1
EXHIBIT 99.1
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 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.
2
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.
2
3
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.
3
4
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 liablities 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 of 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.
4
5
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.
5
6
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.
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
6
7
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 and royalties $ 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:
Company
Prior to
Combination IRSC Combined
------------ ------- --------
YEAR ENDED DECEMBER 31, 1998:
Total revenues and royalties $ 53,549 $ 7,190 $ 60,739
Net income 6,702 194 6,896
YEAR ENDED DECEMBER 31, 1997:
Total revenues and royalties $ 37,546 $ 6,901 $ 44,447
Net income 5,998 103 6,101
7
8
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 was $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
=======
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:
8
9
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
======= ======= =======
9
10
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, 1999 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.
10
11
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.
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.
11
12
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:
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
=======
12
13
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-
Number of Average Exercise
Shares Price 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 Weighted-
Outstanding Remaining 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
=========
13
14
Options Exercisable
--------------------------------------------
Number
Exercisable At Weighted-Average
Range of Exercise Prices 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:
14
15
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.
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
15
16
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.
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
========= ======== ========
16
17
Year Ended December 31,
1999 1998 1997
------- ------- ------
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
======= ======= ======
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
17
18
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.
18