1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 1-13333 ------------------ DBT ONLINE, INC. -------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 85-0439411 - --------------------------------- -------------------------------- (state or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 5550 W. Flamingo Road, Suite B-5 Las Vegas, Nevada 89103 -------------------------------------------------------- (Address of principal executive offices) (702) 257-1112 -------------------------------------------------------- (Registrant's telephone number) Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of common shares outstanding as of March 31, 1998 was 18,465,418. 2 DBT ONLINE, INC. TABLE OF CONTENTS Page ---- PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997..................................................................3 Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997...............................................................................4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997...............................................................................5 Notes to Consolidated Financial Statements......................................................6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................7 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS..............................................................................10 Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................10 Item 3. DEFAULTS UPON SENIOR SECURITIES................................................................10 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................10 Item 5. OTHER INFORMATION..............................................................................10 Item 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................10 Signature........................................................................................................11 EXHIBITS Exhibit 27.1 Financial Data Schedule..............................................................E-6 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - --------------------------------------------------- DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At March 31, At December 31, 1998 1997 ------------ --------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $11,319,800 $ 7,689,800 Accounts receivable, less allowance: March 31, 1998 - $341,900; December 31, 1997 - $330,000 5,938,400 4,448,800 Short-term investments 41,516,400 44,207,200 Prepaid expenses and other current assets 1,708,600 1,681,300 Prepaid income taxes 217,300 ----------- ----------- Total current assets 60,483,200 58,244,400 Property and equipment, net 11,035,500 9,034,000 Patents, less amortization: March 31, 1998 - $2,741,100; 11,101,700 11,525,400 December 31, 1997 - $2,317,300 Goodwilll, less amortization: March 31, 1998 - $550,700 5,256,600 5,463,100 December 31, 1997 - $344,200 Other assets 394,800 341,600 ----------- ----------- TOTAL ASSETS $88,271,800 $84,608,500 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities 5,020,100 3,766,600 Due to other patent interest holders 1,206,000 995,200 Income taxes payable 502,500 ----------- ----------- Total current liabilities 6,728,600 4,761,800 DEFERRED INCOME TAXES 4,061,300 4,199,600 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.10 par value. 5,000,000 shares authorized; no shares issued or outstanding Common stock, 40,000,000 shares authorized; 18,465,418 shares and 15,447,612 shares $.10 par value issued and outstanding at March 31, 1998 and December 31, 1997, respectively 1,846,600 1,838,900 Additional paid-in capital 68,823,600 68,564,600 Retained earnings 6,811,700 5,243,600 ----------- ----------- Total Stockholders' equity 77,481,900 75,647,100 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,271,800 $84,608,500 =========== =========== See notes to consolidated financial statements. Page 3 4 DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Quarter Ended March 31, 1998 1997 ------------ ------------- (Unaudited) (Unaudited) Revenues $10,710,500 $ 6,081,500 Patent royalties 1,714,400 1,517,500 ----------- ----------- Total revenues and royalties 12,424,900 7,599,000 ----------- ----------- Cost of revenues 5,575,000 3,270,700 Selling and promotion 1,225,900 593,000 Research and development 663,000 529,700 General and administrative 3,187,200 1,800,300 ----------- ----------- Total expenses 10,651,100 6,193,700 ----------- ----------- Income from operations 1,773,800 1,405,300 Interest income, net 602,100 31,300 ----------- ----------- Income before income taxes 2,375,900 1,436,600 Provision for income taxes 807,800 545,900 ----------- ----------- Net income $ 1,568,100 $ 890,700 =========== =========== Net income per common share (basic) 0.08 0.06 =========== =========== Weighted average shares outstanding (basic) 18,465,418 15,452,900 =========== =========== Net income per common share (diluted) 0.08 0.06 =========== =========== Weighted average shares outstanding (diluted) 19,118,400 16,106,000 =========== =========== See notes to consolidated financial statements. Page 4 5 DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Quarter Ended March 31, 1998 1997 ------------ ------------ (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,568,100 $ 890,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,627,200 1,127,500 Deferred taxes (138,300) (21,400) Changes in operating assets and liabilities; Accounts receivable and other receivables (1,489,600) (1,134,200) Prepaid insurance and expenses (27,300) (39,700) Accounts payable and accrued liabilities 1,348,000 1,181,400 Due to other patent interest holders 210,800 (26,100) Income taxes payable 719,800 (136,600) ------------ ------------ Net cash provided by operating activities 3,818,700 1,841,600 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment purchased (2,998,500) (1,004,100) Increase in other assets (53,200) (207,300) Proceeds from maturity of investments 2,690,800 ------------ ------------ Net cash used in investing activities (360,900) (1,211,400) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in bank line-of-credit (200,000) Proceeds from exercise of stock options 172,200 Repayments on long-term debt (2,781,300) ------------ ------------ Net cash provided by (used in) financing activities 172,200 (2,981,300) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,630,000 (2,351,100) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,689,800 6,965,600 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,319,800 $ 4,614,500 ============ ============ See notes to consolidated financial statements. Page 5 6 DBT ONLINE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of DBT Online, Inc. (the "Company") and its wholly-owned subsidiaries, Database Technologies, Inc., a Florida corporation ("DBT"), The Information Connectivity Group, Inc. (since August 1, 1997, date of acquisition), a Nevada corporation ("ICON") and Patlex Corporation (since August 20, 1996, date of merger), a Nevada corporation ("Patlex"). The interim consolidated financial statements as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 are unaudited. All significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Such adjustments consist solely of normal recurring accruals. Results for the interim periods are not necessarily indicative of results for a full year. NOTE 2. STOCK SPLIT The Company announced on September 16, 1997, a two-for-one stock split where the Company would distribute 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. NOTE 3. ACQUISITION On August 1, 1997, the Company acquired all of the stock of The Information Connectivity Group, Inc. for consideration in both cash and stock totaling approximately $6 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. Page 6 7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. This information contains certain statements regarding future trends, the accuracy of which is subject to many risks and uncertainties. Such trends, and their anticipated impact upon the Company, could differ materially from those presented in this Form 10-Q. OVERVIEW OF THE COMPANY 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 76% to $10,710,500 for the quater ended March 31, 1998 from $6,081,500 for the same period in 1997. Without regard to acquisitions, EIG revenues increased 65%. 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 the first quarter of 1998, active customers (defined as customers accessing the system in a given month) increased 62% to approximately 11,000 as of March 31, 1998 from 6,800 as of March 31, 1997. For the quarter ended March 31, 1998, total system usage increased 60% to 6.9 million minutes, from 4.3 million minutes for the same period in 1997. EIG's cost of revenues increased 81% to $5,147,900 for the quarter ended March 31, 1998 from $2,846,900 in 1997. As a percentage of EIG revenues, cost of revenues increased to 48.1% from 46.8% in 1997. 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 selling and promotion expenses increased 107% to $1,225,900 for the quarter ended March 31, 1998 from $593,000 for the same period in 1997. 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 increased to 11.4% in 1998 from 9.8% in 1997. The EIG's research and development expenses increased 25% to $663,000 for the quarter ended March 31, 1998 from $529,700 for the same period in 1997. 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 6.2% in 1998 from 8.7% in 1996. EIG's general and administrative expenses increased 86 % to $2,879,800 for the quarter ended March 31, 1998 from $1,545,800 for the same period in 1997. In addition to the acquisition of ICON, the increases were due to increases in rent, goodwill amortization and payroll and related expenses. As a percentage of EIG's total revenues, general and administrative expenses increased to 26.9% in 1998 from 25.4% in 1997. Page 7 8 PATENT ENFORCEMENT GROUP Revenues of the Patent Enforcement Group ("PEG") increased 13% to $1,714,400 for the quarter ended March 31, 1998 from $1,517,500 for the same period in 1997. PEG's cost of revenues were consistent at $427,100 from $423,800 for the same period in 1997 and consists solely of the amortization of its patents. The PEG's general and administrative expenses increased to $307,400 for the quarter ended March 31, 1998 from $254,500 for the same period in 1997. OPERATING PROFIT The EIG contributed $793,800 in operating profit for the quarter ended March 31, 1998 compared to an operating profit of $566,100 for the same period in 1997. PEG contributed $980,000 in operating profit for the quarter ended March 31, 1998 compared to $839,200 for the same period in 1997. On a consolidated basis, the Company's operating profit was $1,773,800 for the quarter ended March 31, 1998 compared to $1,405,300 for the same period in 1997. INTEREST INCOME Net interest income was $602,100 in 1998 compared to 31,300 in 1997. The increase 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% for the quarter ended March 31, 1998 compared to 38% for the same period in 1997. The 1998 effective rate was favorably impacted by non-taxable interest income and reduced state income taxes. NET INCOME In 1998 the Company had net income of $1,568,100 compared to $890,700 in 1997. The increase in net income is due to increase in operating profit, the investment income generated on the proceeds from the issuance of Common Stock in May, 1997, and the reduced effective income tax rate. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations was $3,818,700 for the quarter ended March 31, 1998 compared to $1,841,600 for the same period in 1997. The Company's capital expenditures of $2,998,500 and $1,004,100 in 1998 and 1997, respectively, were primarily attributable to the acquisition of computer equipment for EIG. The Company had working capital at March 31, 1998 of $53,754,600 (including cash and cash equivalents of $11,319,800) compared to $53,482,600 (including cash and cash equivalents of $7,689,800) at December 31, 1997. The increase in 1998 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. Page 8 9 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Information contained above with respect to the Company's investment in its computer facilities and the expansion of its databases, and other statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding expected future events and financial results is forward-looking and subject to risks and uncertainties. Those statements are forward-looking statements within the meaning of Section 31E of the Securities Exchange Act of 1934. The following important factors could affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements: (i) the ability to manage DBT's rapid expansion, (ii) protecting DBT's proprietary technology, (iii) impact of future government regulation on the availability of public records, and (iv) the extent, timing and success of competition from other database providers. Page 9 10 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None to report. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None to report. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None to report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None to report. ITEM 5. OTHER INFORMATION None to report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1* Financial Data Schedule (b) Reports on Form 8-K None - ------------ * Filed herewith. Page 10 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DBT ONLINE, INC. /s/ TIMOTHY M. LEONARD ----------------------------------- TIMOTHY M. LEONARD Vice President, Finance, Treasurer and Chief Financial Officer (Duly authorized officer and chief financial officer) Date: May 13, 1998 Page 11