-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M1cb31cEBUnPZf7xHUgdRfT5WwNbQphwhEHYSrynBWM6mRwbldm0lrMAp66IhCKB u44qx/qEf7ukjBrR2rqpFw== 0000930661-99-002232.txt : 20000211 0000930661-99-002232.hdr.sgml : 20000211 ACCESSION NUMBER: 0000930661-99-002232 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOISLAW COM INC CENTRAL INDEX KEY: 0001088820 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 750655999 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-81107 FILM NUMBER: 99719190 BUSINESS ADDRESS: STREET 1: 105 NORTH 28TH STREET CITY: VAN BUREN STATE: AK ZIP: 72956 BUSINESS PHONE: 5014715581 MAIL ADDRESS: STREET 1: 105 NORTH 28TH STREET CITY: VAN BUREN STATE: AK ZIP: 72956 S-1/A 1 AMENDMENT NO. 4 TO FORM S-1 As filed with the Securities and Exchange Commission on September 28, 1999 Registration No. 333-81107 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- Amendment No. 4 To FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ---------------- 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) ---------------- 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) ---------------- 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) ---------------- Copies to: Kenn W. Webb, Esq. Lawrence S. Wittenberg, Esq. Thompson & Knight LLP Testa, Hurwitz & Thibeault, LLP 1700 Pacific Avenue, Suite 3300 125 High Street Dallas, Texas 75201 Boston, Massachusetts 02110 (214) 969-1700 (617) 248-7000 ---------------- 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. [_] 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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 + +an offer to buy these securities in any state where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION -- SEPTEMBER 28, 1999 PROSPECTUS - -------------------------------------------------------------------------------- 3,980,000 Shares [LOGO] Loislaw.com, Inc. Common Stock - -------------------------------------------------------------------------------- Loislaw.com, Inc. is offering 3,900,000 shares of common stock and Douglas W. Parker, Sr. is offering 80,000 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 legal and related information to lawyers and law firms over the Internet and on CD-ROM. It is anticipated that the public offering price will be between $10.00 and $12.00 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 Douglas W. Parker, Sr. ....................... $ $
See "Risk Factors" on pages 9 to 16 for factors that you should consider before investing in the shares of Loislaw.com. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- The underwriters may purchase up to 597,000 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 PrudentialSecurities.com , 1999 TABLE OF CONTENTS
Page ---- Prospectus Summary................... 4 Risk Factors......................... 9 Forward-Looking Statements........... 17 Use of Proceeds...................... 18 Dividend Policy...................... 18 Dilution............................. 19 Capitalization....................... 20 Selected Financial Data.............. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23
Page ---- Business............................ 33 Management.......................... 45 Certain Transactions................ 54 Principal and Selling Stockholders.. 55 Description of Capital Stock........ 57 Shares Eligible for Future Sale..... 59 Underwriting........................ 61 Legal Matters....................... 62 Experts............................. 62 Available Information............... 63 Index to Financial Statements....... F-1
- ------------------------------------------------------------------------------- You should rely only on the information contained 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. 3 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. Loislaw.com 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 1,300 databases that we estimate to contain over 5.5 million documents. These databases consist 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- searching software programs that automatically and continuously search our web site and notify our users when new documents match their search criteria. Our news feeds provide over 100,000 news articles a month from more than 400 domestic and international sources. Our legal information is available through our web site at loislaw.com for an annual subscription price. We have historically targeted our marketing efforts to small law firms that have fewer than 20 lawyers. Small law firms typically require legal information for the states in which they practice, while large law firms typically require legal 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 dating back to 1899 and all federal circuit courts of appeal dating back to 1971. In addition, with the completion of databases for 14 new states during the first eight months of 1999, we currently provide comprehensive legal information for 34 of the 50 states. The lawyers in these 34 states represent over 88% of the total number of practicing lawyers in small U.S. law firms. 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. As a result of this trend, we have de-emphasized our CD-ROM products in recent periods by implementing a focused marketing and sales effort for our web-based products. Since July 1999, we have offered new subscriptions only for our web-based products. If requested, we deliver CD-ROM discs for the costs of shipping and handling to subscribers of our web-based products. During the month of July 1999, there were more than 2.2 million searches on our web site compared to 225,000 during July 1998. At June 30, 1999, we had a total of 7,844 customers of which 3,132 purchased our web-based 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 $2.8 million in the six months ended June 30, 1999, and incurred a net loss of $6.6 million in 1998 and $7.6 million in the six months ended June 30, 1999. Through June 30, 1999, our accumulated deficit totaled $19.5 million. Our Market The market for web-based and other on-line legal, tax and public record information is large and growing. According to Simba Information, Inc.'s Web/Online Services 1998-2002: Market Analysis & Forecast, 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. We cannot assure you that this projected growth will be achieved. 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. 4 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 in a format 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. Our History and Offices Loislaw.com was incorporated in Arkansas as Law Office Information Systems, Inc. on October 13, 1987 and reincorporated in 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. Intellectual Property 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. 5 The Offering Shares offered by Loislaw.com................ 3,900,000 shares Shares offered by Douglas W. Parker, Sr. .... 80,000 shares Total shares outstanding after this offering.................................... 20,939,524 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. Nasdaq National Market symbol................ LOIS
The common stock to be outstanding after the offering is based on the shares outstanding as of September 28, 1999 and does not include the following: . 1,500,000 shares of common stock reserved for issuance under our employee stock option plan, of which options to purchase 583,122 shares are currently outstanding and options covering 386,500 shares are to be granted upon the completion of this offering at the initial public offering price; . 320,000 shares of common stock reserved for issuance under our stock option plan for non-employee directors, including 120,000 shares that will be covered by options we intend to grant with exercise prices equal to the initial public offering price; . 300,000 shares reserved for issuance under our employee stock purchase plan; and . 35,536 shares reserved for issuance upon the exercise of outstanding warrants. Unless otherwise indicated, all information contained in this prospectus: . reflects a two-for-one stock split effected on July 23, 1999; . reflects 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 reflect the issuance of 597,000 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. 6 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.
Six Months Year Ended December 31, Ended June 30, ------------------------- ---------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (unaudited) (in thousands, except per share data) Statement of Operations Data: Revenues: Web-based products..... $ 28 $ 208 $ 842 $ 272 $ 1,171 CD-ROM products........ 1,855 3,157 3,182 1,516 1,621 Other(1)............... -- -- 1,000 353 -- ------- ------- ------- ------- ------- Total revenues.......... 1,883 3,365 5,024 2,141 2,792 ------- ------- ------- ------- ------- Total operating expenses............... 5,238 5,547 10,142 4,457 9,066 ------- ------- ------- ------- ------- Loss from operations.... (3,355) (2,182) (5,118) (2,316) (6,274) Other income (expense).. (249) (461) (1,507) (642) (1,303) ------- ------- ------- ------- ------- Loss before income taxes ....................... (3,604) (2,643) (6,625) (2,958) (7,577) Income tax benefit...... (52) -- -- -- -- ------- ------- ------- ------- ------- Net loss................ (3,552) (2,643) (6,625) (2,958) (7,577) Accrued preferred stock dividends and accretion on redeemable preferred stock and common stock warrants............... -- (34) (500) (211) (462) ------- ------- ------- ------- ------- Net loss applicable to common stock........... $(3,552) $(2,677) $(7,125) $(3,169) $(8,039) ======= ======= ======= ======= ======= Net loss per share-- basic and diluted...... $ (0.50) $ (0.37) $ (0.99) $ (0.44) $ (0.95) ======= ======= ======= ======= ======= Weighted average common shares outstanding-- basic and diluted...... 7,057 7,163 7,222 7,180 8,424 ======= ======= ======= ======= ======= Year Ended Six Months December 31, Ended June 30, ---------------- ---------------- 1997 1998 1998 1999 ------- ------- ------- ------- (in thousands) Other Data (unaudited): Web-based new sales(2)........... $ 485 $ 1,985 $ 733 $ 1,780 CD-ROM new sales(2).............. 2,370 2,081 1,088 514 ------- ------- ------- ------- Total new sales(2).............. $ 2,855 $ 4,066 $ 1,821 $ 2,294 ======= ======= ======= =======
- -------- (1) Other revenues in 1998 were from producing customized databases for a third party. (2) New sales represent the total payments to be received by us over the lives of the subscription contracts from all new product sales to our new and existing customers during the period. New sales do not include renewals of existing subscriptions to our products. 7 The Pro Forma column included in the Balance Sheet Data adjusts the numbers in the Actual column to give effect to: . the conversion of 931,044 shares of Series A convertible preferred stock and 2,495,697 shares of Series C convertible preferred stock into 6,853,482 shares of common stock immediately upon completion of this offering; and . the elimination of the redemption features on 2,113,232 shares of common stock and outstanding warrants for the purchase of 35,536 shares of common stock. The Pro Forma As Adjusted column included in the Balance Sheet Data adjusts the numbers in the Actual column to give effect to the pro forma adjustments described in the preceding paragraph and: . net proceeds from the sale of 3,900,000 shares of common stock at an assumed public offering price of $11.00 per share by us in this offering after deducting the underwriting discounts and commissions and estimated offering expenses; . our application of $4.9 million to redeem 439,589 shares of Series B redeemable preferred stock and accrued dividends on this stock and $14.6 million to repay outstanding debt with a portion of the net proceeds of this offering; . the loss on extinguishment of debt attributable to the write-off of deferred loan costs in the amount of $4.0 million as a result of repaying the related debt; and . the payment of $250,000 to Dublind Partners, Inc. for financial advisory services.
As of June 30, 1999 ------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) Balance Sheet Data (unaudited): Cash and cash equivalents................. $ 3,275 $ 3,275 $ 22,575 Working capital (deficit)................. (15,543) (15,543) 18,314 Total assets.............................. 30,089 30,089 45,371 Total debt (including capital lease obligations)............................. 14,586 14,586 29 Deferred revenues......................... 4,006 4,006 4,006 Redeemable equity securities.............. 25,324 4,940 -- Total stockholders' equity (deficit)...... (18,307) 2,077 36,856
8 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 $3.6 million in 1996, $2.6 million in 1997, $6.6 million in 1998 and $7.6 million in the six months ended June 30, 1999. These losses have resulted principally from expenses related to database costs and selling and 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 June 30, 1999, we had an accumulated deficit of $19.5 million. The competition in our industry is intense, our principal competitors have significantly greater resources than we do, and this competition may cause us to lose customers and prevent us from attracting new customers. 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. While we have provided legal information since 1987, LEXIS-NEXIS has been in operation for over 25 years and West Group has been in operation for over 100 years. Our competitors also have greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. 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 Group have significant penetration in the large law firm market, a market in which we intend to compete. Also, both LEXIS-NEXIS and West Group maintain web sites that offer access to their legal databases. Although all of our legal information is in hypertext markup language, which is the standard format language used on the Internet, LEXIS-NEXIS and West Group are in the process of converting their legal information into hypertext mark-up language, which may enable them to better serve their customers. In addition, we compete with other 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 quarterly results of operations may fluctuate due to the factors listed below. These fluctuations could result in a lower price for our common stock. Our quarterly results may be affected by 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; . variations in spending patterns by lawyers; . other business interruptions; 9 . 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; . 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, if any, 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 may require additional capital in the future which may not be available to us. We may need to raise additional funds through public or private debt or equity financing. Adequate funds may not be available when needed or may not be available on favorable terms. If we raise additional funds by issuing equity securities, dilution to existing stockholders may result. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business. Our future capital requirements depend upon many factors, including, but not limited to: .our costs to develop our legal databases; .the rate at which we expand our operations; .the extent to which we develop and upgrade our technology; .the occurrence, timing, size and success of acquisitions; and .the response of competitors to our service offerings. We could be exposed to legal liability for inaccuracies in the information we provide because lawyers rely on the integrity of our databases when conducting their legal research. Although we perform extensive quality control tests on information we include in our legal databases, we cannot achieve 100% accuracy. We may be subject to claims by our customers based on negligence or other theories relating to the legal 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. 10 Rapid growth in our business due to an increase in the number of customers subscribing to our web-based products could strain our operational and financial resources causing us to lose customers and increase our operating expenses. 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. Our inability to manage growth effectively or to maintain the quality of our products and services could cause us to lose customers and could materially increase our operating expenses. 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. 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, we may not be able to attract new customers and increase our revenues. The large law firm market is currently dominated by West Group and LEXIS- NEXIS, and we have very little experience in marketing our products to large law firms, corporate legal departments and consumer markets, and thus our inability to penetrate these markets could impede our growth. Substantially all of our revenues to date have been generated by sales of our products to small law firms having 20 or fewer lawyers. Our business strategy 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, our failure to complete our comprehensive state law databases for all 50 states by December 31, 1999 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 could impede our growth. The loss of our relationships with courts and legislatures that provide us with court decisions, statutes and other legal information within hours of being released could adversely affect our business by increasing the time and expense required to convert legal information. We maintain databases consisting of court decisions, statutes, regulations, acts, 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 11 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 from alternate sources, 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. Also, certain materials that are not in the public domain, including the copyrightable portions of compilations of public domain materials, may not be available or may require us to pay significant license fees. The loss of any relationships with data providers, or any significant increase in data acquisition costs, could materially increase our operating expenses. System failures could be harmful to our reputation by interrupting our ability to provide services through our web site. 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. Damage to our computer system could delay or prevent delivery of our products and result in the loss of our customers. 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 could interrupt or delay our operations, damage our reputation and cause us to lose customers. Our reliance on foreign data converters to convert large amounts of printed legal material into electronic format creates risks of business interruption due to the unpredictable nature of international business transactions. We rely on third parties with operations in India, the Republic of the Philippines and The People's Republic of China 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 offerings 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. 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 these countries. We depend heavily on our management team, which has little experience working together or 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 12 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 Mr. Beyland joined Loislaw.com in May 1999, Mr. Parker also performed the duties of 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 computer technicians, programmers and sales and marketing personnel, and our failure to attract and retain these people could affect our ability to respond to rapid technological change and to increase our sales. Our future success also depends upon our ability to attract and retain qualified computer programmers, other technical personnel and sales and marketing personnel. Competition for talented personnel, particularly technical personnel, is intense. This competition could increase the costs of hiring and retaining personnel. We do not have employment agreements with any of our employees, other than Mr. Parker and Mr. Beyland. We may not be able to attract, retain and adequately motivate our personnel or to integrate new personnel into our operations successfully. 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, including our coding software, and we may infringe the proprietary rights of others. Our services are highly dependent upon proprietary technology, including, for example, our proprietary coding software which allows us to mark certain information contained in our databases to enable users to search our databases. We rely on contracts, confidentiality agreements and copyright, trademark and trade secrecy laws 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, including our proprietary coding software. 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. Potential difficulties caused by Year 2000 problems may decrease use of Internet services, may cause harm to our reputation and may adversely affect our revenues. 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 customers 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 13 business to address their Year 2000 issues successfully, could cause harm to our reputation, result in the loss of customers and adversely affect our revenues. Our business strategy includes acquiring complementary businesses. However, 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 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 The market for web-based legal information is new and rapidly evolving, and we may not be able to accurately predict and respond to market developments, which could prevent our products from being accepted. 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 you 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 revenues will be adversely affected. Availability of free information from Internet portal companies may lessen the demand for our products because we charge subscription fees 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 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 in the web-based legal information market, we will be at a competitive disadvantage and we could lose potential customers to our competitors. The market for web-based products and services is characterized by rapid technological developments, evolving industry standards, changing customer demands and frequent introductions of new products, services 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. If we are not successful or if our products are not accepted, we could lose potential customers to our competitors. 14 A downturn in the legal industry could cause our revenues to decrease. Our business depends on the continued demand for legal information in electronic format. Therefore, any downturn in business for the legal profession could cause our revenues to decrease, which will adversely affect our results of operations. Sales of our web-based products are tied to the adequacy of the Internet infrastructure and the continued growth and commercial viability of the Internet. The failure of the Internet to grow or remain a viable commercial medium could harm our growth. Our 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 us. If the government adopts regulation that charges Internet access fees or imposes taxes on subscriptions to our web-based products, our operating expenses will increase. 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, our operating costs may increase and we may not be able to increase the price that we charge for our products to cover these costs. Any new laws or regulations or new interpretations of existing laws and regulations relating to the Internet could increase our operating expenses and adversely affect our results of operations. Risks Related to This Offering If you purchase shares of Loislaw.com in this offering, you will suffer immediate and substantial dilution of $9.24 per share. You will experience an immediate and substantial dilution of $9.24 per share in the pro forma net tangible book value per share of common stock from the initial public offering price. Assuming an initial public offering price of $11.00 per share of common stock, our pro forma net tangible book value as of June 30, 1999, after giving effect to this offering, is $1.76 per share. See "Dilution" on page 19 for more detailed information about the dilution that you will incur. After this offering 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 76.0% of our outstanding common stock (74.0% 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 15 submitted to the stockholders for approval and to control the management and affairs of the company. In addition, our existing stockholders have agreed under an Amended and Restated Stockholders' Agreement dated May 25, 1999 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. The shares that you purchase in this offering might not trade at or above the initial public offering price. The public offering price for the common stock will be determined by negotiations among us, the selling stockholder and the representatives of the underwriters. While 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. As a result, 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 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 technology stocks in particular, have from time to time experienced extreme price and volume fluctuations. These market fluctuations may adversely affect the market price of our common stock. A large number of shares of our stock is eligible for future sale, and the sale of these shares may cause the price of our common stock to drop. After this offering, we will have outstanding 20,939,524 shares of common stock, 21,536,524 shares if the underwriters' over-allotment option is exercised in full. This includes the 3,900,000 shares we are selling in this offering, 4,497,000 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). 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. See "Shares Eligible for Future Sale" on page 59 for more information regarding lockup agreements and registration rights. 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, which may limit the price that certain investors might be willing to pay for our common stock. Our certificate of incorporation and bylaws contain provisions that 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 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. 16 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" on pages 9-16 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. 17 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 $11.00 per share, are estimated to be $39,047,000 ($45,154,310 if the underwriters exercise their over- allotment option in full), after deducting underwriting discounts and commissions and estimated offering expenses of $850,000. We intend to use these net proceeds for the following purposes: . to repay approximately $10.0 million of principal 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; . to pay approximately $4.9 million to redeem the 439,589 shares of Series B redeemable preferred stock plus accrued dividends held by Melissa Parker. For more information about the Series B redeemable preferred stock, see "Certain Transactions" on page 54; . to repay an aggregate of $4.6 million outstanding under notes and lines of credit with Fleet National Bank, N.A. Amounts outstanding under the notes and lines of credit bear interest at an annual rate of prime plus 1.5%; . to pay $250,000 to Dublind Partners, Inc. for financial advisory services; and . the remainder of the net proceeds may be used for development of a consumer web site and our legal databases and expansion of 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. While we discuss potential acquisitions and investments from time to time, we currently have no commitments or agreements for any such acquisitions or investments. 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, our credit agreement with Fleet National Bank, N.A., prohibits us from declaring any dividend on any class of our stock, including the common stock. 18 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. Pro forma 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 on a pro forma basis after giving effect to the conversion of all outstanding shares of convertible preferred stock and the elimination of the redemption features on 2,113,232 shares of common stock and outstanding warrants for the purchase of 35,536 shares of common stock. At June 30, 1999, Loislaw.com had a pro forma net tangible book value of $2,076,787 or $0.12 per share of common stock. After giving effect to the sale of 3,900,000 shares of common stock offered by Loislaw.com at an assumed initial public offering price of $11.00 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 30, 1999 would have been $1.76 per share. This represents an immediate increase in net tangible book value of $1.64 per share to existing stockholders and an immediate and substantial dilution of $9.24 per share to new investors purchasing common stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price......................... $11.00 Pro forma net tangible book value as of June 30, 1999....... $0.12 Increase attributable to new investors...................... 1.64 ----- Pro forma net tangible book value after this offering......... 1.76 ------ Dilution in pro forma net tangible book value to new investors.................................................... $ 9.24 ======
The following table summarizes, on the pro forma basis set forth above as of June 30, 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....... 17,039,524 81.4% $18,451,621 30.1% $ 1.08 New investors............... 3,900,000 18.6% $42,900,000 69.9% $11.00 ---------- ----- ----------- ----- Total..................... 20,939,524 100.0% $61,351,621 100.0% ========== ===== =========== =====
The foregoing tables assume no exercise of the options or warrants outstanding on June 30, 1999 to purchase an additional 618,658 shares of common stock at a weighted average exercise price of $2.65 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 about outstanding options granted by Loislaw.com, see "Management-- Equity Plans" on page 45. In addition, the second table does not reflect the sale of 80,000 shares by the selling stockholder in this offering. This sale will reduce the shares held by existing stockholders to 81.0% 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 19.0% of the total shares of common stock to be outstanding after this offering. Finally, the number of shares disclosed for existing stockholders includes 6,853,482 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 regarding the number of shares held by existing stockholders, see "Principal and Selling Stockholders" on pages 55-56. 19 CAPITALIZATION The following table displays our Actual, Pro Forma and Pro Forma As Adjusted capitalization as of June 30, 1999. Capitalization consists of debt, including the current portion, redeemable equity securities and stockholders' equity (deficit). Our Pro Forma capitalization reflects: . the conversion of 931,044 shares of Series A convertible preferred stock and 2,495,697 shares of Series C convertible preferred stock into 6,853,482 shares of common stock immediately upon completion of this offering; and . the elimination of the redemption features on 2,113,232 shares of common stock and outstanding warrants for the purchase of 35,536 shares of common stock. Our Pro Forma As Adjusted capitalization reflects the Pro Forma adjustments described in the previous paragraph and the following: . the net proceeds from the sale of 3,900,000 shares of common stock at an assumed public offering price of $11.00 per share in this offering after deducting the underwriting discounts and commissions and estimated offering expenses; . our application of $4.9 million to redeem 439,589 shares of Series B redeemable preferred stock and accrued dividends on this stock and $14.6 million to repay outstanding debt with a portion of the net proceeds of this offering; . the loss on extinguishment of debt attributable to the write-off of deferred loan costs in the amount of $4.0 million as a result of repaying the related debt; and . the payment of $250,000 to Dublind Partners, Inc. for financial advisory services.
As of June 30, 1999 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (unaudited, in thousands) Debt, including current portion: 12.5% Senior Subordinated Notes............... $ 9,989 $ 9,989 $ -- Notes payable................................. 4,568 4,568 -- Capital lease obligation...................... 29 29 29 -------- -------- -------- Total debt.................................. 14,586 14,586 29 -------- -------- -------- Redeemable equity securities: Series A convertible preferred................ 2,772 -- -- Series B redeemable preferred, including accrued dividends............................ 4,940 4,940 -- Series C convertible preferred................ 13,876 -- -- Common stock.................................. 3,674 -- -- Common stock warrants......................... 62 -- -- -------- -------- -------- Total redeemable equity securities.......... 25,324 4,940 -- -------- -------- -------- Stockholders' equity (deficit)(1): Common stock, $.001 par value; 50,000,000 shares authorized; 8,082,810 shares issued and 17,049,524 and 20,949,524 shares issued pro forma and pro forma as adjusted, respectively................................. 8 17 21 Additional paid-in capital.................... 1,169 21,544 60,337 Accumulated deficit........................... (19,468) (19,468) (23,486) Treasury stock at cost, 10,000 common shares....................................... (16) (16) (16) -------- -------- -------- Total stockholders' equity (deficit)........ (18,307) 2,077 36,856 -------- -------- -------- Total capitalization........................ $ 21,603 $ 21,603 $ 36,885 ======== ======== ========
- -------- (1) Excludes the following: . 1,500,000 shares of common stock reserved for issuance under our employee stock option plan, of which options to purchase 583,122 shares are currently outstanding and options covering 386,500 shares are to be granted upon the completion of this offering at the initial price to the public; . 320,000 shares of common stock reserved for issuance under our stock option plan for nonemployee directors, including options covering 120,000 shares that we intend to grant with exercise prices equal to the offering price; . 300,000 shares of common stock reserved for issuance under our employee stock purchase plan; and . 35,536 shares reserved for issuance upon the exercise of outstanding warrants. 20 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 Statement of Operations Data and Balance Sheet Data as of and for the 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 six-month periods ended June 30, 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.
Six Months Year Ended December 31, Ended June 30, ------------------------------------------ ---------------- 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 $ 272 $ 1,171 CD-ROM products....... 93 1,742 1,855 3,157 3,182 1,516 1,621 Other(1).............. 1,381 -- -- -- 1,000 353 -- ------ ------- ------- ------- ------- ------- ------- Total revenues...... 1,474 1,742 1,883 3,365 5,024 2,141 2,792 ------ ------- ------- ------- ------- ------- ------- Operating expenses: Database costs........ 405 1,152 1,459 1,563 2,624 1,016 2,704 Costs of other revenues............. 600 -- -- -- 393 147 -- Selling and marketing............ 208 935 2,153 2,363 4,607 1,903 4,321 General and administrative....... 301 569 1,525 1,535 1,977 1,023 1,708 Product development... 27 133 101 86 541 368 333 ------ ------- ------- ------- ------- ------- ------- Total operating expenses........... 1,541 2,789 5,238 5,547 10,142 4,457 9,066 ------ ------- ------- ------- ------- ------- ------- Loss from operations.... (67) (1,047) (3,355) (2,182) (5,118) (2,316) (6,274) ------ ------- ------- ------- ------- ------- ------- Other income (expense): Interest expense, net.................. 13 (69) (251) (455) (1,549) (643) (1,308) Other, net............ (74) 5 2 (6) 42 1 5 ------ ------- ------- ------- ------- ------- ------- (61) (64) (249) (461) (1,507) (642) (1,303) ------ ------- ------- ------- ------- ------- ------- Loss before income taxes.................. (128) (1,111) (3,604) (2,643) (6,625) (2,958) (7,577) Income tax benefit...... (47) (339) (52) -- -- -- -- ------ ------- ------- ------- ------- ------- ------- Net loss................ (81) (772) (3,552) (2,643) (6,625) (2,958) (7,577) Accrued preferred stock dividends and accretion on redeemable preferred stock and common stock warrants .............. -- -- -- (34) (500) (211) (462) ------ ------- ------- ------- ------- ------- ------- Net loss applicable to common stock........... $ (81) $ (772) $(3,552) $(2,677) $(7,125) $(3,169) $(8,039) ====== ======= ======= ======= ======= ======= ======= Net loss per share-- basic and diluted...... $(0.01) $ (0.11) $ (0.50) $ (0.37) $ (0.99) $ (0.44) $ (0.95) ====== ======= ======= ======= ======= ======= ======= Weighted average common shares outstanding-- basic and diluted...... 7,000 7,000 7,057 7,163 7,222 7,180 8,424 ====== ======= ======= ======= ======= ======= =======
21
Six Months Year Ended Ended June December 31, 30, ------------- ------------- 1997 1998 1998 1999 ------ ------ ------ ------ (in thousands) Other Data (unaudited): Web-based new sales(2).............................. $ 485 $1,985 $ 733 $1,780 CD-ROM new sales(2)................................. 2,370 2,081 1,088 514 ------ ------ ------ ------ Total new sales(2)................................ $2,855 $4,066 $1,821 $2,294 ====== ====== ====== ======
As of December 31, As of ------------------------------------------ June 30, 1994 1995 1996 1997 1998 1999 ------ ------ ------- ------- -------- ----------- (unaudited) (unaudited) (in thousands) Balance Sheet Data: Cash and cash equivalents............ $ 40 $ 318 $ 102 $ 3,233 $ 99 $ 3,275 Working capital (deficit).............. (37) (629) (3,397) (514) (4,751) (15,543) Total assets............ 2,344 3,794 6,004 16,298 19,213 30,089 Total debt (including capital lease obligations)........... 116 1,744 3,963 4,107 12,273 14,586 Deferred revenues....... -- 157 1,754 3,522 3,928 4,006 Redeemable equity securities............. -- -- -- 11,216 11,720 25,324 Total stockholders' equity (deficit)....... 1,793 1,021 (2,231) (4,758) (11,900) (18,307)
- -------- (1) Other revenues in 1994 represent payments received from a legal publishing company that had exclusive marketing rights to our products. Other revenues in 1998 were from producing customized databases for a third party. (2) New sales represent the total payments to be received by us over the lives of the subscription contracts from all new product sales to our new and existing customers during the period. New sales do not include renewals of existing subscriptions to our products. 22 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 to lawyers and law firms over the Internet and on CD-ROM. We offer 1,300 databases that we estimate to contain over 5.5 million documents. These databases consist 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, we had an exclusive marketing agreement with Thomson Legal Publishing Company. 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 that we offer is $1,176 per seat per year. This product offers our customers access to 987 databases comprised of acts, statutes, regulations and court decisions. It does not include administrative rules and regulations databases for Delaware, Hawaii, Maine, Mississippi, New Hampshire, Rhode Island, Vermont and Wyoming that we license from a third party and that may be specifically subscribed to by our customers at an additional cost of $3,600. To date, no customers have subscribed to these additional databases. The list price for unlimited Internet access to substantially all state law for one state is $690 per seat per year. We do not charge any additional costs for multiple users of a seat. For example, a law firm with three lawyers may purchase only one seat and allow all three lawyers to share this seat for no additional cost; however, in this example only one lawyer may use the product at a time. Our pricing strategy with respect to our web-based products may change as a result of our evolving market. Continuing legal education and bar materials are available for purchase at an additional charge. Historically we have offered CD-ROM products at annual subscription prices ranging from $300 to $690 per state or federal jurisdiction. In recent periods, we have de-emphasized our CD-ROM products by implementing a focused marketing and sales effort for our web-based products. Since July 1999, we have offered new subscriptions only for our web-based products. If requested, we deliver CD- ROM discs for the costs of shipping and handling to subscribers of our web- based products. Some revenue from CD-ROM sales will continue as we fulfill obligations to our current CD-ROM customers. Revenues from CD-ROM products also include a small amount of revenue from one-time sales of bar association publications. We will continue to make these one-time CD-ROM sales. The migration of our customers to our web-based products will increase our average revenue per customer if most customers purchase unlimited Internet access for substantially all of our databases. It will also decrease our average cost per customer if fewer customers use our CD-ROM products. This is because we currently provide our CD-ROM customers with updated discs every 90 days and because CD-ROM products typically require significantly more customer and technical support due to the reinstallation of updated CD-ROM discs and issues with customer hardware configuration changes. 23 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. Since revenues from the sales of our products are primarily recognized over the subscription period, we use new sales as a performance measure to monitor the growth of our business and the effectiveness of our sales personnel and marketing programs. New sales represent the total payments to be received by us over the lives of the subscription contracts from all new product sales to our new and existing customers during the period. New sales do not include renewals of existing subscriptions to our products. 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. 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. For the six months ended June 30, 1999, web-based products generated 77.6% of new sales, while CD-ROM products fell to 22.4% of new sales. Since July 1999, we have sold new subscriptions only for our web-based products, and our web-based products will represent substantially all of our new sales and revenues in future periods. Internet searches have also increased rapidly. During the month of July 1999, there were more than 2.2 million searches on our web site compared to 225,000 during July 1998. 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 $22 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, other than overhead allocations, related to the production of databases. 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. Databases containing statutes and regulations, which are constantly being changed, have a much more limited useful life. Consequently, we amortize these costs over two years. We expense as incurred database maintenance and updating costs. As of June 30, 1999, we had unamortized deferred loan costs of $4.0 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 Six Months Ended June 30, 1999 and 1998 Revenues. Total revenues increased 30.4% to $2.8 million for the six months ended June 30, 1999 from $2.1 million for the six months ended June 30, 1998. Revenues from web-based products increased 330.5% to $1.2 million for the six months ended June 30, 1999 from $272,000 for the six months ended June 30, 1998. We believe the increase in revenues from web-based products was due primarily to the increase in the number of legal databases we offered to 1,187 at June 30, 1999 from 342 at June 30, 1998, an 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 substantially all of our total revenues in future periods. Our total number of customers increased 23.3% to 7,844 at June 30, 1999 from 6,362 at June 30, 1998. Revenues from CD-ROM products increased 7.0% to $1.6 million for the six months ended June 30, 1999 from $1.5 million for the six months ended June 30, 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 $353,000 and costs of other revenues of $147,000 in the first six months of 1998 related to a customized database project that was started and completed in 1998. 24 Database Costs. Total database costs increased 166.2% to $2.7 million for the six months ended June 30, 1999 from $1.0 million for the six months ended June 30, 1998. The increase in the costs in the first six months of 1999 compared to the first six months of 1998 is attributable to increased amortization and updating costs as a result of having more databases. Selling and Marketing Expense. Selling and marketing expense increased 127.1% to $4.3 million for the six months ended June 30, 1999 from $1.9 million for the six months ended June 30, 1998. This was principally due to a 216.5% increase in compensation and commission expenses associated with an increase in the number of sales and marketing personnel to 183 at June 30, 1999 from 66 at June 30, 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. We pay sales commissions upon receipt of an initial subscription payment after 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 66.9% to $1.7 million for the six months ended June 30, 1999 from $1.0 million for the six months ended June 30, 1998. This increase resulted primarily from an increase in our number of administrative employees to 50 at June 30, 1999 from 19 at June 30, 1998 and executive recruiting and relocation costs of approximately $174,000 in the first six months 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 decreased 9.5% to $333,000 for the six months ended June 30, 1999 from $368,000 for the six months ended June 30, 1998. This decrease was due to a decrease in recruiting costs incurred to hire personnel to perform 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 103.4% to $1.3 million for the six months ended June 30, 1999 from $643,000 for the six months ended June 30, 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. Interest expense included amortization of deferred loan costs of $396,000 for the six months ended June 30, 1999 and $335,000 for the six months ended June 30, 1998. 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- 25 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. Total customers increased 18.4% to 6,976 at December 31, 1998 from 5,894 at December 31, 1997. 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 revenues 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 67.8% to $2.6 million in 1998 from $1.6 million in 1997. The increase in costs for 1998 compared to 1997 is attributable to increased overhead costs as a result of our production of more databases and increased updating costs as a result of having more databases to maintain. Selling and Marketing Expense. Selling and marketing expense increased 94.9% to $4.6 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 28.8% to $2.0 million in 1998 from $1.5 million in 1997. This increase primarily resulted from an increase in the number of employees performing general and administrative functions to 28 at December 31, 1998 from 13 at December 31, 1997. Product Development Expense. Product development expense increased 525.5% to $541,000 in 1998 from $86,000 in 1997. The increase was primarily due to $304,000 paid to third party consultants for product enhancements. 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. Interest expense included amortization of deferred loan costs of $680,000 in 1998 and $48,000 in 1997. 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 70.2% 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. In addition, the total number of customers increased to 5,894 at December 31, 1997 from 4,686 at December 31, 1996. Database Costs. Total database costs increased 7.1% to $1.6 million in 1997 from $1.5 million in 1996. The increase in database costs 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. General and administrative expense remained relatively unchanged at $1.5 million in 1997 and in 1996. Bad debt expense declined from $525,000 in 1996 to $94,000 in 1997 due 26 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 $41,000 of consulting fees paid for the development of our enterprise systems, an increase in the number of employees performing general and administrative functions and the $160,000 settlement of a lawsuit regarding the ownership of equity securities of Loislaw.com with a third party to which we outsourced administrative tasks. Product Development Expense. Product development expense decreased 14.4% to $86,000 in 1997 from $101,000 in 1996. Product development expense was minimal in both years as efforts were focused primarily on production 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. Interest expense included amortization of deferred loan costs of $48,000 in 1997. 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 six quarters in the 18- month period ended June 30, 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.
Quarter Ended ----------------------------------------------------------------- March 31, June 30, September 30, December 31, March 31, June 30, 1998 1998 1998 1998 1999 1999 --------- -------- ------------- ------------ --------- -------- (unaudited, in thousands) Statement of Operations Data: Revenues: Web-based products..... $ 115 $ 157 $ 257 $ 313 $ 474 $ 697 CD-ROM products........ 737 778 801 866 837 784 Other.................. 117 236 255 392 -- -- ------- ------- ------- ------- ------- ------- Total revenues....... 969 1,171 1,313 1,571 1,311 1,481 ------- ------- ------- ------- ------- ------- Operating expenses: Database costs......... 503 512 711 898 1,135 1,569 Costs of other revenues.............. 46 101 102 144 -- -- Selling and marketing.. 801 1,102 1,270 1,434 1,740 2,581 General and administrative........ 568 455 418 536 772 936 Product development.... 154 214 105 68 215 118 ------- ------- ------- ------- ------- ------- Total operating expenses.. 2,072 2,384 2,606 3,080 3,862 5,204 ------- ------- ------- ------- ------- ------- Loss from operations..... (1,103) (1,213) (1,293) (1,509) (2,551) (3,723) Other income (expense)... (278) (364) (410) (455) (593) (710) ------- ------- ------- ------- ------- ------- Net loss................. $(1,381) $(1,577) $(1,703) $(1,964) $(3,144) $(4,433) ======= ======= ======= ======= ======= ======= Other Data: Web-based new sales(1)... $ 181 $ 552 $ 444 $ 808 $ 608 $ 1,172 CD-ROM new sales(1)...... 462 626 593 400 256 258 ------- ------- ------- ------- ------- ------- Total new sales(1)... $ 643 $ 1,178 $ 1,037 $ 1,208 $ 864 $ 1,430 ======= ======= ======= ======= ======= =======
- -------- (1) New sales represent the total payments to be received by us over the lives of the subscription contracts from all new product sales to our new and existing customers during the period. New sales do not include renewals of existing subscriptions to our products. 27 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. Quarterly results from operations are significant to investors because they illustrate recent changes and trends in our business. For example, the quarterly revenue information illustrates a transition from CD-ROM products to web-based products. Likewise, the quarterly results show that total revenues declined for the quarter ended March 31, 1999 because of the lapse of our customized database development revenue. Causes of quarterly fluctuations have included and may include, among other factors: . 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; . 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 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 $349,000 in cash during 1996. Operating activities used cash of $1.7 million in 1997, $5.0 million in 1998, and $5.9 million in the six months ended June 30, 1999, primarily resulting from our net losses, reduced by depreciation and amortization during those periods. We expect to continue to incur significant database production costs for the foreseeable future. The continued amortization of development costs of new databases is expected to generate losses for 1999 through the end of 2000. Investing activities used cash of $3.0 million in 1996, $2.1 million in 1997, $6.2 million in 1998 and $7.6 million during the six months ended June 30, 1999. In 1996 and 1997, the primary use of cash was the payment of our database development costs, which were capitalized. In 1998, $4.8 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 six months of 1999, $5.7 million of these expenditures was for the payment of our database development costs, which we capitalized, and $1.7 million of these expenditures was for property and equipment purchased to support the growth of our business. 28 To finance our operations and continued expansion we have obtained additional capital through private placements 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, $8.1 million in 1998 and $16.7 million during the six months ended June 30, 1999, which included financing from a private placement of common stock and convertible preferred stock in the amount of $15.0 million. During the final six months of 1999, we are obligated to pay $1.2 million to a third party for data conversion services. During the final six 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 second site fully equivalent to our live 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. 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 that converted to a term note on June 1, 1999; . a second equipment line of credit in the maximum principal amount of $1.5 million that will convert to a term note on June 1, 2000; and . a line of credit to finance the development of our databases in the maximum principal amount of $7.0 million that converted to a term note on April 30, 1999. 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 restrictive covenants that obligate us to maintain financial ratios and that, without the prior written consent of the bank, generally prohibit us from incurring indebtedness or declaring or paying dividends or other distributions. At December 31, 1998 and March 31, 1999 we were in default under the credit facility for failing to meet financial covenants. In May 1999 the bank waived the default of these covenants. On June 30, 1999 we were in default under our quick ratio covenant, however, our bank waived this default and any future defaults that may occur regarding this quick ratio covenant until March 31, 2000. We expect to incur significant database production costs for the foreseeable future. Consequently, we may need to obtain additional funds in order to prevent a future default. As of June 30, 1999, we had outstanding borrowings under the credit facility as follows: . $994,000 under the term note for equipment costs; . $292,500 under the second equipment line; and . $3.3 million under the term note 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 June 30, 1999, our accumulated deficit totaled $19.5 million. At December 31, 1998, we had net operating loss carry-forwards of approximately $17.3 29 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 information technology systems, including accounting, data processing, data conversion and telephone/PBX systems, as well as systems that are not commonly thought of as information technology systems, such as heating and air conditioning systems, fax machines, or other miscellaneous systems. Both information technology and non-information technology 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 information technology systems and our non- information technology systems, which consist primarily of minor office equipment. Based upon our identification and assessment of our information technology systems, we have replaced or modified computer equipment and software, as necessary, including our telephone/PBX system. Based upon our identification and assessment of our non-information technology 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 August 31, 1999, we had completed approximately 90 percent of our Year 2000 initiatives and the remaining ones are in process and we expect to complete them on or about November 1, 1999. Specifically, we completed our analysis of and corrected Year 2000 problems associated with our main computer system which includes our application servers that run our programs and our data servers that house our data. With respect to the desktop and individual work stations of our employees, we have completed our analysis of Year 2000 problems and have begun to replace defective hardware. We expect to complete this process by November 1, 1999. Our programs are not dependent on computer time and date stamps. Instead, our programs store references to times and dates internally in data files that are able to recognize four character dates including the year 2000. This will enable our customers to perform searches and display search results even if their personal computer only recognizes two character dates. We have mailed letters to our overseas data convertors to determine the extent to which their information technology and non-information technology systems are vulnerable to Year 2000 issues. Based on their responses, we believe that these data converters' software and computers 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 have completed our survey of third party data vendors, and all of our major vendors have provided Year 2000 compliance statements. We have contacted 307 of our 309 secondary vendors. Three hundred five of these vendors indicate that they are Year 2000 compliant. 30 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 information technology vendors, will not exceed $200,000, which will be funded from operating cash flows. 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 information technology expenditures for fiscal 1999. As of August 31, 1999, we had incurred costs of approximately $35,000 related to our Year 2000 program. 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 that would be reasonably likely to result from our failure and the failure of our data converters, vendors and service providers 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. We do not plan to engage an independent expert to evaluate our Year 2000 identification, assessment, remediation and testing efforts. However, the firm that provided installation, training and other services in connection with our new accounting and sales force management software has reviewed Year 2000 issues related to that software. A number of problems have been identified and have been corrected. 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 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 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 these costs should be capitalized. We do not expect SOP 98- 1, which is effective for Loislaw.com for our fiscal year ending December 31, 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 31 should be expensed as incurred. SOP 98-5 is effective for Loislaw.com for our fiscal year ending December 31, 1999, 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 June 30, 1999, the outstanding principal balance under the credit facility was $4.6 million, and during 1998 the average outstanding principal balance was $2.9 million. 32 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 1,300 databases that we estimate to contain over 5.5 million documents. These databases consist 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- searching software programs that automatically and continuously search our web site and notify our users when new documents match their search criteria. Our news feeds provide more than 100,000 news articles a month from more than 400 domestic and international sources. Our legal information is available through our web site at loislaw.com for an annual subscription price. At June 30, 1999, we had a total of 7,844 customers, of which 3,132 purchased our web-based 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 dating back to 1899 and all federal circuit courts of appeal dating back to 1971. In addition, with the completion of databases for 14 new states during the first eight months of 1999, we currently provide comprehensive legal information for 34 of the 50 states. The lawyers in these 34 states represent over 88% of the total number of practicing lawyers in small U.S. law firms. Small firms typically require legal information for the states in which they practice, while large law 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 Simba Information, Inc.'s Web/Online Services 1998-2002: Market Analysis & Forecast, 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. We cannot assure you that this projected growth will be achieved. 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 Veronis Suhler & Associates in its October 1998 Communications Industry Forecast, there were approximately 980,000 lawyers in the United States as of 33 December 31, 1998 and this number is projected to grow to 1,065,000 in 2002. We cannot assure you that the number of lawyers will grow to this projected amount. 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 collecting, manipulating and distributing 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 law 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, we believe 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, affordable and easy-to-use, web-based legal information to meet the needs of law firms, corporations and other consumers of legal information. 34 The Loislaw.com Solution Through our web site, loislaw.com, we provide comprehensive, affordable and easy-to-use legal information to lawyers and law firms over the Internet. We believe that we were the first company to provide this comprehensive information over the Internet and that we have the largest collection of databases of federal and state law organized 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 Access to our loislaw.com web site is available at an affordable fixed annual subscription price. Our fixed- price model encourages lawyers to use our web site as needed without concern for additional charges. Subscribers pay a fixed annual subscription price of $1,176 per seat per year and receive access to acts, statutes, regulations, court decisions and attorney general opinions. Access to these databases does not include eight special databases comprised of state regulations that we license from a third party and that may be specifically subscribed to by our customers at an additional cost of $3,600. Advanced Functionality Our loislaw.com web site provides advanced functionality. For example, we provide: . simultaneous searching of multiple databases using sophisticated search technology that supports 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 1,300 databases that we estimate to contain over 5.5 million documents. These databases consist 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 34 states, as well as a limited number of court decisions for the remaining 16 states. Over 88% of lawyers in small U.S. law firms 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 more than 100,000 35 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 400 governmental entities and independent publishers from whom we receive court decisions, statutes, regulations, acts 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, acts 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 consists of 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 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 of corporations. We have not focused our marketing efforts on these potential customers to date because they generally require access to comprehensive court decisions for 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 comprehensive, affordable 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 16 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 36 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 web- based products 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 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. We have recently entered into a letter of intent that contemplates a cooperative marketing arrangement with ChoicePoint Inc., a leading provider of public records information. See "Strategic Alliance" on page 42 for more information about this proposed arrangement. . Enter the Consumer Market. We are currently developing a new web site linked to our loislaw.com web site that will offer legal information and related information 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 1,300 databases that we estimate to contain over 5.5 million documents. Our customers access our website with a user identification number and a password that we provide when they subscribe to our web-based products. Customers search our databases by typing in search words. Search results are first presented to a customer in a summary form and if a customer decides to see the full document, he or she simply selects this option on the screen. . 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 37 . State Law. We currently offer comprehensive state law databases for 34 states and intend to complete the databases for the remaining 16 states by December 31, 1999. Over 88% of the total number of practicing lawyers in small U.S. firms practice in states in which we have comprehensive state law databases. A comprehensive state law database provides all statutes, regulations, acts and court rules, appellate court decisions as well as at least 45 years of court decisions. The map and table below depict the states for which we provide comprehensive state law databases and the years in which they were completed. [Map of the United States with shaded states corresponding to the 34 states in which the Company has comprehensive state law databases. The shaded states are the same as the states listed in the table following the map.]
Comprehensive State Legal Information Coverage - -------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 1999 (1) -------------- --------- -------------- ------------- -------- ------------ Arkansas Georgia Massachusetts Kansas Arizona Alabama Colorado Missouri Oklahoma New Hampshire Florida California Connecticut Wisconsin South Carolina Rhode Island Indiana Delaware Louisiana New York Idaho Nebraska Texas Illinois North Carolina Maryland Michigan Nevada New Jersey Ohio Pennsylvania Tennessee Virginia Washington
(1) Represents coverage through August 31, 1999. 38 . 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 305 databases related to the continuing legal education programs administered by these groups. . Loislaw.com News Feeds. Our web site provides news feeds of more than 100,000 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-searching software programs 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 assist customers 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 $690 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 sold new subscriptions to our CD-ROM products until July 1999. While we no longer sell new CD-ROM subscriptions, we expect to continue to produce CD-ROMs in order to offer to our customers a supplemental source when Internet access may not be available to them. We also expect to continue to make one-time sales of bar association publications on CD-ROM. 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, acts and rules directly from official sources within each jurisdiction. We receive this information in both print and electronic form. We have entered into relationships with official sources in each jurisdiction where we provide legal information. In some jurisdictions we have written agreements formalizing our relationships and in other jurisdictions that do not require a written agreement we do not have a written agreement. 39 The charges for access to legal information varies from agreement to agreement. For example, a number of our official sources charge us a nominal fee for delivery of the legal information. Other official sources charge us annual amounts and a percentage of sales. In addition, other official sources charge us a "per email" or "per megabyte" charge. With respect to our news feeds database, we have entered into an agreement with a third party provider and we are charged a monthly fee. We convert legal information into standard generalized mark-up language, or SGML, and hypertext mark-up language, or HTML, to make it easy for users to search our legal databases. By using HTML and SGML programming languages we require fewer lines of code than mainframe computer languages 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 Pacific Data Conversion Corp. operating from The People's Republic of China, Digital Publishing International Ltd. operating from the Republic of the Phillipines, and Infocon operating from India 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. Our agreement with Pacific Data Corporation was for a term of six months and has now expired; however, we are currently negotiating an extension of this agreement. Our contract with Digital Publishing International Ltd. is for a term of 18 months ending in December 1999. Our agreement with Infocon continues for an unspecified period of time. After the information is converted to electronic format, it is forwarded to us for further processing. All of our historical court decisions, approximately 40% of our new statutes and 40% of our new regulations are converted by these third party converters. The balance of this information is converted by us. 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 software programs to identify and 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%. 40 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 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 is an arrow pointing downward from this box to the single box in the sixth row, which contains text "Completed Databases."] We have committed significant resources to establish our production capabilities and processes. At June 30, 1999, our production staff included 142 converters and editors, 37 coders and 36 quality assurance 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 June 30, 1999, we spent over $22 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 June 30, 1999, we had five employees devoted to 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 web site 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 our legal databases. Access to the personal 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. We are developing a consumer web site because we believe that we can provide consumers with access to legal information that will include a 41 subset of our current legal databases. We expect to derive revenue from this consumer site from multiple sources that may include referral fees, subscription-based access to our complete legal databases and advertising revenues. We have no experience in offering our products to non-lawyers and recognize that we face many challenges with the development of this consumer site. Strategic Alliance On September 7, 1999, we entered into a letter of intent that contemplates a cooperative marketing arrangement between us and ChoicePoint Inc., a leading provider of public records information. The arrangement would enable our customers to obtain, through our web site, public records information and other services currently available at CDB4web.com, a web site operated by a subsidiary of ChoicePoint. Similarly, it would enable ChoicePoint's customers to access our legal information. It would also provide for joint marketing efforts to government agencies, corporations and large law firms that may need both ChoicePoint's public records information and our legal information. We believe that this proposed arrangement with ChoicePoint should improve our ability to obtain customers in the government, corporate and large law firm markets. We also intend to make it clear to customers who access our legal information through a ChoicePoint web site that the source of the information is Loislaw.com. Therefore, our relationship with ChoicePoint should also improve our brand awareness in our targeted markets and among other visitors to ChoicePoint's web site. We are currently negotiating a definitive agreement with ChoicePoint. That agreement will set forth the details of our proposed arrangements, including the manner in which each party will receive payment for its products and services. We cannot assure you that we will be able to enter into a definitive agreement with ChoicePoint or that we will be able to reach agreement on all the matters described above if we do enter an agreement. Sales and Marketing We sell our products through a sales force that as of June 30, 1999 included 105 company field sales representatives based in 31 states and 65 inside sales representatives. Our sales force is compensated with a base salary plus a commission. In addition, we have a marketing department that at June 30, 1999 consisted of 13 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 and continuing legal education organizations have agreed to promote our products. We provide free access to our products to the supreme courts of 15 states and to the Supreme Court of the United 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 June 30, 1999, we had a total of 7,844 customers of which 3,132 purchased our web-based products. At December 31, 1998, we had a total of 6,976 customers of which 1,841 purchased our web-based 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. 42 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 customers with technical issues. At June 30, 1999, we had 10 customer service employees and 25 technical support employees. In addition, our field sales representatives provide on-site support. Web Site Hardware and Software Design We currently host our loislaw.com web site at our office in Van Buren, Arkansas. We have designed our web site hardware and software 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 designed to run on more than one operating system. Our web site hardware and software 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. Upon initial conversion of a legal database, the Verity software catalogues the information contained in the database. When a user searches for information on our web site, the Verity software assists in the retrieval of search results by identifying the search request in the catalogued information. We employ multiple servers that have technology that enables them to share incoming user requests so that no single server is overloaded. We believe our servers have sufficient capacity to support our planned growth over the next 12 months. 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 second site fully equivalent to our live web site. This second web site would be fully operational and could completely replace the operations of our existing web site, if necessary. 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 Group, a division of The Thomson Corporation, and LEXIS-NEXIS, which is owned by Reed-Elsevier. While we have been in the legal information business since 1987, West Group has been in the 43 business over 100 years and LEXIS-NEXIS over 25 years. In addition to longer operating histories, our competitors have greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. For more information about our competitors, see "Risk Factors--The competition in our industry is intense, our principal competitors have significantly greater resources than we do, and this competition may cause us to lose customers and prevent us from attracting new customers" on page 9. 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 two 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 West Group because we do not provide any form of legal treatises or law review articles, or many of the other types of analysis and specialized legal information that they provide. Further, we currently do not provide comprehensive court decisions for all 50 states or federal district court decisions, and for those court decision databases we do offer we provide substantially fewer historical court decisions than offered by LEXIS-NEXIS and West Group in many of their comparable databases. 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 488 full-time employees at June 30, 1999, including five in product development, 105 in field sales, 65 in inside sales, 13 in marketing, 179 in converting and production, 36 in quality assurance, 25 in technical support, 16 in management information systems, 10 in customer service, 14 in finance and 20 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. 44 MANAGEMENT Executive Officers and Directors The following table sets forth information with respect to the executive officers and directors of Loislaw.com as of September 28, 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......... 47 Vice President of Business Development Reves W. Dillon, Jr. ... 45 Vice President of Operations Michael E. Romanies..... 36 Vice President of Marketing 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 the compensation committee. (2) Member of the 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 also 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. 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 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, a legal publishing company, from 1993 to February 1995. 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 as a scanning and editing operator in September 1989. 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. Michael E. Romanies joined Loislaw.com as Vice President of Marketing in July 1999. Mr. Romanies served as Vice President of Marketing and Sales at NETsilicon Inc. from August 1998 to June 1999. He also served as Vice President at Number Nine Visual Technology from October 1996 to August 1998, and President of World Color Press New Media from November 1995 to September 1996. In addition, he served as Vice President at Reed Technology from January 1987 to November 1995. Mr. Romanies holds a B.S. in Electrical Engineering from Wilkes University. 45 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 1998. 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 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. He served as a 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-enabled 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 Corporation from 1970 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 our common stock, our existing stockholders 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 our Board of Directors. Mr. Ammerman will continue as a director and Ms. Stone was selected as a director of Loislaw.com in connection with this agreement. For more information regarding the Amended and Restated Stockholders Agreement, see "Compensation Committee Interlocks and Insider Participation" on pages 48-49. 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 (Messrs. Laney and 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 meetings of stockholders to be held during calendar years 2000, 2001 and 2002, respectively. 46 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 recommendations concerning these matters to the Board of Directors. The compensation committee also administers our 1996 Stock Option Plan. For more information about our 1996 Stock Option Plan, see "-- Equity Plans" on page 51. The Board of Directors has also appointed an audit committee consisting of Messrs. Laney and Beyland and Ms. Stone. The audit committee reviews, with our independent auditors, the scope and timing of the auditors' services, the auditors' report on our financial statements following completion of their audit, and our 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 We pay each nonemployee director an annual fee of $10,000 and reimburse 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. The Board of Directors adopted the Nonqualified Stock Option Plan for Nonemployee Directors on July 22, 1999, and we expect to submit it to our stockholders for approval in September 1999. This plan provides for the issuance of a maximum of 320,000 shares of common stock. For more information regarding the Nonqualified Stock Option Plan for Nonemployee Directors, see "--Equity Plans" on page 52. Compensation Committee Interlocks and Insider Participation The Compensation Committee is comprised of Messrs. Parker and Ammerman and Ms. Stone. Mr. Parker is an executive officer of Loislaw.com and is the trustee of the Parker Trust, which is a principal stockholder of Loislaw.com. Ms. Melissa A. Parker, Mr. Parker's sister-in-law, also loaned Loislaw.com a total of $4,000,000, which has subsequently been converted into Series B redeemable preferred stock. Series A convertible preferred stock. On November 24, 1997, we entered into a Senior Subordinated Note and Securities Purchase Agreement with Capital Resource Lenders III, L.P. Under the terms of this agreement, we sold $3 million of Series A convertible preferred stock and issued a warrant for the right to purchase 1,944,586 shares of Loislaw.com common stock at $0.005 per share to Capital Resource Lenders III, L.P. In connection with this sale, we entered into a Stockholders' Agreement and a Registration Rights Agreement. Both of these agreements were amended and restated on May 25, 1999 and are described below. Series C convertible preferred stock. On May 25, 1999, we sold 2,495,697 shares of Series C convertible preferred stock to a limited number of investors for a total of $14.5 million. The names of the investors and the number of shares purchased by them for $5.81 per share are set forth below:
Name of Investor Number of Shares ---------------- ---------------- Capital Resource Lenders III, L.P. ....................... 857,509 Sandler Capital Partners IV, L.P. ........................ 793,680 Sandler Capital Partners IV, FTE, L.P. ................... 325,080 Mark O. Beyland........................................... 129,088 Exeter Capital Partners IV, L.P........................... 390,340
47 Capital Resource Lenders III, L.P. is one of the holders of our Series A convertible preferred stock, and it purchased its portion of the Series C convertible preferred stock by converting notes issued to it by us with a total outstanding principal balance of $5 million. Capital Resource Lenders III and its affiliate, CRP Investment Partners III, also have guaranteed a portion of our lines of credit with our bank. Mark O. Beyland is our President and Chief Financial Officer. Amended and Restated Registration Rights Agreements. On May 25, 1999, we entered into an Amended and Restated Registration Rights Agreement with our stockholders. This agreement gives Capital Resource Lenders III, L.P., CRP Investment Partners III, LLC, Mark O. Beyland, Sandler Capital Partners IV, L.P., Sandler Capital Partners IV, FTE, L.P., Exeter Capital Partners IV, L.P., transferees of Dublind Partners, Inc. and Rowland T. Moriarty the right to require us to use our best efforts to register under the Securities Act all or any part of the shares of our common stock that they own. This right is subject to limitations and conditions, including that we will not be required to effect a registration: . more than one time for the former holders of the Series A convertible preferred stock; . more than one time for the former holders of the Series C convertible preferred stock; and . if the reasonably anticipated total price of the offering 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., may have the right to request the inclusion of their shares of common stock in the registration. 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 limitations and conditions, including that the reasonably anticipated total 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, and $10,000 in fees of legal counsel for the selling stockholders. 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 under the Amended and Restated Registration Rights Agreement, we will indemnify the selling stockholders against Securities Act liabilities incurred in connection with the registration. Subject to some limitations and conditions, the registration rights held by these selling stockholders may be transferred with their securities. Rowland T. Moriarty is a holder of Series A convertible preferred stock, a warrant holder and, on occasion, a marketing consultant to us. He also has guaranteed a portion of our lines of credit with our bank. 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 existing 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., collectively, so long as they each hold at least 10% of our outstanding shares of common stock. In addition, these stockholders, as well as the Parker Trust, will have co-sale rights entitling them to include shares of their stock in the following sales: . the sale of a control block sale 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. The existence of this co-sale right could allow these stockholders to sell their shares of stock at a premium over the fair market value of the common stock and could transfer control of Loislaw.com. 48 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. Loans from our stockholders. We have borrowed money from Capital Resource Lenders III, L.P., CRP Investment Partners III, LLC and Rowland T. Moriarty and have executed several senior subordinated notes, which as of June 30, 1999 had a combined outstanding principal balance of $9,989,434. 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. 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. 1997 Subordinated Debt
Interest Amount We Borrowed Paid Amount We Owed Stockholder During 1997 During 1997 at Year End - ----------- ------------------ ----------- ---------------- Capital Resource Lenders III, L.P. ........................ $4,000,000 $ 52,778 $4,000,000 On November 24, 1997, we granted Capital Resource Lenders III a warrant to purchase 1,944,586 shares of our common stock as part of the consideration for the loan described above. 1998 Subordinated Debt Interest Amount We Borrowed Paid Amount We Owed Stockholder During 1998 During 1998 at Year End - ----------- ------------------ ----------- ---------------- Capital Resource Lenders III, L.P. ........................ $3,933,847 $591,101 $7,867,693 CRP Investment Partners III, LLC ......................... 4,615 692 9,231 Rowland Moriarty ............. 61,538 9,225 123,076 On January 1, 1998, Capital Resource Lenders III assigned $4,616 of the principal of the $4,000,000 note to CRP Investment Partners III and $61,538 of the principal of the $4,000,000 note to Rowland Moriarty. 1999 Subordinated Debt Interest Paid and Principal Amount We Borrowed Repaid Amount We Owed Stockholder During 1999 During 1999 at June 30, 1999 - ----------- ------------------ ----------- ---------------- Capital Resource Lenders III, L.P. ........................ $1,966,924 $831,943 $9,824,051 CRP Investment Partners III, LLC ......................... 2,308 964 11,539 Rowland Moriarty ............. 30,768 12,852 153,844
On February 9, 1999, we granted Capital Resource Lenders III, CRP Investment Partners III and Rowland Moriarty warrants to purchase a total of 204,182 shares of our common stock in connection with a limited guaranty of our credit agreement with Fleet National Bank provided by these parties. The amount we repaid to Capital Resource Lenders III on May 19, 1999 includes a $10,566 reduction of principal in connection with the exercise of warrants. In all other periods, we only paid interest due on the loans. 49 1999 Convertible Debt
Amount Converted into Shares of Amount of Interest Amount We Borrowed Series C Convertible We Paid on Stockholder During 1999 Stock During 1999 May 25, 1999 - ----------- ------------------ -------------------- ------------------ Capital Resource Lenders III, L.P. ............. $5,000,000 $4,982,127 $89,931
On May 25, 1999, the notes described in the table above were converted into 857,509 shares of Series C convertible preferred stock, which will convert into 1,715,018 shares common stock upon the completion of this offering. Three of our Board members are affiliated with our significant stockholders. The persons named below are members of our Board of Directors and are also affiliated with certain of our stockholders.
Entity with Whom Name of Board Member Board Member is Affiliated Relationship with Entity -------------------- -------------------------- ------------------------ Robert C. Ammerman Capital Resource Partners III, Managing Member LLC, the general partner of Capital Resource Lenders III, L.P. CRP Investment Partners III, LLC Managing Member Hannah C. Stone Sandler Capital Management, an Managing Director affiliate of Sandler Capital Partners IV, L.P. and Sandler Capital Partners IV, FTE, L.P. Kyle D. Parker The Parker Trust Trustee
The other three managing members of Capital Resource Partners with whom Mr. Ammerman shares voting and dispositive power with respect to shares held by Capital Resource Lenders are Mr. Fred C. Danforth, Mr. Stephen M. Jenks and Mr. Alexander S. McGrath. Messrs. Danforth, Jenks and McGrath are also the only other managing members of CRP Investment Partners. Investment decisions are determined by a majority vote. The persons who share voting and dispositive power with respect to the shares held by Sandler Capital Partners IV, L.P. and Sandler Capital Partners IV, FTE, L.P. are Mr. Harvey Sandler, Mr. John Kornreich and Mr. Michael Marocco. Lease with the Parker Law Firm. We lease our 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 at the option of Loislaw.com. Monthly payments under the lease were increased to $14,100 in May 1999 as a result of expansion of space under the lease. During 1996, 1997 and 1998, we paid $49,834, $49,834 and $65,984, respectively, under this lease. Executive Compensation Summary Compensation The following table sets forth the compensation that we paid 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 --------------------------- Other Annual Name and Principal Position Salary Bonus Compensation --------------------------- -------- ----- ------------ Kyle D. Parker, Chief Executive Officer.......... $153,905 $ -- $ -- W. Clark Wigley, Vice President of Business Development..................................... 144,000 -- 6,000(1)
- -------- (1) Consists of a car allowance of $500 per month. 50 Employment Agreements We have entered into the following employment agreements with our Chairman and Chief Executive Officer and our President and Chief Financial Officer:
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
The employment 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 agreements, Mr. Parker or Mr. Beyland will be entitled to receive payments equal to one year's annual salary. If the termination of their employment is in connection with a change of control 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 employment agreements, Messrs. Parker and Beyland each agree not to engage, directly or indirectly, in activities in competition with Loislaw.com either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other capacity during the term of the employment agreement and for 12 months after termination of his employment, if the termination occurs during the term of the agreement. 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. On August 31, 1999, the Board of Directors and on September 28, 1999 our stockholders adopted Amendment No. 1 to the 1996 Plan. We have reserved 1,500,000 shares of common stock for issuance under the 1996 Plan, as amended, 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 200,000 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 transferable 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 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 those 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 a total of 583,122 shares of common stock under the 1996 Plan. We have not granted any options under the 1996 Plan to any of the officers named in the Summary Compensation Table. 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 stock options under the 1996 Plan covering a total of 441,454 shares of our common stock at an exercise price of $2.91. One-half of these options vested on the date of grant and the remaining options vest in equal monthly installments over the following 24 months. We intend to grant 51 Michael Romanies stock options under the 1996 Plan to purchase 100,000 shares at an exercise price equal to the initial public offering price. Twenty percent of these options will vest on the date of grant and the remaining options will vest in approximately equal monthly installments over the following 39 months. In addition we intend to grant to 19 of our employees under the 1996 Plan incentive stock options to purchase a total of 286,500 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 remaining options will vest in approximately equal monthly installments over the following 36 months. Employee Stock Purchase Plan. Our Board of Directors adopted the Employee Stock Purchase Plan on September 24, 1999. Our stockholders adopted the employee stock purchase plan on September 28, 1999. The employee stock purchase plan provides 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. A committee of three or more employees appointed by the Board of Directors will administer the employee stock purchase plan. All of our full-time employees 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 employee stock purchase plan. Employees who would own 5% or more of the total combined voting power or value of our stock immediately after the grant will not be eligible to participate in the employee stock purchase plan. To participate in the employee stock purchase plan, an employee must authorize us to deduct not less than one percent nor more than ten percent from his or her pay during six-month payment periods. The first payment period will commence immediately upon registration of Loislaw.com's common stock under the Exchange Act and will end on April 30, 2000. Thereafter, the payment periods will commence on each May 1 and November 1 and end on the following April 30 and October 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 90% of the fair market value of the common stock at the beginning of the payment period and 90% 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 employee 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. The Board of Directors adopted the Nonqualified Stock Option Plan for Nonemployee Directors on July 22, 1999. The nonemployee directors plan provides for the issuance of a maximum of 320,000 shares of common stock. We expect to submit the nonemployee directors plan to our stockholders for approval at their first annual meeting. The nonemployee directors plan is administered by a committee of employee directors, which approved a grant of options to each nonemployee director 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 elected 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. 401(k) Plan We have established a tax-qualified employee savings and retirement plan. Employees must complete 12 months of service before they are eligible to participate. Employees may contribute a 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 retirement plan. Amounts contributed by Loislaw.com vest over six years. 52 Limitation of Liability and Indemnification of Officers and Directors Our certificate of incorporation and by-laws provide that our directors and officers will be indemnified by us 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, our certificate of incorporation provides that our directors will not be personally liable for monetary damages to us or our stockholders for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our 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 expenses (including attorneys' fees and associated legal expenses), judgments, fines and amounts paid in settlement, actually and reasonably incurred by them 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 our directors and officers against specified losses and that insures us against specific obligations to indemnify our directors and officers. We believe these provisions and agreements are necessary to attract and retain qualified directors and officers. 53 CERTAIN TRANSACTIONS We sold Series A convertible preferred stock to Capital Resource Lenders III, L.P. For information relating to the sale of Series A convertible preferred stock see "Compensation Committee Interlocks and Insider Participation" on page 47. We have outstanding shares of Series B redeemable preferred stock that we will redeem. On November 1, 1995, we borrowed $2.0 million from Melissa A. Parker, sister-in-law of Kyle D. Parker and daughter-in-law of Douglas W. Parker, Sr. Further, we borrowed additional funds from Mrs. Parker and as of June 30, 1997 the outstanding principal balance borrowed was $4.0 million. In November 1997, the $4.0 million loan plus accrued interest in the amount of $395,891 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 dividends are paid as and when declared by the Board. We intend to redeem these shares of Series B redeemable preferred stock upon the completion of this offering. In May 1999 we sold shares of Series C convertible preferred stock and common stock to a limited number of investors. For more information relating to the sale of Series C convertible preferred stock see "Compensation Committee Interlocks and Insider Participation" on pages 47-48. In addition, on May 25, 1999 we sold 172,118 shares of common stock to Dublind Partners, Inc. at $2.91 per share. We entered into a registration rights agreement that requires us to register shares held by our existing stockholders for resale. For information relating to the terms of this Amended and Restated Registration Rights Agreement see "Compensation Committee Interlocks and Insider Trading" on page 48. We entered into a stockholders agreement that grants special rights to our existing stockholders. For information relating to the terms of the Amended and Restated Stockholders' Agreement see "Compensation Interlocks and Insider Trading" on pages 48-49. We paid advisory fees to an affiliate of one of our stockholders. On February 5, 1999, Loislaw.com renewed a letter agreement with Dublind Partners, Inc. and Dublind Securities, Inc. under which the Dublind entities provided to us financial advisory services relating to private financings and an initial public offering. Under the original letter agreement, we issued a warrant to Dublind Investments LLC on November 24, 1997 for the right to purchase 730,692 shares of common stock at $0.005 per share for advisory services relating to the Series A convertible preferred stock financing. We paid Dublind Investments LLC, an affiliate of Dublind Partners, Inc. and Dublind Securities, Inc., $475,000 on May 25, 1999 in connection with their services in our Series C convertible preferred stock financing. Upon the closing of this initial public offering of our common stock, we will also pay to Dublind a fee of $250,000 in exchange for financial advisory services provided to us. We have borrowed money from some of our stockholders. For information relating to our loans from stockholders see "Compensation Committee Interlocks and Insider Participation" on pages 49-50. Three of our Board members are affiliated with our significant stockholders. For information relating to our Board members' affiliations with our stockholders see "Compensation Committee Interlocks and Insider Trading" on page 50. We lease our offices from the Parker Law Firm. For information relating to our lease see "Compensation Committee Interlocks and Insider Participation" on page 50. All future transactions will be approved by a majority of our disinterested directors. 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. 54 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of Loislaw.com's common stock as of September 28, 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: . each person or entity named in the table has sole voting power and investment power (or shares the power with his or her spouse) with respect to all shares of capital stock listed as beneficially owned by the person or entity; and . 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 the person that are exercisable within 60 days of September 28, 1999, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 17,039,524 shares of common stock outstanding as of September 28, 1999, after giving effect to the conversion of the convertible preferred stock, and 20,939,524 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).............. 6,710,000 39.4% -- 6,710,000 32.0% W. Clark Wigley(1)(2).... 280,000 1.6 -- 280,000 1.3 Mark O. Beyland(3)....... 534,084 3.1 -- 534,084 2.5 Robert C. Ammerman(4).... 5,664,170 33.2 -- 5,664,170 27.1 Hannah C. Stone(5)....... 2,237,520 13.1 -- 2,237,520 10.7 D. Randy Laney........... -- -- -- -- -- Capital Resource Lenders III, L.P.(4)............ 5,664,170 33.2 -- 5,664,170 27.1 Sandler Capital Partners IV, L.P.(5)............. 2,237,520 13.1 -- 2,237,520 10.7 Sandler Capital Partners IV, FTE, L.P.(5)........ 2,237,520 13.1 -- 2,237,520 10.7 Douglas W. Parker, Sr.(1)(6)............... 1,559,600 9.2 80,000 1,479,600 7.1 All directors and executive officers as a group (11 persons)............ 15,301,568 88.0 80,000 15,221,568 71.5
- -------- (1) Kyle D. Parker is the trustee of the Parker Trust. Under the terms of the trust, Mr. Parker has sole voting power of all of the shares held of record by the trustee and he is the beneficiary of 3,119,200 shares. Douglas W. Parker, Sr. is the beneficiary of 1,479,600 shares and Melissa Parker is the beneficiary of 1,559,600 shares. Further, W. Clark Wigley has been granted an option by the trust to purchase 280,000 shares, and another employee of Loislaw.com beneficially owns 271,600 shares held of record by the trust. Kyle D. Parker holds a right of first refusal to purchase the 271,600 shares beneficially owned by the employee upon the employee's resignation, termination, incapacity or death. Kyle D. Parker disclaims beneficial ownership of the shares held by the Parker Trust, except to the extent of his pecuniary interest in those shares. 55 (2) Consists of an option to purchase 280,000 shares of common stock from the Parker Trust that is fully vested. (3) Includes 275,908 shares subject to options held by Mr. Beyland that are presently exercisable or will be exercisable within 60 days. (4) Consists of the following: . 2,113,232 shares of common stock held of record by Capital Resource Lenders III, L.P., 1,831,292 shares of common stock that it will acquire upon conversion of Series A convertible preferred stock and 1,715,018 shares of common stock that it will acquire upon conversion of Series C convertible preferred stock; and . 2,148 shares of common stock that CRP Investment Partners III, LLC will acquire upon the conversion of Series A convertible preferred stock and 2,480 shares of common stock covered by a warrant held by it. Mr. Ammerman is a managing member of Capital Resource Partners III, LLC, which is 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 beneficially owned by CRP Investment Partners III, LLC. Mr. Ammerman disclaims beneficial ownership of all shares owned by these entities, except to the extent of his pecuniary interest in those shares. 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 1,587,360 shares of common stock that Sandler Capital Partners IV, L.P. will acquire upon the conversion of Series C convertible preferred stock and 650,160 shares of common stock that Sandler Capital Partners IV, FTE, L.P. will acquire upon the conversion of Series C convertible preferred stock. Ms. Stone is a Managing Director of Sandler Capital Management, a general partnership, which is 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 these 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. (6) Consists of 80,000 shares held of record by Mr. Parker and 1,479,600 shares held of record by the Parker Trust of which Mr. Parker is the beneficiary. 56 DESCRIPTION OF CAPITAL STOCK General Our authorized capital stock consists of 50,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of preferred stock, $0.001 par value. Common Stock As of September 28, 1999, there were 10,186,042 shares of common stock outstanding. Based upon the number of shares outstanding as of that date and giving effect to the issuance of 6,853,482 shares of common stock upon the conversion of the Series A convertible preferred stock and the Series C convertible preferred stock and to the completion of this offering, there will be 20,939,524 shares of common stock outstanding. Upon conversion, the shares of Series A convertible preferred stock 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 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 the shares. Preferred Stock As of September 28, 1999, there were 3,866,330 shares of preferred stock outstanding designated as follows: . 931,044 shares were designated as Series A convertible preferred stock; . 439,589 shares were designated as Series B redeemable preferred stock; and . 2,495,697 shares were designated as Series C convertible preferred stock. A total of 6,133,670 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 that 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 preferred stock could: . decrease the amount of earnings and assets available for distribution to holders of common stock; . adversely affect the rights and powers, including voting rights, of holders of common stock; and . 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 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. 57 Delaware Law and Charter and Bylaw 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 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. An "interested stockholder" is generally 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 bylaws 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 bylaws 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 bylaws, unless a corporation's certificate of incorporation or bylaws, 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 by 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 is Reliance Trust Company of Atlanta, Georgia. 58 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 these large sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. After this offering, 20,939,524 shares of common stock will be outstanding, 21,536,524 shares if the underwriters exercise their over-allotment option in full and 22,155,182 shares if, in addition, common stock is issued upon the exercise of outstanding options and warrants. For more information about our outstanding common stock, see "Capitalization" on page 20. Of these shares, the 3,980,000 shares, 4,577,000 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 16,959,524 shares (17,578,182 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 under an exemption from registration, such as the exemption provided by Rule 144. We, our officers, directors, stockholders, including the selling stockholder, and option holders have entered into lock-up agreements under which we and 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. 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 the 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 the following: . 1% of the then-outstanding shares of common stock; and . 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 the sale with the SEC. Sales under Rule 144 are also subject to 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 the 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 under other rights granted under our stock option 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 some limitations. As of the date of this prospectus, the Board of Directors has authorized up to 1,500,000 shares of common stock for issuance under our employee stock option plan and up to 320,000 shares of common stock for issuance under our nonemployee directors stock option plan and intends to authorize up to 300,000 shares of common stock for issuance under an employee stock purchase plan. At June 30, 1999, 298,264 shares of common stock were 59 issuable under outstanding vested options under our employee stock option plan, 284,858 shares of common stock were issuable pursuant to outstanding options that are not yet exercisable, and 916,878 shares of common stock were available for future grants under our employee stock option plan. 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 under 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 some conditions and restrictions (other than the holding period) of Rule 144. After this offering, a majority of the holders of the 1,862,088 shares of common stock that will have been issued upon conversion of the Series A convertible preferred stock and the holders of at least 30% of the 4,991,394 shares of common stock that will have been 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 following: . 1,862,088 shares of common stock issuable upon conversion of the Series A convertible preferred stock; . 4,991,394 shares of common stock issuable upon conversion of the Series C convertible preferred stock; . 257,514 shares of common stock issuable to Mark Beyland upon the exercise of vested options; . 1,056,616 shares of common stock issued to Capital Resource Lenders III, L.P. after it exercised warrants on May 19, 1999; and . a total of 32,160 shares of common stock issuable upon the exercise of warrants assigned to CRP Investment Partners III, L.L.C. and Rowland Moriarty by Capital Resource Lenders III, L.P. on January 1, 1998. All holders of common stock issuable 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 10,144,181 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 limitations, entitled to include shares of common stock in the 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. For more information about the Amended and Restated Stockholders' Agreement, see "Compensation Committee Interlocks and Insider Participation" on pages 48-49. 60 UNDERWRITING We have entered into an underwriting agreement with the underwriters named below, for whom Prudential Securities Incorporated, U.S. Bancorp Piper Jaffray Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and PrudentialSecurities.com, a division of Prudential Securities Incorporated, 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.................................................. PrudentialSecurities.com............................................... --------- Total................................................................ 3,980,000 =========
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 597,000 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 these dealers may reallow a concession not in excess of $ per share to 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 $850,000 in expenses for this offering, including those of the selling stockholder. We and the selling stockholder have agreed to indemnify the underwriters against 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 under 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. 61 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. These 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 195,000 shares for our active customers and 195,000 shares for our officers, directors, employees and other business affiliates or related third parties for sale at the same offering price. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Prudential Securities Incorporated facilitates the marketing of new issues online through its PrudentialSecurities.com division. Clients of Prudential AdvisorSM, a full service brokerage firm program, may view offering terms and a prospectus online and place orders through their financial advisors. Upon the closing of this offering, we will pay Dublind Investments LLC, an affiliate of Dublind Partners, Inc. and Dublind Securities, Inc., a fee of $250,000 in exchange for financial advisory services relating to this offering. 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 L.L.P., 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. 62 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 some of the 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. 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 to make available to our stockholders quarterly reports for each of the quarters of each fiscal year containing unaudited financial statements. 63 INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report............................................. F-2 Balance Sheets at December 31, 1997 and 1998 and June 30, 1999 (unaudited)............................................................. F-3 Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 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 six months ended June 30, 1999 (unaudited).............................. F-5 Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 (unaudited) and 1999 (unaudited)............................................................. F-7 Notes to Financial Statements............................................ F-8
F-1 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 July 22, 1999 KPMG LLP F-2 LOISLAW.COM, INC. BALANCE SHEETS
December 31, June 30, 1999 ------------------------ June 30, Pro forma 1997 1998 1999 (note 7) ----------- ----------- ----------- ------------- (unaudited) (unaudited) ASSETS Current assets: Cash and cash equivalents............. $ 3,233,172 $ 99,042 $ 3,274,946 $ 3,274,946 Accounts receivable, net of allowance for doubtful accounts of $375,000 and $124,974 at December 31, 1997 and 1998, respectively, and $144,241 at June 30, 1999 (note 5)........... 896,001 1,540,052 1,889,283 1,889,283 Prepaid commissions...... 114,936 311,394 748,193 748,193 Prepaid software license................. -- 96,958 271,125 271,125 Other current assets..... 19,654 138,811 631,302 631,302 ----------- ----------- ----------- ----------- Total current assets..... 4,263,763 2,186,257 6,814,849 6,814,849 Databases, net (notes 3 and 5)................... 6,460,547 10,766,967 15,672,406 15,672,406 Property and equipment, net (notes 4 and 5)...... 501,218 1,446,459 2,931,468 2,931,468 Deferred loan costs, net of accumulated amortization of $48,076 and $728,201 at December 31, 1997 and 1998, respectively, and $1,124,482 at June 30, 1999..................... 4,528,723 3,992,278 4,017,634 4,017,634 Other assets.............. 544,081 820,721 652,779 652,779 ----------- ----------- ----------- ----------- Total assets............. $16,298,332 $19,212,682 $30,089,136 $30,089,136 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current installments of long-term debt (note 5)...................... $ 26,443 $ 954,893 $14,557,184 $14,557,184 Accounts payable......... 1,906,319 2,559,631 3,676,373 3,676,373 Deferred revenues........ 2,540,459 2,961,067 3,566,185 3,566,185 Accrued expenses......... 304,708 461,549 557,861 557,861 ----------- ----------- ----------- ----------- Total current liabilities............. 4,777,929 6,937,140 22,357,603 22,357,603 Deferred revenues......... 981,722 967,046 440,037 440,037 Long-term debt, excluding current installments (note 5)................. 4,080,941 11,317,631 28,614 28,614 Other noncurrent liabilities.............. -- 170,373 245,938 245,938 ----------- ----------- ----------- ----------- Total liabilities........ 9,840,592 19,392,190 23,072,192 23,072,192 ----------- ----------- ----------- ----------- Redeemable equity securities (notes 5 and 7): Series A convertible preferred, 931,044 shares.................. 2,492,100 2,605,840 2,772,452 -- Series B redeemable preferred, redemption value of $4,395,890 plus accrued dividends, 439,589 shares.......... 4,430,358 4,770,380 4,940,157 4,940,157 Series C convertible preferred, 2,495,697 shares.................. -- -- 13,875,977 -- Common stock, 730,692 shares at December 31, 1998 and 2,113,232 shares at June 30, 1999.................... -- 1,189,158 3,673,877 -- Common stock warrants.... 4,293,821 3,154,975 61,602 -- ----------- ----------- ----------- ----------- Total redeemable equity securities.............. 11,216,279 11,720,353 25,324,065 4,940,157 ----------- ----------- ----------- ----------- Stockholders' equity (deficit) (notes 5 and 7): Common stock, $.001 par value. 50,000,000 shares authorized; shares issued--7,180,000 at December 31, 1997, and 1998, 8,082,810 at June 30, 1999 and 17,049,524 on a pro forma basis at June 30, 1999.................... 7,180 7,180 8,083 17,049 Additional paid-in capital................. 415,352 -- 1,168,777 21,543,719 Accumulated deficit...... (5,181,071) (11,890,941) (19,467,881) (19,467,881) Treasury stock, at cost, 10,000 shares at December 31, 1998 and June 30, 1999........... -- (16,100) (16,100) (16,100) ----------- ----------- ----------- ----------- Total stockholders' equity (deficit)........ (4,758,539) (11,899,861) (18,307,121) 2,076,787 Commitments and contingencies (notes 5, 7 and 8)................... ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity (deficit)............... $16,298,332 $19,212,682 $30,089,136 $30,089,136 =========== =========== =========== ===========
See accompanying notes to financial statements. F-3 LOISLAW.COM, INC. STATEMENTS OF OPERATIONS
Six Months Year Ended December 31, Ended June 30, ------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (unaudited) Revenues: Web-based products.... $ 28,333 $ 208,357 $ 842,112 $ 272,054 $ 1,171,184 CD-ROM products....... 1,854,605 3,157,056 3,182,067 1,515,506 1,621,188 Other................. -- -- 1,000,000 353,090 -- ----------- ----------- ----------- ----------- ----------- Total revenues...... 1,882,938 3,365,413 5,024,179 2,140,650 2,792,372 ----------- ----------- ----------- ----------- ----------- Operating expenses: Database costs........ 1,459,845 1,563,152 2,623,717 1,015,866 2,704,417 Costs of other revenues............. -- -- 393,357 147,248 -- Selling and marketing............ 2,152,638 2,363,028 4,606,638 1,902,504 4,320,448 General and administrative....... 1,524,997 1,535,179 1,977,424 1,023,306 1,708,179 Product development... 101,057 86,465 540,866 368,228 333,075 ----------- ----------- ----------- ----------- ----------- Total operating expenses........... 5,238,537 5,547,824 10,142,002 4,457,152 9,066,119 ----------- ----------- ----------- ----------- ----------- Loss from operations......... (3,355,599) (2,182,411) (5,117,823) (2,316,502) (6,273,747) ----------- ----------- ----------- ----------- ----------- Other income (expense): Interest expense, net.................. (250,964) (454,667) (1,548,931) (643,290) (1,308,678) Other, net............ 2,644 (6,353) 41,953 1,002 5,485 ----------- ----------- ----------- ----------- ----------- (248,320) (461,020) (1,506,978) (642,288) (1,303,193) ----------- ----------- ----------- ----------- ----------- Loss before income taxes.............. (3,603,919) (2,643,431) (6,624,801) (2,958,790) (7,576,940) Income tax benefit...... (52,184) -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net loss............ (3,551,735) (2,643,431) (6,624,801) (2,958,790) (7,576,940) Accrued preferred stock dividends and accretion on redeemable preferred stock and common stock warrants............... -- (34,468) (500,421) (210,643) (462,079) ----------- ----------- ----------- ----------- ----------- Net loss applicable to common stock........... $(3,551,735) $(2,677,899) $(7,125,222) $(3,169,433) $(8,039,019) =========== =========== =========== =========== =========== Net loss per share -- basic and diluted...... $ (0.50) $ (0.37) $ (0.99) $ (0.44) $ (0.95) =========== =========== =========== =========== =========== Weighted average common shares outstanding -- basic and diluted...... 7,057,206 7,162,740 7,222,344 7,180,000 8,424,298 =========== =========== =========== =========== =========== Unaudited pro forma information: Net loss per share -- basic and diluted.... $ (0.77) $ (0.72) =========== =========== Weighted average common shares outstanding -- basic and diluted.......... 9,084,432 10,702,336 =========== ===========
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 B Series C Common convertible redeemable convertible Common stock preferred preferred preferred stock warrants Total ----------- ---------- ----------- --------- ---------- ---------- Balances at December 31, 1995............ $ -- $ -- $-- $ -- $ -- $ -- Issuance of 120,000 shares of common stock for cash........ -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- ---------- ---------- ---- --------- ---------- ---------- Balances at December 31, 1996............ -- -- -- -- -- -- Issuance of 60,000 shares of common stock for cash............ -- -- -- -- -- -- Issuance of 931,044 shares of Series A convertible 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 redeemable preferred stock........... -- 4,395,890 -- -- -- 4,395,890 Issuance of warrants to purchase 2,675,278 shares of redeemable common stock.... -- -- -- -- 4,293,821 4,293,821 Accrued dividends on Series B redeemable 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 redeemable preferred stock........... -- 340,022 -- -- 340,022 Accretion on redeemable equity securities...... 113,740 -- -- -- 46,659 160,399 Exercise of warrants for 730,692 shares of redeemable common stock.... -- -- -- 1,189,158 (1,185,505) 3,653 Purchase of treasury stock, 10,000 shares... -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- ---------- ---------- ---- --------- ---------- ---------- Balances at December 31, 1998............ 2,605,840 4,770,380 -- 1,189,158 3,154,975 11,720,353 Stockholders' Equity (Deficit) ------------------------------------------------------ Retained Additional earnings/ Common paid-in (accumulated Treasury stock capital deficit) stock Total ------ ---------- ------------- --------- ------------ Balances at December 31, 1995............ $7,000 $ -- $ 1,014,095 $ -- $ 1,021,095 Issuance of 120,000 shares of common stock for cash........ 120 299,880 -- -- 300,000 Net loss........ -- -- (3,551,735) -- (3,551,735) ------ ---------- ------------- --------- ------------ Balances at December 31, 1996............ 7,120 299,880 (2,537,640) -- (2,230,640) Issuance of 60,000 shares of common stock for cash............ 60 149,940 -- -- 150,000 Issuance of 931,044 shares of Series A convertible preferred stock for cash, net of issuance costs of $507,900..... -- -- -- -- -- Conversion of notes payable into 439,589 shares of Series B redeemable preferred stock........... -- -- -- -- -- Issuance of warrants to purchase 2,675,278 shares of redeemable common stock.... -- -- -- -- -- Accrued dividends on Series B redeemable preferred stock........... -- (34,468) -- -- (34,468) Net loss........ -- -- (2,643,431) -- (2,643,431) ------ ---------- ------------- --------- ------------ Balances at December 31, 1997............ 7,180 415,352 (5,181,071) -- (4,758,539) Accrued dividends on Series B redeemable preferred stock........... -- (340,022) -- -- (340,022) Accretion on redeemable equity securities...... -- (75,330) (85,069) -- (160,399) Exercise of warrants for 730,692 shares of redeemable common stock.... -- -- -- -- -- Purchase of treasury stock, 10,000 shares... -- -- -- (16,100) (16,100) Net loss........ -- -- (6,624,801) -- (6,624,801) ------ ---------- ------------- --------- ------------ Balances at December 31, 1998............ 7,180 -- (11,890,941) (16,100) (11,899,861)
(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 B Series C Common convertible redeemable convertible Common stock preferred preferred preferred stock warrants Total ----------- ---------- ----------- ---------- ---------- ----------- Issuance of warrants to purchase 204,182 shares of redeemable common stock (unaudited)..... $ -- $ -- $ -- $ -- $ 408,364 $ 408,364 Accrued dividends on Series B redeemable preferred stock (unaudited)..... -- 169,777 -- -- -- 169,777 Accretion on redeemable equity securities (unaudited)..... 166,612 -- -- 80,472 125,690 372,774 Exercise of warrants for 2,113,232 shares of redeemable common stock (unaudited)..... -- -- -- 3,637,993 (3,627,427) 10,566 Issuance of 2,495,697 shares of Series C convertible preferred stock for cash, net of issuance costs of $624,023 (unaudited)..... -- -- 13,875,977 -- -- 13,875,977 Issuance of 172,118 shares of common stock for cash, net of issuance costs of $21,517 (unaudited)..... -- -- -- -- -- -- Cancellation of redemption feature on 730,692 shares of redeemable common stock (unaudited)..... -- -- -- (1,233,746) -- (1,233,746) Net loss (unaudited)..... -- -- -- -- -- -- ---------- ---------- ----------- ---------- ---------- ----------- Balances at June 30, 1999 (unaudited)..... $2,772,452 $4,940,157 $13,875,977 $3,673,877 $ 61,602 $25,324,065 ========== ========== =========== ========== ========== =========== Stockholders' Equity (Deficit) -------------------------------------------------------- Retained Additional earnings/ Common paid-in (accumulated Treasury stock capital (deficit) stock Total ------ ----------- ------------- --------- ------------- Issuance of warrants to purchase 204,182 shares of redeemable common stock (unaudited)..... $ -- $ -- $ -- $ -- $ -- Accrued dividends on Series B redeemable preferred stock (unaudited)..... -- (169,777) -- -- (169,777) Accretion on redeemable equity securities (unaudited)..... -- (372,774) -- -- (372,774) Exercise of warrants for 2,113,232 shares of redeemable common stock (unaudited)..... -- -- -- -- -- Issuance of 2,495,697 shares of Series C convertible preferred stock for cash, net of issuance costs of $624,023 (unaudited)..... -- -- -- -- -- Issuance of 172,118 shares of common stock for cash, net of issuance costs of $21,517 (unaudited)..... 172 478,313 -- -- 478,485 Cancellation of redemption feature on 730,692 shares of redeemable common stock (unaudited)..... 731 1,233,015 -- -- 1,233,746 Net loss (unaudited)..... -- -- (7,576,940) -- (7,576,940) ------ ----------- ------------- --------- ------------- Balances at June 30, 1999 (unaudited)..... $8,083 $1,168,777 $(19,467,881) $(16,100) $(18,307,121) ====== =========== ============= ========= =============
See accompanying notes to financial statements. F-6 LOISLAW.COM, INC. STATEMENTS OF CASH FLOWS
Six Months Year Ended December 31, Ended June 30, ------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (unaudited) Cash flows from operating activities: Net loss.............. $(3,551,735) $(2,643,431) $(6,624,801) $(2,958,790) $(7,576,940) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization......... 638,210 645,416 1,361,238 642,836 1,411,375 Deferred tax benefit.. (52,184) -- -- -- -- Loss on disposal of property and equipment............ -- -- 3,979 -- -- Change in operating assets and liabilities: Accounts receivable.. (154,920) (1,025,210) (758,773) (368,645) 40,852 Prepaid expenses and other current assets.............. 174,168 (132,655) (412,573) (295,774) (1,103,457) Accounts payable..... 1,371,768 (175,172) 823,685 261,211 1,192,307 Accrued expenses..... 326,070 (132,129) 156,841 (200,669) 96,312 Deferred revenue..... 1,597,149 1,768,429 405,932 332,176 78,109 ----------- ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities......... 348,526 (1,694,752) (5,044,472) (2,587,655) (5,861,442) ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Database costs........ (2,741,984) (1,972,244) (4,769,562) (1,793,658) (5,737,218) Purchase of property and equipment........ (218,045) (92,528) (1,224,665) (870,359) (1,668,324) Decrease (increase) in other assets......... 8,892 (8,827) (161,918) (138,788) (222,141) ----------- ----------- ----------- ----------- ----------- Net cash used by investing activities......... (2,951,137) (2,073,599) (6,156,145) (2,802,805) (7,627,683) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Repayment of capital lease obligation..... -- (25,183) (15,385) (9,967) (5,910) Deferred loan costs (note 5)............. -- (553,614) (143,681) -- (13,273) Proceeds from sale of Series A convertible preferred stock, net of $237,263 costs of issuance (note 5).... -- 2,762,737 -- -- -- Proceeds from sale of Series C convertible preferred stock, net of issuance costs of $624,023 (note 5).... -- -- -- -- 8,893,850 Proceeds from notes payable.............. 253,705 6,117,446 8,661,077 3,423,077 9,362,500 Repayment of notes payable.............. (573,905) (2,240,855) (423,077) (423,077) (2,050,623) 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 -- -- 478,485 Repurchase of treasury stock................ -- -- (16,100) -- -- ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities......... 2,386,744 6,899,477 8,066,487 2,990,033 16,665,029 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........... (215,867) 3,131,126 (3,134,130) (2,400,427) 3,175,904 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 $ 832,745 $ 3,274,946 =========== =========== =========== =========== =========== Supplemental cash flow information: Cash paid for interest............. $ 104,217 $ 581,154 $ 683,761 $ 226,342 $ 1,176,070 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 redeemable preferred stock dividends...... -- 34,468 340,022 170,011 169,777 Satisfaction of capital lease obligation through return of equipment.. -- -- 57,475 -- -- Conversion of related party borrowing to Series B redeemable preferred stock (note 7)................... -- 4,395,890 -- -- -- Issuance of warrants (note 5)............. -- 4,293,821 -- -- 408,364 Accretion on redeemable equity securities........... -- -- 160,399 40,632 372,774 Cancellation of redemption feature on redeemable common stock (note 5)....... -- -- -- -- 1,233,746 Conversion of subordinated notes payable into 857,509 shares of Series C convertible preferred stock (note 5)....... -- -- -- -- 4,982,127 Exercise of warrants for satisfaction of subordinated notes payable (note 5)..... -- -- -- -- 10,566
See accompanying notes to financial statements. F-7 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) (1) Operations Loislaw.com, Inc. (the "Company") provides legal and related information to lawyers and law firms over the Internet and on CD-ROM. (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 legal information. 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 the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. As a result, the Company 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 amounted to approximately $170,000 at December 31, 1998, and approximately $438,000 at June 30, 1999. 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, other than overhead allocations, 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 are also capitalized and amortized to production costs once the product is released, on a straight- line basis over the expected lives of the databases, which are estimated at two years. Costs to maintain and enhance databases are expensed as incurred. F-8 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) Amortization expense related to capitalized databases totaled approximately $500,000, $440,000 and $460,000 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 using 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 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 portions of amounts to be received under long-term subscription agreements amounted to approximately $489,000, $603,000 and $213,000, respectively, at December 31, 1997 and 1998 and June 30, 1999 and are 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 for the same legal databases. Accordingly, there are no separate production costs for web-based and CD-ROM sales. Costs of revenue related to the customized database was approximately $147,000 for the first six months of 1998 and approximately $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 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. (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, F-9 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) 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 the 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 each period as shown below:
Six Months Year Ended December 31, Ended June 30, ---------------------------------- ---------------------- 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- Net loss................ $3,551,735 $2,643,431 $6,624,801 $2,958,790 $7,576,940 Accrued dividends on preferred stock........ -- 34,468 340,022 170,011 169,777 Accretion on redeemable common stock warrants.. -- -- 46,659 -- 125,690 Accretion on redeemable preferred stock........ -- -- 113,740 40,632 166,612 ---------- ---------- ---------- ---------- ---------- Net loss applicable to common stockholders.... $3,551,735 $2,677,899 $7,125,222 $3,169,433 $8,039,019 ========== ========== ========== ========== ========== Weighted average common shares outstanding..... 7,057,206 7,162,740 7,222,344 7,180,000 8,424,298 ========== ========== ========== ========== ========== Loss per share.......... $ (0.50) $ (0.37) $ (0.99) $ (0.44) $ (0.95) ========== ========== ========== ========== ==========
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 210,000, 2,743,278, and 2,086,254, respectively for the years ended December 31, 1996, 1997 and 1998 and 2,816,946 and 618,658, respectively, for the six months ended June 30, 1998 and 1999. Unaudited pro forma loss per share and weighted average shares outstanding reflect the conversion of 931,044 shares of Series A convertible preferred stock and 2,495,697 shares of Series C convertible preferred stock into 6,853,482 shares of common stock and the elimination of the redemption feature on outstanding warrants for 35,536 shares of common stock as if the conversion and the elimination of the redemption feature F-10 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) had taken place at the beginning of the respective periods. Pro forma loss per share has been computed by dividing the pro forma net loss attributable to common stock by the pro forma weighted average shares of common stock outstanding during the period as shown below:
Six Months Year Ended Ended December 31, 1998 June 30, 1999 ----------------- ------------- Net loss................................ $ 6,624,801 $ 7,576,940 Accrued dividends on preferred stock.... 340,022 169,777 ----------- ----------- Pro forma net loss attributable to common stockholders.................... $ 6,964,823 $ 7,746,717 =========== =========== Weighted average common shares outstanding............................ 7,222,344 8,424,298 Conversion of Series A and Series C convertible preferred stock into common stock.................................. 1,862,088 2,278,038 ----------- ----------- Pro forma weighted average common shares outstanding............................ 9,084,432 10,702,336 =========== =========== Pro forma loss per share................ $ (0.77) $ (0.72) =========== ===========
(m) Unaudited Interim Financial Information The interim financial statements as of June 30, 1999 and for the six months ended June 30, 1999 and 1998 are unaudited. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial statement have been included in such unaudited financial statements. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the entire year. (3) Database Costs Database costs consist of the following:
December 31, ---------------------- June 30, 1997 1998 1999 ---------- ----------- ----------- Court ruling databases................... $6,696,994 $ 9,303,468 $14,509,095 Statutes and regulations databases....... 939,048 3,102,136 3,633,727 ---------- ----------- ----------- 7,636,042 12,405,604 18,142,822 Less accumulated amortization............ 1,175,495 1,638,637 2,470,416 ---------- ----------- ----------- $6,460,547 $10,766,967 $15,672,406 ========== =========== ===========
(4) Property and Equipment Property and equipment consist of the following:
December 31, --------------------- June 30, 1997 1998 1999 ---------- ---------- ---------- Office furniture and equipment............ $ 241,952 $ 246,172 $ 686,927 Data processing equipment................. 906,243 1,916,936 3,107,174 Leasehold improvements.................... 18,073 149,611 186,942 ---------- ---------- ---------- 1,166,268 2,312,719 3,981,043 Less accumulated depreciation and amortization............................. 665,050 866,260 1,049,575 ---------- ---------- ---------- $ 501,218 $1,446,459 $2,931,468 ========== ========== ==========
F-11 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) (5) Debt Debt consists of the following:
December 31, ---------------------- June 30, 1997 1998 1999 ---------- ----------- ----------- 12.5% Senior Subordinated Notes......... $4,000,000 $ 8,000,000 $ 9,989,434 Notes payable........................... -- 2,907,000 4,567,750 8.25% revolving line of credit, due June 2000................................... -- 1,331,000 -- Capital lease obligation................ 107,384 34,524 28,614 ---------- ----------- ----------- Total debt............................ 4,107,384 12,272,524 14,585,798 Less current installments............... 26,443 954,893 14,557,184 ---------- ----------- ----------- $4,080,941 $11,317,631 $ 28,614 ========== =========== ===========
Interest expense on related party borrowings was $204,344 in 1996 and $271,823 in 1997 (none in 1998). 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 ("Notes") and a Warrant ("Warrant") and $3,000,000 of Series A convertible 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 November 30, 2003. The Warrant entitles CRL to purchase 1,944,586 shares of common stock of the Company at $.005 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 are being amortized over the term of the notes using the interest method. On January 1, 1998 CRL assigned 32,160 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 730,692 shares of the Company's common stock at $.005 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. F-12 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) 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 sell 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 four separate notes, including a working capital revolving line of credit ("Revolving Credit"), two converting equipment lines of credit ("Equipment LOC"), and a converting SBLC line of credit ("SBLC LOC"). 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 1, 2000. In addition, the Company is required to pay a quarterly commitment fee of $6,250. Under one Equipment LOC note, the Company may borrow up to $1,000,000 for the purchase of qualified equipment, as defined by the Fleet agreement. Advances under this Equipment LOC note amounted to $407,000 at December 31, 1998 and $994,000 at June 30, 1999. Advances under this Equipment LOC converted to Term Note A at June 30, 1999, and are repayable in thirty-six equal monthly installments, plus interest, beginning July 1999. Under the other Equipment LOC note, the Company may borrow up to $1,500,000 for the purchase of qualified equipment. Advances under this note, which amounted to $292,500 at June 30, 1999 (none at December 31, 1998), shall automatically convert at June 1, 2000 to Term Note B and shall be repaid by the Company in thirty-six equal monthly installments, plus interest, beginning July 2000. Borrowings under the Equipment LOC and term notes bear interest, payable monthly, at Fleet's prime rate plus 1 1/2% (9.25% at December 31, 1998). Pursuant to the provisions of the SBLC LOC note, the Company may borrow up to $4,000,000 from Fleet through June 30, 1999, 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 ($3,281,250 at June 30, 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, beginning 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 warrants in February 1999 to the guarantors. The warrants entitle the holders to purchase 204,182 shares of common stock of the Company and have the same terms as the original warrants issued in November 1997 and, accordingly, have been classified as redeemable equity securities in the F-13 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) 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 (2,113,232 shares) in exchange for satisfaction of $10,566 of subordinated notes payable. After exercise of these warrants, all remaining warrants (35,536 shares) are held by CRP and Moriarty. The per share fair value of common stock warrants issued during 1997 and 1999 was $1.60 and $2.00, respectively, on the date of issuance and was determined using the Black Scholes option pricing model with the following assumptions: no expected dividend yield; risk-free interest rate of 4.5% in 1997 and 1999; and an expected life of 7.0 years and 5.5 years, respectively in 1997 and 1999. 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 ("Series C Agreement") with CRL, Dublind Partners, Inc. ("Dublind"), Mark Beyland ("Beyland"), the president of the Company, and other purchasers whereby the Company issued 172,118 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 $4,982,127 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 an advisory fee of $475,000 and paid other costs in connection with the financing amounting to $170,626. These costs of issuance have been allocated between common stock and the Series C Preferred in the amounts of $21,517 and $624,023, respectively. The net proceeds from the Series C Agreement are being used for database development costs and other general corporate purposes. In connection with the Series C 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 730,692 shares previously obtained from exercising warrants in 1998 are no longer subject to such redemption agreements. Accordingly, such shares have been reclassified into common stock and additional paid-in capital as of May 25, 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. However, at June 30, 1999, the Company was not in compliance with one of the financial ratio covenants of the Fleet agreement. The Company has obtained a waiver of the noncompliance until March 31, 2000. Based upon current operations, however, the Company again expects to be in violation of this same covenant at March 31, 2000, the next measurement date for the covenant. Should the Company be in violation of its Fleet covenants, CRL could also accelerate the due date on its subordinated notes. On June 18, 1999, the Company filed a registration statement with the Securities and Exchange Commission to sell shares of common stock in an initial public offering. If the public offering is completed prior to March 31, 2000, the Company's management expects to be in compliance with this covenant as well as all other covenants. If the Company is unable to F-14 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) complete its public offering, and should Fleet require repayment of the borrowings prior to their scheduled maturity, the Company will be required to obtain alternate sources of financing to repay such obligations. Since Fleet has waived violations through December 31, 1999, the Company has classified its debt according to its scheduled maturities at December 31, 1998. Since there can be no assurance that the Company will be able to successfully complete its public offering or obtain alternate sources of financing, the Company has classified all of the Fleet and CRL debt as current at June 30, 1999. The aggregate maturities of long-term debt for the five years ending December 31, 2003 are as follows: 1999, $954,893; 2000, $2,792,227; 2001, $457,571; 2002, $67,833; and 2003, $8,000,000. (6) Income Taxes There was no income tax benefit for the years ended December 31, 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......... $(1,225,332) $ (898,767) $(2,252,432) 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 $233,685 in 1996; $170,553 in 1997; and $427,386 in 1998............................... (154,232) (112,565) (282,074) Change in valuation allowance due to operating losses not utilized...... 1,324,400 1,004,687 2,517,630 Other, net.......................... 2,980 6,645 16,876 ----------- ---------- ----------- $ (52,184) $ -- $ -- =========== ========== ===========
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............................. (2,329,087) (4,846,717) ----------- ---------- Total deferred tax assets..................... 2,500,571 4,161,959 ----------- ---------- Deferred tax liabilities: Capitalized database production costs expensed as incurred for tax purposes................... (2,473,743) (4,122,671) Other, net...................................... (26,828) (39,288) ----------- ---------- Total deferred tax liabilities................ (2,500,571) (4,161,959) ----------- ---------- Net deferred tax liability.................... $ -- $ -- =========== ==========
F-15 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) The valuation allowance at January 1, 1997 was $1,324,400. 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 60,000,000 shares of stock consisting of 50,000,000 shares of $.001 par value common stock and 10,000,000 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 June 30, 1999, there are 6,133,670 shares of undesignated and unissued preferred stock. The Series A Preferred shares, which have an initial liquidation value of $3,000,000, and the Series C Preferred shares, which have an initial liquidation value of $15,000,002, are convertible, at the option of the holder, into two shares of common stock for each preferred share 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. The unaudited pro forma balance sheet at June 30, 1999 is based upon the historical unaudited balance sheet and gives effect to the conversion of the Series A Preferred and Series C Preferred shares into shares of common stock and the elimination of the redemption features on 2,113,232 shares of common stock and outstanding warrants for the purchase of 35,536 shares of common stock as if the conversion and the elimination of the redemption feature had occurred on June 30, 1999. 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. F-16 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) (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 1,000,000 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 ratably over the thirty-six 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 $0.42, $0.55 and $0.18, 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............................... 210,000 $2.50 -------- Balance at December 31, 1996............ 210,000 2.50 -- Granted............................... 12,000 2.50 Forfeited............................. (154,000) 2.50 -------- Balance at December 31, 1997............ 68,000 2.50 14,000 Granted............................... 73,668 2.50 -------- Balance at December 31, 1998............ 141,668 2.50 33,750 ========
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 on option to Beyland on May 25, 1999 for 441,454 shares at an option price of $2.91 per share. The options vest 50% at the date of grant and the remaining options vest in twenty-four equal monthly amounts. (c) Subsequent Event The Company was originally incorporated in 1987 in Arkansas as Law Office Information Systems, Inc. On June 18, 1999 the Company was reincorporated in Delaware as Loislaw.com, Inc. F-17 LOISLAW.COM, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and with respect to the six months ended June 30, 1998 and 1999 is unaudited) On July 22, 1999, the Board of Directors declared a two-for-one stock split, effected in the form of a stock dividend. All share and per share data in the financial statements have been restated to give effect to the stock split. (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, 2003. The lease is renewable for two additional successive periods of five years each. Rent expense was approximately $50,000 in both 1996 and 1997 and approximately $66,000 in 1998. 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-18 - ------------------------------------------------------------------------------- Until , 1999, 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] Loislaw.com Prudential Securities U.S. Bancorp Piper Jaffray Dain Rauscher Wessels a division of Dain Rauscher Incorporated PrudentialSecurities.com - ------------------------------------------------------------------------------- Description of Inside Front Cover Graphic: The inside front cover graphic depicts a computer showing the loislaw.com home page, with the Lady Lois logo on, and projected outward from, the screen. The background is composed of bookshelves containing law books. The heading across the top of the page is in large text and reads "EVOLUTION OF LEGAL INFORMATION". Description of Fold-Out Graphics: The fold-out graphics consist of two pages. On these two pages, there are six pictures (two rows of three) of six different computer screens depicting various aspects of the Loislaw.com product. The background of the two pages is a blue sky with clouds. The heading across the top of the two pages is underlined large text that reads "LOISLAW.COM. . . LEGAL INFORMATION FOR THE INTERNET AGE". The following five phrases are centered along the top of the fold-out pages and appear directly below the heading: . Comprehensive federal and state legal information and news; . Databases updated with the latest legal information; . Database quality standards that we have tested to 99.995% accuracy; . Access available at an annual fixed price; and . Utilizes standard browser-based Internet technology. Starting from the far left side of the top row, the first computer screen depicts a personal home page for a Loislaw.com customer. The heading that appears above this picture is composed of yellow text against a red background and reads "Personalized Access." The standard text that is located directly below the screen reads, "Custom start page to simplify your access, retrieve saved searches, locate previous steps, link you to LOIS LawWatch, track research time and get around-the-clock customer service." The computer screen located in the center of the top row depicts case summaries you can view after completing a search. The heading that appears above this picture is composed of yellow text against a red background and reads "Electronic Annotation". The standard text that is located directly below the screen reads, "View summaries of documents provided by a search that gives you the ability to determine the relevance of the search results prior to reviewing the full text." The computer screen located at the far right side of the top row depicts some of the various sources that are available to you when conducting a search. The heading that appears above this picture is composed of yellow text against a red background and reads "Search Many Legal Sources." The standard text that is directly below the screen reads, "Simultaneously search multiple legal databases using sophisticated search technology that supports both traditional and plain-language searches." The computer screen located in the far left side of the bottom row depicts the LOIS LawWatch feature. The heading that appears above this picture is composed of yellow text against a red background and reads "LOIS LawWatch". The standard text that is directly below the screen reads, "LOIS LawWatch searches all databases and news feeds selected by you around-the-clock and automatically delivers results via e-mail or to your personalized home page." The computer screen located in the center of the bottom row depicts the partial display of two documents. The heading that appears above this picture is composed of yellow text against a red background and reads "View Multiple Documents". The standard text that is directly below the screen reads, "Pop-up abilities, which permit simultaneous review of original and hyperlinked documents." The computer screen located on the far right side of the bottom row lists various news sources that you can search. The heading that appears above this picture is composed of yellow text against a red background and reads "Customized News Feeds." The standard text that is directly below the screen reads, "Provides news feed of over 100,000 news articles per month from more than 400 domestic and international sources of legal, business, financial, health, technology and political news." Description of Inside Back Cover: The inside back cover graphic depicts the sources of our databases as well as our production process. The heading across the top of the page is underlined large text that reads "OUR LEGAL DATABASE PRODUCTION PROCESS". The pictures located directly below the heading represent seven information sources from which we obtain the data for our databases and are identified by the following seven headings: Regulatory Agencies, Bar Associations, Secretaries of State, State Courts, Legislatures, Supreme Courts and Attorneys General. Under these pictures, there is an additional graphic that contains five horizontal rows of boxes with arrows pointing downward from each box (other than the box on the bottom row) to a box below it. The top row contains three boxes which contain text: "Receive Electronic Data from Third Party Converters", "Receive Electronic Data from Data Providers" and "Receive Print from Data Providers & Convert to Electronic Format". There is an arrow pointing downward from each box on this row to a single box on the second row which contains text: "Editing". There is an arrow pointing downward from this box to the single box in the third row, which contains text: "Coding". There is an arrow pointing downward from this box to the single box in the fourth row, which contains text: "Quality Assurance". There is an arrow pointing downward from this box to the single box in the fifth row, which contains text: "1,300 databases with over 5.5 million documents". There is an arrow pointing downward from this box to a computer depicting the Loislaw.com home page. 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............... $ 95,000* Accountants' fees and expenses.................................... $200,000* Legal fees and expenses........................................... $250,000* Printing and engraving expenses................................... $245,000* Transfer agent's and registrar's fees............................. $ 8,000* Blue sky fees and expenses........................................ $ 15,000* Miscellaneous..................................................... $ 8,150* -------- Total........................................................... $850,000 ========
- -------- * Estimate. 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 intend to obtain directors and officers liability insurance with maximum policy limits of $20 million. We have entered 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........... 120,000 shares of common Johnnie L. Hernreich and $300,000 stock Larry Murray April 23, 1997.......... 60,000 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 730,692 shares services of common stock November 24, 1997....... 931,044 shares of Series Capital Resource $3,000,000.00 A convertible preferred Lenders III, L.P. November 24, 1997....... Warrant for the right to Capital Resource (1) purchase of 1,944,586 Lenders III, L.P. shares of common stock December 9, 1998........ 730,692 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 200,806 Lenders III, L.P. shares of common stock February 9, 1999........ Warrant for the right to CRP Investment (2) purchase of 236 shares Partners, LLC of common stock February 9, 1999........ Warrant for the right to Rowland T. Moriarity (2) purchase of 3,140 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............ 2,113,232 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 $4,982,127 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............ 172,118 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 $4,611,280.80 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 1,944,586 shares of its common stock to Capital Resource Lenders III at a purchase price of $.005 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 200,806, 236 and 3,140 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 $.005 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 1996 to May 1999, we granted incentive stock options to purchase an aggregate of 583,122 shares of common stock to employees and officers of Loislaw.com under the 1996 Stock Option Plan at exercise prices ranging from $2.50 to $2.91. In addition, in July 1999 and in September 1999 our Compensation Committee approved the grant of incentive stock options to purchase an aggregate of 386,500 shares of common stock at an exercise price equal to the initial public offering price to employees and officers of Loislaw.com that will be effective on the date on which the initial public offering price for Loislaw.com's common stock is determined. 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. We expect to register the shares covered by these options on a Form S-8 after the closing of the public offering. In addition, on November 24, 1997 and on February 9, 1999, Loislaw.com granted warrants to investors to purchase an aggregate of 2,879,460 shares of common stock of Loislaw.com at an exercise price of $.005 per share. These issuances were exempt from registration under Section 4(2) of, and Rule 506 promulgated under, the Securities Act. On May 19, 1999, one investor exercised its warrants and purchased a total of 2,113,232 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 **3.3 Certificate of Designation as filed with the State of Delaware ***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 L.L.P. ****10.1 1996 Stock Option Plan, as amended ***10.2 Employment Agreement by and between Loislaw.com and Kyle D. Parker ***10.3 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 Letter of Intent by and between Loislaw.com and ChoicePoint Inc. dated as of September 7, 1999 *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 Stock Option Plan for Nonemployee 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 Amendment No. 4 to Subordinated Note and Securities Purchase Agreement and Amendment Agreement by and among Loislaw.com, Capital Resource Lenders III, L.P., CRP Investment Partners III, L.L.C., Rowland Moriarty and certain stockholders, dated as of January 29, 1999 ***10.20 Form of Loislaw.com, Inc. 1996 Stock Option Plan Option Agreement by and between Loislaw.com and Michael E. Romanies ***10.21 Form of Law Office Information Systems, Inc. 1996 Stock Option Plan Option Agreement by and between Loislaw.com and Mark O. Beyland *10.22 Form of Customer Subscription Agreement *21.0 Subsidiaries of Loislaw.com ****23.1 Consent of Thompson & Knight L.L.P. (included in its opinion filed as Exhibit 5.1 hereto) *****23.2 Consent of KPMG LLP ****23.3 Consents of Veronis Suhler & Associated dated as of July 6, 1999 and August 18, 1999 ****23.4 Consents of Simba Information, Inc. dated as of July 7, 1999 and August 17, 1999 *24.1 Power of Attorney (included on signature page of the Registration Statement as initially filed) ****27.1 Financial Data Schedule
- -------- *Previously filed on June 18, 1999. ** Previously filed on July 2, 1999. ***Previously filed on August 2, 1999. ****Previously filed on September 9, 1999. *****Filed herewith. +Confidential treatment has been obtained with respect to certain portions of these agreements. (b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts. 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. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Loislaw.com, Inc. has duly caused this Amendment No. 4 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Van Buren, State of Arkansas, on September 28, 1999. Loislaw.com, Inc. /s/ Kyle D. Parker By: _________________________________ Kyle D. Parker Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 4 to the Registration Statement has been signed by the following persons on September 28, 1999 in the capacities indicated:
Signature Title --------- ----- /s/ Kyle D. Parker Chairman of the Board and ______________________________________ Chief Executive Officer Kyle D. Parker (principal executive officer) /s/ Mark O. Beyland President, Chief Financial ______________________________________ Officer and Director Mark O. Beyland /s/ Pamela G. Rogers Controller and chief ______________________________________ accounting officer Pamela G. Rogers Robert C. Ammerman* Director ______________________________________ Robert C. Ammerman Randy Laney* Director ______________________________________ D. Randy Laney Hannah C. Stone* Director ______________________________________ Hannah C. Stone *BY: /s/ Kyle D. Parker ______________________________________ Kyle D. Parker Attorney-in-Fact
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 EXHIBIT INDEX
Exhibit Number ------- *****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 **3.3 Certificate of Designation as filed with the State of Delaware ***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 L.L.P. ****10.1 1996 Stock Option Plan, as amended ***10.2 Employment Agreement by and between Loislaw.com and Kyle D. Parker ***10.3 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 Letter of Intent by and between Loislaw.com and ChoicePoint Inc. dated as of September 7, 1999 *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 Stock Option Plan for Nonemployee 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
Exhibit Number ------- ***10.19 Amendment No. 4 to Subordinated Note and Securities Purchase Agreement and Amendment Agreement by and among Loislaw.com, Capital Resource Lenders III, L.P., CRP Investment Partners III, L.L.C., Rowland Moriarty and certain stockholders, dated as of January 29, 1999 ***10.20 Form of Loislaw.com, Inc. 1996 Stock Option Plan Option Agreement by and between Loislaw.com and Michael E. Romanies ***10.21 Form of Law Office Information Systems, Inc. 1996 Stock Option Plan Option Agreement by and between Loislaw.com and Mark O. Beyland *10.22 Form of Customer Subscription Agreement *21.0 Subsidiaries of Loislaw.com ****23.1 Consent of Thompson & Knight L.L.P. (included in its opinion filed as Exhibit 5.1 hereto) *****23.2 Consent of KPMG LLP ****23.3 Consents of Veronis Suhler & Associated dated as of July 6, 1999 and August 18, 1999 ****23.4 Consents of Simba Information, Inc. dated as of July 7, 1999 and August 17, 1999 *24.1 Power of Attorney (included on signature page of the Registration Statement as initially filed) ****27.1 Financial Data Schedule
- -------- *Previously filed on June 18, 1999. ** Previously filed on July 2, 1999. ***Previously filed on August 2, 1999. ****Previously filed on September 9, 1999. *****Filed herewith. +Confidential treatment has been obtained with respect to certain portions of these agreements. EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 EXECUTION COPY -------------- LOISLAW.COM, INC. 3,980,000 Shares/1/ Common Stock UNDERWRITING AGREEMENT ---------------------- September 29, 1999 PRUDENTIAL SECURITIES INCORPORATED DAIN RAUSCHER WESSELS U.S. BANCORP PIPER JAFFRAY, INC. PRUDENTIALSECURITIES.COM As Representatives of the several Underwriters c/o Prudential Securities Incorporated One New York Plaza New York, New York 10292 Ladies and Gentlemen: Loislaw.com, Inc., a Delaware corporation (the "Company"), and Douglas W. Parker, Sr., a stockholder of the Company (the "Selling Stockholder") hereby severally confirm their agreement with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly authorized to act as representatives (in such capacities, the "Representatives"), as set forth below. If you are the only Underwriters, all references herein to the Representatives shall be deemed to be to the Underwriters. 1. Securities. Subject to the terms and conditions herein contained, the ---------- Company proposes to issue and sell, and the Selling Stockholder proposes to sell, severally, to the several Underwriters an aggregate of 3,900,000 shares and 80,000 shares, respectively, (the "Firm Securities") of the Company's Common Stock, par value $.001 per share ("Common Stock"). The Company also proposes to issue and sell to the several Underwriters not more than 597,000 additional shares of Common Stock if requested by the Representatives as provided in Section 3 of this Agreement. Any and all shares of Common Stock to be purchased by the Underwriters pursuant to such options are referred to herein as the "Option Securities", and the Firm Securities and any Option Securities are collectively referred to herein as the "Securities". /1/ Plus an option to purchase from the Company up to 597,000 additional shares to cover over-allotments. 2(A). Representations and Warranties of the Company. The Company ---------------------------------------------- represents and warrants to, and agrees with, each of the several Underwriters that: (a) A registration statement on Form S-1 (File No. 333-81107) with respect to the Securities, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the Securities, that shall identify the Preliminary Prospectus (as hereinafter defined) that it supplements containing such information as is required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not rely on Rule 434 under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of this sentence as have been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional shares of Common Stock, which registration shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means the registration statement initially filed relating to the Securities, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act (including the Registration Statement and any Preliminary Prospectus or Prospectus incorporated therein at the time such Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means: (A) if the Company relies on Rule 434 under the Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; -2- (B) if the Company does not rely on Rule 434 under the Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act; or (C) if the Company does not rely on Rule 434 under the Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Act, the prospectus included in the Registration Statement; and the term "Term Sheet" means any term sheet that satisfies the requirements of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus that includes a Term Sheet shall mean the date of such Term Sheet. (b) The Commission has not issued any order preventing or suspending use of any Preliminary Prospectus. When any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (b) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically for use therein. (c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has not been declared effective (i) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration -3- Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. (d) The Company has no subsidiaries. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of Delaware and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company. (e) The Company has full power (corporate and other) to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus; and the Company has full power (corporate and other) to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. (f) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Firm Securities and the Option Securities have been duly authorized and at the Firm Closing Date or the related Option Closing Date (as the case may be), after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable. No holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities, and no holder of securities of the Company has any right which has not been fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Act in the public offering contemplated by this agreement. (g) The capital stock of the Company conforms to the description thereof contained in the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (h) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding (A) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations of the Company to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (i) The financial statements and schedules of the Company included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the financial position of the Company and the results of operations and changes in financial condition as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting -4- principles consistently applied throughout the periods involved (except as otherwise noted therein). The selected financial data set forth under the caption "Selected Financial Data" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present, on the basis stated in the Prospectus (or such Preliminary Prospectus), the information included therein. (j) KPMG LLP, who have certified certain financial statements of the Company and delivered their report with respect to the audited consolidated financial statements and schedules included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent public accountants as required by the Act and the applicable rules and regulations thereunder. (k) The execution and delivery of this Agreement have been duly authorized by the Company and this Agreement has been duly executed and delivered by the Company, and is the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. (l) No legal or governmental proceedings are pending to which the Company or any of its subsidiaries is a party or to which the property of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and, to the Company's knowledge, no such proceedings have been threatened against the Company or with respect to any of its properties; and no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) or filed as required. (m) The issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or blue sky laws and, if the registration statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other material agreement or instrument to which the Company is a party or by which the Company or any of its properties are bound, or the charter documents or by-laws of the Company, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company. (n) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, the Company has not sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered -5- by insurance, or from any labor dispute or any legal or governmental proceeding and there has not been any material adverse change, or any development that may reasonably be expected to result in a material adverse change, in the condition (financial or otherwise), management, business prospects, net worth, or results of the operations of the Company, except in each case as described in or contemplated by the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. (o) The Company has not, directly or indirectly, (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities by the Selling Stockholder under this Agreement). (p) The Company has not distributed and, prior to the later of (i) the Closing Date and (ii) the completion of the distribution of the Securities, will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or other materials, if any permitted by the Act. (q) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (1) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (3) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its consolidated subsidiaries, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (r) The Company has good and marketable title in fee simple to all items of real property and marketable title to all personal property owned by the Company, in each case free and clear of any security interests, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company, and any real property and buildings held under lease by the Company are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such property and buildings by the Company, in each case except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). -6- (s) No labor dispute with the employees of the Company exists or, to the Company's knowledge, is threatened or imminent that may reasonably be expected to result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (t) The Company owns or possesses all material patents, patent applications, trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information described as being owned by it in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the Company has not received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (u) The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; the Company has not been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (v) The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit, except (i) where the failure to have obtained such certificate, authorization or permit, or the revocation or modification thereof, would not result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company or (ii) as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (w) The Company is not required to register as an investment company under the Investment Company Act of 1940, as amended, and this transaction will not cause the Company to become an investment company subject to registration under such Act. (x) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the Company) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of -7- the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (y) The Company is not in violation of any federal or state law or regulation relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials and the Company has received all permits, licenses or other approvals required of it under applicable federal and state occupational safety and health and environmental laws and regulations to conduct its business, and the Company is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals which would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (z) Each certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters pursuant to this Agreement shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (aa) The Company does not own any shares of stock or any other equity securities of any corporation or have any equity interest in any firm, partnership, association or other entity, that is required to be described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and is not so described. (bb) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (cc) The Company is not in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, material lease or other material agreement or instrument to which the Company is a party or by which the Company or any of its properties is bound. 2(B). Representations and Warranties of the Selling Stockholder. The ---------------------------------------------------------- Selling Stockholder represents and warrants to, and agrees with, each of the several Underwriters that: -8- (a) The Selling Stockholder has full power to enter into this Agreement and to sell, assign, transfer and deliver to the Underwriters the Securities to be sold by the Selling Stockholder hereunder in accordance with the terms of this Agreement; and this Agreement has been duly executed and delivered by the Selling Stockholder, and is the valid and binding agreement of the Selling Stockholder, enforceable against the Selling Stockholder in accordance with its terms. (b) The Selling Stockholder has duly executed and delivered a Power of Attorney (the "Power-of-Attorney"), in the form heretofore delivered to the Representatives, appointing Kyle D. Parker as the Selling Stockholder's attorney-in-fact (the "Attorney-in-Fact") with authority to execute, deliver and perform this Agreement on behalf of the Selling Stockholder. Certificates in negotiable form, endorsed in blank or accompanied by blank stock powers duly executed, with signatures appropriately guaranteed, representing the Securities to be sold by the Selling Stockholder hereunder have been delivered to the Attorney-in-Fact pursuant to the Power-of-Attorney for the purpose of delivery pursuant to this Agreement. The Selling Stockholder has full power to enter into the Power-of-Attorney and to perform his obligations thereunder. The Selling Stockholder agrees that each of the Securities represented by the certificates on deposit with the Attorney-in-Fact is subject to the interests of the Underwriters hereunder, that the arrangements made for such custody, the appointment of the Attorney-in-Fact and the right, power and authority of the Attorney-in-Fact to execute and deliver this Agreement, to agree on the price at which the Securities (including the Selling Stockholder's Securities) are to be sold to the Underwriters, and to carry out the terms of this Agreement, are to that extent irrevocable and that the obligations of the Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or the Power-of-Attorney, by any act of the Selling Stockholder, by operation of law or otherwise, by the death or incapacity of the Selling Stockholder, in the case of a trust or estate by the death of the trustee or trustees or the executor or executors or the termination of such trust or estate, or by the occurrence of any other event. If the Selling Stockholder, trustee or executor should die or become incapacitated or any such trust should be terminated, or if any other event should occur, before the delivery of such Securities hereunder, the certificates for such Securities deposited with the Attorney-in-Fact shall be delivered by the Attorney-in-Fact in accordance with the respective terms and conditions of this Agreement as if such death, incapacity, termination, liquidation or dissolution or other event had not occurred, regardless of whether or not the Attorney-in-Fact shall have received notice thereof. (c) The Selling Stockholder is the lawful owner of the Securities to be sold by the Selling Stockholder hereunder and upon sale and delivery of, and payment for, such Securities, as provided herein, assuming the Underwriters have purchased the Securities for value in good faith and without notice of any security interest, lien, encumbrance, equity, claim or other adverse claim, the Selling Stockholder will convey good and valid title to such Securities, free and clear of any security interests, liens, encumbrances, equities, claims or other adverse claims (other than those arising by or through the Underwriters). (d) The Selling Stockholder has not, directly or indirectly, (i) taken any action designed to cause or result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale -9- or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities by the Selling Stockholder under this Agreement). (e) The Selling Stockholder has reviewed the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and the Registration Statement, and the information regarding the Selling Stockholder set forth therein under the caption "Selling Stockholder" is complete and accurate. (f) The sale by the Selling Stockholder of Securities pursuant hereto is not prompted by any adverse information known to the Selling Stockholder concerning the Company that is not set forth in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (g) The sale of the Securities to the Underwriters by the Selling Stockholder pursuant to this Agreement, the compliance by the Selling Stockholder with the other provisions of this Agreement and the Power of Attorney and the consummation of the other transactions herein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required by the National Association of Securities Dealers, Inc. or under state securities or blue sky laws and, if the registration statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default in any material respect under any indenture, mortgage, deed of trust, material lease or other material agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder or any of his properties are bound or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Selling Stockholder. (h) Each certificate signed by the Selling Stockholder and delivered to the Representatives or counsel for the Underwriters pursuant to this Agreement shall be deemed to be a representation and warranty by the Selling Stockholder to each Underwriter as to the matters covered thereby. 3. Purchase, Sale and Delivery of the Securities. (a) On the basis of the --------------------------------------------- representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, (A) the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase from the Company, at a purchase price of $________ per share, the number of Firm Securities set forth opposite the name of such Underwriter in Column (a) of Schedule I hereto and (B) the Selling Stockholder agrees to sell to each of the Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase from the Selling Stockholder at a purchase price of $_________ per share, the number of Firm Securities set -10- forth opposite the name of such Underwriter in Column (b) of Schedule I hereto. One or more certificates in definitive form for the Firm Securities that the several Underwriters have agreed to purchase hereunder, and in such denomination or denominations and registered in such name or names as the Representatives request upon notice to the Company at least 48 hours prior to the Firm Closing Date, shall be delivered by or on behalf of the Company and the Selling Stockholder to the Representatives for the respective accounts of the Underwriters, against payment by or on behalf of the Underwriters of the purchase price therefor by wire transfer in same-day funds (the "Wired Funds") to the respective accounts of the Company and the Selling Stockholder. Such delivery of and payment for the Firm Securities shall be made at the offices of Testa, Hurwitz & Thibeault, 125 High Street, Boston, Massachusetts 02110 at 9:30 A.M., New York time, on __________, 1999, or at such other place, time or date as the Representatives, the Company and the Selling Stockholder may agree upon or as the Representatives may determine pursuant to Section 9 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date". The Company and the Selling Stockholder will make such certificate or certificates for the Firm Securities available for checking and packaging by the Representatives at the offices in New York, New York of the Company's transfer agent or registrar or of Prudential Securities Incorporated at least 24 hours prior to the Firm Closing Date. (b) For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Securities as contemplated by the Prospectus, the Company hereby grants to the several Underwriters an option to purchase, severally and not jointly, the Option Securities. The purchase price to be paid for any Option Securities shall be the same price per share as the price per share for the Firm Securities set forth above in paragraph (a) of this Section 3. The option granted hereby may be exercised as to all or any part of the Option Securities from time to time within thirty days after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading). The Underwriters shall not be under any obligation to purchase any of the Option Securities prior to the exercise of such option. The Representatives may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Company setting forth the aggregate number of Option Securities as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Securities. Any such date of delivery shall be determined by the Representatives but shall not be earlier than two business days or later than five business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representatives and the Company may agree upon or as the Representatives may determine pursuant to Section 9 hereof, is herein called the "Option Closing Date" with respect to such Option Securities. Upon exercise of the option as provided herein, the Company shall become obligated to sell to each of the several Underwriters, and, subject to the terms and conditions herein set forth, each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company the same percentage of the total number of the Option Securities as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Securities, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Securities, one or more certificates in definitive form for such Option -11- Securities, and payment therefor, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in paragraph (a) of this Section 3, except that reference therein to the Firm Securities and the Firm Closing Date shall be deemed, for purposes of this paragraph (b), to refer to such Option Securities and Option Closing Date, respectively. (c) The Company and the Selling Stockholder hereby acknowledge that the wire transfer by or on behalf of the Underwriters of the purchase price for any Securities does not constitute closing of a purchase and sale of the Securities. Only execution and delivery of a receipt for Securities by the Underwriters indicates completion of the closing of a purchase of the Securities from the Company or the Selling Stockholder. Furthermore, in the event that the Underwriters wire funds to the Company or the Selling Stockholder prior to the completion of the closing of a purchase of Securities, the Company and the Selling Stockholder hereby acknowledge that until the Underwriters execute and deliver a receipt for the Securities, by facsimile or otherwise, the Company and the Selling Stockholder will not be entitled to the Wired Funds and shall return the Wired Funds to the Underwriters as soon as practicable (by wire transfer of same-day funds) upon demand. In the event that the closing of a purchase of Securities is not completed and the Wired Funds are not returned by the Company or the Selling Stockholder to the Underwriters on the same day the Wired Funds were received by the Company or the Selling Stockholder, the Company and the Selling Stockholder agree to pay to the Underwriters in respect of each day the Wired Funds are not returned by it, in same-day funds, interest on the amount of such Wired Funds in an amount representing the Underwriters' cost of financing as reasonably determined by Prudential Securities Incorporated. (d) It is understood that any of you, individually and not as one of the Representatives, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Securities to be purchased by such Underwriter or Underwriters. No such payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. 4. Offering by the Underwriters. Upon your authorization of the release ----------------------------- of the Firm Securities, the several Underwriters propose to offer the Firm Securities for sale to the public upon the terms set forth in the Prospectus. 5(A). Covenants of the Company. The Company covenants and agrees with each ------------------------- of the Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto to become effective as promptly as possible. If required, the Company will file the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act. During any time when a prospectus relating to the Securities is required to be delivered under the Act, the Company (i) will comply with all requirements imposed upon it by the Act and the rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (ii) will not file with the Commission the Prospectus, Term -12- Sheet or the amendment referred to in the second sentence of Section 2A(a) hereof, any amendment or supplement to such Prospectus, Term Sheet or any amendment to the Registration Statement or any Rule 462(b) Registration Statement of which the Representatives previously have been advised and furnished with a copy for a reasonable period of time prior to the proposed filing and as to which filing the Representatives shall not have given their consent. The Company will prepare and file with the Commission, in accordance with the rules and regulations of the Commission, promptly upon request by the Representatives or counsel for the Underwriters, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be necessary or advisable in connection with the distribution of the Securities by the several Underwriters, and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representatives of each such filing or effectiveness. (b) The Company will advise the Representatives, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Original Registration Statement or any Rule 462(b) Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding for any such purpose or (iv) any request made by the Commission for amending the Original Registration Statement or any Rule 462(b) Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c) The Company will cooperate with you and counsel for the Underwriters in connection with the qualification of the Securities for offering and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and will continue such qualifications in effect for as long as may be reasonably necessary to complete the distribution of the Securities, provided, -------- however, that in connection therewith the Company shall not be required to - ------- qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. (d) If, at any time prior to the later of (i) the final date when a prospectus relating to the Securities is required to be delivered under the Act or (ii) the Option Closing Date, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the rules or regulations of the Commission thereunder, the Company will promptly notify the Representatives thereof and, subject to Section 5A(a) hereof, will prepare and file with the -13- Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. (e) The Company will, without charge, provide (i) to the Representatives and to counsel for the Underwriters a conformed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto) or any Rule 462(b) Registration Statement, (ii) to each other Underwriter, a conformed copy of such registration statement or any Rule 462(b) Registration Statement and each amendment thereto (in each case without exhibits thereto) and (iii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request; without limiting the application of clause (iii) of this sentence, the Company, not later than (A) 6:00 P.M., New York City time, on the date of determination of the public offering price, if such determination occurred at or prior to 10:00 A.M., New York City time, on such date or (B) 2:00 P.M., New York City time, on the business day following the date of determination of the public offering price, if such determination occurred after 10:00 A.M., New York City time, on such date, will deliver to the Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as the Representatives may reasonably request for purposes of confirming orders that are expected to settle on the Firm Closing Date. (f) The Company, as soon as practicable, will make generally available to its securityholders and to the Representatives an earnings statement of the Company that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (g) The Company will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Prospectus. (h) The Company will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date hereof, except pursuant to this Agreement and except (i) for issuances pursuant to the exercise of employee stock options granted or to be granted under the Company's stock option plans or pursuant to the Company's Employee Stock Purchase Plan, as such plans exist on the date hereof, provided that prior to any such issuance of securities under such plans, the Representatives shall have received a Lock-up Agreement (as defined in Section 7(f) hereto) from each person to be issued such securities or (ii) pursuant to the terms of convertible securities of the Company outstanding on the date hereof. Prudential Securities Incorporated may, in its sole discretion, at any time and without prior notice, release all or any portion of the shares of Common Stock subject to such agreement. -14- (i) The Company will not, directly or indirectly, (i) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities by the Selling Stockholder under this Agreement). (j) The Company will obtain the agreements described in Section 7(f) hereof prior to the Firm Closing Date. (k) If at any time during the 25-day period after the Registration Statement becomes effective or the period prior to the Option Closing Date, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (m) The Company will cause the Securities to be duly included for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") prior to the Firm Closing Date. The Company will use its best efforts to cause the Securities to remain included for quotation on the Nasdaq National Market following the Firm Closing Date. 5(B). Covenants of the Selling Stockholder. The Selling Stockholder ------------------------------------ covenants and agrees with each of the Underwriters that: (a) the Selling Stockholder will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any Securities legally or beneficially owned by the Selling Stockholder or any securities convertible into, or exchangeable or exercisable for, Securities for a period of 180 days after the date hereof. Prudential Securities Incorporated may, in its sole discretion, at any time and without prior notice, release all or any portion of the shares of Common Stock subject to such agreements; provided, however, that notwithstanding the foregoing restrictions on transfer - -------- ------- (collectively, the -15- "Restrictions"), the Selling Stockholder shall be permitted to make the following transfers: (i) transfers of shares of Common Stock made by gift, provided the donee thereof agrees in writing to be bound by the Restrictions; (ii) transfers of shares of Common Stock to members of the Selling Stockholder's immediate family or to a trust or similar estate planning entity established for the benefit of the Selling Stockholder or members of the Selling Stockholder's immediate family, provided that each transferee agrees in writing to be bound by the Restrictions; and (iii) transfers of shares of Common Stock to the transferor's affiliates, as such term is defined in Rule 405 under the Act, provided that each transferee agrees in writing to be bound by the Restrictions. (b) the Selling Stockholder will not, directly or indirectly, (i) take any action designed to cause or result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities by the Selling Stockholder under this Agreement). (c) in order to document the Underwriters' compliance with the reporting and withholding provisions of the Internal Revenue Code of 1986, as amended, with respect to the transactions herein contemplated, such Selling Stockholder agrees to deliver to you prior to or on the Firm Closing Date, as hereinafter defined, a properly completed and executed United States Treasury Department Form W-8 or W-9 (or other applicable form of statement specified by Treasury Department regulations in lieu thereof). (d) As soon as the Selling Stockholder is advised thereof, the Selling Stockholder will advise the Representatives (and immediately confirm such advice in writing), (i) of receipt by the Selling Stockholder or by any representative or agent of the Selling Stockholder, of any communication from the Commission relating to the Registration Statement, the Prospectus or any Preliminary Prospectus, or any notice or order of the Commission relating to the Company or the Selling Stockholder in connection with the transactions contemplated by this Agreement and (ii) of the happening of any event which makes or may make any statement made in the Registration Statement, the Prospectus or any Preliminary Prospectus untrue or that requires the making of any change in the Registration Statement, the Prospectus or such Preliminary Prospectus, as the case may be, in order to make any such statement, in light of the circumstances in which it was made, not misleading. 6. Expenses. The Company will pay all costs and expenses incident to the -------- performance of its obligations and those of the Selling Stockholder under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 11 hereof, including all costs and expenses incident to (i) the printing or other production of documents with respect to the transactions, including any costs of printing the registration statement originally filed with respect to the Securities and any amendment thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus and the Prospectus and any amendment or -16- supplement thereto, this Agreement and any blue sky memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company, (iv) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, including transfer agent's and registrar's fees, (v) the qualification of the Securities under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Underwriters relating thereto, (vi) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Securities, (vii) any quotation of the Securities on the Nasdaq National Market, (viii) all expenses of the Company's officers in connection with any meetings with prospective investors in the Securities and (ix) advertising relating to the offering of the Securities which has been specifically requested by the Company and not the Underwriters. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied, because this Agreement is terminated pursuant to Sections 11(a)(i) and (ii) hereof or because of any failure, refusal or inability on the part of the Company to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been reasonably incurred by them in connection with the proposed purchase and sale of the Securities. The Company shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. 7. Conditions of the Underwriters' Obligations. The obligations of the ------------------------------------------- several Underwriters to purchase and pay for the Firm Securities shall be subject, in the Representatives' sole discretion, to the accuracy of the representations and warranties of the Company and the Selling Stockholder contained herein as of the date hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholder of their respective covenants and agreements hereunder and to the following additional conditions: (a) If the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Original Registration Statement or such amendment and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been declared effective not later than the earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to the registration statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Securities has been filed with the Commission and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2), or with respect to the Original Registration Statement, or such later time and date as shall have been consented to by the Representatives; if required, the Prospectus or any Term Sheet that constitutes a part thereof and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rules 434 and 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company, the Selling Stockholder or the Representatives, -17- shall be contemplated by the Commission; and the Company and the Selling Stockholder shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b)(1) The Representatives shall have received an opinion, dated the Firm Closing Date, of Thompson & Knight, P.C., counsel for the Company, to the effect that: (i) the Company has been duly organized and is validly existing as a corporation in good standing under the laws of Delaware and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of the State of Arkansas; (ii) the Company has corporate power to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus, and the Company has corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it; (iii) the Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus; all of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and, to the knowledge of such counsel, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities; the Firm Securities have been duly authorized by all necessary corporate action of the Company and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable; the Securities have been duly included for trading on the Nasdaq National Market; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities under the Company's Certificate of Incorporation or By-laws; and no holders of securities of the Company have any rights that have not been waived to have such securities registered under the Registration Statement; (iv) the statements set forth under the heading "Description of Capital Stock" in the Prospectus, insofar as such statements purport to summarize certain provisions of the capital stock of the Company, provide a fair summary of such provisions; and the statements set forth under the headings "Certain Transactions" in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, provide a fair summary of such legal matters, documents and proceedings in all materials respects; (v) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement has been duly executed and delivered by the Company; -18- (vi) To the knowledge of such counsel, (A) no legal or governmental proceedings are pending to which the Company is a party or to which the property of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein, and, to the knowledge of such counsel, no such proceedings have been threatened against the Company or any of the Subsidiaries or with respect to any of their respective properties and (B) no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (vii) the issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required by the National Association of Securities Dealers, Inc. or under state securities or blue sky laws, or (B) conflict with or result in a breach or violation of (1) any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, that is material to the Company and known to such counsel and to which the Company is a party or by which the Company or any of its properties are bound, (2) the charter documents or by-laws of the Company or (3) any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company, the violation of which would have a material adverse effect on the Company; (viii) the Registration Statement is effective under the Act; any required filing of the Prospectus, or any Term Sheet that constitutes a part thereof, pursuant to Rules 434 and 424(b) has been made within the time period required by Rules 434 and 424(b); and, to the knowledge of such counsel after due inquiry, no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and, to the knowledge of such counsel, no proceedings for that purpose have been instituted or threatened or are contemplated by the Commission; (ix) the Registration Statement originally filed with respect to the Securities and each amendment thereto, any Rule 462(b) Registration Statement and the Prospectus (in each case, other than the financial statements, schedules and other financial information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the rules and regulations of the Commission thereunder; and (x) if the Company elects to rely on Rule 434, the Prospectus is not "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time of its effectiveness or an effective post-effective amendment thereto (including such information that is permitted to be omitted pursuant to Rule 430A). -19- Such counsel shall make the statements set forth in the following paragraph: During the course of the preparation of the Registration Statement, we participated in conferences with officials and representatives of the Company, representatives of the Underwriters and KPMG LLP, the independent certified public accountants of the Company, at which the contents of the Registration Statement and Prospectus and related matters were discussed. Although we have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nor have we passed upon or assumed any responsibility for the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, no facts have come to our attention that lead us to believe that, at the time the Registration Statement became effective, the Registration Statement (other than the financial statements including supporting schedules and other financial and statistical information, as to which we express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, on the date it was issued, contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (other than the financial statements including supporting schedules and other financial and statistical information, as to which we express no comment). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. (b)(2) The Representatives shall have received an opinion, dated the Firm Closing Date, of Thompson & Knight, P.C. (or such other counsel acceptable to the Representatives) substantially to the effect that: (i) this Agreement and the Power-of-Attorney have been duly executed and delivered by the Selling Stockholder; the Power-of-Attorney is the legal, valid, binding and enforceable instrument of the Selling Stockholder, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and subject, as to enforceability, to general principles of equity and public policy (regardless of whether enforcement is sought in a proceeding in equity or at law); (ii) the delivery by the Selling Stockholder to the several Underwriters of certificates for the Securities being sold hereunder by the Selling Stockholder against payment therefor as provided herein, assuming the Underwriters have purchased the Securities for value in good faith and without any notice of any security interest, lien, encumbrance, equity, claim or other adverse claim, will convey good and valid title to such Securities to the several Underwriters, free and clear of all security interests, liens, encumbrances, equity, claims or other adverse claims (other than those arising by or through the Underwriters); and -20- (iii) the sale of the Securities to the Underwriters by the Selling Stockholder pursuant to this Agreement, the compliance by the Selling Stockholder with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required by the National Association of Securities Dealers, Inc. or under state securities or blue sky laws, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under any indenture, mortgage, deed of trust, lease or other agreement or instrument that is material to the Selling Stockholder and known to such counsel, to which such Selling Stockholder is a party or by which the Selling Stockholder or any of the Selling Stockholder's properties are bound, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Selling Stockholder the violation of which would prevent the Selling Stockholder from performing its obligations hereunder. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of the Selling Stockholder and representations and warranties of the Company and the Selling Stockholder contained herein and in the Power of Attorney. (c) The Representatives shall have received an opinion, dated the Firm Closing Date, of Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters, with respect to the issuance and sale of the Firm Securities, the Registration Statement and the Prospectus, and such other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (d) The Representatives shall have received from KPMG LLP a letter or letters dated, respectively, the date hereof and the Firm Closing Date, in form and substance satisfactory to the Representatives, to the effect that: (i) they are independent accountants with respect to the Company within the meaning of the Act and the applicable rules and regulations thereunder; (ii) in their opinion, the audited financial statements and schedules examined by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iii) on the basis of a reading of the latest available interim unaudited condensed financial statements of the Company, a reading of the unaudited amounts for web-based product revenues, CD-ROM product revenues, total revenues, cost of revenues, loss from operations, net loss and net loss per share for the six months ending June 30, 1999 and of the unaudited --------------------------- financial statements of the Company and its consolidated subsidiaries for the -21- periods from which such amounts are derived, carrying out certain specified procedures (which do not constitute an examination made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (iii), a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that: (A) the unaudited condensed financial statements of the Company included in the Registration Statement and the Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and the Prospectus; (B) the unaudited amounts for Web-based product revenues, CD-ROM product revenues, total revenues, cost of revenues, loss from operations, net loss and net loss per share, included in the Registration Statement and the Prospectus do not agree with the amounts set forth in any unaudited financial statements for those same periods or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the corresponding amounts in the audited financial statements included in the Registration Statement and the Prospectus; and (C) at a specific date not more than five business days prior to the date of such letter, there were any changes in the capital stock or long- term debt of the Company or any decreases in net current assets or stockholders' equity of the Company, in each case compared with amounts shown on the June 30, 1999 unaudited balance sheet included in the Registration Statement and the Prospectus, or for the period from July 1, 1999 to such specified date there were any decreases, as compared with the --- corresponding period in the preceding year, in of the Company except in all ------------------------------------------ instances for changes, decreases or increases set forth in such letter; (iv) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and are included in the Registration Statement and the Prospectus under the captions Prospectus Summary, Risk Factors, Use of Proceeds, Dilution, Capitalization, Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Business, Management, Certain Transactions, Description of Capital Stock and Shares Eligible for Future Sale and in Exhibit 11 to the Registration Statement, and have compared such amounts, percentages and financial information with such records of the Company and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation. -22- In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that (A) such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary, and (B) such changes, decreases or increases do not, in the sole judgment of the Representatives, make it impractical or inadvisable to proceed with the purchase and delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this paragraph (d) with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. (e) The Representatives shall have received a certificate, dated the Firm Closing Date, of the principal executive officer and the principal financial or accounting officer of the Company to the effect that: (i) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and, to the Company's knowledge, no proceedings for that purpose have been instituted or threatened or are contemplated by the Commission; and (iii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), management, business prospects, net worth or results of operations of the Company or any of its subsidiaries, except in each case as described in or contemplated by the Prospectus. (f) The Representatives shall have received from each person who is a director or officer of the Company or who owns shares of Common Stock an agreement ("Lock-up Agreement") to the -23- effect that such person will not, directly or indirectly, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date of this Agreement; provided, however, that -------- ------- notwithstanding the Restrictions, such person shall be permitted to make the following transfers: (i) transfers of shares of Common Stock made by gift, provided the donee thereof agrees in writing to be bound by the Restrictions; (ii) transfers of shares of Common Stock to members of such person's immediate family or to a trust or similar estate planning entity established for the benefit of such person or members of such person's immediate family, provided that each transferee agrees in writing to be bound by the Restrictions; and (iii) transfers of shares of Common Stock to the transferor's affiliates, as such term is defined in Rule 405 under the Act, provided that each transferee agrees in writing to be bound by the Restrictions. Prudential Securities Incorporated may, in its sole discretion, at any time and without prior notice, release all or any portion of the shares of Common Stock subject to such agreements. (g) On or before the Firm Closing Date, the Representatives and counsel for the Underwriters shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. (h) Prior to the commencement of the offering of the Securities, the Securities shall have been included for trading on the Nasdaq National Market. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representatives and counsel for the Underwriters. The Company shall furnish to the Representatives such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representatives and counsel for the Underwriters shall reasonably request. The respective obligations of the several Underwriters to purchase and pay for any Option Securities shall be subject, in their discretion, to each of the foregoing conditions to purchase the Firm Securities, except that all references to the Firm Securities and the Firm Closing Date shall be deemed to refer to such Option Securities and the related Option Closing Date, respectively. 8. Indemnification and Contribution. (a) The Company agrees to indemnify --------------------------------- and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, caused by, related to, based upon or arising out of or in connection with: -24- (i) any untrue statement or alleged untrue statement made by the Company in Section 2(A) of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Securities under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"), (iii) the omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) any untrue statement or alleged untrue statement of any material fact contained in any audio or visual materials, including, without limitation, slides, videos, films and tape recordings used in connection with the marketing of the Securities, including, without limitation, statements communicated to securities analysts employed by the Underwriters, and will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be -------- ------- liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein; and provided, further, -------- ------- that the Company will not be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5A(d) and (e) of this Agreement. If the Company's reimbursement of legal or other expenses incurred by an Underwriter or controlling person is subsequently determined by a court of competent jurisdiction to be required to be remitted back to the Company, each Underwriter or controlling person will promptly return to the Company all amounts received from the Company. -25- This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company will not, without the prior written consent of the Underwriter or Underwriters purchasing, in the aggregate, more than fifty percent (50%) of the Securities, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Underwriter or any person who controls any such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (b) The Selling Stockholder agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, each Underwriter and each person who controls the Company or any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company, any such director, officer, such Underwriter or any such controlling person may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement made by the Selling Stockholder in Section 2(B) of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (iii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading, but with respect to clauses (ii) and (iii) of this sentence only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by the Selling Stockholder specifically for use therein; provided, however, that the Selling Stockholder will not be liable -------- ------- to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5A(d) and (e) of this Agreement; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company, any such director, officer, such Underwriter or any such controlling person in connection with investigating or defending any such loss, claim, damage, liability or any action in respect thereof. If the Selling Stockholder's reimbursement of legal or other expenses incurred by any one of the persons or entities specified in the preceding sentence is subsequently determined by a court of competent jurisdiction to be required to be remitted back to the Selling Stockholder, each such person or -26- entity will promptly return to the Selling Stockholder all amounts received from the Selling Stockholder. In no event, however, shall the liability of the Selling Stockholder for indemnification under this Section 8(b), contribution under Section 8(e), or breach of the representations and warranties contained in Section 2(B) exceed the proceeds, net of underwriting discounts and commissions, received by the Selling Stockholder from the Underwriters in the offering. This indemnity agreement will be in addition to any liability which the Selling Stockholder may otherwise have. The Selling Stockholder will not, without the prior written consent of the Underwriter or Underwriters purchasing, in the aggregate, more than fifty percent (50%) of the Securities, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any such Underwriter or any person who controls any such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. (c) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the Selling Stockholder and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person or the Selling Stockholder may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (ii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein: and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person or the Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or any action in respect thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the -27- commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the -------- ------- defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representatives in the case of paragraph (a) of this Section 8, representing the indemnified parties under such paragraph (a) who are parties to such action or actions) or (ii) the indemnifying party does not promptly retain counsel satisfactory to the indemnified party or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party. (e) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholder bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, -28- among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholder or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company, the Selling Stockholder and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (d). Notwithstanding any other provision of this paragraph (d), no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the total public offering price of the Securities purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed by the provisions of the Prudential Securities Incorporated Master Agreement Among Underwriters. For purposes of this paragraph (e), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same rights to contribution as the Company. 9. Default of Underwriters. If one or more Underwriters default in their ----------------------- obligations to purchase Firm Securities or Option Securities hereunder and the aggregate number of such Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Securities or Option Securities to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Securities by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Securities or Option Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Securities that is more than ten percent of the aggregate number of Firm Securities or Option Securities, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives) of the Securities with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company or the Selling Stockholder other than as provided in Section 10 hereof. In the event of any default by one or more Underwriters as described in this Section 9, the Representatives shall -29- have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 3 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Securities or Option Securities, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 10. Survival. The respective representations, warranties, agreements, -------- covenants, indemnities and other statements of the Company, its officers, the Selling Stockholder and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, the Selling Stockholder, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Securities. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 11. Termination. (a) This Agreement may be terminated with respect to the ----------- Firm Securities or any Option Securities in the sole discretion of the Representatives by notice to the Company and the Selling Stockholder given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company or the Selling Stockholder shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing Date or such Option Closing Date, respectively, (i) the Company or any of its subsidiaries shall have, in the sole judgment of the Representatives, sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any material adverse change, or any development involving a prospective material adverse change (including without limitation a change in management or control of the Company), in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company and its subsidiaries, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (ii) trading in the Common Stock shall have been suspended by the Commission; (iii) trading in the Common Stock shall have been suspended by the Nasdaq National Market or trading in securities generally on the New York Stock Exchange or Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on such exchange or market system; (iv) a banking moratorium shall have been declared by New York or United States authorities; or -30- (v) there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the sole judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. (b) Termination of this Agreement pursuant to this Section 11 shall be without liability of any party to any other party except as provided in Section 10 hereof. 12. Information Supplied by Underwriters. The statements set forth in the ------------------------------------- last paragraph on the front cover page and under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter through the Representatives to the Company for the purposes of Sections 2A(b) and 8 hereof. The Underwriters confirm that such statements (to such extent) are correct. 13. Notices. All communications hereunder shall be in writing and, if ------- sent to any of the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to Prudential Securities Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity Transactions Group, with a copy to Testa, Hurwitz & Thibeault, LLP, 125 High Street, Boston, MA 02110, Attention: Lawrence S. Wittenberg, Esq.; and if sent to the Company, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to the Company at 105 North 28th Street, Van Buren, AR 72956, Attention: Kyle D. Parker, with a copy to Thompson & Knight, P.C., 1700 Pacific Avenue, Suite 3300, Dallas, TX 75201, Attention: Kenn W. Webb, Esq.; and if sent to the Selling Stockholder, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to the Selling Stockholder at 2720 S. Waldron, Fort Smith, AR 72903. 14. Successors. This Agreement shall inure to the benefit of and shall be ---------- binding upon the several Underwriters, the Company and the Selling Stockholder and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company and the Selling Stockholder contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and the Selling -31- Stockholder. No purchaser of Securities from any Underwriter shall be deemed a successor because of such purchase. 15. Applicable Law. The validity and interpretation of this Agreement, -------------- and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any provisions relating to conflicts of laws. 16. Consent to Jurisdiction and Service of Process. All judicial ---------------------------------------------- proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of New York, and by execution and delivery of this Agreement, the Selling Shareholder accepts for itself and in connection with its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. The Selling Shareholder designates and appoints Kyle D Parker, and such other persons as may hereafter be selected by the Selling Shareholder irrevocably agreeing in writing to so serve, as its agent to receive on its behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by the Selling Shareholder to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to the Selling Shareholder at its address provided in Section 13 hereof; provided, however, -------- ------- that, unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Selling Shareholder refuses to accept service, the Selling Shareholder hereby agrees that service of process sufficient for personal jurisdiction in any action against the Selling Shareholder in the State of New York may be made by registered or certified mail, return receipt requested, to the Selling Shareholder at its address provided in Section 13 hereof, and the Selling Shareholder hereby acknowledges that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Underwriter to bring proceedings against the Selling Shareholder in the courts of any other jurisdiction. 17. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -32- If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company and each of the several Underwriters. Very truly yours, LOISLAW.COM, INC. By: __________________________________ Name: Kyle D. Parker Title: Chief Executive Officer SELLING STOCKHOLDER By: Douglas W. Parker, Sr. By:___________________________________ Kyle D. Parker, Attorney-in-Fact The foregoing Agreement is hereby confirmed and accepted as of the date first above written. PRUDENTIAL SECURITIES INCORPORATED DAIN RAUSCHER WESSELS U.S. BANCORP PIPER JAFFRAY PRUDENTIALSECURITIES.COM By: PRUDENTIAL SECURITIES INCORPORATED By:___________________________ Name: Jean-Claude Canfin Title: Managing Director For itself and on behalf of the Representatives. -33- SCHEDULE I UNDERWRITERS (a) (b) Number of Number of Firm Firm Securities to Securities to be Purchased Underwriter be Purchased from from the Selling - ----------- the Company Stockholder ----------- ----------- Prudential Securities Incorporated....... Dain Rauscher Wessels U.S. Bancorp Piper Jaffray, Inc. - -------------------------------- PrudentialSecurities.com - ------------------------ [insert names of other Underwriters - ----------------------------------- alphabetically by bracket or in other ------------------------------------- order determined by Prudential ------------------------------ Securities Incorporated - ------------------------- Equity Transactions Group] -------------------------- _______________ Total .............. -34- EX-10.16 3 EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.16 LOISLAW.COM, INC. EMPLOYEE STOCK PURCHASE PLAN Section 1. Purpose. It is the purpose of the Plan to promote the interests of the Company and its stockholders by providing a method by which eligible employees may use voluntary payroll deductions to purchase shares of Common Stock at a discount, thereby affording them the opportunity to invest in the Company at a preferential price, and to acquire a proprietary interest in the Company and an increased personal interest in its continued success and progress. The Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code and shall be construed accordingly. Section 2. Definitions. As used herein the following terms have the following meanings: (a) "Affiliate" means any corporation that is a subsidiary corporation of the Company within the meaning of Section 424(f) of the Code and that has been designated by the Committee as an Affiliate for purposes of the Plan. (b) "Board of Directors" means the Board of Directors of the Company. (c) "Code" means the United States Internal Revenue Code of 1986, as from time to time amended. (d) "Committee" means the Committee described in Section 4 hereof. (e) "Common Stock" means the $.001 par value Common Stock of the Company. (f) "Company" means Loislaw.com, Inc., a Delaware corporation. (g) "Compensation" for an Option Period means the basic compensation and commissions payable to an employee for services rendered to the Company or any Affiliate, but not including bonuses, overtime or premium pay, allowances, deferred compensation payments or any other extraordinary compensation. The Compensation of an employee who does not receive salary or wages computed in United States dollars shall be determined by converting such salary or wages into United States dollars in accordance with the Compensation Exchange Rate. (h) "Compensation Exchange Rate" means the New York foreign currency exchange rate as reported in The Wall Street Journal for the last business day immediately preceding the first day of the applicable Option Period. (i) "Eligible Employee" means any employee of the Company or an Affiliate who is eligible to participate in the Plan pursuant to Section 5 hereof. (j) "Enrollment Date" means the first day of any Option Period. (k) "Fair Market Value" means the closing sale price on the date in question (or, if there was no reported sale on such date, on the last preceding day on which any reported sale occurred) of the Common Stock on the Nasdaq National Market or any national stock exchange or other stock market on which the Common Stock may from time to time be traded. Notwithstanding anything to the contrary herein, the Fair Market Value of the Common Stock on the first day of the first Option Period shall be the initial price to the public established in connection with the Company's initial public offering of Common Stock. (l) "Option" means any option to purchase shares of Common Stock granted by the Committee pursuant to the provisions of the Plan. (m) "Option Period" means each period beginning on May 1 and ending on the following October 31, and each period beginning on November 1 and ending on the following April 30; provided, however, that the first Option Period shall begin at the time the registration of the Common Stock under the Securities Exchange Act of 1934 becomes effective and end on the following April 30. (n) "Participant" means an Eligible Employee who elects to participate in the Plan pursuant to Section 6 hereof. (o) "Plan" means this Loislaw.com, Inc. Employee Stock Purchase Plan. Section 3. Number of Shares. The aggregate number of shares of Common Stock issued pursuant to Options granted under the Plan shall not exceed a total of 300,000 shares. The maximum number of shares of Common Stock available for sale under the Plan is subject to adjustment as provided in Section 16. The Common Stock to be delivered upon exercise of Options may consist of authorized but unissued shares of Common Stock or shares of Common Stock previously issued and reacquired by the Company. Section 4. Administration of the Plan. The Plan shall be administered by the Committee, which shall consist of three or more employees of the Company. Each member of the Committee shall be appointed by and shall serve at the pleasure of the Board of Directors. The Board of Directors shall have the sole continuing authority to appoint members of the Committee both in substitution for members previously appointed and to fill vacancies however caused. The following provisions shall apply to the administration of the Plan by the Committee: (a) The Committee shall designate one of its members as Chairperson and shall hold meetings at such times and places as it may determine. Each member of the Committee shall be notified in writing of the time and place of any meeting of the Committee at least two days prior to such meeting, provided that such notice may be waived by a Committee member. A majority of the members of the Committee shall constitute a quorum and any action taken by a majority of the members of the Committee present at any duly called -2- meeting at which a quorum is present (or action unanimously approved in writing) shall constitute action by the Committee. (b) The Committee may appoint a Secretary (who need not be a member of the Committee) who shall keep minutes of its meetings. The Committee may make such rules and regulations for the conduct of its business as it may determine. (c) The Committee shall have full authority subject to the express provisions of the Plan to interpret the Plan, to provide, modify and rescind rules and regulations relating to it and to make all other determinations and perform such actions as the Committee deems necessary or advisable to administer the Plan. (d) No member of the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. (e) The Committee may appoint a bank, trust company or other appropriate entity to serve as administrator of the Plan (the "Administrator"). The Administrator's duties shall include establishing and maintaining accounts for Participants, holding in custody for the accounts of Participants the shares of Common Stock purchased by them under the Plan, maintaining records of and providing regular reports for the Participants' accounts and such other duties as may be agreed to by the Committee or set forth in an agreement between the Company and the Administrator. The Committee shall have the authority to approve the form, terms and conditions of an agreement with the Administrator, which agreement may be executed and delivered by any member of the Committee or any proper officer of the Company, and to terminate the engagement of the Administrator and engage a successor Administrator at any time. Section 5. Eligible Employees. Each employee of the Company or an Affiliate who is employed by the Company or an Affiliate on the date his participation in the Plan is to become effective shall be eligible to participate in the Plan; provided, however, that: (a) An employee shall not be granted an Option if such employee would, immediately after grant of the Option, own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any parent or subsidiary corporation of the Company (within the meaning of Section 424(e) and (f) of the Code). For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and stock which the employee may purchase under any outstanding options shall be treated as stock owned by the employee; and (b) No employee shall be granted an Option under the Plan that would permit such employee's rights to purchase shares of stock under all employee stock purchase plans of the Company and its parent and subsidiary corporations (within the meaning of Section 424(e) and (f) of the Code) to accrue (within the meaning of Section 423(b)(8) of the Code) at a rate which exceeds U.S. $25,000 of fair market value of such stock (determined at the -3- time such option is granted) for each calendar year during which any such option granted to such employee is outstanding at any time. For purposes of this Section 5, the term "employee" shall not include (i) an employee who has been employed by the Company or an Affiliate less than six months prior to an Enrollment Date, (ii) an employee whose customary employment is 20 hours or less per week, or (iii) an employee whose customary employment is for not more than five months in any calendar year. Section 6. Method of Participation. Each person who will be an Eligible Employee on any Enrollment Date may elect to participate in the Plan by executing and delivering to the Company, on or before such Enrollment Date, a payroll deduction authorization form as provided in this Section; provided, however, that with respect to the first Enrollment Date, an Eligible Employee may elect to participate in the Plan by executing and delivering a payroll deduction authorization form to the Company on or before the date that is six business days prior to the second payroll distribution to such Eligible Employee after such first Enrollment Date. Such Eligible Employee shall thereby become a Participant on such Enrollment Date and shall remain a Participant until such Eligible Employee's participation is terminated as provided in Section 12 or 13 hereof; provided, however, that if the Company does not receive such payroll deduction authorization form in time to implement the authorized withholding for any payroll period, no withholding shall be made on behalf of such Participant pursuant to this Plan until the next succeeding payroll period. The payroll deduction authorization form executed by a Participant shall request withholding, by means of substantially equal payroll deductions over the Option Period, of an amount which shall be not more than 10% nor less than 1% of such Participant's Compensation for the Option Period. A Participant may change the withholding rate of his or her payroll deduction authorization within such limits by delivering a new payroll deduction authorization form to the Company before the next Enrollment Date for which the change is to be effective. A Participant may not change the withholding rate or his or her payroll deduction authorization with respect to an Option Period at any time after the deadline set forth in the immediately preceding sentence. All amounts withheld in accordance with a Participant's payroll deduction authorization for an Option Period shall be credited to a withholding account for such Participant. No interest shall be payable on withholding accounts. Section 7. Grant of Options. Each Participant shall automatically be granted an Option to purchase shares of Common Stock on the first day of each Option Period. Each Option shall be exercisable on the last business day of the Option Period for the number of shares of Common Stock, including fractional shares to the fourth decimal place, determined by dividing (a) the balance in the Participant's withholding account attributable to such Option Period on the last business day of the Option Period by (b) the purchase price per share of the Common Stock as determined under Section 8. Any provision of this Plan to the contrary notwithstanding, in no event shall the number of shares with respect to which an Option is granted to a Participant in an Option Period exceed that number of shares which has an aggregate Fair Market Value (determined on the date of grant) of U.S. $12,500, and the number of shares actually purchased by a Participant in an Option Period may not exceed this number. If, as a result of such limit or otherwise, the full amount withheld from a -4- Participant's Compensation for any Option Period cannot be used to purchase Common Stock in such Option Period, the excess amount shall be carried forward and applied to the purchase of Common Stock in the next Option Period (subject to the limits set forth in this Plan), unless the Participant has requested that such amount be refunded to him or her by the Company. The Company shall reduce, on a substantially proportionate basis, the number of shares of Common Stock receivable by each Participant upon exercise of an Option in any Option Period in the event that the total number of shares then available under the Plan is less than the total number of shares with respect to which all Participants exercise Options in such Option Period. Section 8. Option Price. The purchase price per share of Common Stock under each installment of each Option shall equal the lesser of (a) 90% of the Fair Market Value per share of Common Stock on the date of grant of the Option or (b) 90% of the Fair Market Value per share of Common Stock on the date on which the Option is exercised. If the Common Stock of the Company is not admitted to trading on any of the aforesaid dates for which closing prices of the stock are to be determined, then reference shall be made to the Fair Market Value of the stock on that date, as determined by the Committee in good faith. Section 9. Exercise of Options. An employee who is a Participant in the Plan on the last business day of an Option Period shall be deemed automatically to have exercised the Option granted to him or her for that Option Period. Upon such exercise, the Company shall apply the entire balance of the Participant's withholding account attributable to that Option Period to the purchase of the maximum number of shares of Common Stock, including fractional shares to the fourth decimal point, as determined under Section 7. For purposes of this Section 9, the balance in the withholding account of a Participant whose salary or wages are not computed in United States dollars shall be converted into United States dollars in accordance with the New York foreign currency exchange rate as reported in The Wall Street Journal for the last business day of the Option Period. As soon as practicable after the end of each Option Period, the Company shall issue and deliver to the Administrator, on behalf of the Participants, a certificate representing the aggregate number of shares purchased by all Participants in such Option Period. The Administrator shall allocate, by book entry, the appropriate number of shares, including fractional shares to the fourth decimal place, to each Participant's account. The obligation of the Company to deliver shares of Common Stock shall be postponed for such period of time as may be necessary to register or qualify the purchased shares under the Securities Act of 1933 and any applicable foreign or state securities law. The proceeds received by the Company upon exercise of an Option shall constitute general funds of the Company. The withholding of payroll deduction amounts from a Participant's Compensation and the application of such amounts to purchase Common Stock from the Company in accordance with this Plan may be accomplished by appropriate entries in the books and records of the Company and need not involve any actual transfer of cash. Any unexercised Option shall expire and become null and void as of the end of the Option Period in which such Option was granted. Section 10. Custody and Issuance of Stock. Each Participant will be credited by the Administrator with his or her pro rata share of the purchased shares delivered to the Administrator -5- in connection with this Plan, including fractional shares to the fourth decimal place. Records of the Company maintained under the Plan will be confidential. Each Participant shall have the right at any time to require the Administrator to release from custody the shares of Common Stock theretofore purchased by such Participant, and to receive a certificate or certificates representing such whole shares of Common Stock and the cash equivalent of any fractional shares. Stock certificates will be issued to a Participant in accordance with this Section upon written request to the Administrator. Such stock certificates will be registered in the name of the Participant or in the name of another person or persons as instructed by the Participant and will be delivered to the Participant or to his or her order. The Participant shall be responsible for, and shall pay to the Administrator, any fees and charges of the transfer agent and registrar for the Company's Common Stock in connection with any issuance of stock certificates to or upon the order of such Participant pursuant to the Plan. The Administrator will convert fractional shares to cash by selling them on the open market in the manner contemplated by Section 11 of this Plan. Section 11. Sale of Shares. Upon notice from a Participant to the Administrator, shares of Common Stock credited to the Participant's account maintained by the Administrator may be sold by such Participant at any time while the Participant remains employed with the Company. Such sale shall be made by the Administrator, at market price, as the first available trade on the business day next following the day on which it receives such notice from the Participant. The Participant shall be responsible for, and shall pay, any fees or charges of the Administrator, brokerage fees and commissions and other charges identified with and incurred as a result of the sale, and the Company shall have no liability or responsibility therefor. When the sale transaction is consummated, the Administrator will forward to such Participant a check for the proceeds of the sale, net of the fees, commissions and other charges, together with a statement detailing the terms of the sale, fees and commissions incurred and remaining account balance. Section 12. Cancellation of Option and Withdrawal From the Plan. A Participant who holds an Option under the Plan may at any time prior to exercise thereof pursuant to Section 9 cancel such Option by written notice delivered to the Company. Upon such cancellation, the balance in the Participant's withholding account attributable to such Option shall be returned to such Participant and he or she shall cease to be a Participant. Partial cancellations shall not be permitted. A Participant may terminate his or her payroll deduction authorization as of any date by written notice delivered to the Company and shall thereby cease to be a Participant as of such date. Partial termination of a payroll deduction authorization shall not be permitted. Any Participant who voluntarily terminates his or her payroll deduction authorization prior to the last business day of an Option Period shall be deemed to have canceled his or her Option for such Option Period. A Participant who withdraws from the Plan pursuant to this Section 12 may re-enroll as of any subsequent Enrollment Date on which he or she is an Eligible Employee in accordance with the procedure set forth in Section 6 of this Plan; provided, however, that a Participant shall not be permitted to re-enroll in the Plan until an Enrollment Date that is at least six months after the date of his or her withdrawal. -6- Section 13. Termination of Employment. Upon the termination of a Participant's employment with the Company or an Affiliate for any reason, such person shall cease to be a Participant, any unexercised Option held by such Participant under the Plan shall be deemed canceled, the balance of such Participant's withholding account shall be returned to such Participant (or, in the event of the Participant's death, to the executor or administrator of his or her estate) and he or she shall have no further rights under the Plan. All Participants shall have the same rights and privileges under the Plan. Notwithstanding the foregoing, nothing in the Plan shall confer upon any Participant any right to continue in the employ of the Company or an Affiliate or in any way interfere with the right of the Company or an Affiliate to terminate the employment of the Participant at any time, with or without cause. Transfers of employment among the Company and its Affiliates and approved leaves of absence not exceeding 90 days shall not be considered terminations of employment for purposes of this Plan. Section 14. Certain Distributions. In the event of the death or termination of employment of a Participant, the discontinuance of the Plan by the Company or the election of a Participant to withdraw from the Plan for any reason, the Participant, or in the event of death, such deceased Participant's designated beneficiary (or if no such beneficiary has been designated, his or her legal representative in accordance with the applicable laws of descent and distribution), shall have the right to elect to receive a distribution of the shares of Common Stock being held for such Participant's account under the Plan or the cash equivalent thereof; provided, however, that if the Committee has not appointed a third party to serve as Administrator, the Committee may require that the shares of Common Stock be distributed and the Participant shall not have the right to receive the cash equivalent thereof (other than the cash equivalent of fractional shares). If such Participant, beneficiary or representative elects to receive Common Stock, all full shares being held for the Participant's account under the Plan will be transferred to such Participant, beneficiary or representative or to his or her order, and a certificate or certificates evidencing such shares will be delivered as promptly as practicable, subject to the receipt by the Administrator of documentation properly evidencing the rights and authority of the beneficiary or representative of any deceased Participant. Such Participant, beneficiary or representative shall be responsible for, and shall pay to the Administrator, any fees and charges of the transfer agent and registrar for the Company's Common Stock in connection with the issuance of stock certificates to or upon the order of such Participant, beneficiary or representative pursuant to this Section. Fractional share balances that have been credited to the Participant will be converted into cash through sale by the Administrator, at market price, as soon as practicable after the Participant's termination of employment, death or withdrawal from the Plan, as the case may be. In the event of discontinuance of the Plan, interests in fractional shares will be liquidated by the Administrator in a like manner and the proceeds distributed pro rata. If such Participant, beneficiary or representative elects to receive cash, all full and fractional shares being held for the Participant's account under the Plan will be sold for such Participant, beneficiary or representative by the Administrator in accordance with Section 11 of the Plan, subject to the receipt by the Administrator of documentation properly evidencing the rights and authority -7- of the beneficiary or representative of any deceased Participant. The Participant, beneficiary or representative shall be responsible for, and shall pay, any fees or charges of the Administrator, brokerage fees and commissions and other charges identified with and incurred as a result of the sale. Section 15. Transferability. An Option granted under the Plan shall not be transferable by the Participant and shall be exercisable only by the Participant. Section 16. Stock Splits or Other Changes in Common Stock; Dividends. In the event the Company shall effect a split of the Common Stock or declare a dividend payable in Common Stock, or in the event the outstanding Common Stock shall be combined into a smaller number of shares, the maximum number of shares as to which Options may be granted under the Plan shall be increased or decreased proportionately, and the Fair Market Value per share of Common Stock as of the date of grant of all outstanding Options shall be adjusted, for purposes of making the determination required by Section 8 of this Plan, in a manner deemed appropriate by the Board of Directors. In the event of a reclassification of Common Stock not covered by the foregoing, or in the event of a liquidation or reorganization of the Company, including a merger, consolidation or sale of assets, the Board of Directors shall make such adjustments, if any, as it may deem appropriate in the number, purchase price and kind of shares that are covered by Options theretofore granted under the Plan or that are otherwise subject to the Plan. Stock splits or dividends paid in shares of Common Stock that are received by the Administrator with respect to shares held in its custody hereunder will be allocated to the Participants in whole shares and in fractional shares to the fourth decimal place in accordance with their interests in the shares with respect to which the stock dividends are paid or the stock split relates. Cash dividends and other cash distributions received by the Administrator with respect to the shares held in its custody hereunder shall be paid to Participants entitled to receive the same. Share options or rights or other property, other than shares of Common Stock, received by the Administrator as distributions on shares held in its custody hereunder shall be distributed to Participants or, if a Participant has so instructed the Administrator, shall be sold by the Administrator for the accounts of such Participants, and the Administrator shall treat the proceeds of such sales in the same manner as cash dividends received by the Administrator on shares held in its custody hereunder; provided that the Administrator shall not be required to sell any options, rights or other property for which there is not an established trading market or that the Administrator otherwise reasonably determines it will not be able to sell without undue effort. The provisions of this Section shall only be applicable if, and only to the extent that, the application thereof does not conflict with any valid governmental statute, regulation or rule. Section 17. Stockholder Rights. Each Participant shall at all times be the beneficial owner of all shares of Common Stock being held for his or her account under the Plan. The Administrator shall deliver to each Participant notices of stockholder meetings, proxy statements and other -8- communications distributed by the Company to its stockholders. Prior to the time the Administrator makes delivery to the Participant of the shares of Common Stock hereunder, the Administrator will exercise all voting rights pertaining to each Participant's pro rata share of such shares in accordance with written directions, if any, given to the Administrator by such Participant prior to the date fixed for such exercise; in the absence of such directions, the Administrator will exercise such voting rights in accordance with the applicable rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange then in effect. Section 18. Statements of Account. The Administrator shall furnish each Participant with a statement promptly after the end of each Option Period (and more frequently if the Board of Directors of the Company or the Committee deems it appropriate) indicating the dollar amount invested and the number of shares purchased during the Option Period (or such shorter period as may be specified by the Board of Directors of the Company or the Committee), and the total number of shares (full and fractional) credited to such Participant's account, and such other pertinent information as the Administrator or the Committee may deem reasonable or necessary. Section 19. Amendment and Termination of the Plan. Subject to the right of the Board of Directors to terminate the Plan prior thereto, the Plan shall terminate when all or substantially all of the Common Stock reserved for purposes of the Plan has been purchased. No Options may be granted after termination of the Plan. The Board of Directors may at any time suspend, terminate, amend or modify the Plan, in whole or in part; provided, however, that no amendment or modification of the Plan shall become effective without the approval of such amendment or modification by the stockholders of the Company if the Company, on the advice of counsel, determines that such stockholder approval is necessary or desirable. No termination or amendment of the Plan shall adversely affect the rights of a Participant under an outstanding Option, except with the consent of such Participant. Section 20. Requirements of Law. The granting of Options and the issuance of Common Stock upon the exercise of an Option shall be subject to all applicable laws, rules and regulations and to such approval by governmental agencies as may be required. Section 21. Effective Date of the Plan. The Plan shall become effective on September __, 1999, the date of its adoption by the Board of Directors, provided it is approved by the Company's stockholders within 12 months of such date. The affirmative vote of the holders of at least a majority of the shares of stock of the Company present and voting on the approval of the Plan at the meeting, provided that the total number of shares voting for the proposal represents more than 50% of the total number of shares of stock entitled to vote at such annual meeting, shall be required to approve the Plan. The foregoing, however, shall not be interpreted to prevent the shareholders from acting by written consent to approve the Plan, in accordance with law and the Company's bylaws. If the Plan is not so approved, the Plan shall terminate, all Options granted hereunder shall be null and void and all shares of Common Stock theretofore issued upon the exercise of Options under the Plan shall be deemed canceled. Certificates representing shares issued to or for the account of Participants prior to stockholder approval of the Plan shall bear appropriate legends indicating that the shares have been issued contingent upon stockholder approval and are cancelable in the event such approval is -9- not obtained. Upon such cancellation, Participants, or the Administrator if applicable, shall promptly deliver to the Company all certificates representing canceled shares and the Company shall promptly return to the Participants, without interest, all funds obtained from such Participants through payroll deductions and used for the purchase of such shares. Section 22. Expenses. Except as otherwise provided in this Plan, the reasonable fees and charges of the Administrator and all costs of maintaining records hereunder will be borne by the Company, in such amounts as may be agreed by the Company and the Administrator. The Company will pay all costs incurred by it in connection with payroll deductions. The Company will not make any contributions to the Plan for the benefit of its employees (other than the provision of shares of Common Stock for purchase at discounted prices as provided herein). Each Participant shall pay and shall be solely responsible for all fees, expenses, commissions and other charges related to transactions effected for his or her account by the Administrator, including without limitation as provided in Sections 10, 11 and 14 hereof. IN WITNESS WHEREOF, this Plan has been executed this ___ day of September, 1999. LOISLAW.COM, INC. By /s/ Kyle D. Parker ------------------------------ Name: Kyle D. Parker ------------------------------ Title: Chief Executive Officer ------------------------------ -10- EX-23.2 4 CONSENT OF KPMG LLP Exhibit 23.2 Independent Auditors' Report on Financial Statement Schedule and Consent The audits referred to in our report dated May 29, 1999, except as to note 7(c) which is as of July 22, 1999, included the related financial statement schedule for each of the years in the three-year period ended December 31, 1998, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG LLP Little Rock, Arkansas September 27, 1999 -----END PRIVACY-ENHANCED MESSAGE-----