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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5550 W. FLAMINGO ROAD, SUITE B-5
LAS VEGAS, NEVADA 89103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING
AREA CODE 702-257-1112
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH
REGISTERED:
Common Stock, par value $.10 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(TITLE OF CLASS)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days: YES
[X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 1, 2000, the aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant was $ 213,302,770.
As of March 1, 2000, the number of outstanding shares of Common Stock, par value
$.10 per share, of the Registrant was 20,145,094.
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TABLE OF CONTENTS
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PART I
Item 1. Business ....................................................................................... 4
Item 2. Properties ..................................................................................... 13
Item 3. Legal Proceedings............................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............................................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 16
Item 6. Selected Financial Data ........................................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................................................... 19
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................................... 25
Item 8. Financial Statements and Supplementary Data..................................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. ...................................................................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 44
Item 11. Executive Compensation ......................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 52
Item 13. Certain Relationships and Related Transactions.................................................. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................................................... 54
Signatures ..................................................................................... 56
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FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this report may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This report contains forward-looking statements that address, among other
things, the integration of acquisitions, limited experience with Internet
business, growth strategy, computer system capabilities, availability of data
and customer demand. These statements may be found under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as in this Form 10-K generally. Actual events or results may
differ materially from those discussed in forward-looking statements as a result
of various factors, including, without limitation, the risks outlined under
"Factors Affecting our Business Condition" and matters described in this Form
10-K generally.
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PART I
ITEM 1. BUSINESS
We are a leading nationwide provider of organized online public records data
and other information. We believe that our database is one of the country's
largest depositories of public records and other public information, containing
more than 5 billion records with more than 25 terabytes of data storage
capacity. Our customers are able to access and search our database 24 hours a
day, 365 days a year through our Internet websites or over a modem connection.
Our files store various kinds of information on individuals, businesses and
assets, including:
INFORMATION ON INDIVIDUALS INFORMATION ON BUSINESSES AND ASSETS
o first and last names o corporation records
o current and past addresses o real property records
o known associates and relatives o motor vehicles records
o telephone numbers o liens, judgments and bankruptcies
o professional licenses o UCC filings
o other assets
Our proprietary software tools allow our customers to quickly and
cost-effectively search our large database for information. Starting with very
little information, such as a name or address, our customers can locate and
build an extensive profile which we are able to generate into comprehensive,
easy-to-read reports.
We currently have more than 15,000 customers utilizing our AutoTrack
services and products, consisting primarily of insurance companies, law firms,
private investigators, law enforcement and government agencies. Our customers
use our online information services to detect fraudulent activity, assist law
enforcement efforts, locate people and assets and verify information and
identities. From 1996 to 1999, our revenues from our Electronic Information
Group increased from $22.6 million to $72.8 million, representing a compound
annual growth rate of 48%, and our EBITDA increased from $3.9 million to $12.5
million, also representing a compound annual growth rate of 48%. Since 1996, we
have successfully introduced new services and technologies to our customers and
have completed several complementary acquisitions.
In September 1999, we acquired KnowX.com and Informed from Information
America, Inc. KnowX.com is a leading Internet-based public record research tool
for consumers and small office users. Informed offers qualified users, including
commercial lending and leasing companies, access to public information through
the Internet or dial-up modems. We believe our acquisition of KnowX.com and
Informed will expand and diversify our customer base and allow us to further
market our products to the rapidly growing population of Internet users.
MARKET OVERVIEW
The market for public information includes both public records and publicly
available information. Public records primarily include information from
governmental entities or agencies, such as names and addresses of individuals
and corporations, driving records, court records, bankruptcy filings, lien
filings and real property records. Publicly available information includes data
such as professional licenses and residence directories. As the sources of this
information are often geographically dispersed and the information is available
in many different forms, locating and aggregating this information is a
time-consuming, costly and challenging task. Moreover, verifying the data and
organizing it into a useful format presents additional difficulty. We believe
that, given the fragmented nature of public records and other publicly available
information, the ability to effectively aggregate the data and generate easy to
read reports in a timely manner represents a high value-added service.
Historically, the primary users of public records have been law enforcement
and other governmental agencies, law firms, insurance companies and licensed
investigation companies. These entities use public records to assist them to
investigate fraudulent and criminal activity, locate individuals and research
businesses and assets. As an example of the significant amount of fraud that
occurs each year, according to a 1996 survey by The Conning Company, more than
$120 billion is lost through insurance fraud each year in the United States,
including $20 billion in property, casualty and life insurance fraud and $95
billion in healthcare insurance fraud. We believe that businesses will expand
their efforts to combat fraud, increasing the demand for public information
services in these markets and continuing to represent a significant growth
opportunity.
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In recent years, additional types of customers, including small businesses,
consumers and larger corporate customers, have been using online public records
in the ordinary course of their business to verify personal information and to
search for information related to individuals or businesses. We believe these
new market opportunities will create additional demand for online public
information search and retrieval services.
We also believe that providers of online information services are well
positioned to participate in the significant growth associated with Internet
commerce. The growth of the Internet as a global medium for communication and
information exchange is expected to continue to increase demand for content and
services that are accessed and delivered through web-based media. According to
International Data Corporation, the number of Internet users worldwide is
expected to grow from 159 million at the end of 1998 to an estimated 510 million
in 2003. International Data Corporation also estimates that the total value of
goods and services purchased over the Internet worldwide will grow from
approximately $50.4 billion in 1998 to approximately $1.3 trillion by the end of
2003. This growth is due in part to a user's ability to efficiently and rapidly
search the Internet to access and manipulate information from a wide variety of
sources. Through electronic commerce, these information services can be accessed
and delivered online in a quick, easy, and inexpensive manner. We believe that
the growth in web-based activity combined with the increasing demand for public
records from both new and existing markets will support significant growth for
comprehensive and organized on-line methods for accessing public information.
STRATEGY
Our business objective is to be the leading provider of organized online
public information to the corporate, consumer and governmental markets, while
enhancing proprietary customer data with public information in our database. To
achieve this objective, we intend to continue to develop long-term customer
relationships and maintain a high level of customer satisfaction, which we
believe will result in additional recurring revenues from our existing products
and an enhanced ability to introduce new products. Key elements of our strategy
are to:
DEVELOP NEW PRODUCTS AND APPLICATIONS UTILIZING OUR LARGE INFORMATION
DATABASE
We believe that we maintain one of the largest databases of public
information in the United States, which is enhanced by proprietary technology
that makes data retrieval fast and efficient. Our existing database of public
records and information, which we continually update and expand, presents
opportunities to develop new products and services at a relatively low
incremental cost. We will seek to capitalize on our relatively fixed investment
in our existing database by continuing to develop new applications that use this
data to tailor services to the needs of particular customers. For example, the
Los Angeles County Sheriff's Department asked us to develop a tool for finding
up-to-date addresses of individuals who were the subject of arrest warrants. In
response, we developed the CLAWS(sm) system, which performs daily searches of
our large databases. We are currently marketing the CLAWS system to our other
law enforcement customers. Similarly, we recently completed a large project
designed to detect voter fraud for the state of Florida and are currently
marketing this service to other states. We will pursue similar additional
opportunities to fully utilize our existing database. In addition to developing
new applications, we believe that we can supply public records and information
on a wholesale basis to Internet-based businesses. For example, we recently
entered into an agreement to supply a minimum of $20 million of data to US
SEARCH over the term of the five and one half year agreement.
EXPAND OUR CUSTOMER BASE BY ENTERING NEW MARKETS
We believe our existing product portfolio, including those products obtained
through recent acquisitions, will allow us to aggressively pursue new market
opportunities. We have specifically identified and intend to pursue growth
opportunities within the consumer, lending/leasing and pre-employment screening
markets. We believe that our acquisition of KnowX.com gives us a significant
presence in the large and rapidly growing consumer and small office markets.
KnowX.com provides these customers with a low cost method of researching
important purchases, such as checking the history and ownership of a home,
before making a purchase decision. We are also currently introducing online
screening and selection services to these markets which will allow customers to
instantly verify the identity of individuals with whom they are conducting
business on the Internet. Our acquisition of Informed provides us with an
established relationship with commercial lending and leasing companies. Lastly,
through our acquisition of Insight, we intend to vigorously pursue customers in
the pre-employment screening market, providing both detailed verification and
screening and selection services. We will continue to seek additional
opportunities to deliver our existing product offerings to new markets.
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DEVELOP MORE EFFICIENT DELIVERY METHODS TO FURTHER PENETRATE EXISTING MARKETS
We continually seek to enhance our relationships with existing customers by
developing more efficient methods for the delivery and presentation of our
products. We recently introduced AutoTrackXP(sm) Online Services, a Windows
compatible product with an HTML-based interface. AutoTrackXP allows customers to
access our products using off-the-shelf web browser technology commonly found on
today's personal computers. We believe that the improved efficiency and ease of
access to our products afforded by AutoTrackXP will significantly expand the
number of customers using our products in industries we presently serve. In
addition to utilizing our browser technology, we expect to utilize our
recently-acquired CaseLINK technology to enhance the presentation of our
reports. CaseLINK converts our data into graphic illustrations that helps users
visualize relationships among people, businesses, vehicles and other assets,
creating user-friendly reports that we believe will contribute to increased use
of our products. We intend to continue to focus on improving the delivery and
presentation of our products, which we believe will increase usage of our
services by our customers.
DEVELOP DECISIONING TOOLS TO HELP CUSTOMERS EVALUATE DATA
We are currently working to develop technologies that qualitatively and
quantitatively evaluate the records and information retrieved by our customers,
particularly in the insurance and health care industries. We believe that these
tools will assist customers in predicting patterns of behavior, which will allow
them to more effectively prevent fraudulent activity. We expect to use this
technology to link our products with customers' specific claims files or
databases to develop decision-making templates to identify potential fraudulent
claims before any payments are made with respect to those claims. We believe
these product development efforts will allow us to provide customized,
comprehensive solutions to our customers, complementing our current product
offerings and significantly increasing the value-added nature of our products.
PURSUE STRATEGIC ACQUISITIONS OF COMPLEMENTARY BUSINESSES
We continuously monitor and consider opportunities to expand our customer
base and acquire new products and technologies through acquisitions of
complementary businesses or assets. We recently completed an acquisition of
WinSHAPES, through which we obtained the CaseLINK technology, and a merger with
IRSC, which provided us with pre-employment screening capabilities. We also
recently acquired KnowX.com and Informed, which we believe will enable us to
establish a significant presence in the consumer, small office and commercial
lending and leasing markets. We intend to continue to pursue additional
strategic acquisitions that enhance our products and technologies and expand our
customer base.
DATABASES AND OPERATIONS
DATABASES
With 25 terabytes of data storage capacity and over 5 billion records, our
databases contain public records, publicly available information and other
non-public information gathered from governmental and private data sources. The
information stored in our files includes first and last names, current and past
addresses, known associates and relatives, telephone numbers, professional
licenses, corporation records, liens, judgments, bankruptcies, UCC filings and
records for real estate, motor vehicles, and other assets. While each file or
source may contain information that is geographically or topically unique, we
have created proprietary software that links the files to each other. Our
proprietary software tools allow customers to perform searches starting with
very little information, and by cross-referencing our databases, generate an
extensive profile built into one comprehensive, easy-to-read report. Customers
conduct searches through all files, or through topical or geographical files, to
retrieve possible matches to the subject of the search. For example, in order to
perform a nationwide search for an individual who has a driver's license, our
databases would search each state's driver's license file, matching similar
names in a matter of seconds. Our software then is able to combine the retrieved
information into an extensive profile on the subject of the search by
cross-referencing data received from the initial search with other records
regarding the same individual in our databases.
Customers can customize their search results in any number of ways. Some of
our customers provide us with their own proprietary data for the retrieval of
cross-referenced or similar data in our databases. Our software is able to build
a profile with information tailored to the customer's request. Using our
software, our databases will retrieve persons or assets associated with the
subject of the search, such as persons living at the same address, and add
associated information to a profile. Our software also has the ability to sort
through a comprehensive profile and generate a report which identifies, in
graphics or in writing, the relationships between people, assets or other
information which appears in a report. We have bundled many of our software
tools into specific products to facilitate frequently run searches. The
following represent our larger, more frequently accessed files, which we also
intend to use in conjunction with products we may acquire in the future.
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o RECORDS ON INDIVIDUALS. We maintain information on millions of
individuals throughout the United States, including current and previous
addresses, neighbors, dates of birth, and other information.
o RECORDS ON CORPORATIONS. We maintain information on active and inactive
businesses, based on Secretary of State filings in 43 states, including
officers, directors, registered agents, corporate status and federal
employment identification numbers.
o PROPERTY RECORDS. Our property records include information on real
property from over 1,100 counties located in 43 states and the U.S.
Virgin Islands, such as mailing address, parcel number, assessed values,
recent and prior sales prices and property narratives.
o VEHICLE RECORDS. Our vehicle records include information on vehicle
registrations in 32 states, including the owner's name and address,
description, title information, vehicle identification number,
lienholder information, and historical data.
o RECORDS ON DRIVERS. We maintain information on drivers' licenses issued
in 18 states, including drivers' license numbers, addresses, dates of
birth and zip codes.
o RECORDS ON LIENS, JUDGMENTS AND BANKRUPTCIES. We maintain information on
business and consumer bankruptcies in all 50 states and we maintain
files on federal and state tax liens and civil judgments in 31 states.
o UCC FILINGS. We maintain UCC lien filing information for 44 states,
including debtor, secured party, address, state, assignee, collateral,
filing number and filing date.
o PROFESSIONAL LICENSES. We maintain professional licensing records from
46 states, including license categories, license numbers, business and
licensee names and addresses. We also have FAA pilots licenses and
DEA-controlled substance licenses in all 50 states.
o TELEPHONE NUMBERS. We maintain listings from all white page and yellow
page directories published nationwide, including the name, address,
city, state, zip, metropolitan statistical area (MSA) and for business
listings the US Government Standard Industrial Classification code
(SIC). We also provide gateway access to each of the regional Bell
electronic directory assistance databases.
We believe that the size and diversity of our databases are unmatched in the
industry and, combined with our ability to quickly cross-reference between them,
provide us with significant competitive advantages in the market place. We
believe we are the only major online public information provider that maintains
and continually refreshes historical information provided to us by our data
suppliers. In many cases, we have archives of data dating back more than 10
years. We also believe that we maintain superior database quality in part
because, while we do not revise data contents, we format each data file we
receive in order to make it useable on our databases.
HARDWARE CONFIGURATION
We designed and built our existing proprietary computer configuration to
create a mass-storage file system. While we currently use our proprietary
hardware configuration, we recently purchased an open-architecture, complete
mass-storage hardware and software system file system which we are in the
process of implementing. Our new configuration will feature database software
designed by Oracle that will run on a central processing unit produced by Sun
Microsystems. EMC will provide the mass storage file system to store the
libraries of information contained in our databases.
We will phase in our new hardware configuration throughout the year 2000 in
order to minimize the risk of service disruption. The implementation of our new
hardware configuration will increase the speed of our data retrieval, the
storage capacity of our databases and the long-term serviceability of our
hardware, all of which will expand our capabilities to continue to service our
growing customer base. Our new computer configuration will continue to offer our
customers fast-index retrieval and real-time redundant fault tolerances.
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DATA SOURCES
We obtain our data from the federal and state governments and from third
party data aggregators. Many of our data suppliers send us computer diskettes,
tapes or other mediums for data storage. We convert and format all of these data
storage mediums for use with our products. We currently receive data from over
300 vendors, which include information from all 50 states, over 3,000 counties
and approximately 1,500 government agencies. Leading domestic credit bureaus are
our largest data suppliers. We also obtain site licenses and pay variable fees
based on the frequency of our customers' access to our suppliers' databases. Our
data costs are comprised of both fixed fee and variable fee arrangements.
In order to protect our databases and to minimize the risk of service
disruptions, we create daily back-up files of the raw data in our databases, our
customers' offline search inquiries and results, saved reports and logged
transactions. We also operate a second system that is redundant to our primary
data retrieval system. In addition, we house our primary and secondary databases
in separate buildings. Our building planners have advised us that our buildings
are substantially hurricane and tsunami proof. We protect our databases from
intruders with a state of the art active security system, and we record the
entry and exit of all employees and visitors at all times with a key card
system.
PRODUCTS
We currently have four principal products:
AUTOTRACK
Our AutoTrack(sm) products provide online access, from a customer's
computer, 24 hours a day, seven days a week, to our databases. AutoTrack is able
to search a multitude of databases for information on specific search items and
combine the data into a single, easy to read report. As hundreds of databases
can be searched to build a report, we simultaneously compile information over
several internal distributed processes, which speed report compilation time
dramatically. Comprehensive database searches and in-depth report compilation
are made possible by our proprietary indexing techniques. We have implemented a
pricing plan that seeks to attract new subscribers and increase usage. The
primary components of the AutoTrack pricing structure are search and report
fees, which cost $2.00 per search and range from $7.00 to $18.00 per report. We
offer AutoTrack through two main products, AutoTrackXP(sm) and
AutoTrackPlus(sm).
AutoTrackXP is our new Windows(R) compatible product that allows access to
our database warehouse using off-the-shelf Web browser technology commonly found
on today's personal computers. With an Internet browser such as Netscape
Navigator(R) or Microsoft Internet Explorer(R), customers can access our
database using Windows point-and-click technology. Customers connect to our
www.autotrackxp.com website using a modem and any standard dial-up software
designed for connecting to the Internet. In addition to the standardized
interface, the multi-tasking Windows environment permits browsing and running of
multiple reports simultaneously, as well as allowing the customer to cut and
paste information from the browser directly into other open documents. With its
HTML-based interface, we believe that anyone familiar with Internet browsers can
easily learn to use AutoTrackXP in just minutes. Introduced on May 1, 1999,
AutoTrackXP represented approximately 48% of our monthly AutoTrack revenue in
December 1999.
AutoTrackPlus is our original data retrieval product. Qualified subscribers
access AutoTrackPlus over a modem connection and are able to search either
national or state-specific databases. We are currently in the process of
converting our AutoTrackPlus customers to AutoTrackXP.
Our AutoTrack products are used by law enforcement, property and casualty
insurance companies and law firms in their day to day business. For example, an
investigator can run a search using AutoTrack to determine whether there is a
relationship between parties in an auto accident for which an insurance claim
has been filed to determine the likely validity of the claim. Similarly, an
investigator could research a suspected criminal's current and former addresses
as well as known associates and their addresses to assist in the apprehension of
a criminal.
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KNOWX.COM
KnowX.com is a market leader of Internet-based public record research
targeting consumers and small office users. Its core product, Ultimate People
Finder(sm), provides a low-cost way to locate individuals through public
records, while its other products provide summary and detailed public record
information on individuals and businesses. KnowX.com provides access to public
records databases that allow users to locate and research people, assets and
companies. We did not purchase any data in connection with the KnowX.com
acquisition, but we have entered into a transition services agreement with the
seller which allows us to use its databases for up to one year. Following this
transition period, we intend to use our databases to supply the public records
and other information for the KnowX.com products.
Reported instantaneously through its web interface, KnowX.com performs
searches on a real-time basis. The KnowX.com website generates its revenue
through transactions, as opposed to advertising, and enjoys repeat customer
usage of nearly 50% of all its traffic. The KnowX.com products have experienced
significant growth as Internet-accessed small businesses and consumers discover
the service and recognize its usefulness.
We acquired KnowX.com in September 1999 as a part of our purchase of
selected businesses from Information America. KnowX.com currently charges
customers up to $1.50 per database search and up to $ 84.00 for a detailed
search. Consumers and small office customers use KnowX.com for a variety of
purposes. For example, a consumer may use KnowX.com to access information to
locate a missing relative or to research the history of a home which the
consumer is thinking of purchasing.
INSIGHT
InSight(TM) is a Windows(R) based software, obtained in May 1999 when we
merged with IRSC, that provides access to public and publicly available records
and permits users to order manual searches such as searches of court records and
employment, education and professional license verifications. Its flexible
interface enables users to create custom menus and custom combined searches. The
custom menu ability helps customers to focus on the specific services most often
used while the custom combined feature saves customers time in entering search
information. Using InSight's profile feature, customers can create subject
profiles, save them and use them at a later date to obtain updated reports.
InSight also allows users to capture information for integration into other
files and reports. InSight Plus(TM) , which is currently under development, is
an enhanced browser-based version of InSight specifically designed for the human
resources market. Features of InSight Plus will include integrated reports,
flexible billing and the ability to obtain status information on orders through
the Internet. An important feature of Insight Plus is the back-end processing
system which we expect will improve turnaround time, reduce costs and increase
quality.
Through InSight, customers can conduct a Signal(TM) search, which is an
instant verification tool that analyzes subject data and produces warnings based
on inconsistencies in that data. For example, a warning would be issued if a
social security number was issued prior to a date of birth or if a telephone
number prefix did not match the city provided. An enhanced version of Signal is
in development, which will take advantage of data hosted by us and provided
through AutoTrack. Users of InSight are charged on a transaction basis with
prices ranging from $3.00 to $20.00 per search or verification.
While InSight is used for a variety of purposes, including loan evaluation
and vendor due diligence, nearly 50% of IRSC's revenues in 1999 were generated
from pre-employment screening. For example, an employer could verify the
accuracy of the information contained on an applicant's employment application,
as well as review or investigate criminal records, driving history or education
credentials. InSight is subject to regulation under the Fair Credit Reporting
Act.
INFORMED
The Informed product line uses publicly available information and high-speed
search and retrieval technology to identify relationships between people, assets
and businesses. Customers use the product for a variety of purposes, including
lending and leasing transactions. The Informed software platform enables users
to access multiple databases and create easy-to-read reports with a web-like
interface. This platform simplifies the search process for the customer,
encouraging more frequent use. Currently, there are three "packaged" Informed
products: Informed Investigator(R), Informed Lender(sm), and Informed Credit
Manager(R). We acquired the Informed product line in September 1999 as part of
our purchase of selected businesses of Information America.
Typical Informed users include banks and leasing companies, in addition to
insurance companies and corporate clients. For example, a loan officer may
verify the background information provided to him by a potential borrower using
the Informed product. The pricing structure for Informed products ranges from
$5.00 for relatively simple searches to $50.00 for more complex searches that
are national in scope.
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RESEARCH AND DEVELOPMENT
We continually work to develop new products and services that respond to our
customers' needs. Our recent research and development efforts currently include,
among other things, the development of products designed to quantitatively and
qualitatively evaluate data to meet the needs of new and existing customers.
As of December 31, 1999, our research and development staff included
personnel with special programming capabilities, including 53 people engaged in
product development and engineering, 6 people engaged in advanced technology
applications, 5 people engaged in quality assurance and testing, and 13 people
in purchasing, administrative and supporting functions.
SALES AND MARKETING
We believe that substantial opportunities exist to attract new customers and
increase our revenues from existing customers. Our marketing objective is to
stimulate demand for our products by targeting the needs of various market
segments, including law enforcement, governmental agencies, insurance companies,
banks, consumers, small businesses and leasing companies. We have divided our
sales and marketing staff into groups that concentrate on one or two industries
in order to focus our efforts. We also are expanding our sales and marketing
department in order to provide more individualized attention to our customers
and to monitor the quality and reliability of our products. Our current sales
force includes 43 people, an increase of 33 employees since 1996. We generally
target customers with higher spend profiles with the goal of entering into
long-term agreements to provide industry specific products to these customers.
In addition, we continue to solicit new customers through trade show
advertisements, direct mail and trade publications.
We have made significant investments in the advertising of the KnowX.com
brand to rapidly increase our consumer customer base.
CUSTOMER SUPPORT AND TECHNICAL ASSISTANCE
Our customer support staff provides technical assistance to all of our
customers, at no charge, 24 hours a day, 365 days per year. We dedicate
specialized operators to first-time users requiring log-in assistance, repeat
users with technical problems, such as connectivity or printing malfunctions,
and customers requiring additional or new products. Our sales and marketing
personnel have trained the customer support staff to offer customers products
that other customers in their industry use.
REGULATION
GOVERNMENT REGULATION
Regulation of access to information for public use varies from state to
state. Therefore, the amount of information available in particular states may
vary. In many states, all government records are specifically made public by law
unless excluded by a specific statutory exception. These exceptions exist
primarily with respect to private criminal history information, such as arrest
records, which generally may only be provided to law enforcement agencies for
specific purposes. The continued availability of public record data is also
subject to federal legislation. For example, the Driver's Privacy Protection Act
of 1994 places certain restrictions on the release and use of personal data
included in state motor vehicle records. Though legislators and consumers appear
to be increasingly scrutinizing privacy laws, we cannot predict whether state
regulation in any particular state will change, nor whether the federal
government will implement new regulations with respect to access to specific
information.
The Fair Credit Reporting Act obligates our IRSC subsidiary to provide
information to users only for permissible purposes, including credit, insurance
or employment purposes. If a creditor, insurer or employer denies an individual
credit, insurance or employment based in whole or in part on our report, then
the consumer must be notified of the basis for denial. Under the FCRA, the
consumer can ask for an opportunity to correct any inaccurate information in the
report. We are obligated to investigate any alleged inaccuracies in our reports
and correct them if necessary. In addition, along with other resellers of public
information, our IRSC subsidiary signed a consent decree with the Federal Trade
Commission. The consent decree regulates our customers' use of information. As a
result, we require that our customers specify their intended use of the
information sought from us.
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SELF-REGULATION
Together with 13 other leading information industry companies, we formed the
Individual Reference Services Group, or IRSG, which worked closely with the
Federal Trade Commission and recently adopted self-regulatory principles
governing the dissemination and use of data that help identify, verify or locate
individuals. The IRSG Principles adopted by the IRSG members in December 1997
impose significant restrictions on the access and distribution of non-public
information. In addition, the IRSG Principles require that information from
non-public sources about persons identifiable as minors are not to be
disseminated to either the public, commercial or professional markets. The IRSG
Principles provide the enforcement mechanisms, including yearly compliance
reviews by qualified independent third party auditors. In the first quarter of
1999, PricewaterhouseCoopers reviewed our Database Technologies, Inc.
subsidiary's operations and certified our compliance with the IRSG Principles.
Also, in the first quarter of 1999, Corbin & Wertz certified our IRSC
subsidiary's compliance with the IRSG Principles, and PricewaterhouseCoopers LLP
certified Information America's business as compliant with the IRSG Principles.
We screen potential customers, process orders and verify the credentials and
references of each potential customer in accordance with the IRSG Principles. We
reserve the right to refuse, or withdraw without notice, access to our products,
and have established procedures designed to restrict access to our system and
certain products to qualified individuals. Once we approve an application, the
customer signs a subscription agreement and use certification which governs the
use of and access to our products. A standard subscription agreement includes a
disclaimer of any warranties on the data and, except for law enforcement and
other government customers, an indemnification for liabilities resulting from
the customer's use of the data.
COMPETITION
The electronic information industry is competitive, and is characterized by
rapid technological change and the entry into the field of large, well
capitalized companies, and smaller, niche competitors. Competition within our
markets is intense and based mainly on price, speed, the comprehensiveness of
data and the ability to provide information in an easy-to-read form. We
currently compete in the investigative, pre-employment and consumer markets.
o In the investigative market, we compete with local, regional and
national private investigation firms, such as LEXIS-NEXIS, West
Publishing, ChoicePoint, Kroll-O'Gara Company, the Pinkerton division of
Securities AB, the Proudfoot Reports Division of ASI Solutions, Inc.,
and a significant number of companies operating on either a national
scale or a local or regional basis.
o In the pre-employment market, we compete with firms offering
comprehensive public record information, such as ChoicePoint and Avert.
o In the consumer market, we compete with free individual locator and
information services, including services offered by Internet search
engines, telephone companies and other third parties who publish free
printed or electronic directories. We also compete with companies that
offer products similar to ours, such as US SEARCH.
Our competitors in these markets often offer a wide variety of information
services, ranging from news to legal databases, that allow them to offer their
products to similar customer bases.
PATENT EXPLOITATION AND ENFORCEMENT BUSINESS
In addition to our online public records business, we operate in the patent
exploitation and enforcement business through our Patlex subsidiary, which
exploits and enforces two partially owned laser patents. These laser patents
include a Gas Discharge Laser Patent and a Brewster Angle Window Patent.
Patlex's patent exploitation and enforcement business involves the
identification of laser products and laser applications that infringe the laser
patents, the execution of licensing agreements with third parties and the
enforcement of the laser patents. The Gas Discharge Laser Patent generates
substantially all of Patlex's revenues and expires in November 2004. The
Brewster Angle Window Patent expires in May 2005. Upon the expiration of the
laser patents, Patlex will lose its right to prevent others from exploiting
these inventions and to receive royalty payments. We do not expect to derive any
revenues from the patent exploitation and enforcement business following the
expiration of the laser patents.
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PATENT EXPLOITATION
Substantially all of Patlex's revenues consist of royalty income derived
from the licensing of the laser patents. As the exclusive licensing agent,
Patlex actively monitors the laser industry to identify manufacturers and users
who exploit the laser patents without Patlex's authorization. Patlex then enters
into agreements that compel the unauthorized manufacturers and users to report
and pay royalties. Generally, these agreements are either licensing agreements
or settlement agreements. The licensing agreements allow users and manufacturers
to use the laser patents on an ongoing basis. By contrast, settlement agreements
require payment of a lump sum of money for past infringement, but do not permit
the continued manufacture and /or use of the laser patents. Manufacturers and
sellers of products that incorporate the laser patent technology typically enter
into licensing agreements while licensees that use, but do not manufacture or
sell, the Laser Patent technology, tend to enter into settlement agreements.
As of December 31, 1999, Patlex had agreements with a total of 182 laser
manufacturers and users representing a wide cross-section of industries. Of such
agreements, 176 were licensing agreements and the remaining six were settlement
agreements.
The market for Patlex's licensing agreements prior to the expiration of the
laser patents depends on the state of the commercial laser industry. Factors
contributing to fluctuation in the number of laser patent license agreements
include Patlex's execution of license agreements with new commercial entities,
spin-offs creating new entities from existing licensees, business failures,
combinations between existing licensees and termination of existing agreements
for cause or by mutual consent. We believe that the majority of the commercial
laser manufacturers in the United States, as well as a majority of manufacturers
importing lasers into the United States, have been licensed to use the laser
patents. In addition, as a result of licensing efforts to date, royalties from
past infringement are expected to be minimal in the future.
PATENT ENFORCEMENT
Patlex's ability to exploit the laser patents through its licensing program
has been directly tied to its successes in litigating the validity of the laser
patents, both in the courts and before the United States Patent and Trademark
Office. We believe that the major period of litigating the validity and
enforceability of the laser patents has passed. However, the laser patents may
be subject to subsequent challenges.
EMPLOYEES
As of December 31, 1999, we had 399 full-time employees. We consider our
relationships with our employees to be good. None of our employees are covered
by collective-bargaining agreements.
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ITEM 2. PROPERTIES
PROPERTY AND EQUIPMENT
We currently lease approximately 150,000 square feet of office space in Boca
Raton, Florida, to conduct our online public records business. Our patent
enforcement business currently leases approximately 3,000 square feet in Las
Vegas, Nevada. Our IRSC subsidiary currently leases 19,674 square feet of office
space in Brea, California. Our WinSHAPES subsidiary currently leases 2,350
square feet of office space in Bainbridge Island, Washington. Our KnowX.com
business currently leases 9,000 square feet of office space in Atlanta, Georgia.
We believe that these facilities are adequate for our current needs.
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ITEM 3. LEGAL PROCEEDINGS
Along with our IRSC subsidiary, its former chairman and principal
shareholder, we were party to a lawsuit against a group of eight companies that
formerly conducted business with IRSC. These eight companies alleged 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 alleged 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 state court in May 1999 to establish
jurisdiction of the action in Florida. Discovery was conducted from June 1999
until October 1999 at which time the parties entered into settlement
negotiations. A settlement agreement was entered into in January 2000. Pursuant
to a March 2, 2000 court order, the Company paid $250,000 as its portion of the
settlement.
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 for litigations discussed above, we are not currently involved in, and do
not know of, any material litigation against us.
Due to the nature of Patlex's business, and especially its involvement in
the enforcement of patent rights, Patlex is from time to time involved in
litigation with alleged infringers of the Laser Patents. Patlex regards all such
lawsuits as occurring in the ordinary course of business. Furthermore, as a
result of the involvement of the United States Patent and Trademark Office in
granting and denying patent applications and in conducting reexaminations of
patents, Patlex has in the past been required to prosecute appeals to the United
States District Court from Patent and Trademark Office rulings adverse to
Patlex's interest. No such appeals are pending at this time, and Patlex does not
anticipate such appeals will be necessary in the future with regard to the Laser
Patents. In connection with suits filed against alleged patent infringers to
enforce a patent, defendants often file counterclaims seeking payment by the
plaintiffs of any damages suffered by the defendants on account of the lawsuit
and reimbursement by the plaintiffs of the defendant's costs and attorney's
fees. While such counterclaims have been filed against Patlex, to date Patlex
has not incurred liability with regard to such counterclaims. Patlex may also be
required to file suits to enforce collection and compliance under its patent
license agreements with its current licensees.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock began trading on the Nasdaq National Market on August
20, 1996 under the symbol "DBTO," until September 17, 1997 when the stock was
listed on the New York Stock Exchange under the symbol "DBT".
The following table sets forth the high and low sales prices of a share for the
Company's common stock, for the indicated quarters of 1998, 1999 and 2000 as
reported on the New York Stock Exchange.
HIGH LOW
1998
First Quarter .......................... $ 33.38 $ 21.50
Second Quarter ......................... 28.25 21.25
Third Quarter .......................... 28.50 12.38
Fourth Quarter ......................... 25.94 12.63
1999
First Quarter .......................... $ 25.25 $ 18.75
Second Quarter ......................... 39.94 22.75
Third Quarter .......................... 33.56 24.50
Fourth Quarter ......................... 26.38 17.38
2000
First Quarter (through March 1, 2000)... $ 23.81 $ 16.75
The number of record holders of the Company's common stock as of March 1,
2000 was 490. The Company believes that a larger number of beneficial owners
hold such shares of common stock in depository or nominee form.
The Company has not paid cash dividends on its common stock and does not
anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data should be read
in conjunction with our consolidated financial statements and notes thereto
included elsewhere in this report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The consolidated financial data
presented below as of December 31, 1999 and 1998 and for the fiscal years ended
December 31, 1999, 1998 and 1997 have been derived from our audited consolidated
financial statements, which are included elsewhere in this report. The
consolidated financial data presented below as of December 31, 1997 and 1996 and
for the year ended December 31, 1996 have been derived from audited financial
statements which are not presented in this report. The consolidated financial
data presented below for the fiscal year ended December 31, 1995 have been
derived from our consolidated financial statements prior to the merger with
IRSC and unaudited financial statements of IRSC.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999(3) 1998 1997 1996(2) 1995(1)
---------- --------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 72,773 $ 54,103 $ 37,777 $ 22,607 $ 13,142
Royalties........................ 6,219 6,636 6,670 2,382 --
-------- -------- --------- -------- --------
Total revenues and
royalties.............. 78,992 60,739 44,447 24,989 13,142
-------- -------- --------- -------- --------
Cost of revenues................. 32,298 26,152 17,957 11,418 3,372
Sales and marketing.............. 13,234 6,508 4,367 2,434 1,026
Research and development......... 5,567 3,078 2,364 2,052 1,017
General and administrative....... 24,407 17,317 11,978 8,273 6,870
Loss on IRB transaction.......... -- -- -- -- 1,660
Merger and acquisition costs..... 817 -- -- -- --
-------- -------- --------- -------- --------
Total expenses........... 76,323 53,055 36,666 24,177 13,945
-------- -------- --------- -------- --------
Income (loss) from operations.... 2,669 7,684 7,781 812 (803)
Interest (expense) income, net... 1,656 2,330 1,491 (174) (76)
-------- -------- --------- -------- --------
Income (loss) before income taxes 4,325 10,014 9,272 638 (879)
Provision for income taxes....... 1,517 3,118 3,171 198 239
-------- -------- --------- -------- --------
Net income (loss)................ $ 2,808 $ 6,896 $ 6,101 $ 440 $ (1,118)
======== ======== ========= ======== ========
Net income (loss) per common share:
Basic.......................... $ 0.15 $ 0.36 $ 0.35 $ 0.04 $ (0.12)
======== ======== ========= ======== =======
Diluted........................ $ 0.14 $ 0.35 $ 0.33 $ 0.03 $ (0.12)
======== ======== ========= ======== =======
Weighted average shares
outstanding:
Basic.......................... 19,221 18,900 17,568 12,561 9,268
======== ======== ========= ======== =======
Diluted........................ 20,199 19,612 18,495 12,835 9,268
======== ======== ========= ======== =======
OTHER DATA:
Cash flows from operating activities.... $ 22,108 $ 9,170 $ 9,599
Cash flows from investing activities.... (37,935) 4,069 (53,542)
Cash flows from financing activities.... 27,519 172 44,707
EBITDA(4)............................... 12,481 15,706 13,583
Capital expenditures.................... 20,560 14,537 6,949
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AS OF DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $33,016 $21,324 $ 7,913 $ 7,149 $ 1,826
Short term investments. 16,500 25,840 44,207 -- --
Working capital........ 47,394 53,922 53,638 4,497 712
Total assets........... 136,488 92,371 86,355 30,821 7,663
Total debt............. -- -- -- 3,073 2,859
Shareholders' equity... 116,398 83,893 76,583 18,932 3,074
- ----------
(1) Our results for 1995 were adversely affected by a loss of $1,660 relating
to our acquisition and disposition of International Research Bureau, Inc.
(2) Our 1996 statement of operations data includes the results of Patlex, our
patent enforcement business, from August 20, 1996, the date of our
reorganization with Patlex, through December 31, 1996.
(3) Our 1999 statement of operations data includes the results of the online
records business of Information America from September 24, 1999, the date
of our acquisition of such businesses, through December 31, 1999.
(4) EBITDA represents earnings before interest and financial charges, income
taxes, depreciation and amortization. We have included information
concerning EBITDA (which is not a measure of financial performance under
generally accepted accounting principles) because we believe that it is
used by certain investors as one measure of financial performance. EBITDA
should not be construed as an alternative to operating income (as
determined in accordance with generally accepted accounting principles) or
as a measure of liquidity. EBITDA as measured by us may not be comparable
to similarly titled measures reported by other companies.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following should be read in conjunction with the consolidated
financial statements and the notes thereto contained in the Company's 1999 Form
10-K. 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-K.
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, 1999, AutoTrack accounted for
approximately 69% 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 (DEA)
and the Federal Bureau of Investigations (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.
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.
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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.
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.
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
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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.
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 IRSC, 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
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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 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
REVENUES
EIG's revenues increased 34.5% to $72,773 for the year ended December 31,
1999, from $54,103 for the year ended December 31, 1998. The increase in EIG's
revenues was attributable to increased revenue from existing customers and
revenue from new products. PEG's revenues decreased 6.3% to $6,219 for the year
ended December 31, 1999, from $6,636 for the year ended December 31, 1998. Total
consolidated revenues increased 30.1% to $78,992 for year ended December 31,
1999, from $60,739 for the year ended December 31, 1998.
COST OF REVENUES
EIG's cost of revenues increased 25.1% to $30,591 for year ended December
31, 1999, from $24,444 for the year ended December 31, 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 42.0% for the year ended December 31,
1999, from 45.2% for year ended December 31, 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 $1,707 for the year ended December 31, 1999, compared
to $1,708 for the year ended December 31, 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 $32,298 for year ended December
31, 1999, from $26,152 for the year ended December 31, 1998.
SALES AND MARKETING
EIG's sales and marketing expenses increased 103.3% to $13,234 for year
ended December 31, 1999, from $6,508 for the year ended December 31, 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 18.2% for the year ended December 31, 1999, from 12.0% for
the year ended December 31, 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 80.9% to $5,567 for year
ended December 31, 1999, from $3,078 for the year ended December 31, 1998. As a
percentage of EIG's revenues, research and development expenses increased to
7.6% for the year ended December 31, 1999, from 5.7% for the year ended December
31, 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 43.5% to $23,378 for
the year ended December 31, 1999, from $16,292 for the year ended December 31,
1998. This increase was due to increases in occupancy expenses, payroll, and
other expenses related to the reorganization of our administrative
infrastructure and special charges from severance agreements 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 32.1% for the year ended December 31, 1999, from 30.1% for the year
ended December 31, 1998. PEG's general and administrative expenses remained
substantially constant at $1,029 for the year ended December 31, 1999, compared
to $1,025 for the year ended December 31, 1998. Total consolidated general and
administrative expenses increased 40.9% to $24,407 for the year ended December
31, 1999, from $17,317 for the year ended December 31, 1998.
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OPERATING PROFIT
EIG reported an operating loss of $814 for the year ended December 31, 1999,
compared to an operating profit of $3,781 for the year ended December 31, 1998.
This decrease was attributable to special charges of $817 for merger-related
costs and $2,492 for stock compensation expense and severance agreements in
1999, along with an increase in both sales and marketing and research and
development expenses. PEG's operating profit decreased 10.8% to $3,483 for the
year ended December 31, 1999, from $3,903 for the year ended December 31, 1998,
due to a decrease in PEG's revenues. Total consolidated operating profit
decreased 65.3% to $2,669 for the year ended December 31, 1999, from $7,684 for
the year ended December 31, 1998. Excluding the special charges, total
consolidated operating profit decreased 22% to $5,986 for the year ended
December 31, 1999.
INTEREST INCOME
Net interest income was $1,656 the year ended December 31, 1999, compared to
$2,330 for the year ended December 31, 1998. The decrease was due to lower cash
and investment balances as a result of cash used for acquisitions and capital
expenditures, which increased significantly throughout 1998 and 1999.
INCOME TAXES
Our effective income tax rate was 35% for the year ended December 31, 1999,
compared to 31% for the year ended December 31, 1998. The 1998 effective tax
rate was favorably impacted by the effects of non-taxable investment income, a
reduction in our valuation allowance, and a research and development tax credit
offset by state income taxes. The 1999 effective tax rate was adversely impacted
by non-deductible stock compensation expenses.
NET INCOME
Our net income decreased 59.3% to $2,808 for the year ended December 31,
1999, from $6,896 for the year ended December 31, 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, severance and stock compensation expenses, and an
increase in the effective tax rate.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUES
EIG's revenues increased 43.2% to $54,103 for the year ended December 31,
1998, from $37,777 for the year ended December 31, 1997. The increase in EIG's
revenues was attributable to new products released by EIG. PEG's revenues
remained constant at $6,636 for the year ended December 31, 1998, compared to
$6,670 for the year ended December 31, 1997. Total consolidated revenues
increased 36.7% to $60,739 for the year ended December 31, 1998, from $44,447
for the year ended December 31, 1997.
COST OF REVENUES
EIG's cost of revenues increased 50.3% to $24,444 for the year ended
December 31, 1998, from $16,259 for the year ended December 31, 1997. The
increase 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. The increase in cost of revenues was also
due in part to the full year effect of our acquisition of ICON. As a percentage
of EIG's revenues, cost of revenues increased to 45.2% for the year ended
December 31, 1998, from 43.0% for the year ended December 31, 1997. PEG's cost
of revenues remained substantially constant at $1,708 for the year ended
December 31, 1998, compared to $1,698 for the year ended December 31, 1997, and
consisted solely of the amortization of costs associated with the purchase of
PEG's patents. Total consolidated cost of revenues increased 45.6% to $26,152
for the year ended December 31, 1998, from $17,957 for the year ended December
31, 1997.
SALES AND MARKETING
EIG's sales and marketing expenses increased 49.0% to $6,508 for the year
ended December 31, 1998, from $4,367 for the year ended December 31, 1997. The
increase was primarily due to our acquisition of ICON and increases in
advertising, trade-show expenses and costs related to the expansion of our sales
force. As a percentage of EIG's revenues, sales and marketing expenses increased
to 12.0% for the year ended December 31, 1998, from 11.6% for the year ended
December 31, 1997. PEG did not have sales and marketing expenses.
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RESEARCH AND DEVELOPMENT
EIG's research and development expenses increased 30.2% to $3,078 for the
year ended December 31, 1998, from $2,364 for the year ended December 31, 1997.
The increase was primarily due to an increase in payroll and related expenses.
As a percentage of EIG's revenues, research and development expenses decreased
to 5.7% for the year ended December 31, 1998, from 6.3% for the year ended
December 31, 1997. PEG did not have research and development expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
EIG's general and administrative expenses increased 49.0% to $16,292 for the
year ended December 31, 1998, from $10,934 for the year ended December 31, 1997.
This increase was due to increases in rent, public company expenses, goodwill
amortization and payroll and related expenses. As a percentage of EIG's
revenues, general and administrative expenses increased to 30.1% for the year
ended December 31, 1998, from 28.9% for the year ended December 31, 1997. PEG's
general and administrative expenses decreased to $1,025 for the year ended
December 31, 1998, from $1,044 for the year ended December 31, 1997. Total
consolidated general and administrative expenses increased 44.6% to $17,317 for
the year ended December 31, 1998, from $11,978 for the year ended December 31,
1997.
OPERATING PROFIT
EIG's operating profit was $3,781 for the year ended December 31, 1998,
compared to $3,853 for the year ended December 31, 1997. PEG's operating profit
remained constant at $3,903 for the year ended December 31, 1998, compared to
$3,928 for the year ended December 31, 1997. Total consolidated operating profit
modestly decreased to $7,684 for the year ended December 31, 1998, from $7,781
for the year ended December 31, 1997.
INTEREST INCOME
Net interest income increased to $2,330 for the year ended December 31,
1998, from $1,491 for the year ended December 31, 1997. The net interest income
in 1998 and 1997 resulted from investment earnings on proceeds from the sale of
our common stock in May 1997.
INCOME TAXES
Our effective income tax rate was 31% for the year ended December 31, 1998,
compared to 34% for the year ended December 31, 1997. The 1998 effective tax
rate was favorably impacted by the effects of non-taxable investment income, a
reduction in our valuation allowance, and a research and development tax credit
offset by state income taxes. The 1997 effective tax rate was favorably affected
by a research and development tax credit.
NET INCOME
Our net income increased 13.0% to $6,896 for the year ended December 31,
1998, from $6,101 for the year ended December 31, 1997. The increase in net
income was primarily due to a significant increase in investment income and a
reduction in the effective tax rate in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations were $22,108 for the year ended December 31,
1999, compared to $9,170 for the year ended December 31, 1998. We had working
capital at December 31, 1999 of $47,394 (including cash, cash equivalents and
marketable securities of $49,516) 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.
Net cash used in investing activities was $37,935 for the year ended
December 31, 1999, compared to net cash provided by investing activities of
$4,069 for the year ended December 31, 1998. This was due to an increase in
capital spending in 1999 and cash used in the acquisitions of Informed and
KnowX.com.
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Net cash provided by financing activities was $27,519 for the year ended
December 31, 1999, compared to $172 for the year ended December 31, 1998. This
was due mostly from $24,081 of proceeds from the issuance of common stock.
Capital expenditures were $20,560 for the year ended December 31, 1999,
compared to $14,537 for the year ended December 31, 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 of
approximately $25,000 related to the upgrade of our database capabilities, which
we intend to fund through our cash flows from operations and existing
cash and short-term investment balances.
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 2000.
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.
YEAR 2000 ISSUES
The Year 2000 ("Y2K") issue is the result of computer programs written using
two digits (rather than four) to define the applicable year. Without corrective
actions, programs with date-sensitive logic may recognize "00" as 1900 rather
than 2000. This could result in miscalculations or system failures,
significantly impacting our business operations.
The Company's work on the Y2K compliance program officially began in 1998. A
Corporate project team, working with outside consultants, developed a process to
identify and correct Y2K issues on all information technology (IT) platforms and
non-IT systems. In addition, all operating units have undertaken Y2K initiatives
with direction from the Corporate project team. As a result of this process, the
Company inventoried and assessed all systems and developed remediation programs
where necessary for all business-critical information technology applications. A
similar program was also developed for non-IT systems. The Company completed its
remediation and testing work in 1999.
In order to mitigate the risk of internal business-critical computer systems
failure, the Company conducted extensive testing, verification and validation
efforts. These efforts, which included program and systems testing, simulated
operations in the year 2000. In addition, a review of the remediation process
and program code by independent third parties was completed, and contingency
plans, including system continuity plans, were developed in 1999.
In order to mitigate the risk of noncompliance external system failure, the
Company identified and contacted critical suppliers, customers and other third
parties to determine their stage of Y2K readiness. For certain third parties
with key system connections, interface testing was performed. The Company
developed contingency plans to mitigate potential disruptions to the Company's
operations. These included action plans to address system failures by third
parties, such as securing alternate sources of materials and developing backup
systems to ensure internal communications were not impacted by external
disruptions affecting voice and data transmission. The Company completed its
contingency plans in the fourth quarter of 1999.
Since the compliance program began, the Company has incurred approximately
$1.9 million in expenses, including consulting fees, internal staff costs and
other expenses. The Company has also procured replacement systems that, in
addition to being Y2K compliant, provide enhanced capability to benefit future
operations.
The Company has not experienced significant Y2K issues subsequent to 1999's
fiscal year end. Although the Company believes it has taken the appropriate
steps to address Y2K readiness, there is no guarantee that the Company's efforts
will prevent a material adverse impact on the results of operations and
financial condition.
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK
The Company's exposure to market risk through derivative financial instruments
and other financial instruments, such as investments in short-term marketable
securities, is not material.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of DBT Online, Inc.
and subsidiaries:
We have audited the consolidated balance sheets of DBT Online, Inc. and
subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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. The consolidated financial statements give retroactive effect to
the merger of the Company and I.R.S.C., Inc. and subsidiaries ("IRSC"), which
has been accounted for as a pooling of interests as described in Note 3 to the
consolidated financial statements. We did not audit the balance sheet of IRSC
as of December 31, 1998, or the related statements of operations, changes in
stockholders' equity, and cash flows of IRSC for the years ended December 31,
1998 and 1997, which statements reflect total assets constituting 2% of
consolidated total assets as of December 31, 1998 and total revenues
constituting 12% and 16% of consolidated total revenues for the years ended
December 31, 1998 and 1997, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for IRSC for 1998 and 1997, is based solely on
the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of DBT Online, Inc. and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 6, 2000
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INDEPENDENT AUDITORS' REPORT
Board of Directors
I.R.S.C., Inc.
We have audited the consolidated balance sheets of I.R.S.C., Inc. and
subsidiaries ("IRSC") as of December 31, 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1998 (not presented separately herein).
Those consolidated financial statements are the responsibility of IRSC's
management. Our responsibility is to express as 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IRSC as of
December 31, 1998, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Corbin & Wertz
Irvine, California
August 12, 1999
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
AT DECEMBER 31,
---------------
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,016 $ 21,324
Accounts receivable, less allowance:
1999, $839; 1998, $399 12,675 9,409
Short-term investments 16,500 25,840
Prepaid expenses and other current assets 2,276 2,422
Prepaid income taxes 1,437
--------- ---------
Total current assets 65,904 58,995
Property and equipment, net 33,369 18,806
Patents, less accumulated amortization:
1999, $5,707; 1998, $4,012 8,135 9,830
Goodwill, less accumulated amortization:
1999, $2,765; 1998, $1,170 28,941 4,637
Other assets 139 103
--------- ---------
TOTAL ASSETS $ 136,488 $ 92,371
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 16,662 $ 3,273
Due to other patent interest holders 1,848 1,394
Income taxes payable 406
--------- ---------
Total current liabilities 18,510 5,073
DEFERRED INCOME TAXES 1,580 3,405
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value. 5,000,000 shares
authorized; no shares issued or outstanding
Common stock, $.10 par value. 100,000,000 shares
authorized; 20,135,964 shares and 18,905,762 shares
issued and outstanding at December 31, 1999
and 1998, respectively 2,013 1,890
Additional paid-in capital 99,388 69,559
Retained earnings 15,252 12,444
Accumulated other comprehensive loss (255)
--------- ---------
Total stockholders' equity 116,398 83,893
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 136,488 $ 92,371
========= =========
See notes to consolidated financial statements.
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DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
---- ---- ----
Revenues $ 72,773 $ 54,103 $ 37,777
Patent royalties 6,219 6,636 6,670
----------- ----------- -----------
Total revenues and royalties 78,992 60,739 44,447
----------- ----------- -----------
Cost of revenues 32,298 26,152 17,957
Sales and marketing 13,234 6,508 4,367
Research and development 5,567 3,078 2,364
General and administrative (including
$1,268 of stock-based compensation
expense in 1999) 24,407 17,317 11,978
Merger and acquisition costs 817
----------- ----------- -----------
Total expenses 76,323 53,055 36,666
----------- ----------- -----------
Income from operations 2,669 7,684 7,781
Interest income, net 1,656 2,330 1,491
----------- ----------- -----------
Income before income taxes 4,325 10,014 9,272
Provision for income taxes 1,517 3,118 3,171
----------- ----------- -----------
Net income $ 2,808 $ 6,896 $ 6,101
=========== =========== ===========
Basic net income per common share $ 0.15 $ 0.36 $ 0.35
=========== =========== ===========
Basic weighted average shares
outstanding 19,221,400 18,900,500 17,577,900
=========== =========== ===========
Diluted net income per common share $ 0.14 $ 0.35 $ 0.33
=========== =========== ===========
Diluted weighted average shares
outstanding 20,198,700 19,612,400 18,495,200
=========== =========== ===========
See notes to consolidated financial statements.
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DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK ACCUMULATED
-------------------------- ADDITIONAL RETAINED OTHER
NUMBER OF PAID-IN EARNINGS COMPREHENSIVE
SHARES PAR VALUE CAPITAL (DEFICIT) INCOME TOTAL
------------ --------- ----------- --------- -------------- -----
BALANCE at January 1, 1997 15,879,958 $ 1,588 $ 17,897 $ (553) $ 18,932
Exercise of stock options 106,190 10 866 876
Issuance of common stock for cash 2,690,000 269 46,543 46,812
Stock issued for acquisition 144,824 15 3,474 3,489
Tax benefit of stock options 242 242
Stock options issued 131 131
Net income 6,101 6,101
---------- ------- -------- -------- ---------
BALANCE at December 31, 1997 18,820,972 1,882 69,153 5,548 76,583
Exercise of stock options 75,105 7 165 172
Issuance of common stock to employee
benefit plan 9,685 1 241 242
Net income 6,896 6,896
---------- ------- -------- -------- ---------
BALANCE at December 31, 1998 18,905,762 1,890 69,559 12,444 83,893
Exercise of stock options 220,217 22 3,416 3,438
Issuance of common stock to employee
benefit plan 9,985 1 306 307
Issuance of common stock for cash 1,000,000 100 23,981 24,081
Tax benefit of stock options 858 858
Stock-based compensation expense 1,268 1,268
Unrealized losses on short-term investments $ (255) (255)
Net income 2,808 2,808
---------- ------- -------- -------- ------ ---------
BALANCE at December 31, 1999 20,135,964 $ 2,013 $ 99,388 $ 15,252 $ (255) $ 116,398
========== ======= ======== ======== ====== =========
See notes to consolidated financial statements.
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DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,808 $ 6,896 $ 6,101
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 9,812 8,022 5,802
Deferred income taxes (1,825) (750) (146)
Stock issued for employee benefit plan 307 242
Stock-based compensation expense 1,268
Stock options issued for services 131
Changes in operating assets and liabilities:
Accounts receivable (3,266) (4,220) (1,916)
Prepaid expenses and other current assets 146 (693) (1,177)
Accounts payable and accrued liabilities 13,389 (1,349) 1,813
Due to other patent interest holders 454 399 (416)
Income taxes (985) 623 (593)
-------- -------- -------
Net cash provided by operating activities 22,108 9,170 9,599
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment purchased (20,560) (14,537) (6,949)
Cash used in acquisitions (26,424) (2,488)
(Increase) decrease in other assets (36) 239 102
Proceeds from sales or maturities of investments 9,085 18,367
Purchases of short-term investments (44,207)
-------- -------- -------
Net cash (used in) provided by investing activities (37,935) 4,069 (53,542)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 24,081 46,812
Net change in bank line-of-credit (200)
Proceeds from exercise of stock options 3,438 172 876
Repayments on long-term debt (2,781)
-------- -------- -------
Net cash provided by financing activities 27,519 172 44,707
-------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,692 13,411 764
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,324 7,913 7,149
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,016 $ 21,324 $ 7,913
======== ======== =======
See notes to consolidated financial statements.
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DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DBT Online, Inc., through its subsidiaries (collectively referred to as the
"Company"), is engaged in the electronic information retrieval industry, which
provides online, real-time access to public records. The Company, through its
Patlex Corporation ("Patlex") subsidiary, is involved in the patent enforcement
and exploitation business, whereby the Company collects royalty fees from a
group of laser patents.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of DBT Online, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated.
USE OF ESTIMATES. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and the accompanying Notes. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with a remaining original maturity at the date of purchase of three
months or less to be cash equivalents.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost and
depreciated using accelerated methods over the estimated useful lives of the
assets. Useful lives range from 3 to 10 years. Expenditures for routine
maintenance and repairs are charged to expense as incurred.
PATENTS AND GOODWILL. The patent costs are amortized on a straight-line
basis over the remaining lives of the patents. Goodwill is amortized on a
straight-line basis over 7 to 10 years.
CARRYING VALUE OF LONG-LIVED ASSETS. Management reviews long-lived assets
for possible impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. If there is an indication of
impairment, management prepares an estimate of future cash flows (undiscounted
and without interest charges) expected to result from the use of the asset and
its eventual disposition. If these cash flows are less than the carrying amount
of the asset, an impairment loss is recognized to write down the asset to its
estimated fair value. Assets, if any, that management has committed to a plan to
dispose, whether by sale or abandonment, are reported at the lower of carrying
amount or fair value, less cost to sell. Preparation of estimated expected
future cash flows is inherently subjective and is based on management's best
estimate of assumptions concerning future conditions.
REVENUE RECOGNITION. The Company recognizes revenue at the time of customer
access. Accounts receivable are primarily with law enforcement agencies,
insurance companies, law firms, and other licensed investigation companies.
Patent royalties are recognized pursuant to license agreements that require the
licensees to periodically report activity to the Company.
CONCENTRATION OF CREDIT RISK. The Company's customers are numerous and
spread over a wide geographic area. As such, the Company believes that it does
not have an abnormal concentration of credit risk within any one market or any
one geographic area.
RESEARCH AND DEVELOPMENT COSTS. Costs for research and development
activities are expensed as incurred, and aggregated $5,567, $3,078, and $2,364
for years ended December 31, 1999, 1998, and 1997, respectively.
INCOME TAXES. The Company provides for deferred taxes under an asset and
liability approach for financial accounting and reporting of income taxes. The
objective of an asset and liability method is to establish deferred tax assets
and liabilities for the temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
due to their short-term nature. Short-term investments are classified as
available-for-sale and are carried at fair value.
NET INCOME PER SHARE. Basic net income per share is determined by dividing
net income by the weighted-average shares outstanding. Diluted net income per
share is determined by dividing net income by the weighted-average shares
outstanding including the effect of stock options, if dilutive. The
weighted-average number of shares for stock options included in the diluted
weighted-average shares outstanding were 977,300, 711,900 and 917,300 in 1999,
1998, and 1997, respectively.
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33
2. COMPREHENSIVE INCOME
Comprehensive income for the years ended December 31, 1999, 1998 and 1997 is
as follows:
1999 1998 1997
---- ---- ----
Net income $2,808 $6,896 $6,101
Adjustment to reconcile net income
to total comprehensive income:
Unrealized loss on investments (255)
------ ------ ------
Comprehensive income $2,553 $6,896 $6,101
====== ====== ======
3. BUSINESS COMBINATIONS
On September 24, 1999, the Company 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, which had a total fair
value of $458 upon issuance, have an exercise 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 $24,709
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:
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998
---- ----
Net revenue $ 88,803 $ 69,130
======== ========
Income before income taxes $ 2,179 $ 7,496
======== ========
Net income $ 1,392 $ 4,894
======== ========
Earnings per share (diluted) $ 0.07 $ 0.25
======== ========
On May 26, 1999, the Company acquired all of the common stock of WinSHAPES
for approximately $442 in cash plus the payment of liabilities in the amount of
$728. 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 was $1,190, 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, the Company merged with I.R.S.C., Inc. ("IRSC"). 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.
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. Results of operations for
the separate companies prior to the combination are as follows:
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PRIOR TO
YEAR ENDED DECEMBER 31: COMBINATION IRSC COMBINED
- ----------------------- ---------------- ----------------- -----------------
1998:
Total revenues and royalties $ 53,549 $ 7,190 $ 60,739
Net income 6,702 194 6,896
1997:
Total revenues and royalties $ 37,546 $ 6,901 $ 4,447
Net income 5,998 103 6,101
On August 1, 1997, the Company acquired all of the stock of The Information
Connectivity Group. The consideration paid included both cash of $2,500 and
common stock of the Company valued at approximately $3,500. For accounting
purposes, the transaction was treated as a purchase. The Company recorded
goodwill of approximately $5,800 in connection with this acquisition, which is
being amortized over seven years.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
AT DECEMBER 31,
------------------
1999 1998
----- ------
Computer equipment $ 42,015 $ 22,554
Office furniture and equipment 2,164 1,599
Leasehold improvements 8,625 7,588
-------- --------
Total cost 52,804 31,741
Less: accumulated depreciation (19,435) (12,935)
-------- --------
Property and equipment, net $ 33,369 $ 18,806
======== ========
Depreciation expense was $6,522, $5,501 and $3,763 for the years ended
December 31, 1999, 1998 and 1997, respectively.
5. SHORT-TERM INVESTMENTS
The Company has investments in state and municipal bonds that are classified
as available-for-sale and are carried at fair value. There were gross unrealized
gains of $5 and $52 and gross unrealized losses of $260 and $78 as of December
31, 1999 and 1998, respectively. There were $97 in realized losses during 1999,
and there were $276 in realized gains during 1998 on the sale of securities.
Cost is determined based on specific identification. At December 31, 1999, these
investments have contractual maturities as follows:
Within 1 year $6,505
After 1 through 5 years 8,602
After 5 through 10 years 547
After 10 years 1,101
-------
16,755
Less: Net unrealized losses (255)
-------
Total: short-term investments $16,500
=======
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Certain of the Company's state and municipal bonds are concentrated in
specific geographic regions. The states in which the components of these
investments resided at December 31, 1999 were as follows:
Florida $7,891
Texas 1,575
Nevada 1,047
Maine 1,028
Arizona 547
Massachusetts 537
Virginia 535
New York 530
Washington 529
Michigan 514
North Carolina 508
New Hampshire 506
Ohio 505
New Mexico 503
Less: net unrealized losses (255)
-------
Total: short-term investments $16,500
=======
6. PATENTS
Patlex owns a 64% income interest in Laser Patent revenue relating to
certain patents involving laser technology. The most commercially significant of
the Laser Patents is the Gas Discharge Laser Patent (U.S. Patent No. 4,704,583),
which covers gas discharge lasers. In addition, the Laser Patents consist of the
Brewster Angle Window Patent (U.S. Patent No. 4,746,201), which involves the use
of an optical system, including optical elements, to polarize light. The Gas
Discharge Laser Patent expires in November 2004 and the Brewster Angle Window
Patent expires in May 2005. Upon the expiration of the applicable patent, Patlex
loses its right to exclude others from exploiting the inventions claimed therein
and, accordingly, the obligation of third parties to make royalty payments to
Patlex will cease.
7. INCOME TAXES
Significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
----- ----- -------
Current
Federal $ 2,868 $ 3,541 $ 3,051
State 187 327 267
------ ------- -------
3,055 3,868 3,318
------ ------- -------
Deferred
Federal (1,423) (718) (127)
State (115) (32) (20)
------ ------- -------
(1,538) (750) (147)
------ ------- -------
Provision for income taxes $ 1,517 $ 3,118 $ 3,171
======= ======= =======
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Deferred income taxes reflect the net income tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes, and the amounts used for income tax purposes. Annual changes
in these temporary differences constitute the principal reconciling items
between pretax accounting income and taxable income. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1999 and
1998 are as follows:
AT DECEMBER 31,
-------------------------------
1999 1998
---- ----
Deferred tax liabilities
Patents $2,766 $3,609
Cash basis accounting 37
Purchased data 246 300
------ ------
3,012 3,946
------ ------
Deferred tax assets
Depreciation 29 62
IRB loss carry forward 358 308
Reserves and other 1,045 371
------ ------
1,432 741
Valuation allowance (200)
------ ------
1,432 541
------ ------
Net deferred income tax liability $1,580 $3,405
====== ======
The Company has a capital loss carry-over of approximately $1,050 for tax
purposes, which expires in 2000. The related deferred tax asset, as of December
31, 1998, had been partially offset by a valuation allowance. However, as the
Company has initiated certain tax-planning strategies that it believes will
result in utilizing this loss carry-over, no valuation allowance is recorded as
of December 31, 1999.
The reconciliation of income tax computed at the federal statutory rate to
income tax expense is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
Federal statutory rate 34% 34% 34%
Tax-exempt investment income (7) (2) (1)
Non-deductible goodwill 7
Non-deductible compensation expense 10
Research and development credit (6) (1) (1)
State income taxes, net of federal income tax benefit 1 2 1
Adjustment to valuation allowance (5) (2)
Other 1 1
--- --- ---
35% 31% 34%
=== === ===
The Company paid income taxes of $4,224, $3,238 and $3,828 in 1999, 1998 and
1997, respectively.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company may be involved in litigation from time to time in the ordinary
course of its business. The Company is not currently involved in any litigation,
or to its knowledge, is any litigation currently threatened that could have a
material effect on its financial position or results of operations.
The Company and the former chairman and principal shareholder of IRSC were
parties to a lawsuit against a group of eight companies that formerly conducted
business with IRSC. These eight companies alleged 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
alleged that the Company interfered with the obligations of IRSC and its former
chairman by acquiring IRSC. When these companies threatened to sue, the Company
filed a lawsuit against them in state court in May 1999 to establish
jurisdiction of the action in Florida. Discovery was conducted from June 1999
until October 1999 at which time the parties entered into settlement
negotiations. A settlement agreement was entered into in January 2000. Pursuant
to a March 2, 2000 court order, the Company paid $250, which is included in
accounts payable and accrued liabilities as of December 31, 1999, as its portion
of the settlement.
-36-
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Due to the nature of Patlex's business, and especially its involvement in
the enforcement of patent rights, Patlex is from time to time involved in
litigation with alleged infringers of the Laser Patents. Patlex regards all such
lawsuits as occurring in the ordinary course of business. Furthermore, as a
result of the involvement of the United States Patent and Trademark Office in
granting and denying patent applications and in conducting reexaminations of
patents, Patlex has in the past been required to prosecute appeals to the United
States District Court from Patent and Trademark Office rulings adverse to
Patlex's interest. No such appeals are pending at this time, and Patlex does not
anticipate such appeals will be necessary in the future with regard to the Laser
Patents. In connection with suits filed against alleged patent infringers to
enforce a patent, defendants often file counterclaims seeking payment by the
plaintiffs of any damages suffered by the defendants on account of the lawsuit
and reimbursement by the plaintiffs of the defendant's costs and attorney's
fees. While such counterclaims have been filed against Patlex, to date Patlex
has not incurred liability with regard to such counterclaims. Patlex may also be
required to file suits to enforce collection and compliance under its patent
license agreements with its current licensees.
EMPLOYMENT AGREEMENTS
In April 1997, the Company entered into an employment agreement with its
chairman, Mr. Borman, which provided for an initial three-year term commencing
on April 1, 1997 with automatic one-year extensions on the anniversary of the
commencement date, unless either the Company or Mr. Borman gives notice to the
other that the term of the agreement will not be extended. The employment
agreement contains certain restrictive covenants, including provisions relating
to non-competition, non-solicitation and the non-disclosure of proprietary
information, during the term of the agreement and for specified periods
thereafter. The 1999 annual compensation rate for Mr. Borman under this
agreement was $160.
In August 1997, the Company entered into an employment agreement with its
then CEO, Mr. Lieppe, which provided for a four-year term commencing August 15,
1997 and ending on August 14, 2001, unless terminated earlier in accordance with
certain circumstances. The 1999 annual compensation rate for Mr. Lieppe under
this agreement was $250. In August 1999, the Company and Mr. Lieppe agreed to
the terms of a Separation of Employment Agreement and General Release and
Consulting Agreement. In connection with this agreement, the Company is to pay
$425 in cash to Mr. Lieppe or on his behalf through December 2000. As of
December 31, 1999, $340 of this amount, representing the remaining unpaid
portion, was included in accounts payable and accrued liabilities. The Company
also incurred stock-based compensation expense of $771 in 1999 resulting from
the Company's allowing Mr. Lieppe to vest in options after his termination date.
During the fourth quarter of 1999, the Company agreed to the terms of
Separation of Employment Agreements and General Release and Consulting
Agreements with three other executives. Under the terms of these agreements, the
Company will pay $799 in cash to these executives or on their behalf for ten to
twelve months. The future payments under these agreements have been included in
accounts payable and accrued liabilities as of December 31, 1999.
In March 1998, the Company entered into an employment agreement with its
Vice President, Human Resources, Mr. Barr, which provides for a two-year term.
In October 1999, the employment agreement was amended for an additional year and
included a change in control provision. The annual compensation rate in 1999 for
Mr. Barr under this agreement was $150.
In August 1999, the Company entered into an employment agreement with its
current CEO, Mr. Fournet, that provides for a four-year term, unless terminated
earlier in accordance with certain circumstances, and which includes a change in
control provision. The annual compensation rate in 1999 for Mr. Fournet under
this agreement was $250.
In February 2000, the Company entered into an employment agreement with its
Vice President, General Counsel and Secretary, Mr. Muetterties, having a
one-year term which renews each day. The agreement calls for a base salary of
$160 in 2000 and includes a change in control provision. The employment
agreement contains certain restrictive covenants, including provisions relating
to non-competition, non-solicitation and non-disclosure of confidential
information during the executive's employment with the Company and for specific
periods thereafter.
LEASES
The Company leases all of its office space under agreements expiring on
various dates through 2008. These leases contain renewal options ranging from
3 to 10 years.
Future minimum payments under operating leases that have non-cancelable
terms in excess of one year are as follows:
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38
YEARS ENDING DECEMBER 31,
- -------------------------
2000 $1,445
2001 1,466
2002 1,181
2003 1,134
2004 1,113
Thereafter through 2008 3,896
-------
Total $10,235
=======
Rent expense was $1,599, $1,054 and $730 respectively, for the years ended
December 31, 1999, 1998, and 1997.
9. STOCK OPTIONS AND BENEFIT PLAN
STOCK OPTIONS
The Company has incentive and non-qualified stock option plans for
directors, employees, and key advisors and has 6,000,000 shares of common stock
reserved for issuance under these plans. The incentive and non-qualified options
become exercisable as determined by the Board of Directors, and have a term of
10 years. As of December 31, 1999, option activity is summarized as follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- --------------
Outstanding at January 1, 1997 1,697,772 $12.30
Granted 1,364,000 22.92
Exercised (52,164) 16.79
Cancelled (186,333) 18.81
--------- ------
Outstanding at December 31, 1997 2,823,273 17.22
Granted 346,000 22.73
Exercised (72,605) 2.38
Cancelled (36,000) 20.00
--------- ------
Outstanding at December 31, 1998 3,060,668 18.16
Granted 1,036,250 28.60
Exercised (218,152) 19.93
Cancelled (464,960) 22.97
--------- ------
Outstanding at December 31, 1999 3,413,806 $20.55
========= ======
OPTIONS OUTSTANDING
-------------------------------------------------------------------------------
NUMBER WEIGHTED-AVERAGE
OUTSTANDING REMAINING WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES AT DECEMBER 31, 1999 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE
------------------------ ------------------- ------------------------ --------------
$0.01- 1.99 47,772 6.5 $0.01
$2.00-15.99 557,895 5.8 2.38
$16.00-24.99 1,609,139 8.0 20.92
$25.00-39.88 1,199,000 9.3 29.33
---------
3,413,806 8.1 $20.55
=========
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OPTIONS EXERCISABLE
---------------------------------------------------------
NUMBER
EXERCISABLE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES AT DECEMBER 31, 1999 EXERCISE PRICE
------------------------ --------------------- --------------
$ 0.01 - 1.99 47,772 $ 0.01
$ 2.00 - 15.99 557,895 2.38
$16.00 - 24.99 870,129 21.57
$25.00 - 39.88 123,791 28.82
---------
1,599,587 $14.79
=========
The Company accounts for stock options issued to employees in accordance
with Accounting Principles Board Opinion No. 25 ("APB No. 25"), Accounting for
Stock Issued to Employees. The Company's employee stock options are issued with
exercise prices that equal the market price of the Company's common stock on the
date of grant and, consequently, no compensation expense is recognized.
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123")
requires entities that account for awards for stock-based compensation to
employees in accordance with APB No. 25 to present pro forma disclosures of net
income and earnings per share as if compensation cost was measured at the date
of grant based on the fair value of the award. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions:
1999 1998 1997
---- ---- ----
Risk-free interest rate 6.5% 6.5% 6.5%
Dividend yield none none none
Volatility factors 51% 57% 43%
Weighted-average expected life 5 years 5 years 5 years
The weighted-average fair value per option granted during 1999, 1998 and
1997 was $14.41, $10.90 and $7.93, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. The Company's
net income and net income per share (diluted) would have been reduced to the
following pro forma amounts for the years ended December 31, 1999, 1998, and
1997, as follows:
1999 1998 1997
---- ---- ----
Net income
As reported $ 2,808 $6,896 $6,101
Pro forma $(1,462) $3,629 $4,081
Net income per share (diluted)
As reported $ 0.14 $ 0.35 $ 0.33
Pro forma $ (0.07) $ 0.19 $ 0.22
The above pro forma amounts reflect the effect of stock options granted
subsequent to January 1, 1996. Accordingly, the pro forma amounts may not be
representative of the future effects on reported net income and earnings per
share that will result from the future granting of stock options, since the pro
forma compensation expense is allocated over the periods in which options become
exercisable and new option awards are granted each year.
During July 1999, the Company extended the exercise period for a retiring
Director's stock options from 90 to 180 days. As a result, the Company incurred
$497 of stock-based compensation expense for the extension of these stock
options.
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40
BENEFIT PLAN
The Company has a 401(k) plan that is available to substantially all of its
employees. The Company provides a match of 66% of the employees' contribution,
with a maximum benefit of up to 4% of eligible compensation in the form of
Company common stock. Contribution expense was $333, $309 and $89 in 1999, 1998
and 1997, respectively.
10. RELATED PARTY TRANSACTIONS
IRSC had a consulting agreement with an affiliate which was terminated May
6, 1999. Pursuant to the agreement, IRSC paid the affiliate for consulting
services and reimbursed the affiliate for certain travel and administrative
expenses incurred on behalf of IRSC. During the years ended December 31, 1999,
1998 and 1997, IRSC paid the affiliate $63, $375 and $365, respectively.
Invemed Associates, Inc. ("Invemed"), from time to time, has provided
financial advisory services to the Company, for which customary compensation has
been paid. In connection with the Company's offering of 1,940,000 shares of
common stock in May 1997 and 5,669,758 shares in October 1999, Invemed performed
certain investment banking services for the Company for which Invemed received
fees of $2,706 and $3,975, respectively. The applicable portion of these fees
was offset against the capital funds received by the Company for the offerings.
Kenneth G. Langone, a director and a shareholder of the Company, is Chairman of
the Board, Chief Executive Officer and President of Invemed, and is the
principal shareholder of Invemed's parent.
On February 7, 1994, the Company entered into a debt and royalty agreement
with a consortium of seven individuals including Jack Hight. During 1995, Mr.
Hight became a shareholder and director of the Company. The agreement provided
the financing necessary for the Company to enter the Texas market, and provided
for a loan to the Company of $200, which was repaid in 1995. The agreement also
provided for the Company to grant to the consortium a royalty to share in the
revenues of the Texas expansion up to $800, computed as 10% of specified
revenues from Texas operations. For the years ended December 31, 1999, 1998 and
1997, the Company paid $149, $165 and $126, respectively, relating to such
royalties. Through December 31, 1999, the Company had paid a total of $500
relating to such royalties.
The Chief Executive Officer and President and the Vice President, Human
Resources have outstanding loans with the Company as of December 31, 1999 in the
amounts of $350 and $125, respectively.
-40-
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11. 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.
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
---- ---- ----
Revenues:
Electronic information $ 72,773 $ 54,103 $ 37,777
Patent enforcement 6,219 6,636 6,670
--------- --------- ---------
Consolidated revenues $ 78,992 $ 60,739 $ 44,447
========= ========= =========
Operating Profit:
Electronic information $ 1,417 $ 5,252 $ 4,688
Patent enforcement 3,483 3,903 3,928
--------- --------- ---------
Segment operating profit 4,900 9,155 8,616
Interest income, net 1,656 2,330 1,491
General corporate expense (2,231) (1,471) (835)
--------- --------- ---------
Consolidated income before income taxes $ 4,325 $ 10,014 $ 9,272
========= ========= =========
Identifiable assets:
Electronic information $ 76,362 $ 33,572 $ 23,405
Patent enforcement 23,285 18,769 17,689
--------- --------- ---------
Total identifiable assets 99,647 52,341 41,094
General corporate assets 36,841 40,030 45,261
--------- --------- ---------
Consolidated assets $ 136,488 $ 92,371 $ 86,355
========= ========= =========
Capital expenditures:
Electronic information $ 20,557 $ 14,530 $ 6,942
Patent enforcement 3 7 7
--------- --------- ---------
Consolidated capital expenditures $ 20,560 $ 14,537 $ 6,949
========= ========= =========
Depreciation and amortization of
Identifiable assets:
Electronic information $ 8,105 $ 6,313 $ 4,107
Patent enforcement 1,707 1,709 1,695
--------- --------- ---------
Consolidated depreciation and
amortization $ 9,812 $ 8,022 $ 5,802
========= ========= =========
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12. SUBSEQUENT EVENT
On February 14, 2000, the Company signed a definitive agreement to merge
with ChoicePoint, Inc. Under the terms of this agreement, the Company's
shareholders will receive 0.525 shares of ChoicePoint, Inc. common stock for
each share of the Company's common stock. The transaction is expected to close
in the second quarter of 2000 and is subject to regulatory and shareholders'
approval.
13. QUARTERLY INFORMATION (UNAUDITED)
QUARTERS ENDED
----------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- ------------- -------- ---------
(As restated) (As previously stated)
Revenues:
1999 $ 21,783 $ 19,465 $ 19,465 $ 19,556 $ 18,188
1998 16,513 15,366 15,366 14,742 14,119
Gross profit
1999 $ 12,441 $ 11,690 $ 11,690 $ 11,807 $ 10,756
1998 8,952 9,221 9,221 8,494 7,922
Net (loss) income
1999 $ (760) $ (37) $ 1,533 $ 1,655 $ 1,950
1998 1,776 1,760 1,760 1,781 1,579
Net (loss) income per share (diluted)
1999 $ (0.04) $ (0.00) $ 0.08 $ 0.08 $ 0.10
1998 0.09 0.09 0.09 0.09 0.08
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 the
Separation of Employment Agreement and General Release and Consulting Agreement
related to the resignation of its former CEO (as described in Note 8), 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.
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43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
-43-
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 1, 2000, our executive officers and directors are as follows:
NAME AGE POSITION
---- --- --------
Frank Borman 72 Chairman of the Board of Directors(1)
Ronald A. Fournet 48 President and Chief Executive Officer
George A. Bruder, Jr. 44 Senior Vice President
J. Henry Muetterties 47 Vice President, General Counsel and Secretary
Kevin A. Barr 40 Vice President, Human Resources
C. Garry Betty 43 Director(2)(5)
Gary E. Erlbaum 55 Director(1)(4)
Jerold E. Glassman 64 Director(2)(3)
Kenneth G. Langone 64 Director(1)
Bernard Marcus 71 Director(3)
Andrall E. Pearson 74 Director(3)
Eugene L. Step 71 Director(2)(4)(5)
- --------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Corporate Goverance Committee.
(5) Member of the Technology Committee.
FRANK BORMAN has been Chairman of the Company since August 1996. From September
1995 until August 1996, he also served as Chief Executive Officer and a director
of Patlex. He served as Chairman and Chief Executive Officer of Patlex from 1988
to December 1992, and as Chairman of AutoFinance Group, Inc. ("AFG") from
December 1992 to September 1995, during the period that Patlex was a subsidiary
of AFG. He served as Vice Chairman of the Board of Directors at Texas Air
Corporation from 1986 to 1991. From 1969 to 1986, he served in various
capacities for Eastern Airlines, including President, Chief Executive Officer
and Chairman of the Board of Directors. Mr. Borman served in the United States
Air Force from 1950 to 1970. Mr. Borman currently serves as a director of The
Home Depot, Inc., and American Superconductor Corporation.
RONALD FOURNET has been Chief Executive Officer and President of DBT Online
since August 1999. Mr. Fournet has served as Chief Information and Technology
Officer of DBT Online since December 1998. From 1996 to 1998, Mr. Fournet served
in various capacities for Equifax, Inc., most recently as Senior Vice President
and Chief Technology Officer of North American operations. Mr. Fournet held
various positions at US West, Inc. from 1986 to 1996. From 1980 to 1986, he
worked in various capacities with GTE Corporation. Mr. Fournet served in the
United States Army Special Forces Intelligence Operations from 1973 to 1980.
GEORGE A. BRUDER, JR. was elected Senior Vice President of Operations in
November, 1997. He has held various positions of the Company since August, 1994.
Prior to joining the Company, Mr. Bruder worked in various capacities at the
Broward Sherriff's office from June, 1982 to August, 1994.
J. HENRY MUETTERTIES was elected Vice President and Secretary on August 20, 1996
and elected General Counsel in January 2000. Beginning in May 1989, he was the
Vice President, General Counsel and Secretary of Patlex and was the Corporate
Licensing Counsel for Patlex since March 1988.
KEVIN A. BARR was elected Vice President, Human Resources in February 1998. From
1995 to 1997, Mr. Barr served in various capacities of Nabisco International,
most recently as Vice President, Human Resources of their Asia Pacific
operations in Singapore. From 1991 through 1995, Mr. Barr served in various
capacities for Dun & Bradstreet.
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C. GARRY BETTY became a director of the Company in August 1998. Mr. Betty is
President and Chief Executive Officer of EarthLink Network, Inc., a national
Internet service provider. Prior to joining EarthLink in 1996, Mr. Betty was
president and CEO of Digital Communications Associates, Inc. from 1989 to 1994.
Mr. Betty is also a director of Physician's Data Corporation and is a member of
the national advisory board of the Georgia Institute of Technology.
GARY E. ERLBAUM has been a director of the Company since August 1996, and was a
director of Patlex from September 1995 to August 1996. He has been involved with
Patlex since May 1972, serving as a Patlex director from 1983 to December 1992,
and as a director of AutoFinance Group, Inc. ("AFG") from December 1992 to
September 1995, during the period that Patlex was a subsidiary of AFG. Mr.
Erlbaum served as the Chairman of the Board of Directors of Patlex from
September 1977 to July 1981 and from October 1981 to February 1983, and served
as the President of Patlex from May 1972 to September 1977 and from December
1978 to July 1981. Since 1983, he has been the President of Greentree Properties
Corporation, which is engaged in real estate and business ventures. He is also a
director of David's Bridal, Inc., and several privately owned companies.
JEROLD E. GLASSMAN was elected a director in February, 1999. Since 1969 Mr.
Glassman has served as Chairman of the law firm of Grotta, Glassman & Hoffman,
P.A. which specializes in labor, employment and employee benefits law and
related litigation. Mr. Glassman also serves as Special Labor Counsel to the New
Jersey Sports and Exposition Authority, Special Labor Counsel to Governor
Christine Todd Whitman of New Jersey, and Director of the DiGiorgio Corporation
of Carteret, New Jersey, a large wholesale grocery distribution company.
KENNETH G. LANGONE has been a director of the Company since August 1996, and was
a director of Patlex from September 1995 to August 1996. He has been involved
with Patlex since 1979, serving as a Patlex director from 1979 to December 1992,
and as a director of AutoFinance Group, Inc. ("AFG") from December 1992 to
September 1995, during the period that Patlex was a subsidiary of AFG. Since
1974, Mr. Langone has been Chairman of the Board, Chief Executive Officer and
President of Invemed Associates, Inc. ("Invemed"), a New York Stock Exchange
member firm engaged in investment banking and brokerage. He is one of the
co-founders of The Home Depot, Inc. and has been a director of that company
since 1978. He also serves as a director of the New York Stock Exchange, Inc.,
General Electric Company, Unifi, Inc. and Tricon Global Restaurants, Inc. He is
also a director of several private corporations.
BERNARD MARCUS has been a director of the Company since October 1997. Mr. Marcus
is one of the co-founders of The Home Depot, Inc., and has been its Chairman of
the Board of Directors since its inception in 1978. He also served as The Home
Depot's Chief Executive Officer from 1978 to 1997. He also serves on the Board
of Directors of National Service Industries, Inc., and Westfield America, Inc.
Mr. Marcus also serves on the Board of the National Foundation for the Centers
for Disease Control and Prevention and is Chairman of the Board of The Marcus
Center, which provides support services for persons with developmental
disabilities and their families. In addition, he is a member of the Advisory
Board and Board of Directors of the Shepherd Center in Atlanta, Georgia and Vice
President and member of the Board of The City of Hope, a charitable organization
in Duarte, California.
ANDRALL E. PEARSON has been a director of the Company since June 1997. Since
June 1997, Mr. Pearson has been Chairman and Chief Executive Officer for Tricon
Global Restaurants, Inc. Prior to joining Tricon Global Restaurants he served as
Principal for Clayton, Dubilier & Rice, Inc., a management buy-out firm in New
York, specializing in leveraged acquisitions involving management participation
of large USA corporations. From 1985 until June 1993, he was the Class of 1958
Professor of Business Administration at Harvard Business School (HBS). Prior to
joining HBS, Mr. Pearson spent 15 years at PepsiCo, Inc., 14 years as President
and Chief Operating Officer. Mr. Pearson serves as a director of CitiGroup. Inc.
He is also a trustee of the New York University Medical Center and the Good
Samaritan Medical Center in Palm Beach, Florida.
EUGENE L. STEP has been a director of the Company since March 1997. From 1973 to
1992, Mr. Step served in various senior management positions with Eli Lilly &
Co., most recently as Executive Vice President, President of the Pharmaceutical
Division and a member of the Board of Directors and its Executive Committee. Mr.
Step is a past Chairman of the Board of the Pharmaceutical Manufacturers
Association and a past President of the International Federation of
Pharmaceutical Manufacturers Association. Mr. Step also serves as a director of
Cell Genesys, Inc., Scios, Inc., Medco, Inc., Pathogenesis, Inc. and Guidant
Corp.
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ELECTION OF DIRECTORS
The Board is divided into three classes of directors. The Bylaws of the
Company provide that at each annual meeting of shareholders, directors shall be
chosen by class for a term of three years, or for such shorter term as the
shareholders may specify, to preserve, as evenly as practicable, the division of
directors into classes.
The Directors and their current classification and terms are as follows:
CLASS OF
NAME DIRECTOR AGE
---- -------- ---
DIRECTORS WHOSE TERM EXPIRES IN 2000
Kenneth G. Langone........................... I 64
Eugene L. Step............................... I 71
Ronald Fournet............................... I 48
DIRECTORS WHOSE TERM EXPIRES IN 2001
Frank Borman................................. II 72
Jerold E. Glassman........................... II 64
Andrall E. Pearson........................... II 74
DIRECTORS WHOSE TERM EXPIRES IN 2002
C. Garry Betty............................... III 43
Gary E. Erlbaum.............................. III 55
Bernard Marcus............................... III 71
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. During 1999, non-employee directors of the
Company received annual compensation of $16,000, and an additional $1,000 for
each meeting of the Board of Directors attended, up to a maximum annual
compensation of $20,000. Pursuant to the Deferred Compensation Plan for Non
Employee Directors, each qualifying director may elect to receive their annual
compensation in Company common stock in lieu of cash. Messrs. Betty, Marcus,
Pearson and Step elected to participate in this plan. All directors are
reimbursed for expenses associated with the attendance of the Board of
Directors' meetings.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
No interlocking relationship exists between the board of directors or
compensation committee and the board of directors or compensation committee of
any other company, with the exception that Mr. Marcus serves on the Compensation
Committee of the Company and Mr. Borman serves on the Compensation Committee of
Home Depot of which Mr. Marcus is Chairman.
SECTION 16(a) -- BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon the Company's review of Forms 3, 4 and 5 and on amendments
thereto furnished to the Company pursuant to Section 16 of the Exchange Act, all
such forms were filed on a timely basis by each reporting person except the Form
5 for Messrs. Betty, Marcus, Pearson and Step for the year ended December 31,
1999 which forms were filed late by the Company.
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11. EXECUTIVE COMPENSATION
The following table sets forth compensation information concerning the chief
executive officer and the four most highly compensated executive officers of the
Company for the fiscal year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION OTHER SECURITIES
--------------------------------- ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(2)
--------------------------- ---- ------ ----- --------------- ------------ ---------------
Ronald Fournet 1999 (3) $198,750 $107,950 * 115,000 $ 4,078
President & Chief 1998 0 0 * 85,000 0
Executive Officer
Charles A. Lieppe 1999 $250,000 0 * 0 $6,666
President & Chief 1998 $250,000 0 $112,297 0 $6,666
Executive Officer 1997 (4) 81,731 $14,000 * 600,000 0
Frank Borman 1999 $160,000 0 * 0 $11,953
Chairman of the Board 1998 $160,000 0 * 0 $8,836
1997 $160,000 0 * 0 $6,369
Kevin A. Barr 1999 $151,125 $24,433 30,000 $6,666
Vice President 1998 (5) $103,846 $75,962 $129,688 40,000 $1,688
Human Resources
Timothy M. Leonard 1999 (6) $154,481 0 * 30,000 $6,395
Vice President, Finance 1998 $137,308 0 * 0 $5,050
Treasurer and 1997 $115,782 $53,907 $32,675 95,000 $1,954
Chief Financial Officer
J. Henry Muetterties 1999 $133,051 $28,129 $24,177 30,000 $7,342
Vice President, and 1998 $127,374 $27,309 $23,202 0 $5,900
Secretary 1997 $120,720 $25,763 $38,898 0 $3,942
- ----------
* Value of perquisites and other personal benefits paid does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for
the executive officer.
(1) Includes amounts for certain costs in connection with employment by DBT
Online Inc. and relocation to Florida for Mr. Fournet, Mr. Lieppe, Mr.
Leonard and Mr. Barr. For Mr. Muetterties, includes amounts contributed to
Patlex's Deferred Compensation Plan and in 1997 certain costs in connection
with his relocation to Las Vegas, Nevada.
(2) Includes amounts received as Company matching contributions under DBT
Online, Inc's 401(k) savings plan by Mr. Fournet ($4,078 - 1999); Mr.
Lieppe ($6,666 -- 1999, 1998); Mr. Borman ($6,666 -- 1999; 5,667 -- 1998;
$3,200 -- 1997); Mr. Barr ($6,666 -- 1999, $1,688 -- 1998); Mr. Leonard
($6,395--1999, 5,050 - 1998, and 1,954 - 1997); Mr. Muetterties ($6,666 -
1999, $5,371 -- 1998; $3,413 -- 1997); and amounts paid by Patlex for life
insurance premiums for Mr. Borman ($5,287 -- 1999, $3,169 -- 1998, 1997)
and Mr. Muetterties ($676 -- 1999, $529 -- 1998, 1997).
(3) Mr. Fournet joined the Company in December 1998 and was named President and
Chief Executive Officer in August 1999.
(4) Mr. Lieppe joined the Company in August 1997 and resigned in August 1999.
(5) Mr. Barr joined the Company in March 1998.
(6) Mr. Leonard resigned as an officer of the Company in February 2000.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table contains information concerning the exercise of stock
options during fiscal year 1999 for each of the executive officers named in the
Summary Compensation Table.
NUMBER SECURITIES
UNDERLYING OPTIONS/SAR'S VALUE OF UNEXERCISED
SHARES HELD AT FISCAL YEAR END IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE (#) FISCAL YEAR END ($)
EXERCISE REALIZED ----------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------- ------------ --------- -------------- ------------------------------ --------------
Ronald Fournet -- -- 21,250 178,750 $100,938 $302,813
Charles A. Lieppe -- -- 350,000 0 240,625 --
Frank Borman -- -- 157,895 0 $3,463,822 --
Kevin Barr -- -- 20,000 50,000 -- --
J. Henry Muetterties -- -- 0 30,000 -- $73,125
Timothy M. Leonard -- -- 88,334 36,666 $649,273 $12,915
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning grants of stock options
made during fiscal year 1999 to each of the executive officers named in the
Summary Compensation Table. No stock appreciation rights were granted during
fiscal year 1999.
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
-------------------------- AT ASSUMED ANNUAL
PERCENT OF RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS EXERCISE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERMS(2)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
------------------- ------------- -------------------------- ------------ ------------ ------------
Ronald Fournet 115,000 (1) 11.1% $29.94 08/10/09 $2,165,346 $5,487,414
Charles A. Lieppe -- -- -- -- -- --
Frank Borman -- -- -- -- -- --
Kevin Barr 30,000 (1) 2.9% $29.13 08/02/09 $549,591 $1,392,771
J. Henry Muetterties 30,000 (1) 2.9% $21.88 12/06/09 $412,806 $1,046,132
Timothy M. Leonard 30,000 (1) 2.9% $29.13 08/02/09 $549,591 $1,392,771
- ----------
(1) These options vest as follows: one-fourth of the total amount on the first
anniversary of the grant date, and one-fourth of the total amount on each
of the next three anniversaries of the grant date.
(2) Amounts represent hypothetical gains that could be achieved for the options
granted if they were exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the option grant date to the expiration date. These
assumptions are not intended to forecast future stock price appreciation.
The potential reasonable value computation does not take into account
federal or state income tax consequences of option exercises or sales of
appreciated stock.
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EMPLOYMENT AGREEMENTS
In April 1997, the Company entered into an employment agreement with its
chairman, Mr. Borman, which provided for an initial three-year term commencing
on April 1, 1997 with automatic one-year extensions on the anniversary of the
commencement date, unless either the Company or Mr. Borman gives notice to the
other that the term of the agreement will not be extended. The employment
agreement contains certain restrictive covenants, including provisions relating
to non-competition, non-solicitation and the non-disclosure of proprietary
information, during the term of the agreement and for specified periods
thereafter. The 1999 annual compensation rate for Mr. Borman under this
agreement was $160,000.
In August 1997, the Company entered into an employment agreement with its
then CEO, Mr. Lieppe, which provided for a four-year term commencing August 15,
1997 and ending on August 14, 2001, unless terminated earlier in accordance with
certain circumstances. The 1999 annual compensation rate for Mr. Lieppe under
this agreement was $250,000. In August 1999, the Company and Mr. Lieppe agreed
to the terms of a Separation of Employment Agreement and General Release and
Consulting Agreement. In connection with this agreement, the Company is to pay
$425,000 in cash to Mr. Lieppe or on his behalf through December 2000. As of
December 31, 1999, $340,000 of this amount was included in accounts payable and
accrued liabilities for the remaining unpaid portion. The Company also incurred
stock-based compensation expense of $771,000 in 1999 resulting from the Company
extending the time in which certain stock options held by Mr. Lieppe were
allowed to vest.
In March 1998, the Company entered into an employment agreement with its
Vice President, Human Resources, Mr. Barr, which provides for a two-year term.
In October 1999, the employment agreement was amended for an additional year and
included a change in control provision. The annual compensation rate in 1999 for
Mr. Barr under this agreement was $150,000.
In August 1999, the Company entered into an employment agreement with its
current CEO, Mr. Fournet that provides for a four-year term, unless terminated
earlier in accordance with certain circumstances, and which includes a change in
control provision. The annual compensation rate for Mr. Fournet under this
agreement was $250,000.
In February 2000, the Company entered into an employment agreement with its
Vice President, General Counsel and Secretary, Mr. Muetterties having a one-year
term which renews itself each day. The agreement calls for a base salary of
$160,000 in 2000 and includes a change in control provision. The employment
agreement contains certain restrictive covenants, including provisions relating
to non-competition, non-solicitation and non-disclosure of confidential
information during the executive's employment with the Company and for specific
periods thereafter.
COMPENSATION COMMITTEE REPORT
The Compensation Committee is responsible for implementing and
administering the Company's compensation policies and programs for its executive
officers. This includes setting the base salaries and the total compensation
levels of the Chief Executive Officer (the "CEO") and the other executive
officers of the Company. In addition, the Compensation Committee is responsible
for setting the performance criteria for bonus awards and determining the
achievement levels and payout for the executive officers.
COMPENSATION PHILOSOPHY
The Company's compensation policies for executive officers, as established
by the Compensation Committee, are designed to (a) provide competitive
compensation packages that will attract and retain talented executive officers,
(b) link compensation to financial and operating results, so as to reward
successful performance, and (c) provide long-term equity compensation, to
further align the interests of executive officers with those of shareholders and
further reward successful performance. The principal components of the Company's
executive officer compensation program are base salary, bonus awards and grants
of stock options.
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ANNUAL COMPENSATION
Annual cash compensation is comprised of base salary and bonus awards.
Salary determinations have not been based upon any specific criteria. The salary
levels of executive officers of the Company that were hired in 1999 were
established at the time the executives were hired. The Compensation Committee
approved the compensation levels of the newly hired executives taking into
consideration the Company's objective of attracting outstanding executives to
join a relatively young and growing corporation. The salary levels of certain
other executive officers of the Company for 1999 were based on established
levels set by employment contracts previously entered into by the executive
officers.
Bonus awards made to executive officers in 1999 were based in part on
established minimums set by their employment agreements and in part upon the
Company's achievement of performance targets. The Compensation Committee also
took into consideration the leadership provided by the Company's executive
officers in managing the Company's growth in 1999.
LONG-TERM COMPENSATION
The Compensation Committee believes that stock options are an important
component of compensation for executive officers of the Company because it
closely aligns the interests of management with those of the shareholders. Stock
options also provide an attractive compensation incentive in hiring new
executive officers. This policy of the Compensation Committee is carried out for
the Company by the Stock Option Plan Administration Committee, which has the
discretion to grant stock options to executive officers. The number of options
in each grant is not based on any specific criteria, but the Committee did
consider primarily the executive's position, skills and achievements.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Ronald Fournet was named President and Chief Executive Officer of the
Company on August 10, 1999. His salary level of $250,000 for 1999 was
established by the Board of the Company. He received a sign-on bonus of $85,000
in 1999. Mr. Fournet's compensation in 1999 was based upon the terms of the
employment agreement that was dated August 10, 1999.
DEDUCTIBILITY OF CERTAIN COMPENSATION
Section 162(m) of the Internal Revenue Code generally denies a federal
income tax deduction for certain compensation exceeding $1,000,000 paid to the
CEO or any of the four other highest paid executive officers, excluding (among
other things) certain performance-based compensation. Through December 31, 1999,
this provision has not affected the Company's tax deductions, but the
Compensation Committee will continue to monitor the potential impact of section
162(m) on the Company's ability to deduct executive compensation.
COMPENSATION COMMITTEE
Andrall E. Pearson, Chairman
Jerold Glassman, Esq.
Bernard Marcus
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STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Company's common stock with the cumulative total shareholder return of (i) the
S&P Stock Market (U.S.) Index (the "S&P Index"); and (ii) a "peer group" index
assuming an investment of $100 on September 28, 1995 in each of the common stock
of the Company, the stocks comprising the S&P Index and the stocks comprising
the peer group, and further assuming reinvestment of dividends. The "peer group"
consists of ChoicePoint, American Business Information, Inc., Vista Information
Solutions, Inc. and Avert, Inc.
The graph commences on September 28, 1995, the date that the Patlex common
stock began trading publicly. From September 28, 1995 and until March 17, 1996,
the Patlex common stock was listed on the Nasdaq Small-Cap Market. From March
18, 1996 until August 19, 1996, the Patlex common stock was listed on the Nasdaq
National Market. The Company's common stock was traded on the Nasdaq National
Market from August 20, 1996 until it began trading on the New York Stock
Exchange on September 17, 1997.
COMPARISON OF CUMULATIVE RETURN
THE COMPANY, S&P INDEX AND PEER GROUP INDEX
(FROM SEPTEMBER 28, 1995 TO DECEMBER 31, 1999)
TOTAL SHAREHOLDER RETURNS
(DIVIDENDS REINVESTED)
[GRAPH]
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of the common stock as of March 1, 2000 (i) by each person who
beneficially owns more than 5% of the outstanding shares of the common stock,
(ii) by each of the Company's executive officers and directors, and (iii) by all
of the executive officers and directors of the Company as a group. Unless
otherwise noted, each person named in the table has sole voting and investment
power as to shares shown.
SHARES OF
COMMON STOCK PERCENT
NAMES OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS (1)
------------------------- ------------------ ------------
AXA Financial, Inc. (2) 3,461,600 17.2%
FMR Corp. (3) 2,566,400 12.7%
Kenneth G. Langone (4) 2,561,094 12.6%
Gary Erlbaum (5) 417,962 2.1%
Frank Borman (6) 200,000 *
Bernard Marcus (7) 78,453 *
J. Henry Muetterties 49,820 *
Andrall E. Pearson (7) 30,538 *
Eugene L. Step (8) 30,436 *
Ronald Fournet (9) 21,250 *
Kevin A. Barr (7) 20,000 *
C. Garry Betty (10) 10,538 *
Jerold E. Glassman (10) 10,000 *
All Officer and Directors as a Group (11)
(12 persons) 3,468,425 16.6%
- ----------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In general, a person who has voting power or investment power
with respect to securities is treated as a beneficial owner of those
securities. Shares of common stock subject to options or warrants currently
exercisable or exercisable within 60 days count as outstanding for
computing the percentage beneficially owned by the holder. Except as
otherwise indicated by footnote, we believe that the persons named in this
table have solve voting and investment power with respect to the share of
common stock shown.
(2) Based on our review of a Schedule 13G filed with the Commission on February
10, 2000, we believe these shares are held by AXA Financial, Inc. whose
address is 1290 Avenue of the Americas, New York, NY 10104.
(3) Based on our review of a Scheduled 13G filed with the Commission on
February 14, 2000, we believe these shares are held by FMR Corp. whose
address is 82 Devonshire Street, Boston, MA 02109.
(4) Includes (i) 900,000 shares owned by Invemed Associates, Inc., (ii) 200
shares owned by his spouse, (iii) 200,000 shares issuable upon exercise of
presently exercisable options and (iv) 660,894 shares owned by the Invemed
Catalyst Fund. Mr. Langone is Chairman of the Board, Chief Executive
Officer and President of Invemed and the principal shareholder of Invemed's
parent corporation. The address of this shareholder is 375 Park Ave., Suite
2205, New York, NY 10152.
(5) Includes (i) 29,420 shares owned by SPSP Corporation of which Mr. Erlbaum
is a director, President and 36.7% shareholder, (ii) 3,750 shares held by
trusts for which Mr. Erlbaum serves as trustee or co-trustee, (iii) 139,360
shares owned by Erlbaum Family L.P., of which Mr. Erlbaum is President of
the general partnership, (iv) 2,922 shares owned by Mr. Erlbaum's son, and
(v) 200,000 shares issuable upon exercise of presently exercisable options.
(6) Includes 157,895 shares issuable pursuant to currently exercisable stock
options.
(7) Includes 20,000 shares issuable pursuant to currently exercisable stock
options.
(8) Includes 30,000 shares issuable pursuant to currently exercisable stock
options.
(9) Includes 21,250 shares issuable pursuant to currently exercisable stock
options.
(10) Includes 10,000 shares issuable pursuant to currently exercisable stock
options.
(11) Includes 727,479 shares issuable pursuant to currently exercisable stock
options.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Invemed Associates, Inc. ("Invemed"), from time to time, has provided
financial advisory services to the Company, for which customary compensation has
been paid. In connection with the Company's offering of 1,940,000 shares of
common stock in May 1997 and 5,669,758 shares in October 1999, Invemed performed
certain investment banking services for the Company for which Invemed received
fees of approximately $2,706,000 and 3,975,000, respectively. Kenneth G.
Langone, a director and a shareholder of the Company, is Chairman of the Board,
Chief Executive Officer and President of Invemed, and is the principal
shareholder of Invemed's parent.
On February 7, 1994, Database Technologies, Inc. entered into a debt and
royalty agreement with a consortium of seven individuals including Jack Hight.
During 1995, Mr. Hight became a shareholder and director of DBT. The agreement
provided the financing necessary for Database Technologies, Inc. to enter the
Texas market. The agreement provided for a loan to Database Technologies, Inc.
of $200,000, which was repaid in 1995. The agreement also provided for Database
Technologies, Inc. to grant to the consortium a royalty to share in the revenues
of the Texas expansion up to $800,000, computed as 10% of specified revenues
from Texas operations. For the years ended December 31, 1999, 1998 and 1997,
Database Technologies, Inc. paid $149,267, $164,561 and $125,957, respectively,
relating to such royalties. Through December 31, 1999, Database Technologies,
Inc. had paid a total of $499,717 relating to such royalties.
Messrs. Fournet and Barr have outstanding loans with the Company in the
amounts of $350,000 and $125,000, respectively.
Mr. Muetterties was extended a loan on February 20, 2000 in the amount of
$342,928. This loan is a bridge loan provided in association with Mr.
Muetterties relocation to Boca Raton, Florida and is due May 31, 2000.
IRSC had a consulting agreement with an affiliate which was terminated May
6, 1999. Pursuant to the agreement, IRSC paid the affiliate for consulting
services and reimbursed the affiliate for certain travel and administrative
expenses incurred on behalf of IRSC. During the years ended December 31, 1999,
1998 and 1997, IRSC paid the affiliate $62,500, $375,000 and $365,000,
respectively.
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ITEM 14. EXHIBITS, FINANCIALS STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
3(i)** Amended and Restated Articles of Incorporation
3(ii)* Amended and Restated Bylaws
10(i)+ Employment Agreement dated March 11, 1990, between Patlex and Frank Borman
10(ii)++ Employment Agreement dated August 15, 1997, between DBT Online, Inc. and Charles A. Lieppe***
10(iii)* Employment Agreement dated February 14, 2000, between DBT Online, Inc. and J. Henry
Muetterties***
10(iv)+ Security and Escrow Agreement dated September 29, 1992, between Patlex and NGN Acquisition
Corporation
10(v)+ Standard Form of Licensing Agreement
10(vi)+ Purchase Agreement dated December 11, 1919, between Patlex and Gordon Gould
10(vii)+ Agreement dated January 31, 1982, among Patlex, Refac Technology Development Corporation, Refac
International Ltd., Gordon Gould, NGN Acquisition Corporation, and the partnership of
Lerner, David, Littenberg & Samuel
10(viii)+ Agreement dated October 1, 1984, among Patlex, Refac
Technology Development Corporation, East West Trade Services,
Ltd., and Refac International, Ltd.
10(ix)+ Agreement dated 1986 among Patlex and NGN Acquisition Corporation, Gordon Gould, and Apollo
Lasers, Inc.
10(x)+ Letter of Clarification dated January 31, 1990, among Patlex, Gordon Gould, and NGN Acquisition
Corporation
10(xi)**** Agreement and Plan of Merger By and Among ChoicePoint, Inc. ChoicePoint Acquisition Corporation
and DBT Online, Inc. dated February 14, 2000
10(xii)+++ Amended and Restated Stock Option Plan***
10(xiii)++++ Lease (For Boca Raton, Florida Location)
10(xiv)* Employment Agreement dated February 4, 1998, between DBT Online, Inc. and Kevin Barr as
amended***
10(xv)* Employment Agreement dated August 10, 1999 between DBT Online, Inc. and
Ronald Fournet***
10(xvi)* Separation of Employment Agreement and General Release and Consulting Agreement between
DBT Online, Inc. and Thomas J. Hoolihan dated January 12, 2000 and an Amendment thereto dated February
11, 2000***
10(xvii)* Separation of Employment Agreement and General Release and Consulting Agreement between DBT
Online, Inc. and Andrew J. Perlmutter dated January 7, 2000 and an Amendment thereto dated
February 13, 2000***
10(xviii)* Separation of Employment Agreement and General Release and Consulting Agreement between DBT
Online, Inc. and Timothy M. Leonard dated January 7, 2000 and an Amendment thereto dated
February 11, 2000***
10(xix)* Separation of Employment Agreement and General Release Consulting Agreement between DBT
Online, Inc. and Charles Lieppe dated January 3, 2000***
10(xx)* Agreement and Plan of Reorganization among DBT Online, Inc., DBT Acquisition, Inc.,
I.R.S.C., Inc., The Shareholders of I.R.S.C., Inc. and certain other parties dated May 6, 1999
21* Subsidiaries
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of Corbin & Wertz
27* Financial Data Schedule (for Securities and Exchange Commission use only)
- ----------------
* Filed herewith
** Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-2000)
*** Management contract or compensatory plan
**** Incorporated by reference to the Company's Form 8-K filed February 15,
2000
+ Incorporated by reference to the Form 10-KSB of Patlex Corporation for
the year ended June 30, 1995
++ Incorporated by reference to the Company's Form 10-Q for the period
ended September 30, 1997
+++ Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 333-41313) filed with the Securities and Exchange
Commission on December 1, 1997.
++++ Incorporated by reference to the Company's Form 10-K for the period
ended December 31, 1998
-54-
55
DBT ONLINE, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(In thousands)
CHARGED TO WRITE-OFFS
BEGINNING STATEMENT OF OTHER AND OTHER ENDING
DESCRIPTION BALANCE OPERATIONS INCREASES ADJUSTMENTS BALANCE
- ------------------------------------------------------------ --------- ------------- --------- ----------- --------
Year ending December 31, 1997
Allowances for uncollectible accounts $250 $115 $ 25(1) $ (40) $350
==== ==== ==== ===== ====
Year ended December 31, 1998
Allowance for uncollectible accounts $350 $159 $ 0 $(110) $399
==== ==== ==== ===== ====
Year ended December 31, 1999
Allowance for uncollectible accounts $399 $231 $388(2) $(179) $839
==== ==== ==== ===== ====
- ---------------
(1) Represents the allowance established in connection with the acquisition of
The Information Connectivity Group, Inc.
(2) Represents the allowance established in connection with the acquisition of
KnowX.com and Informed.
(b) Reports on Form 8-K
Form 8-K dated October 8, 1999 reporting the Asset Purchase
Agreement Among West Publishing Company, Information America, Inc.
and DBT Online, Inc. dated as of August 20, 1999
-55-
56
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 10, 2000 DBT Online, Inc.
By:/s/ Ronald Fournet
-----------------------------------
Ronald Fournet
President and Chief Executive Officer
Power of Attorney
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capabilities and on the
dates indicated. Each person whose signature appears below in so signing also
makes, constitutes, and appoints J. Henry Muetterties his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and his name, place and stead, in any and all capacities, to execute and
cause to be filed with the Securities and Exchange Commission any and all
amendments to this Report, and in each case to file the same, with all exhibits
thereto and other documents in connection therewith, and hereby ratifies and
confirms all that said attorney-in-fact or his substitute or substitutes may do
or cause to be done by virtue hereof.
NAME CAPACITY DATE
- ---- -------- ----
/s/ Frank Borman Chairman of the Board of March 10, 2000
Frank Borman Directors
/s/Ronald Fournet President, Chief Executive March 10, 2000
Ronald Fournet Officer and Director
/s/Judith D. Brown Principal Accounting Officer March 10, 2000
Judith D. Brown
/s/ Charles G. Betty Director March 10, 2000
Charles G. Betty
/s/ Jerold E. Glassman Director March 10, 2000
Jerold E. Glassman
/s/ Gary E. Erlbaum Director March 10, 2000
Gary E. Erlbaum
/s/ Ken Langone Director March 10, 2000
Ken G. Langone
/s/ Bernard Marcus Director March 10, 2000
Bernard Marcus
/s/ Andrall E. Pearson Director March 10, 2000
Andrall E. Pearson
/s/ Eugene L. Step Director March 10, 2000
Eugene L. Step
-56-
57
ANNUAL RETURN PERCENTAGE
COMPANY NAME/INDEX DEC 95 DEC 96 DEC 97 DEC 98 DEC 99
- -------------------------------------------------------------------------------------------------
DBT ONLINE INC 268.75 0.85 67.64 0.00 -2.51
S&P 500 INDEX 5.76 22.96 33.36 28.58 21.04
PEER GROUP -51.50 16.54 0.19 -0.53 51.60
INDEXED RETURNS
BASE
PERIOD
COMPANY NAME/INDEX 28-SEP-95 DEC 95 DEC 96 DEC 97 DEC 98 DEC 99
- ------------------------------------------------------------------------------------------------------------
DBT ONLINE INC 100 368.75 371.88 623.44 623.47 607.82
S&P 500 INDEX 100 105.76 130.04 173.43 222.99 269.91
PEER GROUP 100 48.50 56.52 56.63 56.33 85.40
PEER GROUP COMPANIES
- --------------------------------------------------------------------------------
AVERT INC
CHOICEPOINT INC
INFOUSA INC (FORMERLY AMERICAN BUS INFO)
VISTA INFO SOLUTIONS INC