1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 1-13333 ------------ DBT ONLINE, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 85-0439411 ---------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 5550 W. FLAMINGO ROAD, SUITE B-5 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) LAS VEGAS, NEVADA 89103 - -------------------------------------------------------------------------------- (702) 257-1112 - -------------------------------------------------------------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of common shares outstanding as of September 30, 1999 was 19,084,486. Page 1 2 DBT ONLINE, INC. TABLE OF CONTENTS PAGE ---- PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (Unaudited) Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998...................................................................... 3 Consolidated Statements of Operations for the Three Months Ended September 30, 1999 and 1998................................................................................... 4 Consolidated Statements of Operations for the Nine Months Ended September 30, 1999 and 1998................................................................................... 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998................................................................................... 6 Notes to Consolidated Financial Statements.................................................... 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................ 11 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS........................................................................ 21 Item 2. CHANGES IN SECURITIES.................................................................... 21 Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................... 21 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 21 Item 5. OTHER INFORMATION........................................................................ 21 Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................... 21 Signature............................................................................................... 23 EXHIBIT Exhibit 27.1 Financial Data Schedule.......................................................... E-1 Page 2 3 Part I - FINANCIAL INFORMATION ITEM 1. Financial Statements DBT Online, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) At September 30, At December 31, 1999 1998 ---------------- --------------- (As restated, see Note 7) (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,394 $ 21,324 Accounts receivable, less allowance: September 30, 1999 - $741 December 31, 1998 - $399 12,501 9,409 Short-term investments 18,773 25,840 Prepaid expenses and other current assets 3,247 2,422 Prepaid income taxes 229 --------- --------- Total current assets 42,144 58,995 Property and equipment, net 23,329 18,806 Patents, less amortization: September 30, 1999 - $5,284 December 31, 1998 - $4,012 8,559 9,830 Goodwill, less amortization: September 30, 1999 - $1,883 December 31, 1998 - $1,170 29,112 4,637 Other assets 129 103 --------- --------- TOTAL ASSETS $ 103,273 $ 92,371 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 5,839 $ 3,273 Due to other patent interest holders 1,780 1,394 Income taxes payable 406 --------- --------- Total current liabilities 7,619 5,073 DEFERRED INCOME TAXES 3,026 3,405 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.10 par value. 5,000 shares authorized; no shares issued or outstanding Common stock, $.10 par value. 100,000 shares authorized 19,084 shares and 18,906 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 1,909 1,890 Additional paid-in capital 74,907 69,559 Retained earnings 16,093 12,444 Accumulated other comprehensive loss (281) --------- --------- Total stockholders' equity 92,628 83,893 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 103,273 $ 92,371 ========= ========= See notes to consolidated financial statements. Page 3 4 DBT Online, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three Months Ended September 30, -------------------------------- 1999 1998 --------- ---------- (As restated, see Note 7) (Unaudited) (Unaudited) Revenues $ 17,933 $ 13,672 Patent royalties 1,532 1,693 -------- -------- Total revenues and royalties 19,465 15,365 -------- -------- Cost of revenues 7,775 6,146 Sales and marketing 3,443 1,802 Research and development 1,200 771 General and administrative 6,841 4,698 -------- -------- Total expenses 19,259 13,417 -------- -------- Income from operations 206 1,948 Interest income, net 419 714 -------- -------- Income before income taxes 625 2,662 Provision for income taxes 662 902 -------- -------- Net (loss) income $ (37) $ 1,760 ======== ======== Net (loss) income per common share (basic) $ (0.00) $ 0.09 ======== ======== Weighted average shares outstanding (basic) 19,043 18,906 ======== ======== Net (loss) income per common share (diluted) $ (0.00) $ 0.09 ======== ======== Weighted average shares outstanding (diluted) 19,043 19,487 ======== ======== See notes to consolidated financial statements. Page 4 5 DBT Online, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Nine Months Ended September 30, ------------------------------ 1999 1998 -------- ---------- (As restated, see Note 7) (Unaudited) (Unaudited) Revenues $52,528 $39,073 Patent royalties 4,681 5,153 ------- ------- Total revenues and royalties 57,209 44,226 ------- ------- Cost of revenues 22,956 18,591 Sales and marketing 8,774 5,180 Research and development 3,401 2,068 General and administrative 16,491 12,479 Merger and acquisition costs 817 ------- ------- Total expenses 52,439 38,318 ------- ------- Income from operations 4,770 5,908 Interest income, net 1,322 1,818 ------- ------- Income before income taxes 6,092 7,726 Provision for income taxes 2,524 2,606 ------- ------- Net income $ 3,568 $ 5,120 ======= ======= Net income per common share (basic) $ 0.19 $ 0.27 ======= ======= Weighted average shares outstanding (basic) 18,979 18,899 ======= ======= Net income per common share (diluted) $ 0.18 $ 0.26 ======= ======= Weighted average shares outstanding (diluted) 20,039 19,667 ======= ======= See notes to consolidated financial statements. Page 5 6 DBT Online, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended September 30, --------- --------- 1999 1998 --------- --------- (As restated, see Note 7) (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,568 $ 5,120 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,568 5,315 Deferred taxes (379) (361) Stock issued for employee benefit plan 307 Stock compensation expense 1,268 Changes in operating assets and liabilities: Accounts receivable (2,193) (2,737) Prepaid expenses and other current assets (818) (1,056) Accounts payable and accrued liablities 2,445 728 Due to other patent interest holders 386 324 Income taxes payable (635) (203) -------- -------- Net cash provided by operating activities 10,517 7,130 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment purchased (8,501) (12,009) Cash paid for acquisition, net of cash acquired (25,436) (Increase) decrease in other assets (23) 185 Proceeds from maturity of investments 6,786 31,686 -------- -------- Net cash (used in) provided by investing activities (27,174) 19,862 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 3,334 172 Payments on long-term debt (607) -------- -------- Net cash provided by financing activities 2,727 172 -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,930) 27,164 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,324 7,913 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,394 $ 35,077 ======== ======== See notes to consolidated financial statements. Page 6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The following should be read in conjunction with the consolidated financial statements and the notes thereto, which are included in the Company's Annual Report on Form 10-K, as amended for the year ended December 31, 1998. NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of DBT Online, Inc. (the "Company") and its wholly owned subsidiaries. The interim consolidated financial statements as of September 30, 1999 and for the three and nine months ended September 30, 1999 and 1998 are unaudited. All significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Such adjustments consist solely of normal recurring accruals. Results for the interim periods are not necessarily indicative of results for a full year. The weighted-average number of shares for stock options included in the diluted weighted-average shares outstanding were 1,060,681 and 768,326 for the nine months ended September 30, 1999 and 1998, respectively. The additional 1,136,000 weighted-average shares for stock options which would have been included in the diluted weighted-average shares outstanding for the three months ended September 30, 1999 were excluded from the calculation because their inclusion would be antidilutive. The weighted-average number of shares for stock options included in the diluted weighted-average shares outstanding was 580,851 for the three months ended September 30, 1998. NOTE 2. BUSINESS COMBINATIONS On September 24, 1999, we acquired KnowX.com and Informed from Information America, Inc. for $25,000 in cash and warrants to purchase 329,172 shares of common stock of the Company. The warrants have a strike price of $52.50 per share and expire on March 24, 2001. KnowX.com is a leading Internet-based public record research tool for consumers and small office users. The Informed product line offers qualified users, including commercial lending and leasing companies, access to public information through the Internet or dial-up modems. The transaction was accounted for as a purchase and the Company's results of operations include the results of KnowX.com and Informed since the date of acquisition. Goodwill resulting from this transaction is approximately $24,000 and is being amortized on a straight-line basis over ten years. Unaudited pro-forma results of operations, assuming the acquisition of KnowX.com and Informed occurred as of the beginning of 1998, after giving effect to certain adjustments such as interest and amortization of goodwill resulting from the acquisition, are summarized as follows: Nine Months Ended Nine Months Ended September 30, 1999 September 30, 1998 ------------------ ------------------ Net revenue $67,020 $49,998 ======= ======= Income before income taxes $ 3,946 $ 6,448 ======= ======= Net income $ 2,152 $ 4,277 ======= ======= Earnings per share (diluted) $ 0.11 $ 0.22 ======= ======= On May 26, 1999, we acquired all of the common stock of WinSHAPES for approximately $442 in cash plus the payment of liabilities in the amount of $704. WinSHAPES is a company engaged in the development of software that converts data into graphic illustrations that visualize interrelationships among people, businesses, vehicles and other assets. The transaction was accounted for as a purchase and the Company's results of operations include the results of WinSHAPES since the date of acquisition. Goodwill resulting from this transaction is $1,125, and is being amortized on a straight-line basis over seven years. Pro forma operating information is not provided for this acquisition because its effects on the results of operations are not material. On May 6, 1999, we acquired I.R.S.C., Inc. ("IRSC"), pursuant to the merger (the "IRSC Merger") of a wholly owned subsidiary of the Company, with and into IRSC. Upon consummation of the IRSC Merger, IRSC became a wholly owned subsidiary of the Company. IRSC is a provider of court records and other public information used to conduct pre-employment screening and other anti-fraud due diligence services for business customers. Page 7 8 As a result of the IRSC Merger, each share of IRSC common stock was converted into the right to receive approximately 1.43 shares of Company common stock or 432,346 common shares of the Company in the aggregate. The IRSC Merger was accounted for as a pooling-of-interests and, accordingly, the Company's financial statements for periods prior to the IRSC Merger have been restated to include the results of IRSC for all periods presented. Details of the results of operations of the Company and IRSC for the three months ended March 31, 1999 (the end of the interim period nearest the date that the combination was consummated) and the nine months ended September 30, 1998 is as follows: Three Months Ended Nine Months Ended March 31, 1999 September 30, 1998 ------------------ ------------------ Revenues: Company $16,442 $39,040 IRSC 1,746 5,186 ------- ------- Combined $18,188 $44,226 ======= ======= Net income: Company $ 1,871 $ 3,462 IRSC 79 106 ------- ------- Combined $ 1,950 $ 3,568 ======= ======= NOTE 3. COMPREHENSIVE INCOME Comprehensive (loss) income for the three and nine months ended September 30, 1999 and 1998 is as follows: Three Months Ended Nine Months Ended September 30, September 30, --------------------- -------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income $ (37) $ 1,760 $ 3,568 $ 5,120 Adjustment to reconcile net income to total comprehensive income: Unrealized loss on investments (58) (281) ------- ------- ------- ------- Comprehensive (loss) income $ (95) $ 1,760 $ 3,287 $ 5,120 ======= ======= ======= ======= Page 8 9 NOTE 4. BUSINESS SEGMENTS The Company's reportable segments, namely electronic information and patent enforcement, are organized based on their products and services. Information concerning the segments in which the Company operates is shown in the table below. Operating profit is derived as total revenues less operating expenses; interest expense and general corporate expenses have not been considered. Identifiable assets by segment are those assets that are used in the Company's operations in each segment. General corporate assets consist primarily of cash and cash equivalents and short-term investments. Substantially all revenues are derived from, and its assets located in, the United States of America. Nine Months Ended September 30, ----------------------------- 1999 1998 -------- -------- Revenues: Electronic information $ 52,528 $ 39,073 Patent enforcement 4,681 5,153 -------- -------- Consolidated revenues $ 57,209 $ 44,226 ======== ======== Operating profit: Electronic information $ 3,997 $ 3,854 Patent enforcement 2,611 3,056 -------- -------- Segment operating profit 6,608 6,910 Interest income 1,322 1,818 General corporate expense (1,838) (1,002) -------- -------- Consolidated income before income taxes $ 6,092 $ 7,726 ======== ======== Capital expenditures: Electronic information $ 8,499 $ 12,002 Patent enforcement 2 7 -------- -------- Consolidated capital expenditures $ 8,501 $ 12,009 ======== ======== Depreciation and amortization of identifiable assets: Electronic information $ 5,288 $ 4,034 Patent enforcement 1,280 1,281 -------- -------- Consolidated depreciation and amortization $ 6,568 $ 5,315 ======== ======== As of As of September 30, December 31, 1999 1998 ------------- ------------- Identifiable assets: Electronic information $ 65,992 $ 33,572 Patent enforcement 11,626 18,769 -------- -------- Total identifiable assets 77,618 52,341 General corporate assets 25,655 40,030 -------- -------- Consolidated assets $103,273 $ 92,371 ======== ======== Page 9 10 NOTE 5. LITIGATION Our IRSC subsidiary, its former chairman and principal shareholder and DBT Online are parties to a lawsuit against a group of eight companies that used to do business with IRSC. These eight companies allege that IRSC was obligated to enter into a merger agreement with them and that the former chairman of IRSC was obligated to work for the company surviving the merger. The companies also allege that we interfered with the obligations of IRSC and its former chairman by acquiring IRSC. When these companies threatened to sue, we filed a lawsuit against them in federal court to establish jurisdiction of the action in Florida. We believe we have meritorious defenses to these companies' claims. NOTE 6. SUBSEQUENT EVENT On October 7, 1999, the Company completed a secondary offering of 5,669,758 shares of its common stock. The offering consisted of 1,000,000 shares sold by the Company, resulting in net proceeds to the Company of approximately $23,400 (after deducting underwriting discounts and estimated offering expenses payable by it) and 4,669,758 shares sold by selling shareholders, including all of the 4,469,758 shares owned by the founder of the Company. NOTE 7. RESTATEMENT Subsequent to the issuance of the Company's September 30, 1999 financial statements, the Company's management determined that it had not recorded charges that it had incurred during the third quarter of 1999 in connection with a severance agreement related to the resignation of its former CEO, as well as related stock compensation expense in connection with both the resignation of the former CEO and a Director. As a result, the September 30, 1999 financial statements have been restated from the amounts previously reported to reflect these charges for the severance agreement and related stock compensation expense. A summary of the significant effects of the restatement is as follows: AS PREVIOUSLY REPORTED AS RESTATED ------------- ----------- At September 30, 1999: Prepaid income taxes $ 106 $ 229 Accounts payable and accrued liabilities 5,414 5,839 Additional paid-in capital 73,639 74,907 Retained earnings 17,663 16,093 For the three months ended September 30, 1999: General and administrative expenses 5,148 6,841 Income before income taxes 2,318 625 Net income (loss) 1,533 (37) Earnings per share (basic) .08 (.00) Earnings per share (diluted) .08 (.00) For the nine months ended September 30, 1999: General and administrative expenses 14,798 16,491 Income before income taxes 7,785 6,092 Net income 5,138 3,568 Earnings per share (basic) .27 .19 Earnings per share (diluted) .26 .18 Page 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The following should be read in conjunction with the consolidated financial statements and the notes thereto contained in the Company's 1998 Form 10-K, as amended. This information contains certain statements regarding future trends, the accuracy of which is subject to many risks and uncertainties. Such trends, and their anticipated impact upon the Company, could differ materially from those presented in this Form 10-Q. Subsequent to the issuance of the Company's September 30, 1999 financial statements, the Company's management determined that it had not recorded charges that it had incurred during the third quarter of 1999 in connection with a severance agreement related to the resignation of its former CEO, as well as related stock compensation expense in connection with both the resignation of the former CEO and a Director. As a result, the September 30, 1999 financial statements have been restated from the amounts previously reported to reflect these charges for the severance agreement and related stock compensation expense. The effects of the restatement are presented in Note 7 to the consolidated financial statements and have been reflected herein. OVERVIEW OF THE COMPANY We are a leading nationwide provider of online public records data and other publicly available information operating through our Electronic Information Group (EIG). We also operate in the patent exploitation and enforcement business through our Patent Enforcement Group (PEG). EIG provides online integrated database services and related reports to law enforcement and other government agencies, law firms, insurance companies, and licensed investigation companies. PEG exploits and enforces two laser patents, generating its revenues through patent royalties. FACTORS AFFECTING OUR BUSINESS CONDITION In addition to the factors discussed in the Overview and Liquidity and Capital Resources sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the following additional factors may affect our business condition and future results: WE RELY HEAVILY ON ONE PRODUCT. WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS OR ENHANCE OUR EXISTING PRODUCTS. We rely heavily on AutoTrack(sm), our primary investigative search product. For the year ended December 31, 1998, AutoTrack accounted for approximately 67% of our revenues. AutoTrack competes in markets characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Our success will depend to a substantial degree upon our ability to develop in a timely fashion enhancements to AutoTrack and to introduce new products that meet changing customer requirements and emerging industry standards. In order to meet these demands, we continuously evaluate opportunities to enhance AutoTrack and to develop or acquire new products that would utilize our supply of public records information. We may not be able to identify, develop, produce, acquire, market or support new products, or these new products may not gain market acceptance. In addition, some of our new product introductions or enhancements may shorten the life cycle of existing products, including AutoTrack. Failure to introduce new products or product enhancements effectively and on a timely basis could have a material adverse effect on our business, results of operations and financial condition. Furthermore, the development by our competitors of products that would make AutoTrack obsolete could materially adversely affect our business, results of operations and financial condition. DURING THE FIRST HALF OF 1999, SOME OF OUR LAW ENFORCEMENT CUSTOMERS SUSPENDED USE OF OUR PRODUCTS AND SERVICES THOUGH ONE OF THESE LAW ENFORCEMENT CUSTOMERS RECENTLY LIFTED ITS SUSPENSION, FURTHER SUSPENSION OF USE OF OUR PRODUCTS AND SERVICES COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND REPUTATION. During the first half of 1999, the Drug Enforcement Administration and the FBI suspended their use of DBT's products and services. These agencies expressed concern about whether the target and content of their searches on our databases were accessible by current or former DBT employees. After completing an analysis of our databases and operating procedures, the DEA recently lifted its suspension of our products and services. However, the DEA has not yet returned to its customary level of use prior to the suspension. The FBI continues to analyze our databases and operating procedures. The failure of these agencies to resume full use of our services, or any additional suspensions of use by other customers, could have a material adverse effect on our business, results of operations and reputation. Page 11 12 EFFICIENT USE OF OUR DATABASES DEPENDS ON OUR ACCESS TO SOCIAL SECURITY NUMBERS. Social security numbers are the primary organizing principles that we use to generate our reports. Social security numbers could become unavailable to us in the future because of changes in the law or because our data suppliers decide not to supply them to us. If we cannot obtain social security numbers in the future, our ability to generate reports efficiently will be reduced. We can and do use names, addresses and dates of birth to generate our reports. However, without the use of social security numbers, we believe that those reports would not be as complete or accurate as reports generated with social security numbers. We also would incur significant expense to revise the software we use to generate reports. Less complete or less accurate reports could adversely affect our business, results of operations and financial condition. WE RELY ON TWO SUPPLIERS FOR THE CREDIT HEADER DATA IN OUR DATABASE. We obtain the credit header data in our database from two consumer credit reporting agencies. The data consists of names, addresses, social security numbers and dates of birth. The two consumer credit agencies are Experian Information Solutions, Inc. and Trans Union Corporation. One or both of these suppliers could stop supplying this data to us or could substantially increase their prices. This would materially adversely affect our business, results of operations and financial condition. LEGISLATORS AND CONSUMERS ARE INCREASINGLY SCRUTINIZING EXISTING FEDERAL AND STATE LAWS RELATING TO PRIVACY AND THE USE OF PERSONAL INFORMATION AND PROPOSING NEW PRIVACY LAWS. IF THESE LAWS BECOME MORE RESTRICTIVE, WE COULD HAVE LESS INFORMATION TO SUPPLY TO CUSTOMERS AND OUR BUSINESS COULD BE HARMED. Many privacy and consumer advocates and federal regulators have become increasingly concerned with public access to or use of personal information, particularly social security numbers and dates of birth. We use personal information to search our databases and to access information in databases of others. Various federal regulators and organized groups have lobbied and are expected to continue to lobby for the adoption of new or additional federal and state legislation to regulate the widespread dissemination or commercial use of personal information. If federal or state laws are amended or enacted in the future to further restrict access and use of personal information, we could have less information to provide to our customers and our business and results of operations could be adversely affected. OUR ARRANGEMENTS WITH DATA SUPPLIERS ARE NON-EXCLUSIVE, WHICH MAKES US VULNERABLE TO COMPETITION, AND GENERALLY SHORT-TERM, WHICH MAKES US SUSCEPTIBLE TO PRICE INCREASES OR NON-RENEWAL. The ability of others to obtain the same data as us or our failure to obtain the data necessary for our products at commercially reasonable costs or at all could materially adversely affect our business and results of operations. We obtain the raw data that we provide to customers from credit reporting agencies, government agencies, data aggregators, competitors and other sole source third party suppliers on a non-exclusive basis. Due to the non-exclusive nature of these relationships, we cannot prevent others from making publicly available the same information that we offer to our customers. Our agreements with our suppliers are generally short-term agreements and some of our suppliers directly compete with us, both of which make us vulnerable to unpredictable price increases or non-renewal. Increases in the cost of obtaining information from suppliers could force us to find alternative sources of information which may not be available on suitable terms. Non-renewal of existing agreements by suppliers, or our failure after non-renewal to enter into new agreements with alternative third party suppliers, could decrease the amount of information we can offer to customers and, consequently, reduce customer use of our products. In addition, some of the data we receive from governmental sources is not available from other sources and therefore cannot be replaced. OUR MARKETS ARE HIGHLY COMPETITIVE AND HAVE RELATIVELY LOW BARRIERS TO ENTRY. OUR INABILITY TO RESPOND SUCCESSFULLY TO THE EFFORTS OF OUR COMPETITORS MAY ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. Competition within our markets is intense and based mainly on price, speed, the comprehensiveness of data and our ability to provide information in an easy-to-read format. Although we believe that we maintain more historical information than our competitors, our markets are highly fragmented and have relatively few barriers to entry. As a result, new companies may enter into direct competition with us, and existing competitors could increase their market share within our customer markets. Either of these developments could adversely affect our business and results of operations. Page 12 13 In addition, many of our competitors have greater financial and marketing resources than we do. Our competitors may gain significant competitive advantages by increasing efforts to further penetrate their existing client bases and business relationships. These competitors and other potential competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote more resources to developing public record search services for individual or corporate clients than we are willing or able to accomplish. Our competitors or potential competitors may develop services that are superior to or less expensive than ours or create products that achieve greater market acceptance than ours. In response to these competitive pressures, we may make service or marketing decisions, such as reducing our prices or increasing our advertising, which may affect our operating results. If we are unsuccessful in responding to our competitors, our business and results of operations may be materially adversely affected. PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS. The Year 2000 issue is whether technology systems will be able to recognize and process date sensitive information in the year 2000. If technology systems with date sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the year 1900 rather than the year 2000. The Year 2000 issue could affect our internal technology systems, including our data storage files or hardware, and, if not corrected, could cause system shutdowns, system interruptions or delays in services to customers. As a technological company, we rely heavily on information technology systems, including proprietary software, microprocessors, operating systems, desktop computers and network hardware equipment. These systems store and manage our data files, run our products and perform a variety of administrative functions including accounting, financial reporting, payroll and invoicing. Our inability to make the required Year 2000 modifications or conversions to our technology or our inability to identify and remediate Year 2000 problems in a timely and cost-effective manner could have a material adverse effect on our business and results of operations. Year 2000-related issues of third parties on whom we rely could also adversely affect us. Our most significant Year 2000 issues relate to the Year 2000 readiness of our data suppliers and Internet connectivity service providers. We depend on information contained primarily in electronic format in databases and computer systems maintained by third parties, including governmental agencies. We also rely on telecommunications service providers to connect us to the Internet. The disruption of third-party systems or the failure of our systems to properly interact with these third-party systems could prevent us from receiving orders or delivering search results in a timely manner, or could affect our ability to refresh our data. The failure of any of those systems could prevent us from delivering our products and services, which could have a material adverse effect on our business and results of operations. Although we have undertaken substantial efforts to identify and remediate Year 2000 issues material to our business and to develop contingency plans, there can be no assurance that our efforts will be successful. We are currently developing contingency plans to address any problems that may result if we are unable to achieve Year 2000 readiness for our critical operations. We expect to complete these contingency plans by December 1999. We may not be able to develop, and, if necessary, implement a contingency plan that will adequately address all of our Year 2000 issues. WE FACE SECURITY RISKS RELATED TO OUR ELECTRONIC TRANSMISSION OF CONFIDENTIAL INFORMATION. FRAUDULENT USE OF CREDIT CARD DATA COULD ADVERSELY AFFECT OUR BUSINESS. We rely on encryption and other technologies to verify customers' identities and to effect secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the security measures used by us to protect customer transaction data. Breaches of our security could harm our reputation and customers' willingness to use our services. Security breaches could also cause interruptions in our operations and force us to expend significant money and other resources to alleviate any resulting problems. Security breaches involving the storage and transmission of our customers' proprietary information, including credit card numbers, could expose us to risk of loss or litigation. We may also suffer losses as a result of online customer orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders. Under current credit card practices, a merchant is liable for fraudulent credit card transactions where, as is the case with transactions processed by KnowX.com, that merchant does not obtain a cardholder's signature. We maintain business interruption insurance to mitigate losses associated with operational interruptions caused by any security breaches. Any breach of our security or fraudulent use of credit card data could have a material adverse effect on our business and results of operations. Page 13 14 WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR INFRASTRUCTURE AND RECRUITING QUALIFIED PERSONNEL, BOTH OF WHICH WE NEED TO MANAGE OUR RAPID GROWTH. We are experiencing periods of rapid growth associated with the implementation of our growth strategy. Rapid growth could significantly strain our communication and networking infrastructure, management team and financial resources. To manage our growth effectively, we will need to continuously enhance our information and operational systems, including our operating systems, database software and our financial systems and controls. We will also need to attract, train and retain additional senior managers, technical professionals, including programmers, and other employees. As we offer new services and pursue new customer markets, such as the consumer, banking and health care markets, we will need to increase our executive and sales and support personnel. Our business and results of operations may be adversely affected if we are unable to expand and continually improve our operational infrastructure or to recruit and integrate appropriate personnel. OUR SERVICES ARE SUBJECT TO VARIOUS FEDERAL AND STATE LAWS AND LICENSING REQUIREMENTS. In connection with some services we provide, particularly pre-employment background checks by our IRSC subsidiary, we are considered a "consumer reporting agency," as this term is used in the Fair Credit Reporting Act. We are therefore required to comply with the various consumer credit disclosure requirements of the Fair Credit Reporting Act. Noncompliance with the Fair Credit Reporting Act can result in enforcement actions and fines by both the Federal Trade Commission and state attorneys general. Willful or negligent noncompliance could result in civil liability. Similarly, there are a number of states that have laws similar to the Fair Credit Reporting Act. Further, many state laws limit the type of information that can be made available to the public. In addition, some state laws may require us to be licensed in order to conduct pre-employment background checks. Customers in these states can access our websites, which may subject us to the laws of those states. Although we believe we have obtained the necessary licenses in each state where appropriate for our business, any failure to maintain required licenses could have a material adverse effect on our business and results of operations. In the event we are determined to have violated these federal or state laws, we could be subject to substantial civil and criminal liability which could have a material adverse effect on our business and results of operations. WE HAVE A LIMITED OPERATING HISTORY ON THE INTERNET. BECAUSE OF OUR RELATIVE NEWNESS TO THE INTERNET, ITS RAPIDLY CHANGING MARKETPLACE AND THE UNPREDICTABLE GROWTH OF THE ELECTRONIC INFORMATION MARKET, IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS. We have recently launched and acquired Internet products and, consequently, do not have a long operating history on the Internet. We may be unable to effectively use Internet technology or adapt to its rapid changes. Furthermore, we may be unable to accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors on the Internet. Any evaluation of our business and prospects must be made in light of the risks and difficulties frequently encountered by companies offering services in new and rapidly evolving markets such as the Internet. The Internet marketplace is characterized by rapidly changing consumer preferences, low barriers to entry for competitors and rapidly changing technologies. Failure to recognize or respond to these factors may result in a material adverse effect on our business and prospects. Expanding the KnowX.com and AutoTrack Internet products and increasing the market awareness of our Internet services may be complicated, time-consuming and expensive. In addition, it is difficult to predict the size and future growth rate, if any, of the electronic information market. The market for electronic information services may not continue to develop or may become unprofitable. New and evolving trends, including the trend toward low-cost and enhanced access to public information on the Internet, may hinder the growth of our market. WE MAY HAVE DIFFICULTY IDENTIFYING, COMPLETING AND INTEGRATING ACQUISITIONS, WHICH COULD DECREASE OUR EARNINGS. Our growth depends in part on our ability to identify complementary acquisition candidates and to effectively combine the operations of acquired companies with our own. Complementary acquisition candidates may not be available, or may be unwilling to complete acquisitions on suitable terms. We may be unable to finance acquisitions. Using cash to finance acquisitions may reduce the funds we have available for other corporate purposes. The issuance of common stock to finance acquisitions could be substantially dilutive to existing shareholders. Once we have acquired a business, the integration process may require changes in the operating technologies and strategies of the acquired business. For example, we could have difficulty integrating KnowX.com and Informed into our current business, including linking our databases to Page 14 15 the newly acquired products. The integration of acquired businesses may also divert management's attention from its day to day responsibilities. Any difficulties we encounter in the integration process could reduce the earnings we generate from acquired businesses, which may have a material adverse effect on our business and results of operations. THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES EIG's revenues increased 31.2% to $17,933 for the three months ended September 30, 1999, from $13,672 for the same period in 1998. The increase in EIG's revenues was attributable to increased revenue from existing customers and revenue from new products. EIG's active customers (defined as customers accessing the system in a given month) increased 4.3% to 13.4 thousand at September 30, 1999, from 12.9 thousand at September 30, 1998. We imposed a service fee in the first quarter of 1999, which eliminated a number of unprofitable customers. PEG's revenues decreased 9.5% to $1,532 for the three months ended September 30, 1999, from $1,693 for the same period in 1998. Total consolidated revenues increased 26.7% to $19,465 for the three months ended September 30, 1999, from $15,365 for the same period in 1998. COST OF REVENUES EIG's cost of revenues increased 28.5% to $7,348 for the three months ended September 30, 1999, from $5,719 for the same period in 1998. The increase in EIG's cost of revenues was due primarily to increases in both data purchase costs and depreciation expense as EIG continued to invest both in its computer facilities and in the expansion of its databases. As a percentage of EIG's revenues, cost of revenues decreased to 41.0% for the three months ended September 30, 1999, from 41.8% for the same period in 1998. PEG's cost of revenues remained the same at $427 for the three months ended September 30, 1999 and 1998 and consists solely of the amortization costs associated with the purchase of the PEG's patents. Total consolidated cost of revenues increased 26.5% to $7,775 for the three months ended September 30, 1999, from $6,146 for the same period in 1998. SALES AND MARKETING EIG's sales and marketing expenses increased 91.1% to $3,443 for the three months ended September 30, 1999, from $1,802 for the same period in 1998. The increase was primarily due to increases in advertising expenses and sales and marketing personnel. As a percentage of EIG's revenues, sales and marketing expenses increased to 19.2% for the three months ended September 30, 1999, from 13.2% for the same period in 1998. This increase was attributable to a greater emphasis on utilizing sales and marketing campaigns to increase revenue growth. PEG did not have sales and marketing expenses. RESEARCH AND DEVELOPMENT EIG's research and development expenses increased 55.6% to $1,200 for the three months ended September 30, 1999 from $771 for the same period in 1998. As a percentage of EIG's revenues, research and development expenses increased to 6.7% for the three months ended September 30, 1999, from 5.6% for the same period in 1998. The increase was primarily due to an increase in both salaries and personnel associated with our new product development efforts. PEG did not have research and development expenses. Page 15 16 GENERAL AND ADMINISTRATIVE EXPENSES EIG's general and administrative expenses increased 47.5% to $6,576 for the three months ended September 30, 1999, from $4,456 for the same period in 1998. This increase was due to increases in occupancy expenses, payroll, and other expenses related to the reorganization of our administrative infrastructure. In addition, EIG's general and administrative expenses for the three months ended September 30, 1999 include $1,693 related to special charges for a severance agreement and related stock compensation expense in connection with the resignation of our former CEO and a Director. As a percentage of EIG's revenues, general and administrative expenses increased to 36.7% for the three months ended September 30, 1999, from 32.6% for the same period in 1998. PEG's general and administrative expenses increased to $265 for the three months ended September 30, 1999, from $242 for the same period in 1998. Total consolidated general and administrative expenses increased 45.6% to $6,841 for the three months ended September 30, 1999, from $4,698 for the same period in 1998. OPERATING PROFIT EIG reported an operating loss of $634 for the three months ended September 30, 1999, compared to a $925 operating profit for the same period in 1998. This decrease was attributable to the continued growth in revenues offset by increased cost of revenues and other operating expenses including the severance and related compensation expense in connection with the resignation of our former CEO and a Director. PEG's operating profit decreased 18.0% to $840 for the three months ended September 30, 1999, from $1,024 for the same period in 1998 due to a decrease in PEG's revenues. Total consolidated operating profit decreased 89.4% to $206 for the three months ended September 30, 1999, from $1,949 for the same period in 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES EIG's revenues increased 34.4% to $52,528 for the nine months ended September 30, 1999, from $39,073 for the same period in 1998. The increase in EIG's revenues was attributable to increased revenue from existing customers and revenue from new products. EIG's active customers (defined as customers accessing the system in a given month) increased 4.3% to 13.4 thousand at September 30, 1999, from 12.9 thousand at September 30, 1998. We imposed a service fee in the first quarter of 1999, which eliminated a number of unprofitable customers. PEG's revenues decreased 9.2% to $4,681 for the nine months ended September 30, 1999, from $5,153 for the same period in 1998. Total consolidated revenues increased 29.4% to $57,209 for the nine months ended September 30, 1999, from $44,226 for the same period in 1998. COST OF REVENUES EIG's cost of revenues increased 25.2% to $21,676 for the nine months ended September 30, 1999, from $17,310 for the same period in 1998. The increase in EIG's cost of revenues was due primarily to increases in both data purchase costs and depreciation expense as EIG continued to invest both in its computer facilities and in the expansion of its databases. As a percentage of EIG's revenues, cost of revenues decreased to 41.3% for the nine months ended September 30, 1999, from 44.3% for the same period in 1998. The decrease in cost of revenues as a percentage of EIG's revenues was due to the scale benefits associated with our accelerated revenue growth. PEG's cost of revenues remained substantially constant at $1,280 for the nine months ended September 30, 1999, compared to $1,281 for the same period in 1998, and consisted solely of the amortization of costs associated with the purchase of PEG's patents. Total consolidated cost of revenues increased 23.5% to $22,956 for the nine months ended September 30, 1999, from $18,591 for the same period in 1998. SALES AND MARKETING EIG's sales and marketing expenses increased 69.4% to $8,774 for the nine months ended September 30, 1999, from $5,180 for the same period in 1998. The increase was primarily due to increases in advertising expenses and sales and marketing personnel. As a percentage of EIG's revenues, sales and marketing expenses increased to 16.7% for the nine months ended September 30, 1999, from 13.3% for the same period in 1998. This increase was attributable to a greater emphasis on utilizing sales and marketing campaigns to increase revenue growth. PEG did not have sales and marketing expenses. Page 16 17 RESEARCH AND DEVELOPMENT EIG's research and development expenses increased 64.5% to $3,401 for the nine months ended September 30, 1999, from $2,068 for the same period in 1998. As a percentage of EIG's revenues, research and development expenses increased to 6.5% for the nine months ended September 30, 1999, from 5.3% for the same period in 1998. The increase was primarily due to an increase in both salaries and personnel associated with our new product development efforts. PEG did not have research and development expenses. GENERAL AND ADMINISTRATIVE EXPENSES EIG's general and administrative expenses increased 34.6% to $15,701 for the nine months ended September 30, 1999, from $11,663 for the same period in 1998. This increase was due to increases in occupancy expenses, payroll, and other expenses related to the reorganization of our administrative infrastructure and the special charges from a severance agreement and related stock compensation expense in connection with the resignation of our former CEO and a Director. As a percentage of EIG's revenues, general and administrative expenses remained relatively the same at 29.9% for the nine months ended September 30, 1999, from 29.8% for the same period in 1998. PEG's general and administrative expenses decreased to $790 for the nine months ended September 30, 1999, from $816 for the same period in 1998. Total consolidated general and administrative expenses increased 32.2% to $16,491 for the nine months ended September 30, 1999, from $12,479 for the same period in 1998. OPERATING PROFIT EIG's operating profit decreased 24.3% to $2,159 for the nine months ended September 30, 1999, from $2,852 for the same period in 1998. This decrease was attributable to the continued growth in revenues offset by increased cost of revenues and other operating expenses and, in particular, the severance and related stock compensation expense in connection with the resignation of our former CEO and a Director. Operating profit for the nine months ended September 30, 1999 included one-time merger-related costs of $817 and severance and stock compensation expense of $1,693. Excluding the one-time merger-related costs, severance and stock compensation expense, EIG's operating profit increased 63.7% to $4,669 for the nine months ended September 30, 1999. PEG's operating profit decreased 14.6% to $2,611 for the nine months ended September 30, 1999, from $3,056 for the same period in 1998 due to a decrease in PEG's revenues. Total consolidated operating profit decreased 19.3% to $4,770 for the nine months ended September 30, 1999, from $5,908 for the same period in 1998. INTEREST INCOME Net interest income was $1,322 the nine months ended September 30, 1999, compared to $1,818 for the same period in 1998. The decrease was due to lower cash and investment balances as our capital expenditures increased significantly throughout 1998, reducing our beginning cash balance in 1999. INCOME TAXES Our effective income tax rate was 41% for the nine months ended September 30, 1999 compared to 34% for the same period in 1998. The effective tax rates for both of these periods were favorably impacted by non-taxable interest income and reduced state income taxes. The 1999 effective tax rate was adversely affected by non-deductible stock compensation expense recorded in the third quarter. NET INCOME Our net income decreased 30.3% to $3,568 for the nine months ended September 30, 1999, from $5,120 for the same period in 1998. The decrease was primarily due to the decrease in operating profit of EIG and PEG, reduced interest income during the period, the occurrence of non-recurring, merger-related and severance and stock compensation expense, and an increase in the effective tax rate. Page 17 18 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operations were $10,517 for the nine months ended September 30, 1999, compared to $7,130 for the same period in 1998. We had working capital at September 30, 1999 of $34,525 (including cash, cash equivalents and marketable securities of $26,167) compared to $53,922 (including cash, cash equivalents and marketable securities of $47,164) at December 31, 1998. We expect to fund future working capital requirements with our existing cash and short-term investment balances and with cash generated from operations. Capital expenditures were $8,501 for the nine months ended September 30, 1999, compared to $12,009 for the same period in 1998. These expenditures were primarily attributable to the acquisition of computer equipment and, in 1998, to leasehold improvements of our new facility in Boca Raton, Florida. We anticipate additional capital expenditures during the next two fiscal years related to the upgrade of our database capabilities, which we intend to fund entirely through our cash flows from operations. We currently have no debt and believe that our existing cash and short-term investment balances together with our cash flows from both EIG and PEG operations will be sufficient to meet our anticipated cash and capital requirements through 1999. INFLATION The rate of inflation has not had a material impact on our operations. Moreover, if inflation remains at its recent levels, it is not expected to have a material impact on our operations for the foreseeable future. THE YEAR 2000 ISSUE The Year 2000 Issue relates to whether information and non-information technology systems will be able to recognize and process date-sensitive information in the year 2000. We rely, directly and indirectly, on information technology systems, such as microprocessors, proprietary operating systems, desktop computers, network hardware equipment, and applications software, to operate our products, manage our business data and perform a variety of administrative services, including accounting, financial reporting, payroll processing and invoicing. We also rely on non-information technology systems, including office equipment, security systems, and telephone systems, to execute our day-to-day operations. In addition, third parties material to our operations, such as suppliers, vendors, and customers, rely on information and non-information technology systems to manage their businesses. Our most significant Year 2000 issues relate to the Year 2000 readiness of our data suppliers and Internet connecting service providers. The Year 2000 Issue could affect our, or third parties', technology systems. The Year 2000 Issue could also affect the KnowX.com and Informed businesses, which we acquired from Information America, Inc. In connection with our acquisition of KnowX.com and Informed, we conducted a Year 2000 due diligence review of these products. Based on our review, we believe KnowX.com and Informed are substantially Year 2000 compliant. In addition, the agreement with Information America contains a representation that all of the technology included in the assets we purchased and necessary to operate the KnowX.com and Informed businesses is Year 2000 compliant. In order to minimize the risk of Year 2000-related losses, we began conducting a comprehensive assessment of our Year 2000 Issues in August 1998. The assessment focused on five areas that, if affected by the Year 2000 Issue, could have a material adverse effect on our operations. These areas are: 1) data storage; 2) product software used by our customers; 3) product software used internally by us; 4) hardware; and 5) non-information technology systems. The following is a Year 2000 status report for each of these areas, based upon the phase of the assessment completed to date. DATA STORAGE All of our data fields have been made Year 2000 compliant. We continually review vendor-supplied data to ensure compliance is maintained. If any third party fails to supply us with compliant data, we modify the data in order to make it Year 2000 ready. If any third party data suppliers give us data that is not Year 2000 compliant, it could take us longer to make the data suitable for use in our databases. Page 18 19 PRODUCT SOFTWARE USED BY OUR CUSTOMERS Our product software is divided into two types: software written by us and commercial software written by third parties. The following is an update on the Year 2000 status of each of these areas: o SOFTWARE WRITTEN BY US. Preliminary date forward testing revealed that software written by us is Year 2000 compliant. Two software programs important to our business and operations, AutoTrackPLUS(SM) and AutoTrackXP(SM), have been successfully tested for Year 2000 compliance. o COMMERCIAL SOFTWARE WRITTEN BY THIRD PARTIES. Version 8.0 of pcAnywhere, the software used to access AutoTrackPLUS, has been certified as Year 2000 compliant by Symantec Corporation, its manufacturer. Through testing, we have determined that earlier versions of pcAnywhere (4.5 and 5.0 for DOS(R), 2.0 for Windows(R), and 7.5 for Windows) are also Year 2000 compliant, except for one two-digit year display, which does not affect the operation of these versions. However, we expect that in the coming months, many of our customers, as part of their Year 2000 remediation efforts, will be switching from the earlier versions of pcAnywhere to more updated, Year 2000-certified software programs, including AutoTrackXP. Versions 4.0 and earlier of Microsoft Internet Explorer(R), which our customers use to access our products, will not be tested for Year 2000 compliance by Microsoft, the manufacturer. We expect that customers using these earlier versions will migrate their systems into Year 2000 compliance through Microsoft's Website, which provides online upgrades of Microsoft Internet Explorer(R) at no cost. Versions 3.x and 4.x of Netscape Navigator(R) are both Year 2000 compliant when used with Windows 95 or later operatinG systems. We expect that customers using earlier versions of Netscape Navigator will migrate their systems into Year 2000 compliance through Netscape's Website, which provides online upgrades at no cost. Third Party dialer applications used on the AutoTrackXP install disks have been certified as Year 2000 compliant by the vendor. PRODUCT SOFTWARE USED INTERNALLY BY US We have installed a real-time inventory system. We will postpone upgrading commercial software used internally until late 1999, in order to ensure that we obtain the most advanced versions possible. HARDWARE DESKTOP MACHINES. Most of our approximately 350 desktop machines have been replaced with certified Year 2000 compliant Hewlett Packard desktops as part of a company-wide computer upgrade program. Clocking for our computer network has been centralized through a new Year 2000 compliant system. The system controls timekeeping for all desktop machines and servers, and ensures that all date- and time-related codes and functions used in hardware throughout our network remain Year 2000 compliant. SUPPORT MACHINES. Support machines used by us have been manually tested and determined to be Year 2000 compliant. SERVERS. Many of our computer servers have failed real-time clock testing. However, successful date forward testing and manufacturer statements of function have shown this failure will not materially affect the operation of the servers. Further Year 2000-related testing of the servers will be conducted as a safeguard. NETWORK HARDWARE. Our network hardware includes routers, hubs, switches, CD-ROM towers, print servers, and communication servers. Hewlett Packard, our hardware vendor, has certified approximately 80% of this network hardware as Year 2000 compliant. Cisco has certified the remaining 20% of the network hardware. We have confirmed these results through successful date forward testing. COMMUNICATIONS HARDWARE. Our communications hardware includes modems and DSU/CSUs. These systems have all been successfully date forward tested. Page 19 20 NON-INFORMATION TECHNOLOGY SYSTEMS INTERNET CONNECTIVITY. We rely on telecommunications service providers to connect us to the Internet. If our service providers' systems were not Year 2000 compliant and failed, we could be prevented from receiving orders or delivering search results. By December 31, 1999, we intend to be working with three internet service providers, each of whom could exclusively service our business. We believe that at least one of our three telecommunications service providers will be Year 2000 compliant, however, there can be no assurance that all three or any of the three will be Year 2000 ready. PHONE SYSTEM. Siemens has certified our phone system as Year 2000 compliant. SECURITY SYSTEM. Security software has been certified as Year 2000 compliant. The vendor is currently testing the security hardware for Year 2000 compliance. OFFICE ENVIRONMENTAL SYSTEM. Our office environmental system is currently manually controlled and Year 2000 compliant. However, new automated controls for the environmental system are being installed. We plan to test these controls for Year 2000 compliance after they are installed. TELEPHONE AND UTILITY SYSTEM. The Year 2000 status of our telephone and utility systems has not been assessed. We expect that these systems will be made Year 2000 compliant by their providers. SUMMARY We expect to be fully Year 2000 compliant by the end of November 1999. Given our efforts to identify and address our Year 2000 Issues, we do not believe that Year 2000 Issues will have a material adverse effect on our business, results of operations, or financial condition. We estimate that the total cost of addressing our Year 2000 Issue will be approximately $300. All costs associated with the remediation of the Year 2000 Issue will be expensed as incurred. We will develop a contingency plan for dealing with Year 2000 Issues by December 1999. RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE Our failure to correct a material Year 2000-related problem in our information or non-information technology systems could result in an interruption in, or a failure of, our normal business activities or operations. We depend on information contained primarily in electronic format in databases and computer systems maintained by third parties, including governmental agencies. We also rely on telecommunications service providers to connect us to the Internet. The disruption of third-party systems or the failure of our systems to properly interact with these third-party systems could prevent us from receiving orders or delivering search results in a timely manner, or could affect our ability to refresh our data. Our inability to bring historical data files, date fields or information purchased from vendors into Year 2000 compliance could have a material adverse effect on our business, financial condition, and results of operations. In addition, we are currently unable to predict the effect that the Year 2000 Issue will have on our suppliers, or the extent to which we would be vulnerable to our suppliers' failures to remediate their Year 2000 Issues on a timely basis. The failure of a major supplier to convert its systems on a timely basis or in a manner that is incompatible with our systems could have a material adverse effect on us. Page 20 21 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Our IRSC subsidiary, its former chairman and principal shareholder and DBT Online are parties to a lawsuit against a group of eight companies that used to do business with IRSC. These eight companies allege that IRSC was obligated to enter into a merger agreement with them and that the former chairman of IRSC was obligated to work for the company surviving the merger. The companies also allege that we interfered with the obligations of IRSC and its former chairman by acquiring IRSC. When these companies threatened to sue, we filed a lawsuit against them in federal court to establish jurisdiction of the action in Florida. We believe we have meritorious defenses to these companies' claims. We also have brought a lawsuit against High Tech Data Services and its affiliates and principals, with whom we had a non-competition and non-disclosure agreement. We believe, and our lawsuit alleges, that High Tech Data Services violated the non-competition and non-disclosure agreement, infringed our trade and service marks and misappropriated our trade secrets. On October 27, 1999, the court issued a summary judgement in favor of the Defendants in the lawsuit. The Company plans to file an appeal of the summary Judgement. From time to time, we are involved in litigation in the ordinary course of business, including litigation in connection with non-competition agreements our employees sign and the alleged infringement of intellectual property rights. Except the IRSC and High Tech Data Services litigations discussed above, we are not currently involved in, and do not know of, any material litigation against us. ITEM 2. CHANGES IN SECURITIES None to report. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None to report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None to report. ITEM 5. OTHER INFORMATION None to report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1* Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K The Company has filed the following reports on Form 8-K during the period covered by this report: (i) Form 8-K dated August 20, 1999 and filed on September 3, 1999 and (ii) Form 8-K dated August 12, 1999 and filed on August 13, 1999. Page 21 22 The 8-K filed on September 3, 1999, was filed to report the purchase from Information America, Inc. ("Information America"), a Georgia corporation, of its Online Public Records business unit and its KnowX.com business unit pursuant to the Asset Purchase Agreement entered into as of August 20, 1999, among West Publishing, Information America and the Company. The 8-K filed on August 13, 1999, was filed to report the resignation of Charles A. Lieppe as President, Chief Executive Officer and a Director of the Company due to personal reasons and the appointment of Ronald Fournet, the Company's Chief Information and Technology Officer, as President and Chief Executive Officer. - ----------- * Filed herewith. Page 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DBT ONLINE, INC. /s/ Judith D. Brown ---------------------------------------------- JUDITH D. BROWN (Principal Accounting Officer) /s/ J. Henry Muetterties ---------------------------------------------- J. HENRY MUETTERTIES (Vice President General Counsel and Secretary) Date March 7, 2000 Page 23