced suit in state court and obtained a temporary order
restraining the Company from engaging in certain practices in connection with
its appellate brief business. The Company removed the action to Federal Court
and, on November 4, 1998, after consideration of the evidence and the parties'
briefs, the Federal Court dissolved the temporary restraining order and because
it found that it is unlikely that Lawfinders would be successful on the merits
of its action, denied Lawfinders a preliminary injunction.
Lawfinders' subsequent appeal of that decision was likewise denied. The Company
asked the court for, and was granted, summary judgment on all counts except
those that were dismissed with Lawfinders' agreement. Lawfinders appealed the
summary judgment.
In a unanimous opinion filed on July 26, 2002, the United States Court of
Appeals for the Fifth Circuit affirmed the summary judgment of the District
Court dismissing Lawfinders' remaining claims, effectively ending the four-year
dispute. In essence, the courts agreed with LRC that Lawfinders failed to offer
any evidence to support any of its claims. The Company's costs of defending the
action, including attorneys' fees, have been covered by the Company's general
liability insurance carrier.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certification
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Legal Research Center, Inc., (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Christopher R. Ljungkull, Chief [Executive/Financial] Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1945; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
By: /s/ Christopher R. Ljungkull
---------------------------------
November 13, 2002
(b) Reports on Form 8-K
none
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LEGAL RESEARCH CENTER, INC.
Dated: November13, 2002 By: /s/ Christopher R. Ljungkull
-------------------------------
Christopher R. Ljungkull
Chief Executive Officer
Certification of
Chief Executive Officer
Of Legal Research Center, Inc.
I, Christopher R. Ljungkull, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Legal Research Center,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
LEGAL RESEARCH CENTER, INC.
Dated: November 13, 2002 By: /s/ Christopher R. Ljungkull
----------------------------------
Christopher R. Ljungkull
Chief Executive Officer
Certification of
Chief Financial Officer
Of Legal Research Center, Inc.
I, Christopher Ljungkull, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Legal Research Center,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls, and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
LEGAL RESEARCH CENTER, INC.
Dated: November 13, 2002 By: /s/ Christopher R. Ljungkull
---------------------------------
Christopher R. Ljungkull
Chief Financial Officer