1
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13333
DBT ONLINE, INC.
Exact Name Of Registrant As Specified In Its Charter
PENNSYLVANIA 85-0439411
(STATE OR OTHER JURISDICTION 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. [X]
As of March 16, 1998, the aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant was $ 288,235,450.
As of March 16, 1998, the number of outstanding shares of Common Stock,
par value $.10 per share, of the Registrant was 18,461,231.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III is incorporated by reference to
portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 1997 fiscal year.
2
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
Executive Officers of the Registrant 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 15
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 39
Signatures 44
This Report contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1934, that address, among other
things, 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 the Report generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including without limitation matters set forth in the Report generally.
i
3
PART I
ITEM 1. BUSINESS
The Company is a holding company with businesses that serve the
electronic information and patent enforcement industries. Its electronic
information businesses are on-line providers of integrated database services and
related reports primarily to law enforcement and other governmental agencies,
law firms, insurance companies and licensed investigation companies. Its patent
enforcement business is engaged in the exploitation and enforcement of two laser
patents and generates its revenues through patent royalties.
ELECTRONIC INFORMATION BUSINESS
The Company operates in the electronic information industry through two
subsidiaries, Database Technologies, Inc. and The Information Connectivity
Group, Inc. that comprise the Electronic Information Group (EIG). The EIG is a
national provider of on-line integrated database services and related reports to
law enforcement and other governmental agencies, law firms, insurance companies
and licensed investigation companies. The EIG has developed proprietary software
which contains unique algorithms and utilizes advanced microprocessor-based
technology to locate, cross reference and retrieve public records from multiple
data sources. The EIG allows its restricted customer base to access its system
from desktop computers and generate reports which are delivered in an organized,
comprehensive and easy to read format. The system simultaneously accesses over
1,000 data sources containing billions of records as if they were part of a
single database in preparing the computer-generated reports.
DATA SOURCES
Data is acquired from both governmental and commercial sources and then
formatted for use with EIG products. The acquisition is structured as a
purchase, an acquisition of a site license or at a variable cost based on
access. In the case of a purchase or site license, additional costs, payable to
the supplier of such information, are not generally incurred as customers access
the database. In the case of acquisitions of real-time information, variable
costs are incurred and are charged to customers at a variable rate based upon
usage by the customer.
PRODUCTS
AUTOTRACK PLUS(SM). AutoTrack Plus, EIG's premier product, provides
on-line access to billions of national, state and county public records, 24
hours a day, 7 days a week. Users are able to search a particular database and
then cross-reference other databases within AutoTrack Plus in order to expand
the information available. Available search information includes, but is not
limited to, current and past addresses, telephone numbers, neighbors and
associates, as well as professional licenses, driving histories, business
profile reports, real estate, vehicles and other assets. Users are able to
undertake a detailed search of all relevant data based on a limited amount of
information.
AutoTrack Plus is an aggregation of numerous products; some of the
larger, more frequently accessed products are:
FACES OF THE NATION(R). Faces of the Nation contains information on
individuals throughout the United States. With limited information,
users can access current and previous addresses, neighbors, date of
birth and other information for millions of individuals. Although the
scope of this database is national, some individuals in the United
States may not be included.
CORPORATIONS OF THE NATION. Corporations of the Nation contains
information on active and inactive businesses based on secretary of
state filings in 43 states
1
4
including officers, directors, registered agents, corporate status and
federal employment identification numbers. Searches can be performed
through the use of names, addresses, federal employer identification
numbers and corporation numbers.
PROPERTIES OF THE NATION. Properties of the Nation contains information
on real property in 42 states and the U.S. Virgin Islands. Users can
receive information on situs and mailing address, parcel number,
assessed values, recent and prior sales prices and property narratives
as well as other information related to the property.
VEHICLES OF THE NATION(R). Vehicles of the Nation contains information
on vehicle registrations in 32 states including owner's name and
address, description, title information, vehicle identification number
(VIN), lienholder information and historical data. Searches can be
based on any combination of the vehicle's license tag, model and
description, zip code, VIN, owner name, address and county.
DRIVERS OF THE NATION(R). Drivers of the Nation contains information on
drivers' licenses issued in 22 states and can be searched using a
combination of name, drivers' license number, address, date of birth
and zip code.
LIENS/JUDGMENTS/BANKRUPTCIES. Liens/Judgments/Bankruptcies contains
information on business and consumer bankruptcies in all 50 states.
Users can also locate data in 31 states relating to federal and state
tax liens and civil judgments.
UCC'S OF THE NATION. UCC's of the Nation contains UCC lien filing
information for 44 states. Users can search by debtor name, secured
party name, address, state and filing number and receive records on
which secretary of state office they are from, date filed, action,
debtor, secured party, assignee, plaintiff and collateral.
AutoTrack Plus also includes databases from a number of states with
the broadest selection of state databases for Florida, Texas, New York and
California. The most substantial individual state data in AutoTrack Plus are
available for individuals, corporations and assets in Florida. Florida databases
provide information on drivers' licenses, vehicles, boats, worker's compensation
claims, accident reports, trademarks, concealed weapons permits, professional
licenses, UCC lien filings, corporations, real estate and much more specialized
information. Users can access data ranging from most recent property sales
values to driving histories and can locate information on an individual's
Florida vehicles and vessels, real property, any possible Florida corporate
affiliations, Florida professional licenses, known addresses, marriages and
divorces.
Other individual state data available in AutoTrack Plus for various
states includes citizen profiles, professional licenses, vehicle and vessel
registrations, drivers' licenses, marriages, secretary of state filings and
other specialized data. These state databases utilize the same search methods as
the national databases and users can combine searches of various state and
national databases.
Comprehensive and dossier reports allow users to efficiently and
cost-effectively gather all the relevant information available in AutoTrack Plus
on the subject of their search in a clear and convenient format. These reports,
which can be either national or statewide in their scope, eliminate the user's
need for further searches and provide the most complete amount of information in
the shortest time.
SOS+ allows users to order public records in a batch mode or to access
AutoTrack Plus on-line in an inter-active session.
2
5
DATACASE. DataCase provides information on New York Supreme Court civil
cases from twelve New York City metropolitan area counties and Erie County, as
well as judgment, docket and lien information for the New York City boroughs.
Users also have access to the New York State Attorney registration information
and New York County Clerk records. DataCase, allows users to monitor the status
of pending cases and current case activity in the New York Unified Court System
("NYUCS"), and access both motion calendars and appearance calendars to assist
in scheduling and planning. DataCase allows the user to discover the litigation
histories of parties, uncover litigation patterns and practices of individuals
and companies and determine which law firms and state justices have been
involved in particular litigation. In addition, DataCase allows users to search
for data or specific court judgments and liens in the New York City area.
Searches can be performed by case name, law firm, specific county, defendant,
plaintiff or other information.
RESEARCH AND DEVELOPMENT
The EIG's research and development efforts include utilizing the newest
and most advanced microprocessor-based technologies to upgrade its existing
computer infrastructure. As of December 1997, the EIG maintained over 16.0
terabytes of online data storage, which is continually being expanded.
The prominent advantages of the EIG's open architecture mass storage
file systems, which the EIG continues to enhance, are large file size, fast
index retrieval and real-time redundant fault tolerances, as well as the ability
to link dissimilar data elements through intelligent indexing. Distributed
processing in an open architecture environment and multi-tiered client server
methodology afford the EIG the ability to seamlessly address multiple file types
and utilize idle processor resources across the EIG system infrastructure.
The EIG focuses additional research and development efforts on EIG
delivery methods and on enhancing its products and providing new products and
capabilities to its customers. The EIG is currently developing and testing its
internet interface for users with high security requirements, particularly law
enforcement. The EIG is also currently developing, and expects to introduce
during 1998, an intranet HTML-based delivery method as an alternative to its
DOS-based delivery methods. See "Products."
3
6
CUSTOMERS
EIG has increased its customer base rapidly over the last three years,
from approximately 1,000 active customers in December 1994 to approximately
10,000 active customers in December 1997.
Initially, EIG's products were used primarily by insurance companies
to investigate claims and later expanded to law enforcement agencies and
licensed investigation firms. Currently, the products are provided to law
enforcement and other governmental agencies, licensed investigation firms, law
firms, insurance companies and other qualified entities. The EIG reserves the
right to refuse, or withdraw without notice, access to its products and has
established procedures designed to restrict access to its system and certain
products to qualified individuals. As of December 31, 1997, the Company had
approximately 20 employees dedicated to receiving phone calls from potential
customers' accounts, processing orders and verifying the credentials and
references of each potential customer by reviewing professional licenses, credit
reports, references and other relevant credentials in order to verify the
customer and its intended use of information. Once an application has been
approved, the customer signs a subscription agreement which provides the terms
and conditions governing use of and access to the EIG's products. A standard
subscription agreement includes a disclaimer of any warranties on the data and
indemnification of the EIG for liabilities resulting from the customer's use of
the data.
Once a customer has been approved, the EIG delivers its software with
instructions to call for a password and assistance on installation. A technical
support staff of approximately 40 people provides customers with any needed
assistance on an on-going basis, without charge. This service is avilable 24
hours a day, 7 days a week, 52 weeks a year.
The EIG has implemented a pricing plan that seeks to attract new
subscribers and to increase usage. The primary component of the EIG pricing
structure is a per-minute connection fee. Users access the database by calling a
toll free number by modem from their computers. The per-minute fee currently
ranges from $.50 to $1.50 per minute. The EIG does not currently charge an
installation or fixed monthly fee to its customers.
The EIG is increasing its participation in key trade shows, advertising
in a wider range of trade journals and publications, and instituting several
direct mail campaigns targeted at specific market segments.
GOVERNMENT REGULATION
Regulation of access to information for public usage varies from state
to state. Therefore, the amount of information available in particular states
may vary. In Florida and Texas, the two states in which the EIG does the most
significant amount of its business, access to records is relatively
unrestricted. In these states, all government records are specifically made
public by law unless excluded by a specific statutory exception. Such exceptions
exist primarily with respect to some criminal history information, which, when
an exception is applicable, generally may only be provided to law enforcement
agencies for specific purposes. The EIG cannot predict whether the degree of
regulation in any particular state will change, or whether the federal
government will implement any regulations with respect to access to specific
information.
INFORMATION ACCESS ISSUES
Database Technologies, Inc. together with 13 other leading information
industry companies, formed the Individual Reference Services Group ("IRSG")
which in December, 1997 adopted self-regulatory principles governing the
dissemination and use of data that help identify, verify or locate individuals.
In order to develop a set of principles that balance
4
7
legitimate privacy concerns and the need for access to personal information,
particularly to facilitate law enforcement and combat fraud, the IRSG worked
closely with the Federal Trade Commission, which issued a report to Congress
commending the IRSG for its self-regulatory efforts. The principles adapted by
the IRSG members impose significant restrictions on the access to and
distribution of non-public information. Furthermore, IRSG members have agreed
that information from non-public sources about persons identifiable as minors
will not be made available to either the public or commercial and professional
markets. Lastly, such principles provide for enforcement mechanisms including
yearly audits by qualified independent auditors.
5
8
PATENT ENFORCEMENT BUSINESS
The Company operates in the patent enforcement business through its
Patlex subsidiary which has been engaged in the patent exploitation and
enforcement business since late 1979. Patlex owns a 64% interest in the royalty
income from, and a 42.86% ownership interest in, the "Laser Patents" which
derive from patent applications originally filed by Dr. Gordon Gould in 1959.
Patlex is also the exclusive licensing agent for the Laser Patents. The patent
enforcement business includes the identification of laser products and laser
applications which infringe the Laser Patents and the execution of licensing
agreements through normal commercial negotiations or pursuant to settlements of
litigation brought against infringers of the Laser Patents.
LASER PATENTS. 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 will lose 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.
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. The Company believes that the major period of litigating the
validity and enforceability of the Laser Patents has passed. The "major period"
refers to the period of time (from October 11, 1977, the issue date of the
Optically Pumped Laser Patent, through 1988) in which the most significant
number of lawsuits were prosecuted representing the greatest challenge to the
validity and scope of the Laser Patents. However, the Laser Patents may be
subject to subsequent challenges. There can be no assurance that, if challenged,
Patlex would prevail in any subsequent proceedings or that such challenges may
not entail substantial litigation expenses. If there is an unappealable
successful challenge against the validity of the Gas Discharge Laser Patent, the
impact would be materially adverse to Patlex. See "Item 3. -- Legal
Proceedings."
There were no expenses relating to litigation of the Laser Patents
during 1997.
PATENT LICENSING AGREEMENTS. Patlex is the exclusive licensing agent
for the Laser Patents. As licensing agent, Patlex actively pursues its patent
licenses, which require manufacturers and users who exploit the inventions
claimed in the Laser Patents to report and pay royalties to Patlex. Patlex then
distributes these royalties among itself and the other parties holding interests
in the royalty income. Patlex actively monitors the laser industry to identify
infringers and new laser applications which infringe the Laser Patents. The
agreements into which Patlex enters generally fall into three categories: (i)
license agreements with manufacturers of lasers or laser systems that use the
inventions claimed in the Laser Patents; (ii) license agreements with users of
lasers or laser systems that use the inventions claimed in the Laser Patents;
and (iii) settlement agreements which require a payment of a specific sum of
money for past infringement of certain of the Laser Patents but do not include a
grant of a license to make, use or sell any product that utilizes the inventions
claimed in the Laser Patents. As of December 31, 1997, Patlex had agreements
with a total of 219 companies, including users and manufacturers representing a
cross-section of industries in the United States. Of such agreements, 182 were
licensing agreements with manufacturers who had an obligation to report and pay
royalties on the sale of lasers or laser systems which use the Laser Patents.
The Company believes the majority of the commercial laser
6
9
manufacturers in the United States, as well as a majority of manufacturers
importing lasers into the United States, have been licensed.
The market for Patlex's patent license agreements under the Laser
Patents depends on the commercial laser industry. The number of license
agreements fluctuates with the 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.
The agreements with both manufacturers and users generally provide for
one or more "lump sum" payments in consideration of nonexclusive licenses for
certain applications of all of the Laser Patents and a release of all claims for
damages from past infringements. Substantially all of the licenses also provide
for future royalty payments if the licensee engages in the manufacture or sale
of lasers subject to the Laser Patents. In contrast, substantially all of the
licenses with licensees that use, but do not manufacture or sell products
covered by, the Laser Patents, provide only for a one-time lump sum payment for
past infringement. As a result of licensing efforts to date, royalties from past
infringements are expected to be minimal in the future. The two largest
licensees accounted for 11.8% and 11.3% of the Laser Patent royalties during the
fiscal year ended December 31, 1997. The Company believes that in the event
either one or both of these licensees ceases manufacturing licensed laser
products, the impact on Patlex's revenues would be temporary, as it is
anticipated that other manufacturers would satisfy the overall demand for such
licensed laser products.
COMPETITION
The electronic information industry is competitive and characterized by
rapid technological change and the entry into the field of large and
well-capitalized companies as well as smaller competitors. In a broad sense, the
Company competes or may compete directly and indirectly internationally with
large, well-established information providers. These competitors offer a wide
variety of information services ranging from news to legal databases which allow
them to offer their product to larger customer bases and to more easily attract
customers to their products.
As exclusive licensing agent of the Laser Patents, Patlex does not
encounter any competition in licensing manufacturers and users of the technology
covered by the Laser Patents. Although the Company believes the laser technology
covered by the Laser Patents to be state of the art, any advance in technology
which would render one or more of the Laser Patents obsolete could have a
material adverse effect on Patlex's future patent royalty revenue.
EMPLOYEES
At December 31, 1997, the Company had 215 full-time employees. The
Company considers its relationships with its employees to be good. None of the
Company's employees are covered by collective bargaining agreements.
7
10
ITEM 2. PROPERTIES
The Company's Electronic Information Group currently leases
approximately 42,000 square feet of office space in Pompano Beach, Florida to
conduct its business. In January, 1998, the Company's Electronic Information
Group executed a lease for approximately 150,000 square feet in Boca Raton,
Florida to provide for EIG's growth. The Company's patent enforcement business
currently leases approximately 3,000 square feet in Las Vegas, Nevada. The
Company believes that these facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
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
material litigation, or, to its knowledge, is any material litigation currently
threatened.
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.
8
11
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, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Frank Borman 70 Chairman of the Board of Directors
Charles A. Lieppe 53 President and Chief Executive Officer
and Director
George A. Bruder, Jr. 42 Senior Vice President, Operations
Thomas J. Hoolihan 41 Vice President and General Counsel
Timothy M. Leonard 39 Vice President, Finance, Treasurer and
Chief Financial Officer
J. Henry Muetterties 43 Vice President and Secretary
Mr. Borman has been Chairman of the Company since 1988. From August
1988 until August 1996, he served as Chief Executive Officer of the Company and
as its President from February 1989 until August 1996. Mr. Borman served as a
director of AutoFinance Group, Inc. ("AFG") from 1990 until September 27, 1995
and served as Chairman of AFG's Board of Directors from December 1992 until
September 27, 1995. Mr. Borman currently serves as a member of the Board of
Directors of The Home Depot, Inc., Thermo Instruments Systems, American
Superconductor Corporation and is also a member of the Board of Trustees of the
National Geographic Society.
Mr. Lieppe was elected President and Chief Executive Officer of the
Company in August, 1997 and a member of the Board of Directors. From April, 1996
through February, 1997, Mr. Lieppe was President and Chief Executive Officer of
Nabisco International. From 1991 through November, 1995, Mr. Lieppe was
President and Chief Executive Officer of Berol Corporation.
Mr. Bruder 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.
Mr. Hoolihan was elected Vice President and General Counsel of the
Company in November, 1997. From January, 1989 until November, 1997, Mr. Hoolihan
served in various capacities at Unilever United States, Inc. ("UNUS"), most
recently as Associate General Counsel - Corporate and Assistant Secretary of
UNUS.
Mr. Leonard was elected Vice President, Finance, Treasurer and Chief
Financial Officer of the Company on February 18, 1997. From June 1994 until
January 1997, he served in various capacities for GMIS Inc., including Director
of Finance from June 1994 through May 1995 and Vice President, Finance and Chief
Financial Officer from May 1995 through January 1997. Mr. Leonard worked for
Ernst & Young from 1981 through June 1994.
Mr. Muetterties was elected Vice President and Secretary on August 20,
1996. 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.
9
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until March 17, 1996, the Patlex Common Stock was listed on the Nasdaq
Small-Cap Market under the symbol "PTLX." The Patlex Common Stock began trading
on the Nasdaq National Market on March 18, 1996 under the symbol "PTLX." 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 and/or Patlex's Common Stock, for the indicated quarters of
1996 and 1997, as reported on The Nasdaq Stock Market and the New York Stock
Exchange.
HIGH LOW
1996
First Quarter $23.75 $ 6.63
Second Quarter 27.75 15.13
Third Quarter 24.00 17.88
Fourth Quarter 21.25 11.25
1997
First Quarter $22.88 $15.00
Second Quarter 29.00 17.78
Third Quarter 32.88 21.50
Fourth Quarter 34.75 24.75
The number of record holders of the Company's Common Stock as of March
16, 1998 was 522. 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.
10
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for the
fiscal years ended December 31, 1997, 1996, 1995, 1994 and 1993 have been
derived from the audited financial statements of the Company. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited consolidated
financial statements of the Company, and notes thereto, included elsewhere in
this Report.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997(2) 1996(1) 1995 1994 1993
------- ------- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues $ 30,876,100 $ 16,321,300 $ 8,076,300 $ 2,751,100 $ 477,400
Patent royalties 6,669,700 2,382,000 -- -- --
------------ ------------ ------------ ------------ ------------
Total revenues and
royalties 37,545,800 18,703,300 8,076,300 2,751,100 477,400
Cost of revenues 15,376,200 8,996,300 3,372,300 856,200 180,000
Selling and promotion 3,467,100 1,930,400 1,025,700 287,100 7,900
Research and development 2,364,000 2,052,300 1,017,000 552,700 120,000
General and administrative 8,716,800 4,814,800 1,908,100 609,900 175,400
Loss on IRB transaction -- -- 1,660,100 -- --
------------ ------------ ------------ ------------ ------------
Total expenses 29,924,100 17,793,800 8,983,200 2,305,900 483,300
------------ ------------ ------------ ------------ ------------
Income (loss) from
operations 7,621,700 909,500 (906,900) 445,200 (5,900)
Interest (expense)
income, net 1,467,400 (159,100) (76,100) (15,400) 82,900
------------ ------------ ------------ ------------ ------------
Income (loss) before
income taxes 9,089,100 750,400 (983,000) 429,800 77,000
Provision for income taxes 3,090,900 231,000 208,700 -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 5,998,200 $ 519,400 $ (1,191,700) $ 429,800 $ 77,000
============ ============ ============ ============ ============
Basic net income (loss) per
share $ 0.35 $ 0.04 $ (0.13) $ 0.05 $ .01
============ ============ ============ ============ ============
Basic weighted average shares
outstanding 17,135,600 12,128,400 8,835,600 7,875,200 6,890,900
============ ============ ============ ============ ============
Diluted net income (loss) per
share $ 0.33 $ 0.04 $ (0.13) $ 0.05 $ 0.01
============ ============ ============ ============ ============
Diluted weighted average shares
outstanding 18,015,100 12,354,600 8,835,600 7,875,200 6,890,900
============ ============ ============ ============ ============
AS OF DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital
(Deficit) $ 53,482,600 $ 4,207,500 $ 508,500 $ (4,400) $(36,000)
Total assets 84,608,500 29,556,000 6,557,200 1,524,500 260,800
Total debt 2,981,300 2,641,600 684,700 11,000
Stockholders' equity 75,647,100 18,230,500 2,598,400 552,300 138,500
(1) The 1996 Statement of Operations includes the results of Patlex from
August 20, 1996 through December 31, 1996.
(2) The 1997 Statement of Operations includes the results of The
Information Connectivity Group from August 1, 1997 through December 31,
1997.
11
14
ITEM 7. 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, and other financial
information included elsewhere in this Report. This Report 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 Report.
OVERVIEW OF THE COMPANY
The Company is a holding company with businesses that serve the
electronic information and patent enforcement industries. Its electronic
information businesses are on-line providers of integrated database services and
related reports primarily to law enforcement and other government agencies, law
firms, insurance companies and licensed investigation companies. Its patent
enforcement business is engaged in the exploitation and enforcement of two laser
patents and generates its revenues through patent royalties.
ELECTRONIC INFORMATION GROUP
The Electronic Information Group's ("EIG") revenues increased 89% to
$30,876,100 for the year ended December 31, 1997 from $16,321,300 for 1996.
Without regard to acquisitions, EIG revenues increased 85%.
The increase in EIG's revenues was attributable to an increase in the
number of active customers and the number of minutes users spent on-line. During
1997, active customers (defined as customers accessing the system in a given
month) increased 69% to approximately 10,000 as of December 31, 1997 from 5,900
as of December 31, 1996. During 1996 active customers increased 90% to 5,900
active customers from 3,100 active customers as of December 31, 1995.
During the year ended December 31, 1997, total system usage was 20.6
million minutes, up from 11.5 million minutes in 1996 and 5.8 million minutes in
1995, an increase of 79% and 98%, respectively. Revenues from on-line charges in
1997 were $24,513,900, compared to $15,397,400 in 1996, and $7,259,300 in 1995,
an increase of 59% in 1997 and 112% in 1996. In 1997, EIG's average revenue
per active customer was approximately $3,100. By comparison in 1996 and 1995,
the average revenue per average active customer was $3,000 and $3,500,
respectively.
EIG's cost of revenues increased 63% to $13,677,800 in 1997 from
$8,374,300 in 1996. As a percentage of EIG revenues, cost of revenues decreased
to 44.3% from 51.3% in 1996. In addition to the acquisition of ICON, the dollar
increase in the Company's cost of revenues was due primarily to increases in
both purchased data costs and depreciation expense as EIG continued to invest
both in its computer facilities and in the expansion of its databases. The
Company expects this trend to continue.
EIG's cost of revenues increased 148% to $8,374,300 in 1996 from
$3,372,300 in 1995 and increased to 51.3% as a percentage of total revenues from
41.8% in 1995. The increase was due primarily to increases in both purchased
data costs and depreciation expense.
EIG's selling and promotion expenses increased 80% to $3,467,100 in
1997 from $1,930,400 in 1996. The increase was primarily due to the acquisition
of ICON and increases in payroll, advertising and trade show expenses. As a
percentage of EIG revenues, selling and promotion decreased to 11.2% in 1997
from 11.8% in 1996.
12
15
EIG's selling and promotion expenses increased 88% to $1,930,400 in
1996 from $1,025,700 in 1995. The increase was primarily due to increases in
payroll and trade show expenses. As a percentage of total revenues, selling and
promotion decreased to 11.8% in 1996 from 12.7% in 1995.
The EIG's research and development expenses increased 15% to
$2,364,000 in 1997 from $2,052,300 in 1996. The EIG's research and development
expenses increased 102% in 1996 to $2,052,300 from $1,017,000 in 1995. These
increases were caused by increases in payroll and related expenses. As a
percentage of EIG's total revenues, research and development expenses decreased
to 7.7% in 1997 from 12.6% in 1996 and 12.6% in 1995.
EIG's general and administrative expenses increased 75% in 1997 to
$7,673,700 from $4,395,800 in 1996. EIG's general and administrative expenses
increased 130% in 1996 to $4,395,800 from $1,908,100 in 1995. The increases were
due to increases in rent, public company expenses, goodwill amortization and
payroll and related expenses. As a percentage of EIG's total revenues, general
and administrative expenses decreased to 24.9% in 1997 from 26.9% in 1996 and
23.6% in 1995.
PATENT ENFORCEMENT GROUP
Revenues of the Patent Enforcement Group ("PEG") increased 180% to
$6,669,700 for the year ended December 31, 1997 compared to $2,382,000 for 1996.
The 1996 revenues of PEG are included from August, 1996, the date of its
acquisition by the Company. PEG's cost of revenues increased to $1,698,100 from
$622,000 for the period from August, 1996 through December 31, 1996 and consists
solely of the amortization of its patents. The PEG's general and administrative
expenses increased to $1,043,100 for the year ended December 31, 1997 from
$419,000 for the period from August, 1996 through December 31, 1996.
OPERATING PROFIT
The EIG contributed $3.7 million in operating profit for the year ended
December 31, 1997 compared to an operating loss of $432,000 for 1996. PEG
contributed $3.9 million in operating profit for the year ended December 31,
1997 compared to $1.3 million for 1996.
On a consolidated basis, the Company's operating profit (loss) was
$7,621,700 for the year ended December 31, 1997 compared to $909,500 and
($906,900) for 1996 and 1995, respectively.
INTEREST INCOME (EXPENSE)
Net interest income was $1,467,400 in 1997 compared to net interest
expense of $159,100 and $76,100 in 1996 and 1995, respectively. 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 34% in 1997 compared to 32%
in 1996 and 21% in 1995. The 1997 effective rate was favorably impacted by a
research and development tax credit. The 1996 effective rate was favorably,
impacted by a research and development tax credit, offset by non-deductible
merger expenses and state income taxes. The 1995 effective tax rate is lower due
to the Company being treated as an S Corporation for part of that year.
13
16
LOSS ON IRB TRANSACTION
The Company's 1995 consolidated statements of operations reflects a
loss of $1,660,100 corresponding to the costs incurred by DBT in a transaction
with International Research Bureau, Inc. ("IRB"). Effective July 1, 1995,
Database Technologies, Inc. ("DBT") purchased for cash and stock all of the
outstanding shares of IRB's common stock. Subsequent to the acquisition,
management of DBT re-evaluated the future potential of IRB's core document
retrieval business and concluded that IRB's assets, other than its on-line
customer list, had no future value to DBT. Factors which led DBT's management to
this evaluation included the conclusions that DBT's technology was superior to
IRB's, and that IRB's data was duplicative of data which DBT already possessed.
On December 13, 1995, IRB's shares were transferred back to the original owners
of IRB in exchange for DBT common stock. Because DBT's ownership of IRB was
temporary, DBT accounted for its investment in IRB using the equity method.
As a result of these transactions, DBT acquired IRB's customer list for
its on-line business and was granted a covenant not to compete. Management's
estimate of the fair value of the acquired assets, totaling $198,600, was
recorded on DBT's balance sheet. The costs associated with this transaction
included a cash payment of $1,000,000 and the issuance of DBT common stock
valued at $485,700 (after accounting for the returned shares). The Company's
loss of $1,660,100 was calculated after writing down the Company's investment
in IRB and other costs totaling $373,000.
14
17
NET INCOME
In 1997 the Company had net income of $5,998,200 compared to $519,400
in 1996 and a loss of $1,191,700 in 1995. The increase in net income is due to
significant increase in operating profit of the Electronic Information Group,
the full year effect of the PEG business (acquired in August, 1996) and the
investment income generated on the proceeds from the issuance of Common Stock in
May, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operations was $9,031,600 and $1,386,500
in 1997 and 1996, respectively. The Company's capital expenditures of $6,421,100
and $5,300,700 in 1997 and 1996, respectively, were primarily attributable to
the acquisition of computer equipment for EIG. The Company had working capital
at December 31, 1997 of $53,482,600 (including cash and cash equivalents of
$7,689,800) compared to $4,207,500 (including cash and cash equivalents of
$6,965,600) at December 31, 1996. The increase in 1997 was due to the growth of
EIG and issuance of Common Stock in May, 1997.
The Company expects to fund future working capital requirements from
its existing cash and short-term investment balances together with cash
generated from operations. If necessary, other sources of capital available to
the Company may include access to the capital markets and additional bank
borrowings.
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.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company does not believe that it has material exposure to the Year
2000 issue with respect to its own information systems since its existing
systems correctly define the year 2000. The Company intends to conduct an
analysis in 1998 to determine the extent to which its major suppliers' systems
(insofar as they relate to the Company's business) are subject to the Year 2000
issue. The Company is currently unable to predict the extent to which the Year
2000 issue will affect its suppliers, or the extent to which it would be
vulnerable to the suppliers' failure to remediate any Year 2000 issues on a
timely basis. The failure of a major supplier to convert its systems on a timely
basis or a conversion that is incompatible with the Company's systems could have
a material adverse effect on the Company. The Company is not able to estimate
the costs associated with the Year 2000 issue. The modification costs incurred
in connection with Year 2000 compliance will be expensed as incurred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DBT ONLINE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Deloitte & Touche LLP, Independent Auditors 17
Consolidated Balance Sheets at December 31, 1997 and 1996 18
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 19
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 20
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 21
Notes to Consolidated Financial Statements 22
16
19
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. (the
"Company") and subsidiaries as of December 31, 1997 and 1996, 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, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DBT Online, Inc. and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 11, 1998
17
20
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
-------------------
1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,689,800 $ 6,965,600
Accounts receivable, less allowance:
1997 - $330,000; 1996 - $250,000 4,448,800 2,397,600
Short-term investments 44,207,200
Prepaid expenses and other current assets 1,681,300 464,800
Prepaid income taxes 217,300
------------ ------------
Total current assets 58,244,400 9,828,000
Property and equipment, net 9,034,000 6,064,300
Patents, less amortization:
1997 - $2,317,300; 1996 - $622,300 11,525,400 13,220,500
Goodwill, less amortization:
1997 - $344,200 5,463,100
Other assets 341,600 443,200
------------ ------------
TOTAL ASSETS $ 84,608,500 $ 29,556,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 3,766,600 $ 1,975,500
Current portion of long-term debt 1,415,500
Bank line-of-credit 200,000
Due to other patent interest holders 995,200 1,411,300
Income taxes payable 618,200
------------- ------------
Total current liabilities 4,761,800 5,620,500
LONG-TERM DEBT, less current portion 1,365,800
DEFERRED INCOME TAXES 4,199,600 4,339,200
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value, 5,000,000 shares
authorized; no shares issued or outstanding
Common stock, $.10 per value, 40,000,000 shares authorized;
18,388,626 and 15,447,612 shares, issued and outstanding at
December 31, 1997 and 1996, respectively 1,838,900 1,544,800
Additional paid-in capital 68,564,600 17,440,300
Retained earnings(deficit) 5,243,600 (754,600)
------------ ------------
Total stockholders' equity 75,647,100 18,230,500
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 84,608,500 $ 29,556,000
============ ============
See notes to consolidated financial statements.
18
21
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
Revenues $ 30,876,100 $16,321,300 $ 8,076,300
Patent royalties 6,669,700 2,382,000
Total revenues and royalties ------------ ----------- ------------
37,545,800 18,703,300 8,076,300
------------ ----------- ------------
Cost of revenues 15,376,200 8,996,300 3,372,300
Selling and promotion 3,467,100 1,930,400 1,025,700
Research and development 2,364,000 2,052,300 1,017,000
General and administrative 8,716,800 4,814,800 1,908,100
Loss on IRB transaction 1,660,100
------------ ------------ ------------
Total expenses 29,924,100 17,793,800 8,983,200
------------ ------------ ------------
Income (loss) from operations 7,621,700 909,500 (906,900)
Interest income (expense), net 1,467,400 (159,100) (76,100)
------------ ------------ ------------
Income (loss) before income taxes 9,089,100 750,400 (983,000)
Provision for income taxes 3,090,900 231,000 208,700
------------ ------------ ------------
Net income (loss) $ 5,998,200 $ 519,400 $ (1,191,700)
============ ============ ============
Net income (loss) per share (basic) $ 0.35 $ 0.04 $ (0.13)
============ ============ ============
Weighted average shares outstanding (basic) 17,135,600 12,128,400 8,835,600
============ ============ ============
Net income (loss) per share (diluted) $ 0.33 $ 0.04 $ (0.13)
============ ============ ============
Weighted average shares outstanding (diluted) 18,015,100 12,354,600 8,835,600
============ ============ ============
Pro Forma:
Provision for income taxes $ 247,600
============
Net income (loss) $ (1,230,600)
============
Net income (loss) per share (diluted and basic) $ (0.14)
============
See notes to consolidated financial statements.
19
22
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------- ADDITIONAL RETAINED
NUMBER PAID-IN EARNINGS
OF SHARES PAR VALUE CAPITAL (DEFICIT) TOTAL
--------- --------- --------- --------- -----
BALANCE at January 1, 1995 7,875,290 $ 7,800 $ 74,700 $ 469,800 $ 552,300
S Corporation distributions (117,400) (117,400)
Record distribution payable and
other adjustments upon
S Corporation termination 230,700 (434,700) (204,000)
Stock issued for acquisition of
assets, net 385,102 400 485,300 485,700
Issuance of common stock for
cash 1,994,856 2,000 3,071,500 3,073,500
Net loss (1,191,700) (1,191,700)
---------- --------- ---------- ---------- ----------
BALANCE at December 31, 1995 10,255,248 10,200 3,862,200 (1,274,000) 2,598,400
Change in par value 1,015,400 (1,015,400)
Stock issued for acquisition 5,131,702 513,200 14,235,100 14,748,300
Exercise of stock options 60,662 6,000 137,000 143,000
Stock options issued for
services, net of income taxes 221,400 221,400
Net income 519,400 519,400
---------- ---------- ----------- ---------- ----------
BALANCE at December 31, 1996 15,447,612 1,544,800 17,440,300 (754,600) 18,230,500
Exercise of stock options 106,190 10,600 865,300 875,900
Issuance of common stock for
cash 2,690,000 269,000 46,543,000 46,812,000
Stock issued for acquisition 144,824 14,500 3,473,900 3,488,400
Tax benefit of stock options 242,100 242,100
Net income 5,998,200 5,998,200
---------- ---------- ----------- ---------- -----------
BALANCE at December 31, 1997 18,388,626 $1,838,900 $68,564,600 $5,243,600 $75,647,100
========== ========== =========== ========== ===========
See notes to consolidated financial statements.
20
23
DBT ONLINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $5,998,200 $519,400 $(1,191,700)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 5,586,600 3,016,500 941,900
Deferred income taxes (139,600) (536,000) 141,400
Tax benefit of stock options 242,100
Stock options issued for services 355,000
Loss on IRB transaction 1,660,100
Changes in operating assets and
liabilities:
Accounts receivable (1,866,300) (922,000) (789,300)
Prepaid expenses and other current assets (1,193,800) (159,300) (143,900)
Accounts payable and accrued
liabilities 1,656,000 (11,700) 888,400
Due to other patent interest holders (416,100) 120,800
Income taxes (835,500) (996,200)
----------- ----------- -----------
Net cash provided by operating
activities 9,031,600 1,386,500 1,506,900
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchased (6,421,100) (5,300,700) (3,115,600)
IRB transaction (1,373,000)
Cash (used) acquired in acquisition (2,487,300) 8,505,100
Decrease (increase) in other assets 101,600 49,300 (240,900)
Purchase of short-term investments (44,207,200)
----------- ----------- -----------
Net cash (used in) provided by
investing activities (53,014,000) 3,253,700 (4,729,500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 46,812,000 3,073,500
Net change in bank line-of-credit (200,000) 100,000 100,000
Proceeds from exercise of stock options 875,900 143,000
Proceeds from long-term debt borrowings 1,500,000 2,364,000
Repayments on long-term debt (2,781,300) (1,260,300) (507,100)
Repayment of note payable, shareholder
and other 200,000
S Corporation distributions (321,400)
----------- ----------- -----------
Net cash provided by financing
activities 44,706,600 682,700 4,709,000
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 724,200 5,322,900 1,486,400
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 6,965,600 1,642,700 156,300
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,689,800 $ 6,965,600 $ 1,642,700
=========== =========== ===========
See notes to consolidated financial statements.
21
24
DBT ONLINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DBT Online, Inc. (the "Company"), through its Database Technologies, Inc.
("DBT") and The Information Connectivity Group, Inc. ("ICON") subsidiaries is
engaged in the electronic information retrieval industry which provides on-line,
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 the Company 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 five to seven 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 seven 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, which 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. 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.
22
25
RESEARCH AND DEVELOPMENT COSTS - Costs for research and development
activities are expensed as incurred and aggregated $2,364,000,
$2,052,300 and $1,017,000 for years ended December 31, 1997, 1996 and
1995, respectively.
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. The carrying amount of
long-term debt approximates fair value due to its stated interest rate
approximating a market rate.
NET INCOME (LOSS) PER SHARE - Basic net income (loss) per share is
determined by dividing net income (loss) by the weighted average shares
outstanding. Diluted net income (loss) per share is determined by
dividing net income (loss) 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 879,500 and 226,200 in 1997
and 1996, respectively.
RECLASSIFICATIONS - Certain amounts have been reclassified to conform
with the 1997 presentation.
NEW ACCOUNTING PRONOUNCEMENTS - The Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
Earnings per Share, in 1997. In accordance with SFAS No. 128, the
Company has restated all prior-period earnings per share data to
conform with the provisions of this pronouncement.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS No. 130") "Reporting
Comprehensive Income". SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Comprehensive income is defined as the change in the stockholders'
equity during a period exclusive of stockholder investments and
distributions to stockholders. For the Company, in addition to net
income (loss), comprehensive income includes changes in net unrealized
gains (losses) on "available for sale" marketable securities. In June
1997 the Financial Accounting Standards Board also issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131") "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
requires disclosure in the Company's consolidated financial statements
(including quarterly condensed consolidated financial statements) of
financial and descriptive information by operating segments as used
internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No's. 130 and 131 are effective
for the Company's 1998 fiscal year (exclusive of the quarterly segment
data under SFAS No. 131 which is effective the following fiscal year)
and requires comparative information for earlier periods presented. The
Company has not yet determined the effect, if any, that the application
of the provisions of SFAS No's. 130 and 131 may have on the Company's
reported financial position and results of operations.
23
26
2. ACQUISITIONS
On August 1, 1997, the Company acquired all of the stock of ICON. The
consideration paid included both cash of $2.5 million and common stock
of the Company valued at $3.5 million. For accounting purposes, the
transaction was treated as a purchase. The Company recorded goodwill of
approximately $5.8 million in connection with this acquisition which is
being amortized over seven years. Had the acquisition of ICON been
consummated as of January 1, 1996, the pro forma results of operations
for the Company would not have been materially affected.
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 Database Technologies, Inc.
Pursuant to the terms of the merger and reorganization, the former
shareholders of Patlex owned approximately 33.2% of the Company and the
former owners of Database Technologies, Inc. owned 66.8% of the
Company, based on the shares and options outstanding at August 20,
1996. For accounting purposes, this transaction was treated as a
purchase of Patlex with DBT as the accounting acquirer.
The purchase price was determined based on the 5,895,428 shares of
Company common stock and stock options issued (based on the number of
shares of Patlex common stock and options to purchase Patlex common
stock outstanding immediately prior to the merger, as prescribed by the
merger agreement) which were valued at $14,060,000 together with
transaction costs of $689,000 and was allocated to Patlex's assets and
liabilities based upon their estimated fair values at August 20, 1996.
A summary of such allocation follows:
Current Assets, including cash of $8,505,100 $ 8,966,000
Investment in Patents 13,844,000
Other Assets 27,000
Current Liabilities (3,715,000)
Other Liabilities (4,373,000)
-----------
Total purchase price $14,749,000
===========
As a consequence of this transaction, the consolidated financial
statements include the results of operations for Patlex for the period
from August 20, 1996, forward.
If the merger and reorganization had been completed on January 1, 1995,
pro forma results for the years ended December 31, 1996 and 1995 would
be as follows (the pro forma information is not necessarily indicative
of the consolidated results of operations that would have occurred had
the merger and reorganization been completed as of January 1, 1995):
PRO FORMA (UNAUDITED)
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
---- ----
Revenue $24,017,300 $15,094,300
Net Income $ 2,688,200 $ 801,300
Net Income Per Share (basic and diluted) $ 0.17 $ 0.06
24
27
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
AT DECEMBER 31,
-----------------------
1997 1996
---- ----
Computer equipment $15,209,300 $ 9,041,800
Office furniture and equipment 795,500 442,500
Leasehold improvements 277,300 169,500
----------- -----------
Total cost 16,282,100 9,653,800
Less: Accumulated depreciation (7,248,100) (3,589,500)
----------- -----------
Property and equipment, net $ 9,034,000 $ 6,064,300
=========== ===========
Depreciation expense was $3,547,300, $2,394,200 and $885,200 for the
years ended December 31, 1997, 1996 and 1995, respectively.
25
28
4. SHORT-TERM INVESTMENTS
At December 31, 1997, short-term investments consist of the following:
State and municipal bonds $37,026,500
(including accrued interest of $544,300)
Certificates of deposit 7,180,700
-----------
(including accrued interest of $85,700)
Total $44,207,200
===========
STATE AND MUNICIPAL BONDS - The Company has investments in state and
municipal bonds that are classified as available-for-sale. At
December 31, 1997, the Company's cost of such securities approximated
market value and there were approximately $66,000 of gross unrealized
gains and losses with respect to such securities. During 1997 there
were no sales of any of the Company's state and municipal bonds. At
December 31, 1997, these investments have contractual maturities as
follows:
Within one year $ 12,829,900
After one through five years 17,915,100
After five through ten years 1,509,700
After ten years 4,227,500
-------------
$ 36,482,200
=============
Certain of the Company's state and municipal bonds are concentrated in
specific geographic regions. The states in which a significant
component of these investments resided at December 31, 1997 were as
follows:
Florida $13,725,500
Texas 6,393,600
Washington 3,314,700
California 2,934,200
Others 10,114,200
-----------
$36,482,200
===========
CERTIFICATES OF DEPOSIT - At December 31, 1997, the Company had placed
$7.1 million with an individual who brokers certificates of deposit.
The broker operates his trust function in the form of a sole
proprietorship and sources his certificates of deposit through small
financial institutions and other certificate of deposit brokers. The
nature of this arrangement could cause the Company to be placed in the
position of an unsecured creditor with respect to this individual,
which situation creates a significant concentration of credit risk. The
Company's agreements with this broker call for the maturity of these
arrangements on various dates through May 6, 1998. Subsequent to
December 31, 1997, the Company began to allow its arrangements with
this broker to mature and through March 11, 1998 had received $2.5
million of its original investment.
26
29
5. PATENTS
Patlex owns a 64% income interest in laser patent revenue relating to
certain patents relating to 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.
27
30
6. DEBT
Long-term Debt consists of the following at December 31, 1996:
Note payable to a commercial bank with monthly
principal installments of $7,680 plus interest
at 7.65% at December 31, 1996. The note matures
in November 1997 $ 84,400
Note payable to a commercial bank with monthly
principal installments of $6,944 plus interest
at 7.65% at December 31, 1996. The note matures
in November 1997 76,400
Note payable to a commercial bank with monthly
principal installments of $27,778 plus interest
at 7.74% at December 31, 1996. The note matures
in July 1998 527,800
Note payable to a commercial bank with monthly
principal installments of $41,667 plus interest
at 7.95% at December 31, 1996. The note matures
in June 1999 1,250,000
Note payable to a commercial bank with monthly
principal installments of $35,111 plus interest
at 7.85% at December 31, 1996. The note matures
in December 1998 842,700
----------
Total debt 2,781,300
Less: current portion 1,415,500
----------
Long-term portion $1,365,800
==========
All debt with the commercial bank was personally guaranteed by the
principal shareholder of the Company and secured by substantially all
assets of the Company. In addition, the Company was required to
maintain certain financial ratios and comply with specified covenants.
In January, 1997, the Company paid off all of its outstanding debt.
The Company paid interest of $13,400, $266,700 and $98,800 in 1997,
1996 and 1995, respectively.
28
31
7. STOCKHOLDERS' EQUITY
The Company announced on September 16, 1997, a two-for-one stock split
pursuant to which the Company distributed to each shareholder of record
on September 26, 1997 one share of Common Stock for each share of
Common Stock outstanding. All share and per share amounts have been
restated to give effect to the split.
29
32
8. INCOME TAXES
Significant components of the provision for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
Current:
Federal $2,980,500 $ 667,000 $ 61,000
State 250,000 100,000 6,300
---------- ----------- ----------
3,230,500 767,000 67,300
Deferred:
Federal (121,000) (492,700) (9,300)
State (18,600) (43,300) (4,500)
Deferred tax liability established
July 1, 1995 155,200
----------- ----------- ----------
(139,600) (536,000) 141,400
----------- ----------- ----------
Provision for income taxes $3,090,900 $ 231,000 $ 208,700
=========== =========== ==========
Included in the 1995 provision is $155,200 in deferred income taxes
established resulting from the termination of the S Corporation
election.
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, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax liabilities:
Patents $4,120,900 $4,503,400
Cash basis accounting 66,300 102,400
Purchased data 291,800 102,400
---------- ----------
4,479,000 4,708,200
Deferred tax assets:
Depreciation 90,100 171,500
Research and development tax credits 110,000
IRB loss carry forward 196,000 196,000
Reserves and other 189,300 87,500
---------- ----------
475,400 565,000
Valuation allowance (196,000) (196,000)
---------- ----------
Net deferred income tax liability $4,199,600 $4,339,200
========== ==========
DBT has a capital loss carryover of approximately $700,000 for tax
purposes, which expires in 2000. This loss results from the IRB
transaction. The related deferred tax asset has been completely offset
by a valuation allowance, as it is more likely than not that this asset
will not be realized prior to its expiration.
30
33
The reconciliation of income tax computed at the federal statutory rate
to income tax expense is as follows:
YEAR ENDED
DECEMBER 31,
----------------------
1997 1996 1995
---- ---- ----
Federal statutory rate 34% 34% (34%)
Non deductible merger expenses 7
Tax exempt investment income (1)
Loss on IRB transaction 61
Research and development tax credit (1) (15)
Income taxed as an S corporation through July 1, 1995 (21)
Effect of change in tax status from S corporation 17
State income taxes, net of federal income tax benefit 1 6 (2)
Other 1
---- ---- ----
34% 32% 21%
==== ==== ====
The Company paid income taxes of $3,823,500, $1,809,200 and $16,500 in
1997, 1996 and 1995, respectively.
31
34
9. IRB TRANSACTION
Effective July 1, 1995, the Company purchased for cash and stock all of
the outstanding shares of common stock of International Research
Bureau, Inc. ("IRB"). Subsequent to the acquisition, the Company
reevaluated the future potential of IRB's core document retrieval
business and concluded that IRB's assets, other than its on-line
customer list, had no future value. Factors which led the Company's
management to this evaluation included the conclusions that the
Company's technology was superior to IRB's and that IRB's data was
duplicative of data which the Company already possessed. On December
13, 1995, IRB's shares were transferred back to the original owners of
IRB in exchange for DBT common stock. Because the Company's ownership
of IRB was temporary, DBT has accounted for its investment in IRB using
the equity method.
As a result of these transactions, the Company acquired IRB's customer
list for its on-line business and a covenant not to compete. The assets
of the Company given up included cash of $1,000,000; common stock
valued at $485,700 (after accounting for the returned shares); and
investments in the operations of IRB and other costs totaling $373,000.
Management's estimate of the fair value of the acquired assets,
totaling $198,600, was recorded on DBT's balance sheet, and the
remainder of the costs incurred were charged to operations.
32
35
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company may be involved in litigation from time to time in the
ordinary course of its business. DBT 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.
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 March 1991, Patlex entered into an employment agreement with its
chairman, Frank Borman, effective January 1, 1991. The agreement
provides for minimum annual compensation of $145,000 and provides for
an initial three-year employment period which is automatically extended
for an additional year on its anniversary date unless the Company
notifies him it does not wish to extend the term of the agreement. This
agreement has been extended for a three year period year effective
April 1, 1997. The 1997 annual compensation rate for Mr. Borman was
$160,000.
In August 1997, The Company entered into an employment agreement with
its President and Chief Executive Officer, Charles A. Lieppe, which
provides for a four year term beginning August 15, 1997 and ending on
August 14, 2001, unless terminated earlier in accordance with certain
circumstances. The 1997 annual compensation rate for Mr. Lieppe was
$250,000.
33
36
LEASES
The Company leases all of its office space under agreements expiring on
various dates through 2002. Certain of these leases contain three-year
renewal options.
Future minimum payments under operating leases that have non-cancelable
terms in excess of one year are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1998 $ 124,700
1999 83,000
2000 62,000
2001 38,500
2002 17,000
Rent expense was $568,000, $327,700 and $284,700, respectively, for the
years ended December 31, 1997, 1996, and 1995.
In January, 1998, the Company entered into a lease agreement to lease
certain office space over a ten year period. The future minimum
payments are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1998 $ 206,500
1999 1,091,000
2000 1,783,300
2001 1,823,500
2002 1,876,300
Thereafter through 2008 11,440,000
-----------
Total $18,220,600
===========
34
37
11. STOCK OPTIONS AND BENEFIT PLAN
STOCK OPTIONS
The Company has incentive and non-qualified stock option plans for
directors and key employees and has 3,000,000 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 ten years.
Option activity, segregated into ranges of exercise prices, is
summarized as follows:
Wtd. Avg Wtd. Avg Wtd. Avg
Number Exer. Price Number Exer. Price Number Exer. Price
of shares per share of shares per share of shares per share
--------- ----------- --------- --------- --------- ---------
Acquired in connection
with the acquisition
and reorganization 700,000 $ 2.38
Granted 1,032,000 $ 20.00
Exercised (60,000) $ 2.38
Cancelled (22,000) $ 20.00
------- ---------
Outstanding at Dec. 31, 1996 640,000 $ 2.38 1,010,000 $ 20.00
Granted 1,144,000 $ 21.76 220,000 $ 28.97
Exercised (9,500) $ 2.38 (42,666) $ 20.00
Cancelled (186,333) $ 18.81
------- --------- -------
Outstanding at Dec. 31, 1997 630,500 $ 2.38 1,925,001 $ 21.16 220,000 $ 28.97
======= ======= ========= ====== ======= ========
Exercisable at Dec. 31, 1997 630,500 $ 2.38 171,500 $ 22.27
======= ======= ========= ======
The options with a $2.38 weighted average exercise price have a
weighted-average remaining contractual life of 7.8 years, those with a
weighted average exercise price of $21.16 (range of $16.00 - $23.63)
have a remaining contractual life of 9 years and those with a weighted
average exercise price of $28.97 (range of $26.25 - $32.13) have a
weighted average remaining contractual life of 9.5 years.
In addition, there are 9,268 options outstanding at December 31,
1997 (all exercisable) for which no consideration will accrue to the
Company. A total of 54,024 and 664 of such options were exercised in
1997 and 1996, respectively.
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 which equal the market
price of the Company's common stock on the date of grant and,
consequently, no compensation expense is recognized.
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:
1997 1996
---- ----
Risk-free interest rate 6.5% 6.5%
Dividend yield none none
Volatility factors 43% 47%
Weighted-average expected life 5 years 5 years
35
38
The weighted-average fair value per option granted during 1997 and
1996 was $10.17 and $8.65, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which 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 options' 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, 1997 and 1996 as follows:
1997 1996
---- ----
Net income:
As reported $5,998,200 $519,400
Pro forma 3,933,800 179,400
Net income per share (diluted):
As reported $ .33 $ .04
Pro forma $ .22 $ .01
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.
BENEFIT PLAN
During 1997 the Company adopted a 401(k) plan which 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 $81,800 in 1997.
36
39
12. BUSINESS SEGMENTS
With the acquisition of Patlex in August, 1996, the Company began
operating in two major segments: the electronic information industry
and the patent enforcement business. 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.
1997 1996
---- ----
Revenues:
Electronic information $30,876,100 $16,321,300
Patent enforcement 6,669,700 2,382,000
----------- -----------
Consolidated revenues $37,545,800 $18,703,300
=========== ===========
Operating profit:
Electronic information $4,529,100 $194,700
Patent enforcement 3,928,100 1,341,000
----------- -----------
Segment operating profit 8,457,200 1,535,700
Interest income (expense) 1,467,400 (159,100)
General corporate expense (835,500) (626,200)
----------- -----------
Consolidated income before income taxes $9,089,100 $750,400
=========== ===========
Identifiable assets:
Electronic information $21,658,600 $ 9,000,900
Patent enforcement 17,688,600 20,292,500
----------- -----------
Total identifiable assets 39,347,200 29,293,400
General corporate assets 45,261,300 262,600
----------- -----------
Consolidated assets $84,608,500 $29,556,000
=========== ===========
Capital expenditures:
Electronic information $6,414,600 $5,277,400
Patent enforcement 6,500 23,300
----------- -----------
Consolidated capital expenditures $6,421,100 $ 5,300,700
=========== ===========
Depreciation and amortization of
identifiable assets:
Electronic information $3,891,500 $2,388,200
Patent enforcement 1,695,100 628,300
----------- -----------
Consolidated depreciation and
amortization $5,586,600 $ 3,016,500
=========== ===========
37
40
13. PRO FORMA INCOME TAXES AND EARNINGS (UNAUDITED)
As discussed in Note 8, having elected status as an S corporation, the
shareholders of DBT paid the federal income tax on DBT's earnings
through June 30, 1995. Additionally, DBT was exempt from Florida state
income tax on its earnings during that period, as Florida does not
separately tax S corporations. As a result, no income tax expense was
provided in the historical financial statements for taxable income
attributable to DBT through June 30, 1995; however, as disclosed in the
Consolidated Statement of Changes in Stockholders' Equity, S
corporation distributions were made to the shareholders to assist them
in making the corporate tax payments.
The pro forma amounts presented on the accompanying consolidated
statements of operations reflect the amount of income taxes, the
resulting income after taxes, and earnings per share as if DBT had not
made the election to be taxed as an S corporation. The pro forma
computation of taxes for 1995 excludes the loss on the IRB transaction
as the deferred tax asset arising from this loss has been fully
allowanced.
38
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEMS 10, 11, 12 AND 13.
The information required under these items is contained in the
Company's 1998 Proxy Statement, that will be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal year
end. This information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
The financial statements required by this item are
included and listed in the accompanying Index to
Consolidated Financial Statements in Part II, Item 8
of this Report.
2. FINANCIAL STATEMENT SCHEDULES
SCHEDULE II- Valuation and Qualifying Accounts
39
42
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
Report of Deloitte & Touche LLP, Independent Auditors 41
SCHEDULE II - Valuation and Qualifying Accounts 42
Schedules I, III and IV are not required to be filed.
40
43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of DBT Online, Inc. and subsidiaries:
We have audited the consolidated financial statements of DBT Online, Inc. (the
"Company") and subsidiaries as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated March 11, 1998; such report is included elsewhere in this
Form 10-K. Our audits also included the consolidated financial statement
schedule of the Company, listed in Item 14. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 11, 1998
41
44
DBT ONLINE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
CHARGED TO WRITE-OFFS
BEGINNING STATEMENT OF OTHER AND OTHER ENDING
DESCRIPTION BALANCE OPERATIONS INCREASES ADJUSTMENTS BALANCE
- ----------- ------- ---------- --------- ----------- -------
Year ended December 31, 1995:
Allowances for uncollectible
accounts $ 8,000 $ 31,100 $ 0 $ (21,600) $ 17,500
======== ======== ======== ========= =========
Year ended December 31, 1996:
Allowances for uncollectible
accounts $ 17,500 $ 49,900 $200,000(1) $ (17,400) $ 250,000
======== ======== ======== ========= =========
Year ended December 31, 1997:
Allowances for uncollectible
accounts $ 250,000 $ 95,000 $ 25,000(2) $ (40,000) $ 330,000
========= ======== ======== ========= =========
(1) Represents the allowance established in connection with the acquisition
of Patlex.
(2) Represents the allowance established in connection with the acquisition
of the Information Connectivity Group, Inc.
42
45
3. EXHIBITS:
The following is a list of all exhibits filed as a
part of this Report:
EXHIBITS
EXHIBIT DESCRIPTION OF DOCUMENT
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 September 14, 1992 between Patlex 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, 1979 between Patlex and Gordon Gould
10(vii)+ Agreement dated January 31, 1982 among Patlex, Refac Technology Development Corporation, Refac International
Limited, 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)+ Stock Purchase Agreement dated May 14, 1991 among Patlex, Sydney M. Irmas and certain other shareholders
10(xii)+++ Amended and Restated Stock Option Plan***
21* Subsidiaries
23.1* Consent of Deloitte & Touche LLP
27* Financial Data Schedule (for SEC use only)
* Filed herewith.
** Incorporated by reference to the Company's Registration Statement on
Form S-4(File No. 333-2000).
+ Incorporated by reference to the Form 10-KSB of Patlex Corporation for
the year ended June 30, 1995.
*** Management contract or compensatory plan.
+++ 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-Q for the period
ended September 30, 1997.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Report.
43
46
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.
DBT Online, Inc.
Date: March 27, 1998 By: /s/ Charles A. Lieppe
----------------------------------
Charles A. Lieppe
President and Chief Executive Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE APPEARS
BELOW IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS TIMOTHY M. LEONARD HIS
TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION, 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 27, 1998
- ---------------------------- Directors
Frank Borman
/s/ Charles A.Lieppe President, Chief Executive March 27, 1998
- ---------------------------- Officer and Director
Charles A. Lieppe
/s/ Timothy M. Leonard Vice President, Finance, Treasurer March 27, 1998
- ---------------------------- and Chief Financial Officer
Timothy M. Leonard (Principal Financial
and Accounting Officer)
Director March 27, 1998
- ----------------------------
Hank Asher
/s/ Gary E. Erlbaum Director March 27, 1998
- ----------------------------
Gary E. Erlbaum
/s/ Jack Hight Director March 27, 1998
- ----------------------------
Jack Hight
/s/ Ken Langone Director March 27, 1998
- ----------------------------
Ken Langone
/s/ Bernard Marcus Director March 27, 1998
- ----------------------------
Bernard Marcus
/s/ Andrall E. Pearson Director March 27, 1998
- ----------------------------
Andrall E. Pearson
/s/ Eugene L. Step Director March 27, 1998
- ----------------------------
Eugene L. Step
/s/ Sari Zalcberg Director March 27, 1998
- ----------------------------
Sari Zalcberg
44