1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 of incorporation or organization) Identification No.) 5550 W. FLAMINGO ROAD, SUITE B-5 ---------------------------------------- (Address of principal Executive Offices) LAS VEGAS, NEVADA 89103 ---------------------------------------- (702) 257-1112 ---------------------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of common shares outstanding as of June 30, 1998 was 18,473,416. 2 DBT ONLINE, INC. TABLE OF CONTENTS PAGE ---- PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997..................................................................3 Consolidated Statements of Operations for the Three Months Ended June 30, 1998 and 1997...............................................................................4 Consolidated Statements of Operations for the Six Months Ended June 30, 1998 and 1997...............................................................................5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997...............................................................................6 Notes to Consolidated Financial Statements......................................................7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................8 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS..............................................................................11 Item 2. CHANGES IN SECURITIES..........................................................................11 Item 3. DEFAULTS UPON SENIOR SECURITIES................................................................11 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................11 Item 5. OTHER INFORMATION..............................................................................12 Item 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................12 Signature........................................................................................................13 EXHIBIT Exhibit 27.1 Financial Data Schedule..............................................................E-1 Page 2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------------------------------------------- DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At June 30, At December 31, 1998 1997 ----------- -------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $12,541,200 $ 7,689,800 Accounts receivable, less allowance: June 30, 1998 - $339,000 December 31, 1997 - $330,000 6,012,400 4,448,800 Short-term investments 36,898,500 44,207,200 Prepaid expenses and other current assets 2,113,700 1,681,300 Prepaid income taxes 456,200 217,300 ----------- ----------- Total current assets 58,022,000 58,244,400 Property and equipment, net 14,795,400 9,034,000 Patents, less amortization: June 30, 1998 - $3,164,900 December 31, 1997 - $2,317,300 10,677,900 11,525,400 Goodwill, less amortization: June 30, 1998 - $757,200 December 31, 1997 - $344,200 5,050,000 5,463,100 Other assets 103,600 341,600 ----------- ----------- TOTAL ASSETS $88,648,900 $84,608,500 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities 4,049,700 3,766,600 Due to other patent interest holders 1,280,000 995,200 ----------- ----------- Total current liabilities 5,329,700 4,761,800 DEFERRED INCOME TAXES 3,949,100 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, $.10 par value. 100,000,000 shares and 40,000,000 shares authorized at June 30, 1998 and December 31, 1997, respectively. 18,473,416 shares and 18,388,626 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 1,847,400 1,838,900 Additional paid-in capital 68,971,200 68,564,600 Retained earnings 8,551,500 5,243,600 ----------- ----------- Total stockholders' equity 79,370,100 75,647,100 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,648,900 $84,608,500 =========== =========== See notes to consolidated financial statements. Page 3 4 DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, -------------------------------- 1998 1997 ----------- ----------- (Unaudited) (Unaudited) Revenues $11,299,900 $ 7,019,100 Patent royalties 1,745,300 1,817,500 ----------- ----------- Total revenues and royalties 13,045,200 8,836,600 ----------- ----------- Cost of revenues 5,651,100 3,401,500 Selling and promotion 1,607,700 704,300 Research and development 634,400 625,200 General and administrative 3,026,700 2,053,600 ----------- ----------- Total expenses 10,919,900 6,784,600 ----------- ----------- Income from operations 2,125,300 2,052,000 Interest income, net 510,700 238,100 ----------- ----------- Income before income taxes 2,636,000 2,290,100 Provision for income taxes 896,200 870,200 ----------- ----------- Net income $ 1,739,800 $ 1,419,900 =========== =========== Net income per common share (basic) $ 0.09 $ 0.09 =========== =========== Weighted average shares outstanding (basic) 18,465,500 16,418,000 =========== =========== Net income per common share (diluted) $ 0.09 $ 0.08 =========== =========== Weighted average shares outstanding (diluted) 19,400,000 17,161,000 =========== =========== See notes to consolidated financial statements. Page 4 5 DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended June 30, -------------------------------- 1998 1997 ----------- ----------- (Unaudited) (Unaudited) Revenues $22,010,400 $13,100,600 Patent royalties 3,459,700 3,335,000 ----------- ----------- Total revenues and royalties 25,470,100 16,435,600 ----------- ----------- Cost of revenues 11,226,100 6,672,200 Selling and promotion 2,833,600 1,297,300 Research and development 1,297,400 1,154,900 General and administrative 6,213,900 3,853,900 ----------- ----------- Total expenses 21,571,000 12,978,300 ----------- ----------- Income from operations 3,899,100 3,457,300 Interest income, net 1,112,800 269,400 ----------- ----------- Income before income taxes 5,011,900 3,726,700 Provision for income taxes 1,704,000 1,416,100 ----------- ----------- Net income $ 3,307,900 $ 2,310,600 =========== =========== Net income per common share (basic) $ 0.18 $ 0.14 =========== =========== Weighted average shares outstanding (basic) 18,461,900 15,935,500 =========== =========== Net income per common share (diluted) $ 0.17 $ 0.14 =========== =========== Weighted average shares outstanding (diluted) 19,259,100 16,633,500 =========== =========== See notes to consolidated financial statements. Page 5 6 DBT ONLINE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months ended June 30, ----------------------------------- 1998 1997 ------------ ------------ (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,307,900 $ 2,310,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,440,200 2,293,300 Deferred taxes (250,500) (169,700) Changes in operating assets and liabilities; Accounts receivable and other receivables (1,563,600) (1,248,500) Prepaid expenses and other current assets (432,400) (241,400) Accounts payable and accrued liabilities 526,000 1,917,700 Due to other patent interest holders 284,800 (5,500) Income taxes payable (238,900) (210,000) ------------ ------------ Net cash provided by operating activities 5,073,500 4,646,500 CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment purchased (7,941,000) (3,380,000) Increase (decrease) in other assets 238,000 (44,500) Proceeds from maturity of investments 7,308,700 ------------ ------------ Net cash used in investing activities (394,300) (3,424,500) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from insurance of Common Stock 46,928,600 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 43,947,300 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 4,851,400 45,169,300 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,689,800 6,965,600 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,541,200 $ 52,134,900 ============ ============ See notes to consolidated financial statements. Page 6 7 DBT ONLINE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 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., a Nevada Corporation ("ICON") and Patlex Corporation (since August 20, 1996, date of merger), a Pennsylvania corporation ("Patlex"). The interim consolidated financial statements as of June 30, 1998 and for the three and six month periods ended June 30, 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 ICON 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 7 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto. This information contains certain statements regarding future trends, the accuracy of which is subject to many risks and uncertainties. Such trends, and their anticipated impact upon the Company, could differ materially from those presented in this Form 10-Q. OVERVIEW OF THE COMPANY 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 61% to $11,299,900 for the three months ended June 30, 1998 from $7,019,100 for the same period in 1997. Without regard to acquisitions, EIG revenues increased 54%. 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. DBT's active customers (defined as customers accessing the system in a given month) increased 54% to 11,700 at June 30, 1998 from 7,600 at June 30, 1997. Total system usage increased 56% to 7.5 million minutes for the three months ended June 30, 1998, from 4.8 million minutes for the same period in 1997. EIG's revenues increased 68% to $22,010,400 for the six months ended June 30, 1998 from $13,100,600 for the same period in 1997. Total system usage increased 57% to 14.4 million minutes for the six months ended June 30, 1998, up from 9.2 million minutes for the same period in 1997. EIG's cost of revenues increased 75% to $5,224,000 for the three months ended June 30, 1998 from $2,977,700 for the same period in 1997. As a percentage of EIG revenues, cost of revenues increased to 46.2% for the three months ended June 30, 1998 from 42.4% for the same period in 1997. In addition to the acquisition of ICON, the dollar increase in the EIG'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 78% to $10,371,900 for the six months ended June 30, 1998 from $5,824,600 for the same period in 1997. As a percentage of EIG revenues, cost of revenues increased to 47.1% for the six months ended June 30, 1998 from 44.5% for the same period in 1997. In addition to the acquisition of ICON, the dollar increase in EIG'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 128% to $1,607,700 for the three months ended June 30, 1998 from $704,300 for the same period in 1997. The increase was primarily due to increases in payroll and advertising expenses. As a percentage of EIG's revenues, selling and promotion increased to 14.2% for the three months ended June 30, 1998 from 10%, for the same period in 1997. EIG's selling and promotion expenses increased 118% to $2,833,600 for the six months ended June 30, 1998 from $1,297,300 for the same period in 1997. In addition to the acquisition of ICON, the increase was primarily due to increases in payroll and advertising expenses. As a percentage of total revenues, selling and promotion increased to 12.9% for the six months ended June 30, 1998 from 9.9%, for the same period in 1997. EIG's research and development expenses increased 2% to $634,400 for the three months ended June 30, Page 8 9 1998 from $625,200 for the same period in 1997. This increase was caused by an increase in payroll and related expenses. As a percentage of total revenues, research and development expenses were 5.6% for the three months ended June 30, 1998, a decrease from 8.9% for the same period in 1997. EIG's research and development expenses increased 12% to $1,297,400 for the six months ended June 30, 1998 from $1,154,900 for the same period in 1997. This increase was caused by an increase in payroll and related expenses. As a percentage of total revenues, research and development expenses were 5.9% for the six months ended June 30, 1998, a decrease from 8.8% for the same period in 1997. EIG's general and administrative expenses increased 49% to $2,760,100 for the three months ended June 30, 1998 from $1,856,200 for the same period in 1997. This increase was due to increases in payroll and related expenses. As a percentage of EIG revenues, general and administrative expenses decreased to 24.4% for the three months ended June 30, 1998 from 26.4% for the same period in 1997. EIG's general and administrative expenses increased 66% to $5,640,000 for the six months ended June 30, 1998 from $3,402,000 for the same period in 1997. This increase was due to increases in payroll and related expenses. As a percentage of EIG revenues, general and administrative expenses remained relatively consistent at 25.6% and 26% for the six months ended June 30, 1998 and 1997, respectively. PATENT ENFORCEMENT GROUP Revenues of the Patent Enforcement Group ("PEG") decreased 4% to $1,745,300 for the quarter ended June 30, 1998 from $1,817,500 for the same period in 1997. PEG's cost of revenues were consistent at $427,000 for the quarter ended June 30, 1998 versus $424,000 for the same period in 1997 and consists solely of the amortization of its patents. PEG's general and administrative expenses increased to $266,500 for the quarter ended June 30, 1998 from $197,400 for the same period in 1997. PEG's revenues increased 4% to $3,459,700 for the six months ended June 30, 1998 from $3,335,000 for the same period in 1997. PEG's cost of revenues were consistent at $854,200 and $847,600 for the six months ended June 30, 1998 and 1997, respectively, and consist solely of the amortization of its patents. PEG's general and administrative expenses increased to $573, 900 for the six months ended June 30, 1998 from $451,900 for the same period in 1997. OPERATING PROFIT The EIG contributed $1,073,700 in operating profit for the three months ended June 30, 1998 compared to an operating profit of $855,700 for the same period in 1997. PEG contributed $1,051,700 in operating profit for the quarter ended June 30, 1998 compared to $1,196,300 for the same period in 1997. On a consolidated basis, the Company's operating profit was $2,125,300 for the three months ended June 30, 1998 compared to $2,052,000 for the same period in 1997. INTEREST INCOME Net interest income was $510,700 for the three months ended June 30, 1998 compared to $238,100 for the same period in 1997. The net interest income is due primarily 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 six months ended June 30, 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. Page 9 10 NET INCOME The Company had net income of $3,307,900 for the six months ended June 30, 1998 compared to $2,310,600 for the same period in 1997. The increase is due to an 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 $5,073,500 and $4,646,500 for the six months ended June 30, 1998 and 1997, respectively. The Company's capital expenditures of $7,941,000 and $3,380,000 for the six months ended 1998 and 1997, respectively, were primarily attributable to the acquisition of computer equipment for DBT. The Company had working capital at June 30, 1998 of $52,692,300 (including cash and cash equivalents of $12,541,200) compared to $53,482,600 (including cash and cash equivalents of $7,689,800) at December 31, 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. 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. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Information contained above with respect to the Company's investment in its computer facilities and the expansion of its databases, and other statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding expected future events and financial results is forward-looking and subject to risks and uncertainties. Those statements are forward-looking statements within the meaning of Section 31E of the Securities Exchange Act of 1934. The following important factors could affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements: (i) the ability to manage DBT's rapid expansion, (ii) protecting DBT's proprietary technology, (iii) impact of future government regulation on the availability of public records, and (iv) the extent, timing and success of competition from other database providers. Page 10 11 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None to report. ITEM 2. CHANGES IN SECURITIES None to report. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None to report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS At the Annual Meeting of Shareholders for the Company held on May 12, 1998, the shareholders took the following action with respect to the following four matters which were the only matters submitted to a vote of the shareholders: (A) Elected three Class II directors consisting of those persons listed below. The number of votes for and votes withheld from each nominee for director are set forth opposite each director's name. NOMINEE FOR TERM TOTAL VOTE FOR TOTAL VOTE WITHHELD FROM EXPIRING IN 2001 EACH DIRECTOR EACH DIRECTOR ---------------- -------------- ------------------------ Frank Borman 16,655,559 35,761 Jack Hight 16,656,175 35,145 Andrall E. Pearson 16,656,951 34,369 Messrs. Kenneth G. Langone, Charles A. Lieppe, Eugene L. Step and Ms. Sari Zalcberg continued as Class I directors whose term expires at the Annual Meeting of Shareholders to be held in 2000. Messrs. Hank Asher, Gary E. Erlbaum and Bernard Marcus continued as Class III directors whose term expires at the Annual Meeting of Shareholders to be held in 1999. (B) Approved a proposed amendment to the Company's Amended and Restated Stock Option Plan to increase the number of authorized shares from 3,000,000 to 6,000,000 shares available for issuance under the Amended and Restated Stock Option Plan. The vote on this amendment was as follows: FOR 12,737,941 AGAINST 598,337 ABSTAIN 17,256 BROKER NON-VOTES 3,337,786 (C) Approved a proposed amendment to the Company's Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from 40,000,000 to 100,000,000. The vote on this amendment was as follows: FOR 16,063,236 AGAINST 616,470 ABSTAIN 11,614 Page 11 12 (D) Ratified the selection of Deloitte & Touche LLP as the independent public accountants of the Company for the fiscal year ending December 31, 1998. The vote on this matter was as follows: FOR 16,679,425 AGAINST 4,042 ABSTAIN 7,853 BROKER NON-VOTES 0 ITEM 5. OTHER INFORMATION None to report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1* Financial Data Schedule (for SEC use only). - ------------ * Filed herewith. Page 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DBT ONLINE, INC. /s/ Timothy M. Leonard -------------------------------------- TIMOTHY M. LEONARD Vice President, Finance, Treasurer and Chief Financial Officer (Duly authorized officer and chief financial officer) Date: August 10, 1998 Page 13