1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 0-9111-99 --------- DBT ONLINE, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) PENNSYLVANIA 85-0439411 - --------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 5550 W. FLAMINGO ROAD, SUITE B-5 ---------------------------------------- (Address of principal Executive Offices) LAS VEGAS, NEVADA 89103 ---------------------------------------- (702) 257-1112 ---------------------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of common shares outstanding as of June 30, 1997 was 9,095,818. 2 DBT ONLINE, INC. TABLE OF CONTENTS PAGE ---- PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996..................................................................3 Consolidated Statements of Operations for the Three Months Ended June 30, 1997 and 1996...............................................................................4 Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and 1996...............................................................................5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996...........................................................6 Notes to Consolidated Financial Statements......................................................7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................8 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS..............................................................................11 Item 2. CHANGES IN SECURITIES..........................................................................11 Item 3. DEFAULTS UPON SENIOR SECURITIES................................................................11 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS............................................11 Item 5. OTHER INFORMATION..............................................................................12 Item 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................12 Signature........................................................................................................13 EXHIBIT Exhibit 27.1 Financial Data Schedule..............................................................E-1 Page 2 3 PART I - FINANCIAL INFORMATION Item 1: Financial Statements DBT ONLINE, INC. and subsidiaries CONSOLIDATED BALANCE SHEETS ================================================================================ June 30, December 31, 1997 1996 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 52,134,900 $ 6,965,600 Accounts receivable, less allowance: June 30, 1997- $274,000 December 31, 1996-$250,000 3,646,100 2,397,600 Prepaid expenses and other current assets 616,500 375,100 ------------ ------------ Total current assets 56,397,500 9,738,300 Property and equipment, net 7,998,500 6,064,300 Patents, less amortization: June 30, 1997 - $1,469,800; December 31, 1996 - $622,300 12,373,000 13,220,500 Other assets 515,900 532,900 ------------ ------------ Total assets $ 77,284,900 $ 29,556,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 3,570,900 $ 1,653,200 Current portion of long-term debt 0 1,415,500 Bank line-of-credit 0 200,000 Due to other patent interest holders 1,405,800 1,411,300 Income taxes payable 408,200 618,200 Customer deposits 260,800 322,300 ------------ ------------ Total current liabilities 5,645,700 5,620,500 Long-term debt, less current portion 0 1,365,800 Deferred income taxes 4,169,500 4,339,200 Stockholders' equity: Preferred stock, $.10 par value 5,000,000 shares authorized; no shares issued or outstanding -- -- Common stock, $.10 par value 40,000,000 shares authorized; 9,095,818 shares and 7,723,806 shares issued and outstanding at June 30, 1997 and December 31, 1996, respectively 909,600 772,400 Additional paid in capital 65,004,100 18,212,700 Retained earnings (deficit) 1,556,000 (754,600) ------------ ------------ Total stockholders' equity 67,469,700 18,230,500 ------------ ------------ Total liabilities and stockholders' equity $ 77,284,900 $ 29,556,000 ============ ============ See notes to consolidated financial statements. Page 3 4 DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ================================================================================ Three Months Ended June 30, 1997 1996 ----------- ----------- (Unaudited) (Unaudited) Revenues $ 7,019,100 $ 3,789,000 Patent royalties 1,817,500 ----------- ----------- Total revenues and royalties 8,836,600 3,789,000 Cost of revenues 3,401,500 1,862,300 Selling and promotion 704,300 489,600 Research and development 625,200 585,200 General and administrative 2,053,600 851,900 ----------- ----------- Total expenses 6,784,600 3,789,000 ----------- ----------- Income from operations 2,052,000 0 Interest income (expense), net 238,100 (66,200) ----------- ----------- Income before income taxes 2,290,100 (66,200) Provision for income taxes 870,200 (43,000) ----------- ----------- Net income $ 1,419,900 ($ 23,200) =========== =========== Net income per common share $ 0.17 -- =========== =========== Weighted average shares outstanding 8,580,500 5,127,600 =========== =========== See notes to consolidated financial statements. Page 4 5 DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ================================================================================ Six Months Ended June 30, 1997 1996 ----------- ----------- (Unaudited) (Unaudited) Revenues $13,100,600 7,138,800 Patent royalties 3,335,000 ----------- ----------- Total revenues and royalties 16,435,600 7,138,800 Cost of revenues 6,672,200 3,414,800 Selling and promotion 1,297,300 805,500 Research and development 1,154,900 983,700 General and administrative 3,853,900 1,619,000 ----------- ----------- Total expenses 12,978,300 6,823,000 ----------- ----------- Income from operations 3,457,300 315,800 Interest income (expense), net 269,400 (101,600) ----------- ----------- Income before income taxes 3,726,700 214,200 Provision for income taxes 1,416,100 62,500 ----------- ----------- Net income $ 2,310,600 $ 151,700 =========== =========== Net income per common share $ 0.28 $ 0.03 =========== =========== Weighted average shares outstanding 8,316,800 5,127,600 =========== =========== Page 5 6 DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================ Six Months Ended June 30, 1997 1996 ------------ ------------ (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,310,600 $ 151,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,293,300 944,100 Deferred taxes ($ 169,700) ($ 46,200) Changes in operating assets and liabilities: Accounts receivable (1,248,500) (547,200) Prepaid expenses and other current as (241,400) (67,300) Accounts payable and accrued liabili1 1,917,700 127,900 Due to other patent interest holders (5,500) 0 Income taxes payable (210,000) 0 Customer deposits (61,500) 68,300 ------------ ------------ Net cash provided by operating activities 4,585,000 631,300 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment purchased (3,380,000) (2,757,400) Increase in other assets 17,000 (153,300) ------------ ------------ Net cash used in investing activities (3,363,000) (2,910,700) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Common stock 46,928,600 0 Net change in bank line-of-credit (200,000) 500,000 Issuance of long-term debt 0 1,500,000 Repayments on long-term debt (2,781,300) (545,200) ------------ ------------ Net cash provided by financing activities 43,947,300 1,454,800 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 45,169,300 (824,600) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,965,600 1,642,700 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 52,134,900 $ 818,100 ============ ============ See notes to consolidated financial statements. Page 6 7 DBT ONLINE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of DBT Online, Inc. (the "Company") and its wholly-owned subsidiaries, Database Technologies, Inc., a Florida corporation ("DBT") and Patlex Corporation (since August 20,1996, date of merger), a Pennsylvania corporation ("Patlex"). The interim consolidated financial statements as of June 30, 1997 and for the six months ended June 30, 1997 and 1996 are unaudited. All significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Such adjustments consist solely of normal recurring accruals. Results for the interim periods are not necessarily indicative of results for a full year. NOTE 2. PRO FORMA INFORMATION On August 20, 1996, the former shareholders of Patlex approved a plan of reorganization pursuant to which the Company was reorganized into a holding company structure and each share of Patlex was converted into a share of the Company. Also on August 20, 1996, a wholly-owned subsidiary of the Company merged with DBT. Pursuant to the terms of the merger and reorganization, the former shareholders of Patlex received approximately 33.2% of the Company and the former owners of DBT received 66.8% of the Company, based on the shares and options outstanding at August 20, 1996. For accounting purposes, the transaction was treated as a purchase of Patlex with DBT as the accounting acquirer. If the merger and reorganization had been completed on January 1, 1996, pro forma results for the six months ended June 30, 1996 would be as follows (the pro forma information is not necessarily indicative of the combined results of operations that would have occurred had the merger and reorganization been completed as of January 1, 1996): Revenues $ 11,454,000 Net Income $ 1,241,000 Net Income Per Common Share $ 0.16 Page 7 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. This information contains certain statements regarding future trends, the accuracy of which is subject to many risks and uncertainties. Such trends, and their anticipated impact upon the Company, could differ materially from those presented in this Form 10-Q. OVERVIEW OF THE COMPANY AND 1996 REORGANIZATION The Company is a holding company with two wholly-owned operating subsidiaries, DBT and Patlex, which are respectively engaged in the provision of on-line integrated database services and the patent exploitation and enforcement business. The Company was reorganized into its current structure on August 20, 1996. On August 20, 1996, the shareholders of Patlex approved a Plan of Reorganization pursuant to which the Company was reorganized into a holding company and Patlex became a wholly-owned subsidiary of the Company. Also on August 20, 1996, another wholly-owned subsidiary of the Company merged with and into DBT and DBT became a wholly-owned subsidiary of the Company (the "Merger"). The Company is the successor registrant to Patlex. For accounting purposes the Merger was treated as a purchase business acquisition of Patlex by DBT (a reverse acquisition) and a recapitalization of DBT. Assets and liabilities of Patlex acquired in the Merger were recorded at their fair value as of August 20, 1996. REVENUES The Company's revenues increased 133% to $8,836,600 for the three months ended June 30, 1997 from $3,789,000 for the same period in 1996. DBT contributed $7,019,100 to the Company's revenues and Patlex contributed $1,817,500 to the Company's revenues. The increase in DBT's revenues was attributable to an increase in the number of active customers and the number of minutes users spent on line. DBT's active customers (defined as customers accessing the system in a given month) increased 88% to 9,000 at June 30, 1997 from 4,800 at June 30, 1996. Total system usage was 4.8 million minutes for the three months ended June 30, 1997, up from 2.6 million minutes for the same period in 1996, an increase of 85%. Revenues from on-line charges were $6,333,200 and $3,562,100 for the three months ended June 30, 1997 and 1996, respectively, an increase of 78%. The Company's revenues increased 130% to $16,435,600 for the six months ended June 30, 1997 from $7,138,800 for the same period in 1996. DBT contributed $13,100,600 to the Company's revenues and Patlex contributed $3,335,000 to the Company's revenues. Total system usage was 9.2 million minutes for the six months ended June 30, 1997, up from 4.9 million minutes for the same period in 1996, an increase of 88%. Revenues from on-line charges were $12,171,300 and $6,714,600 for the six months ended June 30, 1997 and 1996, respectively, an increase of 81%. COST OF REVENUES The Company's cost of revenues increased 83% to $3,401,500 for the three months ended June 30, 1997 from $1,862,300 for the same period in 1996. As a percentage of total revenues, cost of revenues decreased to 38.5% for the three months ended June 30, 1997 from 49.2% for the same period in 1996. For the three months ended June 30, 1997, Patlex's cost of revenues, which consisted solely of the amortization of its patents, was $423,800. In addition to the consolidation of Patlex, the increase in the Company's cost of revenues was due primarily to increases in both purchased data costs and depreciation expense as DBT continued to invest both in its computer facilities and in the expansion of its databases. The Company expects this trend to continue. The Company's cost of revenues increased 95% to $6,672,200 for the six months ended June 30, 1997 from $3,414,800 for the same period in 1996. As a percentage of total revenues, cost of revenues decreased to 40.6% for the six months ended June 30, 1997 from 47.8% for the same period in 1996. For the six months ended June 30, 1997, Patlex's cost of revenues, which consisted solely of the amortization of its patents, was $847,600. In addition Page 8 9 to the consolidation of Patlex, the increase in the Company's cost of revenues was due primarily to increases in both purchased data costs and depreciation expense as DBT continued to invest both in its computer facilities and in the expansion of its databases. The Company expects this trend to continue. SELLING AND PROMOTION EXPENSES DBT's selling and promotion expenses increased 44% to $704,300 for the three months ended June 30, 1997 from $489,600 for the same period in 1996. The increase was primarily due to increases in payroll and trade show expenses. As a percentage of total revenues, selling and promotion decreased to 8% for the three months ended June 30, 1997 from 12.9%, for the same period in 1996. DBT's selling and promotion expenses increased 61% to $1,297,300 for the six months ended June 30, 1997 from $805,500 for the same period in 1996. The increase was primarily due to increases in payroll and trade show expenses. As a percentage of total revenues, selling and promotion decreased to 7.9% for the six months ended June 30, 1997 from 11.3%, for the same period in 1996. RESEARCH AND DEVELOPMENT EXPENSES DBT's research and development expenses increased 6.8% to $625,200 for the three months ended June 30, 1997 from $585,200 for the same period in 1996. This increase was caused by an increase in payroll and related expenses. As a percentage of total revenues, research and development expenses were 7.1% for the three months ended June 30, 1997, a decrease from 15.4% for the same period in 1996. DBT's research and development expenses increased 17% to $1,154,900 for the six months ended June 30, 1997 from $983,700 for the same period in 1996. This increase was caused by an increase in payroll and related expenses. As a percentage of total revenues, research and development expenses were 7% for the six months ended June 30, 1997, a decrease from 13.8% for the same period in 1996. GENERAL AND ADMINISTRATIVE EXPENSES DBT's general and administrative expenses increased 92% to $1,631,500 for the three months ended June 30, 1997 from $851,900 for the same period in 1996. This increase was due to increases in payroll and related expenses. Patlex's general and administrative expenses, which consisted principally of salaries, were $288,400 for the three months ended June 30, 1997. The Company's corporate expenses, which consisted principally of corporate insurance, public company related expenses and legal fees, were $133,700. As a percentage of total revenues, general and administrative expenses remained relatively consistent at 23.2% and 22.5% for the three months ended June 30, 1997 and 1996, respectively. DBT's general and administrative expenses increased 90% to $3,077,900 for the six months ended June 30, 1997 from $1,619,000 for the same period in 1996. This increase was due to increases in payroll and related expenses. Patlex's general and administrative expenses, which consisted principally of salaries, were $542,900 for the six months ended June 30, 1997. The Company's corporate expenses, which consisted principally of corporate insurance, public company related expenses and legal fees, were $233,100. As a percentage of total revenues, general and administrative expenses remained relatively consistent at 23.4% and 22.7% for the six months ended June 30, 1997 and 1996, respectively. INTEREST EXPENSE Net interest income was $238,100 for the three months ended June 30, 1997 compared to net interest expense of $66,200 for the same period in 1996. The net interest income is due to the Company's investment earnings on proceeds from the issuance of Common Stock in May, 1997 INCOME TAXES The Company's effective income tax rate was 38% for the six months ended June 30, 1997 compared to 29.2% for the same period in 1996. Page 9 10 NET INCOME The Company had net income of $2,310,600 for the six months ended June 30, 1997 compared to $151,700 for the same period in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations was $4,585,000 and $631,300 for the six months ended June 30, 1997 and 1996, respectively. The Company's capital expenditures of $3,380,000 and $2,757,400 for the six months ended 1997 and 1996, respectively, were primarily attributable to the acquisition of computer equipment for DBT. The Company had working capital at June 30, 1997 of $50,751,800 (including cash and cash equivalents of $52,134,900 compared to $4,117,800 (including cash and cash equivalents of $6,965,600) at December 31, 1996. The increase in working capital at June 30, 1997 is principally due to receipt by the Company of $46.9 million from its issuance of 1,345,000 shares of Common Stock in May, 1997. The Company expects to fund future working capital requirements from its existing cash balances and cash generated from operations. INFLATION The rate of inflation has not had a material impact on the operations of the Company. Moreover, if inflation remains at its recent levels, it is not expected to have a material impact on the operations of the Company for the foreseeable future. NEW ACCOUNTING PRONOUNCEMENT The Company will adopt the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128), Earnings Per Share, in the fourth quarter of 1997. The effects of adopting SFAS No. 128 will not be material in relation to the Company's financial statements. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Information contained above with respect to the Company's investment in its computer facilities and the expansion of its databases, and other statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding expected future events and financial results is forward-looking and subject to risks and uncertainties. Those statements are forward-looking statements within the meaning of Section 31E of the Securities Exchange Act of 1934. The following important factors could affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements: (i) the ability to manage DBT's rapid expansion, (ii) protecting DBT's proprietary technology, (iii) impact of future government regulation on the availability of public records, and (iv) the extent, timing and success of competition from other database providers. Page 10 11 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None to report. ITEM 2. CHANGES IN SECURITIES None to report. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None to report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS At the Annual Meeting of Shareholders for the Company held on May 22, 1997, the shareholders took the following action with respect to the following three matters which were the only matters submitted to a vote of the shareholders: (A) Elected three Class I directors consisting of those persons listed below. The number of votes for and votes withheld from each nominee for director are set forth opposite each director's name. NOMINEE FOR TERM TOTAL VOTE FOR TOTAL VOTE WITHHELD FROM EXPIRING IN 2000 EACH DIRECTOR EACH DIRECTOR ---------------- ------------- ------------------------ Kenneth G. Langone 7,111,241 30,098 Eugene L. Step 7,111,046 30,293 Sari Zalcberg 7,111,061 30,278 Messrs. Charles Asher, Frank Borman and Jack Hight continued as Class II directors whose term expires at the Annual Meeting of Shareholders to be held in 1998. Messrs. Hank Asher, Gary E. Erlbaum and Thomas Simpson continued as Class III directors whose term expires at the Annual Meeting of Shareholders to be held in 1999. (B) Approved a proposed amendment to the Company's Amended and Restated Stock Option Plan to increase the number of authorized shares from 900,000 to 1,500,000 shares available for issuance under the Amended and Restated Stock Option Plan. The vote on this amendment was as follows: FOR 5,977,692 AGAINST 35,764 ABSTAIN 2,269 BROKER NON-VOTES 1,125,614 (C) Ratified the selection of Deloitte & Touche LLP as the independent public accountants of the Company for the fiscal year ending December 31, 1997. The vote on this matter was as follows: FOR 7,137,693 AGAINST 2,308 ABSTAIN 1,338 BROKER NON-VOTES 0 Page 11 12 ITEM 5. OTHER INFORMATION None to report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1* Financial Data Schedule - ------------ * Filed herewith. Page 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DBT ONLINE, INC. /s/ TIMOTHY M. LEONARD -------------------------------------------- TIMOTHY M. LEONARD Vice President, Finance, Treasurer and Chief Financial Officer (Duly authorized officer and chief financial officer) Date: August 11, 1997 Page 13